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Court of Chancery Interprets Partner Duties

Posted In LP Agreements

Forsythe v. ESC Fund Management Co., C.A. No. 1091-VCL (October 9, 2007).

The duties of a general partner in a Delaware limited partnership are governed by the partnership agreement. But when those duties may be delegated to third parties under the terms of the partnership agreement, the GP duties are less clear. Here, the Court had to decide if the scienter required by the Caremark case applied to hold the GP liable if red flags pointed to abuses by the parties running the show or whether instead the general partnership obligations of a GP to be responsible for its agents was the standard to apply.

Recognizing that in this case the authority to delegate to third party managers with clear conflicts of interest put the GP on notice, the Court held that the GP had more than just Caremark-like duties -there was a duty of more active inquiry.

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