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Chancery Declines to Award Damages Equivalent to Contractual Dissociation Remedy Under Partnership Agreement

Posted In Chancery, LLCs/LLPs

In re Cellular Telephone Partnership Litigation, Coordinated C.A. No. 6885-VCL (Del. Ch. Sept. 28, 2021)
Plaintiffs held a minority interest in a partnership owned and controlled by AT&T. In 2010, AT&T implemented a transaction causing the partnership to transfer its assets to an affiliate, freezing out the plaintiffs. In connection with the freeze out, plaintiffs received $4.1 million—their pro rata share of the $219 million that AT&T paid to the partnership. Plaintiffs later brought an action in the Court of Chancery alleging that by implementing the transaction, AT&T breached the partnership agreement on a number of different bases.

Following a five-day trial, the Court of Chancery rejected all but one of the plaintiffs’ claims, finding that plaintiffs had successfully established that AT&T breached the “title” provision in the partnership agreement. That provision required certain partnership assets to be held in the name and for the benefit of the partnership, but, instead, AT&T held the assets for its own benefit. In connection with this breach, plaintiffs sought the monetary equivalent of the “contractual dissociation” damages provided for in the partnership agreement. Pursuant to the agreement’s terms, a partner committing a material breach could be dissociated from the partnership and, if the executive committee determined that the non-exclusive remedy was appropriate, the dissociated partner would receive the value of its capital account and the non-breaching partners would receive a pro rata allocation of the breaching partner’s interest.

The court declined to award plaintiffs dissociation damages in the circumstances, finding that such an award would be “unconscionably disproportionate” to the harm caused by the breach. Instead, the court awarded plaintiffs compensatory damages of approximately $40,000 plus pre- and post-judgment interest, which constituted the proportionate share of net income AT&T should have allocated to plaintiffs had it not breached the title provision. Rejecting plaintiffs’ argument that Delaware’s contractarian approach to general partnerships supported an award of dissociation damages, the court observed that, pursuant to the partnership agreement, the dissociation remedy was not exclusive, could be waived in the sole discretion of an executive committee, and there was a material default component of the remedy. In denying the dissociation award, the court explained that the plaintiffs only prevailed in proving that AT&T breached a provision resulting in “negligible” damages and awarding dissociation damages “would be too untethered from the nature of the proven breach.”

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