In Fritchel v. White, 452 P. 3d 601 (Wy. 2019), certain limited partners in the John E. White Family Limited Partnership filed a direct action against the estate of the Partnership’s patriarch and sole general partner, John E. White (“White”), claiming that they were individually harmed by White’s actions. The Supreme Court of Wyoming affirmed the dismissal of the suit because it should have been pleaded as a derivative action, covering three new issues under Wyoming law in the process, but changing little in the process.
White established the Partnership as part of his estate planning, gifting ownership interests to each of his four children, their spouses, and his grandchildren. In 1999, the Partnership acquired real property in Pueblo, Colorado (the Property). Through a byzantine series of transactions with two sets of third parties, White eventually conveyed the Property back to himself for inadequate consideration and forgave payment on a note due to the Partnership. White failed to notify the Partnership of these transactions.
White died in November of 2017 with the Property in his estate, which required equal distributions to each of his four children. After discovering the Property transactions, the limited partners, with the exception of White’s children and two granddaughters, filed suit against White’s estate. They alleged that they were directly and individually injured by White’s failure to reimburse the Partnership and, by extension, the plaintiffs themselves, for the Partnership’s lost income when White took back the Property and forgave the note. The district court dismissed the complaint, concluding that the Plaintiffs’ claim was improperly pleaded as a direct action, when it should have been pleaded as a derivative action. The appellate court affirmed, and plaintiffs appealed to the Supreme Court of Wyoming, which also affirmed, writing new Wyoming law in the process.
First, the Supreme Court concluded that Plaintiffs’ injury was derivative. Looking to corporate law for guidance, the Court pointed out that the nature of the alleged wrong controls in an action by a limited partner. To bring direct action, a plaintiff must allege a “special injury” that is “direct and independent” of the partnership. Id. at 605 (quoting Wallop Canyon Ranch, LLC v. Goodwyn, 351 P. 3d 943, 951-52 (Wyo. 2015)). This means that the limited partner could, as it did in Fritchel, sue the general partner in its own name for that injury. By contrast, where a limited partner “alleges wrongs to the partnership which have indirectly damaged the limited partner” through her interest in the partnership, then the action is derivative, and must be brought in the name of the partnership by the limited partner. Fritchel, 452 P. 3d at 605 (quoting Wallop Canyon Ranch, 351 P. 3d at 951-52). The Court held that the only alleged injury was the loss of money by the Partnership equal in value to the promissory note plus interest. This was derivative with respect to Plaintiffs because their only injury was through their interest in the Partnership.
Plaintiffs argued that they suffered a direct injury because White breached his fiduciary duties owed to them. The Supreme Court acknowledged that a general partner in a limited partnership has fiduciary duties to both the partnership itself and to the limited partners individually. Here, the Court reached its first novel issue, because it had not previously considered whether a general partner’s breach of fiduciary duty owed to both the partnership and its limited partners should be remedied by a direct or a derivative action. In keeping with its authority, the Wyoming Supreme Court held that to bring a breach of fiduciary duty claim individually, a limited partner must allege a direct injury “independent of the injury to the Limited Partnership.” Fritchel, 452 P. 3d at 606. Because Plaintiffs did not do that, their claim had to be dismissed and re-pleaded as a derivative claim.
Plaintiffs also asserted that a direct cause of action was appropriate because they suffered a “special injury.” Id. “A special injury occurs when the limited partner suffered an injury that is special and distinct from not only any injury suffered by the entity but also any injury suffered by other limited partners.” Id. (internal quotation marks and citation omitted). Plaintiffs claimed that their injury was different from those suffered by the limited partners who were not parties to the suit, i.e., White’s children. Whereas Plaintiffs were stuck with their devalued interests in the Partnership that had been harmed by White’s divestiture of the Property and forgiving of the note, White’s children could recoup some of that loss of value because they stood to inherit the Property through the 25% of White’s estate to which each of them was entitled. The Court was not convinced. White’s transaction with regard to the Property devalued his children’s interests in the Partnership to the same extent as those of Plaintiffs, so the injury was not special at all, regardless of any ability to recoup the loss.
The Wyoming Supreme Court then reached its second issue of first impression. Plaintiffs urged the Court to adopt a rule promulgated by the American Law Institute and applied to closely-held companies. The rule vests trial courts with discretion “to allow plaintiffs to remedy derivative injuries through direct actions.” Id. at 606. But the Court pointed out that Wyoming has never strayed from the principle that derivative injuries require derivative actions and saw no reason to do so in Fritchel by adopting the proposed rule. Indeed, even if the Court adopted the discretionary rule, it would not have been satisfied because other Courts apply it to claims that are “much more direct than…a typical derivative claim.” Id. at 607. Fritchel was not that claim.
Plaintiffs complained that they would be left without a remedy if forced to plead a derivative action. Indeed, to plead a derivative claim in Wyoming -- as in most jurisdictions -- a limited partner must first meet the so-called demand requirement by asking the general partner to bring the action on behalf of the partnership. Plaintiffs could not do that because White, the general partner, passed away. In its third issue of first impression, the Court addressed demand futility in the limited partnership context. Consistent with the Wyoming limited partnership statute, the Court held that a limited partner could meet the demand requirement by pleading futility. In particular, by pleading that a limited partner’s effort to force the general partner to bring an action was “unlikely to succeed.” Given the lack of a general partner, Plaintiffs could meet that standard.
The Wyoming Supreme Court addressed several issues in Fritchel v. White for the first time. However, the case changes little for Wyoming partnerships. Limited partners may only sue directly if they suffer direct injury -- whether for breach of fiduciary duty or any other claim. And, the trial court cannot excuse them, through the use of its discretion, from failing to sue derivatively when they have no such injury. But, limited partners can, as provided by Wyoming statute, meet the demand requirement of derivative pleading through demand futility.