Kaye Scholer Thwarts Passport’s Motion to Dismiss ESG Capital Partners’ Case

December 16, 2015

»  Click here to read more about the case win on Law360.Kaye Scholer secured a significant victory for investment fund client ESG Capital Partners II LP in its case against Passport Special Opportunities Master Fund and other defendants when the Delaware Chancery Court on December 16 denied Passport’s motion to dismiss. Vice Chancellor Laster’s careful and well-reasoned decision paves the way for ESG to vindicate the rights of the limited partners who have yet to receive a distribution and have suffered two substantial blows in connection with their investmentfirst at the hand of Mr. Timothy Burns, the former general partner in ESG; and, thereafter, at the hands of Passport and the other defendants, who have failed to return their Facebook shares for distribution to all limited partners in accordance with the provisions of the limited partnership agreement.

The case involves ESG’s claims to recover preferential transfers that were made to Passport and other limited partners in ESG to the detriment of the non-favored limited partners. ESG was formed in 2011 by Mr. Burns to invest in shares of Facebook in advance of Facebook's initial public offering (IPO) in 2012. Mr. Burns has been convicted criminally for wrongfully diverting the ESG partnership’s assets, and is currently incarcerated.  

Additionally, rather than making distributions of Facebook shares post-IPO in accordance with the terms of ESG’s partnership agreement, Mr. Burns made preferential transfers to certain limited partners and no distributions of Facebook shares to other limited partners. These preferential transfers violated the terms of the partnership agreement because they were not made in proportion to the limited partners’ interest in the partnership and, accordingly, gave Passport and the other preferred limited partners “greater than their respective percentage interest in the shares.”

ESG filed an action with the Delaware Chancery Court to recover, for the benefit of all limited partners in the partnership, the Facebook shares that were transferred by Mr. Burns to Passport and the other preferred limited partners (or the current value of those shares) so that ESG can allocate those shares, or the current value thereof, for the benefit of all limited partners in accordance with the provisions of the partnership agreement. 

In denying Passport’s motion to dismiss, Vice Chancellor Laster of the Delaware Chancery Court rejected as “frivolous” Passport’s argument that by purchasing units in the partnership, it acquired the right to a particular number of Facebook shares. V.C. Laster also rejected Passport’s argument that the preferential transfer it received was protected because of a side letter that Passport had entered into with ESG. Specifically, V.C. Laster held that “the integration clause in the Subscription Agreement wiped out the Side Letter, which could not confer super-limited-partner status on the Passport Fund in any event.”

Kaye Scholer Bankruptcy & Restructuring partners Madlyn Primoff and Benjamin Mintz, supported by Litigation associate Kyle Gooch, represent ESG in the case against Passport.

» Read the full court decision here. 

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