BOUCHARD, C.
This action involves a dispute between two co-founders and former executives of the J.G. Wentworth operating companies and several entities in the current J.G. Wentworth corporate family, which are in the business of buying and selling structured settlements and annuity payments.
In 2007, Plaintiffs Gary Veloric, Michael Goodman, The Goodman 2007 Grantor Retained Annuity Trust One and The Goodman 2007 Grantor Retained Annuity Trust Two (collectively, the "Plaintiffs") became parties to a Tax Receivable Agreement (the "TRA") entitling them to receive payments derived from certain tax benefits that defendant J.G. Wentworth, Inc. ("Wentworth") may realize in the future. Significantly, Plaintiffs are not entitled to receive any such payments until after the tenth anniversary of the TRA unless there has been a change of control (as defined in the TRA) in the interim and, as things turned out, the amount of such payments stands to be substantially greater for Plaintiffs if a change of control has occurred (approximately $35 million according to Plaintiffs) than if they must wait until after the tenth anniversary of the TRA (potentially $0). This is because the payments owed to Plaintiffs under the TRA are calculated based on certain assumed tax benefits in the event of a change of control as opposed to the actual tax benefits realized if the TRA runs its course.
In October 2013, Plaintiffs filed this action asserting that Wentworth and other defendants breached the TRA because they failed to pay Plaintiffs after a purported change of control that occurred in 2011 or, alternatively, in 2013. Plaintiffs also advance a litany of other claims against defendants arising from the same underlying events for anticipatory repudiation, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, aiding and abetting, and unjust enrichment. For these claims, Plaintiffs seek approximately $35 million in damages and a declaratory judgment.
Defendants moved to dismiss the complaint in its entirety for failure to state a claim upon which relief may be granted under Court of Chancery Rule 12(b)(6).
In this opinion, I conclude that Plaintiffs have failed to state a claim for breach of contract because they have not alleged facts establishing a change of control that would give rise to liability under the plain and unambiguous terms of the TRA. Additionally, I find that Plaintiffs remaining claims, which largely duplicate and/or are governed by their contract claims, fail to state a claim upon which relief may be granted.
The reader is forewarned that this case involves a maze of corporate entities and an alphabet soup of corporate names. Charts depicting the corporate structures at relevant points in time are set forth below in an effort to simplify the underlying facts as much as possible.
In 1992, plaintiffs Gary Veloric ("Veloric") and Michael Goodman ("Goodman") co-founded the operating companies now popularly known as J.G. Wentworth. The J.G. Wentworth companies were (and remain today) in the business of buying and selling structured settlements and annuity payments. Their television commercials are well known to those who may "need cash now."
In 2005, non-party JLL Partners, Inc. ("JLL"), a private equity firm, formed defendant JLL JGW Distribution, LLC, a Delaware limited liability company ("JLL Distribution"), to acquire the J.G. Wentworth operating companies from Veloric, Goodman, and certain non-parties. At all times relevant to this case, JLL Distribution has been wholly-owned by three limited partnerships affiliated with JLL that the parties collectively refer to as "Fund V."
In connection with JLL Distribution's acquisition of the J.G. Wentworth operating companies, Veloric and Goodman purchased minority interests in defendant J.G. Wentworth, LLC, a Delaware limited liability company ("JGW LLC"), which owns and operates the J.G. Wentworth operating companies through various non-party subsidiaries. Veloric and Goodman remained senior executives of the J.G. Wentworth companies.
In 2007, Fund V and JLL Distribution sought to offer equity in the J.G. Wentworth companies through a private offering, to be followed soon thereafter by a public offering. In doing so, they allegedly wanted to maximize their investment by separating the to-be-offered equity interests from the value of the companies' favorable tax treatment.
They initiated a restructuring that involved several steps. Fund V and JLL Distribution first formed defendant JGW Holdco, LLC, a Delaware limited liability company ("Holdco"), to wholly-own JGW LLC.
At all times relevant to this case, Wentworth has served as the sole managing member of Holdco, and individual defendants Levy, David Miller ("Miller"), Francisco J. Rodriguez ("Rodriguez"), and Alexander R. Castaldi ("Castaldi") (collectively, the "Director Defendants") have served as the directors of Wentworth. The Director Defendants are managing directors of JLL and serve on the Wentworth board allegedly at the pleasure of Fund V and JLL Distribution.
After the private offering, JLL Distribution owned 52.4% of Wentworth's outstanding common stock, and Verolic and Goodman each owned 9.9%. The balance of Wentworth's equity (approximately 27.8%) was issued in the private offering.
JLL Distribution also owned a majority of Holdco's membership interests. Wentworth obtained a 13.9% economic interest in Holdco and became Holdco's sole managing member. Finally, Veloric and Goodman each obtained 9.9% membership interests in Holdco.
The corporate structure resulting from the transactions described above, as it existed when the TRA (discussed below) was signed, is depicted in Chart 1 below:
Plaintiffs allege that Wentworth's "equity interest in and contractual rights with Holdco are its only material assets."
Under the federal tax code, an exchange of membership interests in Holdco for Class A shares in Wentworth would allegedly cause a favorable adjustment to the tax basis of Holdco's assets. It also would cause corresponding, favorable tax benefits to Wentworth.
On August 9, 2007, in conjunction with the private offering (and the anticipated public offering), JLL Distribution, Wentworth, and Plaintiffs executed the Tax Receivable Agreement (as defined above, the "TRA") to capture some of the tax benefits that might accrue to Wentworth in a public offering.
Under the TRA, Wentworth is obligated to make "Tax Benefit Payments" to the principals, including JLL Distribution and Plaintiffs, following a "Covered Taxable Year." The Tax Benefits Payments represent 85% of actual or assumed savings in taxes (depending on the context) realized from the tax basis step-ups that result from an exchange of Holdco membership interests for Wentworth Class A shares.
The TRA defines a Covered Taxable Year as a "Taxable Year" (a tax year under applicable tax laws) "ending (i) after the earlier to occur of the closing of the Taxable Year that includes the 10th anniversary of the Original Sale Date and the date of a Change of Control, and (ii) on or before an Early Termination Date."
The TRA defines a "Change of Control" to occur in one of four enumerated situations. The parties agree that a Change of Control has not occurred with respect to the first two provisions, which correspond to a change in the voting control or board composition of Wentworth. The two Change of Control provisions relevant here are the first part of the third definition ("Paragraph 3(x)") and the fourth definition ("Paragraph 4"). Paragraph 3(x) provides that a Change of Control occurs if:
Paragraph 4 provides that a Change of Control occurs if:
Plaintiffs allege the TRA was drafted almost exclusively by Fund V, JLL Distribution, and their counsel and they did not make any changes to the definition of "Change of Control" in the draft that was presented to them.
If there is no Change of Control, then the Tax Benefit Payments owed to the principals (starting in 2018) are calculated by comparing Wentworth's actual tax liability for a Covered Tax Year with its hypothetical liability had there been no tax basis step-up. In contrast, if there is a Change of Control, then the Tax Benefit Payments are calculated pursuant to a formula in the TRA that assumes Wentworth would have sufficient taxable income to utilize all the deductions created by the tax basis step-ups.
Several defendants allegedly told Plaintiffs in 2012 that Wentworth might not generate enough income to take advantage of the tax basis step-ups created by their exchange of membership interests—meaning that Plaintiffs' proportionate share of Wentworth's actual savings might be worthless.
If a Change of Control occurs, Wentworth has forty-five days from filing its federal tax return for the relevant Covered Tax Year to provide to the principals a "Tax Benefit Schedule."
In approximately April 2009, Veloric and Goodman exchanged their membership interests in Holdco and their Class B shares in Wentworth for Class A shares in Wentworth. By this time, they were no longer executives of Wentworth.
These exchanges triggered Wentworth's obligation under the TRA to provide an "Exchange Basis Schedule" that reflected its resulting tax basis step-ups. The Exchange Basis Schedules, which were provided by Wentworth's accounting firm in 2011, stated that the tax basis step-ups created by Veloric's and Goodman's exchanges were $43,464,817 each.
In May 2009, Wentworth, Holdco, and JGW LLC filed petitions for a Chapter 11 bankruptcy. The debtors filed a consensual, prepackaged plan of reorganization.
The plan did not impair Plaintiffs' interest in the TRA, and the plan expressly provided that it "shall not constitute a `change of control' under any provision of any contract . . . of the Debtors,"
In June 2009, the bankruptcy court approved the debtors' plan of reorganization. Pursuant to the plan, JLL Distribution invested $100 million in Holdco to fund JGW LLC's obligations to certain creditors and its acquisition of additional structured settlements and annuity payments; that investment "entitled JLL Distribution to $100 million worth" of Holdco membership interests.
Chart 2 reflects the corporate structure after the bankruptcy reorganization in June 2009:
In 2011, JGW LLC acquired the operating assets of Peachtree Financial Solutions, which was also in the structured settlement and annuity payment business. This acquisition was completed in two steps on July 12, 2011: (i) a subsidiary of the Peachtree companies, Orchard Acquisition Company, LLC ("Orchard"), merged with and into a newly formed, wholly-owned subsidiary of JGW LLC called Peach Acquisition LLC ("Peach LLC"), with Orchard as the surviving entity (the "Peach Merger");
After these mergers, the equity interests in JGW LLC were converted into interests in Peachtree LLC. The economic ownership of Peachtree LLC was as follows: (i) 45.7% by Holdco; (ii) 5.1% by JLL Distribution; and (iii) the remaining interests by the Peachtree companies and other non-parties. Peachtree LLC owned 100% of the voting and economic interests in JGW LLC, which owned 100% of the voting and economic interests in Orchard. Chart 4 reflects the corporate structure after the Peach Merger and the JGW Merger:
Plaintiffs contend that each of these two mergers constituted a Change of Control under the TRA: the Peach Merger under Paragraph 3(x), and the JGW Merger under Paragraph 4. As I will discuss below, the parties offer different interpretations of who the "ultimate parent" of Orchard was immediately after the Peach Merger for purposes of Paragraph 3(x). Plaintiffs contend that the ultimate parent was Fund V or, alternatively, JGW LLC.
At some point during the fall of 2012, Plaintiffs learned through public reports that Fund V and JLL Distribution had hired two investment banks to sell the assets of Peachtree LLC and JGW LLC. In November 2012, Veloric contacted executives and agents of certain defendants, apparently asserting that any sale of Peachtree LLC would constitute a Change of Control under the TRA. He received several responses, each of which Plaintiffs contend was an anticipatory repudiation by defendants of their obligations under the TRA. These statements are discussed below in analyzing the merits of Plaintiffs' claim for anticipatory repudiation. The potential sale of Peachtree LLC that concerned Plaintiffs in 2012 did not occur.
On October 7, 2013, non-party JGWPT Holdings Inc. ("Peachtree Inc.") filed a Form S-1 Registration Statement with the SEC to conduct an initial public offering. The IPO occurred on November 8, 2013. Plaintiffs concede they did not allege the precise managerial structure of Peachtree LLC at this time.
On November 13, 2013, in connection with the IPO, Peachtree LLC merged with and into a limited liability company of the same name, which was majority owned by Peachtree Inc. (the "IPO Merger"). After the IPO Merger, Peachtree Inc. owned a 38.6% economic interest in, and became the sole managing member of, the surviving Peachtree LLC. In turn, JLL Distribution obtained an approximately 63.4% voting interest in Peachtree Inc. when its majority interest in Peachtree Inc. and Holdco's interest in Peachtree Inc. are combined.
Plaintiffs contend that the IPO Merger constituted a Change of Control under Paragraph 3(x) of the TRA. As I will discuss below, the parties once again offer different interpretations of who the "ultimate parent" of Peachtree LLC was immediately after the IPO Merger for purposes of Paragraph 3(x). Plaintiffs submit that the ultimate parent was Fund V or, alternatively, Peachtree Inc.
On October 30, 2013, Plaintiffs commenced this action against defendants asserting certain individual and derivative claims. On November 27, 2013, defendants moved to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim and Court of Chancery Rule 23.1 for failure to make a pre-suit demand upon the Wentworth board of directors or to plead facts excusing such demand.
On January 23, 2014, in response to defendants' opening brief in support of their motion to dismiss, Plaintiffs filed the Amended Complaint. On February 6, 2014, defendants moved to dismiss the Amended Complaint under Rule 12(b)(6) and Rule 23.1.
In the Amended Complaint, Plaintiffs assert seven causes of action:
Under various theories, these claims all revolve around whether a Change of Control occurred under the TRA, which would entitle Plaintiffs to certain Tax Benefit Schedules, Tax Benefit Payments, and possibly Early Termination Payments.
I consider the sufficiency of Plaintiffs' claims in the order in which they were alleged. In doing so, I conclude that Plaintiffs have failed to state a claim for relief under any of Counts I-VII. Accordingly, I dismiss the Amended Complaint in its entirety under Rule 12(b)(6).
A motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim must be denied unless, assuming the well-pled allegations to be true and viewing all reasonable inferences from those allegations in the plaintiffs' favor, I do not find there to be a "reasonably conceivable set of circumstances" in which the plaintiffs could recover.
Delaware law "adheres to the objective theory of contract interpretation."
Several contract interpretation principles guide my inquiry into whether a particular term is reasonably susceptible of different meanings. For instance, I may consider how a term operates with respect to the contract as a whole.
To state a claim for breach of contract under Delaware law, a plaintiff must allege "1) a contractual obligation; 2) a breach of that obligation by the defendant; and 3) resulting damage to the plaintiff."
Paragraph 3(x) of the TRA provides that a Change of Control occurs if:
The two terms of Paragraph 3(x) whose meanings are in dispute are "subsidiary" and "ultimate parent."
For purposes of my analysis, Paragraph 3(x) can be reconfigured as follows: a Change of Control occurs where (i) there is a merger of (ii) "any direct or indirect subsidiary of [Wentworth] (including [Holdco])" such that (iii) immediately after the merger, Wentworth's board of directors (i.e., the Director Defendants) immediately prior to the merger do not constitute "at least a majority of the board of the company surviving the merger or, if the surviving company is a subsidiary, the ultimate parent thereof."
The Peach Merger, depicted in Chart 3 above, plainly involved a merger. Orchard, a subsidiary of the Peachtree companies, merged with and into Peach LLC, a subsidiary of JGW LLC, with Orchard as the surviving entity. The remaining dispute with respect to this claim is two-fold: whether Peach LLC was a "subsidiary" of Wentworth, and which entity was the "ultimate parent" of Orchard after the merger.
Defendants contend that Peach LLC was not an indirect subsidiary of Wentworth based on prominent secondary sources that define a subsidiary as an entity that is "controlled by another corporation by reason of the latter's ownership of at least a majority of the shares of the capital stock" or an entity "in which a parent corporation has a controlling share." Consequently, defendants argue that because Wentworth owned less than 1% of Holdco, Holdco was not a subsidiary of Wentworth and, by extension, neither was JGW LLC (through Holdco LLC) nor Peach LLC (through JGW LLC) an indirect subsidiary of Wentworth.
I do not find defendants' position to be a reasonable construction of the term "subsidiary" as it is used in Paragraph 3(x). That provision expressly identifies Holdco as a subsidiary of Wentworth, even though, when the parties executed the TRA, Wentworth's interest in Holdco was only 13.9%, not a majority and not what ordinarily may be considered a controlling share.
Because Paragraph 3(x) expressly identified Holdco as a subsidiary despite Wentworth's less-than-controlling interest when the TRA was signed, it is not reasonable in my view to interpret the term "subsidiary" as used in the TRA to require a majority or controlling interest by one entity in another. Holdco only could have been identified as Wentworth's subsidiary because, with Wentworth as its sole managing member, it was under Wentworth's control. I thus interpret "subsidiary" as used in Paragraph 3(x) to mean an entity under Wentworth's control.
Here, based on the only reasonable interpretation of "subsidiary," the chain of control immediately prior to the Peach Merger was as follows: Wentworth controlled Holdco (despite its less-than-1% interest) by virtue of its position as Holdco's sole managing member and the well-pled allegations of control over Holdco's business and affairs; Holdco controlled JGW LLC through its majority interest; and JGW LLC controlled Peach LLC as a wholly owned subsidiary. I therefore conclude under the plain meaning of Paragraph 3(x) that Peach LLC was an indirect subsidiary of Wentworth.
The parties offer competing interpretations of "ultimate parent" in Paragraph 3(x) of the TRA. Plaintiffs contend that Fund V or, alternatively, JGW LLC was the ultimate parent of Orchard. In opposition, defendants submit that Wentworth was Orchard's ultimate parent. Neither of the parties presented any Delaware case law, case law from another jurisdiction, or any persuasive secondary source (such as an annotated model agreement) interpreting the phrase "ultimate parent" in the context of a tax receivable agreement.
Simply because parties dispute the meaning of "ultimate parent" does not mean that the term is ambiguous.
I conclude that "ultimate parent" is not reasonably susceptible to more than one meaning. In my opinion, where one entity controls another, even without a majority or controlling interest, they can be said to be in a parent-subsidiary relationship. Thus, for purposes of the TRA, the parent (if there is one) of an entity is whatever entity that controls it.
I agree with defendants that the only reasonable interpretation of "ultimate" is that of "last" or "final."
For the reasons explained above, Peach LLC was an indirect subsidiary of Wentworth immediately before the Peach Merger. Orchard was likewise a wholly-owned subsidiary of JGW LLC after the Peach Merger, which requires that I identify the "ultimate parent" of Orchard. Applying the only reasonable interpretation of "ultimate parent," the chain of control immediately after the Peach Merger, as depicted in Chart 4, was as follows: JGW LLC was Orchard's parent; Peachtree LLC was JGW LLC's parent, it is reasonable to infer that Holdco was Peachtree LLC's parent;
Thus, the ultimate parent of Orchard immediately after the Peach Merger was JLL Associates G.P. V, L.L.C. ("Fund V G.P.").
Plaintiffs do not contend that a Change of Control occurred because Fund V G.P. does not have a board of directors. Rather, Plaintiffs argue that, because all four Director Defendants did not manage Fund V G.P., they could not have constituted a majority of the managers of Orchard's ultimate parent after the Peach Merger. That is, Plaintiffs argue that "one person is not `at least a majority' of the four-person Wentworth [] board."
In my opinion, defendants offer the only reasonable construction of this clause of Paragraph 3(x). Interpreting the clause according to its plain meaning, the Director Defendants did constitute a majority of the managers of Fund V G.P.—namely, Levy, as the sole manager of Fund V G.P., constituted a majority of one. That the other directors of Wentworth were absent from Fund V's governing body is irrelevant. By analogy, to say that the Philadelphia Phillies baseball team (consisting of twenty-five players) constitutes a majority of the starters on the National League All-Star team (consisting of nine players) is not to say that every Phillie has the privilege of being a starter in the All-Star Game. Plaintiffs' interpretation would be reasonable if Paragraph 3(x) included a qualifier to specify that all members of the board of directors of Wentworth must constitute a majority of the board of the ultimate parent. But, that or similar language is absent from Paragraph 3(x) of the TRA.
Notably, in the second definition of a Change of Control, which refers to the composition of the Wentworth board, the TRA includes the phrase "majority of the number of directors of Wentworth."
Moreover, in my opinion, Plaintiffs' interpretation of Paragraph 3(x) would lead to absurd results given the corporate structure of J.G. Wentworth when the parties executed the TRA in 2007. At that time, as discussed above, the ultimate parent of any of Wentworth's direct or indirect subsidiaries was Fund V G.P. Thus, under Plaintiffs' interpretation, any merger involving a Wentworth subsidiary would trigger a Change of Control under Paragraph 3(x)—and an approximately $35 million payment according to Plaintiffs—irrespective of the fact that the composition of the board of the ultimate parent never changed. Levy was the sole managing member of Fund V G.P. when the TRA was signed in 2007 and has been at all times since.
Similarly, if the four Director Defendants continued to comprise the Wentworth board before the occurrence of a subsidiary merger covered by Paragraph 3(x), then, under Plaintiffs' position, there would be a Change of Control even if three of the Director Defendants—and no one else—constituted the board of directors of the ultimate parent after the merger. These absurd outcomes demonstrate to me that Plaintiffs' construction of Paragraph 3(x) is plainly not reasonable.
For the foregoing reasons, although Plaintiffs sufficiently alleged that the Peach Merger was a merger involving an indirect subsidiary of Wentworth, they have not adequately alleged that the Director Defendants did not constitute a majority of the board of the ultimate parent of Orchard immediately after the Peach Merger. Accordingly, the Amended Complaint fails to state a claim for breach of the TRA based on a Change of Control arising from the Peach Merger.
For the JGW Merger, which is depicted in Chart 3 above, Plaintiffs contend there was a Change of Control under Paragraph 4 of the TRA. Paragraph 4 provides that a Change of Control occurs if:
Defendants argue that because Plaintiffs allege that Wentworth's only asset before and after the JGW Merger was exactly the same—its 0.000015% interest in Holdco—there was no disposition of any of Wentworth's assets, let alone substantially all of them. In response, Plaintiffs assert that Wentworth's assets should include "its indirect ownership of and control over the assets of its subsidiaries (including JGW LLC)"
I do not find Plaintiffs' interpretation of Paragraph 4 to be reasonable. I find the term "[Wentworth's] assets" to be clear and unambiguous, and I interpret it according to its plain meaning: "Wentworth's assets" means the assets owned by Wentworth. The reference to Wentworth's subsidiaries in Paragraph 3(x) shows that, when the parties to the TRA intended to include subsidiaries, they did so expressly. This distinction again supports my interpretation here. Accordingly, Plaintiffs' allegation that Wentworth's sole asset before the JGW Merger—its less-than-1% interest in Holdco—was the same after the JGW Merger
Even if Paragraph 4 could reasonably be construed such that the JGW Merger was a disposition by Wentworth of its assets, it would be far from "all or substantially all" of its assets. The TRA does not define "substantially all." Thus, it is appropriate to consider by analogy how that term is interpreted as it appears in 8 Del. C. § 271.
To recap, through the JGW Merger, Holdco's 70% interest in JGW LLC was diluted to an approximately 45.7% interest in Peachtree LLC, which in turn owned 100% of JGW LLC. By Plaintiffs' logic, if Holdco's assets should count as its parent's (Wentworth's) assets before the JGW Merger, then so too should Peachtree LLC's assets count as its parent's (Holdco's) assets after the JGW Merger. In my opinion, it is not reasonably conceivable that a decrease in Holdco's ownership of JGW LLC from 70% to 45.7%—a decrease of approximately 35%—would satisfy the "quantitative and qualitative test" of substantially all assets under Delaware law,
The Amended Complaint thus fails to state a claim for breach of the TRA based on a Change of Control arising from the JGW Merger.
The IPO Merger is depicted in Chart 5 above. Defendants again raise the threshold argument that the entity that merged in the IPO Merger, Peachtree LLC, was not a subsidiary of Wentworth. Plaintiffs allege that Holdco owned 45.7% of the membership interests of Peachtree LLC, that Fund V and JLL Distribution collectively owned 5.1%, and that various non-parties owned the remainder. Defendants note there is no well-pled allegation as to which entity was Peachtree LLC's managing member immediately before the IPO Merger. Plaintiffs claimed in their brief that "the facts regarding the precise pre-merger managerial structure of [Peachtree LLC] have not been disclosed to Plaintiffs."
Viewing Plaintiffs' well-pled allegations most favorably to them, as I must at the motion to dismiss stage, I agree that the Amended Complaint supports the reasonable inference that Holdco controlled Peachtree LLC immediately before the IPO Merger. Thus, based on the interpretation of "indirect subsidiary" outlined above, Peachtree LLC was an indirect subsidiary of Wentworth under the plain meaning of this unambiguous clause of Paragraph 3(x).
The parties again offer competing interpretations of "ultimate parent" in Paragraph 3(x) of the TRA in the context of the IPO Merger. Plaintiffs once more contend that Fund V or, alternatively, Peachtree Inc. was the ultimate parent of Peachtree LLC immediately after the IPO Merger. Defendants maintain that Wentworth was Peachtree LLC's ultimate parent.
The only reasonable interpretation of Paragraph 3(x) in the context of the IPO Merger is identical to that in the context of the Peach Merger. The chain of control after the IPO Merger is reflected in Chart 6 above. Peachtree Inc. held 38.6% in, and was the sole managing member of, Peachtree LLC. Similar to the interpretation above that Wentworth was Holdco's parent, it is reasonable to infer that Peachtree Inc. and Peachtree LLC were in a parent-subsidiary relationship, which again requires that I identify Peachtree LLC's "ultimate parent." Peachtree Inc.'s parent was either JLL Distribution (through its majority interest) or Holdco, whose parent was Wentworth, whose parent was JLL Distribution. In either case, the analysis leads to JLL Distribution, whose parent was Fund V.
Based on the same chain of control for Fund V depicted in Chart 7, the ultimate parent of Fund V was Fund V G.P. Thus, Peachtree LLC's ultimate parent after the IPO Merger was Fund V G.P., whose sole managing member was Levy. Plaintiffs' technical argument here—that the four Director Defendants did not constitute a majority of the managers of Fund V G.P. after the IPO Merger—fails for the same reasons discussed above concerning the Peach Merger.
Thus, in my opinion, the only reasonable interpretation of Paragraph 3(x) is that, although it is reasonable to infer that the IPO Merger was a merger involving an indirect subsidiary of Wentworth, Plaintiffs have not adequately alleged that the Director Defendants did not constitute a majority of the board of the ultimate parent of Peachtree LLC after the IPO Merger. I therefore conclude that Plaintiffs have failed to state a claim for breach of the TRA based on a Change of Control arising from the IPO Merger.
Plaintiffs allege that defendants repudiated their obligations under the TRA, thereby materially breaching the TRA and requiring Wentworth to make Early Termination Payments to Plaintiffs of approximately $35 million.
Chancellor Allen cogently outlined the contours of the doctrine of anticipatory repudiation under Delaware law in Carteret Bancorp, Inc. v. Home Group, Inc.
Initially, to the extent Plaintiffs assert that defendants repudiated the TRA by refusing to make Tax Benefit Payments that were due after a Change of Control, the Plaintiffs have failed to state a claim for lack of a valid premise: because the Amended Complaint fails to establish a breach of the TRA based on a Change of Control for the reasons explained above, Wentworth was under no obligation to make those payments yet. Additionally, in my opinion, none of the four statements alleged by Plaintiffs rises to the level, even under the reasonable conceivability standard, to state a claim for anticipatory repudiation under Delaware law.
First, Plaintiffs allege that defendant Miller told Veloric during a telephone call that he "believed the Bankruptcy extinguished all of the obligations under the TRA."
Second, Plaintiffs allege that defendant Rodriguez told Veloric in a November 1, 2012 email (which was not attached to the Amended Complaint) that Wentworth "had no assets with which it could pay Veloric and Goodman, and that Defendants believed no other Wentworth entity owed any obligation relating to the TRA."
Third, Plaintiffs allege certain defendants claimed that Wentworth "would not owe any payments under the TRA because it would not earn enough income to pay any taxes and thus receive tax benefits."
Fourth, Plaintiffs allege that various defendants asserted that a loan from Holdco to Wentworth to pay Wentworth's obligations to Plaintiffs "would be impermissible because [Wentworth] is insolvent."
Plaintiffs further allege that, on November 20, 2012, in response to letters sent to JLL Distribution and Wentworth on November 8 and November 16 stating that the rumored sale of Peachtree LLC would constitute a Change of Control under the TRA,
Plaintiffs contend that Wentworth, Holdco, and JGW LLC breached the implied covenant of good faith and fair dealing in the TRA and the Holdco LLC Agreement due to their conduct surrounding the JGW Merger and, to a lesser extent, the Peach Merger. Specifically, they argue that, by inserting Peachtree LLC in the corporate structure between Holdco and JGW LLC, defendants unreasonably left Wentworth without sufficient "access [to] funds to pay its obligations under the TRA."
The implied covenant of good faith and fair dealing "requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain."
Defendants argue, among other things, that the Peach Merger and JGW Merger do not implicate the implied covenant in the TRA because those transactions were reasonably foreseeable when the parties agreed to the definition of Change of Control. I agree. It was foreseeable in August 2007 that the J.G. Wentworth companies might engage in a variety of merger or acquisition transactions that could affect Wentworth's tax liability. The parties to the TRA considered this issue, as evidenced by the TRA's thorough and detailed Change of Control definition, which covered a wide variety of transactions involving Wentworth and its subsidiaries. The fact that the parties considered this issue generally but declined to include specific transactions like the Peach Merger or the JGW Merger within the ambit of any Change of Control definition demonstrates that there is no "gap" in this provision of the TRA for the implied covenant of good faith and fair dealing to fill.
Plaintiffs allege that they did not make any changes to the Change of Control definition from the draft of the TRA that was provided to them. But that is not a well-pled allegation that they were not sophisticated parties who had no opportunity to negotiate that provision of the TRA. It is improper, under considerable Delaware Supreme Court authority, for Plaintiffs to rely upon the implied covenant to attempt to rewrite and expand the Change of Control definition to which they explicitly agreed to cover similar transactions.
Notably, moreover, neither the Peach Merger nor the JGW Merger is alleged to have affected the amounts of the payments that Plaintiffs may one day receive under the TRA after its tenth anniversay. In this respect, Plaintiffs' reliance on American Capital Acquisition Partners, LLC v. LPL Holdings, Inc.
Plaintiffs allege that Holdco breached its contractual obligation, under Section 4.2 of the Holdco LLC Agreement, to loan money to Wentworth to the extent that its distributions to Wentworth are insufficient to satisfy Wentworth's obligations under the TRA.
Plaintiffs assert a derivative breach of fiduciary duty claim against the Director Defendants as directors of Wentworth and against Fund V and JLL Distribution as the alleged controlling stockholders of Wentworth for their conduct relating to the acquisition of the operating assets of Peachtree Financial Solutions in 2011. Plaintiffs purport to assert this claim as creditors of an allegedly insolvent Wentworth or, alternatively, as stockholders of Wentworth.
Plaintiffs' fiduciary duty claim is not what one would expect a fiduciary duty claim to look like. Plaintiffs do not allege, for example, that the Director Defendants, Fund V, or JLL Distribution had any financial interest in the Peachtree businesses before the 2011 transaction or that the price paid to acquire those businesses was unfair. By all accounts, the 2011 mergers were part of an arms' length transaction with a third party.
Instead, Plaintiffs' theory of fiduciary liability is that these defendants acted "disloyally" by cutting "off Wentworth[], a corporation to which they are fiduciaries, from assets and funds, to the benefit of [Fund V and JLL Distribution]."
Plaintiffs spend considerable energy in their brief discussing, without effectively applying, Delaware case law that describes the type of allegations necessary to support distinct contract and fiduciary duty claims in similar situations. In my opinion, this case law does not govern here because Plaintiffs' claim for breach of fiduciary duty claim is simply a creative re-pleading of their contract claims asserted in Counts I and II.
Under the "well-settled principle" articulated by the Delaware Supreme Court in Nemec v. Shrader,
This Court has applied this principle to dismiss duplicative fiduciary duty claims in a variety of contexts, such as those premised entirely on a breach of an LLC agreement
To state a claim for aiding and abetting under Delaware law, a plaintiff must allege, among other elements, a defendant's knowing participation in another's breach of fiduciary duty.
The Delaware Supreme Court has defined unjust enrichment as "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."
Here, the parties cannot legitimately dispute that the TRA is enforceable and that it governs Plaintiffs' requests for relief. To the extent Plaintiffs seek to enforce their rights to payment under the TRA, the proper theory of liability would be damages for breach of contract, not unjust enrichment. In other words, it is not reasonably conceivable that the Plaintiffs' unjust enrichment claim is "governed by fiduciary principles and not an enforceable contract."
Plaintiffs seek a declaratory judgment that Fund V, JLL Distribution, Wentworth, Holdco, Peachtree LLC, and JGW LLC are jointly and severally liability to Plaintiffs for their damages.
For the foregoing reasons, defendants' motion to dismiss the Amended Complaint in its entirety under Court of Chancery Rule 12(b)(6) is GRANTED.
Pls.' Ans. Br. 3-4 (citing Deborah L. Paul & Michael Sabbah, Understanding Tax Receivable Agreements, Practical Law The Journal, June 2013, at 74-79).
Defendants assert that the operative LLC agreement immediately after the Peach Merger was JGW LLC's Sixth Amended and Restated Limited Liability Company Agreement, which is extraneous to the Amended Complaint. Defs.' Op. Br. 25. That agreement purportedly established a four-member board of directors, comprised of the four Director Defendants.
Because I ultimately conclude that the composition of the board of JGW LLC after the Peach Merger is immaterial to my disposition of defendants' motion to dismiss, I need not resolve whether JGW LLC's Sixth Amended and Restated Limited Liability Company Agreement may be considered at the pleadings stage.
Plaintiffs also contend that defendants, because they allegedly stood to benefit most financially from a Change of Control, wanted this type of hair-trigger provision. Am. Compl. ¶ 53; Pls.' Ans. Br. 22 n.8. However, in my view, no reasonable person would agree to a provision that would preclude, at a cost of over $35 million, even the most minor corporate restructuring that is wholly internal to Wentworth and its subsidiaries.
