Spencer L. Murfey, III v. WHC Ventures, LLC ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: December 7, 2021
Date Decided: January 25, 2022
Carl D. Neff, Esquire Raymond J. DiCamillo, Esquire
FisherBroyles, LLP Richards, Layton & Finger, P.A.
Brandywine Plaza West One Rodney Square
1521 Concord Pike, Suite 301 920 N. King Street
Wilmington, Delaware 19803 Wilmington, Delaware 19801
RE: Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
Dear Counsel:
Pending before me are cross-motions for summary judgment on defendants’
counterclaim Count I and plaintiffs’ Count II. After my bench ruling on July 7,
2021,1 the only issue remaining to be decided in connection with those motions is
whether Section 4.3.1(b) of the partnership agreements at issue allows the general
partner to shift attorneys’ fees from litigation against a limited partner to that limited
partner. I asked for supplemental briefing, and received it in December 2021.2 I
write to resolve that issue today.
1
Docket Item (“D.I.”) 102.
2
D.I. 113; D.I. 118; D.I. 119.
Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
January 25, 2022
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As an initial matter, the defendants have withdrawn their counterclaim Count
I and have agreed not to seek to shift fees for this matter under Section 4.3.1.3 The
defendants urge that Section 4.3.1’s interpretation is therefore only relevant to future
and hypothetical disputes, and so the dispute over its meaning is unripe. But the
defendants overlook plaintiffs’ Count III, which asserts the defendants breached the
partnership agreements by shifting fees against the limited partner for previous
litigation, because neither Section 4.3.1 nor any other section in the partnership
agreements permit that fee-shifting.4 That dispute is live; it is not hypothetical; and
no additional facts will develop to advance the dispute for better presentation to the
Court. Under a practical and common-sense consideration, I conclude that the
dispute over the meaning of Section 4.3.1 is ripe for judicial determination,5 and that
the declaratory judgment sought in plaintiffs’ Count II fairly advances the
justiciability of the breach claim in Count III.6
3
D.I. 111; D.I. 118 at 2 (referencing “WHC Defendants’ agreement not to allocate fees in
connection with this litigation”); id. at 3 (“Additionally, after the Ruling, the WHC
Defendants agreed not to allocate fees under Section 4.3.1 in connection with this litigation
and to dismiss Counterclaim I, which dismissal occurred on October 14, 2021.”).
4
D.I. 73 ¶¶ 94–99.
5
See Schick Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235,
1238–39 (Del. Ch. 1987).
6
See Rollins Int’l, Inc. v. Int’l Hydronics Corp., 303 A.2d 660, 662 (Del. 1973) (noting a
purpose of declaratory judgment is to advance the stage of justiciability); see also id. at
Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
January 25, 2022
Page 3 of 7
And so I turn to the meaning of Section 4.3.1. It reads:
4.3.1 Certain Costs and Expenses.
(a) Reserves. The General Partner may cause some or all of the amount
of any reserve described in Section 3.2 and any increase or decrease in
any such reserve, to be specially accrued and charged against the
Partnership’s Net Asset Value, the proceeds of a Limited Partner’s
mandatory withdrawal, or a particular Partner to whom the General
Partner determines that expense, liability or contingency is attributable
and/or some combination of those, with whatever adjustments the
General Partner determines are equitable and consistent with the intent
expressed below. The Partners intend in this Section 4.3.1 and other
provisions in this Agreement related to reserves, to authorize the
General Partner to take steps to cause, to the extent the General Partner
considers equitable and practicable, particular contingent costs to be
borne by Limited Partners to whom those costs arc attributable.
(b) Other Special Costs. The Partnership may cause any expenditures,
payments or amounts that the General Partner determines are, were or
should be made or withheld on behalf of, for the benefit of, or because
of circumstances applicable to, fewer than all Partners to be charged to
those Partners.7
“A fee-shifting provision must be a clear and unequivocal agreement triggered
by a dispute over a party’s failure to fulfill obligations under the contract.”8 It must
662–63 (accepting as ripe a defendant’s declaratory judgment counterclaim filed after the
plaintiff dismissed its claim on those same rights).
7
D.I. 73 at Ex. L § 4.3.1 [hereinafter “LPA”] (emphasis omitted). The parties agree that
this LPA is representative of all the partnership agreements in this case.
8
Facchina Constr. Litigs., 2021 WL 1118115, at *2 (Del. Super. Mar. 24, 2021) (citing
SARN Energy LLC v. Tatra Defence Vehicle A.S., 2019 WL 6525256, at *1 (Del. Super.
Oct. 31, 2019)); Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2020
WL 7861336, at *5 (Del. Ch. Dec. 31, 2020) (“[I]ndemnity agreements are presumed not
to require reimbursement for attorneys’ fees incurred as a result of substantive litigation
Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
January 25, 2022
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include “specific language,” such as “any reference to ‘prevailing parties,’ a
hallmark term of fee-shifting provisions.”9 This requirement is observed with
particular obedience in interpreting cost-shifting provisions between litigants, so that
first-party cost-shifting does not swallow the American Rule.10 Section 4.3.1 shifts
an “expense, liability or contingency,” or “special costs,” namely “expenditures,
payments or amounts,” at the general partner’s discretion.11 It does not clearly or
unambiguously shift fees in litigation.
Reading the agreement as a whole does not support characterizing
Section 4.3.1 as a fee-shifting provision. Section 4.3.1 appears in Article IV,
between the parties to the agreement absent a clear and unequivocal articulation of that
intent.” (internal quotation marks omitted) (quoting Senior Hous. Cap., LLC v. SHP Senior
Hous. Fund, LLC, 2013 WL 1955012, at *44 (Del. Ch. May 13, 2013))), aff’d sub nom.
Herzog v. Great Hill Equity P’rs IV, LP, 2021 WL 5993508 (Del. Dec. 20, 2021); Int’l Rail
P’rs LLC v. Am. Rail P’rs, LLC, 2020 WL 6882105, at *5–6 (Del. Ch. Nov. 24, 2020)
(collecting Superior Court cases regarding fee shifting provisions), cert. denied, (Del. Ch.
2020), and appeal refused, 245 A.3d 517 (Del. 2021).
9
Senior Hous. Cap., 2013 WL 1955012, at *45 (“Here, there is no specific language in the
indemnification provision of the Management Agreements that covers fee-shifting.
Therefore, I will not interpret the provision in an expansive way that would be inconsistent
with the American Rule.”); Nasdi Hldgs., LLC v. N. Am. Leasing, Inc., 2020 WL 1865747,
at *6 (Del. Ch. Apr. 13, 2020) (ORDER) (citations omitted).
10
Senior Hous. Cap., 2013 WL 1955012, at *44; accord Deere & Co. v. Exelon Generation
Acqs., LLC, 2016 WL 6879525, at *1 (Del. Super. Nov. 22, 2016) (finding indemnification
provisions must specifically address fee-shifting to achieve fee-shifting, to prevent
“swallow[ing] the American Rule”).
11
LPA § 4.3.1.
Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
January 25, 2022
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“Accounts and Allocations.”12 It follows Section 4.2’s allocations of profits and
losses.13 It precedes Section 4.3.2, which refers to Section 4.3.1 in the context of
“assets that give rise to special allocations pursuant to . . . Section 4.3.1.”14 Section
4.4.2 references adjusting each partner’s capital account for “any costs, expenses or
charges” allocated pursuant to Section 4.3.1.15 The rest of Article IV addresses the
allocation of gains, income, losses, deductions, and tax liability. This context in
Article IV supports the interpretation that Section 4.3.1’s “special costs” represent
operating expenses, not intra-partnership litigation.16
The partnership agreement also contains a separate fee-shifting provision.
Section 14.14 shifts fees to the prevailing party in an arbitration, an option available
if either litigant in an inter-partnership dispute elects it.17 Section 14.14 on its face
does not shift fees in litigation. The presence of Section 14.14 indicates the parties
were aware of how to shift fees, and intended to shift fees only in arbitration. Section
12
Id. at Art. IV.
13
Id. § 4.2 (“Allocations of Profit and Loss”).
14
Id. § 4.3.2.
15
Id. § 4.4.2.
16
Id. § 4.3.1; see also id. § 2.1 (addressing “special charges” that the general partner can
assess to cover costs associated with accepting contributed assets).
17
Id. § 14.14 (“The arbitrator will, in the Award, allocate all of the costs of the arbitration,
including the fees of the arbitrator and the reasonable attorneys’ fees of the prevailing party,
against the party who did not prevail.”).
Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
January 25, 2022
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14.14 supports an interpretation that Section 4.3.1 does not encompass fee-shifting
in intra-partnership litigation.
Section 4.3.1 does not create a clear and unequivocal agreement to shift fees
to a limited partner when the general partner prevails in litigation against that limited
partner. Summary judgment is entered in favor of plaintiffs on defendants’
counterclaim Count I and plaintiffs’ Count II. To the extent an order is required to
implement this ruling, IT IS SO ORDERED. The parties shall confer on what
remains to be done in this matter and submit a schedule for accomplishing those
tasks.
Spencer L. Murfey, III, et al. v. WHC Ventures, LLC, et al.,
Civil Action No. 2020-0704-MTZ
January 25, 2022
Page 7 of 7
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
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