On February 15, 2012, the Court of Chancery issued a decision in the matter of In re Estate of Everett T. Conaway, which reinforces the notion of freedom of contract under the Delaware Revised Uniform Limited Partnership Act (“DRULPA”).  In this case, Vice Chancellor Glasscock analyzed whether a restraint on alienation in a partnership agreement was valid, thereby precluding a limited partner’s ability to transfer his ownership in such partnership.

Background

Jesse Conaway and Everett Conaway formed a limited partnership, the purpose of which was to provide a mechanism by which Everett could make transfers of appreciated stock to Jesse through the transfer of limited partnership interests in the limited partnership, thus limiting tax exposure.  The original limited partners were Everett Conaway as trustee of the Everett T. Conaway Revocable Trust (“ETC Trust”), and Jesse Conaway as trustee of the Jesse Frederick Conaway Declaration of Trust (“JFC Trust”).

After entering into the LPA, Everett Conaway amended the ETC Trust so that the interest of the trust passed to Janice Conaway, as opposed to Petitioner.  This transfer was made without the consent of the JFC Trust.  Therefore, Petitioner Jesse Conaway sought a declaratory judgment that such amendment violated the restriction on alienation of the LP, given that at the time the LP was formed, the interest of the ETC Trust was to be inherited by Jesse Conaway.

Analysis

The specific language of the alienation provision of the limited partnership agreement (“LPA”) provides, in relevant part:

Any Partner may transfer or assign his or her partnership interest in the Partnership to another Partner or Partners. Except as set forth herein, . . . the Limited Partner shall not sell, transfer or assign all or part of the Limited Partner’s interest in the Partnership or substitute an assignee as Limited Partner without the written consent of the General Partner  and nontransferring Limited Partner.

In its analysis, the Court emphasized the contractual freedom given under the DRULPA to parties entering into a limited partnership agreement.  Analyzing the provision in the context of the contractual freedom under DRULPA, the Court ruled that the LPA’s language clearly and unambiguously prevents restriction on the transfer of partnership interests. 

Respondent argued that Petitioner’s withholding of consent constituted a breach of fiduciary duty and self dealing.  The Court rejected this argument, and held that Petitioner merely exercised his contracted-for rights under the LPA.  The Court also rejected Respondent’s argument that the restraint constituted an unreasonable restraint on alienation.  Finally, the Court rejected Respondent’s argument that the transfer restriction violated the principle of upholding the testator’s (Everett’s) intent, and held that the testator’s intent cannot change preexisting contractual obligations.

Conclusion

This decision is significant in that it demonstrates the significance of contractual freedom under the DRULPA, and it shows the Court’s inclination to uphold restraints on alienation of partnership agreements which are clear and unambiguous.