## Facts

- Prometheus Income Partners, L.P., a California limited partnership formed to invest in real estate, was managed by its general partner, Prometheus Development Company, Inc. (PDC); Joseph and Madeline Perretta and others were limited partners.
- Barry Diller controlled PDC and also owned PIP Partners–General, LLC (PIP Partners), which held about 18.2% of the limited partner units.
- PDC proposed a merger in which the partnership would be merged into PIP Partners, effectively buying out limited partner units for $1,736 per unit.
- PDC circulated a proxy statement describing “mirror voting,” under which PIP Partners would vote its units in the same proportion as units voted by unaffiliated limited partners.
- The partnership agreement required an “absolute majority” of limited partner interests entitled to vote to approve a merger and, by its terms, allowed PIP Partners to vote its units.
- Overall, 50.7% of all limited partner units voted in favor of the merger, a figure that included PIP Partners’ units.
- Among unaffiliated limited partners, 73.6% of their units were voted; of those voted units, 46.0% supported the merger.
- The Perrettas sued, alleging PDC breached the fiduciary duty of loyalty through self-dealing and by setting an unfairly low buyout price.
- The district court dismissed the complaint on the ground that the merger was validly approved and ratified; the limited partners appealed.

## Issues

1. Under California law, what approval is required to ratify a general partner’s self-interested transaction in a limited partnership?
2. May a limited partnership agreement count the votes of the interested general partner or its controlled affiliates toward ratification of the general partner’s conflicted transaction?
3. Did the limited partners’ vote validly ratify the merger so as to bar the fiduciary-duty claims at the pleading stage?

## Decision

- The Ninth Circuit reversed the dismissal and remanded.
- The court held that ratification of a general partner’s self-interested transaction must be by disinterested limited partners; the general partner and its affiliates may not supply the ratifying votes.
- The court held it was “manifestly unreasonable” to treat votes cast by an interested general partner or its affiliates as part of the limited partners’ ratification vote.
- Because the merger’s approval depended on PIP Partners’ affiliated units, the transaction was not validly ratified, and dismissal based on ratification was improper.

## Legal Principles

- A general partner owes limited partners a duty of loyalty and may not rely on ratification of a conflicted transaction unless approval is obtained from disinterested owners after adequate disclosure.
- Contractual modification of default partnership rules is limited; a provision that effectively permits a fiduciary (or its controlled affiliate) to ratify the fiduciary’s own self-dealing is unenforceable as “manifestly unreasonable” under California law.
- For ratification analysis in a self-dealing transaction, votes of an interested general partner and its controlled affiliates must be excluded; the transaction cannot be insulated from fiduciary-duty claims by counting those votes.

## Conclusion

The Ninth Circuit held that a self-interested merger proposed by a general partner was not ratified where approval turned on votes held by the general partner’s controlled affiliate, rendering dismissal of the limited partners’ fiduciary-duty claims erroneous and requiring remand for further proceedings.


Perretta v. Prometheus Dev. Co., 520 F.3d 1039 (9th Cir. 2008)