Umbach v. Carrington Investment Partners (US) LP
3:08-cv-00484 | D. Conn. | Jan 26, 2011
United §%ar§es Déswi§:€:_{)ourt
Distr§t;i' Of Connectxcut
UNITED sTATES DISTRICT coURT FH_ED AT NEW HAVEN
DISTRICT oF coNNEcT:cUT
___________________________________ X
Joseph Umbach, .
Plaintiff, : CIVIL NO.
v. : 3:08-CV-484 (EBB)
CARRINGTON INVESTMENT PARTNERS, l
ET AL.
Defendants.
___________________________________ §
RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT
Introduction
Plaintiff, Joseph Umbach (“Umbach”); brought this action
for declaratory judgment and/or equitable relief pursuant to the
Declaratory Judgment Act, 28 U.S.C. § 2201 (a), and Section 10
(b) of the Securities Exchange Act of 1934 as amended, 15 U.S.C.
§ 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and the laws of
the States of Delaware and Connecticut, against defendants
Carrington lnvestment Partners (US), LP (“Fund”), Carrington
Capital Management, LLC (“General Partner”) and Bruce Rose
(“Rose”) (collectively, “Defendants”) in a six-count complaint.
Defendants previously filed a motion to dismiss, which the Court
granted in part and denied in part. The Court granted
Defendants’ motion to dismiss as to count one, wherein Umbach
sought relief in the form of a declaratory judgment, and a
portion of Count three, wherein Umbach alleged a breach of
fiduciary duty related to Defendants’ conduct prior to Umbach’s
investment in the Fund. Five counts remain following the
Court’s ruling on Defendants’ motion to dismiss: securities
fraud (count two); breach of fiduciary duty with regard to
Defendants’ conduct following Umbach’s investment in the Fund
(count three); common law fraud (Count four); negligent
misrepresentation (count five); and breach of contract (count
six).
Currently pending before the Court is Defendants’ motion
for summary judgment on these remaining counts [Doc. No. 881 and
Umbach’s cross motion for summary judgment on count six [Doc.
No. 96]. For the following reasons, Defendants’ motion for
summary judgment with regard to counts two, four and five is
GRANTED. Defendants’ motion for summary judgment with regard to
count three is DENIED. Defendants’ motion with regard to count
six is DENIED in part and GRANTED in part. Umbach’s cross
motion for summary judgment with regard to count six is also
DENIED.
I. BACKGROUND
A. Factual Background
The court sets forth only those facts deemed necessary to
an understanding of the issues raised in, and decision rendered
on, the parties’ cross motions for summary judgment. For the
purposes of these motions, the Court accepts undisputed facts as
true and resolves disputed facts in favor of the non-moving
party, where there is evidence to support such allegations.
ln the mid 1990s, Umbach sold a company he had founded,
Mistic Beverages, for approximately $95 million dollars. Since
that time, he became an “accredited investor” and “qualified
purchaser” within the meaning of federal securities laws,
because he had at least $5,000,000 in investments. By May 2005,
he had become a sophisticated and experienced hedge fund
investor, and had established a portfolio of hedge funds with
Ozcar Multi Strategies, LLC (“OMS”), as part of a leveraged
investment program he had implemented through BNP Paribas, which
controlled OMS. OMS is a limited liability company organized
under the laws of the State of Delaware.
Carrington lnvestment Partners (US), LP (“Fund”) is a
limited partnership organized and existing under the laws of the
State of Delaware with its principal place of business in
Greenwich, Connecticut. lt is a hedge fund that invested in
securities resulting from the securitization of subprime
mortgage loans. Carrington Capital Management, LLC (“General
Partner”), a limited liability company, also organized and
existing under the laws of the State of Delaware with its
principal place of business in Greenwich, is the general partner
of the Fund. Bruce Rose (“Rose”), who resides in Connecticut,
is the president and managing member of the General Partner.
At some point, Umbach and Defendants entered into
negotiations regarding the Umbach’s possible investment in the
Fund. On or about May 12, 2005, Defendants forwarded various
fund offering documents to Umbach. Included among these
materials was a confidential offering memorandum (WCMO”),
limited partnership agreement (“LPA”) and a subscription
agreement (“SA”). Section 3.9 of the LPA was entitled “Total
and/or Partial Withdrawals by Partners; Penalties.“ Section
3.9.1 provided that:
[A] Limited Partner may not withdraw any portion of its
Capital Account with respect to each of its lnterests
(except for any portion attributable to the automatic
reinvestment of dividends and other distributions of the
Partnership) unless such portion has been invested with the
Partnership for a period of not less than 12 months (the
“lock-up period”). The General Partner may waive the lock-
up period, in its discretion.
Section 14.4 of the LPA contained an integration clause
which provided that the LPA would constitute “the entire
agreement between the Partner with respect to the subject matter
hereof, and will supersede any prior agreement or understanding,
oral or written, relating to the Partnership.” The LPA,
however, also permitted the General Partner to “enter into side
letters that establish rights under, or alter or supplement the
terms of [the LPA] or any Subscription Agreement.”
On or about May 27, 2005, Umbach, through OMS, invested
approximately $l million into the Fund and became a limited
partner. 1n a letter dated May 27, 2005, the parties entered
into a side agreement of the sort contemplated in Section 14.4
of the LPA (“Side Letter”). The Side Letter provided the
following, in relevant part:
This letter certifies that Carrington Capital Management
LLC has agreed to exempt Joseph Umbach or his investing
entity (the “Investor”) from the “lock-up” period as
described in Section 3.9.1 of the Amended and Restated
Agreement of Limited Partnership of Carrington lnvestment
Partners (US), LP, (the “Fund”). . . . For any new
additions to the interest, the same terms would apply.
The parties do not disagree as to the wording of the
aforementioned documents. Rather, the proper interpretation of
these documents and the communications between the parties in
the run-up to Umbach’s decision to invest with the Fund are the
focus of the present litigation. More specifically, Umbach
alleges that, prior to signing the Side Letter, he informed Rose
that the existence of any lock-up period would be untenable for
him and that neither he nor any of his affiliated investing
entities would invest in the Fund unless Defendants eliminated
or permanently waived all lock-up periods. Umbach also alleges
that Rose represented to him that his investment would not be
subject to any lock-up period at any time, and that Umbach would
at all times have a quarterly redemption right. Rose
categorically denies these allegations.
Neither Umbach nor OMS sought to exercise any withdrawal
rights during the twelve months following Umbach’s investment in
the Fund. On July ll, 2007, OMS submitted a written request to
redeem its investment “at September 28, 2007 valuation.”l On
August 30, 2007, Rose sent a letter to the limited partners
informing them that the Fund had received redemption requests
from certain limited partners, but ”[g]iven the potential timing
1ln his original complaint, Umbach alleged that OMS’ July
11, 2007 letter designated September 30, 2007 as the withdrawal
date. Umbach now asserts that through discovery he learned that
OMS actually designated September 28, 2007 as the withdrawal
date. This discrepancy may be of some significance in the
ultimate determination of the contractual effect of the
subsequent amendment on Umbach’s redemption request, a question
which is not appropriate for summary judgment. §ee infra at §
III (D).
Umbach recently moved for leave to amend his complaint to
reflect the correct date. lt is of course well within the
discretion of a trial court to permit parties to amend their
pleadings prior to trial. Fed. R. Civ. Pro. 15(a)(2) (although,
in his motion to amend, Umbach cited Rule 15 (b), which pertains
to amendments during and after trial, the Court construes his
motion to have been made pursuant to Rule 15 (a), which governs
amendments before trial). The Court, having found no reason
that would justify a denial of Umbach’s requested amendment,
granted Umbach’s motion to amend and ordered him to file an
amended complaint forthwith [Doc. No. 136].
6
of these requests overlaid with general market conditions, we do
not believe that sales of assets into the current market to meet
the redemption requests is in the best interests of the limited
partners as a whole.” Section 11 of the LPA provided that, with
certain restrictions, the LPA could be amended with the support
of at least two-thirds of the outstanding interests in the Fund.
Rose represented that a majority of the limited partners had
requested a proposal to amend the LPA “in order to ensure that
all limited partners will be treated equally.” Rose concluded
that “if the proposed amendment is approved, all limited
partners will make a one-year commitment to the partnership and
all currently pending withdrawal requests will be deemed to be
rescinded.” He attached to his letter a “Proposed Amendment,”
which reflected the terms described by Rose and advised the
limited partners that they had until September 14, 2007 to vote
on the Amendment.
On September 7, 2007, a document entitled “Amendment No. 1,
dated as of September 30, 2007 to Second Amended and Restated
Agreement of Limited Partners” was distributed to the limited
partners. The revised amendment was accompanied by a document
entitled “Amendment Election” which summarized the substance of
the revised amendment and provided a space for the Limited
Partners to record their votes. The Amendment Election provided
that it should be returned “as soon as convenient and in any
event by September 14, 2007.”
On September 13, 2007, a new document was sent to the
limited partners. This document was accompanied by a memorandum
which explained: “Based upon comments that we received from some
of our Limited Partners, we attach a revised Amendment No. 1 to
the Limited Partnership agreement as well as a revised election
form.” The memorandum requested that the attached revised
election form either be executed or re-executed by the limited
partners no later than September 19, 2007. Like the earlier
versions, the second revised amendment included a provision
rescinding pending withdrawals and implementing a new one-year
luck up period. On September 19, 2007, Rose announced to the
limited partners that the amendment had been approved by the
requisite number of partners and, therefore, would become
effective on September 30, 2007. OMS assigned all of its
interest in the Fund to Umbach on December 7, 2007.
II. STANDARD
Summary judgment is appropriate when “there is no genuine
issue as to any material fact and . . . the moving party is
entitled to a judgment as a matter of law.” Fed. R. Civ. P.
56(c). A “genuine issue of material fact” exists if the
evidence is such that a reasonable jury could find in favor of
the non-moving party, Holtz v. Rockefeller & Co., 258 F.3d 62" date_filed="2001-07-10" court="2d Cir." case_name="Laura Holtz v. Rockefeller & Co., Inc.">258 F.3d 62,
69 (2d Cir. 2001). lt is the burden of the movant to show that
no genuine factual dispute exists. Adickes v. S.H. Kress & Co.,
398 U.S. 144" date_filed="1970-06-01" court="SCOTUS" case_name="Adickes v. S. H. Kress & Co.">398 U.S. 144, 157 (1970).
The non-moving party, however, “may not rely on conclusory
allegations or unsubstantiated speculation. . . . lf the
evidence [presented by the non-moving party] is merely
colorable, or is not significantly probative, summary judgment
may be granted. . . . To defeat a motion, there must be
evidence on which the jury could reasonably find for the [non-
movant].” Scotto v. Almenas, 143 F.3d 105" date_filed="1998-05-05" court="2d Cir." case_name="John Scotto v. Arcadio Almenas">143 F.3d 105, 114 (2d. Cir. 1998)
(internal citations omitted; internal quotation marks omitted).
III. DISCUSSION
Five counts remain following the Court’s ruling on
Defendants’ motion to dismiss: securities fraud (count two);
breach of fiduciary duty with regard to Defendants’ conduct
following Umbach’s investment in the fund (count three); common
law fraud (Count Four); negligent misrepresentation (count
five); and breach of contract (count six). For the sake of
clarity and convenience, the Court will address the various
legal issues, and rule accordingly, in the following order: ln
Part A of this opinion, the Court concludes that Defendants are
entitled to summary judgment with regard to Umbach’s claims of
securities fraud and common law fraud. ln Part B, the Court
concludes that Defendants are entitled to summary judgment with
regard to Umbach’s claim of negligent misrepresentation. ln
Part C, the Court concludes that Defendants are not entitled to
summary judgment with regard to Umbach’s claim of breach of
fiduciary duty. ln Part D, the Court concludes that, although
neither Defendants nor Umbach are entitled to summary judgment
with regard to the entirety of Umbach’s breach of contract
claim, Defendants’ are entitled to partial relief on count six.
A. Fraud
ln counts two and four of the complaint, Umbach maintains
that Defendants violated Section 10 (b) of the Securities
Exchange Act of 1934 as amended, 15 U.S.C. § 78j(b), and Rule
lOb-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, as well as
common law fraud. “Section 10(b) of the Securities Exchange Act
of 1934 forbids (1) the ‘use or employ[ment] ... of any
deceptive device,’ (2) ‘in connection with the purchase or sale
of any security,’ and (3) ‘in contravention of' Securities and
Exchange Commission ‘rules and regulations.’ 15 U.S.C. § 78j(b).
Commission Rule 10b-5 forbids, among other things, the making of
any ‘untrue statement of a material fact’ or the omission of any
material fact ‘necessary in order to make the statements made
not misleading.’” Dura Pharmaceuticals, lnc. v. Broudo, 544
10
U.S. 336, 341 (2005). To establish a violation of Section
10(b), a plaintiff must show that the defendant (1) made a
misstatement or omission of material fact, (2) with scienter,
(3) in connection with the purchase and sale of securities, (4)
upon which the plaintiff reasonably relied, (5) which
proximately caused the plaintiff's damages. Rothman v. Gregor,
220 F.3d 81" date_filed="2000-07-11" court="2d Cir." case_name="Joel Rothman v. Andrew Gregor">220 F.3d 81, 89 (2d Cir. 2000). Common law fraud similarly has
an intent requirement. See Stephenson v. Capano Dev., lnc., 462
A.2d 1069, 1074 (Del. 1983) (fraud requires a false
representation and knowledge or belief of its falsity).
Umbach alleges that during a phone conversation on or about
May 18, 2005, Rose represented that in the event Umbach or “or
any of his affiliated investing entities, including OMS,
invested in the Fund, any such investment would not be subject
to any lock-up period at any time, and could at all times be
redeemed on a quarterly basis with only 30 days’ prior written
notice.” Umbach claims that in making this statement Rose
omitted a material fact by failing explicitly to inform Umbach
that this assurance was subject to abrogation by an amendment to
the LPA, and that in the event such an amendment was made, the
Fund might not honor a quarterly redemption right.
As an initial matter, the parties disagree as to whether
Rose even made such an oral promise to Umbach concerning his
redemption rights or that he failed to adequately explain that
ll
Umbach’s redemption rights could potentially be rescinded by
amendment to the LPA. Umbach states in his affidavit that he
and Rose did in fact have such a conversation in which Rose
promised that Umbach would always be able to redeem his
investment with appropriate notice. Rose, on the other hand,
states in his affidavit that he made quite clear to Umbach that
he would only be exempted from a lock-up period for the first
year of his investment. Defendants argue, without conceding that
Rose made any misrepresentations, that they are entitled to
summary judgment because Umbach is unable to establish that in
making such misrepresentation or omission of material fact, Rose
acted with scienter. Specifically, Defendants assert that
Umbach has no evidence to prove that, at the time Rose made the
alleged representations, he knew they were false. The Court
agrees that Umbach has not made a sufficient showing that Rose
engaged in a conscious effort to defraud him.
lt is well established that “[i]f the nonmoving party
fails to make a sufficient showing on an essential element of
its case with respect to which it has the burden of proof at
trial, then summary judgment is appropriate. Celotex Corp.;!;
Catrett, 477 U.S. 317" date_filed="1986-06-25" court="SCOTUS" case_name="Celotex Corp. v. Catrett, Administratrix of the Estate of Catrett">477 U.S. 317, 322 (1986). "ln such a situation, there
can be 'no genuine issue as to any material fact,' since a
complete failure of proof concerning an essential element of the
nonmoving party's case necessarily renders all other facts
12
immaterial." ld. at 322-23, accord, Goenaga v. March of Dimes
Birth Defects Foundation, 51 F.3d 14" date_filed="1995-03-24" court="2d Cir." case_name="Jose GOENAGA, Plaintiff-Appellant, v. MARCH OF DIMES BIRTH DEFECTS FOUNDATION, Defendant-Appellee">51 F.3d 14, 18 (2d. Cir. 1995)
(holding that a movant's burden is satisfied by showing the
absence of evidence supporting an essential element of the
nonmoving party's claim). Although courts are mandated to
"resolve all ambiguities and draw all inferences in favor of the
nonmoving party," Aldrich v. Randolph Central School District,
963 F.2d 520" date_filed="1992-05-05" court="2d Cir." case_name="Cora Aldrich v. Randolph Central School District and Cattaraugus County Civil Service Commission">963 F.2d. 520, 523 (2d Cir. 1992), "[o]nly when reasonable minds
could not differ as to the import of the evidence is summary
judgment proper." Bryant v. Maffucci, 923 F.2d 979" date_filed="1991-01-17" court="2d Cir." case_name="Grishelda Bryant v. John J. Maffucci, Dawn Thackeray, Yvonne Powell, Norwood Jackson and Dr. Edward Allan">923 F.2d 979, 982 (2d
Cir. 1991). lf the nonmoving party submits evidence which is
"merely colorable," or is not "significantly probative," summary
judgmentn@y be granted. Anderson, 477 U.S. 317" date_filed="1986-06-25" court="SCOTUS" case_name="Celotex Corp. v. Catrett, Administratrix of the Estate of Catrett">477 U.S. at 249-50.
The Second Circuit has recognized that the failure to carry
out a promise made in connection with a securities transaction
“is normally a breach of contract. lt does not constitute fraud
unless, when the promise was made, the defendant secretly
intended not to perform or knew that he could not perform.”
Mills v. Polar Molecular Corp., 12 F.3d 1170" date_filed="1993-12-17" court="2d Cir." case_name="William Mills v. Polar Molecular Corporation">12 F.3d 1170, 1176 (2d Cir.
1993).
Mill§ is instructive here. Essentially, with regard to the
characterization of Umbach’s claims based on Rose’s
representations about redemption rights, Umbach alleges that
Rose promised him that he would always have quarterly redemption
13
rights, in conformity with his interpretation of the provisions
of the Side Letter to the LPA, and that Rose failed to perform
that promise. Umbach simply has insufficient evidence to
establish that when Rose made that alleged promise, he knew that
the LPA would be amended to prvent Umbach from withdrawing
funds, or that he secretly intended not to perform that promise.
To the contrary, the preponderance of the evidence supports the
conclusion that Defendants’ decision to amend the LPA to lock up
quarterly withdrawals was based on liquidity concerns in the
face of late summer 2007 economic conditions and the number of
redemption requests received from limited partners - -
conditions that Rose could not have known about or predicted in
late spring 2005 when he allegedly made a representation to
Umbach that he would always be able to redeem his investment on
a quarterly basis. Put another way, the Court finds that the
connection between the alleged misrepresentation and the act
that would constitute the culmination of the fraud is simply too
attenuated to establish scienter, the state of mind that is an
essential element of the alleged fraud. Because Umbach has
failed to submit evidence that is sufficiently probative of
Rose’s fraudulent intent at the time his alleged
misrepresentations or omission was made, Defendants are entitled
to summary judgment on counts two and four.
14
B. Negligent Misrepresentation
ln count five, Umbach alleges that Defendants, and more
specifically Rose, are guilty of negligent misrepresentation.
Specifically, Umbach claims that Defendants “were careless and
negligent in imparting the misrepresentations and omissions, had
no reasonable grounds for believing the aforesaid
representations to be true, or should have known them not to be
true.” Defendants have moved for summary judgment on this
count, arguing, inter alia, that Umbach has failed to
demonstrate that Rose acted recklessly in making the alleged
misstatements or misrepresentations. The Court agrees.
Negligent misrepresentation requires (1) a misrepresentation (2)
that was known or should have been known to be such, (3)
intended to induce action by the plaintiff, and (4) injury. §ee
Kronenberg v. Katz, 872 A.2d 568" date_filed="2004-05-19" court="Del. Ch." case_name="Kronenberg v. Katz">872 A.2d 568, 585 (Del. Ch. 2004) (citing
Gibbs v. Ernst, 647 A.2d 882" date_filed="1994-09-13" court="Pa." case_name="Gibbs v. Ernst">647 A.2d 882, 889-90 (Pa. 1994)).
Analyzed under this rubric, Umbach’s negligent
misrepresentation claim fails for much the same reason his fraud
claims fail; he cannot establish the second prong of the test,
specifically, that Rose knew or should have known his alleged
representations were false.
Even if the Court were to accept as true the fact that Rose
told Umbach that his investment would always be redeemable,
Umbach is required to also establish that Rose's
15
misrepresentation was made with knowledge of its falsity or that
it was made under circumstances in which Rose ought to have
known of its falsity. As explained above, the connection
between the alleged misrepresentation about Umbach’s
unrestricted right to withdraw his investment on a quarterly
basis and the Fund's actual suspension of all withdrawals
through the amendment process is simply too attenuated to permit
an inference of intent or knowledge. As previously noted,
Umbach has not shown that Rose knew or could have known at the
time Umbach made his investment that circumstances would
necessitate a suspension of all withdrawals. ln the absence of
evidence establishing that Rose knew his representation was
false or that he ought to have known of its falsity, Umbach has
not satisfied the second prong of the test for establishing
negligent misrepresentation, and Defendants are entitled to
summary judgment on count five,
C. Breach of Fiduciary Duty
ln count three, Umbach asserts a claim of breach of
fiduciary duty based on his challenges to the fundamental
fairness of the amendment. The Court is not persuaded by
Defendants’ arguments in support of summary judgment on this
claim,
16
A claim for breach of fiduciary duty raises issues relating
to the internal affairs of a business entity and therefore is
Morgan Stanley & Co., lnc., 623 F.2d 796" date_filed="1980-06-04" court="2d Cir." case_name="Kathryn R. Walton and Irmgart Van Daell Heckel v. Morgan Stanley & Co. Incorporated, and Olinkraft, Inc.">623 F.2d 796, 798 n. 3 (2d Cir.
1980). Under Delaware law,2 it is well settled that in the
absence of a contractual provision to the contrary, a general
partner owes a fiduciary duty to the limited partners. E.g;,
Boxer v. Husky Oil Co., 429 A.2d 995" date_filed="1981-04-24" court="Del. Ch." case_name="Boxer v. Husky Oil Co.">429 A.2d 995, 997 (Del. Ch. 1981) (notes
that statutory and common law both recognize that a general
partner owes a fiduciary duty to limited partners).
Accordingly, the general partner in a limited partnership has
the duty to exercise the utmost good faith, fairness, and
loyalty. ld. “Unless the partnership agreement preempts
fundamental fiduciary duties, a general partner is obligated to
act fairly and prove fairness when making self-interested
decisions.” Twin Bridges Ltd. v. Draper, WL 2744609 (Del. Ch.
2007).
Here, putting aside the applicability and interpretation of
the Side Letter, meach was merely attempting to exercise a
contractual right as expressly provided for in the LPA --
redeeming his investment at the end of a quarter. But once
Umbach filed his redemption request, the General Partner sought
2ln the present case, the limited partnership was formed
under the laws of Delaware.
17
to abrogate this contractual right by amending the LPA to
rescind all redemption requests. ln doing so, it can fairly be
said that the general partner was acting in its own self
interest, and thus questions of fundamental fairness inevitably
arise.
Significantly, while the LPA contemplated redemption
lockups or delays in the event of a liquidy crisis, see LPA
3.9.1 (providing a specific mechanism by which the General
Partner could delay the repayment of redemption requests in the
event of an extraordinary hardship), the general partner did not
avail itself of this provision, but rather sought to amend the
LPA in a way that would circumvent the prior redemption process
to which all limited partners had agreed. By virtue of such
legal maneuvering, the general partner was able to essentially
reset the order of limited partner redemptions. This alone is
sufficient to raise an inference of bad faith and unfair
dealing. For these reasons, Defendants’ motion for summary
judgment on count five is denied.
D. Breach of Contract
ln count six, Umbach alleges that in failing to honor OMS's
request to redeem its interest in the Fund, Defendants breached
the terms of the Side Letter in conjunction with the LPA, which
constituted an integrated contract between the parties. The
18
Court concludes that the contract is ambiguous with regard to
several critical terms, thus necessitating extrinsic evidence
which will require credibility assessments. Thus, the cross
motions for summary judgment on count six are DENIED (although,
as the Court will explain below, Defendants’ motion is granted
in part).
lt is axiomatic that review of a summary judgment motion
requires the Court to pierce the pleadings and to assess the
proof in order to see if there is a genuine need for trial.
Under Delaware law, interpretation of the language in a contract
is a question of law. Allied Capital Corp. v. GC-Sun Holdings,
L;§;, 910 A.2d 1020" date_filed="2006-11-22" court="Del. Ch." case_name="Allied Capital Corp. v. GC-Sun Holdings, L.P.">910 A.2d 1020, 1030 (Del. Ch. 2006).3 Typically,
“[s]ummary judgment is an appropriate process for the
enforcement of unambiguous contracts because there is no
material dispute of fact for the court to resolve.” Comet
Systems, lnc. Shareholders’ Agent v. MlVA, lnc., 980 A.2d 1024" date_filed="2008-10-22" court="Del. Ch." case_name="Comet Systems, Inc. Shareholders' Agent v. MIVA, Inc.">980 A.2d 1024,
1030 (Del. Ch. 2008). The terms used in a contract are
3Umbach’s action for breach of contract comes within the
jurisdiction of this Court pursuant to 28 U.S.C. § l332(a)(1),
which grants federal district courts “Original jurisdiction of
all civil actions” that meet the requirements for federal
diversity jurisdiction enumerated therein. A federal court
sitting in diversity applies the choice of law rules of the
state in which it sits.” See Schwartz v. Liberty Mut. lns. Co.,
539 F.3d 135" date_filed="2008-08-19" court="2d Cir." case_name="Schwartz v. Liberty Mutual Insurance">539 F.3d 135, 147 (2d Cir. 2008). Connecticut courts favor the
enforcement of contractual choice of law provisions. See
Reichhold Chemicals, lnc., v. Hartford Accident & lndemnity Co.,
252 Conn. 774" date_filed="2000-05-03" court="Conn." case_name="Reichhold Chemicals, Inc. v. Hartford Accident & Indemnity Co.">252 Conn. 774, 788, 750 A.2d 1059" date_filed="2000-05-17" court="Conn." case_name="State v. Mukhtaar">750 A.2d 1059 (2000). Accordingly, this
claim is governed by Delaware law pursuant to the LPA’s choice
of Delaware law as the law governing contract disputes.
19
controlling when there is no question as to what the parties
intended or meant so that a reasonable person in the position of
either party would not have any expectations that are
inconsistent with the contract language. Eagle lndus. v.
DeVilbiss Healthcare, 702 A.2d 1228" date_filed="1997-11-25" court="Del." case_name="Eagle Industries, Inc. v. DeVilbiss Health Care, Inc.">702 A.2d 1228, 1232 (Del. 1997). This is
not the case where the terms are ambiguous. Thus, when the
contractual provisions in controversy are fairly susceptible of
different interpretations or may have two or more different
meanings, the contract is ambiguous and the interpreting court
must look beyond the language of the contract to ascertain the
parties' intentions. ld.
The Court will address the issues pertaining to a breach of
contract in the following order. The Court first analyzes
Umbach’s allegation that the amendment was adopted by means of
an improper voting procedure that violated the terms of the LPA.
ln doing so, the Court concludes that the voting procedure did
not violate the terms of the LPA and, therefore, dismisses this
portion of Umbach’s claim, The Court next addresses Defendants’
claim that the Side Letter did not grant OMS immutable
redemption rights in the Fund or waive the ability to amend the
LPA to lock-up Umbach’s investment in the Fund following the
initial twelve month period, and Umbach’s counter argument that
the Side Letter granted him permanent immunity from lockup
periods, even if the LPA were to be amended, The Court
20
concludes that neither party is entitled to summary judgment
with regard to this issue. Finally, the Court addresses
Umbach’s claim that, even if the amendment was validly passed,
his right to redeem his investment was perfected prior to the
amendment’s adoption, thereby rendering the amendment
inapplicable to his withdrawal request. The Court again
concludes that neither party is entitled to summary judgment
with regard to this issue.
1. Voting Procedures
Section 6.3 of the LPA governs voting procedures. lt
provides that limited partners would be deemed to have voted as
requested by the general partner on a particular matter unless
they objected in writing within twenty days. According to
Umbach, Defendants breached this provision by requesting that
limited partners vote on the final version of the amendment in
fewer than twenty days. The Court disagrees with Umbach’s
interpretation of the plain language in this section of the LPA.
Section 6.3 does contain an expiration date for the casting
of votes, but it does not require the general partner to await
all dissenting votes when a requisite number of limited partners
have already voted in favor of a proposal. lt also does not
preclude the general partner from requesting that limited
partners cast their vote in less than twenty days. Although the
21
Supreme Court of Delaware has held that in some instances
involving corporate voting procedures “inequitable action does
not become permissible simply because it is legally possible,”
Schnell v. Chris-Craft lndustries, lnc., 285 A.2d 437" date_filed="1971-11-29" court="Del." case_name="Schnell v. Chris-Craft Industries, Inc.">285 A.2d 437, 439 (Del.
1971), this doctrine has been tempered somewhat, and is to be
exercised with “caution and restraint.” Alabama By-Products
Corp. v. Neal, 588 A.2d 255" date_filed="1991-03-08" court="Del." case_name="Alabama By-Products Corp. v. Neal">588 A.2d 255, 258 fn.l (Del. 1971). lnvocation
of this equitable principle “should be reserved for those
instances that threaten the fabric of law, or which by an
improper manipulation of the law, would deprive a person of a
clear right.” ld. lt is not applicable here, where there is
nothing about the designated voting period that threatens the
fabric of law, or deprives anyone of a clear right. lndeed, as
the Court previously noted, the issue of whether Umbach had
unfettered quarter redemption rights is unclear. Simply put, the
Court concludes that in the absence of a clear right the
challenged voting procedure did not constitute a breach of
contract. Accordingly, this aspect of Umbach’s breach of
contract claim is dismissed.
2. The Side Letter
At the time the Side Letter was executed, the only lock-up
provision that existed was the one in the LPA which provided
that no redemptions could be made during the initial twelve
22
months of an investment. The LPA was silent as to redemption
rights thereafter. As such, when the Side Letter and the LPA
are construed together, as they must be, there is ambiguity with
regard to the meaning and extent of “lock-up period.” For
example, it is unclear whether the term “lock-up period,” as it
is used in the Side Letter, refers (1) to any period in which a
limited partner may not withdraw any portion of its funds, or
(2) specifically to the 12 month period following an initial
investment in which limited partners could not withdraw
investment funds. This ambiguity is further evidenced by the
seeming illogic of securing an exemption from a lock-up of funds
for only the first twelve month period following an investment.
Given the ambiguity identified above, the parties'
disagreement with regard to the proper interpretation of the
side letter can only be resolved with extrinsic evidence, such
as Umbach’s assertion that Rose made a verbal commitment to him.
Because there is a factual dispute with regard to what Rose said
to him, resolution of this issue must be left to the fact
finder’s determination based on its assessment of the
credibility of each party. Thus, this claim cannot be decided
on summary judgment. See e.g., Cerberus lntern., Ltd. v. Apollo
Mgnt., L.P., 794 A.2d 1141" date_filed="2002-03-13" court="Del." case_name="CERBERUS INTERN. LTD. v. Apollo Mgmt. LP">794 A.2d 1141, 1152 (Del. 2002)(noting that if the
matter depends to any material extent upon a determination of
credibility, summary judgment is inappropriate). ln addition,
23
other extrinsic evidence, such as industry practices, may also
aid in interpreting the contract.4
3. The Amendment as Breach of antract
Similarly, the issues of the amendment’s fundamental
fairness and whether its adoption constituted a breach of
contract cannot be resolved on summary judgment. ln this
regard, there are disputed material facts that preclude the
determination, as a matter of law, as to whether an amendment to
the LPA could rescind a withdrawal request that was pending at
or prior to the time of the amendment’s adoption. lndeed, the
4 Prior to Umbach’s investment in the fund that is at issue
here (which Umbach financed through his investment program with
BNP Paribas) Umbach attempted to invest in the Fund through an
investment program he maintained with HSBC USA lnc. (“HSBC”).
During the early stage of negotiations in connection with that
attempt, Defendants accepted a side letter proposed by Umbach
that was materially the same as the one that was eventually
signed in connection with the investment at issue here.
According to Umbach, he switched to the BNP Paribas program
because Defendants rejected an additional side letter, requested
by HSBC, that would have required the Fund to report to HSBC if
HSBC’s total investment went above nineteen percent of the
aggregate investments in the Fund and, in such event, to provide
the right to immediate redemption.
Defendants claim that the very fact that HSBC requested an
additional side letter regarding redemption rights is proof
positive that Umbach did not believe the first side letter
provided him with a permanent right to quarterly redemption.
Contrary to Defendants’ contention, however, Umbach’s
alternative inferences on this issue should be presented to the
jury for resolution. Because the Court does not find the
defendants’ interpretation to be the only reasonable inference
that can be drawn from the evidence, summary judgment is not
appropriate.
24
Court notes that though the amendment at issue is not
specifically precluded by the LPA, the LPA is vague with regard
to the extent to which it could be amended, Thus, the LPA
cannot be interpreted, as a matter of law, as being subject to
amendment ad infinitum, without restriction or limitation. The
Court is unable to determine whether the LPA could be amended to
rescind pending redemption requests, or, even if it could,
whether the amendment applied to Umbach’s redemption request
which stated a valuation date of September 28, 2007. This
determination should be guided by extrinsic evidence as to the
subjective expectations of the parties with regard to the
limitations, if any, of the amendment process.
ln sum, the agreements governing the rights and obligations
of the parties in this action are ambiguous with regard to
several critical, material issues and thus Umbach’s breach of
contract claims cannot be resolved on summary judgment.
25
mg
For each of the reasons set forth herein, Defendants’
motion for summary judgment as to counts two, four and five is
granted. Defendants’ motion for summary judgment on count three
is DENlED. Defendants’ motion for summary judgment on count six
is GRANTED in part, and DENlED in part. Umbach’s cross motion
for summary judgment On count six is DENIED.
SO ORDERED this 26th day of January, 2011 at New Haven,
Connecticut.
k£h :LAh¢-=mv-w
-.‘__ _ -_ \'. 'l'.. ' '___'. _. l ' :\l '\
_ \
3_. 1_
ELLEN BREE'BURNS,
sENIoR JUDGE UN:TED sTATEs DISTRICT COURT
26