Regulation

Kinder Morgan Can’t Escape $100M Judgment

Investors in a master limited partnership were shortchanged when the partnership overpaid in a natural gas pipeline deal.
Matthew HellerDecember 4, 2015
Kinder Morgan Can’t Escape $100M Judgment

Kinder Morgan must pay the bulk of a $171 million award to former unitholders of a master limited partnership that the pipeline operator acquired last year, a Delaware judge has ruled.

The merger did not deprive the unitholders of standing to sue over a 2011 “fall dropdown” deal in which El Paso Corp. sold two natural gas subsidiaries to the partnership, El Paso Pipeline Partners, Vice Chancellor J. Travis Laster said.

El Paso Corp. was acquired by Kinder Morgan in 2012 but was still the nominal defendant in the case, which was styled as a derivative action brought on behalf of the partnership.

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Granting Kinder Morgan’s motion to dismiss “would generate a windfall for [El Paso Corp.] at the expense of the unaffiliated limited partners for whose indirect benefit this suit originally was brought,” Laster wrote in his opinion.

The ruling, if upheld on appeal, means Kinder Morgan must pay 58.6%, or $100 million, of the $171 million judgment Laster awarded the unitholders in April on their claim that El Paso Corp. caused the partnership to overpay for the subsidiaries. El Paso Corp. owned 41.4% of the partnership, with the rest being controlled by the independent investors.

El Paso Corp. argued that since the unitholders’ claim was derivative, it belonged to El Paso Pipeline and passed to Kinder Morgan upon the closing of the merger. But Laster found the unitholders had a direct claim for breach of the limited partnership agreement and “remain entitled to enforce the terms of that agreement.”

In addition, he said, the Delaware Supreme Court has recognized that when claims have features of both the derivative and direct categories, a plaintiff can litigate either type of claim.

“Drop-down” transactions refer to a structure common in the energy industry in which a parent company sells assets to a subsidiary.

Laster’s initial decision to find El Paso Corp. liable “was remarkable both because of the size of the damages and because he imposed the liability in the context of a partnership, a form of business organization that generally gives directors far greater leeway than the corporation does,” TheStreet said.