JER Hudson GP XXI LLC v. DLE Investors, LP

Decision Date02 May 2022
Docket NumberC.A. No. 2021-0478-MTZ
Parties JER HUDSON GP XXI LLC and Hudson Housing Tax Credit Fund XXI LP, Plaintiffs, v. DLE INVESTORS, LP, Defendant.
CourtCourt of Chancery of Delaware

James P. Hughes, Melanie K. Sharp, Craig D. Gear, and Richard J. Thomas, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Jessica Ragosta Early, Emily A. Robey-Phillips, HOLLAND & KNIGHT LLP, Boston, Massachusetts; Attorneys for Plaintiffs JER Hudson GP XXI LLC and Hudson Housing Tax Credit Fund XXI LP.

Christopher Viceconte, GIBBONS P.C., Wilmington, Delaware; Louis E. Dolan, NIXON PEABODY LLP, Washington, DC, Laura B. Bacon, NIXON PEABODY LLP, Chicago, IL; Attorneys for Defendant DLE Investors, LP.

ZURN, Vice Chancellor.

For over three decades, the federal government has created tax subsidies to promote the development and maintenance of affordable rental housing. Under this program, tax credits are allocated to each state, which in turn allocate the tax credits to qualified affordable housing projects. The tax credits are passed along to investors in those projects, thereby incentivizing investment in affordable housing.

Affordable housing projects in this program are typically held by a limited partnership. The investors purchase limited partnership interests, and a general partner manages the partnership and the property. Investors claim the tax credits allocated to the property in which they invest over a period of ten years. After that period expires and the investors have received their tax credits, the investors frequently sell their limited partnership interests for much less than they paid for them. The program has additional mandates and features that support keeping the property as affordable housing for an additional twenty years, including a means of transferring the property to a qualified affordable housing nonprofit at a below-market price.

Recently, a new type of buyer has emerged to buy the investors’ discounted limited partnership interests. It purchases a limited partnership stake from the initial investor after the investor harvested the property's tax credits. As a new limited partner, the buyer engages in a now-nationally-familiar pattern of tactics to prevent the property from being transferred to the nonprofit. Around the country, about half a dozen courts have weighed in on the propriety of those strategies under the federal tax subsidy program. This precedential opinion contributes to that body of law through the lens of fiduciary duties and the internal affairs of Delaware limited partnerships.

The plaintiffs here are the partnership and general partner; the defendant is the new limited partner. The new limited partner repeatedly sought either a sale of the property or a buyout of its partnership interests at what it considered fair market value. When the general partner would not go along, the limited partner claimed the general partner's response to the property's disposition to a nonprofit amounted to a breach of fiduciary and contractual duties under the limited partnership agreement. The limited partner attempted to remove the general partner for cause, as is its right under that agreement. The general partner seeks a declaratory judgment that it was not validly removed. The limited partner asserts counterclaims for breach of fiduciary duty, breach of contract, and declaratory relief that the removal was valid.

This post-trial opinion finds in favor of the general partner and the partnership. The general partner's authority and duties are circumscribed by the partnership agreement. The general partner has modified fiduciary duties, but the limited partner failed to prove the general partner breached them. The limited partner also failed to prove the general partner breached the limited partnership agreement. Therefore, the limited partner lacked cause to remove the general partner. The removal is invalid, the general partner remains in its role as the general partner, and the general partner is not liable for any breach. The limited partnership agreement dictates that the general partner receive fees and expenses for surviving an unwarranted removal attempt.


Plaintiff Hudson Housing Tax Credit Fund XXI LP (the "Fund") is a limited partnership that holds indirect interests in other limited partnerships, each of which in turn holds an affordable housing property developed under the federal Low-Income Housing Tax Credit ("LIHTC") program.2 The other plaintiff, JER Hudson GP XXI LLC ("Fund GP"), is the Fund's general partner (together with the Fund, "Plaintiffs").3 The Fund was created in 2002.4 Defendant DLE Investors, LP ("DLE") is one of the Fund's limited partners. DLE became a Fund limited partner in 2007.5 The Fund distributed all tax credits flowing from one particular property to its investors by 2015.6 The partners projected that between 2020 and 2021, that property would be transferred to a nonprofit for a below-market price pursuant to the LIHTC program and the partnership agreement of the entity holding the property.7

By 2020, new owners had taken control of DLE.8 Under new management, DLE sought either a sale of the property or a buyout of its Fund interest at fair market value.9 Fund GP declined both transactions. The partnership holding the property, in which the Fund held indirect limited partner interests, proceeded to transfer the property to an affordable housing nonprofit as contemplated by the LIHTC program and that partnership's governing documents.10 Fund GP sought the advice of counsel and concluded it would not challenge the transfer.11 In response, DLE purported to remove Fund GP as general partner of the Fund, asserting its inaction was a breach of fiduciary and contractual duties, including a duty to seek DLE's consent.12 Fund GP contends it breached no such duty and was improperly removed.13

Having weighed the evidence and evaluated the credibility of the witnesses, I find that the facts presented at trial support Plaintiffs’ position. The following facts were proven by a preponderance of the evidence presented at trial or are drawn from judicially noticeable authority.14

A. The Low-Income Housing Tax Credit Program

More background about the LIHTC program may be helpful context. The LIHTC program is designed to encourage new construction and rehabilitation of existing buildings as affordable rental housing.15 It is set forth in Section 42 of the Internal Revenue Code (" Section 42").

As set forth in Section 42, the LIHTC program is a federal subsidy program specifically designed to promote the nationwide development and preservation of rental housing that is affordable to low and moderate income households. The LIHTC program subsidizes low-income housing by: (1) making available to a "qualified low-income housing project" tax credits, which provide a dollar-for-dollar income tax reduction; and (2) permitting institutional investors with large, annual, and predicable income tax obligations (known as "tax credit investors"), such as banks, to acquire these tax credits in exchange for providing capital necessary to develop the project.16

The Supreme Judicial Court of Massachusetts has described the LIHTC program as "the most important source of financing for affordable housing ... across the nation."17

The LIHTC program is built on federal allocations of tax credits to state housing finance agencies in all fifty states.18 The state agencies award tax credits to real estate developers who win a competitive application process to develop affordable housing.19 The nonrefundable tax credits are valuable to large financial institutions with significant federal tax liabilities.20 Those investors’ capital contributions provide necessary equity to develop the qualified affordable housing property.21 "[D]evelopers ‘sell’ the tax credits to private investors, usually through a syndicator, in exchange for an equity investment in the housing project."22 Those syndicators connect investors to affordable housing projects offering tax credits.23

The syndicators form partnerships to develop and hold LIHTC-eligible properties, and to facilitate investment in exchange for tax credits.24 Syndicators and investors often partner in several partnerships holding several affordable housing projects.25 The partnerships have the purpose of acquiring, financing, developing, and managing the affordable housing.26

The syndicator is usually the general partner, and it will often receive fees for its role.27 The general partner has discretion and control over the partnership's operations, subject to certain enumerated restrictions.28 Institutional investors seeking tax credits invest as limited partners with only a few enumerated consent rights.29

"Through this framework, Section 42 advances the deliberate policy choice to replace a typical equity investor's expectations of economic cash flow or appreciation from the apartment complex with a comparable or better return on investment almost solely derived from tax benefits."30 The limited partner's receipt of tax credits is stretched over ten years (the "Credit Period") to provide a baseline ten-year incentive to maintain the housing as affordable.31 To keep those tax credits from being clawed back, the partnership must adhere to LIHTC program requirements, including rental rate restrictions, for another five years (together with the Credit Period, the fifteen-year "Compliance Period").32 And even after the end of the Compliance Period, project owners allocated tax credits after 1989 must continue to comply with the program for an additional fifteen years, known as the "Extended Use Period."33 Thus, investors’ bargain for ten years of tax credits results in thirty years of affordable housing.

The program is designed to keep the housing affordable even longer.34 At the end of the Compliance Period, the partnership can convey the property to a certified nonprofit under the terms of a...

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    • United States
    • Court of Chancery of Delaware
    • May 2, 2023
    ... ... He would only commit if (i) ... all existing preferred stock became common stock, (ii) Rich ... and his fellow investors received a new class of preferred ... stock (the "Preferred Stock"), and (iii) the Funds ... and other significant investors executed a ... For a decision illustrating ... the effect of a limited purpose provision in the context of a ... partnership, see JER Hudson GP XXI LLC v. DLE Investors, ... LP , 275 A.3d 755, 787-88 (Del. Ch. 2022) ("The ... partnership's purpose limits the general partner's ... ...

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