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Chancery Orders Dissolution of LP Based on "Not Reasonably Practicable" Standard in Section 17-802

By Francis G.X. Pileggi

Harris v. RHH Partners, LP, et al., No. 1198-VCN, (Del. Ch., January 27, 2010), read letter decision here. A prior decision in this case by the Delaware Court of Chancery was highlighted here.

Why This Short Ruling is Noteworthy

This decision in noteworthy because it applies a statute that, comparatively speaking, does not enjoy a copious body of case law interpreting it. The statute in question is the dissolution statute for LPs, Section 17-802 of Title 6 of the Delaware Code. Decisions interpreting this dissolution statute have also been applied by analogy to the counterpart statute in the Delaware LLC Act, Section 18-802. These statutes allow for one to petition to dissolve an LP or an LLC when: "it is not reasonably practicable to carry on the business in conformity with the partnership [or LLC] agreement."

Background

This case involved two parties who owned an LP, called RHH Partners, that in turn owned the personal residence of the sole limited partner who owned 99% of the LP. The remaining 1% was owned by a former friend who was also the general partner. Harris, the 99% owner and general partner, was a New York lawyer by training and appeared in this case pro se, as did the general partner.

Court's Reasoning

Despite a general purpose clause authorizing the LP to operate "for all lawful purposes", the Court  found after hearing testimony that the purpose of the LP "was not entirely clear" though it likely evolved over time. The Court concluded that: "its purpose, however ill-defined, ceased to exist", and therefore, based on Section 17-802, the court held that "it is not reasonably practicable for RHH to carry on the business in conformity with the partnership agreement."

Moreover, the Court reasoned that: (i) leaving the two partners "in any kind of business relationship would serve no useful purpose"; and (ii) there is no apparent purpose for the LP; and (iii) using the LP as a vehicle to own Harris' residence "has no cognizable relationship to any business purpose for which RHH might exist."

Winding-up

Ordering dissolution did not end the discussion. For the winding-up aspect of the case, the Court divided ownership of the sole asset of the LP, the personal residence of Harris, in the same proportion as the two men owned the LP. Thus, Harris received a "99 % fee simple interest " in the real estate, and the other partner received a "1% undivided fee simple interest". The Court noted that before distribution of the assets could be made, Section 17-804 required that creditors be paid.

Postscript

Notwithstanding the unusual procedural aspect of both parties appearing pro se, thus resulting in a less developed factual record and fewer formal legal arguments presented, the issue the Court addressed is sufficiently important, and the case law on the dissolution statute sufficiently meager--by comparison to many corporate statutes for example, that this ruling merited a quick overview.

Full post as published by Delaware Corporate and Commercial Litigation Blog on January 31, 2010 (boomark / email).