   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

DAVID C. FANNIN AND LUCILLE S.          )
FANNIN AS CO-TRUSTEES OF THE DAVID      )
C. FANNIN REVOCABLE TRUST DATED         )
AUGUST 3, 1995 AND THE LUCILLE          )
STEWART FANNIN REVOCABLE TRUST          )
DATED AUGUST 3, 1995,                   )
                                        )      C.A. No. 12541-VCF
                Plaintiffs,             )
                                        )
     v.                                 )
                                        )
UMTH LAND DEVELOPMENT, L.P., UMT        )
SERVICES, INC., UMT HOLDINGS, L.P.,     )
UMTH GENERAL SERVICES, L.P., UNITED )
MORTGAGE TRUST, UNITED                  )
DEVELOPMENT FUNDING, L.P., UNITED       )
DEVELOPMENT FUNDING IV, UNITED          )
DEVELOPMENT FUNDING X, L.P., TODD F. )
ETTER, HOLLIS M. GREENLAW, MICHAEL )
K. WILSON, BEN L. WISSINK, CARA D.      )
OBERT, AND MELISSA H. YOUNGBLOOD, )
                                        )
               Defendants,              )
                                        )
     and                                )
                                        )
UNITED DEVELOPMENT FUNDING III, L.P., )
                                        )
            Nominal Defendant.          )
_______________________________________ )

                    MEMORANDUM OPINION

                    Date Submitted: April 14, 2020
                     Date Decided: July 31, 2020
Robert J. Kriner, Jr. and Tiffany J. Cramer, CHIMICLES SCHWARTZ KRINER
& DONALDSON-SMITH LLP, Wilmington, Delaware; Attorneys for Plaintiffs
David C. Fannin and Lucille S. Fannin as Co-Trustees of the David C. Fannin
Revocable Trust Dated August 3, 1995 and the Lucille Stewart Fannin Revocable
Trust Dated August 3, 1995.

Steven L. Caponi, K&L GATES LLP, Wilmington, Delaware; John W. Rotunno,
Paul J. Walsen, Joseph C. Wylie II, Molly K. McGinley, Matthew A. Alvis, K&L
GATES LLP, Chicago, Illinois; Attorneys for UMTH Land Development, L.P.,
UMT Services, Inc., UMT Holdings, L.P., UMTH General Services, L.P., United
Mortgage Trust, United Development Funding, L.P., United Development Funding
IV, and United Development Funding X, L.P.

Myron T. Steele, Timothy R. Dudderar, Jacqueline A. Rogers, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for
Defendants Todd F. Etter, Hollis M. Greenlaw, Michael K. Wilson, Ben L. Wissink,
Cara D. Obert, and Melissa Youngblood.



FIORAVANTI, Vice Chancellor
       United Development Funds is a family of investment funds that makes loans

for the purpose of real estate development. The nominal defendant in this action,

United Development Funding III, L.P. (“UDF III” or the “Partnership”), is a

Delaware limited partnership and a member of the family. The plaintiffs are

limited partners of UDF III. They allege that UDF III’s general partner and the

entities and individuals that ultimately control UDF III used the Partnership’s

funds to support earlier-formed funds within the family as part of a broader scheme

to conceal the earlier funds’ losses and to support their continued payment of

partnership distributions.   Plaintiffs allege the general partner and those that

control it breached their fiduciary duties and UDF III’s limited partnership

agreement, committed corporate waste, and were unjustly enriched. Plaintiffs also

allege that affiliates of the general partner aided and abetted the breaches of

fiduciary duty alleged in the complaint and were also unjustly enriched.

       The defendants have moved to dismiss for failure to plead demand futility,

failure to state a claim, and laches. This opinion concludes that the motions to

dismiss should be granted in part and denied in part.          The plaintiffs have

adequately pleaded demand futility, and they have stated claims for breach of

fiduciary duty and breach of contract, unjust enrichment, and aiding and abetting a

breach of fiduciary duty. The claim for waste of partnership assets is dismissed for

failure to state a claim.
I.       FACTUAL BACKGROUND

         The facts recited in this opinion come from the Verified Second Amended

and Supplemental Derivative and Class Action Complaint (the “Complaint” or

“SAC”), the exhibits attached thereto, and documents incorporated by reference

into the Complaint.1

         A.     The Parties

         Plaintiffs own limited partnership units (“LP Units”) in the Partnership.2

Plaintiffs bring their complaint derivatively on behalf of UDF III and directly on

behalf of themselves and the unaffiliated holders of the LP Units (“Limited

Partners”).

         The eight entity defendants reside within the United Development Funds

family: (a) four engage in real estate loans: United Mortgage Trust (“UMT”),

United Development Funding, L.P. (“UDF I”), United Development Funding IV,

L.P. (“UDF IV”), and United Development Funding X, L.P. (“UDF X”); (b) the

Partnership’s general partner, UMTH Land Development, L.P. (“UMTH LD” or

the “General Partner”); 3 (c) the General Partner’s general partner, UMT Services,




1
    Dkt. 119.
2
 SAC ¶ 1. Plaintiffs purchased the LP Units for $250,000 in 2008 and have held the LP
Units continuously since their purchase. Id. ¶ 25.
3
    UMTH LD is a Delaware limited partnership. Id. ¶ 29.
                                            2
Inc. (“UMT Services”); 4 (d) the 99.9% owner of the General Partner, UMT

Holdings, L.P. (“UMT Holdings”); 5 and (e) UMTH General Services, L.P.

(“UMTH General”), which assists the General Partner in the management of the

Partnership and provides external advisory services to UMT and UDF IV. 6 The

foregoing entities are referred to as the “Entity Defendants.”

          The six individual defendants are alleged to “control and ultimately own”

the General Partner: Todd F. Etter, Hollis M. Greenlaw, Michael K. Wilson, Ben

L. Wissink, Cara D. Obert, and Melissa H. Youngblood (each an “Individual

Defendant,” and collectively, the “Individual Defendants”).7        The Individual

Defendants indirectly own the General Partner through their collective 87.15%

ownership of UMT Holdings.8 In addition, Etter, Greenlaw, and Wilson comprise

the board of directors of UMT Services, which is the general partner of the General

Partner.9




4
    Id. ¶ 30. UMT Services is a Delaware corporation. Id.
5
    Id. UMT Holdings is a Delaware limited partnership. Id. ¶ 39.
6
 Id. ¶ 40. UMTH General is a Delaware limited partnership. Id. “UMTH General
manages UMT’s day-to-day operations, providing it with administrative services, and
managing its assets.” Id. ¶ 38.
7
    Id. ¶ 4.
8
    Id. ¶ 39.
9
    Id. ¶¶ 30, 31(b), 32(b), 33(a).
                                             3
           B.    The United Development Funds

           All of the Defendants are involved in raising investor funds for the purpose

of making loans to fund real estate development. 10 UMT is a real estate investment

trust formed in 1996 for the purpose of raising investor capital to invest in

mortgage loans.11 UMT is managed by an advisor controlled by Etter.12

           In 2003, Etter and Greenlaw formed UMT Services, UMT Holdings, UMTH

General, and UMTH LD. 13            UMT Services is the general partner of UMT

Holdings, UMTH General, and UMTH LD. 14 In Plaintiffs’ words, UMT Services

is the entity “at the top of the Partnership’s control structure.” 15 UMTH LD is

owned by UMT Holdings,16 and UMT Holdings is in turn owned primarily by the

Individual Defendants. 17




10
     See id. ¶¶ 4, 28-44.
11
     Id. ¶ 45.
12
     Id.
13
     Id. ¶ 46.
14
     Id.
15
  Pls.’ Ans. Br. 5, Dkt. 133; see also SAC ¶ 62 (“As the general partner of Land
Development, Defendant UMT Services controls UDF III.”).
16
     SAC ¶ 30.
17
  Id. ¶ 39. The breakdown of ownership interests in UMT Holdings include Etter (30%),
Greenlaw (30%), Wissink (10.09%), Wilson (7.41%), Youngblood (4.83%), and Obert
(4.82%). Id. UMT Holdings also owns UMTH General, which manages and advises
UMT’s day-to-day operations. Id. ¶¶ 38, 39. UMTH General’s general partner is UMT
Services. Id. ¶ 30(d).
                                             4
          Etter and Greenlaw formed UDF I in 2003, nonparty United Development

Funding II, L.P. (“UDF II”) in 2004, and UDF III in 2005. 18 UDF X, UDF IV, and

UDF V were formed in 2007, 2009, and 2013, respectively. 19 UDF I, UDF II,

UDF III, UDF IV, UDF V, and UDF X are each referred to as a “UDF Fund” or

collectively as the “UDF Funds.”

          UDF III is governed by the Second Amended and Restated Agreement of

Limited Partnership, dated April 21, 2006 (the “Partnership Agreement”).20

According to the Partnership Agreement, UDF III was formed “[t]o originate,

acquire, service and otherwise manage . . . a diversified portfolio of mortgage loans

on real property . . . and to issue or acquire an interest in credit enhancements to

borrowers (i.e., guarantees or letters of credit) . . . .” 21 UDF III is a public, unlisted

limited partnership.22

          UMTH LD receives a 0.25% annual servicing fee from UDF III for all of

UDF III’s outstanding loan balances.23 Accordingly, UMTH LD would receive a


18
     Id. ¶¶ 3, 47.
19
     Id. ¶¶ 41, 43, 55.
20
   The Second Amended and Restated Agreement of Limited Partnership of UDF III is
attached as Exhibit A to the Entity Defendants’ Opening Brief, Dkt. 125.
21
     SAC ¶ 64 (citing Partnership Agreement § 4.1).
22
   Id. ¶ 56. UDF III registered with the SEC, can sell to the investing public, and is
required to file reports with the SEC, but because UDF III is unlisted, there is no public
market for UDF III’s LP Units. Id.
23
     Id. ¶ 257.
                                             5
higher servicing fee if UDF III did not write down its loans. UDF III paid the

General Partner over $7.6 million in mortgage servicing fees through September

2015. 24 In addition to fees from UDF III, UMTH LD has financial interests in

UDF I and UDF II. First, UMTH LD receives an asset management fee from UDF

I and UDF II. 25 Second, UMTH LD owns a 49.99% subordinated profits interest

in UDF I and a 49.95% subordinated profits interest in UDF II, and would receive

distributions that UDF I or UDF II paid in accordance with those subordinated

profits interests.26

           UMTH LD is the general partner of UDF III and, as noted above, UMT

Services is the general partner of UMTH LD. Plaintiffs allege that, because UMT

Services is the general partner to UMTH LD, UMT Services controls UDF III, and

that the Individual Defendants control UMTH LD because they are officers and/or

directors of UMTH LD and/or UMT Services.27 In addition to their ownership of

UMT Holdings, the Individual Defendants hold the following positions:




24
     Id.
25
  Id. ¶¶ 29(b), 340(a)-(b). The amount UMTH LD received through the asset
management fee is not alleged.
26
   Id. The amount UMTH LD received through these subordinated profits interests is not
alleged.
27
     Id. ¶¶ 60-62.
                                          6
              • Etter is UDF III’s original limited partner. 28           Etter is also the

                    executive vice president of UMTH LD, and a 50% owner, chairman,

                    and director of UMT Services. 29 Plaintiffs also allege that “UMT has

                    been externally managed by an advisor controlled by Defendant Etter

                    since its formation.” 30

              • Greenlaw is the current chief executive officer and former president of

                    UMTH LD, and a 50% owner, president, chief executive officer, and

                    director of UMT Services. 31

              • Wilson is the current president, former senior vice president of

                    marketing, and a partner of UMT Holdings; 32 and executive vice

                    president and director of UMT Services. 33 In addition, Wilson is

                    alleged to have “directed the capital raise of over $1 billion across the

                    affiliated entities.”34




28
     Id. ¶ 31.
29
     Id. ¶ 31(a)-(b).
30
     Id. ¶ 45.
31
     Id. ¶ 32(a)-(b).
32
     Id. ¶ 33(b).
33
     Id. ¶ 33(c).
34
     Id. ¶ 33(f).
                                                   7
             • Wissink is the current president and former chief operating officer of

                    UMTH LD; 35 a partner of UMT Holdings;36 and chief operating

                    officer of UMT Services.37 Etter, Greenlaw, and Wissink are also the

                    three voting members of UMTH LD’s investment committee, and are




35
     Id. ¶ 34(a).
36
     Id. ¶ 34(b).
37
     Id. ¶ 34(c).
                                               8
             alleged to have “made all investment, loan underwriting, and

             impairment decisions” on behalf of UDF III. 38

          • Obert is the chief financial officer of UMTH LD; 39 the former chief

             financial officer, former controller, and a partner of UMT Holdings;40

             and the treasurer of UMT Services. 41


38
   Id. at Ex. 1 ¶¶ 11-13, 46 (Complaint, Sec. and Exch. Comm’n v. United Dev. Funding
III, L.P., et. al., 3:18-cv-01735-L (N.D. Tex. 2018) [hereinafter the “SEC Complaint” or
“SEC Compl.”]. The Court may consider the SEC Complaint and consent judgments,
attached as Exhibits 1-3 to Plaintiffs’ Complaint, because the Complaint quotes from and
incorporates them by reference. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d
312, 320 n.28 (Del. 2004) (noting that the court may take judicial notice of contents of
court records from another jurisdiction and SEC filings (citing Southmark Prime Plus,
L.P. v. Falzone, 776 F.Supp. 888, 891-92 (D. Del. 1991))); see also In re LendingClub
Corp. Deriv. Litig., 2019 WL 5678578, at *5 & n.24 (Del. Ch. Oct. 31, 2019) (taking
judicial notice of an order by the SEC instituting proceedings against the defendants
because “the Complaint quotes from and thus incorporates it by reference”); In re Tyson
Foods, Inc. Consol. S’holder Litig., 919 A.2d 564, 578 (Del. Ch. 2007) (relying on a
consent judgment with the SEC). Defendants’ argument that this Court may not consider
the substance of the allegations contained in the SEC Complaint and consent judgments
is not persuasive. Oral Arg. Tr. 34, Dkt. 142 (Walsen, counsel for Entity Defendants);
see also Entity Defs.’ Opening Br. 27-28, Dkt. 125. Defendants rely upon Lipsky v.
Commonwealth United Corporation, in which the Second Circuit held that “neither a
complaint nor references to a complaint which results in a consent judgment may
properly be cited in the pleadings under the facts of this case.” 551 F.2d 887, 893 (2d
Cir.1976). The court in Lipsky based that holding on Federal Rule of Evidence 410,
which prohibits a plea of nolo contendere from being later used against the party who so
pleaded, and struck references to a consent decree and complaint as immaterial under
Federal Rule of Civil Procedure 12(f). Id. at 894. Courts have typically limited the
application of Lipsky to prevent settlements and their pleadings from being admitted as
evidence in subsequent litigations only as to liability, but allowed them to be admissible
for other purposes, including proof of knowledge. See In re OSG Sec. Litig., 12 F. Supp.
3d 619, 622 (S.D.N.Y. 2014); see also In re Morgan Stanley Van Kampen Mut. Fund Sec.
Litig., 2006 WL 1008138, at *2, 5, 7, & n.14 (S.D.N.Y. Apr. 18, 2006) (holding that SEC
and NASD settlement agreements were not legal precedents with a preclusive effect, but
taking judicial notice of factual allegations from the SEC and NASD settlement
agreements).
                                            9
                • Youngblood is the chief operating officer of UTMH LD; 42 a partner of

                    UMT Holdings;43 and the executive vice president of UMT Service. 44

           C.       Overview of the Challenged Transactions

           The UDF Funds raise investor funds for the purpose of making loans to fund

real estate development. To do so, UMT loaned money to UDF I and UDF II,

which, in turn, loaned money to real estate developers.45 The collapse of the real

estate markets beginning in 2007 resulted in the insolvency of many real estate

lenders and real estate developers.46 Consequently, UMT, UDF I, and UDF II

were faced with substantial impending liabilities, loan impairments, and losses

relating to their loans. 47 Rather than writing down the value of the loans held by

UMT, UDF I, and UDF II, however, certain Defendants used UDF III’s assets to

make and increase loans and loan-related commitments to the earlier-formed UDF




39
     SAC ¶ 35(a).
40
     Id. ¶ 35(b).
41
     Id. ¶ 35(d).
42
     Id. ¶ 36(a).
43
     Id. ¶ 36(b).
44
  Id. ¶ 36(c). The Court has included a copy of the organizational chart submitted by
Plaintiffs, id. ¶ 44, as an Appendix to this Opinion.
45
     Id. ¶ 48.
46
     Id. ¶ 69.
47
     Id.
                                              10
Funds. 48       In addition, UDF III made loans to two Texas-based real estate

developers and their affiliates to enable them to repay earlier loans from UMT,

UDF I, and UDF II.49 Plaintiffs contend that Defendants wanted to conceal the

losses facing UMT, UDF I, and UDF II to ensure that they would continue to

receive distributions and fees from those earlier-formed United Development Fund

entities and to continue raising investor capital. 50 The scheme is alleged to have

continued when later-formed UDF Funds directed funds and their Developer

Borrowers to UDF III to prop up distributions to its own Limited Partners. 51

          Plaintiffs challenge four core groups of transactions: (1) UDF III’s purchase

of a participation interest in UMT’s loan to UDF I; (2) UDF III’s loans to other

UDF Funds or their subsidiaries; (3) UDF III’s guarantees of loans owed by other

UDF Funds or their subsidiaries; and (4) UDF III’s loans to real estate developers

that previously borrowed money from other United Development Funds and

modifications to those loans.

                  1.        The UMT Participation Interest Agreement




48
     See, e.g., id. ¶ 91.
49
     See, e.g., id. ¶¶ 6-8.
50
     Id. ¶¶ 10-11, 91-92.
51
     Id. ¶¶ 13, 145.
                                              11
           Shortly after UDF I’s formation in 2003, UMT extended a $7.5 million line

of credit to UDF I (the “UMT Loan”).52 The principal amount of the UMT Loan

increased several times, and the maturity date was extended multiple times. 53 By

2006, the line of credit had been increased to $45 million. 54 When the real estate

markets collapsed, it became unlikely that UDF I would be able to repay the UMT

Loan.55          According to Plaintiffs, Defendants forced UDF III to assume

responsibility for the UMT Loan. 56

           In September 2008, UDF III entered into an economic participation

agreement with UMT (the “UMT Loan Participation Agreement”), whereby UDF

III purchased: (1) a participation interest in the $45 million UMT Loan (the “UMT

Participation Interest”), and (2) an option to acquire a full ownership economic

participation interest in the UMT Loan (the “UMT Loan Option”).57 Under the

UMT Loan Participation Agreement, UDF III agreed to reimburse UMT for all

funds advanced to UDF I through the UMT Loan, regardless of whether the

monies were advanced before or after entry into the UMT Loan Participation



52
     Id. ¶ 79. UMT also made loans to UDF II. Id. ¶ 48.
53
     Id. ¶¶ 79, 100.
54
     Id. ¶ 79.
55
     Id. ¶ 80.
56
     Id. ¶ 98.
57
     Id.
                                             12
Agreement. 58 The UMT Loan amount was increased multiple times after UDF III

entered into the UMT Loan Participation Agreement. 59 On April 1, 2015, UDF III

exercised the UMT Loan Option, which converted UDF III’s economic interest in

the UMT Loan into a full participation interest.60 The UMT Loan Participation

Agreement effectively shifted the responsibility for the UMT Loan from UMT to

UDF III. 61

           At the time of the UMT Loan Participation Agreement, Defendants knew

that UDF I would be unable to repay the loan without new investor capital.62

Plaintiffs allege that the UMT Loan Participation Agreement and the exercise of

the UMT Loan Option were self-interested acts that benefited Defendants to the

detriment of UDF III and the Limited Partners. 63                Plaintiffs allege these

transactions permitted Defendants to fund UMT shareholder distributions in 2008

and 2009, increased management and servicing fees, increased the value of UMTH

LD’s subordinated profits interest in UDF I, and concealed losses from securities


58
     Id.
59
     Id. ¶ 100.
60
     Id. ¶ 104.
61
     Id. ¶ 98.
62
  In its Annual Report for 2007, UMT disclosed that “continued or further deterioration
of homebuilding conditions or in the broader economic conditions of the homebuilding
market could . . . increase the likelihood of a default on the [UDF I] line of credit loan.”
SAC ¶ 80 (quoting UMT, Form 10-K (filed Mar. 31, 2008)).
63
     SAC ¶ 105.
                                            13
broker-dealers to continue raising investor capital.64 Plaintiffs allege that, based on

“the available evidence,” UDF I is (as of the filing of the Complaint) insolvent and

that UDF III sustained massive losses as a consequence of its investment in the

UMT Participation Interest.65

                  2.   Loans to Other UDF Funds
           Plaintiffs allege that Defendants caused UDF III to make several self-

interested loans to UDF I, UDF I’s wholly owned subsidiary Northpointe LLC, and

UDF X.

           In December 2006, UDF III loaned approximately $6.3 million to UDF I

(the “2006 UDF I Loan”). 66 The 2006 UDF I Loan was originally scheduled to

mature on June 21, 2007.67 Defendants increased the principal amount of the loan

and extended its maturity date on several occasions.68 On October 1, 2013, UDF I

assigned a promissory note payable by “an unrelated party” in exchange for

cancellation of the 2006 UDF I Loan. 69 The Complaint alleges that UDF III




64
     Id. ¶¶ 90-92, 99, 105.
65
   Id. ¶ 106. Plaintiffs elected not to pursue a books and records demand for additional
information prior to filing any of its complaints.
66
     Id. ¶ 108.
67
     Id.
68
  Id. ¶ 108(a), (b), (e)-(h). By June 30, 2012, the principal amount was $15.5 million,
and the maturity date was June 30, 2015. Id. ¶ 108(f).
69
     Id. ¶ 108(i).
                                          14
suffered a substantial loss on the 2006 UDF I Loan based on the information

Plaintiffs uncovered through SEC filings.70

           In December 2007, UDF III loaned $6 million to UDF I’s wholly owned

subsidiary, Northpointe LLC (the “UDF NP Loan”). 71 In 2011, the loan amount

was increased to $15 million, and the maturity date was extended to December

2013, which was further extended two additional times to December 2015.72 UDF

I’s subsidiary has not satisfied the loan.73 As of September 30, 2015, the UDF NP

Loan had been transferred from UDF III to UDF IV. 74

           In November 2007, UDF III loaned $70 million to UMTH LD’s wholly

owned subsidiary, UDF X (the “UDF X Loan”). 75 The loan’s maturity date was

extended four times—most recently in 2015 to extend the maturity date to

November 2016—but UDF X has not made timely payments on this loan since

2014. 76




70
     Id. ¶ 108(j).
71
     Id. ¶ 109.
72
     Id. ¶ 109(c)-(d).
73
     Id. ¶ 109(f).
74
     Id.
75
     Id. ¶¶ 111-12.
76
     Id. ¶¶ 113-14, 235-36.
                                        15
                  3.    The Guarantees
         From 2009 through 2014, UDF III entered into eight agreements

guaranteeing loan obligations totaling $96.9 million owed by UDF IV, UMT, UDF

I, or their subsidiaries (the “Guarantees”).77 Plaintiffs allege that the controllers of

UDF III knew that UDF IV, UMT, and UDF I lacked the ability to satisfy their

underlying loan obligations and that UDF III’s controllers used UDF III’s assets to

satisfy the loan obligations of these entities. 78    For example, UDF IV’s loan

obligations represent approximately $85 million of the $96.9 million UDF III

guaranteed.79 UDF IV does not appear to have the financial ability to satisfy its

loan obligations. In February 2016, following news that the FBI had raided the

corporate offices of the UDF Funds, UDF IV stock dropped by more than 50%

before trading in UDF IV stock was halted. 80 In May 2016, UDF IV announced

that it defaulted on a $35 million loan from an unaffiliated party. 81 Plaintiffs allege

that because of UDF IV’s financial condition UDF III’s assets and value were put

at risk through the Guarantees.




77
     Id. ¶¶ 248, 251, 255.
78
     See id. ¶¶ 246, 250, 254, 256.
79
     Id. ¶ 223.
80
     Id. ¶¶ 17(g)-(h), 225.
81
     Id. ¶ 223.
                                          16
                  4.      The Developer Borrower Loans
         From 2003 to 2006, UDF I extended at least 27 loans to Buffington Land

Development, LLC (“Buffington Land”) and its affiliates and at least 13 loans to

CTMGT, LLC (“CTMGT”) and its affiliates (collectively, as defined above, the

“Developer Borrowers”).82           UMT also made multiple loans to the Developer

Borrowers.83

         Shortly after its formation, UDF III began loaning money to the Developer

Borrowers.84           Plaintiffs allege that UDF III’s direct loans to the Developer

Borrowers were not used to fund real estate development projects, but rather to pay

down their earlier loans from UDF I and UDF II. 85 This repayment scheme is

alleged to have allowed UDF I and UDF II to continue making distributions to

their investors. 86

         Plaintiffs point to loans made to Shahan Prairie L.P. (“Shahan Prairie”), an

entity affiliated with CTMGT as an example of the scheme. In 2004, UDF I made

82
  Id. ¶¶ 71, 76. UDF III participated pro rata in all of UDF I’s loans to the Developer
Borrowers. Id. ¶ 76.
83
     Id. ¶¶ 71, 75.
84
   Id. ¶ 121. Plaintiffs also contend that Buffington Land is not a third-party borrower
because UMTH LD is a limited partner of Buffington Homebuilding Group, Ltd., an
affiliate of Buffington Land. Id. ¶ 74.
85
  Id. ¶ 122. Plaintiffs theorize that the Developer Borrowers willingly participated in this
scheme because their total indebtedness remained the same and their costs may have even
gone down because UDF III loaned money at lower rates than its earlier affiliates. Id. ¶
124.
86
     Id. ¶ 122.
                                             17
real estate development loans to Shahan Prairie.87 In September 2007, UDF III

loaned approximately $1.9 million to Shahan Prairie, an entity affiliated with

CTMGT, and later increased the loan to approximately $4.8 million. 88            In

November 2007, Shahan Prairie repaid the loan to UDF I in full. 89 In June 2015,

UDF V made an $18.1 million loan to Shahan Prairie, and “[i]mmediately

thereafter, [Shahan] Prairie repaid its loan in full to UDF III.” 90 Yet more than a

decade after UDF I made the initial real estate development loan to Shahan Prairie,

the land owned by Shahan Prairie remains undeveloped. 91 Plaintiffs contend the

loans to Shahan Prairie serve as “a clear example of Defendants’ practice of

causing successive affiliated entities to make loans to real estate developers that

had borrowed from earlier affiliated entities.” 92

           In December 2007, UDF III loaned $25 million to CTMGT (the “CTMGT

Loan”) secured by multiple investments that are cross-collateralized and secured

by collateral-sharing arrangements, which allocate the proceeds of the co-

investment collateral between UDF I and UDF III.              The CTMGT Loan



87
     Id. ¶¶ 129-30.
88
     Id. ¶ 131.
89
     Id.
90
     Id. ¶ 132.
91
     Id. ¶ 281.
92
     Id. ¶ 129.
                                          18
commitment was increased to $112.9 million over the next several years.93

Effective July 1, 2015, UDF III agreed to defer some or all of its payment

preference to allow CTMGT to pay UDF I before UDF III. 94

         Although it remains unclear from the pleadings the exact date when UDF

III’s loans to Buffington Land first began, the Complaint alleges that UDF III

extended loans to Buffington Land soon after UDF III was initially formed. 95 UDF

III also increased the principal loan balance to Buffington Land over the years,

from $77 million as of March 2013 to more than $122 million by January 2016,

while knowing Buffington Land was unable to pay the loans and concealing this

information from the Limited Partners.96 On December 2016, UDF III forgave

Buffington Land’s $122 million of indebtedness for minimal consideration and

personal releases.97 Plaintiffs also allege that UDF III will be forced to record

impairments on its loans to CTMGT. 98




93
     Id. ¶¶ 140-41.
94
     Id. ¶ 142.
95
     See id. ¶ 121.
96
     Id. ¶¶ 151, 153, 214; see also SEC Compl. ¶¶ 35-40.
97
  SAC ¶ 183; see also id. ¶ 217 (“The UDF Funds entered into an agreement releasing
Buffington Land and its affiliates and subsidiaries from any and all liabilities, including
forgiveness of UDF III’s $122 million loan, in exchange for ‘6 finished residential lots
and approximately 4.56 acres of land in Pflugerville, Travis County, Texas.’”).
98
     Id. ¶ 222.
                                             19
            Plaintiffs allege that the loans to the Developer Borrowers also violate the

concentration limit set in the Partnership Agreement, which prohibits UDF III from

investing more than 20% of its offering proceeds in loans to any borrower.99

            D.    UDF III’s Auditor Resigns, and the Partnership Ceases
                  Distributions.

            As of September 20, 2015, more than 90% of UDF III’s loan portfolio

consisted of loans to UDF I and its subsidiaries, UDF X, and the Developer

Borrowers.100 These loans consisted primarily of: a balance of approximately

$71.2 million of the UMT Participation Interest in the UMT Loan; a balance of

approximately $16.4 million in the UDF X Loan; a balance of approximately

$106.5 million in loans to Buffington Land; a balance of approximately $115.9

million in loans to CTMGT with an additional balance in loans to CTMGT’s

affiliates that comprised approximately 13% of the Partnership’s outstanding loan

portfolio. 101 Plaintiffs allege that each of these counterparties is insolvent and will

not be able to repay these loans to UDF III. 102




99
   Id. ¶¶ 291-93. The Partnership Agreement requires that no more than 20% of UDF
III’s offering proceeds may be invested in loans to any one borrower. Partnership
Agreement § 11.3(b).
100
      SAC ¶ 238.
101
      Id.
102
      See id. ¶¶ 239-44.
                                             20
          In November 2015, the long-time outside auditor to UDF III, the General

Partner, UMT, UDF I, UDF II, UDF IV, UDF V, and UDF Holdings resigned.103

UDF III ceased filing quarterly and annual reports with the SEC in November

2015, and despite engaging a new auditor in June 2016, has not resumed the filing

of quarterly or annual reports.104 After January 2016, UDF III ceased paying

distributions to its Limited Partners. 105

          E.       The SEC Investigates and Files an Action Against UDF III, UDF
                   IV, and Certain Individual Defendants.

          Three weeks after announcing the resignation of its auditor, the Partnership

announced that UDF III and UDF IV had been the subjects of a nonpublic fact-

finding investigation by the SEC that began in April 2014.106 On October 18,

2016, UDF III revealed in a Form 8-K filing that UDF III, UMTH LD, and certain

of the Individual Defendants had received Wells Notices 107 from the SEC, in which

the SEC had made a preliminary determination to recommend filing an

enforcement action against UDF III and certain unnamed individuals “associated




103
      Id. ¶¶ 17(a), 197, 269.
104
      Id. ¶¶ 197-99.
105
      Id. ¶ 17(e).
106
      Id. ¶ 148.
107
   A Wells Notice is a notification from the SEC that it intends to recommend bringing
an enforcement action against a company or individual and to provide them with an
opportunity to respond before the recommendation. See 17 C.F.R. § 202.5(c) (2008).
                                             21
with the Partnership and its general partner.” 108 The October 18, 2016 Form 8-K,

signed by the General Partner stated the Partnership’s belief that “no enforcement

action is warranted against the Partnership or any individuals associated with the

Partnership and its general partner” and that “the Partnership intends to contest any

charges that may be brought.”109

         On July 18, 2018, the SEC filed a complaint against UDF III, UDF IV,

Greenlaw, Etter, Wissink, Obert, and David Hanson, 110 accusing them of loaning

money from UDF IV to the Developer Borrowers, so that the Developer Borrowers

could pay back their loan from UDF III with UDF IV’s money and allow UDF III

to pay distributions (the “SEC Action”). 111 The SEC Complaint alleges that the

defendants violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and

Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of

1934. The SEC Complaint alleges that Etter, Greenlaw, Wissink, and Obert were

involved in all of the “investment, loan underwriting and impairment decisions for

108
      SAC ¶ 148.
109
   UDF III, Form 8-K (filed Oct. 18, 2016); see SAC ¶ 148 (quoting the Form 8-K). The
Form 8-K is incorporated by reference into the Complaint. Wal-Mart Stores, 860 A.2d at
320 (noting that on a motion to dismiss, the Court may consider documents that are
“incorporated by reference” or “integral” to the complaint).
110
   David Hanson is the Chief Accounting Officer and former Chief Operating Officer for
UDF IV. SEC Compl. ¶ 15. Hanson is not alleged to have served a role on UDF III. Id.
¶ 49 (“During the Relevant Period, Hanson did not hold a position at UDF III and did not
serve on the UDF Investment Committee or participate in its investment, loan
underwriting, and impairment decisions.”).
111
      SAC ¶ 149; see also SEC Compl. ¶¶ 1, 3.
                                            22
UDF III and UDF IV.” 112 Etter, Greenlaw, Wissink, and Obert are alleged to have

known that the loans to the Developer Borrowers were not being used to develop

projects and directed the Developer Borrowers to use the proceeds to pay down

interest and principal on the Developer Borrowers’ outstanding loans to UDF

III. 113 On the same day that the SEC Complaint was filed, each of the defendants

in the SEC Action entered into consent judgments, whereby Greenlaw, Etter,

Wissink, and Obert agreed to collectively pay $7.45 million in disgorgement,

prejudgment interest, and civil penalties. 114        Plaintiffs have attached and

incorporated by reference the SEC Complaint and the consent judgments into the

Complaint.115

         F.    Hayman Capital Management Reports on the UDF Scheme.

         In December 2015, Hayman Capital Management, L.P. (“Hayman”), a

hedge fund with a short position in the stock of UDF IV, began to publish reports

accusing certain Defendants of using loans by newer UDF Funds to bail out and




112
      SEC Compl. ¶¶ 11-14, 46.
113
      SAC ¶ 250, SEC Compl. ¶ 27.
114
      SAC Exs. 2-3.
115
   Id. at Exs. 1-3. Under the consent judgments, UDF III, UDF IV, Greenlaw, Etter,
Wissink, and Obert did not admit or deny the allegations of the SEC Complaint, but
agreed to be permanently restrained and enjoined from violation of Sections 17(a)(2) and
(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the
Exchange Act. Id. at Exs. 2-3 ¶ 2.
                                          23
support loans made by earlier UDF Funds.116 The Complaint does not attach any

of Hayman’s reports, but relies on Hayman’s allegations that “new investor

money” raised through UDF III, UDF IV, and UDF V provided liquidity to earlier-

formed United Development Fund entities. 117 Hayman noted that UDF III’s loan

portfolio was concentrated in loans to the two Developer Borrowers that had

borrowed from earlier-formed UDF Funds. 118 Hayman also raised concerns about

the resignation of the UDF Funds’ auditor. 119

          G.       This Litigation

          On July 7, 2016, Plaintiffs filed a Verified Derivative and Class Action

Complaint for Breach of Fiduciary Duties against entities and individuals related to




116
   Id. ¶¶ 17(c), 273. Several United Development entities filed suit against Hayman and
others challenging Hayman’s reports and assert claims for, inter alia, business
disparagement, tortious interference with contract and business relationship, and civil
conspiracy. See United Dev. Funding, L.P., et al. v. Hayman Capital Management, L.P.,
et al., Case No. CC-17-06253-B (County Court at Law No. 2, Dallas County, Texas)
(Nov. 28, 2017); see also Bass v. United Dev. Funding, L.P., 2019 WL 3940976, at *1
(Tex. App. Aug. 21, 2019), review denied (Mar. 13, 2020). On June 11, 2018, the court
in that action entered an order denying Hayman’s motion to dismiss under the Texas
Citizens Participation Act, finding that the plaintiffs had established a prima facie case
against Hayman. See Entity Defs.’ Opening Br. 9, n.3. On August 21, 2019, the Court of
Appeals for the Fifth District of Texas affirmed the trial court’s denial of Hayman’s
motion to dismiss, finding that Hayman had motive to maximize profits from its $59
million short position in UDF IV. See Bass v. United Dev. Funding, L.P., 2019 WL
3940976, at *1; Entity Defs.’ Reply Br. 1, Dkt. 137.
117
      SAC ¶ 17(c).
118
      Id. ¶ 17(c).
119
      Id. ¶ 273.
                                           24
the Entity Defendants. 120         On March 17, 2017, Plaintiffs amended that

complaint.121

         On January 16, 2018, the Court stayed this action pending the resolution of

five earlier-filed actions pending in the United States District Court for the

Northern District of Texas that included claims against many of the same

Defendants here (the “Texas Actions”). 122

         On March 28, 2019, following the resolution of the Texas Actions and the

SEC Action, the Court entered the parties’ stipulation to lift the stay of this

action. 123       On April 29, 2019, Plaintiffs filed the Complaint, incorporating

allegations from the SEC Complaint and consent judgments.             The Complaint

contains seven counts. Counts I, III-V, and VII are pleaded as derivative claims,

and Counts II and VI are pleaded as direct claims.

                • Count I (“Derivative Claim, On Behalf of UDF III, For Breach of

                  Fiduciary Duty”): Count I is a derivative claim on behalf of UDF III

                  against Etter, Greenlaw, Wilson, Wissink, Obert, Youngblood, UMT

120
      Dkt. 1.
121
      Am. Derivative and Class Action Compl. Dkt. 54.
122
    Order Granting Mot. to Stay. Dkt. 93. The “Texas Actions” include the federal
derivative actions on behalf of UDF IV and UDF V, Evans v. Greenlaw et al, 3:16-cv-
00635 (N.D. Tex.), and the federal and state law securities class actions on behalf of
purchasers of UDF IV and UDF V stock, In re United Dev. Funding IV Sec. Litig., Case
No. 3:15-cv-4030-M (N.D. Tex.) and Hay v. United Dev. Funding IV, et al., Case No.
4:16-cv-00188 (N.D. Tex.).
123
      Dkt. 117.
                                            25
                   Services, and UMTH LD for breach of fiduciary duty. Plaintiffs

                   allege that UMTH LD owes fiduciary duties to UDF III because it is

                   the general partner of UDF III;124 that UMT Services owes fiduciary

                   duties because it is the general partner of UMTH LD; that Etter and

                   Greenlaw owe fiduciary duties because they are the “ultimate

                   controllers and owners of UMT Services”; 125 that Etter, Greenlaw,

                   and Wilson owe fiduciary duties because they are directors and

                   officers of UMT Services and “controllers of the decisions and

                   conduct which injured UDF III”; 126 and that Wissink, Obert, and

                   Youngblood owe fiduciary duties as “senior executive decision-

                   makers concerning the conduct that injured UDF III.” 127 Plaintiffs

                   argue that each of these Defendants breached their fiduciary duties

                   through “conflicted and self-dealing conduct.”128

             • Count II: (“Direct Claim, On Behalf of the Class, for Breach of

                   Fiduciary Duties”): Count II asserts a direct claim on behalf against

                   Etter, Greenlaw, Wilson, Wissink, Obert, Youngblood, UMT


124
      SAC ¶ 357.
125
      Id. ¶ 354.
126
      Id. ¶ 355.
127
      Id. ¶ 358.
128
      Id. ¶¶ 354-58.
                                              26
                   Services, and UMTH LD for the same breach of fiduciary duty.129

                   Plaintiffs allege these Defendants breached their fiduciary duties by

                   their decision to cease distributions of the Cash Available for

                   Distribution to UDF III’s Limited Partners since January 2016 and by

                   omitting and misstating material information provided to the Limited

                   Partners concerning UDF III and its assets. 130

             • Count III (“Derivative Claim, On Behalf of UDF III, for Waste of

                   Partnership Assets”):       Count III alleges that Etter, Greenlaw,

                   Wilson, Wissink, Obert, Youngblood, UMT Services, and UMTH LD

                   wasted Partnership assets by engaging in the challenged loan

                   transactions and for failing to enforce UDF III’s rights under the loan

                   agreements. 131   In response to Defendants’ briefs, Plaintiffs have

                   abandoned this claim as to all defendants except UMTH LD. 132

             • Count IV (“Derivative Claim, On Behalf of UDF III, for Aiding

                   and Abetting Breach of Fiduciary Duty”): Count IV asserts a

                   derivative claim on behalf of UDF III against UMT, UMT Holdings,




129
      Id. ¶¶ 360-65.
130
      Id. ¶ 366.
131
      Id. ¶ 370.
132
      Pls.’ Ans. Br. 98 n.61.
                                               27
                   UMTH General, UDF I, UDF IV, and UDF X for aiding and abetting

                   the breaches of fiduciary duty described in Counts I and II. 133

             • Count V (“Derivative Claim, on Behalf of UDF III, for Breach of

                   Contract”): Count V is a derivative claim against UMTH LD for

                   breach of the Partnership Agreement.        Plaintiffs contend that by

                   causing UDF III to invest in and/or to make loans to UDF I and its

                   subsidiaries and to the Developer Borrowers, UMTH LD breached

                   Section 11.3(b) of the Partnership Agreement, which provides loan

                   concentration limitations to any single borrower.134 Plaintiffs allege

                   that UMTH LD also breached the Partnership Agreement by failing to

                   obtain appraisals in connection with the UMT Participation Interest

                   and UMT Option. 135

             • Count VI (“Direct Claim, on Behalf of the Class, for Breach of

                   Contract”): Count VI is a direct claim against UMTH LD for breach

                   of the Partnership Agreement. Plaintiffs contend that UMTH LD’s

                   decision to cease distributions of the Cash Available for Distribution




133
      SAC ¶ 375.
134
      Id. ¶¶ 379-80.
135
      Id. ¶ 381.
                                               28
                   and to cease distributions of financial reports for UDF III breached the

                   Partnership Agreement.136

             • Count VII (“Derivative Claim, on Behalf of UDF III, for Unjust

                   Enrichment”): Count VII is a claim for unjust enrichment against all

                   Defendants. 137

          On June 28, 2019, the Entity Defendants and Individual Defendants each

filed separate motions to dismiss the Complaint.138 On April 14, 2020, this Court

held oral argument on the Motions to Dismiss. 139

II.       ANALYSIS

          The Defendants have moved to dismiss pursuant to Court of Chancery Rules

12(b)(6) and 23.1. The Defendants contend the Complaint does not state a claim

under Court of Chancery Rule 12(b)(6), because (1) claims based on transactions

that occurred and were disclosed more than three years prior to the commencement

of this action are barred by laches and statutes of limitations; (2) the Plaintiffs have

failed to allege injury; and (3) the Complaint fails to state claims as to each of the

causes of actions.140 Second, the Individual Defendants argue that they do not owe


136
      Id. ¶ 385.
137
      Id. ¶¶ 389-90.
138
      Entity Defs.’ Mot. to Dismiss, Dkt. 125; Individual Defs.’ Mot. to Dismiss, Dkt. 124.
139
      Dkt. 142.
140
      Entity Defs.’ Opening Br. 2.
                                               29
fiduciary duties to UDF III or its limited partners. 141 This argument urges the

Court to reject the well-established precedent of In re USACafes, L.P. Litigation142

and its progeny, which held that the persons who ultimately control a corporate

general partner owe fiduciary duties to the limited partnership. Wissink, Obert,

and Youngblood separately argue that even if this Court follows USACafes, Counts

I, II, and VII should be dismissed as to them because the Plaintiffs have failed to

allege that these specific Defendants exercise sufficient control over UDF III to

impose fiduciary duties upon them. 143         The Defendants further argue that the

derivative claims based upon the transactions with “unaffiliated, third-party

borrowers” must be dismissed pursuant to Court of Chancery Rule 23.1 for failure

to plead demand futility. 144

         A.     Motion to Dismiss for Failure to State a Claim

         The pleading standards governing a motion to dismiss under Court of

Chancery Rule 12(b)(6) are minimal. Central Mortg. Co. v. Morgan Stanley

Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). On a motion to dismiss

for failure to state a claim:

                (i) all well-pleaded factual allegations are accepted as
                true; (ii) even vague allegations are well-pleaded if they

141
      Individual Defs.’ Opening Br. 8.
142
      600 A.2d 43 (Del. Ch.), appeal refused, 602 A.2d 1082 (Del. 1991).
143
      Individual Defs.’ Opening Br. 35-41.
144
      Entity Defs.’ Opening Br. 2.
                                             30
            give the opposing party notice of the claim; (iii) the
            Court must draw all reasonable inferences in favor of the
            non-moving party; and ([iv]) dismissal is inappropriate
            unless the plaintiff would not be entitled to recover under
            any reasonably conceivable set of circumstances
            susceptible to proof.

Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations and

quotations omitted); accord Central Mortg., 27 A.3d at 536. Although the Court

must accept as true the well-pleaded allegations in the Complaint, the Court “need

not accept inferences or factual conclusions unsupported by specific allegations of

fact.” Transdigm Inc. v. Alcoa Glob. Fasteners, Inc., 2013 WL 2326881, at *4

(Del. Ch. May 29, 2013).       “[A] trial court is required to accept only those

‘reasonable inferences that logically flow from the face of the complaint’ and ‘is

not required to accept every strained interpretation of the allegations proposed by

the plaintiff.’” In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168

(Del. 2006) (quoting Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001)).

“Moreover, a claim may be dismissed if allegations in the complaint or in the

exhibits incorporated into the complaint effectively negate the claim as a matter of

law.” Malpiede, 780 A.2d at 1083.

            1.     Plaintiffs’ Claims Predating July 7, 2013 Are Partly Barred
                   By Laches.
      “Laches is an affirmative defense that the plaintiff unreasonably delayed in

bringing suit after learning of an infringement of his or her rights. . . .      In


                                        31
determining whether an action is barred by laches, the Court of Chancery will

normally . . . apply the period of limitations by analogy.” Levey v. Brownstone

Asset Mgmt., LP, 76 A.3d 764, 769 (Del. 2013).           The statute of limitations

governing each of Plaintiffs’ claims is three years. Dubroff v. Wren Holdings,

LLC, 2011 WL 5137175, at *12 (Del. Ch. Oct. 28, 2011) (breach of fiduciary duty,

aiding and abetting a breach of fiduciary duty, and unjust enrichment); Marnavi

S.p.A. v. Keehan, 900 F. Supp. 2d 377, 395 (D. Del. 2012) (waste of partnership

assets); Bear Stearns Mortg. Funding Tr. 2006-SL1 v. EMC Mortg. LLC, 2015 WL

139731, at *6 (Del. Ch. Jan. 12, 2015) (breach of contract). Under Delaware law,

“a cause of action accrues ‘at the time of the wrongful act, even if the plaintiff is

ignorant of the cause of action.’” ISN Software Corp. v. Richards, Layton &

Finger, P.A., 226 A.3d 727, 732 (Del. 2020) (quoting Wal-Mart Stores, 860 A.2d

at 319), reargument denied (Mar. 20, 2020). The Plaintiffs filed their original

complaint on July 7, 2016, and by analogy, transactions that occurred and were

disclosed prior to July 7, 2013 are barred by laches.

      Defendants list twelve transactions that they argue are barred by laches, in

full or in part. 145 These transactions include loans in which the borrowed amounts

were increased and the maturity dates were extended multiple times after their


145
    Entity Defs.’ Opening Br. 36-37 (list of conduct challenged as time-barred because
they are based on “allegations relying in whole or in part upon conduct that occurred
prior to July 2013”).
                                         32
origination.      The parties, however, have acknowledged that extensions and

increases in lending which occurred within the three-year limitations period would

not be barred by laches, even if they relate to a loan or agreement that originated

prior to the three-year limitations period. 146 Thus, as a practical matter, the only

transactions that are subject to the three-year limitations period are the transactions

that occurred prior to July 7, 2013, rather than the later extensions and increases to

the loans, which could independently serve as the basis for a claim. Therefore, the

transactions at issue here are:

         (1)    Originating and four increases in, and extensions to the maturity date
                of, the UDF I Loan;147
         (2)    Entry into the UMT Participation Interest Agreement; 148
         (3)    Originating and an increase in, and extension to the maturity date of,
                the UDF NP Loan;149
         (4)    Originating the UDF X Loan;150
         (5)    Guaranteeing UMTHF’s loan; 151


146
    See, e.g., Oral Arg. Tr. 59:22-60:4 (Walsen, counsel for Entity Defendants)
(challenging the extension of the maturity date and increase in loan balance to the 2006
UDF I Loan that occurred before 2013); id. at 69:12-19 (Kriner, counsel for Plaintiffs).
147
   SAC ¶ 108 (alleging that UDF III originated the 2006 UDF I Loan in December 2006
and that the amount of the 2006 UDF I Loan was increased and its maturity date extended
four times before December 2012).
148
    Id. ¶¶ 98-100 (alleging that UDF III entered into the UMT Loan Participation
Agreement in September 2008, that UMT advanced funds to its shareholders in 2008 and
2009, and that the commitment in the UMT Loan was increased and its maturity date
extended twice before the beginning of 2013).
149
   Id. ¶ 109 (alleging that UDF III originated the UDF NP Loan in December 2007 and
that, before September 2011, the amount of the UDF NP Loan was increased to $15
million and its maturity date extended to December 2013).
150
      Id. ¶¶ 111-13 (alleging that UDF III originated the UDF X Loan in November 2007).
                                            33
      (6)    Guaranteeing UDF IV Home Finance, L.P.’s loan; 152
      (7)    Guaranteeing UMT 15th Street L.P.’s loan;153
      (8)    Guaranteeing UDF IV Acquisitions L.P.’s loan; 154
      (9)    Guaranteeing UDF IV Finance II L.P.’s loan; 155
      (10)   Guaranteeing UMT HF III L.P.’s loan; 156
      (11)   Originating the loan to Shahan Prairie, an affiliate of CTMGT; 157 and
      (12)   Entering into the CTMGT Loan. 158




151
   Id. ¶ 118(1) (alleging that UDF III entered into a guaranty agreement in August 2009
binding UDF III as the guarantor for UMTHF’s repayment of a loan to Texas Capital
Bank, National Association).
152
   Id. ¶ 118(2) (alleging that UDF III entered into a guaranty agreement in April 2010
binding UDF III as the guarantor for UDF IV Home Finance L.P.’s repayment of a loan
to Community Trust Bank of Texas).
153
   Id. ¶ 118(3) (alleging that UDF III entered into a guaranty agreement in April 2010
binding UDF III as the guarantor for UMT 15th Street, L.P.’s repayment of a loan to
Community Trust Bank of Texas and that UMT 15th Street is a wholly owned subsidiary
of UMT).
154
   Id. ¶ 118(4) (alleging that UDF III entered into a guaranty agreement in August 2010
binding UDF III as the guarantor for UDF IV Acquisitions, L.P.’s repayment of a loan to
Community Trust Bank of Texas and that UDF IV Acquisitions, L.P. is a wholly owned
subsidiary of UDF IV).
155
    Id. ¶ 118(5) (alleging that UDF III entered into a guaranty agreement in December
2010 binding UDF III as the guarantor for UDF IV Finance II’s repayment of a loan to
The F&M Bank and Trust Company n/k/a Prosperity Bank, and that UDF IV Finance II
is a wholly owned subsidiary of UDF IV).
156
   Id. ¶ 118(6) (alleging that UDF III entered into a guaranty agreement in May 2011
binding UDF III as the guarantor for UMT HF III’s repayment of a loan to Veritex
Community Bank, N.A., and that UMT HF III is a wholly owned subsidiary of UMT).
157
   Id. ¶¶ 130-31 (alleging that UDF III loaned $1.9 million to Shahan Prairie in
September 2007 and that it increased its loan twice before the end of 2012); see also id. ¶
132 that Shahan Prairie repaid the loan to UDF III in June 2015, after UDF V made an
$18.1 million loan to Shahan Prairie).
158
   Id. ¶¶ 140 (alleging that UDF III originated a secured loan to CTMGT and its
subsidiaries in December 2007, the amount of which was increased twice before the
beginning of 2013).
                                            34
         Plaintiffs argue that the analogous statute of limitations must be tolled for

two reasons. 159 First, Plaintiffs argue that their claims are subject to equitable

tolling, contending that they “reasonably relied . . . upon the Fiduciary Defendants

to make and disclose investments in good faith in accordance with their fiduciary

duties.”160 Plaintiffs argue that they were not aware of any issues with UDF III

until late 2015, “when the [UDF III’s] auditor resigned, [UDF III] acknowledged

that it had been subject to an SEC investigation since April 2014, Hayman Capital

issued reports regarding the self-dealing conduct within the UDF family of entities,

and      the    Fiduciary       Defendants   halted   payment   of   limited   partnership

distributions.” 161 Second, Plaintiffs broadly contend that the Complaint generally

demonstrates that Defendants engaged in fraudulent concealment until 2015. 162

                           a.    Plaintiffs’ Claims Relating to the Developer Borrower
                                 Loans, the UMT Loan, and the UMT Participation
                                 Interest Agreement Are Equitably Tolled.

         The doctrine of equitable tolling stops a statute of limitations from running

while a plaintiff has “reasonably relied upon the competence and good faith of a


159
   “If a prima facie basis for laches exists from the face of the complaint, the plaintiff
bears the burden to plead specific facts to demonstrate that the analogous statute of
limitations was tolled.” Bean v. Fursa Capital P’rs, LP, 2013 WL 755792, at *4 (Del.
Ch. Feb. 28, 2013) (citing In re Dean Witter P'ship Litig., 1998 WL 442456, at *6 (Del.
Ch. July 17, 1998)).
160
      Pls.’ Ans. Br. 53.
161
      Id. at 54 (citing SAC ¶ 17).
162
      Pls.’ Ans. Br. 52.
                                               35
fiduciary.” Tyson Foods, 919 A.2d at 585. The statute of limitations resumes

running, however, after the injured party is put on inquiry notice of the claim. In

re Ebix, Inc. Stockholder Litig., 2014 WL 3696655, at *8 (Del. Ch. July 24, 2014).

Plaintiffs bear the burden of pleading facts demonstrating that they were not on

inquiry notice of the facts underlying their purported claims. Weiss v. Swanson,

948 A.2d 433, 451 (Del. Ch. 2008). “No evidence of actual concealment is

necessary in such a case, but the statute is only tolled until the investor knew or

had reason to know of the facts constituting the wrong.” Tyson Foods, 919 A.2d at

585 (citations omitted).

      According to Plaintiffs, Defendants used each of the challenged transactions

to wrongfully cover debts of other affiliated entities at UDF III’s expense. UDF

III’s public filings disclose the challenged transactions but, as described above,

Plaintiffs argue that they lacked inquiry notice of the scheme in late 2015, when a

hedge fund disseminated a report asserting that the United Development Fund

entities were operating as a “Ponzi-like scheme,” UDF III’s auditor resigned, and

UDF III announced that it was the subject of an SEC investigation. 163            The

Complaint sufficiently alleges that Plaintiffs were not on inquiry notice of their

pre-July 7, 2013 claims relating to the UMT Loan and the UMT Participation


163
    SAC ¶ 17 (“In late 2015, information began to surface which cast doubt on the
integrity and value of the Partnership’s assets and the completeness and candor of the
information historically provided to the Limited Partners.”).
                                         36
Interest Agreement and the CTMGT Loan. The remainder of Plaintiffs’ pre-July 7,

2013 claims are not equitably tolled.

      Plaintiffs have alleged that UDF III’s disclosures with respect to the

CTMGT Loan, the UMT Loan, and the UMT Participation Interest Agreement

were misleading. Plaintiffs have alleged that UDF III disclosed that the purpose of

the loans was to fund real estate development projects, not to benefit other United

Development Funds, as Plaintiffs allege.164 Plaintiffs are entitled to rely on these

disclosures, and the well-pleaded allegation that this disclosure was false refutes

that they were on inquiry notice that the loans were being used for another

purpose. 165



164
    Id. ¶¶ 121-39 (alleging that the loans to the Developer Borrowers were shams to
permit them to repay loans to UDF III affiliates at lower rates and that the Limited
Partners were misled to believe that the loans “were made for the purpose of funding
actual real estate development projects”); see also UDF III, Form 10-Q (filed Sept. 30,
2015) (“The purpose of the UMT Loan is to finance UDF I’s investments in real estate
development projects.”). Defendants do not specifically argue that any pre-2013 loans to
Buffington Land in their list of transactions are barred by laches, see Entity Defs.’
Opening Br. 35-37, but that challenge would fail for the same reasons described here.
See also SEC Compl. ¶¶ 37-40 (alleging that UDF III disclosed in its annual report for
2013 that “full collectability” for the Buffington Land loan was considered “probable,”
and that “UDF knew or should have known that full collectability . . . was not probable
and, at best, highly uncertain.”); SAC ¶ 285 (alleging that UDF III made a false
representation regarding the bankruptcy proceeding for Lennar Buffington Stonewall
Ranch L.P., an affiliate of Buffington Land (“Lennar Buffington”)). The SEC Complaint
does not identify Buffington Land by name, but the facts of record indicate that the
Austin-based developer named in the SEC Complaint was Buffington Land.
165
    Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc., 2007 WL 2982247, at *14 (Del. Ch.
Oct. 9, 2007) (“Reasonable reliance on the competence and good faith of fiduciaries can
toll the running of the statute of limitations.”).
                                          37
         Plaintiffs’ allegations with respect to the remainder of their pre-July 7, 2013

claims fail to satisfy their burden to demonstrate that they were not on inquiry

notice of their claims. Plaintiffs’ first argument is that a November 2015 letter

demonstrates that they reasonably relied on UDF III’s representations that its loans

to affiliates of its general partner were beneficial. 166 On November 9, 2015, certain

Defendants issued a letter to the Limited Partners recommending that they reject a

tender offer of $14.50. Plaintiffs allege that this was a false representation that the

tender offer price was less than the then-current $20 reported unit price and

potential long term value of the LP Units. Plaintiffs, however, fail to connect any

representation in this letter to the challenged transactions pre-dating July 7, 2013.

         In fact, the public filings cited by Plaintiffs disclose the terms of the

allegedly wrongful transactions prior to July 7, 2013 and, unlike UDF III's

disclosures relating to the UMT Loan and the loans to Developer Borrowers,

Plaintiffs have not specifically alleged facts demonstrating that UDF III's

disclosures regarding the other challenged transactions misled them. For example,

Plaintiffs allege that Defendants originated, increased, and extended the 2006 UDF

I Loan at a time when UDF I was unable to meet its loan requirements. While

Plaintiffs allege that UDF I is currently insolvent, the Complaint does not contain

any well-pleaded allegation that Defendants knowingly extended or increased the

166
      Pls.’ Ans. Br. 53-54.
                                           38
2006 UDF I Loan at a time when UDF I was unable to meet its loan obligations

before July 7, 2013. 167 Indeed, Plaintiffs acknowledge that they were informed

through UDF’s 2011 annual report that the principal amount of the 2006 UDF I

Loan had increased from $6.9 million when the loan was originated to $12.8

million without any increase in collateral.168 Plaintiffs’ claim that the 2006 UDF I

Loan was knowingly undercollateralized is therefore untimely.

          Plaintiffs’ claims with respect to the UDF X Loan, the UDF NP Loan, the

Shahan Prairie loan, and the guarantees to related entities fail for the same reasons:

Plaintiffs have failed to plead specific facts establishing that they were not on

inquiry notice of their pre-July 7, 2013 claims as to these transactions. Plaintiffs

do not allege that UDF III’s public filings omitted any information relating to the

UDF X Loan. Plaintiffs conclusorily allege that “UDF X was not an economically

sound borrower” at the time that UDF III originated the UDF X Loan, but that

allegation is contradicted by Plaintiffs’ allegation that UDF X made payments

under the UDF X Loan to UDF III until 2014.169 Plaintiffs base their pre-July 7,

2013 claims regarding the UDF NP Loan, the Shahan Prairie loan, and the

167
   See also SAC ¶¶ 98-110 (alleging that the UMT Loan, the 2006 UDF I Loan, the UDF
NP Loan, and the UDF X Loan were made to support UDF I and UDF X at UDF III’s
expense); ¶¶ 242-44 (alleging that UDF I and UDF X are insolvent).
168
      Id. ¶ 108.
169
   Compare id. ¶ 112 (alleging that UDF III originated the UDF X Loan in November
2007), with id. ¶ 242 (alleging that UDF X stopped making loan payments to UDF III in
2014).
                                         39
guarantees to related entities on the fact that the transactions were to related

entities or that UDF III failed to obtain an increase in collateral at the same time its

loans were increased, but as with the 2006 UDF I Loan, these facts were also

disclosed to Plaintiffs. 170

       Plaintiffs have thus failed to plead specific facts sufficient to equitably toll

their challenges to Defendants’ actions with respect to the 2006 UDF I Loan, the

UDF X Loan, the UDF NP Loan, and guarantees to UDF affiliates to the extent

those acts pre-date July 7, 2013.171

                     b.        Plaintiff Has Not Established Fraudulent
                               Concealment.

       Plaintiffs have waived any argument that they have pleaded fraudulent

concealment. A statute of limitations may be disregarded when a defendant has

“fraudulently concealed from a plaintiff the facts necessary to put him on notice of

the truth.” Tyson Foods, 919 A.2d at 585. Plaintiffs bear the burden of pleading

specific facts to demonstrate that the analogous statutes of limitations were tolled.


170
    See id. ¶ 109 (alleging that UDF III’s November 14, 2011 Form 10-Q disclosed that
the UDF NP Loan was increased to $15 million without any increase in collateral); see
also ¶ 118 (describing UDF III’s guaranty agreements for affiliates by reference to UDF
III’s public disclosures), ¶ 131 (alleging, without more, that UDF III provided a loan to
Shahan Prairie in 2007).
171
   To the extent that discovery shows that pre-July 7, 2013 claims barred by laches
should have been equitably tolled, Plaintiffs may seek to revisit this issue “should future
developments provide a compelling reason for doing so,” subject to the law of the case
doctrine. In re Dell Techs. Inc. Class V S’holders Litig., 2020 WL 3096748, at *43 (Del.
Ch. June 11, 2020).
                                            40
Eni Holdings, LLC v. KBR Grp. Holdings, LLC, 2013 WL 6186326, at *13 (Del.

Ch. Nov. 27, 2013). “Claims of fraudulent concealment are subject to a heightened

pleading standard” and must be stated “with particularity.”                IMO Estate of

Lambeth, 2018 WL 3239902 at *4.

         Plaintiffs’ argument as to fraudulent concealment is relegated to a footnote,

referring to the failure to disclose Buffington Land’s inability to satisfy its

indebtedness.172 But Defendants have not argued that Plaintiffs’ claims as to that

transaction are time-barred.173           Plaintiffs have not established fraudulent

concealment as a basis to avoid laches for their pre-July 7, 2013 claims. 174

                2.     The Claims Are Not Barred Under the Partnership
                       Agreement.
         The Defendants seek dismissal of Counts I-IV and VII (claims for breach of

fiduciary duty, aiding and abetting breach of fiduciary duty, waste, and unjust

enrichment) because they are based upon conduct disclosed and permitted in the

Partnership Agreement and UDF III’s public filings.175 The Defendants argue that

the Plaintiffs bought their LP Units with knowledge that the Partnership

Agreement and UDF III’s public filings disclosed the potential for the conflicts of


172
      See Pls.’ Ans. Br. 56-57 & n.28.
173
      Entity Defs.’ Opening Br. 36-37 (list of conduct challenged as time-barred).
174
  “Issues not briefed are deemed waived.” Emerald P’rs v. Berlin, 726 A.2d 1215, 1224
(Del. 1999).
175
      Entity Defs.’ Opening Br. 38-43.
                                              41
interest and the actions underlying Counts I-IV and VII, and therefore, Plaintiffs

cannot now complain about those same transactions. 176

          A limited partner may, under limited circumstances, be precluded from

asserting claims based upon conflicts of interest where the conflicts of interest are

disclosed in the partnership agreement or a prospectus. Seafood Funding Ltd.

P’shp v. M&M Assocs. II, L.P., 672 A.2d 66, 72 (Del. Ch. 1995) (“A conflict of

interest disclosed in a prospectus or partnership agreement and a plaintiff’s

acceptance of the terms of the prospectus or Partnership Agreement precludes the

plaintiff from bringing a derivative claim based on the facts disclosed in those

documents.” (emphasis added)); see also Boxer v. Husky Oil Co., 1983 WL 17937,

at *6 (Del. Ch. June 28, 1983) (where partnership agreement and prospectus

specifically contemplated that a general partner with a disclosed conflict would

play a role in selecting an appraiser, the plaintiffs could not base a cause of action

on the mere fact that the general partner in fact played the very role contemplated

for it when it came time to select an appraiser), aff’d, 483 A.2d 633 (Del. 1984)

(ORDER); Werner v. Miller Tech. Mgmt., L.P., 831 A.2d 318, 334 (Del. Ch. 2003)

(“In some instances, disclosure of conflicts of interest may preclude a claim for

breach of the duty of loyalty” (citing Boxer, 1983 WL 17937)).




176
      Id. at 39.
                                         42
          Defendants cite only one provision of the Partnership Agreement to support

this defense, which they acknowledge merely provides “for the possibility that

UDF III may extend loans or engage in transactions with earlier UDF

programs.” 177 Section 13.3 of the Partnership Agreement prohibits loans to the

General Partner or affiliates of the General Partner, except under certain

conditions. 178 The Defendants also point to boilerplate disclosures in one of UDF

III’s public filings about potential conflicts of interest. 179 Defendants cite no

authority where a limited partner was barred from bringing a breach of fiduciary

duty claim because a potential conflict of interest was recited in a public filing.

Thus, Defendants are left with the loan limitation restriction in Section 13.3. 180

          In order to foreclose a plaintiff from complaining about a corporate action,

the plaintiff must have “full knowledge of all the facts [in which] he or she has

concurred.” Werner, 831 A.2d at 334. In Werner, the Court concluded that a

private placement memorandum “did not disclose the potential for conflicts of

interest with enough specificity to prevent [the plaintiff] from bringing a duty of


177
      Id. at 42.
178
      Partnership Agreement § 13.3(a)-(b).
179
   Entity Defs’ Opening Br., Ex. J, at 5-6, 12-13 (UDF III, Annual Report (filed Apr. 2,
2007)).
180
   For this reason, Defendants’ legal authorities do not carry the day. Litman v.
Prudential-Bache Props., Inc., 1993 WL 5922, at *5 (Del. Ch. Jan. 4, 1993) (referring to
“acceptance of the terms in the prospectus and partnership agreement”); Goodman v.
Futrovsky, 213 A.2d 899, 903 (Del. 1965) (conflict disclosed in prospectus).
                                             43
loyalty claim.” Id. Just as in Werner, Section 13.3 of the Partnership Agreement

could not “convey full knowledge” that UMTH LD would cause UDF III to enter

into interested transactions with earlier UDF Funds for the purpose of concealing

their losses and enabling them to make distributions to their limited partners. Id.

         This conclusion is further supported by considering the Partnership

Agreement as a whole. The Partnership Agreement requires that, “[t]he General

Partner shall exercise its fiduciary duty for the safekeeping and use of all funds and

assets of the Partnership . . . and shall not employ, or permit another to employ,

such funds or assets in any manner except for the exclusive benefit of the

Partnership. In addition, the Partnership shall not permit the Partners to contract

away the fiduciary duty owed to the Partners by the General Partner under

common law.” 181 Viewed in context, Section 13.3 cannot be read to foreclose the

Limited Partners from pursuing derivative claims for breaches of fiduciary duty.

That is particularly true where, as here, the creators of the Partnership chose not to

eliminate fiduciary duties owed to the Partnership or the Limited Partners arising

from conflicted transactions. See 6 Del. C. § 17-1101(d); see also infra Section

II(A)(4)(b).




181
      Partnership Agreement § 11.3(g).
                                         44
                   3.   The Complaint Adequately Alleges Injury.
          Defendants argue that the Plaintiffs have failed to allege injury arising from

the challenged conduct.        Defendants contend that “most losses alleged in the

[Complaint] either are losses allegedly sustained by a UDF affiliate . . . or by a

Developer Borrower.” 182 The Defendants further contend that Plaintiffs cannot

allege injuries stemming from guaranty agreements that have not yet matured and

that the allegations of loss suffered by UDF III generally involve only a risk of loss

or inference of loss. 183 Defendants also assert that Plaintiffs failed to allege how

the Limited Partners suffered tangible injury as a result of UDF III’s failure to file

quarterly and annual reports with the SEC. 184

          Plaintiffs respond they have provided factual allegations evidencing the

“systematic collapse and financial devastation of UDF III” 185 and that “[UDF III’s]

failure to distribute financial statements have prevented Plaintiffs and other limited

partners from making informed decisions on their investment in UDF III, the

calculation of damage for which can be later determined by the Court.”186

Plaintiffs argue, “The total damages to UDF III, the Plaintiffs and Limited Partners

182
      Entity Defs.’ Opening Br. 46.
183
      Id. at 46.
184
      Id. at 47.
185
   Pls.’ Ans. Br. 59. See also SAC ¶¶ 119-20 (alleging that the “guaranty amounts
pursuant to these agreements . . . expos[ed] UDF III to the risk of massive losses for
which UDF III was receiving inadequate consideration.”)
186
      Pls.’ Ans. 59, n.30.
                                            45
cannot currently be determined because the Fiduciary Defendants have failed to

file with the SEC, or to publicly disclose any quarterly or annual report, or audited

or unaudited financial statement, for UDF III since November 16, 2015 . . . .” 187

         Damages can be pleaded generally. See Bamford v. Penfold, L.P., 2020 WL

967942, at *21 (Del. Ch. Feb. 28, 2020). “Proof of . . . damages and of their

certainty need not be offered in the complaint in order to state a claim.” Anglo Am.

Sec. Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143, 156 (Del. Ch. 2003).

Plaintiffs’ fiduciary duty claims are based on a breach of the duty of loyalty.

“Delaware law dictates that the scope of recovery for a breach of the duty of

loyalty is not to be determined narrowly.” Thorpe by Castleman v. CERBCO, Inc.,

676 A.2d 436, 445 (Del. 1996); see also Encite LLC v. Soni, 2011 WL 5920896, at

*25 (Del. Ch. Nov. 28, 2011) (“Where this Court finds that a breach of fiduciary

duty has occurred, the specificity and amount of evidence required from the

Plaintiff on the issue of damages is minimal.”).

         Plaintiffs have pleaded sufficient injury to survive a motion to dismiss.

First, Plaintiffs identified that UDF III forgave $122 million of indebtedness to

Buffington Land, and that UDF III acknowledged this loan forgiveness may have a

“material adverse impact on UDF III’s financial statements.” 188 Second, Plaintiffs


187
      SAC ¶ 19; see also Pls.’ Ans. Br. 59.
188
      SAC ¶¶ 84, 218-20.
                                              46
have alleged other loans are also uncollectible because CTMGT, UDF I, and UDF

X are insolvent.189 This includes the UMT Loan, in which UDF III exercised its

UMT Participation Interest, the UMT NP Loan, and the UDF X Loan190 Third,

Plaintiffs have alleged that UDF III paid over $7.6 million in mortgage servicing

fees to UMTH LD through September 2015 for an inflated loan balance because

Defendants knew or should have known that many of the loans in UDF III’s loan

portfolio were materially impaired.191 Plaintiffs seek to recover the fees and profits

that Defendants obtained as a result of their breaches of fiduciary duty. At this

stage, Plaintiffs’ allegations of injury are sufficient to state a claim.

                4.     Counts I and II Allege Breaches of Fiduciary Duty as to
                       UMTH LD, UMT Services, Etter, Greenlaw, Wilson, and
                       Wissink.
         Count I is a derivative claim against UMTH LD, UMT Services, Etter,

Greenlaw, Wilson, Obert, Wissink, and Youngblood for breach of fiduciary duty.

Count II is asserted as a direct claim for breach of fiduciary duty.

         “A claim for breach of fiduciary duty requires proof of two elements: (1)

that a fiduciary duty existed and (2) that the defendant breached that duty.” Beard

Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010), aff’d, 11 A.3d 749 (Del.

189
   Id. ¶¶ 241-43. To the extent Plaintiffs are asserting a claim as to the loan extended to
Shahan Prairie, see id. ¶¶ 129-34, Plaintiffs admit that the loan was repaid in full and
have not adequately alleged damages as to that transaction. See infra n.259.
190
      Entity Defs.’ Opening Br. 44-45.
191
      SAC ¶¶ 257-59.
                                            47
2010). The Defendants argue that the Individual Defendants do not owe fiduciary

duties to UDF III or its Limited Partners, and even if they do, the Plaintiffs have

not alleged a breach of duty as to several of their claims.

                        a.     USACafes and Stare Decisis

            The Individual Defendants contend the managers and directors of the

corporate General Partner should not be held to owe fiduciary duties to the

Partnership or the Limited Partners. The Individual Defendants acknowledge that

in USACafes, then-Chancellor Allen held that directors and controllers of a

corporate general partner owed fiduciary duties to the limited partnership and the

limited partners.192 The Individual Defendants recognize that USACafes has been

ensconced in Delaware alternative entity law for nearly three decades.193

Nevertheless, they argue that “USACafes was wrongly decided and, more

importantly, presents an irreconcilable conflict with current Delaware law

regarding alternative entities.”194

            Stare decisis (“to stand by things decided”) is the legal term for fidelity to

precedent. Black’s Law Dictionary 1696 (11th ed. 2019). 195 The doctrine “finds

ready application in Delaware corporate law.” Leonard Loventhal Account v.

192
      Individual Defs.’ Opening Br. 9-10, Dkt. 124 (citing USACafes, 600 A.2d at 48-49).
193
      Id.
194
      Id. at 30.
195
   For a recent discussion of stare decisis, see June Med. Servs. L.L.C. v. Russo, 140 S.
Ct. 2103, 2134 (2020) (Roberts, C.J. concurring).
                                              48
Hilton Hotels Corp., 780 A.2d 245, 248 (Del. 2001). “It is axiomatic . . . that once

a trial judge decides an issue, other trial judges on that court are entitled to rely on

that decision as stare decisis.” Gatz Properties, LLC v. Auriga Capital Corp., 59

A.3d 1206, 1209 (Del. 2012); see also Leonard Loventhal Account v. Hilton Hotels

Corp., 2000 WL 1528909, at *5 (Del. Ch. Oct. 10, 2000) (observing that the

doctrine of stare decisis is applicable to “a decision of a court higher in rank, or of

the same rank” (quoting 20 Am. Jur. Courts § 201 (1965)), aff’d, 780 A.2d 245

(Del. 2001).

      This Court has “followed USACafes consistently.” Feeley v. NHAOCG,

LLC, 62 A.3d 649, 671 (Del. Ch. 2012). While the contours of the fiduciary

obligations have been debated, it is well established that, at a minimum, the

individuals and entities that own and control the general partner owe the limited

partners “the duty not to use control over the partnership’s property to advantage

the corporate director at the expense of the partnership.” Bay Ctr. Apartments

Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *10 (Del. Ch. Apr. 20,

2009); accord Feeley, 62 A.3d at 671; see generally Martin I. Lubaroff et al.,

Lubaroff & Altman on Delaware Limited Partnerships § 14.01[C], at 14-19 (2d ed.

2020) (“USACafes, L.P. does not fully define the scope of a common law fiduciary

duty of a director of a corporate general partner to a limited partnership and to its

limited partners.”).   Corporate practitioners and drafters of alternative entity

                                          49
agreements are well advised of this precedent and the importance of it when

drafting alternative entity agreements. See, e.g., Lubaroff § 14.01[C], at 14-19; IV

Robert S. Saunders et al., Folk on the Delaware Corporation Law § 17-403.05[H]

(6th ed. 2020).

      Controllers may avoid or at least minimize the duty that USACafes

recognized by structuring their limited partnership agreements to eliminate

fiduciary duties. Delaware limited partnership jurisprudence has long recognized

broad license to limit fiduciary duty protections in limited partnership agreements.

See Sonet v. Plum Creek Timber Co., L.P., 722 A.2d 319, 322 (Del. Ch. 1998). In

a 2004 amendment to the Delaware Revised Uniform Partnership Act (the “LP

Act”), Section 17-1101(d) clarified that the drafters of limited partnership

agreements may eliminate duties, including fiduciary duties, owed by “a partner or

other person . . . to a limited partnership or to another partner or to another person

that is a party to or is otherwise bound by a partnership agreement.” 6 Del. C. §

17-1101(d). In the same amendment, Section 17-1101(f) clarified that the limited

partnership agreement may provide for the limitation or elimination of liabilities

for breach of fiduciary duty.

      The Individual Defendants’ request for this Court to reject USACafes is a tall

order indeed. To depart from USACafes would require the Court to ignore that

creators of Delaware limited liability companies have drafted their agreements

                                         50
with full knowledge of the USACafes holding as well as the ability of the drafters

of their agreements to limit or eliminate fiduciary duties.          See Lubaroff, §

14.01[C], at 14-19 (discussing USACafes and “recommend[ing] that the duties

(including fiduciary duties) of such persons to a limited partnership and to the

partners of such partnership and to other persons that are parties to or are otherwise

bound by a partnership agreement to be defined in the partnership agreement in

accordance with Section 17-1101(d)”); id. at 14-15 (“The best way to protect an

affiliate of a general partner of a limited partnership is by drafting into a

partnership agreement the desired standard by which such persons or entities are to

be judged.”).

        Some partnership agreements have eliminated fiduciary duties; 196 others

have not. The Defendants here did not, but that was a conscious decision on their

part.    To be sure, UDF III was formed in 2005, one year after the 2004

amendments to Section 17-1101(d) and 17-1101(f) of the LP Act. The Individual

Defendants have not shown that USACafes reflects “a clear manifestation of error”


196
   See, e.g., Hite Hedge LP v. El Paso Corp., 2012 WL 4788658, at *3 (Del. Ch. Oct. 9,
2012) (granting motion to dismiss where partnership agreement eliminated fiduciary
duties); Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 186 (Del. Ch. 2014) (limited
partnership agreement eliminated all fiduciary duties); In re Kinder Morgan, Inc. Corp.
Reorganization Litig., 2015 WL 4975270, at *5 (Del. Ch. Aug. 20, 2015) (granting
motion to dismiss where limited partnership agreement eliminated fiduciary duties);
Inter-Marketing Gp. USA, Inc. v. Armstrong, 2019 WL 417849, at *5-6 (Del. Ch. Jan. 31,
2019) (holding plaintiffs did not establish demand futility where limited partnership
agreement eliminated fiduciary duties).
                                          51
or that there are “urgent reasons” for this Court to abandon its holding. Loventhal,

789 A.2d at 248. If USACafes is to be jettisoned, that is a determination for the

Delaware Supreme Court. Feeley, 62 A.3d at 671.

                       b.     The Complaint Adequately Alleges that UMT
                              Services, Etter, Greenlaw, Wilson, and Wissink Owe
                              Fiduciary Duties.

         The Partnership Agreement does not eliminate or limit fiduciary duties owed

by UMTH LD or any other person. Therefore, UMTH LD owes fiduciary duties to

UDF III as its general partner. Feeley, 62 A.3d at 662 (“General partners owe

default fiduciary duties.”). Defendants do not dispute that UMTH LD and UMT

Services owe fiduciary duties to UDF III and its Limited Partners. 197

         Pursuant to USACafes and its progeny, the “individuals and entities who

control the general partner owe to the limited partners at a minimum the duty of

loyalty.” Feeley, 62 A.3d at 670. Defendants concede that if USACafes applies,

Etter, Greenlaw, and Wilson also owe fiduciary duties to UDF III and its Limited

Partners. 198     The Individual Defendants contend, however, that even under

USACafes, Wissink, Obert, and Youngblood do not owe fiduciary duties because

those Individual Defendants are not alleged to exert sufficient control over the




197
      Entity Defs.’ Reply Br. 42.
198
      See Individual Defs.’ Reply Br. 21-26, Dkt. 136.
                                              52
assets of UDF III. 199 “[T]o have any fiduciary duties to an entity, the affiliate must

exert control over the assets of that entity.” Bay Ctr. Apartments, 2009 WL

1124451, at *9 (citing Wallace v. Wood, 752 A.2d 1175, 1118 (Del. Ch. 1999)

(“Officers, affiliates and parents of a general partner, may owe fiduciary duties to

limited partners if [they] control the partnership’s property.”)).

            Wissink is the president and former chief operating officer of UMTH LD

and one of three voting members of UMTH LD’s investment committee (Etter and

Greenlaw being the other two).200 Wissink is further alleged to have participated

in all investment, loan underwriting, and impairment decisions on behalf of UDF

III, including the challenged transactions. 201 Specifically, by March 2014, UDF III

allegedly knew that “full collectability from [Buffington Land] was not probable

and, at best, highly uncertain[,]” yet the investment committee continued to extend

the maturity date and increase the loan to Buffington Land.202          Wissink also

personally executed the agreements on behalf of UDF III for the UMT

Participation Loan, the UMT Loan Option, and the UDF X Loan. 203                Those

allegations are enough at the pleading stage to support a reasonable inference that


199
      Id.
200
      SAC ¶ 34.
201
      Id. ¶ 34; SEC Compl. ¶¶ 11-13, 46.
202
      SAC ¶ 136 (quoting the SEC Complaint).
203
      Id. ¶ 162.
                                           53
Wissink exercised sufficient “control” along with Etter, Greenlaw, and Wilson

over the assets of UDF III to justify the imposition of fiduciary duties on him.

          Obert and Youngblood are senior officers of UMTH LD, but there are no

specific allegations that either individual exerted actual control over UDF III’s

assets. UDF III’s public filings disclosed that UDF III’s “success depends to a

significant degree on the diligence, experience and skill of certain executive

officers and other certain key personnel of our general partner, including . . .

Youngblood and . . . Obert.”204 Those allegations are not sufficient to establish a

reasonable pleading stage inference that Obert and Youngblood exercised

sufficient “control” over the assets of UDF III to justify the imposition of fiduciary

duties on them. See Lewis v. AimCo Properties, L.P., 2015 WL 557995 (Del. Ch.

Feb. 10, 2015) (allegations that an individual holds officer positions in affiliated

entities and that the individual made some public statements on behalf of the

limited partnership, without more, are not enough to show that the individual

exercised control of the relevant defendant entities).

          The Court concludes that UMTH LD, UMT Services, Etter, Greenlaw,

Wilson, and Wissink owe fiduciary duties to UDF III and the Limited Partners.

Accordingly, Counts I and II are dismissed as to Obert and Youngblood only. For




204
      Id. ¶ 161.
                                          54
the remainder of this Opinion, UMTH LD, UMT Services, Etter, Greenlaw,

Wilson, and Wissink are collectively referred to as the “Fiduciary Defendants.”

                      c.     The Complaint Fails to Allege a Direct Breach of
                             Fiduciary Duty for the Failure to Distribute Cash
                             Available for Distribution.

         Count II alleges that the Fiduciary Defendants breached their fiduciary

duties by their failure to cause UDF III to distribute Cash Available for

Distribution from January 2016 to the present. Count II also alleges the Fiduciary

Defendants breached their fiduciary duties by omitting and misstating material

information provided to the Limited Partners concerning UDF III and its assets.205

Defendants argue that Count II must be dismissed for failure to state a claim as to

these two allegations.

         Section 9.1 of the Partnership Agreement provides that “Cash Available for

Distribution for each applicable accounting period shall be distributed (a) 90% to

the Limited Partners and the General Partner . . . and (b) 10% to the General

Partner.”206 Section 3.13 defines “Cash Available for Distribution” as “cash funds

received by the Partnership from operations . . . , including, without limitation,

interest, points or dividends from interim investments and proceeds from

borrowings, if any, less all cash used to pay [UDF III’s] expenses and debt


205
      SAC ¶ 366.
206
      Partnership Agreement § 9.1.
                                          55
payments and amounts set aside for reserves.”207          Defendants argue that the

Partnership Agreement provides the General Partner with absolute discretion to

maintain cash reserves, which are excluded from the Cash Available for

Distribution.208      Therefore, Defendants argue, the decision to maintain cash

reserves and cease distributions was a valid exercise of business judgment.209

Defendants also argue that Plaintiffs do not allege that there was, in fact, Cash

Available for Distribution. The Individual Defendants argue that Count II is not a

fiduciary duty claim, but rather a claim for breach of contract and that the General

Partner, which among the Defendants is the only party to the LPA, is the only one

with potential liability.

          Plaintiffs contend, however, that even if the General Partner has absolute

discretion to determine reserves, it does not supplant the General Partner’s duty to

act loyally in exercising that discretion.210 Plaintiffs also argue that this claim is a

distinct from the breach of contract claim because it relies on additional facts.

Plaintiffs claim that the fiduciary decision to preserve cash was made to allow the

Fiduciary Defendants “to fund their own special interests at the unfair expense of



207
      Id. § 3.13.
208
      Entity Defs.’ Opening Br. 49.
209
      Entity Defs.’ Reply Br. 44.
210
   Pls.’ Ans. Br. 95-96 (citing Paige Capital Mgm’t, LLC v. Lerner Master Fund, LLC,
2011 WL 3505355 at *32 (Del. Ch. Aug. 8, 2011).
                                          56
the limited partners.” 211 Plaintiffs specifically point to paragraphs 151, 181, and

183 of the Complaint for allegations that “the Fiduciary Defendants continued to

cause the Partnership to make loan advancements to Buffington Land after January

2016.” 212 But, as Defendants note, none of those paragraphs alleges any loan

advancements to Buffington Land after January 2016. At minimum, Plaintiffs

contend their allegations are sufficient to rebut the business judgment rule. 213

            The Complaint does not allege facts sufficient to create a reasonable

inference that there was Cash Available for Distributions or that distributions were

ceased and cash preserved starting in January 2016 to fund the Fiduciary

Defendants’ own special interests.        Accordingly this portion of Count II is

dismissed for failure to state a claim.

            Count II also alleges the Fiduciary Defendants breached their fiduciary

duties by omitting and misstating material information provided to the Limited

Partners concerning the Partnership and its assets.214 Count II purports to allege a

direct fiduciary duty claim for two types of communications or omissions. The

first is in the context of a request for stockholder action concerning the November

9, 2015 letter dissuading UDF III Limited Partners from tendering into a mini-


211
      Pls.’ Ans. Br. 94.
212
      Id.
213
      See id. at 96.
214
      SAC ¶ 366.
                                           57
tender offer.     The second is in the context of providing false or materially

misleading communications about the Partnership’s operations in general. The

first category falls within the duties of care and loyalty and is referred to as a

“fiduciary duty of disclosure.” Dohmen v. Goodman, 2020 WL 3428213, at *4

(Del. June 23, 2020) (noting that communications concerning investment decisions

such as tendering stock is a request for stockholder action). In that circumstance, a

stockholder alleging a breach of the duty of disclosure need not allege damages.

Id. (“In this context, we have characterized a fiduciary’s damages liability as ‘per

se.’”).

          The second category concerns communications not associated with

stockholder action, “such as when directors make periodic financial disclosures

required by securities laws.” Id. In this context, the “fiduciary duty of disclosure”

is not implicated; nevertheless, under the duties of care and loyalty, “the directors

must deal honestly with stockholders.” Id. To state a claim in this context, the

directors must have knowingly disclosed false information. In addition, damages

is an element of the claim. Id. This type of claim is also considered derivative. In

re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 990 (Del. Ch. 2007).

          In their opening brief, the Entity Defendants argued that the claims

concerning alleged omissions and misrepresentations in Count II should be




                                         58
dismissed for failure to allege injury. 215 The portion of Count II concerning the

November 9, 2015 letter to Limited Partners implicates the fiduciary duty of

disclosure. The Entity Defendants’ argument that this claim fails for failure to

allege damages fails, because damages is not an element that Plaintiffs are required

to plead. Dohmen, 2020 WL 3428213, at *4.216 Accordingly, this portion of

Count II states a disclosure claim. 217

       The remaining claims in Count II concerning communications to Limited

Partners do not involve a request for stockholder action. Plaintiffs allege that the

Defendants purposefully misled the Limited Partners by concealing information

concerning the Partnership and its assets. Plaintiffs also allege that UDF III’s

public filings misled the Limited Partners to believe that UDF III’s distributions

215
   Entity Defs.’ Opening Br. 50. In their opening brief, the Individual Defendants argued
that if the Court holds that any of the Individual Defendants are held to owe fiduciary
duties under USACafes, then Count II should be dismissed for failure to rebut the
business judgment rule, referring to an argument in the Entity Defendants’ opening brief.
Individual Defs.’ Opening Br. 32. But that argument section of the brief does not address
the disclosure claim.
216
    In a footnote in their reply brief, the Entity Defendants argued that the claim should be
dismissed because plaintiffs have not adequately alleged that the “representations [in the
letter] were actually false at the time they were made.” Entity Defs.’ Reply Br. 30 n.8.
The Court does not consider this argument as it was not fairly raised in the opening brief,
nor does the legal standard governing the duty of disclosure require that the
representation be false to state a claim. See Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992)
(recognizing a fiduciary duty to “disclose fully and fairly all material information within
the board’s control when it seeks shareholder action”); Gantler v. Stephens, 965 A.2d
695, 710 (Del. 2009) (“The essential inquiry [in a fiduciary duty of disclosure claim] is
whether the alleged omission or misrepresentation is material.”).
217
   The parties have not briefed the issue of whether the disclosure claim implicates the
duties owed by the individual Fiduciary Defendants under USACafes.
                                             59
were being paid through operations of the Partnership, when in fact they were

being paid through transfers from UDF IV. 218 These derivative claims require a

plaintiff to plead knowingly false disclosure and damages. Dohmen, 2020 WL

3428213, at *4.         In their brief, the only specific allegation they point to is

paragraph 288 of the Complaint, which concerns the allegations pertaining to the

November 9, 2015 letter, which relates to the direct disclosure claim, not the

derivative claim. 219 Accordingly, the derivative portion of the claims in Count II is

dismissed for failure to state a claim.

                5.     Count III Fails to Allege a Derivative Claim for Waste.
         Count III asserts a derivative claim on behalf of UDF III against UMTH LD

for waste. 220 Defendants argue that Plaintiffs have failed to meet the high standard

for pleading a claim for corporate waste. For a waste claim to survive a motion to

dismiss, a plaintiff must show “economic terms so one-sided as to create an

inference that no person acting in a good faith pursuit of the corporation's interests


218
   SAC ¶ 150 (“UDF III investors were led to believe that their distributions were being
paid from the operation of their fund. . . . UDF III investors would have considered it
important when making an investment decision that the true source of a portion of their
received distributions were not actually coming from funds from operations as disclosed
in UDF III’s filings . . . but instead were the results of transfer from UDF IV.” (quoting
SEC Compl. ¶¶ 32, 34)).
219
      See Pls.’ Ans. Br. 96-97.
220
   Plaintiffs originally asserted this claim against UMTH LD, UMT Services, and all of
the Individual Defendants. In response to arguments in the Individual Defendants’ briefs,
Plaintiffs dropped their claim for waste against all Defendants except UMTH LD. Pls.’
Ans. Br. 98, n.61.
                                           60
could have approved the terms.” Sample v. Morgan, 914 A.2d 647, 670 (Del. Ch.

2007); see also Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 192 (Del.

Ch. 2014) (same). “The pleading burden on a plaintiff attacking a corporate

transaction as wasteful is necessarily higher than that of a plaintiff challenging a

transaction as ‘unfair’ as a result of the directors' conflicted loyalties . . . .” Harbor

Fin. P'rs v. Huizenga, 751 A.2d 879, 892 (Del. Ch. 1999). As a result, a “claim for

waste will arise only in the rare, unconscionable case where directors irrationally

squander or give away corporate assets.” In re Walt Disney Co. Derivative Litig.,

906 A.2d 27, 74 (Del. 2006).

      The Complaint falls short of the high standard to plead a claim for waste of

partnership assets. The challenged transactions fail to show economic terms “so

one-sided” that they are “unconscionable.” For example, extending the maturity

date and accepting assignments for some of the challenged loans rather than

writing them off would not be unconscionable if it increased the likelihood that

they would be repaid. Furthermore, Plaintiffs do not allege facts to show that the

Partnership received no consideration for the challenged loans and transactions.

Accordingly, Plaintiffs have failed to state a claim for waste of partnership assets.

             6.     Count IV States a Claim for Aiding and Abetting a Breach
                    of Fiduciary Duty.
      Count IV alleges UMT, UMT Holdings, UMTH General, UDF I, UDF IV,

and UDF X aided and abetted the Fiduciary Defendants’ breaches of fiduciary
                                           61
duties. Under Delaware law, a person or entity that knowingly and substantially

participates in a breach of fiduciary duty is jointly and severally liable with the

fiduciary for the breach. RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 872

(Del. 2015). To state a claim for aiding and abetting, a plaintiff must allege “(1)

the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3)

knowing participation in that breach by the defendants, and (4) damages

proximately caused by the breach.”           Malpiede, 780 A.2d at 1096 (internal

quotations omitted).

      The Defendants that are the subject of this claim challenge Count IV only on

the premise that Plaintiffs are precluded from bringing claims based on interested

transactions disclosed in UDF III’s public filings and Partnership Agreement. As

discussed supra Section II(A)(2), the Court rejects Defendants’ arguments on that

issue. Accordingly, the motion to dismiss Count IV is denied.

             7.     Count V Fails to Allege a Derivative Claim for Breaches of
                    Sections 11.3(b) and 13.3, but States a Claim for Breach of
                    Section 11.3(c).
      “[T]o survive a motion to dismiss for failure to state a breach of contract

claim, the plaintiff must demonstrate: first, the existence of the contract, whether

express or implied; second, the breach of the obligation imposed by that contract;

and third, the resultant damage to the plaintiff.” VLIW Tech., LLC v. Hewlett-

Packard Co., 840 A.2d 606, 612 (Del. 2003). Moreover, “[a]n allegation, though


                                           62
vague or lacking in detail, is nevertheless ‘well-pleaded’ if it puts the opposing

party on notice of the claim being brought against it.” VLIW Tech., 840 A.2d at

611.

          Counts V asserts a derivative claim on behalf of UDF III that UMTH LD

breached the Partnership Agreement: (1) by causing UDF III to concentrate assets

“to or from any one borrower that would exceed, in the aggregate, an amount

greater than 20% of the Offering Proceeds” in violation of Section 11.3(b); 221 and

(2) by failing to obtain the appraisals in connection with the UMT Participation

Interest and UMT Option in violation of Sections 11.3(c) and 13.3.222                  The

Defendants argue that Count V must be dismissed because the Complaint fails to

plead that UMTH LD violated the express terms of the Partnership Agreement. 223

          Section 11.3(b) of the Partnership Agreement prohibits the General Partner

from causing the Partnership to “invest in or make mortgage loans to or from any

221
      SAC ¶¶ 172-86, 379-80.
222
      Id. ¶ 381.
223
    In the opening brief, the Entity Defendants also argue that Count V, a derivative
breach of contract claim on behalf of UDF III, must be dismissed because UDF III is not
a party to the Partnership Agreement. Entity Defs.’ Opening Br. 50-51. The Defendants
do not appear to defend this argument in their reply brief, and it fails as a matter of law.
Section 17-101(4) of the LP Act provides that the “limited partnership is bound by its
partnership agreement whether or not the limited partnership executes the partnership
agreement.” 6 Del. C. § 17-101(14). By binding UDF III to the Partnership Agreement,
Section 17-101(14) makes it a party to the Partnership Agreement and therefore can
enforce the Partnership Agreement. See Seaport Vill. Ltd. v. Seaport Vill. Operating Co.,
LLC, 2014 WL 4782817, at *2 (Del. Ch. Sept. 24, 2014) (holding that under the parallel
provision of the LLC Act, an LLC is a party to its operating agreement and therefore can
enforce that agreement’s fee-shifting provision against another party to that agreement).
                                            63
one borrower that would exceed, in the aggregate, an amount greater than 20% of

the Offering proceeds.”224         The Complaint alleges that UMTH LD breached

Section 11.3(b) when it concentrated more than 20% of UDF III’s offering

proceeds in loans to UDF I, Buffington Land, and CTMGT.225 The obvious flaw

in this claim is that Plaintiffs consolidated the loans of each of UDF I, Buffington

Land, and CTMGT’s affiliated entities to allege a breach of the 20% concentration

limit. 226

         Plaintiffs argue that the Court should allow consolidation at the pleading

stage because Section 11.3(b) is designed to “protect[] the Partnership from

overexposure of its assets to the credit risk of any entity.” 227 In the alternative,

Plaintiffs argue that this Court should find Section 11.3(b) ambiguous as to

whether it allows such consolidation. 228

         Section 11.3(b) prohibits the Partnership from making loans “to or from any

one borrower that would exceed, in the aggregate, an amount greater than 20% of




224
      Partnership Agreement § 11.3(b) (emphasis added).
225
      SAC ¶¶ 172-86, see also Pls.’ Ans. Br. 100.
226
   Compare, e.g., SAC ¶ 168 (alleging that CTMGT comprised 31% of the outstanding
loan balance of UDF III’s portfolio), with Entity Defs.’ Opening Br., Ex. O (promissory
note to CTMGT and its subsidiaries as co-borrowers).
227
      Pls.’ Ans. Br. 102.
228
      Id. 103.
                                             64
the Offering Proceeds.”229        The language of Section 11.3(b) is unambiguous.

“One” means “a single person or thing.”              Merriam Webster’s Collegiate

Dictionary 812 (10th ed. 1997).            Delaware courts construe contract terms

according to their plain meaning. Parker v. Barley Mill House Assocs., L.P., 38

A.3d 1255, at *2 (Del. 2012) (TABLE). Plaintiffs have not shown an adequate

reason for this Court to ignore the plain meaning of the Partnership Agreement or

to disregard the separate and distinct legal identities of affiliates of UDF I,

Buffington Land, CTMGT, and their respective subsidiaries and affiliates when

applying this provision of the contract.

         Plaintiffs also argue that the 20% loan concentration limit in Section 11.3(b)

was breached solely as to loans to UDF I. 230          Plaintiffs allege that UDF III

concentrated more than 20% of UDF III’s offering proceeds in UDF I as a single

borrower through the UMT Participation Interest and the 2006 UDF I Loan.231

This argument fails for the same reason discussed above. The allegations of the

Complaint refer to loans to “UDF I and its subsidiaries” and “lending to UDF I and

its affiliates” as exceeding the 20% threshold. 232 Plaintiffs have cited no facts to

support an argument that subsidiaries and affiliates comprise one borrower. Nor


229
      Partnership Agreement § 11.3(b).
230
      Pls.’ Ans. Br. 103.
231
      SAC ¶ 176.
232
      Id. ¶¶ 176-79.
                                            65
do they offer legal argument to support that theory for purposes of applying this

provision of the contract.

         Plaintiffs next allege that UMTH LD breached Sections 11.3(c) and 13.3 of

the Partnership Agreement by failing to “obtain the required appraisals of the

properties and collateral supposedly supporting the UMT Loan.” 233 Defendants

argue that Section 11.3(c) does not require UDF III to independently obtain

appraisals; it requires only that any loans be supported by “an appraisal of the

property which secures the loan,” whether that appraisal was obtained by UDF III

or by another lender. 234 That may be so, but Plaintiffs have alleged that the

Partnership “did not [ ] obtain any appraisals of the collateral or other assurance

that the loan was properly secured.”235 On the low pleading threshold on a motion

to dismiss, this supports an inference that there were no appraisals of the properties

supporting the UMT Loan from any source. Accordingly, this claim cannot be




233
      Id. ¶¶ 187-89.
234
      Entity Defs.’ Opening Br. 64.
235
      SAC ¶ 189.
                                         66
dismissed. 236 Therefore, Plaintiffs have stated a claim for a breach of Section

11.3(c).

         Section 13.3 requires that loans made to affiliates of UMTH LD be

supported by a fairness opinion from an independent advisor.237                 The Entity

Defendants’ Opening Brief attached UDF III’s Form 10-Q for the period ended

September 30, 2015 (which is also incorporated by reference into the Complaint),

which expressly states that UDF III “obtained an opinion from Jackson Claborn

stating that the transactions are fair and at least as reasonable to the Partnership as

a transaction with an unaffiliated party in similar circumstances.” 238 Plaintiffs

made no argument on this issue in their Answering Brief, and the Court concludes

that Plaintiffs have abandoned this claim. See Emerald P'rs, 726 A.2d at 1224

(“Issues not briefed are deemed waived.”). Accordingly, Plaintiffs’ claim for

breach of Section 13.3 is dismissed. Count V is dismissed, except for the breach of

contract claim relating to Section 11.3(c).


236
   Plaintiffs argue that even if an appraisal is obtained by another entity, Section 11.3(c)
requires that UDF III maintain that appraisal in its records. Pls.’ Ans. Br. 104. Plaintiffs,
however, have not pleaded that the appraisal is not in UDF III’s records. This new
assertion only surfaced in Plaintiffs’ Answering Brief. Because the claim is not being
dismissed, the Court need not address this late-blooming assertion. Nevertheless,
Plaintiffs have not alleged how the mere failure to maintain an appraisal in the
Partnership’s records could give rise to any damages.
237
      SAC ¶ 188; Partnership Agreement § 13.3(a)(ii).
238
   Defs.’ Opening Br., Ex. O. The Court does not take judicial notice of the truth of this
representation in the SEC filing, but notes it to plausibly explain why Plaintiffs appear to
have abandoned this claim.
                                             67
                  8.    Count VI Alleges a Direct Breach of Contract Claim.
            Count VI asserts a direct claim that UMTH LD breached the Partnership

Agreement: (1) by causing UDF III to cease distributions of the Cash Available for

Distribution; 239 and (2) by causing UDF III to cease distributions of financial

reports for UDF III. 240 Plaintiffs argue that Count VI fails to state a claim because

the Complaint does not allege that there was any Cash Available for Distribution,

and that Count VI should be dismissed for laches 241 and a failure to plead injury or

damages resulting from any purported breach. 242

            As explained earlier, Plaintiffs have not stated a claim for breach of

fiduciary duty for ceasing distributions of Cash Available for Distribution. The

same reasoning is applicable here. Plaintiffs have not alleged that UDF III in fact

has any Cash Available for Distribution in UDF III and, accordingly, have failed to

plead a breach of Section 9.1 of the Partnership Agreement.

            Section 15.2 of the Partnership Agreement states that the “General Partner

shall prepare or caused to be prepared” numerous reports, including required

quarterly and annual reports to be filed with the SEC, 243 as well as an annual report


239
      SAC ¶ 385.
240
      Id.
241
   The Court has already resolved which transactions are not barred by laches. See supra
Section II(A)(1).
242
      Entity Defs.’ Reply Br. 53.
243
      Partnership Agreement §§ 15.2(c), (d), (g), (h).
                                               68
containing financial statements and a report of activities of the Partnership for the

year to be sent to the Limited Partners. 244 In addition, “[t]he General Partner shall

furnish each Limited Partner an annual statement of estimated Unit value.”245

Plaintiffs allege that the General Partner has not provided these reports since

2015. 246 Defendants’ only argument is that Plaintiffs have not alleged damages,

relying upon Villare v. Beebe Med. Ctr., Inc., 2014 WL 1095331, at *4 (Del.

Super. Mar. 19, 2014). Villare is inapposite. Villare was a decision on summary

judgment where the court held there was no contract and even if there were, the

plaintiff could not establish its lost profits theory of damages because the plaintiff

did not have an expert. Here, the Court concludes that Plaintiffs have met their

minimal burden of alleging injury.         Furthermore, Plaintiffs have requested

equitable relief, which could be available to enforce their information rights.

Accordingly, the motion to dismiss is granted in part and denied in part as to Count

VI.


                 9.    The Complaint States a Claim for Unjust Enrichment.
          Count VII alleges that, “[b]y their wrongful acts and omissions, each

Defendant was unjustly enriched at the expense of and to the detriment of UDF



244
      Id. § 15.2(b).
245
      Id. § 15.2(f).
246
      SAC ¶¶ 264-267, 385.
                                         69
III.” 247    Plaintiffs assert that the Fiduciary Defendants were unjustly enriched

through their breach of fiduciary duty, while the remaining Defendants knowingly

participated in and unjustly benefited from those breaches. 248              The Entity

Defendants argue the unjust enrichment claim must be dismissed because the

parties’ relationship is governed by contract, which precludes an unjust enrichment

claim. They also argue Plaintiffs fail to specify a direct relationship between the

challenged transactions and any benefit to several of the Entity Defendants.249

Wissink, Obert, and Youngblood separately move to dismiss the unjust enrichment

claim on the grounds that it is premised upon the breach of a fiduciary duty that

they do not owe. 250

          Unjust enrichment is the “unjust retention of a benefit to the loss of another,

or the retention of money or property of another against the fundamental principles

of justice or equity and good conscience.” Nemec v. Shrader, 991 A.2d 1120, 1130

(Del. 2010). The elements of unjust enrichment are: (i) an enrichment, (ii) an

impoverishment, (iii) a relation between the enrichment and impoverishment,

(iv) the absence of justification, and (v) the absence of a remedy provided by law.

Id.; Jackson Nat. Life Ins. Co. v. Kennedy, 741 A.2d 377, 393 (Del. Ch. 1999).


247
      Id. ¶ 388.
248
      Id. ¶ 390.
249
      Entity Defs.’ Opening Br. 55-56.
250
      Individual Defs.’ Opening Br. 40-41.
                                             70
Courts developed unjust enrichment as a theory of recovery to remedy the absence

of a formal contract. ID Biomedical Corp. v. TM Tech., Inc., 1995 WL 130743, at

*15 (Del. Ch. Mar. 16, 1995).

      In evaluating the unjust enrichment claim, the Court must first determine

whether a contract governs the parties’ relationship.               “If a contract

comprehensively governs the parties’ relationship, then it alone must provide the

measure of the plaintiff’s rights, and any claim of unjust enrichment will be

denied.” Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2014

WL 6703980, at *27 (Del. Ch. Nov. 26, 2014) (internal quotations omitted).

“[T]his Court routinely dismisses unjust enrichment claims that are premised on an

‘express, enforceable contract that controls the parties’ relationship’ because

damages is an available remedy at law for breach of contract.” Veloric v. J.G.

Wentworth, Inc., 2014 WL 4639217, at *19 (Del. Ch. Sept. 18, 2014) (quoting

Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 891 (Del. Ch. 2009)).

Furthermore, the Plaintiffs cannot use “a claim for unjust enrichment to extend the

obligations of a contract to [persons] who are not parties to the contract.” Kuroda,

971 A.2d at 892.

      Plaintiffs argue the relationship here is governed not only by contract, but “is

also governed by common law fiduciary duties” and that the unjust profits are the




                                         71
result of breaches of fiduciary duty. 251          Plaintiffs also assert that the unjust

enrichment claim is an alternative to damages for breach of fiduciary duty. 252

            The essence of the unjust enrichment claim is that the Fiduciary Defendants

breached their fiduciary duties through the challenged loan transactions to

affiliated UDF funds or the Developer Borrowers and were unjustly enriched—

directly or indirectly—through additional fees and increased value of their

subordinated profits interests in UDF I and UDF II. 253

            Based upon the allegations in the Complaint and the parties’ briefing, the

parties have not sufficiently joined issue on whether each of the challenged

transactions are governed by a contract that comprehensively governs the

relationship among UDF III and the Entity Defendants. The Entity Defendants

seemingly rely on Vichi v. Koninklijke Philips Electronics N.V., 62 A.3d 26 (Del.

Ch. 2012), for the proposition that Plaintiffs do not allege a direct relationship

between UDF III’s loans to affiliates and non-parties and any corresponding

benefit to UMT, UMT Holdings and UMTH General.254 Vichi was a decision on

summary judgment, not a motion to dismiss where the pleading standard is much

lower. In Vichi, the plaintiff sought to hold a non-party to the contract liable for


251
      Pls.’ Ans. Br. 106.
252
      Id.
253
      SAC ¶¶ 150, 316, 326, 334, 340.
254
      Entity Defs.’ Opening Br. 56; Entity Defs.’ Reply Br. 54.
                                              72
the counter-party’s breach. The Court granted summary judgment for the non-

contracting defendant because a contract governed the relationship and the plaintiff

could not use unjust enrichment to hold a non-contracting party liable. The Court

also rejected plaintiff’s argument that the loan directly benefited the non-

contracting party through reduced investment risk and enhanced reputational

benefits. Id. at 60-61. Unlike in Vichi, the Plaintiffs here have alleged facts to

support more than a reasonable inference that the benefits obtained were financial

and direct. Accordingly, the Court cannot determine, as a matter of law, that any

of the unjust enrichment claims should be dismissed solely on the grounds that

relationships were comprehensively governed by contract.

      As to the other grounds for dismissal, the Court concludes that the claim for

unjust enrichment must be dismissed as to UMT Services and UMT. Plaintiffs

specifically pointed to paragraphs 150, 316, 326, 330, 334, and 340 of the

Complaint as allegations showing “unjust profits obtained” by several of the Entity

Defendants as a result of the Partnership’s lending. But those paragraphs do not

allege facts to support a reasonable inference that UMT Services or UMT were

unjustly enriched. Therefore, Count VII is dismissed as to those two Defendants.

      At this stage, the Court cannot dismiss the unjust enrichment claims as to the

Individual Defendants. It is unlikely that those who have been determined to owe

fiduciary duties—UMTH LD, UMT Services, Greenlaw, Etter, Wilson, and

                                        73
Wissink—“could be liable for unjust enrichment under circumstances when they

would not also be liable for a breach of fiduciary duty.” Frederick Hsu Living

Trust v. ODN Hldg. Corp., 2017 WL 1437308, at *43 (Del. Ch. Apr. 14, 2017).

Yet it is possible that they could have a defense to fiduciary duty liability but the

profits they received could have resulted from a fiduciary breach. Id. Under those

circumstances, the unjust enrichment claim could be a vehicle for the Partnership’s

recovery. Id. That same rationale supports the Plaintiffs’ unjust enrichment claims

against Obert and Youngblood. Although the Court has concluded that they do not

owe fiduciary duties, the Plaintiffs may be able to show that the profits they are

alleged to have obtained are without justification.

         B.     Motion to Dismiss for Demand Futility

                1.     The Legal Standard

         The Defendants have moved to dismiss the derivative claims arising from

the Partnership’s loan transactions with the Developer Borrowers for failure to

plead demand futility. 255 A limited partner seeking to pursue a derivative claim on

behalf of the limited partnership must “set forth with particularity the effort, if any,

of the plaintiff to secure initiation of the action by a general partner or the reasons

for not making the effort.” 6 Del. C. § 17-1003. “Delaware courts look to

pleading standards developed in the corporate context to determine whether a


255
      Entity Defs.’ Opening Br. 10.
                                          74
limited partner has alleged particularized facts satisfying section 17-1003

requirements.” Forsythe, 2007 WL 2982247, at *5.

       The parties agree that demand futility here is governed by the Aronson

test.256   Under Aronson, “to show demand futility, [Plaintiffs] must provide

particularized factual allegations that raise a reasonable doubt that (1) the directors

are disinterested and independent [or] (2) the challenged transaction was otherwise

the product of a valid exercise of business judgment.” In re Citigroup Inc., 964

A.2d at 120 (second alteration in original) (citation and internal quotation marks

omitted). Under the first prong:

             Disinterested means that directors can neither appear on
             both sides of a transaction nor expect to derive any
             personal financial benefit from it in the sense of self-
             dealing, as opposed to a benefit which devolves upon the
             corporation or all stockholders generally. Independence
             means that a director’s decision is based on the corporate
             merits of the subject before the board rather than
             extraneous considerations or influences.

In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 821 (Del. Ch. 2005)

(internal quotations omitted). With respect to the second prong, this Court has

explained that Plaintiffs must “plead particularized facts sufficient to raise (1) a

reason to doubt that the action was taken honestly and in good faith or (2) a reason


256
   Entity Defs.’ Opening Br. 12-13; Pls.’ Ans. Br. 29. See Aronson v. Lewis, 473 A.2d
805 (Del. 1984). The Aronson test applies when “a decision of the board of directors is
being challenged in the derivative suit.” Rales v. Blasband, 634 A.2d 927, 933 (Del.
1993).
                                          75
to doubt that the board was adequately informed in making the decision.” Lenois

v. Lawal, 2017 WL 5289611, at *10 (Del. Ch. Nov. 7, 2017) (quoting In re J.P.

Morgan Chase, 906 A.2d at 824)). “Certainly, if this is an ‘interested’ director

transaction, such that the business judgment rule is inapplicable to the board

majority approving the transaction, then the inquiry ceases.” Aronson, 473 A.2d at

815. Under those circumstances, the defendant directors—or the general partner

and its controllers in the case of a limited partnership—face sufficient risk from a

lawsuit challenging the transaction they approved for demand to be futile. Hughes

v. Xiaoming Hu, 2020 WL 1987029, at *11 (Del. Ch. Apr. 27, 2020).

      On a motion to dismiss, the “well-pleaded factual allegations of the

derivative complaint are accepted as true on such a motion.” Rales, 634 A.2d at

931. “[T]he court [is] bound to draw all inferences from those particularized facts

in favor of the plaintiff, not the defendant, when dismissal of a derivative

complaint is sought.” Delaware Cty. Employees Ret. Fund v. Sanchez, 124 A.3d

1017, 1022 (Del. 2015). “The requirement of factual particularity does not entitle

a court to discredit or weigh the persuasiveness of well-pled allegations.”

Louisiana Mun. Police Employees’ Ret. Sys. v. Pyott, 46 A.3d 313, 351 (Del. Ch.

2012), rev’d on other grounds, 74 A.3d 612 (Del. 2013). Plaintiffs only need to

“make a threshold showing, through the allegation of particularized facts, that the[]

claims have some merit.” Pyott, 46 A.3d at 351 (quoting Rales, 634 A.2d at 934).

                                         76
The court will examine all facts pleaded to determine whether, when taken

together, they cast a reasonable doubt on the general partner’s disinterest or

independence in considering a demand to pursue claims concerning the Developer

Borrower transactions.     See Cal. Pub. Empl. Ret. Sys. v. Coulter, 2002 WL

31888343, at *9 (Del. Ch. Dec. 18, 2002) (“If taken separately, none of the

individual allegations would be adequate to raise a reasonable doubt as to

Mandigo's disinterest or independence. . . . Taken together, they give this Court

reason to doubt that Mandigo is disinterested and independent.”).

      The parties disagree as to whether the demand futility analysis should be

conducted solely from the perspective of UDF III’s General Partner, UMTH LD,

or the individuals with ultimate decision-making authority regarding any litigation

demand. Defendants argue that the Court may only consider whether the General

Partner is disinterested and independent.257 Plaintiffs argue that the Court should

also look to Etter and Greenlaw, who constitute a majority of the board of UMT



257
    Entity Defs.’ Opening Br. 13-14. The Defendants argue that demand futility must be
considered only at the General Partner level and not to the humans that control it. For
this proposition, the Defendants primarily rely upon Gotham v. Hallwood Realty
Partners, L.P., 1998 WL 32631 (Del. Ch. Nov. 10, 1998), and Wenske v. Blue Bell
Creameries, Inc., 2018 WL 3337531 (Del. Ch. July 6, 2018). Because I conclude that
Plaintiffs have established demand futility as to the General Partner, I need not decide
this issue. Cf. DiRienzo v. Lichtenstein, 2013 WL 5503034, at *18 (Del. Ch. Sept. 30,
2013) (holding demand should be directed to the board of the general partner because the
board was elected by the limited partners and owed fiduciary duties to the limited
partners).
                                          77
Services, the general partner to UMTH LD. 258 As discussed below, Plaintiffs have

alleged facts sufficient to raise a reasonable doubt that UMTH LD is disinterested

and independent, and the Court needs not consider whether demand futility can be

satisfied by raising reasonable doubt as to the disinterestedness and independence

of Etter and Greenlaw.

                2.     Plaintiffs Have Pleaded Facts Giving Rise to a Reasonable
                       Doubt that UMTH LD Is Disinterested and Independent.

         Defendants argue that Plaintiffs’ claims relating to (1) the Shahan Prairie

loan,259 (2) the violation of the loan concentration limits in the Partnership

Agreement, and (3) the other loans to the Developer Borrowers and their affiliates

must be dismissed for failure to plead demand futility. 260 Any claim relating to the

Shahan Prairie loan and the derivative claims alleging violation of the loan

concentration limitations in the Partnership Agreement have already been

dismissed. Therefore, the remaining derivative claims subject to challenge for

failure to plead demand futility are the remaining loans to the Developer

Borrowers and their affiliates.


258
      Pls.’ Ans. Br. 28-31.
259
    Plaintiffs do not appear to bring a claim challenging the Shahan Prairie loan, but rather
allege the unusual circumstances surrounding the Shahan Prairie loan and its repayment
as a “demonstration of the existence of the overall scheme[.]” Pls.’ Ans. Br. 62 n.32.
The allegations relating to the Shahan Prairie loan do not independently state a claim
because the Complaint alleges the loan has been repaid in full and does not allege
damages as to that transaction.
260
      Entity Defs.’ Opening Br. 15-16; Entity Defs.’ Reply Br. 15.
                                              78
      The Complaint sufficiently alleges that UMTH LD, as the general partner of

UDF III, is not disinterested and independent with respect to each of UDF III’s

loans to CTMGT, Buffington, and their respective affiliates. Plaintiffs have

adequately alleged that UMTH LD derives a financial benefit not shared with the

Limited Partners and that its actions were designed to enrich UMTH LD and its

controllers at UDF III’s expense with respect to its loans to the Developer

Borrowers. See In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 821

(Del. Ch. 2005) (defining disinterestedness and independence).

                   a.     Plaintiffs Have Pleaded Facts From Which the Court
                          Can Reasonably Infer that UMTH LD Was Engaged
                          in a Scheme to Pay Affiliated Funds Through Loans
                          to the Developer Borrowers.

      As a threshold matter, the Complaint contains well-pleaded allegations that

Defendants, including UMTH LD, were involved in a general scheme to funnel

money from later-formed UDF Funds to pay debts of earlier UDF Funds. While

some of Plaintiffs’ allegations do not directly relate to injuries sustained by UDF

III and its Limited Partners, they are nevertheless well-pleaded allegations that

Defendants have been improperly shuttling money from one UDF entity to another

through real estate developers as part of a broader scheme to permit the earlier

entities to pay off loans and make distributions.




                                         79
            Although the Shahan Prairie loan did not cause injury to UDF III because

the loan to UDF III has been repaid, the Shahan Prairie loan remains an illustrative

example of how Plaintiffs allege the scheme operates. Shahan Prairie is an affiliate

of CTMGT and owns 102 acres of undeveloped property in Denton, Texas.261

UDF I loaned $2.4 million to Shahan Prairie in 2004. 262 In September 2007, UDF

III made a $1.9 million loan to Shahan Prairie secured by land.263           Shortly

thereafter, in November 2007, Shahan Prairie repaid the UDF I loan in full. UDF

III then increased the loan to Shahan Prairie three times, the final increase in

February 2014 to approximately $4.8 million.264 In June 2015, UDF V made an

$18.1 million loan to Shahan Prairie.        Immediately thereafter, Shahan Prairie

repaid the UDF III loan in full. 265 The Complaint alleges that as of December

2015, the Shahan Prairie land in Denton, Texas remains undeveloped.266

            The Plaintiffs also rely on allegations in the SEC Complaint as further

evidence of a scheme sweeping in numerous United Development Fund entities.




261
      SAC ¶¶ 129-30.
262
      Id. ¶ 130.
263
      Id. ¶ 131.
264
      Id.
265
      Id. ¶ 132.
266
      Id. ¶ 134.
                                           80
According to the SEC Complaint,267 in 2011, UDF IV began making loans to

developers who had also borrowed money from UDF III. 268 When UDF III did not

have sufficient funds to pay partnership distributions, the developers were directed

to use the funds received from UDF IV to pay down their UDF III loans.269 In

most of these cases, the developers never actually received the borrowed funds at

all. Instead, the money was simply transferred from UDF IV to UDF III. 270 The

Complaint alleges these transactions, which had not been disclosed to investors,

resulted in at least $67 million of distributions to UDF III limited partners from

UDF IV funds—or half of all distributions from January 2011 through December

2015. 271 The Complaint alleges that the General Partner did not disclose to the

Limited Partners that distributions were not being funded from operations of the

fund, but rather through loans from affiliated funds to the Developer Borrowers.272




267
   The SEC Complaint was filed after a four-year investigation and is attached to and
incorporated by reference in the SAC.
268
      SEC Compl. ¶ 3.
269
      Id.
270
      Id.
271
      Id. ¶¶ 30-31.
272
   SAC ¶ 150 (“UDF III investors were led to believe that their distributions were being
paid from the operation of their fund. . . . UDF III investors would have considered it
important when making an investment decision that the true source of a portion of their
received distributions were not actually coming from funds from operations as disclosed
in UDF III’s filings . . . but instead were the results of transfer from UDF IV.” (quoting
SEC Compl. ¶¶ 32, 34)).
                                           81
      Defendants argue that any alleged scheme stopped short before it harmed

UDF III. 273 Defendants note that the Shahan Prairie loan was repaid in full, and

that the SEC Complaint contained no allegations that UDF III loans to the

Developer Borrowers were used to repay loans to earlier funds within the United

Development Funds family. Therefore, according to Defendants, Plaintiffs have

not alleged particularized allegations to establish a disabling conflict as to UMTH

LD for purposes of excusing demand. If these were the only allegations supporting

demand futility, Defendants would prevail. But they are not the only allegations,

and Plaintiffs have alleged well-pleaded facts from which the Court can reasonably

infer that the alleged scheme did not, in fact, stop at UDF IV.

                    b.    Plaintiffs Have Pleaded Facts From Which the Court
                          Can Reasonably Infer that UMTH LD Has Siphoned
                          Funds from UDF III.

      Plaintiffs have adequately alleged that UMTH LD is not independent with

respect to the Developer Borrower transactions because those transactions were

undertaken for the benefit of UDF I and II at the expense of UDF III and the

Limited Partners.

      The Complaint contains allegations from which it is reasonable to infer that

UDF III made loans to Buffington Land and its affiliates to benefit other UDF


273
  See Entity Defs.’ Opening Br. 19 (“Thus, UDF III Unit Holders such as Plaintiffs
would benefit from the conduct alleged by the SEC.” (emphasis in original)).
                                         82
affiliates. In November 2015, UDF III filed an involuntary bankruptcy petition

against Lennar Buffington claiming a debt of $106.5 million. 274 According to

Plaintiffs, the bankruptcy filings revealed that Lennar Buffington’s land remained

undeveloped, that Lennar Buffington had a much smaller loan on its balance sheet

to UDF I, and that Lennar Buffington had no ability to repay UDF III. 275 Plaintiffs

allege that UDF III’s disclosures misled its investors into believing that these loans

were used to fund real estate development projects. 276

          The Complaint contains well-pleaded allegations that any risk relating to the

loans to Buffington Land were concealed from the Limited Partners. Plaintiffs

make particularized allegations supporting a reasonable inference that the General

Partner withheld from UDF III’s auditors the projections by Buffington Land that

showed its inability to pay its loan balance to UDF III.             Instead, different

projections were created to show Buffington Land being able to pay off the loan.277

Thereafter, the Buffington Loan commitment was increased to $85 million and

UDF III disclosed that full collectability was considered probable. In January

2017, UDF III forgave more than $122 million in indebtedness and UDF I forgave


274
   SAC ¶ 211 (“UDF III is listed in the debtor’s schedules of the Lennar Buffington
bankruptcy proceeding as holding a $106.5 million claim. UDF I is listed in the debtor’s
schedules as holding a $30.7 million claim.” (emphasis omitted)).
275
      Id. ¶¶ 214-15.
276
      Id. ¶ 122.
277
      Id. ¶¶ 151-53.
                                            83
more than $33 million in indebtedness to Buffington Land, including Lennar

Buffington, for minimal consideration.278

          The Complaint also contains allegations that Defendants have caused UDF

III to act against the interests of its Limited Partners with respect to the CTMGT

Loan to CTMGT and its subsidiaries.           The CTMGT is a co-investment loan

secured by collateral-sharing agreements which allocate the proceeds of the co-

investment collateral between UDF III and UDF I. 279 Plaintiffs allege that, in July

2015, Defendants caused UDF III to enter into an agreement permitting UDF III to

defer its payment preference from CTMGT so that CTGMT and its subsidiaries

could prioritize payments to UDF I.280 Such allegations are sufficient to raise a

reasonable doubt that UMTH LD, as the General Partner of UDF III, was not

independent regarding the UDF III’s Development Borrower loans.

          Plaintiffs have also alleged that UMTH LD was self-interested in the

Developer Borrower transactions because UMTH LD had a financial interest in

supporting UDF I and II, as well as to increase UDF III’s loan balance. According

to Plaintiffs, UMTH LD derived two types of benefits from by originating,

extending, and increasing UDF III’s loans to the Developer Borrowers. First,

UMTH LD owns a 49.99% subordinated profits interest in UDF I and a 49.95%

278
      See id. ¶ 217.
279
      Id. ¶ 141.
280
      Id. ¶ 142.
                                         84
subordinated profits interest in UDF II.281 Second, UMTH LD directly benefits

from greater loan balances at UDF III because it extracts a 0.25% annual servicing

fee from UDF III for UDF III’s aggregated outstanding loan balances.282 These

allegations support a reasonable inference that UMTH LD had a pecuniary interest

not shared with the Limited Partners in originating, extending, and increasing loans

to the Developer Borrowers.         According to the Complaint, the Developer

Borrowers were incentivized to accept the loans from UDF III to pay their loans to

UDF I and II because their total indebtedness remained the same, and the UDF III

loans were provided at a lower rate than the prior loans to UDF I and II. 283 Given

the number and magnitude of these loans, it is a reasonable inference that any

financial benefits UMTH LD obtained through these transactions were material. 284

          Defendants raise two arguments that UMTH LD can impartially evaluate a

demand. First, Defendants argue that UMTH LD does not technically stand on

both sides of a transaction with UDF III because the Developer Borrowers, UDF I,


281
      Id. ¶ 340(a)-(b).
282
    Id. ¶ 257. UDF III paid UMTH LD over $7.6 million in mortgage servicing fees
through September 2015. Id.
283
      Id. ¶¶ 123-24.
284
    See id. ¶¶ 127 (“UDF III’s SEC filings indicate that as of September 30, 2015, UDF
III’s loan to Buffington Land had comprised 25% of its loan portfolio; its loans to
CTMGT comprised another 31% of the portfolio; and its loans to CTMGT’s affiliates
comprised an additional 13%.”); 135 (alleging that UDF III’s forgiveness of $122 million
indebtedness owed to UDF III by Buffington Land represented “approximately 31% of
UDF III’s loan portfolio as of September 30, 2015”).
                                          85
and UDF II serve as intermediaries.285 Notably, however, Defendants do not argue

that the Complaint fails for demand futility regarding other challenged transactions

between UDF III, UDF IV, and UDF IV subsidiaries, and merely interposing the

Developer Borrowers as a mechanism to funnel funds from one related entity to

another related entity does not render the allegations so “remote” and “circuitous”

as to defeat the reasonable inference that these transactions were intended to

benefit UMTH LD at UDF III’s expense.286

      Second, the Defendants argue that the CTMGT and Buffington loans

challenged in the Complaint consist of several loans to affiliates of those entities

that are not individually challenged. However, Defendants correctly acknowledge
285
    Entity Defs.’ Opening Br. 20 (citing In re Coca-Cola Enters., Inc. S’holders Litig.,
2007 WL 3122370, at *2 (Del. Ch. Oct. 17, 2007)). Coca-Cola is distinguishable. In
Coca-Cola, the Court found that allegations of shared control were insufficient where
Coca-Cola Company was alleged to control Coca-Cola Enterprises, Inc. but only named
three of the latter company’s thirteen directors and owned a 36% share. By contrast, the
Complaint alleges facts sufficient to reasonably infer that UMTH LD, UDF III, and UDF
I are dominated by the same persons. For example, among the many interrelationships
between Defendants, Etter and Greenlaw collectively own a majority of UMT Holdings
(the owner of UMTH LD) and are joint owners of UMT Services, which is argued to be
at the “top of [UDF III’s] control structure.” Pls.’ Ans. Br. 5. Etter and Greenlaw also
own a majority of UDF I’s general partner and the entirety of UDF II’s general partner.
Etter and Greenlaw are also alleged to have acted in concert by forming UMT Services,
UMT Holding, UMTH General, and UMTH LD. SAC ¶¶ 31-32, 46.
286
    SAC ¶ 122 (“The proceeds of the loans that Defendants caused UDF III to make to the
Developer Borrowers were not used to fund real estate development projects. Rather,
UDF III’s loan proceeds allowed the Developer Borrowers to pay down loans to earlier
affiliates of UDF III. Upon information and belief, including the SEC Action’s
allegations based on its multi-year investigation, Defendants specifically directed the
Developer Borrowers to use UDF III’s loan proceeds in this manner.”); see also id. ¶ 9
(alleging that the Developer Borrowers were directed to use loan proceeds to pay off
earlier United Development Funds).
                                          86
that the Court is not required to view any one transaction in isolation or ignore the

allegations that provide relevant context. 287 In its totality, the Complaint contains

allegations sufficient to raise a reasonable doubt that UMTH LD is disinterested

and independent with respect to each of the loans to the Developer Borrowers. 288

       Although the Court is not determining demand futility based upon the

independence or disinterestedness of the humans that ultimately control it, it is

relevant to note that in responding to a demand, the General Partner would be

required to consider litigation against all three individuals that ultimately control

the General Partner (Etter, Greenlaw, and Wilson) and six individuals that

ultimately own nearly 100% of the General Partner (Etter, Greenlaw, Wilson,

Wissink, Obert, and Youngblood).

       Of those six individuals, two of them—Etter and Greenlaw—constitute a

majority of the board of the General Partners’ general partner, and they indirectly

own a majority interest in the General Partner. In that regard, the General Partner

287
   Entity Defs.’ Reply Br. 5. “In deciding whether to consider a sequence of transactions
separately or collectively, the Court reviews the circumstances surrounding the
challenged transactions, as alleged by the particularized facts of the complaint, to decide
whether it can be reasonably inferred that those transactions constituted a single, self-
interested scheme.” In re Nat’l Auto Credit, Inc. S’holders Litig., 2003 WL 139768, at
*9 (Del. Ch. Jan. 10, 2003).
288
    See SAC ¶¶ 136 (alleging that UDF III made an approximately $77 million loan to
Buffington Land in 2008), 140 (alleging that UDF III originated a $25 million loan to
CTMGT and its subsidiaries in 2007); see also id. ¶ 121 (alleging that UDF III began to
make loans to CTMGT and Buffington Land shortly after UDF III’s formation); 76
(alleging that UDF I made loans to CTMGT, Buffington Land, and their affiliates, and
that UDF II participated in those loans).
                                            87
publicly stated just three months after the filing of the original complaint in this

action that it would “contest any charges that may be brought” by the SEC against

“the Partnership or any individuals associated with the Partnership and its general

partner.” 289 Although the full details of the Wells Notice that triggered the General

Partner’s response were not released, the Wells Notice followed an investigation

that began in April 2014 and culminated in the SEC complaint and simultaneous

consent judgment that were filed in July 2018. If the General Partner were to

move forward with pursing the claims asserted by the Plaintiffs in this action, it

likely would have undercut the persuasive force of any Wells submission that the

General Partner said would “explain the Partnership’s views and its believe that no

enforcement action is warranted against the Partnership or any individuals

associated with the Partnership and its general partner.”290 It also could have

potentially undercut the Partnership’s avowed intention to “contest any charges

that may be brought.” 291 C.f. In re Fitbit, Inc. S’holder Litig., 2018 WL 6587159,

at *16-17 (Del. Ch. Dec. 14, 2018) (observing that if the corporation were to

pursue derivative claims against directors it would undercut or even compromise

the defense of all defendants in a parallel securities action).


289
   UDF III, Form 8-K (Oct. 18, 2016); see also SAC ¶ 148 (referencing the October 18,
2016 Form 8-K).
290
      Id.
291
      Id.
                                           88
         The General Partner’s public rebuke of any and all potential claims against

“any individuals associated with the Partnership and its general partner” further

supports a pleading stage inference that the General Partner could not exercise

independent and disinterested business judgment in responding to a demand to

commence litigation against the three directors that control the General Partner and

the six persons that own it.292

         At bottom, evaluating the ability of a board—or in this instance, a general

partner—to impartially consider a demand is a “contextual inquiry.” 293 Viewed in


292
     I find the General Partner’s statements here to be distinguishable from those in
Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *6 (Del. Ch. Mar. 17, 2006), and
Tilden v. Cunningham, 2018 WL 5307706, at *11 (Del. Ch. Oct. 26, 2018). In both of
those cases, the Court would not impute to otherwise independent and disinterested
directors a statement by the company that derivative litigation was without merit. Singer,
2006 WL 741939, at *6 (“It would be unreasonable for this court to conclude that a board
made up of a majority of independent directors could not be asked to pursue this
litigation simply because the company expressed a belief in a public filing that the claims
in a series of related litigations were unfounded.” (emphasis added)); Tilden, 2018 WL
5307706, at *11 (“Independent and disinterested directors are presumed to be fit to
evaluate impartially the merits of a demand to pursue legal claims.”); see also Kops v.
Hassell, 2016 WL 7011569, at *2-3 (Del. Ch. Nov. 30, 2016) (concluding that a
proclamation of innocence in a newspaper advertisement did not constitute de facto
rejection of a derivative demand where there was no showing that the board or special
committee considering the demand was “involved in drafting, preparing, or authorizing
the advertisement”). Unlike in Singer and Tilden, the demand inquiry here is not, at least
in the first instance, considered from the perspective of an otherwise disinterested and
independent board, but rather the General Partner itself—which is the entity that issued
the statement. Cf. Biondi v. Scrushy, 820 A.2d 1148, 1166 (Del. Ch. 2003) (finding that a
special committee's “publicly and prematurely issued statements exculpating one of the
key company insiders whose conduct is supposed to be impartially investigated,” while
the investigation was underway, undermined the court's confidence in the special
litigation committee's process).
293
      Beam v. Stewart, 845 A.2d 1040, 1049 (Del. 2004).
                                            89
isolation, any one or even several of the allegations summarized above would not

be sufficient to excuse demand on the General Partner as to the Developer

Borrower transactions.        Viewed collectively, however, with all reasonable

inferences drawn in Plaintiffs’ favor, I am persuaded that Plaintiffs have alleged

sufficient particularized facts that to support a reasonable inference that the

General Partner was involved in a broad scheme that utilized UDF III loans to two

favored real estate development firms and their affiliates to maintain partnership

distributions at affiliated funds. The allegations are sufficient to excuse demand as

to the derivative claims concerning the specific Borrower Loan transactions

alleged in the Complaint. See Sanchez, 124 A.3d at 1019 (“[I]t is important that

the trial court consider all particularized facts pled by the plaintiffs about the

relationships between the director and the interested party in their totality and not

in isolation from each other, and draw all reasonable inferences from the totality of

those facts in favor of the plaintiffs.”).

III.   CONCLUSION

       For the foregoing reasons, pursuant to Court of Chancery Rule 12(b)(6), the

motion to dismiss is GRANTED in part and DENIED in part and as to as to Counts

I, II, V, and VI, DENIED as to Count IV, and GRANTED as to Counts III and VII.

The motion to dismiss pursuant to Court of Chancery Rule 23.1 is DENIED.

       IT IS SO ORDERED.

                                             90
APPENDIX




   91
