King & Spalding brought a successful summary judgment motion on behalf of Alden Torch Financial (“Alden Torch”) and its affiliates in the Central District of California in a dispute with the general partners of a partnership that owns a 72-unit low-income housing tax credit property in Coachella, California. On January 12, 2022, the Court ruled that the for-profit developer general partner of the partnership breached its fiduciary duties to Alden Torch’s affiliates—who are the partnership’s investor limited partners—by (1) entering into a secret side deal with the partnership’s non-profit general partner that assigned to the for-profit developer a below-market right of first refusal (“ROFR”) that Congress specifically reserved for tenants and qualified nonprofit organizations, and (2) attempting to abuse its authority as the partnership’s general partner to trigger the below-market ROFR in order to enrich itself at the expense of its partners and the partnership. The Court further found that the ROFR was not triggered because the developer general partner never formed a genuine desire to accept a purchase offer on behalf of the partnership, and that the developer general partner could not refinance the partnership’s mortgage without the investors’ consent.
This decision is the latest in a string of victories in similar matters this King & Spalding team has won on behalf of Alden Torch and its affiliates over several years. It is also part of a larger trend of courts rejecting efforts by general partners to divest affordable housing investors of the fair market value of their investments. See, e.g., Senior Hous. Assistance Grp. v. AMTAX Holdings 260, LLC, et al., No. C17-1115-RSM, 2019 WL 1417299 at *1, 9 , 11 (W.D. Wash. Mar. 29, 2019) (discussing “Global Indemnity Agreement” in which for-profit general partners “would maintain their ownership interest” upon the non-profit’s exercise of its below-market ROFR, and finding that the general partners acted in bad faith when they “induce[d]” potential buyers to submit purchase offers “as part of [the non-profit general partner’s] secret effort to self-trigger its ROFR”); SunAmerica Hous. Fund 1050 v. Pathway of Pontiac, 19-11783, 2021 WL 391420, at *6 (E.D. Mich. Feb. 4, 2021) (finding that general partners breached their fiduciary duties to investor limited partners by purporting to manifest an intent to sell just to trigger a below-market ROFR). This decision, however, will hopefully cause general partners to think twice before attempting to take advantage of their investor limited partners in violation of their fiduciary obligations.