Chester County Employees' Retirement Fund v. New Residential Corp.

Opinion

COURT OF CHANCERY

OF THE

STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES Leonard Williams Justice Center VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734

Date Submitted: October 28, 2016 Date Decided: December 1, 2016

Michael Hanrahan, Esquire Robert S. Saunders, Esquire Paul A. Fioravanti, Jr., Esquire Ronald N. Brown, III, Esquire Corinne Elise Amato, Esquire Sarah R. Martin, Esquire Kevin H. Davenport, Esquire Skadden, Arps, Slate, Meagher & Flom LLP Prickett, Jones & Elliott, P.A. One Rodney Square 1310 North King Street Wilmington, DE 19899 Wilmington, DE 19801

RE: Chester County Employees’ Retirement Fund v. New Residential Corp. et al., Civil Action No. 11058-VCMR

Dear Counsel:

This letter opinion addresses Plaintiff’s motion for reargument of this

Court’s October 7, 2016, memorandum opinion (the “Opinion”)1 granting

Defendants’ motion to dismiss. For the reasons stated herein, the Plaintiff’s

motion is denied.

1 Capitalized terms not defined in this letter opinion refer to the definitions in the Opinion. See Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004 (Del. Ch. Oct. 7, 2016).

C.A. No. 11058-VCMR December 1, 2016 Page 2 of 10

I. BACKGROUND The complete facts of this case are outlined in the Court’s Opinion.

Plaintiff’s Amended Complaint challenges a series of transactions that New

Residential entered in connection with its acquisition of the assets of HLSS.

Plaintiff alleges that the New Residential board was beholden to Fortress, which

was interested in the HLSS acquisition and associated transactions because the

transactions had the effect of increasing FIG’s management fees under a

Management Agreement that was itself allegedly negotiated by beholden directors.

I held in the Opinion that the Amended Complaint fails to adequately allege

demand futility because it does not allege that any benefits Fortress received from

the challenged transactions were material to Fortress. I granted Plaintiff leave to

replead because it appeared that there may have been merit to Plaintiff’s claims if

properly pled.

On October 14, 2016, Plaintiff filed a motion for reargument as to the

Court’s dismissal of counts I and II of Plaintiff’s Amended Complaint. Plaintiff

makes three arguments in its motion. First, Plaintiff argues that the Court

incorrectly decided that a materiality requirement applies to the side benefits

C.A. No. 11058-VCMR December 1, 2016 Page 3 of 10

Fortress allegedly received as a result of the challenged transactions.2 Second,

Plaintiff contends that if a materiality requirement applies, the Amended

Complaint properly alleges materiality.3 Third, Plaintiff asserts that repleading is

not desirable.4 Defendants filed an opposition to the motion for reargument on

October 28, 2016, asserting that Plaintiff does not identify any legal authority that

the Court overlooked or any facts that the Court misapprehended and that

Plaintiff’s contentions are not proper grounds to seek reargument.5

II. ANALYSIS

Under Court of Chancery Rule 59(f), a party may move for reargument

within five days after the filing of the Court’s opinion.6 Reargument will be

granted only where the court “overlooked a decision or principle of law that would

2 Pl.’s Mot. for Reargument ¶¶ 2-4; see Khanna v. McMinn, 2006 WL 1388744, at *17 (Del. Ch. May 9, 2006) (“Ultimately, the inquiry into independence turns in this instance on whether Covad’s business relationship with BEA Systems was material to BEA or to [the director] himself as a director of BEA.”); Jacobs v. Yang, 2004 WL 1728521, at *6 (Del. Ch. Aug. 2, 2004) (“Merely stating that the agreements between Yahoo! and AMG are ‘crucial to AMG’s continued viability’ is not enough. . . . [T]he facts alleged do not give rise to the inference that the value of these contracts was material to Activision or Macromedia.”).

3 Pl.’s Mot. for Reargument ¶¶ 5-14.

4 Id. ¶¶ 15-16.

5 Defs.’ Opp. to Mot. for Reargument.

6 Ct. Ch. R. 59(f).

C.A. No. 11058-VCMR December 1, 2016 Page 4 of 10

have controlling effect or . . . misapprehended the facts or the law so the outcome

of the decision would be different.”7 “Mere disagreement with the Court’s

resolution of a matter is not sufficient, and the Court will deny a motion for

reargument that does no more than restate a party’s prior arguments.”8 It is “not

the role of Rule 59(f)” to allow a party to “seek another opportunity to address

matters already considered” when the Court did not overlook or misapprehend a

point of law or fact.9 Reargument also generally is “only available to re-examine

the existing record.”10 A party may seek reargument based on newly discovered

evidence only when the party can show that the evidence could not have been

discovered before in the exercise of reasonable diligence.11

A. Self-Dealing

Plaintiff argues that the New Residential public offerings were self-dealing

transactions rather than side benefit transactions. As Plaintiff notes in its motion

7 Pontone v. Milso Indus. Corp., 2014 WL 4352341, at *1 (Del. Ch. Sept. 3, 2014).

8 Zutrau v. Jansing, 2014 WL 6901461, at *2 (Del. Ch. Dec. 8, 2014).

9 HB Korenvaes Invs., L.P. v. Marriott Corp., 1993 WL 1500678, at *1 (Del. Ch. July 19, 1993).

10 Zutrau, 2014 WL 6901461, at *2 (quoting Reserves Dev. LLC v. Severn Sav. Bank, FSB, 2007 WL 4644708, at *1 (Del. Ch. Dec. 31, 2007)) (internal quotation marks omitted).

11 Id.

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for reargument, however, Plaintiff did not address the distinction between self-

dealing and side benefit transactions in its briefs or at oral argument.12 Even if I

were to consider it now, Plaintiff does not point to any fact or law that I

misapprehended or overlooked.

Plaintiff also argues that the recharacterization of HLSS income and the

renegotiation of the Management Agreement with FIG were self-dealing

transactions. Plaintiff challenges the recharacterization of income and the

renegotiation of the Management Agreement separately for the first time in its

motion for reargument. I decline to reconsider my decision when Plaintiff fails to

identify any fact or law that I misapprehended in the Opinion but rather seeks to

make different arguments about an issue that I already considered.13 Plaintiff,

instead, should allege facts to support these arguments in a second amended

complaint.

B. Materiality

Plaintiff argues that if materiality is required, it has been properly pled. The

theory of Plaintiff’s case is that Fortress caused New Residential to enter into a

series of transactions, including overpaying for the assets of HLSS, in order to

12 Pl.’s Mot. for Reargument ¶ 2.

13 See HB Korenvaes Invs., 1993 WL 1500678, at *1.

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increase fees and other benefits to Fortress and its affiliates.14 Plaintiff alleges, and

I held, that at least half of the New Residential directors were beholden to Fortress

at the time of the transactions.15 In the Opinion, I thus inquired into whether the

increase in fees and other benefits was material to Fortress.16

The Amended Complaint and Plaintiff’s motion for reargument include

several large numbers, but Plaintiff does not explain how they are probative of

whether the alleged benefits were material to Fortress.17 Regarding Plaintiff’s

arguments about the fees and benefits themselves, some were raised before18 and

some are new.19 Although Plaintiff again references large numbers, the Amended

14 The Amended Complaint assumes that all of these benefits flowed to Fortress from its affiliates.

15 Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004, at *10 (Del. Ch. Oct. 7, 2016).

16 Id. at *11 & n.69; see Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *5 (Del. Ch. June 26, 2014); Khanna v. McMinn, 2006 WL 1388744, at *17 (Del. Ch. May 9, 2006); Jacobs v. Yang, 2004 WL 1728521, at *6 (Del. Ch. Aug. 2, 2004).

17 E.g., Compl. ¶ 133. Plaintiff’s motion for reargument focuses at some points on the size of New Residential’s public offerings, for example.

18 Plaintiff argues that the challenged transactions increased the present value of fees Fortress receives from New Residential by between $487 million and $552 million. See id. ¶¶ 9, 133. Plaintiff also points to the allegation that New Residential provides a quarter of the fees from Fortress’s private equity business to support its materiality argument. See id. ¶ 130.

19 Plaintiff argues that Fortress received a $100 million benefit from the challenged New Residential transactions over a six-month period, which was material because

C.A. No. 11058-VCMR December 1, 2016 Page 7 of 10

Complaint and briefing fail to explain how the increased benefits were material to

Fortress. For example, while the Amended Complaint alleges the present value of

fees from New Residential, the present value of Fortress’s other sources of future

revenue is not alleged. The Amended Complaint also fails to explain the relative

importance of fees from Fortress’s private equity business—or of the business

practice of entering the type of transactions challenged in this case—to Fortress’s

business as a whole. Plaintiff has not pointed to any Delaware authority holding

that because numbers are large in Plaintiff’s view, they are material to a company

regardless of its size. And Plaintiff has not articulated why such a rule should be

adopted in Delaware.20

Plaintiff also argues that because Fortress touted the fees it earns from

permanent capital vehicles in its public disclosures, they were material to

Fortress received only $74 million in income from New Residential in all of 2014. Pl.’s Mot. for Reargument ¶¶ 8, 9. The $100 million figure does not appear in Plaintiff’s briefs or complaint, and Plaintiff has not explained why it added the numbers that it did to reach the $100 million.

20 Cf. Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002) (“Materiality means that the alleged benefit was significant enough ‘in the context of the director’s economic circumstances, as to have made it improbable that the director could perform her fiduciary duties to the . . . shareholders without being influenced by her overriding personal interest.’” (quoting In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999))).

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Fortress.21 But Plaintiff cites no cases holding that simply because a fact is

publicly disclosed, it necessarily is material to a business.22

Plaintiff’s final approach is to point the Court to the public filings

incorporated by reference into the Amended Complaint to support its materiality

argument. Plaintiff references the 2014 Fortress form 10-K (cited once in

Plaintiff’s Amended Complaint23), Fortress’s Second Quarter 2015 Earnings

Supplement (cited twice in the Amended Complaint24), and Fortress’s July 30,

2015 Earnings Report (cited once in the Amended Complaint25) and suggests that

the Court may find additional information in those public filings showing

materiality.26 Plaintiff may viably argue materiality by referencing additional

21 Pl.’s Mot. for Reargument ¶ 7.

22 Cf. Khanna v. McMinn, 2006 WL 1388744, at *17 (Del. Ch. May 9, 2006) (holding that where a director’s dual directorship on the boards of two companies that do business with one another is publicly disclosed, the disclosure alone is not sufficient to hold that the business relationship is material to the company or the director).

23 Compl. ¶ 57.

24 Id. ¶¶ 57, 133.

25 Id. ¶ 133.

26 Plaintiff’s motion for reargument relies on numbers in the Fortress public filings that did not appear in the Amended Complaint or Plaintiff’s opposition brief. See, e.g., Pl.’s Mot. for Reargument ¶¶ 12-13 (citing Fortress’s $1.8 billion in total revenue for 2014 and the fact that FOE I and FIG reported 100% of their income on Fortress financial statements).

C.A. No. 11058-VCMR December 1, 2016 Page 9 of 10

publicly available information to explain the relative importance to Fortress of the

figures in the Amended Complaint. But it is not the responsibility of this Court to

parse through hundreds of pages of public filings that Plaintiff cites sparingly in

search of relevant facts that Plaintiff should have pled in its Complaint (and could

plead in a further amended complaint). Plaintiff is expected to identify the relevant

provisions of documents incorporated by reference and make arguments supporting

its position. Just as the Court is not required to sift through hundreds of pages of

public filings for relevant facts not alleged in the complaint or to anticipate

arguments not supported by the complaint, it is unfair to require that Defendants do

the same.27 Moreover, Defendants raised the issue of materiality in their opening

brief in support of their motion to dismiss and at oral argument.28 But Plaintiff did

not respond to that argument. I have granted Plaintiff leave to replead.29 The

proper place to assert new materiality allegations is in a second amended

complaint.

27 Am. Legacy Found. v. Lorillard Tobacco Co., 2005 WL 5775807, at *2 (Del. Ch. Oct. 3, 2005) (“There is a value in the conservation of judicial resources that ordinarily precludes this sort of piecemeal litigation of issues.”).

28 Defs.’ Opening Br. 30, 47-48; Oral Arg. Tr. 19, 34.

29 Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004, at *12 (Del. Ch. Oct. 7, 2016).

C.A. No. 11058-VCMR December 1, 2016 Page 10 of 10

C. Desirability of Repleading

Plaintiff asserts that repleading is not desirable because the composition of

the New Residential board has changed, and Plaintiff does not have much more

information than the Amended Complaint already alleges. Whether filing a second

amended complaint is desirable is not a relevant consideration on a motion for

reargument.30 Regardless, the Opinion analyzed only three New Residential

directors. Additionally, Plaintiff’s motion for reargument shows that there are

more concrete facts publicly available than Plaintiff included in the Amended

Complaint or its briefing. A new complaint—not a motion for reargument—is the

proper place for Plaintiff to identify specific numbers and facts in the Fortress

financial statements to establish materiality.

III. CONCLUSION For the foregoing reasons, Plaintiff’s motion for reargument is DENIED.

IT IS SO ORDERED.

Sincerely,

/s/Tamika Montgomery-Reeves Vice Chancellor

TMR/jp

30 See Ct. Ch. R. 59(f); Pontone v. Milso Indus. Corp., 2014 WL 4352341, at *1 (Del. Ch. Sept. 3, 2014).