Even if you aren’t the actual plaintiff in a lawsuit you can still be personally liable for breach of a covenant not to sue. It’s easy! Sign a release in your individual capacity, cause an entity you control to bring a lawsuit, and then financially support the suit. And you can share the liability with your friends who signed with you!  That’s the takeaway in Dallas Gas Partners, LP, et al v. Prospect Energy Corporation.

Muse, Nelson and others formed Dallas Gas Partners, LP (DGP), which got into a feud with Prospect Energy over an agreement to finance the purchase of Gas Solutions. In a transaction to resolve the dispute, the parties executed three documents:

  • DGP’s limited partners signed a “Unanimous Written Consent of the Partners,” approving assignment of the contract to purchase Gas Solutions.
  • Muse, Nelson, Weiss, and Prospect signed a “LLC Membership Interest Purchase Agreement” which included a “Mutual Release” by which each signatory agreed to release all claims arising out of the agreement, and a covenant not to “institute, maintain, or prosecute any action, claim, suit, proceeding or cause of action” relating to the agreement. The agreement provided for recovery of “actual damages”.
  • The DGP partners also signed a “Consent and Agreement of Limited Partners”, by which they consented to the assignment of the right to purchase Gas Solutions and the transfer of the membership interests to Prospect. Each limited partner ratified the Mutual Release.

DGP sued Prospect alleging many bad deeds. Prospect counterclaimed and sued DGP, its general partner, Muse, Nelson, and Weiss for breach of the covenant not to sue.

Prospect prevailed. The court found that Muse, Nelson, and Weiss signed the LLC Purchase Agreement in their individual capacities and were therefore bound by the Mutual Release. Muse, Nelson, and Weiss received “‘significant consideration” in the transaction. There was “uncontroverted evidence” that Muse, Nelson, and Weiss caused and funded the filing of both lawsuits.”

Muse and Nelson argued that, even assuming they were bound personally by the LLC Membership Interest Purchase Agreement, there was no breach because they didn’t personally sue Prospect; DGP did.

But in that agreement the three individuals transferred their individual interests to Prospect. And they signed the Consent and Agreement of Limited Partners as partners.

Focusing on the phrase “institute, maintain or prosecute any action, claim, suit . . . to enforce any of” the released claims the court decided that even though they weren’t the actual plaintiff, the individuals caused the suit to be filed, prosecuted it, and funded it.

The word ‘maintain,’ must be given meaning, the court said, relying on the definition from Merriam-Webster: “to support or provide for.” Based on this definition, Muse and Nelson, as signatories of the agreement, could “maintain”’ a lawsuit by providing financial support. Muse and Nelson violated the mutual release and covenant not to sue by personally funding the suit.

Prospect’s only damages were its attorneys’ fees, which the court awarded as “actual damages”.

Lou Reed RIP. (Ignore the graphics; the song is great)