Argued: April 5, 2016
appeal from a judgment entered in the United States District
Court for the District of Connecticut, Jeffrey Alker Meyer,
Judge, requiring them to pay plaintiff $1, 335,
137.55 in damages plus $529, 409.48 in prejudgment interest
for breach of a limited partnership agreement
("Agreement") that, at the time it was entered into
by the plaintiff limited partner, allowed such a partner to
withdraw part or all of his interest in defendants' hedge
fund. Defendants principally contend that the district court,
Ellen Bree Burns, Judge, to whom the action was
previously assigned, erred (1) in granting summary judgment
against them on the ground that their acts to modify the
Agreement--after plaintiff had given notice of withdrawal in
conformity with the Agreement's terms-- to allow
rejection of that notice constituted a breach, and (2) in
calculating the dollar amount plaintiff would have received
but for the breach. While we see no error in the court's
ruling on liability, we conclude that there were factual
issues to be tried as to the calculation of damages.
and remanded for further proceedings as to damages.
TOPTANI, New York, New York, for Plaintiff-Appellee.
K. LIN, Los Angeles, California (William D. Temko, Munger,
Tolles & Olson, Los Angeles, California; Jeffrey R.
Babbin, James O. Craven, Wiggin and Dana, New Haven
Connecticut, on the brief), for Defendants-Appellants.
Before: KEARSE, CABRANES, and CHIN, Circuit Judges.
KEARSE, Circuit Judge:
Carrington Investment Partners (US), LP, et al., a
hedge fund and its managers (collectively
"Carrington"), appeal from a judgment entered in
the United States District Court for the District of
Connecticut, Jeffrey Alker Meyer, Judge, requiring
them to pay plaintiff Joseph Umbach, the indirect purchaser
and assignee of a limited partnership interest in
defendants' fund, $1, 335, 137.55 in damages plus $529,
409.48 in prejudgment interest for breach of the limited
partnership agreement ("Agreement" or
"LPA") which, at the time it was entered into by
Umbach's assignor, allowed a limited partner under stated
conditions, including 30 days' advance notice, to
withdraw part or all of his interest in the hedge fund. The
district court, Judge Ellen Bree Burns, to whom the action
was previously assigned, granted Umbach's motion for
summary judgment, ruling (1) that defendants'
actions--after Umbach had given notice of withdrawal in
conformity with the Agreement's terms--in causing the LPA
to be modified, without the consent of all limited partners,
to facilitate defendants' nullification of Umbach's
notice of withdrawal constituted a breach of the Agreement,
and (2) that Umbach was entitled to recover $1, 335, 137.55
in contract damages, representing his share of the fund's
net asset value as of the date his interest, in accordance
with the relevant Agreement, was entitled to be withdrawn.
Defendants contend principally (1) that the court erred in
its interpretation of the LPA and should have granted summary
judgment in their favor on the issue of liability, and (2)
that, in any event, permitting Umbach to withdraw from the
fund would have precipitated a sale of fund assets at
distressed prices, making it impossible for Umbach to receive
more than a minuscule distribution, if any. For the reasons
that follow, we reject defendants' challenges to the
district court's ruling on the issue of liability, but we
conclude that factual questions prevented the court from
calculating as a matter of law the amount that Umbach would
have received if his withdrawal request had been honored.
Carrington Investment Partners (US), LP (the
"Fund"), was a hedge fund that invested in
securities linked to single-family residential subprime
mortgages. The Fund was structured as a limited partnership;
the Fund's general partner was defendant Carrington
Capital Management, LLC ("CCM" or "General
Partner"); defendant Bruce Rose was the president and
managing member of the General Partner. Umbach became a
limited partner in May 2005, indirectly investing $1 million
in the Fund; he eventually acquired direct ownership of that
interest through assignment. For purposes of this opinion, we
will, as did the district court, "refer to Umbach as the
original investor and attribute any relevant action by
[Umbach's investment surrogate] to Umbach" himself,
Umbach v. Carrington Investment Partners (US), LP,
No. 3:08-cv-484 (EBB), 2014 WL 10537157, *1 n.1 (D. Conn.
Apr. 23, 2014) ("Umbach I"). As described
in Umbach I, most of the facts are not in dispute.
Relevant Provisions of the Limited Partnership
note, as did the district court, that although the limited
partnership agreement that was in effect at the time of
Umbach's 2005 investment was amended in 2006, the
modifications did not change the LPA in any respect that is
material to this action, and we too will refer to the 2006
version of the Agreement as the original agreement, see
Umbach I, 2014 WL 10537157, at *1 n.2.
Delaware law--which the Agreement provided would be
applicable--prior to the dissolution and winding up of a
limited partnership, a limited partner may withdraw from the
partnership "in accordance with the partnership
agreement." Del. Code Ann. Tit. 6, § 17-603 (2015).
With exceptions not relevant here, the LPA's original
§ 3.9.1, titled "Total and/or Partial
Withdrawals by Partners; Penalties, "
provided, in pertinent part, that
a Limited Partner may not withdraw any portion of its Capital
Account with respect to each of its Interests . . . 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. Following such lock-up period,
a Limited Partner may, upon written request . . .
withdraw all or a portion of his Interest as of the last
Business Day of each quarter . . . . Written notice of
such withdrawal in proper form must be received by the
General Partner at least thirty (30) days prior to each
Withdrawal Date, unless such notice is waived by the General
Partner in its sole discretion. . . . In the event of a
total or partial withdrawal of . . . an Interest,
the General Partner will distribute 90% of the amount
withdrawn, without interest, from the withdrawing
Partner's Capital Account with respect to an Interest
generally within twenty (20) Business Days after the
Withdrawal Date, and the balance, if any, will be
distributed, with interest, after the completion of an
audit. . . . A Partner may revoke his notice of
intent to withdraw on or prior to the Withdrawal Date by
written instructions to the General Partner.
(Agreement § 3.9.1 (emphases added).)
section also made provision for certain "Hardships"
that would allow the General Partner to partially postpone
withdrawal distributions by "certify[ing] that
extraordinary circumstances exist[ed], " such as
"the General Partner's inability to liquidate
positions as of [a] Withdrawal Date" (Agreement §
3.9.1). It stated that in the event the General Partner
provided a Hardships certification, the Fund could
delay payment to Partners requesting withdrawal of the
proportionate part of the value of withdrawn Interests
represented by the sums which are the subject of such
Hardships, in which event payment for withdrawal will be made
to Partners as soon thereafter as is practicable following
the end of such Hardships.
11 of the LPA provided, with some stated exclusions, that the
"General Partner and Limited Partners holding at least
two-thirds (66 2/3%) of the outstanding
Interests"--sometimes referred to as a
supermajority--"have the right to amend" the LPA.
(Id. § 11.1.) However, in a section titled
"Restrictions on General Partner's
Authority, " the LPA provided that
"[n]otwithstanding anything in this
Agreement to the contrary, the General Partner may not,
without the consent or ratification of the specific act by
all the Limited Partners . . . do any act in
contravention of this Agreement . . . ." (Id.
§ 5.3(a)(i) (emphases added).)
Umbach's Notice of Withdrawal and Carrington's
11, 2007, more than a year after the end of his lock-up
period, Umbach submitted to CCM a written request to withdraw
his entire interest in the Fund. In accordance with §
3.9.1, he designated September 28, 2007, the last business
day of the third quarter of 2007, as the withdrawal date.
August 30, 2007, Carrington proposed to the limited partners
an Amendment of § 3.9.1 to be effective "September
30, 2007, " which added the following new first
Unless earlier declared by the General Partner . . . the
next Withdrawal Date shall be September 30, 2008 . . .
and Withdrawal Requests pending on or prior to the date
hereof shall be deemed to be rescinded and of no further
force or effect.
(Amendment No. 1, dated as of September 30, 2007, to [the
original] Agreement of Limited Partnership 1-2.) The district
court noted that, as thus proposed, the Amendment's
literal "effective date [would have been] two days
after Umbach's withdrawal request was to take
effect, " Umbach I, 2014 WL 10537157, at *2 n.3
(emphasis added). However, because the effective date of the
Amendment was not material to the resolution of Umbach's
breach-of-contract claim, the court accepted, for purposes of
considering Carrington's summary judgment motion,
"Carrington['s] assert[ion] that the Amendment was
actually meant to take effect on September 28,
2007." Id. (emphasis added).
voted against the proposed Amendment, as did some other
limited partners. However, the proposal was approved by more
than two-thirds of the limited partners, and CCM deemed it
adopted. Thus, the Amendment (1) imposed a new,
not-previously-contemplated, 12-month lock-up period, and (2)
retroactively rescinded pending withdrawal requests. CCM
treated Umbach's withdrawal notice as rescinded and
refused to pay him his interest in the Fund.
The Present Action and the Cross-Motions for Summary
commenced the present action against Carrington in 2008 and
filed a First Amended Complaint in 2011 alleging, to the
extent pertinent to this appeal, that defendants'
rejection of his withdrawal request constituted a breach of
the LPA. He alleged that Carrington's purported amendment
of the Agreement was in contravention of the terms of the LPA
and thus impermissible, and he principally requested
rescission of the Agreement and restitution of his $1 million
investment, plus interest. Defendants denied that there was
any breach, and asserted, inter alia, that the
Amendment of the LPA was duly authorized and that it
nullified Umbach's withdrawal request. They also raised
18 affirmative defenses, including the assertion that if
Umbach had suffered any damages he had failed to mitigate
completion of discovery, both sides moved for summary
judgment. As discussed in greater detail in Part II.B. below,
defendants presented, inter alia, the declaration of
CCM's Chief Strategy Officer, stating (a) that by early
summer in 2007 the market for subprime-mortgage-backed
securities "had completely shut down"; (b) that a
substantial number of limited partners in addition to Umbach
had sent Carrington requests to withdraw their interests as
of September 28, 2007; and (c) that the Fund could not have
satisfied more than a fraction of those requests with the
cash it had on hand and would have had to sell securities at
depressed prices to meet all of them. (Declaration of Darren
A. Fulco dated November 4, 2013 ("Fulco
Declaration" or "Fulco Decl."), ¶¶
7-10.) Defendants claimed that the Amendment was necessary to
avoid having to liquidate the Fund; they also stated that in
proposing the Amendment and rejecting Umbach's withdrawal
request, they had consulted with counsel and believed that
those acts were within the authority conferred on them by the
LPA. (See Fulco Decl. ¶¶ 20-24.)
Defendants contended that § 5.5.1 of the LPA thus
immunized CCM and Rose from an award of damages for those
argued that the purported amendment was ineffective because
§ 5.3 of the LPA expressly provided that notwithstanding
any other provision in the LPA, the General Partner could not
take any action in contravention of the LPA without the
consent of all of the limited partners.
Partial Summary Judgment as to Liability
Umbach I, the district court partially dealt with
the issue of liability on Umbach's breach-of-contract
claim. It stated that
[t]he singular question of law underlying . . . the breach of
contract . . . claim is whether the retroactive rescission
provision of the Amendment--while ostensibly having obtained
a supermajority vote of the Limited Partners pursuant to
Section 11.1--was null and void because it constituted an
"act in contravention of [the LPA]" and did not
have the required consent of all Limited Partners in
accordance with Section 5.3.
Umbach I, 2014 WL 10537157, at *3. It noted that
"neither party has argued that the LPA contains
ambiguous terms pertaining to resolution of th[is] . . .
claim . . . ." Id. at *3 n.5.
reserving decision on defendants' contention that the
Agreement made CCM and Rose immune from a claim for damages,
the district court concluded that defendants had breached the