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Paige Capital Mgmt., LLC v. Lerner Master Fund, LLC - Civil Action No. 5502-CS, 2011 Del. Ch. LEXIS 116 (Ch. Aug. 8, 2011)


New York law is clear that contracts must be read as a whole and in a manner that gives effect to every provision. Where there is more than one agreement that governs a contractual relationship of parties, then a court may look to the agreements to see if they have a "collective design." Where there is more than one agreement, the more specific agreement is generally given precedence over the more general.

A director, member, or officer of a corporate entity serving as the general partner of a limited partnership who exercises control over the partnership's property owes fiduciary duties directly to the partnership and its limited partners.


Michele Paige, a hedge fund manager had achieved some success working for other established investment firms and hoped to strike out on her own. Paige bargained with the Lerner Master Fund, LLC, (Lerner) a seed investor, for the latter to invest in the first investment fund she had ever managed on her own. The idea was that Lerner would benefit not only from the gains on its investment, but would also share some of the fees that would be generated when the "Hedge Fund" found additional investors. To facilitate the investment, Paige and Lerner negotiated a specific contract governing their relationship. That contract was executed by Lerner and Lerner also signed on to the Limited Partnership Agreement (the "Partnership Agreement") that would govern all investors in the Fund. In the specifically negotiated Revenue Sharing Agreement (the "Seeder Agreement"), Lerner was generally precluded from withdrawing its capital for three years upon penalty of paying an identified sum of liquidated damages and could only withdraw without cost if the hedge fund manager committed a breach of fiduciary duty, lost a key individual, failed to abide by risk covenants, or materially breached the Seeder Agreement. About a year into the three-year period, Lerner began to evaluate all of its investments in hedge funds given the weakened state of the market, and has come to the conclusion to withdraw its entire investment. In response, Paige refused to return Lerner’s capital, arguing that it was entitled to raise the "Gates" contained in the generally applicable Partnership Agreement. The "Gate Provision" enabled Paige to restrict a withdrawal of capital if it would result in more than 20% of the total assets of the Hedge Fund being withdrawn in any six-month period. Because Paige had never secured any other outside investor in the Fund, Lerner’s $40 million investment comprised over 99.9% of the Fund's invested capital. Because of Paige’s refusal to return Lerner’s investment, several actions were filed in court including breach of contract. 


Can Michele Paige use the “Gate Provision” in the parties' limited partnership agreement to restrict the withdrawal of capital by Lerner Master Fund, LLC, its seed investor?




The court found that Paige was not contractually entitled to use the “Gate Provision” in the parties' limited partnership agreement to restrict the withdrawal of capital by Lerner Master Fund, LLC, its seed investor. When pertinent principles of contract law were considered, the terms of the parties' revenue sharing agreement (RSA) setting forth the conditions and time frame under which the seed investor could withdraw had to be read as exclusive and as excluding any application of the gates provision, which would undercut the specifically negotiated withdrawal arrangements in the RSA. That finding was consistent with the expectation created Paige and her representatives during negotiations, when she made clear that the limited partnership agreement contemplated specific bargains with particular large investors like the seed investor and thus that the specific deal embodied in the RSA was in essence, the deal. Therefore, the court concluded that Paige’s refusal to honor the withdrawal request and return the seed investor's capital in full was a violation of the RSA and a breach of contract.

The court ordered that Lerner’s capital be returned with an appropriate award of pre-judgment interest. Among other orders, Paige and her husband were made to repay the hedge fund any management and incentive fees earned on the seed investor's capital since October 31, 2010. Paige and her husband were also ordered to repay the hedge fund any fees and expenses advanced by the hedge fund related to the litigation.

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