Umbach v. Carrington Investment Partners (US), LP
2017 U.S. App. LEXIS 4370
| 2d Cir. | 2017Background
- Carrington Investment Partners (the Fund) was a Delaware‑law limited partnership investing in subprime mortgage‑linked securities; Umbach acquired a limited‑partner interest in 2005.
- The LPA (§ 3.9.1) allowed limited partners (after a 12‑month lock‑up) to give 30 days’ written notice to withdraw as of the last business day of a quarter; the GP was required to distribute 90% generally within 20 business days and the remainder after audit; only a partner could revoke a withdrawal prior to the withdrawal date.
- § 11.1 authorized amendments by the GP and a two‑thirds limited‑partner supermajority; § 5.3 ("Notwithstanding anything in this Agreement") barred the GP from doing any act "in contravention of this Agreement" without the consent of all limited partners.
- On July 11, 2007 Umbach properly gave notice to withdraw effective September 28, 2007. Carrington then caused an amendment to § 3.9.1 that retroactively rescinded pending withdrawal requests and imposed a new 12‑month lock‑up; the amendment was approved by >66⅔% and deemed adopted over some partners’ objections.
- Umbach sued for breach; the district court granted partial summary judgment for Umbach on liability, concluded rescission was inappropriate but awarded damages equal to Umbach’s pro rata NAV as of September 28, 2007 ($1,335,137.55) plus prejudgment interest, and denied GP immunity. Carrington appealed as to liability and damages.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the GP’s amendment and retroactive rescission of pending withdrawal requests breached the LPA | Umbach: The LPA’s § 3.9.1 gave him a vested right to withdraw once he timely gave notice; § 5.3 required unanimous consent to "contravene" the Agreement, so the retroactive rescission was invalid | Carrington: § 11.1 permitted amendment by GP plus two‑thirds of LPs, so the amendment (and deeming it effective) validly rescinded pending withdrawals | Court: Affirmed — the LPA unambiguously bars the GP from contravening existing partner rights without all LPs’ consent; amendment could not validly rescind Umbach’s timely withdrawal request |
| Whether the GP and its officers are contractually immune from damages under the LPA indemnification/exculpation clause | Umbach: § 5.3’s "notwithstanding" limitation makes a claim for damages viable because the GP acted outside its authority; exculpation requires a reasonable belief within authority, which defendants failed to prove | Carrington: § 5.5.1 shields GP and officers from damages for acts reasonably believed to be within authority; they relied on counsel | Held: Affirmed — given § 5.3’s placement and plain language, belief that the GP had authority was unreasonable as a matter of law on the record, so immunity was inapplicable |
| Whether Umbach could amend pleadings to seek damages despite arbitration clause | Umbach: The action long asserted breach; defendants’ litigation conduct (discovery, proposed counterclaims) waived arbitration; justice favored permitting damages pleading | Carrington: Arbitration clause required damages claims to be arbitrated; allowing belated damages claim prejudiced defendants | Held: Affirmed — defendants waived arbitration by litigating and seeking counterclaims in court; district court did not abuse discretion in permitting amendment |
| Proper measure and quantification of damages (NAV vs. but‑for liquidation value; setoffs for post‑2007 distributions) | Umbach: Damages equal to reported September 28, 2007 NAV (financial statement) because Carrington did not actually liquidate or mark assets to market | Carrington: If forced to honor withdrawals, Fund would have liquidated at distressed prices and Umbach’s recovery would have been negligible; also amounts later distributed to Umbach must offset damages | Held: Vacated as to damages and remanded — liability stands, but factual disputes (effect of forced liquidation, whether reported NAV reflected realizable market value, and post‑2007 distributions/setoffs) preclude resolving damages as a matter of law |
Key Cases Cited
- Riverbend Community, LLC v. Green Stone Engineering, LLC, 55 A.3d 330 (Del. 2012) (clear contract language may be resolved on summary judgment)
- GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776 (Del. 2012) (contract interpretation and ambiguity principles under Delaware law)
- Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (court determines ambiguity as a matter of law; interpret plain meaning)
- Rhone‑Poulenc Basic Chemicals Co. v. American Motorists Insurance Co., 616 A.2d 1192 (Del. 1992) (contract is ambiguous only if reasonably susceptible to multiple meanings)
- J.C.B. Sales Ltd. v. Wallenius Lines, 124 F.3d 132 (2d Cir. 1997) (discussion on the nature and effect of amendments)