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Litigation: No personal jurisdiction in Delaware over managers of state LLPs for breach of fiduciary duty claims

Delaware Supreme Court decision may result in an amendment to the LLP Act

On Nov. 14, in New Media Holding Co., LLC v. Brown, Chancellor Leo E. Strine Jr., held that Delaware law provides no statutory basis for exercising jurisdiction over the manager of a Delaware limited liability partnership for breaches of fiduciary duty in the course of his work for the partnership, absent acts taken in Delaware in furtherance of the alleged wrongdoing.

New Media Holding Co. LLC alleged that Grant Brown and Capita Fiduciary Group abused their management position and helped dilute Plaintiff’s stake in a television network. Capita Fiduciary sought to dismiss the action for lack of personal jurisdiction and for improper venue. In the alternative, Capita Fiduciary sought to stay the action until a related action in New York became final and unappealable. The Court of Chancery granted defendants’ motion to dismiss, holding that the court does not have personal jurisdiction over the defendants, and therefore ruled Capita Fiduciary’s other arguments were moot. This case offers insight into the limits of Delaware’s long-arm statute.

In 2007, Vladimir Gusinski and Konstantin Kagalovsky created a television network, Iota Ventures LLC, and later converted it into Iota Ventures LLP (Iota), a Delaware limited liability partnership. Kagalovsky offered Gusinski a 50 percent stake in Iota, which Gusinski held through New Media.

Grant Brown managed Iota on behalf of his employer, Capita Fiduciary Group, a fiduciary service company. New Media alleged that Capita Fiduciary abused its management position and helped dilute New Media’s stake in the television network from 50 percent to 0.3 percent. For that reason, New Media claimed the court had jurisdiction over the Capita Fiduciary under both 10 Del. C. § 3104 and 6 Del. C. § 18-109(a). Nevertheless, in response to a motion challenging personal jurisdiction, the court held: (1) it does not have jurisdiction over Capita Fiduciary under 10 Del. C. § 3104 because New Media failed to show Capita Fiduciary’s alleged acts occurred in Delaware; and (2) 6 Del. C. § 18-109(a) does not apply because Iota was converted into an LLP before any of the challenged acts took place and before New Media invested in Iota.

The court held it did not have jurisdiction over Capita Fiduciary under Delaware’s long-arm statute because none of Capita Fiduciary’s alleged actions occurred in Delaware. Under 10 Del. C. § 3104, courts of Delaware may exercise personal jurisdiction over a nonresident defendant who “transacts any business or performs any character of work or service in [Delaware],” where the cause of action “arises from that business, work, or service.” New Media argued that Capita Fiduciary creating Iota as a Delaware entity, paying annual partnership taxes, and filing annual reports in Delaware is sufficient to confer jurisdiction over Capita Fiduciary. The court disagreed because New Media’s claims that its stake in the partnership was unfairly diluted are not related to acts that Capita Fiduciary carried out in Delaware, and no act in Delaware was necessary to, or done in connection with, the alleged dilutive scheme.

The court also held that it did not have jurisdiction over Capita Fiduciary under 6 Del. C. § 18-109(a), part of the Delaware Limited Liability Company Act (LLC Act), which permits service of process on the managers of limited liability companies, because Iota was converted into an LLP before any of the alleged fraudulent acts took place and before New Media invested in Iota. Consequently, jurisdiction conferred by the LLC Act ended when Iota was converted into a LLP.

If the Delaware Supreme Court agrees that the current statutory scheme fails to extend personal jurisdiction over managers of Delaware LLPs for claims that they breached their fiduciary duty to the LLP, then the LLP Act is likely to be amended.

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John Reed

John Reed is a partner the Delaware office of DLA Piper, where he concentrates his practice on corporate litigation and counseling. He can be contacted...

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