Delaware Court of Chancery Certifies Class Action Alleging Self-Interested Conversion from LP to LLC

Delaware Court of Chancery Certifies Class Action Alleging Self-Interested Conversion from LP to LLC

Garrett v. Zon Capital Partners, L.P., C. A. No. 5607-CS (Del. Ch., Nov. 10, 2011), read letter ruling here.

Issue Addressed:

Whether a motion for class certification should be granted pursuant to Court of Chancery Rule 23 in connection with a complaint that alleges a self-interested transaction in which a majority of limited partners voted to convert an LP into an LLC.

Brief Background:

The defendants largely agreed to class certification under Rule 23. The LLC involved had 4 classes of membership: A, B, C and D. The defendants only objected to the inclusion in the class of 10 Class B Members who also made investments as Class A Members. They argued, based in part on deposition transcripts, that those who were both Class B Members and Class A Members had conflicting economic interests as compared to those who were only Class B Members.

Legal Analysis:

The Court explained the two-step analysis it conducts to determine the appropriateness of class certification:

Class certification under Rule 23 involves a two-step analysis, and the plaintiff
seeking certification bears the burden of establishing that each step is satisfied in
accordance with the Rule.

The first step requires satisfaction of Court of Chancery Rule 23(a), which requires the party seeking class certification to demonstrate that: (1) "the class is so numerous that joinder of all members is impracticable;" (2) "there are questions of law or fact common to the class;" (3) "the claims or defenses of the representative parties are typical of the claims or defenses of the class;" and (4) "the representative parties will fairly and adequately protect the interests of the class."

If the proponent of class certification is able to establish the four elements under Rule 23(a), the second step of the class certification analysis requires a demonstration that the class is maintainable as a class action under at least one of the three recognized "prerequisites" contained in Rule 23(b)(1) through (3). The plaintiffs in this case claim to satisfy Rule 23(b)(1)(B) because "[t]he prosecution of separate actions by or against individual members of the class would create a risk of . . . [a]djudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests," as well as Rule 23(b)(3) because "questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and . . . a class action is superior to other available methods for the fair and efficient adjudication of the controversy . . . ." (citations omitted).

In rejecting the defendants' arguments, the Court reasoned that: "... although the Class A Members receive distributions before the Class B Members begin to share in the distributions, a successful prosecution of the class action would only have the effect of requiring the General Partner to repay distributions it allegedly wrongfully accelerated to itself (as a Class C Member) or to the BlackRock
entities under the terms of the LLC Agreement and distribution scheme above [described in a chart provided in the Court's decision,] and would not have any adverse effect on the Class A Members."

In sum, the Court granted the motion to certify the class as described in more detail in the decision.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

For more information about LexisNexis products and solutions connect with us through our corporate site.