Partner Reinsurance Company Ltd. v.RPM Mortgage, Inc.et al

Background

The case followed an eight-day bench trial concerning a merger agreement signed on February 16, 2017. Under the agreement, RPM was to acquire a majority interest in Entitle Direct Group, Inc. and its subsidiary, Entitle Insurance Company. PartnerRe, a principal owner of Entitle, had been assigned Entitle’s claims against RPM and its affiliates.

RPM did not appear for the scheduled June 9, 2017 closing. The agreement required RPM and Entitle to use best efforts to obtain regulatory approval and included provisions addressing access to records, purchase-price adjustments for pre-closing losses, material adverse effects, and regulatory conditions requiring substantial capital contributions. The Ohio Department of Insurance approved the transaction without conditions on June 2, 2017. Entitle later terminated the agreement after RPM continued refusing to close, and Entitle was eventually acquired by Radian.

Contract Claims

PartnerRe claimed that RPM breached the merger agreement by failing to close. RPM counterclaimed that Entitle had breached its duties by withholding financial information, failing to update regulatory projections, improperly communicating with the Ohio Department of Insurance, and failing to cooperate with RPM’s proposed communications with that agency.

The court rejected RPM’s counterclaim. It found that Entitle complied with its obligations to provide reasonable access to books and records. The updated projections RPM requested did not already exist, and Entitle supplied them within a reasonable period after creating and reviewing them. The court also found that Entitle had no duty to provide certain regulatory-surveillance communications before closing and that it provided the requested communications after RPM asked for them.

The court further held that Entitle did not breach its duties to use reasonable best efforts or cooperate in obtaining regulatory approval. Under the circumstances, Ohio law did not require RPM to submit updated post-merger projections to the Ohio Department of Insurance. The agency already had current financial information through Entitle’s monthly reporting, and submitting new projections late in the approval process could have delayed or jeopardized approval. Entitle therefore was not required to join or support RPM’s proposed outreach to the agency.

Material Adverse Effect and Regulatory Condition

The court rejected RPM’s argument that Entitle experienced a material adverse effect that excused RPM from closing. The agreement excluded failures to meet projections, changes in interest rates, and industry trends from the material-adverse-effect definition. The court found that Entitle’s increased losses were primarily attributable to temporary market conditions and one-time merger-related costs, not a long-term reduction in earning power.

The court also rejected RPM’s argument that the Ohio Department of Insurance had imposed a burdensome condition. The agency’s May 24 communication said that Entitle might need to consider another capital contribution to prevent further hazardous-financial-condition failures. It did not require a contribution as a condition of approving the merger, and RPM had long known that regulatory capital contributions were possible. The court found that no unfulfilled closing condition excused RPM’s performance.

RPM’s Breach

The merger agreement’s termination provision required a party seeking damages after termination to show that the other party acted with knowledge or reckless disregard that its conduct would constitute a material breach. The court found that RPM and Robert Hirt satisfied that standard. It concluded that Hirt and RPM knew, or recklessly disregarded, that refusing to close would breach the agreement.

The court found that RPM advanced a shifting series of pretexts, including alleged lack of financial transparency, improper regulatory communications, the supposed need to revise the regulatory application, restructuring of the Hirt family trust, supposed lender approval requirements, a proposed addition of another buyer, and an alleged material adverse effect. The court found these reasons were efforts to delay the closing, obtain more favorable terms, or avoid the transaction after Hirt developed buyer’s remorse. The court also found that RPM had enough cash to close, although doing so would have substantially reduced its cash reserves.

Damages

The court awarded PartnerRe $10,886,955 in expectation damages. The award included $5,950,106 for the difference between the cash consideration PartnerRe would have received if RPM had closed and the amount received in the later Radian transaction, plus $4,916,849 for the value of PartnerRe’s expected minority equity interest.

The court awarded simple prejudgment interest beginning June 9, 2017, at the Delaware statutory rate described in the opinion. It also awarded post-judgment interest under 28 U.S.C. § 1961, using the federal rate and annual compounding required by that statute.

Alter-Ego Claims

PartnerRe also sought to hold Robert Hirt, Tracey Hirt, and the Robert Hirt and Tracey Najarian Hirt Revocable Living Trust personally liable for RPM’s breach under an alter-ego theory. Applying Delaware law, the court found that RPM was a legitimate operating business that generally observed corporate formalities, was not shown to be inadequately capitalized for an improper purpose, and was not merely a facade for the Hirts. PartnerRe also did not show that the corporate structure was used to shield an injustice beyond the underlying contract breach.

The court therefore did not impose alter-ego liability on Robert Hirt, Tracey Hirt, or the Trust. It entered judgment for those defendants on the alter-ego claims. The court directed the Clerk to close the case.