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

Background

Partner Reinsurance Company Ltd. sued RPM Mortgage, Inc. and LendUS, LLC over the defendants’ alleged failure to complete an Agreement and Plan of Merger involving Entitle Direct Group, Inc. LendUS had become RPM’s successor in interest after a merger. PartnerRe, acting as Entitle’s stockholder representative, alleged that RPM refused to close the transaction after demanding additional financial information and a $6 million loan, and that Entitle later sold to another buyer for substantially less.

The proposed amended complaint sought to add alter-ego claims. Alter-ego liability is a theory under which a court may disregard a company’s separate legal identity and hold its owners or related entities responsible for the company’s obligations. PartnerRe sought to add 10 defendants: Erwin Robert Hirt, Tracey Hirt, the Robert Hirt and Tracey Najarian Hirt Revocable Living Trust, JAN (Lend USA) Holdings, Inc., MM-air, LLC, RPM Loan Servicing Investments LP, RPM Holdings I, LLC, Hirt Management, LLC, Mortgage Management, Inc., and TRH Holdings, LLC.

Legal standards

The court evaluated the motion under Federal Rules of Civil Procedure 15(a), 16(b), and 21. Rule 15(a) generally favors allowing amendments when justice requires, but amendment may be denied if it would be futile, unfairly prejudicial, or made in bad faith. An amendment is futile if the proposed claim could not survive a motion to dismiss. Because PartnerRe filed after the scheduling-order deadline, it also had to show good cause under Rule 16(b), including diligence in seeking the amendment.

For the alter-ego allegations, the court applied Delaware law because it found no meaningful conflict between Delaware and California law. Under the standard used by the court, PartnerRe had to plausibly allege both that the entities operated as a single economic entity and that using the separate corporate structure would cause injustice or unfairness.

Court’s analysis

The court held that PartnerRe plausibly alleged that the Hirts, through the Hirt Trust, dominated RPM and LendUS. The allegations included that the Hirts controlled the companies, moved money into and out of them at their discretion, used company funds for personal purposes, made transfers outside regular board processes, and relied on temporary contributions to satisfy lenders’ minimum-cash requirements. PartnerRe also alleged that these practices left RPM short of the cash needed to complete the Entitle transaction.

The court concluded that these allegations were sufficient at the pleading stage to show a possible single economic entity and injustice or unfairness. The court emphasized that it was accepting the non-conclusory allegations as true for purposes of the amendment motion; it was not making a final finding that alter-ego liability had been proven. The court also stated that actual fraud was not required for the unfairness element, although the misuse of the corporate structure had to involve more than the underlying breach of contract itself.

The court reached a different conclusion for JAN, MM-air, RPM Loan Servicing, RPM Holdings, Hirt Management, Mortgage Management, and TRH. The proposed complaint did not plausibly allege that those entities owned or controlled RPM or LendUS, or that they were otherwise the alter egos of those companies. Allegations that the entities were owned by the Hirts, shared addresses or ownership, and received or transferred money did not establish the necessary relationship to RPM or LendUS.

The court also rejected the argument that the amendment would cause undue prejudice. Although additional discovery could be required, the new allegations arose from the same underlying events and would substantially overlap with existing discovery. The court further found good cause because PartnerRe said it learned important information about the Hirts’ financial transfers and use of the corporate form during depositions and later document production, then moved promptly to amend. The court found no specific challenge or showing that PartnerRe knew these facts before the original amendment deadline.

Disposition

Judge Paul A. Engelmayer granted in part and denied in part PartnerRe’s motion for leave to amend. The court granted the request to add alter-ego claims against Erwin Robert Hirt, Tracey Hirt, and the Robert Hirt and Tracey Najarian Hirt Revocable Living Trust. It denied the request to add those claims against JAN, MM-air, RPM Loan Servicing, RPM Holdings, Hirt Management, Mortgage Management, and TRH. In all other respects, the court granted the motion and directed PartnerRe to file the amended complaint by November 18, 2020.