Mizel v. Unified Capital Partners 3 LLC

Background

Steven Mizel Roth IRA was one of 33 limited partners in Consolidated Asset Funding 3 LP, a Delaware limited partnership formed to invest in plaintiff-side litigation funding. Mizel brought a derivative lawsuit, meaning a lawsuit by a partner on behalf of the partnership, against Unified Capital Partners 3 LLC (UCP), the partnership’s general partner, and Unified Asset Management, LLC (UAM), an affiliate hired as the partnership’s asset manager. Consolidated Asset Funding 3 LP was named as the nominal defendant.

Mizel alleged that the partnership agreement required UCP to begin dissolving and winding down the partnership in October 2018. He alleged that UCP instead continued operating the partnership and used partnership assets to pay UAM and other vendors after that date. He claimed that the partnership lost more than $17 million in value after October 2018. His amended complaint asserted breach of contract, breach of fiduciary duty, waste of partnership assets, and a request for an accounting. Mizel conceded that the accounting request was not an independent claim but depended on his other claims.

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a legally sufficient claim.

Contract Claim Against UCP

Under Delaware law, a breach-of-contract claim requires an alleged contract, a breach of a contractual obligation, and resulting damages. The court found no dispute that the partnership agreement was a valid contract or that Sections 10.1 through 10.4 required UCP to begin dissolving and winding down the partnership in October 2018. Mizel’s allegation that UCP failed to perform those duties was therefore sufficient to allege a breach.

The court also found that Mizel adequately alleged damages. He did not need to prove damages or state an exact amount at the pleading stage. His allegation that the partnership declined in value because UCP continued operating it in violation of the agreement supported a reasonable inference that the partnership was harmed.

The defendants argued that the agreement allowed UCP to extend the dissolution date with the approval of limited partners representing a majority of the partnership’s capital commitments. The court agreed that UCP could amend the dissolution date if it provided a written proposed amendment and the required majority either approved it or failed to object within 25 business days. A valid amendment could defeat Mizel’s claims. But whether those conditions were satisfied was a factual issue outside the complaint’s allegations, so the court would not resolve it on a motion to dismiss.

Remaining Claims

The court dismissed the breach-of-contract claim against UAM because Mizel did not explain how UAM’s receipt of asset-management fees violated a contract between UAM and the partnership.

The court dismissed the fiduciary-duty claim against UCP because Section 9.1(b) of the partnership agreement waived potential fiduciary-duty claims against UCP, subject to applicable law. The court also found that the amended complaint alleged no facts showing that UAM breached any fiduciary duty it owed to the partnership.

The court dismissed the waste claims. Under Delaware law, waste requires an exchange so one-sided that no business person of ordinary, sound judgment could conclude that the partnership received adequate value. The court found that Mizel did not allege that the partnership overpaid for asset-management services or that the vendor agreements were unconscionable. The court characterized the alleged payment of operating expenses after the partnership should have dissolved as a contract issue, not waste. It also found that UAM was not a proper defendant for waste because the complaint did not allege that UAM controlled the partnership.

Disposition

Judge Naomi Reice Buchwald denied the defendants’ motion to dismiss as to Mizel’s breach-of-contract claim against UCP and the accounting request derivative of that claim. The court granted the motion as to the remaining claims and dismissed those claims with prejudice. The clerk was directed to terminate the pending motion.