Court Opinion

ID: 4401635
Source: CourtListenerOpinion
Date Created: 2019-05-29 20:03:20.379134+00
Date Added: 2024-06-11T14:52:03.906191
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

HARRY GREENHOUSE                         :
                                         :
                        Plaintiff,       :
                                         :
               v.                        :    C.A. No. 2018-0214-JRS
                                         :
POLYCHAIN FUND I LP and                  :
POLYCHAIN 2030, LLC,                     :
                                         :
                        Defendants.      :

                         MEMORANDUM OPINION

                       Date Submitted: February 25, 2019
                         Date Decided: May 29, 2019

Joseph H. Huston, Jr., Esquire and Stacey A. Scrivani, Esquire of Stevens & Lee,
P.C., Wilmington, Delaware and Todd C. Toral, Esquire and AnnaMarie A.
Van Hoesen, Esquire of Jenner & Block LLP, Los Angeles, California, Attorneys
for Plaintiff.

Jeffrey M. Gorris, Esquire and Christopher P. Quinn, Esquire of Friedlander &
Gorris, P.A., Wilmington, Delaware and J. Noah Hagey, Esquire and Taylor Altman,
Esquire of Braunhagey & Borden LLP, New York, New York, Attorneys for
Defendants.

SLIGHTS, Vice Chancellor
         This action involves a demand by Plaintiff, Harry Greenhouse, to inspect the

books and records of Defendant, Polychain Fund I LP (“Polychain” or the “Fund”),

under Delaware Revised Uniform Limited Partnership Act (“DRULPA”)

Section 17-305.1 Plaintiff purportedly seeks to inspect Polychain’s books and

records for the purpose of investigating the value of his capital account and the

amount paid to him upon his withdrawal from the partnership. At first glance, the

demand and its purpose appear proper enough. But Plaintiff has a standing problem.

When he withdrew from Polychain, he ceased being a limited partner and lost

standing to demand inspection of Polychain’s books and records.

         Plaintiff resists the premise of lost standing by pointing to the fact that

Polychain withheld 5% of his redemption upon withdrawal as an audit holdback and

then later provided him with an additional cash distribution based on assets that

could not be valued at the time of his investment. Neither the holdback nor the cash

distribution reflects equity in the firm, however, because they do not reflect an

interest that rises or falls with the value of the Fund. They are, instead, discrete

obligations and rights unique to Plaintiff in his capacity as a redeemed member.

Because Plaintiff no longer possesses an equity interest in Polychain, he has no

statutory or contractual right to inspect its books and records.

1
    6 Del. C. § 17-305.

                                           1
      Polychain has moved for judgment on the pleadings. According to Polychain,

the facts as admitted by Plaintiff demonstrate, as a matter of law, that Plaintiff is no

longer a limited partner with rights to inspect the partnership’s books and records.

For the reasons explained below, I agree. The motion for judgment on the pleadings

is granted.

                                I. BACKGROUND

      The facts are drawn from the well-pled allegations in the complaint and

documents incorporated by reference, including Polychain’s limited partnership

agreement (the “LPA”) and correspondence by and between Plaintiff and

Polychain.2 I have afforded Plaintiff all reasonable inferences, as I must on a motion

for judgment on the pleadings.3

    A. Parties and Relevant Non-Parties

      Defendant, Polychain, is a Delaware limited liability company. It is a fund

comprising a portfolio of blockchain assets that includes digital currencies and

2
  See Credit Suisse Sec. (USA) LLC v. W. Coast Opportunity Fund, LLC, 2009
WL 2356881, at *3 (Del. Ch. July 30, 2009) (noting, on a motion for judgment on the
pleadings, “[t]he Court may consider the unambiguous terms of exhibits attached to the
pleadings and those incorporated into them by reference”).
3
  See Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d
1199, 1205 (Del. 1993) (noting, on a motion for judgment on the pleadings, “a trial court
is required to view the facts pleaded and the inferences to be drawn from such facts in a
light most favorable to the non-moving party”); Graulich v. Dell, 2011 WL 1843813, at *4
(Del. Ch. May 16, 2011) (“In ruling on a motion for judgment on the pleadings, the Court
must take the well-pled facts alleged in the complaint as true . . . .”).

                                           2
“Simple Agreements for Future Tokens” (“SAFTs”).4 Defendant, Polychain 2030,

LLC, is Polychain’s current general partner.5 Nonparty, Polychain Capital LP

(“Polychain Capital”), was the general partner of the Fund at the time of Plaintiff’s

withdrawal from the partnership.6 Plaintiff, Harry Greenhouse, claims to be a

limited partner of Polychain.7

     B. Plaintiff Redeems His Interest in Polychain

         On November 13, 2017, Polychain Capital requested that the limited partners

consent to, among other things, the designation of “side pockets” for certain of the

Fund’s investments, including SAFTs.8 Limited partners were told that if they did

4
  Compl. ¶¶ 3, A. 1. Because the complaint uses paragraph numbers 1–5 twice, references
to the second set of paragraphs 1–5 are indicated with the preface “A,” the letter of the
subheading under which the paragraphs appear in the Complaint.
5
    Compl. ¶ 4.
6
    Compl. ¶ A. 3.
7
    Compl. ¶¶ 5, 30.
8
  Compl. ¶¶ 11–12. A “side pocket” is a type of account used by hedge funds to separate
illiquid, hard-to-value assets from liquid assets. See Henry Ordower, Demystifying Hedge
Funds: A Design Primer, 7 U.C. Davis Bus. L.J. 323, 328 (2007). Funds treat side pocket
accounts in various ways depending on the fund’s investment goals and the nature of the
assets placed in the accounts: “(i) some funds estimate the value of side pocket positions
and include a payment for them in the redemption price; (ii) more often, funds permit
investors to redeem the liquid portion of their interests but retain the investor in the fund
with respect to the investor’s share of illiquid positions; (iii) other funds exclude side
pocket value from the redemption proceeds for investors wishing to redeem from the fund
before the illiquid positions are sold, so that the redeeming investor simply relinquishes
any interest in the side pocket; (iv) in order to avoid harsh results, managers occasionally
create a separate class of fund interests with some investors only sharing in the liquid
                                             3
not provide their consent by November 30, 2017, they would be withdrawn from the

partnership as of December 31, 2017.9

         Two weeks later, on November 27, 2017, Plaintiff notified Polychain Capital

that he intended to make a full redemption of his capital account.10 He alleges that

he based this decision on assurances from Joseph Eagan, Polychain Capital’s Chief

Operating Officer, that the Fund’s most liquid assets would be valued for redemption

at prices as of December 31, 2017, and that there would be a framework to value

less liquid assets.11 Eagan also stated that the illiquid assets would be placed in side

pockets and excluded from the redemption until they were deemed to be liquid by

Polychain Capital.12 Two days after Plaintiff determined to withdraw, Polychain

Capital’s chief of staff, Caroline Jaquiss, informed Plaintiff that his redemption

would be valued “under the old terms,” and that no assets would be side-pocketed.13

         Over the next few weeks, Plaintiff attempted to obtain more information

regarding the valuation of his redemption. On December 13, 2017, an email from

positions in the fund’s portfolio, while others, with a longer-term appetite for commitment,
participate in the side pocket portion of the fund as well.” Id.
9
    Compl. ¶ 12.
10
     Compl. ¶ 15.
11
     Compl. ¶¶ 10, 14–15.
12
     Compl. ¶ 14.
13
     Compl. ¶¶ 7, 16.

                                             4
counsel for Polychain Capital, Karl Cole-Frieman, to Greenhouse largely confirmed

Eagan’s prior assurances concerning the valuation procedures.14 Because Plaintiff

requested full withdrawal before Polychain had designated any side pockets,

however, Polychain Capital determined that his redemption would be valued without

the benefit of excluding less liquid assets from the valuation process until their

liquidity improved.15

           In the following weeks, counsel for Plaintiff sought information regarding the

valuation policy but was told the policy would not be disclosed.16 Hoping to reach

an agreement on the side pockets or at least on a more beneficial procedure for

valuing Plaintiff’s interests, Plaintiff’s counsel requested on December 26, 2017,

that Polychain suspend Plaintiff’s redemption request.17 Polychain refused.18

           On January 25, 2018, Plaintiff received an investor statement indicating that

his account had been fully redeemed; four days later, he received and accepted a

14
   Compl. ¶ 17; Compl., Ex. D (email from Cole-Frieman, dated December 13, 2017,
explaining that all assets would be priced as of December 31, 2017, certain less liquid
assets would be priced at fair market value as determined in Polychain’s discretion and
others would continue to be held at cost).
15
     Id.
16
     Compl. ¶¶ 18, 19; Compl., Ex. E.
17
     Compl. ¶ 20; Compl., Ex. F.
18
     Compl. ¶ 21; Compl., Ex. G.

                                              5
wire transfer for the withdrawal.19 Polychain withheld 5% of Plaintiff’s capital

account as an audit holdback per the LPA.20

      C. The Books and Records Demand

         Section 10.2 of the LPA permits the Fund’s limited partners to inspect the

books and records of the partnership as provided under DRULPA.21 After his

repeated efforts to obtain information through other means failed to yield results, on

February 28, 2018, Plaintiff finally made a written demand to inspect Polychain’s

books and records under Section 17-305.22 The demand seeks all books and records

from the time Plaintiff first invested to the date of his demand relating to:

         a. Any assets held by Polychain;

         b. Any transactions Polychain consummated with any person, entity,
            and/or investee, regarding any assets held by Polychain, including,
            without limitation, any SAFT entered into with any enterprise;

         c. Any performance, management, or consulting fees and their
            calculation paid by Polychain to anyone, including the General
            Partner;

19
     Compl. ¶ 22.
20
   Id.; Compl., Ex. A (“LPA”) § 8.04 (“[T]he General Partner shall have the right, at its
discretion, to withhold 5% of the net asset value of the withdrawn Capital Account for the
Partnership’s liabilities and other contingencies until no later than 30 days after the
completion of the year-end audit of the Partnership’s financial statements . . . .”).
21
     LPA § 10.02.
22
     Compl. ¶ 26; Compl., Ex. J.

                                            6
           d. The mathematical methodology used in respect of Mr. Greenhouse’s
              account statements and/or redemption;

           e. Any side deals or binding side letters Polychain and/or the General
              Partner entered into with any person, including, without limitation,
              any limited partner, if such side deals or letters affected or could
              have possibly affected the value of Mr. Greenhouse’s interest in
              Polychain; and

           f. Any agreements or engagements with any third parties (paid or
              otherwise) that might have affected the treatment of
              Mr. Greenhouse’s interest or its value.23

      D. Procedural Posture

           When Polychain failed to respond to his demand,24 Plaintiff filed his Verified

Complaint for Inspection of Partnership Books and Records (the “Complaint”)

on March 26, 2018.          On June 1, 2018, the Court stayed the action pending

a determination of arbitrability by an appointed arbitrator.25 On October 22, 2018,

a JAMS arbitrator determined that Plaintiff’s books and records action should be

adjudicated in this Court.26 Defendants answered the Complaint on May 11, 2018,27

23
     Id.
24
     Compl. ¶ 28.
25
     D.I. 46.
26
     D.I. 47.
27
     D.I. 49.

                                              7
and moved for judgment on the pleadings the following day.28 The motion was

submitted to the Court on February 25, 2019.

                                 II. ANALYSIS

         Defendants contest Plaintiff’s standing to inspect Polychain’s books and

records. They argue that because Plaintiff has withdrawn from the partnership and

fully redeemed his partnership interest, he is no longer a limited partner. Instead, at

most, Plaintiff is now a creditor of the Fund and, in that capacity, he no longer

possesses inspection rights. Plaintiff counters that he continues to hold an equity

interest in Polychain because his withdrawal was partial and involuntary.

He contends that Polychain redeemed him over his objection, withheld 5% of his

interest as an audit holdback and later gave him a cash distribution based on assets

in which he continued to have an interest after his redemption.

         Plaintiff’s arguments in support of his standing to seek inspection are

unpersuasive. The law is clear that only current limited partners can inspect books

and records. Unless the partnership agreement provides otherwise, limited partners

who have withdrawn from the partnership have rights and remedies as creditors of

the partnership but no longer maintain an equity interest that would entitle them to

rights as limited partners. The Complaint does not allege that Plaintiff resisted

28
     D.I. 52.

                                          8
Polychain’s refusal to suspend his withdrawal from the partnership or that he sought

to return the distribution of his capital account when he received it. His arguments

in briefing and at oral argument—that he did not want to be redeemed and, in fact,

continues to have a small ongoing equity interest based on the audit holdback and

assets that yielded a subsequent cash distribution—do not change the fact that he has

withdrawn from the partnership and no longer has rights as a limited partner.

Because he no longer retains an equity interest in the partnership, he is not entitled

to inspect the partnership’s books and records.29

29
   Because I have determined Plaintiff has no standing to compel inspection, I need not
address Defendants’ argument that Plaintiff is disqualified from seeking inspection because
he can obtain the documents in the arbitration proceeding pending between the parties. I do
note, however, that the concerns that animate the cases Defendants cite are not present here
where Defendants initiated the arbitration against Plaintiff after he had initiated this books
and records action. See CHC Invs., LLC v. FirstSun Capital Bancorp, 2019 WL 328414,
*2 (Del. Ch. Jan. 24, 2019) (explaining that simultaneous “plenary and [books and records]
complaints are inherently contradictory” because plaintiff represents, in the former, that it
has sufficient information to support its allegations, while representing, in the latter, that it
requires information to support its plenary claims; and also addressing the concern in this
context that plaintiff will abuse the inspection right as a means to end-run discovery laws);
Cent. Laborers Pension Fund v. News Corp., 2011 WL 6224538 (Del. Ch. Nov. 30, 2011)
(denying inspection where plenary court had not positively granted leave to amend); Beiser
v. PMC-Sierra, 2009 WL 483321 (Del. Ch. Feb. 26, 2009) (denying inspection where the
only purpose was to access records that would not have been available through discovery
in the plenary action); W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d
636, 641 (Del. Ch. 2006) (denying inspection where court in plenary action had dismissed
complaint without leave to amend); King v. Verifone, 12 A.3d 1140 (Del. 2011) (permitting
inspection where court in plenary action had granted plaintiff leave to amend).

                                               9
      A. Standard of Review

         Under Court of Chancery Rule 12(c), judgment on the pleadings will be

granted “if the pleadings fail to reveal the existence of any disputed material fact and

the movant is entitled to judgment as a matter of law.”30 In making a determination

on a motion for judgment on the pleadings, “the Court must take the well-pled facts

alleged in the complaint as true, and view ‘the inferences to be drawn from such

facts in a light most favorable to the non-moving party.’”31 But the Court need not

“blindly accept as true all allegations, nor must it draw all inferences from them in

[the non-moving party’s] favor unless they are reasonable inferences.”32

      B. Plaintiff Lacks Standing to Inspect Polychain’s Books and Records

         Plaintiff brings this action under 6 Del. C. § 17-305, which governs the rights

of limited partners to inspect books and records of the limited partnership in which

they are invested. Central to the statute is the refrain that the inspection right belongs

to current limited partners. As the statute makes clear, “[e]ach limited partner has

the right . . . to obtain from the general partners . . . for any purpose reasonably

related to the limited partner’s interest as a limited partner” certain books and

30
     W. Coast Mgmt., 914 A.2d at 641; see also Graulich, 2011 WL 1843813, at *4 (same).
31
 W. Coast Mgmt., 914 A.2d at 641 (quoting Meades v. Wilm. Hous. Auth., 2003
WL 939863, at *2 (Del. Ch. Mar. 6, 2003)).
32
  McMillan v. Intercargo Corp., 768 A.2d 492, 500 (Del. Ch. 2000) (quoting In re Lukens
Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999)).

                                            10
records; if the demand is made by an attorney or agent, it must be accompanied by

a writing that “authorizes the attorney . . . to so act on behalf of the limited partner”;

if the limited partnership does not respond to the demand, “the limited partner may

apply to the Court of Chancery for an order to compel such disclosure” of books and

records if “the limited partner shall first establish: (1) that the limited partner has

complied with the provisions of this section respecting the form and manner of

making demand for obtaining such information, and (2) that the information the

limited partner seeks is reasonably related to the limited partner’s interest as a

limited partner.”33 By reiterating that the statutory right of inspection belongs to

limited partners and limited partners only, the statute implicitly eliminates any claim

for inspection that other constituents of the partnership may seek to bring.

         As Defendants point out, the language in Delaware’s statute differs from the

inspection rights afforded in the Revised Uniform Limited Partnership Act

(“RULPA”).34 RULPA Section 304(e), entitled “Rights to Information of Limited

Partner and Person Dissociated As Limited Partner,” provides for “a person

dissociated as a limited partner” to “have access to information to which the person

33
     6 Del. C. §§ 17-305(a) – (d) (emphasis supplied).
34
  See RULPA § 304; see also, Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 714 A.2d
96, 101–02 (Del. Ch. 1998) (chronicling the legislative history of 6 Del. C. 17-305 and
noting its departure from RULPA generally, and RULPA § 304 specifically).

                                              11
was entitled while a limited partner” if certain conditions are met.35 Section 17-305,

on the other hand, affords no comparable right to former limited partners to inspect

a partnership’s books and records.

      The notion that inspection rights belong only to ongoing equity participants

in the limited partnership is reinforced by Section 18-305 of the Delaware Limited

Liability Company Act and Section 220 of the Delaware General Corporation Law.36

Under Section 18-305, inspection rights are provided to “[e]ach member of a limited

liability company.”37 Similarly, under Section 220, as a predicate to inspection,

stockholder plaintiffs must prove they own stock in the corporation whose records

35
  RULPA § 304(e); see also § 304, cmt. (“[the RULPA] builds on predecessor law by . . .
providing access rights for former limited partners.”).
36
  6 Del. C. § 18-305; 8 Del C. § 220; see also Gotham P’rs, 714 A.2d at 101 (explaining
that modifications to § 17-305 were intended “to inject a special proceeding equivalent to
§ 220 into the limited partnership’s statutory scheme” and noting the “strikingly similar”
language).
37
   6 Del. C. § 18-305(a); see also Prokupek v. Consumer Capital P’rs LLC, 2014
WL 7452205, at *7 (Del. Ch. Dec. 30, 2014) (“By its plain language, Section 18-305(a) of
the LLC Act confers inspection rights only on current members of an LLC.”).

                                           12
they wish to inspect,38 and former directors are not entitled to inspect books and

records of a corporation on whose board of directors they no longer serve.39

         Of course, the LPA could have provided for different inspection rights than

those granted under Section 17-305,40 but that did not happen here. To the contrary,

the LPA states, “Limited Partners shall be permitted to inspect the books and records

of the Partnership as provided under [the DRULPA].”41

         Plaintiff offers no meaningful counter to the proposition that former limited

partners are not entitled to inspect books and records of the partnership. He argues,

instead, that standing should be determined as of the date the inspection demand is

delivered to the partnership as opposed to the date the Complaint is filed. This

distinction, even if significant, does not help Plaintiff for the simple reason that he

was not a limited partner of Polychain at either time. Plaintiff was fully redeemed

38
  8 Del C. §§ 220(a), (c); see also Weingarten v. Monster Worldwide, Inc., 2017
WL 752179, at *5 (Del. Ch. Feb. 27, 2017) (dismissing plaintiff’s inspection demand
where he did not “first establish” that he was a stockholder at the time he filed his
complaint).
39
  8 Del C. § 220(d); see also Jacobson v. Dryson Acceptance Corp., 2002 WL 75473, at *4
(Del. Ch. Jan. 9, 2002) (finding removed director did not have standing to pursue his claim
under Section 220(d)).
40
     See 6 Del. C. § 17-305(f).
41
     LPA § 10.02.

                                            13
at least as of January 29, 2018, roughly one month before he delivered his formal

inspection demand and two months before he filed his Complaint.

        “Under the [DRULPA], once a partner withdraws, the partner becomes

‘simply a contract claimant holding fixed rights,’ and can sue in contract for failure

to pay the value of its share as of the withdrawal date.”42 Once Plaintiff became

entitled to a distribution of his capital account, his rights and remedies with respect

to the partnership were those of a creditor, and his rights to inspect the Fund’s books

and records were terminated:

       Books and records rights . . . are designed, for the most part, statutorily
       to allow someone who is an ongoing equity participant in an enterprise
       to seek out information relevant to its voting decisions and other things.
       By becoming a redeeming member, you are down to the rights you have
       as a redeeming member . . . .43

       In the Complaint, Plaintiff repeatedly characterizes himself as a redeemed

partner.44 Though he pleads that he requested a suspension of his redemption, he

42
  Schuss v. Penfield P’rs, L.P., 2008 WL 2433842, at *4 (Del. Ch. June 13, 2008) (quoting
Hillman v. Hillman, 910 A.2d 262, 278 (Del. Ch. 2006)); see also 6 Del. C. § 17-606(a)
(“[U]nless otherwise provided in the partnership agreement, at the time a partner becomes
entitled to receive a distribution, he or she has the status of, and is entitled to all remedies
available to, a creditor of the limited partnership with respect to the distribution.”).
43
  TowerHill Wealth Mgmt. LLC v. The Bander Family P’ship LP, C.A. No. 3830-VCS,
41–42 (Del. Ch. Aug. 22, 2008) (TRANSCRIPT); see also Gotham P’rs, 714 A.2d at 102
(noting the purpose of information rights for limited partners and stockholders is “to protect
their financial stake in the entity”).
44
  See, e.g., Compl. ¶ 15 (“Mr. Greenhouse notified Polychain by email that he wanted to
make a full redemption of his capital account.”); ¶ 22 (“Mr. Greenhouse received an
investor statement dated December 31, 2017, indicating that his capital account for
                                              14
acknowledges that Polychain denied that request and he has not sought to challenge

that decision here or elsewhere.           If Plaintiff actually thought Polychain had

wrongfully refused the suspension, he would have sent back the wire transfer of his

redeemed funds and challenged the refusal. Instead, he accepted the wire transfer

and thereafter acted as if he had been redeemed.45 While Plaintiff challenges the

valuation of his redemption, he makes no claims that the redemption itself was

ineffective, that it was for anything less than his full capital account or that the

valuation is based on an ongoing equity interest in the Fund.

         Notably, at oral argument, Plaintiff did not rely on the pleadings to support

his purported ongoing equity interest, choosing instead to focus entirely on the

implications of two newly introduced documents. While Defendants were right to

challenge Plaintiff’s late reliance upon unpled facts, I need not address the objection

because the unpled facts do not change the calculus.46 The new documents—a

distribution letter with a transmittal email and a wire transfer, both from Polychain—

Polychain had been redeemed.”); ¶ 23 (“Despite his repeated requests, at no time did
Mr. Greenhouse receive explanation for, or documentation regarding, the contents or
valuation of his redemption . . . . Mr. Greenhouse has no way to accurately evaluate the
interest which was the subject of the redemption . . . . Mr. Greenhouse is informed and
believes that certain assets were improperly valued at cost, and that his redemption was
therefore significantly undervalued.”); ¶ 24 (“Mr. Greenhouse sent a request to
Mr. Carlson-Wee in connection with his redemption . . . .”).
45
     Compl. ¶ 22.
46
     See Oral Arg. Tr. on Defs.’ Mot. for J. on the Pleadings (“Tr.”) (D.I. 74) 38–39, 43–44.

                                              15
merely confirm Plaintiff’s status as a former limited partner. The salutation for the

email and letter both read, “Dear former investor”; the body of the email explains

that the letter concerns “a cash distribution resulting from [Plaintiff’s] former

investment,” and refers to Plaintiff’s “former investment” two more times; and the

distribution letter states, “[s]ince your balance was fully redeemed as of

December 31, 2017 . . . .”47 On the face of these documents, it is difficult to accept

Plaintiff’s argument that they somehow support the notion that he continues to have

an ongoing equity interest in Polychain.

      More than their reference to Plaintiff’s status as a former investor, the

documents reveal in content and purpose that Plaintiff is no longer a limited partner

of Polychain. Plaintiff argues that the cash distribution evidences an ongoing

interest in a side pocket account that existed after his redemption.48 But Defendants

correctly respond that the cash distribution is in satisfaction of what was owed to

Plaintiff as of December 31, 2017. Indeed, the letter explains that the distribution is

Plaintiff’s pro rata share of additional assets that could not be valued when Plaintiff

47
     Oral Arg. Ex. A (email from investorservices@mgstover.com to
harrygreenhouse@gmail.com, dated Jan. 30, 2019, re: Polychain Fund I, LP—Distribution
Letter; letter from Polychain Capital to Former Investor, dated Jan. 30, 2019).
48
   Oral Arg. Ex. B (Chase checking account “credit transactions” indicating incoming wire
transfer on February 20, 2019 for $4,479.33); see also Tr. 24 (Plaintiff’s counsel pointing
out that the description of the wire transfer refers to “BK OBI=SIDE POCKET
REDEMPTION”).

                                            16
withdrew from the fund but could be valued as of January 30, 2019.49 This “pro

rata” share has not fluctuated with the value of the Fund as have the equity interests

of Polychain’s remaining limited partners since Plaintiff’s withdrawal.50 Had the

fund declined in value in the wake of his withdrawal, Plaintiff would readily

distinguish himself from those limited partners saddled with cheaper assets and

argue that his status as a fully redeemed partner requires that the Fund pay out the

balance owed to him based on a valuation as of the date of his withdrawal.51 At best,

the January 30, 2019, distribution suggests Plaintiff was invested in side pockets

during his time as a limited partner, a fact that may be relevant to valuing his

redemption but does nothing to support his claim of ongoing equity interest.

           The 5% audit holdback likewise is not evidence of an ongoing equity interest.

As with the cash distribution, the audit holdback does not rise and fall with the value

of the Fund. Moreover, Section 8.04 of the LPA makes clear that the purpose of the

audit holdback is to cover any downward audit adjustment to the partnership’s net

asset value, thereby ensuring that the redeemed partner’s redemption is consistent

with the Fund’s audited net asset value. According to the LPA, any unapplied

49
     Oral Arg. Ex. A.
50
     Id.
51
  See, e.g., Schuss, 2008 WL 2433842, at *1 (addressing former limited partners’ breach
of contract action after decline in value of designated securities by the time of the
distribution).

                                             17
portion of the audit holdback must be returned to the redeemed partner within the

30 days of the end-of-year audit.52 And that is precisely what happened; Plaintiff

received the entirety of the holdback within 30 days of the completion of the Fund’s

2017 annual audit.53 Nothing about that holdback resembles equity and, therefore,

Polychain’s decision to exercise its holdback right did not somehow extend

Plaintiff’s status as a limited partner.

                               III. CONCLUSION

         For the foregoing reasons, Defendants’ motion for judgment on the pleadings

must be GRANTED.

         IT IS SO ORDERED.

52
     LPA § 8.04.
53
  Tr. 21–22. Plaintiff argues that he must have remained a limited partner after Polychain
exercised its right to withhold part of his redemption under the LPA because, otherwise,
he would have no right to require Polychain to comply with its obligation to return unused
funds and otherwise comply with the LPA. This argument ignores that, by statute,
redeemed partners continue to have rights to enforce certain provisions of the LPA as
creditors. See 6 Del. C. § 17-606.

                                           18