In re El Paso Pipeline Partners, L.P. Derivative Litigation

Delaware Court of Chancery · Corporations

CorporationsLimited partnershipsDerivative litigationDirect versus derivative claimsMerger standingContractual alternative entitiesLP AgreementConflict-of-interest Provision

Facts

El Paso Parent controlled El Paso MLP through the General Partner and caused El Paso MLP in 2010 to buy assets from El Paso Parent in the conflicted Fall Dropdown. The court previously held that the General Partner breached the LP Agreement's Conflict-of-interest Provision by causing the transaction and awarded $171 million in damages. While the case was pending, Kinder Morgan acquired El Paso Parent and then consummated a related-party merger eliminating El Paso MLP's public existence, and the merger proxy stated that the merger consideration did not attribute value to this litigation. After the merger closed, the General Partner argued that because the plaintiff had styled the action as derivative, the merger extinguished standing and required dismissal.

Issue

Whether the plaintiff lost standing to pursue and enforce the post-trial liability award after the merger because the claim was derivative. More specifically, the court had to decide whether the breach of the LP Agreement claim was direct, derivative, or dual-natured, and whether estoppel barred the plaintiff from seeking a pro rata recovery for former unaffiliated limited partners.

Rule

A limited partner may sue directly to enforce rights conferred by a limited partnership agreement because the agreement is a contract binding the partnership and the partners. If Delaware law requires a binary characterization, a claim for breach of a specific contractual limitation in an LP agreement is direct; alternatively, a claim may be dual-natured when both the entity and the investors suffer injury and either an entity-level or investor-level remedy is possible, and such a claim may continue after a merger through a pro rata recovery to the unaffiliated investors. A plaintiff's prior characterization of a claim as derivative does not estop the court from treating the claim differently, and equity may tailor relief accordingly.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Cedar Basin Logistics, L.P., a Delaware limited partnership based in Tulsa, has an agreement stating that its general partner may not approve any affiliate lease unless an independent review committee approves it in good faith. The agreement also eliminates fiduciary duties and substitutes only contractual duties. After the general partner causes the partnership to enter an overpriced warehouse lease with its controller's affiliate, limited partner Maya Ortiz sues for breach of that provision.

If a Delaware court must classify Maya's claim as either direct or derivative, which is the best characterization?

Explanation. The majority held that when limited partners seek to enforce a specific contractual constraint in an LP agreement, the claim is direct if forced into a binary choice. The key inquiry is the source of the right: a contractual provision limiting the general partner's authority. The opinion rejected the idea that any overpayment claim automatically becomes derivative, and it also rejected reliance on the old special-injury formulation. (Derived from In re El Paso Pipeline Partners, L.P. Derivative Litigation (n.d.).)