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Quick Take on UDF’s Claims Against Kyle Bass

by Jacob Heidkamp

Earlier this week, the UDF family of funds (consisting of all the non-listed United Development Funding investment programs syndicated through the retail broker dealer channel, among others) filed suit against J. Kyle Bass and Hayman Capital Management, L.P., and affiliates, based on multiple counts described below. We have received questions from a few clients regarding this matter, and anticipate more questions will be forthcoming. Here’s what we can say at this point.

How could this affect UDF program shareholders?

The effect of the litigation for existing UDF shareholders will bear out over a period of time that may take years, as this case will likely be met with a robust defense from Mr. Bass, and the case (if it survives a prospective motion for summary judgment) will yield a discovery period followed by a trial.  If the case is decided in the plaintiffs’ favor, it would likely yield some amount of damages payable to the UDF entities that would benefit shareholders. According to the complaint, the UDF family of funds has alleged that the defendants’ actions caused “hundreds of millions of dollars in damages.”

Intriguing allegations

While a review of the merits of the case is outside the scope of this post, we note a few interesting items from the complaint. UDF alleges that Mr. Bass and Hayman furnished an anonymous letter to the UDF family of funds’ previous independent accountants, Whitley Penn, which contained “false facts” to support the defendants’ allegations that Whitley Penn was essentially a conspirator with the UDF family of funds in disseminating false information to investors and the public. (Note that the UDF funds have not produced quarterly or annual reports for periods dating back to September 30, 2015.) UDF asserts that Mr. Bass and Hayman reaped profits in excess of $60 million in a short trade of UDF IV shares after the shares were delisted from NASDAQ in October 2016. UDF’s complaint also alleges that Bass and Hayman potentially stood to profit not only from its short trade, but also from prospective discounted purchases of UDF’s real estate assets. 

You can access the full complaint, filed in the County Court of Dallas County, Texas, here using the Case No. CC-17-06253-B.

Elements of the claims

The complaint lists multiple counts including business disparagement, tortious interference with an existing contract, tortious interference with prospective business relationships, and separate counts of civil conspiracy related to each of the aforementioned counts as well. In order for plaintiffs to prevail on these claims, they must establish the following elements under Texas law for each individual claim (h/t Texas law firm Funderburk, Funderburk, and Courtois, LLP, which further details the elements of these claims here, here, and here):

Business disparagement:

  • The defendant published false and disparaging information about it,
  • with malice,
  • without privilege,
  • that resulted in special damages to the plaintiffs.

Tortious interference with an existing contract:

  • An existing contract subject to interference, and
  • a willful and intentional act of interference with the contract,
  • that proximately caused the plaintiff’s injury, and
  • caused actual damages or loss.

Tortious interference with prospective business relationships

  • There was a reasonable probability that the plaintiff would have entered into a business relationship with a third party, and
  • the defendant either acted with a conscious desire to prevent the relationship from occurring or knew that interference was certain or substantially certain to occur as a result of its conduct, and
  • the defendant’s conduct was independently tortious or unlawful, and
  • the interference proximately caused the plaintiff’s injury, and
  • the plaintiff suffered actual damage or loss as a result.

Civil conspiracy:

  • Combination by two or more persons, and
  • an object to be accomplished, and
  • a meeting of the minds on the object or course of action, and
  • one or more unlawful, overt acts, and
  • damages as a proximate result.

FactRight will continue to monitor further developments in this case. Please reach out to me with any questions at Jake@FactRight.com.

 

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Filed Under: REITs, Legal and Regulatory