WALLACE EX REL. CENCOM v. Wood

• Decision Date: 12 October 1999
• Docket Number: C.A. No. 15731.
• Citation: WALLACE EX REL. CENCOM v. Wood, 752 A.2d 1175 (Del. Ch. 1999)
• Parties: Ron WALLACE, Brian Matthews, David J. Lerner and Fred N. Roberts, derivatively on behalf of CENCOM CABLE INCOME PARTNERS II, L.P., Plaintiffs, v. Howard L. WOOD, Barry L. Babcock, Jerald L. Kent, Theodore W. Browne, II, Cencom Properties II, Inc., CC II Holdings, Inc., Cencome Partners, Inc., Cencom Cable Entertainment, Inc., Charter Communications, Inc., Charter Communications II, L.P., Charter Communications, L.P. and CC Cable, Inc., Defendants, and Cencom Cable Income Partners II, L.P., Nominal Defendant.
• Court: Court of Chancery of Delaware

752 A.2d 1175

Ron WALLACE, Brian Matthews, David J. Lerner and Fred N. Roberts, derivatively on behalf of CENCOM CABLE INCOME PARTNERS II, L.P., Plaintiffs, v.Howard L. WOOD, Barry L. Babcock, Jerald L. Kent, Theodore W. Browne, II, Cencom Properties II, Inc., CC II Holdings, Inc., Cencome Partners, Inc., Cencom Cable Entertainment, Inc., Charter Communications, Inc., Charter Communications II, L.P., Charter Communications, L.P. and CC Cable, Inc., Defendants, andCencom Cable Income Partners II, L.P., Nominal Defendant.

C.A. No. 15731.

Court of Chancery of Delaware, New Castle County.

Submitted: September 14, 1999.

Decided: October 12, 1999.

Pamela S. Tikellis, James C. Strum and Robert J. Kriner, Jr. of Chimicles, Jacobsen & Tikellis, Wilmington, Delaware.Of Counsel: Lawrence P. Kolker and Gregory M. Nespole of Wolf Haldenstein Adler Freeman & Herz, New York, New York; Michael E. Criden of Hanzman Criden Korge & Chaykin, Miami, Florida; Lynda J. Grant of Goodkind Labaton Rudoff & Sucharow, New York, New York.

Daniel A. Dreisbach and Michael D. Allen of Richards, Layton & Finger, Wilmington, Delaware.Of Counsel: Stephen B. Higgins, Linda Carroll Reisner and Thompson Coburn, St. Louis, Missouri, for Defendants.

OPINION

STEELE, Vice Chancellor.

I.Issues Presented

Can holders of units in a Limited Partnership state a cognizable claim for breach of fiduciary duties against parent corporations of the Limited Partnership's corporate general partner, affiliates of that corporate general partner, and officers of that corporate general partner?

Officers, affiliates and parents of a general partner, may owe fiduciary duties to limited partners if those entities control the partnership's property.Clearly, those duties, when owed, may not be breached in a manner that harms the partnership.

I find plaintiffs have alleged sufficient facts which, if true, state a claim that defendants used their virtually unchecked control of the Partnership in order to enhance their self-interest at the expense of the Partnership.Therefore, I find that plaintiffs have stated a claim for breach of fiduciary duties owed by the defendant Officers, Affiliates and Parents.

Where the Limited Partners do state a cognizable claim for breach of fiduciary duty, may they also pursue apparently inconsistent claims that those same entities are non-fiduciaries who aided and abetted the General Partner's breach of fiduciary duty and who tortiously interfered with the Partnership Agreement?

In their opposition to Defendant's Motion for Judgment on the Pleadings, plaintiffs also creatively allege that the Officers, Affiliates and Parents aided and abetted the General Partner's breaches of fiduciary duty, and that the Officers, Affiliates and Parents tortiously interfered with the Partnership Agreement.¹Plaintiffs presumably advance these claims, which are inherently inconsistent with their primary claim, hoping to secure a fall-back position against the Officers, Affiliates and Parents in the event the primary breach of fiduciary duty claim is dismissed.Nevertheless, the plaintiffs plead facts which, if true, support the requisite elements for aiding and abetting.I conclude, therefore, that plaintiffs' aiding and abetting claim survives defendants' motion to dismiss.However, I dismiss plaintiffs' tortious interference claim as plaintiffs fail to allege facts that, even if accepted as true, support this claim.

II.Background

Cencom Cable Income Partners II, L.P. was formed in 1987 to acquire, own and operate existing cable television systems.Response to the Limited Partnership offerings was less than enthusiastic as only 90,915 of the 250,000 available units were sold.As a result, limited funds were available for the planned acquisition of cable systems.A provision in the Partnership Agreement exacerbated this shortfall by prohibiting indebtedness for acquisitions in excess of 20% of the funds raised by the sale of Units.

Plaintiffs allege that the General Partner as well as the Officers, Parents, and Affiliates concocted a plan to circumvent this prohibition and to continue to make acquisitions.The plan contemplated that the Officers and Parents create other entities (the Affiliates) and use these entities, which were primarily owned and funded by the Partnership, to acquire leverage, which would then be used to make the acquisitions.These acquisitions generated sizable fees for the defendants.In contrast, plaintiffs claim to be facing what appears to be a loss of 12.1% to 17.6% on their initial investment.²

Plaintiffs also plead the following noteworthy facts.Three of the four Officers are also directors of the General Partner.The fourth of the four Officers is the General Counsel and Secretary for the General Partner.All of the General Partner's stock is owned by a Parent defendant, and all of that Parent defendant's stock is owned by another Parent defendant.This second Parent defendant is owned and controlled by the Officers.

III.Plaintiff's Contentions

In this derivative action, the Limited Partners contend that the defendants breached fiduciary and contractual duties owed to the Partnership and Limited Partners.More specifically, the Limited Partners claim that the defendants used Partnership funds to establish business entities, then wrongfully used these entities to circumvent a provision in the Partnership Agreement forbidding the Partnership from incurring debt in excess of twenty percent (20%) of the gross proceeds of the Partnership's public offering.Defendants' unremarkable motivation to engage in this behavior was, according to plaintiffs, financial.The defendants used the additional leverage to purchase cable systems and in the process generated fees for themselves.Plaintiffs argue these acquisitions were exorbitantly over-priced, made for purely self-interested reasons, and were adverse to the interests of the Limited Partnership.

Plaintiffs aver that the Officers, Affiliates and Parents aided and abetted the General Partner in wrongfully circumventing provisions of the partnership agreement, and tortiously interfered with the performance of the partnership.Plaintiffs further contend that the defendants usurped business opportunities available to the Limited Partnership.

Defendants counter by arguing that the defendants, excepting the General Partner, owe no fiduciary duty to the Partnership or the Limited Partners.Defendants further argue the Officers could only be liable for tortious interference if the allegedly interfering action exceeded the scope of their authority.Likewise, defendants claim plaintiffs failed to plead facts sufficient to show the Affiliates or Parents were "interfering parties", or intervened maliciously or in bad faith to injure plaintiffs.In their reply brief, however, defendants, for reasons unknown to me, fail to address plaintiffs' aiding and abetting claim.

IV.Analysis

A.Standards applicable to Defendants' Motion for Judgment on the Pleadings

Defendants move for judgment on the pleadings pursuant to Court of Chancery Rule(h)(2) which permits a party to present a motion to dismiss for failure to state a claim upon which relief can by granted by motion for judgment on the pleadings pursuant to Chancery CourtRule 12(c).³As in evaluating any motion to dismiss, I must assume the truthfulness of all well-pleaded, nonconclusory allegations found in the Complaint and extend the benefit of all reasonable inferences that can be drawn from the pleading to the non-movant.⁴To award judgment on the pleadings in favor of the defendants, I must find that plaintiffs have either utterly failed to plead facts supporting an element of the claim⁵ or that under no reasonable interpretation of the facts alleged in the Complaint (including reasonable inferences) could plaintiff state a claim for which relief might be granted.⁶Notwithstanding Delaware's permissive pleading standard, I am free to disregard mere conclusory allegations made without specific allegations of fact to support them.⁷With this standard in mind, I examine plaintiffs' allegations.

B.Can the Officers, Parents and Affiliates be liable for Breach of Contract if they were not Parties to the Partnership Agreement?

The only defendant who is a party to the Partnership Agreement is the General Partner.This fact is not disputed.It is a general principle of contract law that only a party to a contract may be sued for breach of that contract.⁸Indeed, Delaware law clearly holds that officers of a corporation are not liable on corporate contracts as long as they do not purport to bind themselves individually.⁹In their reply brief, plaintiffs effectively abandon their breach of contract claim against the Officers, Affiliates and Parents, choosing instead to assert a tortious interference claim.¹⁰Not surprisingly, I dismiss any claim for breach of contract against the Officers, Parents and Affiliates.

C.Does Plaintiff State a Cognizable Claim that the Officers, Parents and Affiliates owe Fiduciary Duties to the Limited Partnership and its Limited Partners?

Unquestionably, the general partner of a limited partnership owes direct fiduciary duties to the partnership and to its limited partners.¹¹Chancellor Allen, by analogizing to fiduciary duties under trust law, extended this principle in In re USACafes, L.P. Litigation ("In re USACafes")¹², finding that, under certain circumstances, directors of a corporate general partner likewise may owe fiduciary duties to the partnership and to the limited partners.Chancellor Allen did not attempt to delineate the full extent of these duties, but they must surely entail "the duty not to use control over the partnership's property to advantage the corporate director at the expense of the partnership."¹³This case requires that I examine the parameters of the fiduciary duties articulated by Chancellor Allen and apply them to the facts pleaded here by plaintiffs.

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