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Limited partner can’t file derivative suit for p’ship

A family dispute over a Toyota dealership in Northern Virginia has produced the first appellate ruling in the state over the standing of a limited partner to file a derivative action on behalf of the partnership.

The Supreme Court of Virginia ruled on April 18 that the limited partner lacked standing to bring the suit largely because he had economic interests different from those of the partnership.

The dispute stemmed from the financial arrangement Louis Allen Jennings, the proprietor of the Toyota dealership in Springfield, and his wife set up for their five children. The youngest child, Michael, received the dealership, and his four siblings maintained ownership through a limited partnership of one of two parcels on which the dealership is located. The partnership also had a 99-year-lease on the second parcel.

The dealership paid the partnership $50,000 a month, beginning in 1994, with options to extend the lease for additional five-year periods, as a lease on the first parcel and a sublease on the second.

As the proprietor of the dealership, Michael attempted in 2004 to have the partnership subordinate the lease to a construction loan for expansion of the dealership. His siblings refused, and only one of them took him up on his offer to pay each of them $2 million for his or her interest in the partnership.

Michael became upset about statements by his older brother, Louis, to Toyota officials suggesting that the lease between the partnership and the dealership was invalid. Robert E. Scully Jr., the Alexandria attorney who represented the partnership, said Louis believed that the structure of the inheritance of the dealership favored Michael at the expense of Louis and three sisters.

The sisters took no position on the dispute other than to write a “To Whom it May Concern” letter stating, in effect, that that one general partner could not unilaterally make decisions for the partnership.

Michael filed a derivative suit seeking to have Louis removed from the partnership because his statements were inconsistent with the interests of the corporation.

While the suit was pending, Michael bought the property for which the partnership had a 99-year lease and told it that he intended to raise the rent from $2,500 to $10,500 a month.

He also told the family members that any dispute over the rent would have to be arbitrated and that he would seek back rent of $3 million and an even greater rent increase if they challenged his actions. That issue already has been arbitrated, Senior Justice Elizabeth B. Lacy noted in her unanimous opinion, Jennings v. Kay Jennings Family Limited Partnership, (VLW 008-6-046).

The partnership responded to Michael’s suit by contending that he lacked standing to sue because he did not “fairly and adequately represent the interests” of the partnership as required by under Virginia Code § 50-73-62.

In the absence of Virginia authority, Fairfax Circuit Judge Michael P. McWeeny relied on the eight-part test established in the Davis v. Comed Inc. 619 F. 2d 588 (6th Cir. 1980), the leading case on standing to bring a derivative action.

McWeeny focused on three of the eight elements: economic antagonisms between the representative and the other limited partners, other litigation pending between the plaintiff and the defendants, and the degree of support for the plaintiff from the other partners.

The judge ultimately concluded that Michael’s interests were different from those of the partnership because he had an interest as the owner of the dealership in diminishing rent while the partnership had an interest in maximizing it.

Lacy endorsed McWeeny’s analysis. “Michael’s economic interests as both landlord and lessee of the Partnership created a direct conflict, particularly in light of the fact that Michael’s income from the Partnership was substantially less than the income from his dealership,” she wrote.

“And throughout the record Michael made it clear that his actions were inspired by his desire to ‘control’ the partnership,” she said.

Scully said the analysis “confirms what most assumed is what the law ought to be” in the absence of any case even close to the point. The ruling is important, however because “it gives you a case to cite,” he said.

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