Perretta v. Prometheus Development Company, Inc.

520 F.3d 1039 (9th Cir. 2008)

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Nature of the Case

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Facts

Prometheus Income Partners, LP (Partnership) was a California limited partnership, organized to manage two large apartment complexes in Santa Clara, California. Its general partner was Prometheus Development Co., Inc. (D), a California corporation. Louis and Frank Perretta (Ps) were limited partners in the Partnership. D notified Ps that it wanted to merger Partnership into PIP Partners-General, LLC (PIP Partners) an entity owned by the DNS Trust and Diller's daughter, and which owned approximately 18.2% of the limited partnership units in the Partnership. The proxy statement t stated that PIP Partners would 'vote neutrally with respect to the merger proposal, meaning that PIP Partners will vote its units for or against the proposal in the same proportion as the total number of units voted by unaffiliated partners.' The Proxy Statement clearly noted several times that the interests of D and its affiliates were adverse to those of the limited partners unaffiliated with D. When the final votes were tallied of the total partnership units owned by unaffiliated limited partners a plurality of 46.0% of those units were voted to approve the Merger. If the limited partnership votes of D's affiliate, PIP Partners, were not counted, an absolute majority of votes in favor of the Merger would not have been achieved. According to the Second Amended and Restated Limited Partnership Agreement of the Partnership an absolute majority of limited partner interests entitled to vote was necessary to approve the merger. Ps filed a class action against D, Diller, and two other officers of PDC. The district court granted the D's motion to dismiss the complaint, with leave to amend. The district court stated that the limited partners' ratification of the Merger would only be disregarded if D's disclosure in the Proxy Statement were properly alleged to be fraudulent. Ps had not done this with the specificity required by Federal Rule of Civil Procedure 9(b). Ps amended the complaint alleging that D failed to properly disclose eight material matters to the limited partners in the Proxy Statement. It omitted the allegation that a majority of unaffiliated partners had approved the Merger, and noted that if PIP Partners 'had simply abstained from voting, the Merger would not have been approved.' Ds moved to dismiss. The district court granted the motion to dismiss in that the voters ratified the Merger because a majority of the voting unaffiliated limited partners voted for the Merger, even if they did not make up a majority of all unaffiliated limited partners entitled to vote. P appealed.