Delaware Business Litigation Report

Court of Chancery Finds Majority Stakeholder, Chief Executive Officer and General Partner of Limited Partnership Breached His Fiduciary and Contractual Duties to Limited Partnership

McGovern v. General Holding, Inc., C.A. No. 1296-N, 2006 WL 1468850 (Del. Ch. May 18, 2006). Plaintiffs brought action individually and on behalf of limited partnership against 90% owner of limited partnership for, among other things, breach of fiduciary duty and breach of limited partnership agreement. Plaintiffs were business partners with Defendant Evan Koslow in a limited partnership called KXI Industries, Inc. Koslow owned approximately 90% of KXI, served as its CEO and chief inventor and acted as its general partner through a wholly owned subsidiary. Plaintiffs owned approximately 10% of KXI. Before Plaintiffs invested in KXI, Koslow formed KXI as a joint venture with Exxon in 1989. Pursuant to the partnership agreement, another Koslow entity, KT, was required to grant KXI a license to certain filter technology. The partnership agreement allowed Koslow to use KXI assets for non-KXI purposes during the first three years of KXI as long as such use did not interfere with KXI. Koslow was also required to reimburse KXI for use of such assets. In 1989, Koslow also caused KT and KXI to enter into a license agreement (the "1989 License Agreement") requiring KXI to transfer any improvements it made to the technology licensed by KT to KT. After Exxon withdrew from KXI, Plaintiffs invested in it and Koslow began conducting all his research activities through KXI. KXI funded all research and development; KT had no employees or research facilities. In early 2005, Koslow no longer wished to work with Plaintiffs and announced that many technologies developed by KXI actually belonged to KT pursuant to the 1989 License Agreement. Koslow began pursuing opportunities to exploit these technologies without KXI or Plaintiffs. As a result, Plaintiffs instituted this action. After trial, the Court held that Koslow breached his fiduciary and contractual duties to KXI by trying to usurp technologies KXI developed at its own expense for himself. The Court rejected Koslow's reliance on the 1989 License Agreement as justifying his actions because: (1) the 1989 License Agreement was moribund after Exxon withdrew and of dubious validity to begin with; (2) even if the agreement was in effect, Koslow could not use KXI's resources to pursue technologies that would only benefit KT; and (3)throughout discovery, Koslow took the position that improvements made by KXI were not based on the technologies covered by the 1989 License Agreement. The Court removed Koslow as a general partner and appointed a receiver to sell KXI. To prevent Koslow from interfering with the sale process, the Court held Koslow could not bid on KXI and could not compete with KXI for three years. As a result of his breaches of fiduciary duty and the limited partnership agreement, the Court ordered Koslow to reimburse KXI for attorneys' fees he caused KXI to advance to him. The Court also found that KXI was required to bear Plaintiffs' attorneys' fees because their suit conferred a benefit on KXI. Share