RoundPoint Mortgage Servicing Corporation v. Freedom Mortgage Corporation ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ROUNDPOINT MORTGAGE )
SERVICING CORPORATION, a )
Delaware corporation, and RPFG )
HOLDINGS, INC., a Florida )
corporation, )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0161-SG
)
FREEDOM MORTGAGE )
CORPORATION, a New Jersey )
corporation, and FMC/RADIANT )
MERGER SUB INC., a Delaware )
corporation )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: June 17, 2020
Date Decided: July 22, 2020
Kevin R. Shannon, Christopher N. Kelly, and Daniel M. Rusk, of POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Andrew
W. Stern, Jon W. Muenz, and Charlotte K. Newell, of SIDLEY AUSTIN LLP, New
York, New York, Attorneys for Plaintiffs and Counterclaim Defendants RoundPoint
Mortgage Servicing Corporation and RPFG Holdings, Inc.
Rudolf Koch, Kevin M. Gallagher, and Kevin M. Regan, of RICHARDS, LAYTON
& FINGER P.A., Wilmington, Delaware; OF COUNSEL: Edward L. Powers, Jeffrey
L. Friesen, and Florence M. Craig, of ZUCKERMAN GORE BRANDEIS &
CROSSMAN, LLP, New York, New York, Attorneys for Defendants and
Counterclaim Plaintiffs Freedom Mortgage Corporation and FMC/Radiant Merger
Sub Inc.
GLASSCOCK, Vice Chancellor
Before me is a limited issue of contract construction, in way of a merger
agreement. The merger consideration here is, in my experience, unusual. The buyer
is obligated to pay book value plus a premium (minus a fixed amount). The issue
before me concerns a provision in the merger agreement contemplating that, during
the period between signing and closing, the controlling stockholder of the target
would extend credit to the target; as a condition to closing the target, the parties
agreed, “shall have repaid” any such credit “outstanding” to its controlling
stockholder.
Here, the controlling stockholder made substantial loans to the target, forgave
all but $1 million, and the target attempted to proceed to closing. The parties
disagree about the application of the contractual language to these facts. The
Plaintiffs here, the target and its corporate grandparent (the owner of the controlling
stockholder), point out that only $1 million remains “outstanding” and that the target
is ready to make that repayment and close. The Defendants (the acquirer and merger
sub) point out that over $150 million of credit owed to the controlling stockholder
has been outstanding, and was not repaid, but forgiven. This makes a difference in
the purchase price, because the forgiveness increases book value and the buyer must
pay the premium on such book value at closing.
The Plaintiffs seek a declaratory judgment of their rights under the merger
agreement, and specific performance. The Defendants have counterclaimed, raising
1
contractual defenses including but not limited to the dispute just described, and
invoking the implied covenant in the latter dispute as well. I bifurcated the matter
and held a trial on two issues: Does the closing condition in the merger agreement
described above exclude retiring debt by forgiveness? And if not, does the implied
covenant serve to provide that term? I find the answer to both is in the negative, for
the reasons below.
I. BACKGROUND
This Action involves the purchase of RoundPoint Mortgage Servicing
Corporation by Freedom Mortgage Corporation (the “Merger”). The Merger was
agreed to via an agreement and plan of merger executed on May 23, 2019 (the
“Merger Agreement”).
The facts in this Memorandum Opinion reflect my findings based on the
parties’ briefing, 149 documentary exhibits, and trial held on June 17, 2020. This
Memorandum Opinion resolves only the Plaintiffs’ claim for a declaratory judgment
under Section 7.02(f) of the Merger Agreement and the Defendants’ third
counterclaim alleging breach of the implied covenant of good faith and fair dealing.
My findings herein are without prejudice to the resolution of the remaining claims
to be heard at the second phase of trial.1
1
Citations to the Joint Trial Exhibits are cited as “JX #”. Citations to the Declarations submitted
in this matter, which are included as JX 104, JX 105, JX 106, JX 107 and JX 108, are referenced
2
A. The Parties
Plaintiff and Counterclaim Defendant RoundPoint Mortgage Servicing
Corporation (“RoundPoint”) is a Delaware corporation engaged in the business of
originating, refinancing, and servicing residential mortgage loans.2 RoundPoint
acquires Mortgage Servicing Rights (“MSRs”) and originates, refinances, and
services residential mortgage loans; MSRs are RoundPoint’s primary assets.3
Plaintiff and Counterclaim Defendant RPFG Holdings, Inc. (“Holdings”) is a
Florida corporation.4 Holdings owns 100% of the membership interests of non-party
RoundPoint Financial Group, LLC (“RPFG”).5 RPFG itself owns approximately
79% of the voting power of RoundPoint and over 99% of RoundPoint’s common
stock.6
Defendant and Counterclaim Plaintiff Freedom Mortgage Corporation
(“Freedom”) is a New Jersey Corporation and one of the nation’s largest mortgage
loan originators and servicers, with approximately 8,000 employees and contractors
in more than 75 locations in the United States.7
herein as “[Name] Decl.”. I cite to the Plaintiffs’ Verified Complaint (“Compl.”) where the
Plaintiffs’ allegations are not in dispute.
2
Compl., ¶ 15.
3
Zeidman Decl., ¶ 3.
4
Compl., ¶ 16.
5
Id.; Zeidman Decl., ¶ 2.
6
Compl., ¶ 16; Zeidman Decl., ¶ 2.
7
King Decl., ¶ 1; Compl., ¶ 17.
3
Defendant and Counterclaim Plaintiff FMC/Radiant Merger Sub Inc.
(“Merger Sub”) is a Delaware corporation wholly owned by Freedom, and was
incorporated for the purpose of effectuating the Merger.8
B. The Merger Agreement and the RPFG Facility
On May 23, 2019, RoundPoint, Holdings (for limited purposes), Freedom,
and Merger Sub agreed to the Merger Agreement, which sets forth an acquisition of
RoundPoint by Freedom.9 The consideration to be paid in cash by Freedom was not
fixed, but was to be calculated according to a book-value-based formula.10 The
consideration is determined by taking the book value—i.e. the net asset value—of
RoundPoint as of the last day of the month immediately preceding the month in
which closing occurs, multiplying that amount by 107.5%, and subtracting
$4,150,000 from the product.11 The practical implication of this formula is that the
consideration to be paid by Freedom in the Merger was uncertain when the Merger
Agreement was signed, and that any fluctuation will be attributable to changes in
RoundPoint’s net asset value.
Before entering into the Merger Agreement, RoundPoint had an existing
revolving credit facility with Bank of America Merrill Lynch (“BAML,” and the
8
Compl., ¶ 18.
9
JX 29 (“Merger Agreement”).
10
Id. § 2.01.
11
Id. §§ 2.01, 10.02 (“Book Value of the Company”).
4
revolving credit facility the “BAML Loan”).12 The BAML Loan is secured by
RoundPoint’s MSR assets.13 MSRs fluctuate in value depending on a number of
factors, namely, market interest rates.14 The mechanics of the BAML Loan were
such that RoundPoint was subject to margin calls if the value of the MSR collateral
declined.15 In negotiating the Merger Agreement, Freedom expressed a preference
that the BAML Loan remain in place after the signing of the Merger Agreement.16
RoundPoint was concerned that if the BAML Loan was subject to margin calls
between signing and closing—because RoundPoint’s MSRs declined in value—
restrictions in the Merger Agreement, such as restrictions on selling assets, could
restrain RoundPoint from taking steps it would ordinarily take to pay margin calls
under the BAML Loan.17
The parties’ solution to RoundPoint’s concerns about meeting BAML’s
margin calls was to permit RoundPoint to borrow funds from RPFG—its controlling
stockholder—pursuant to a revolving credit facility.18 No such facility was in place
before the parties entered into the Merger Agreement.19 Though the facility was not
entered into before the Merger Agreement was signed, it was provided for in the
12
Zeidman Decl., ¶ 5; King Decl., ¶ 3; Reisman Decl., ¶ 7.
13
Zeidman Decl., ¶ 5; Reisman Decl., ¶ 8.
14
Reisman Decl., ¶ 8.
15
Id.
16
Id. ¶ 7; Mallol Decl., ¶ 5.
17
Reisman Decl., ¶ 8.
18
Id. ¶ 9.
19
King Decl., ¶ 6.
5
Merger Agreement as the “RPFG Facility.”20 The Merger Agreement states that the
RPFG Facility “means the Resolving Unsecured Loan Facility to be entered into
between [RoundPoint], as borrower, and [RPFG], as Lender, substantially on terms
as set forth on Schedule 5.01(b)(iv).”21
Schedule 5.01(b)(iv) contains a summary of principal terms and conditions
for the RPFG Facility in the form of a term sheet.22 The maximum borrowing
amount in Schedule 5.01(b)(iv) is $40,000,000.23 Schedule 5.01(b)(iv) states that
the affirmative covenants and negative covenants of the RPFG Facility were to be
“[u]sual and customary for transactions of this type.”24 The proceeds of the RPFG
Facility may only be used to meet margin calls under the BAML Loan.25
Section 7.02 of the Merger Agreement states in pertinent part:
The obligation of [Freedom] and [Merger Sub] to effect the Merger are
further subject to the satisfaction or waiver on or before the Closing
Date of each of the following conditions . . . (f) RPFG Facility. If the
RPFG Facility has been put in place prior to Closing, [RoundPoint]
shall have obtained any and all necessary consents to repay (in
accordance with all of its contractual obligations and restrictions, and
otherwise), and shall have repaid, all amounts outstanding under the
RPFG Facility.26
20
Reisman Decl., ¶ 9; Merger Agreement, § 10.02 (“RPFG Facility”).
21
Merger Agreement, § 10.02 (“RPFG Facility”).
22
JX 30, Schedule 5.01(b)(iv).
23
Id.
24
Id.
25
Id.
26
Merger Agreement, § 7.02 (emphasis added).
6
As noted, the parties executed the Merger Agreement on May 23, 2019.27
RoundPoint faced a margin call shortly thereafter, and, consequently, on May 31,
2019 RoundPoint and RPFG entered into the RPFG Facility.28
C. RPFG Purports to Forgive Amounts Under the RPFG Facility
In June 2019, Freedom approved an increase of the RPFG Facility from $40
million to $100 million.29 The increase was presumably necessary due to further
declines in value of RoundPoint’s MSRs, leading to margin calls under the BAML
Loan. Freedom’s approval was necessary to increase the amount of the RPFG
Facility due to restrictions on RoundPoint’s incurrence of indebtedness under
Section 5.01(b)(iv) of the Merger Agreement.30 Thereafter, in August 2019,
Freedom approved a further increase of the RPFG Facility, and RoundPoint and
RPFG increased the size of the RPFG Facility to $123 million in January 2020.31
After the RPFG Facility was increased to $123 million, RPFG forgave $50
million under the RPFG Facility in January 2020, taking the balance from $123
million to $73 million at the end of January 2020. 32 In February 2020, RoundPoint
borrowed an additional $50 million under the RPFG Facility to satisfy and/or avoid
27
Merger Agreement.
28
JX 36; Reisman Decl., ¶ 15.
29
Zeidman Decl., ¶ 7; JX 38, at RP_000082897.
30
See Merger Agreement, § 5.01(b)(iv).
31
JX 54, at RP_000085000; Zeidman Decl., ¶ 9; King Decl., ¶ 33(a).
32
Reisman Decl., ¶ 23.
7
margin calls.33 RPFG then forgave $122 million, leaving RoundPoint owing $1
million under the RPFG Facility at the end of February 2020.34 Additional loans
were extended in early March 2020, though the amounts are unclear from the
record.35 In February 2020, RoundPoint communicated that it was able to repay all
amounts then outstanding under the RPFG Facility—that is, $1 million—and sought
confirmation from Freedom that Freedom would close the transaction on March 16,
2020.36 On March 2, 2020, Freedom refused to confirm that it would close the
transaction, and contended that all conditions to closing had not been met.37
D. Procedural History
RoundPoint and Holdings filed their Verified Complaint (the “Complaint”)
on March 4, 2020. The Complaint seeks a declaratory judgment and specific
performance of the Merger Agreement.38 Specifically, the Complaint seeks a
declaration that Section 7.02(f) of the Merger Agreement will be satisfied by
forgiveness by RPFG and repayment by RoundPoint of any outstanding amount
(after such forgiveness) under the RPFG Facility.39 Freedom and Merger Sub filed
their Answer and Verified Counterclaims on March 24, 2020.40 The Defendants
33
Id. ¶ 26.
34
Id.
35
See Id. ¶ 29.
36
Id. ¶ 25.
37
Id. ¶ 29; JX 90.
38
Compl., ¶¶ 78–92.
39
Id. ¶¶ 78–84.
40
Defs.’ Answ. and Verified Countercls., D.I. 28 (“Answ. and Countercls.”).
8
made three counterclaims: the first for a declaratory judgment that they have no
obligation to close the Merger, the second for breach of contract, and the third for
breach of the implied covenant of good faith and fair dealing.41
The parties sought to commence motion practice, and I agreed to hear the
Plaintiffs’ motion for partial summary judgment—on their declaratory judgment
claim regarding Section 7.02(f)—and the Plaintiffs’ motion to dismiss the
Defendants’ implied covenant counterclaim. I heard Oral Argument on these
motions on April 22, 2020. At the conclusion of Oral Argument, I denied the
Plaintiffs’ motion to dismiss the implied covenant counterclaim.42 I subsequently
ruled that ambiguities exist in Section 7.02(f) of the Merger Agreement, and denied
the Plaintiffs’ motion for partial summary judgment on their declaratory judgment
claim.43 I then instructed the parties to engage in discovery and presentation
regarding only those issues which I had considered at Oral Argument—that is, the
declaratory judgment claim under Section 7.02(f) of the Merger Agreement and the
Defendants’ implied covenant counterclaim.44 I held a one day trial on June 17,
2020 regarding those claims and considered the matter submitted for decision on that
date.
41
Id. ¶¶ 89–108.
42
Oral Arg. Tr., D.I. 80, at 65:15–65:20.
43
Oral. Arg. Tr., D.I. 81, at 6:20–7:2.
44
Letter, D.I. 59.
9
II. ANALYSIS
A. Section 7.02(f)
The Plaintiffs ask for a declaratory judgment that Section 7.02(f) of the
Merger Agreement will be satisfied by repayment by RoundPoint of any amount
outstanding (after giving effect to forgiveness by RPFG) under the RPFG Facility.45
Section 7.02(f) is replicated in full, supra, but the parties’ dispute on the Plaintiffs’
claim ultimately boils down to eleven words: “and shall have repaid, all amounts
outstanding under the RPFG Facility.”46 The Plaintiffs contend that to fulfill the
closing condition RoundPoint must repay, at or prior to closing, all outstanding
amounts then owed to RPFG, i.e. leaving no balance owed, and that Section 7.02(f)
does not prohibit forgiveness of debt under the RPFG Facility. Conversely, the
Defendants argue that RoundPoint and Freedom intended Section 7.02(f) to require
repayment in full of all amounts borrowed under the RPFG Facility and outstanding
at any time, and not to permit such loans to be forgiven by RPFG.
The Plaintiffs previously moved for summary judgment on their declaratory
judgment claim.47 Summary judgment on a contract claim is appropriate only if the
language is clear and unambiguous.48 I denied the Plaintiffs’ motion for partial
45
Compl., ¶ 84.
46
Merger Agreement, § 7.02(f).
47
Pls.’ Mot. for Partial Summ. J., D.I. 35.
48
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007).
10
summary judgment because I found Section 7.02(f) to be ambiguous.49 “Contracts
are ambiguous ‘when the provisions in controversy are reasonably or fairly
susceptible of different interpretations or may have two or more different
meanings.’”50 At the summary judgment stage I found both the Plaintiffs’ and the
Defendants’ interpretation of Section 7.02(f) reasonable.
Though both interpretations are reasonable, the Plaintiffs’ interpretation of
Section 7.02(f) is certainly the more intuitive reading. Delaware law mandates that
“when interpreting a contract, the role of a court is to effectuate the parties’ intent.
In doing so, we are constrained by a combination of the parties’ words and the plain
meaning of those words where no special meaning is intended.”51 The combination
of words used in the relevant clause of Section 7.02(f), considering their plain
meaning, does not explicitly comment on or restrict in any way amounts no longer
“outstanding.” Accordingly, in the Plaintiffs’ view of this language, RoundPoint
must have repaid only the “outstanding” balance of its loans to fulfill the closing
condition, not some other amount, be it the full, original amount of the loans, or
some amount outstanding at some other point in time. Forgiven debt is no longer
outstanding.52 The words “shall have repaid,” per the Plaintiffs, are applicable only
49
Oral. Arg. Tr., D.I. 81, at 6:20–7:2.
50
United Rentals, 937 A.2d at 830 (quoting Rhone–Poulenc Basic Chems. Co. v. Am. Motorists
Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)).
51
AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008).
52
Forgive, Merriam Webster’s Online Dictionary, https://www.merriam-webster.com/
dictionary/forgive (“to grant relief from payment of”).
11
to the amounts outstanding immediately prior to closing, and do not operate on any
amounts no longer outstanding, without regard to why such amounts are no longer
outstanding. The intent expressed through such a reading of Section 7.02(f) is
simply that no amounts may remain outstanding on the RPFG Facility in order for
the Plaintiffs to fulfill the closing condition. If the outstanding amount is $0,
RoundPoint is in compliance.
The Defendants’ reading, by contrast, has a temporal element, that is, that
“shall have repaid” (rather than “shall repay”) refers not only to any amounts
outstanding immediately prior to closing, but to any amounts that were ever
outstanding under the RPFG Facility. But to accept the Defendants’ reading would
be to read the clause as containing a cryptic protection against the retirement of debt
under the RPFG Facility by any means other than repayment. The plain language of
the section is not naturally read this way because, as noted, the language is silent on
how amounts are to be deemed “outstanding.” If the intent was to ensure that debt
be repaid and not forgiven, that intent is expressed poorly. Though I have found the
Defendants’ proffered interpretation not unreasonable for purposes of summary
judgement, it is certainly the less intuitive reading.
12
Where, such as here, the contract is ambiguous, the court may consider
extrinsic evidence to resolve the ambiguity.53 The court “will apply the parol
evidence rule and consider all admissible evidence relating to the objective
circumstances surrounding the creation of the contract.”54 Such extrinsic evidence
can include overt statements and acts of the contracting parties, the business context,
prior dealings between the parties, and business custom and usage in the industry.55
“After examining the relevant extrinsic evidence, a court may conclude that, given
the extrinsic evidence, only one meaning is objectively reasonable in the
circumstances of the negotiation.”56
The parties have submitted extrinsic evidence, but it does not aid my
understanding as to whether the parties intended Section 7.02(f) to restrict
forgiveness of RPFG Facility debt. Remarkably, the parties agree that forgiveness
of RPFG Facility debt was never discussed during the negotiations of the Merger
Agreement.57 Though the parties disputed whether RPFG could forgive RPFG
Facility debt after the Merger Agreement was signed, one of the “primary tenets” of
53
Salamone v. Gorman, 106 A.3d 354, 374 (Del. 2014) (citing In re IBP, Inc. S’holders Litig., 789
A.2d 14, 55 (Del. Ch. 2001)).
54
Id. (quoting In re Mobilactive Media, LLC, 2013 WL 297950, at *15 (Del. Ch. Jan. 25, 2013)).
55
Id. (quoting Mobilactive, 2013 WL 297950, at *15).
56
Id. (quoting Mobilactive, 2013 WL 297950, at *15).
57
Defs.’ Corrected Pretrial Br., D.I. 90, at 40 (“[F]orgiveness of the RPFG Facility debt was never
discussed at all during the negotiations.” (emphasis in original)); Pls.’ Answering Pre-Trial Br.,
D.I. 95, at 16 (“Freedom also relies heavily upon the fact that forgiveness of the RPFG Facility
was not explicitly discussed before execution of the Merger Agreement. The parties agree on that
point.” (footnotes omitted)).
13
the parol evidence rule is that “relevant extrinsic evidence is that which reveals the
parties’ intent at the time they entered into the contract. In this respect, backward-
looking evidence gathered after the time of contracting is not usually helpful.”58
Consequently, though the parties dutifully collected and presented extrinsic evidence
for trial, there is no evidence extrinsic to the Merger Agreement read as a whole
pertinent to whether the parties intended to regulate or restrict RPFG Facility debt
forgiveness in Section 7.02(f). The Defendants point to the fact that the peculiar
consideration here—book value plus a premium—will allow the Plaintiffs to reap a
windfall by retiring the RPFG Facility debt by forgiveness, but fail to point to any
evidence that the parties recognized this and intended to avoid it through the
language of Section 7.02(f).
Though the extrinsic evidence does not help resolve Section 7.02(f)’s
ambiguity, other provisions of the Merger Agreement regarding forgiveness of debt
are probative, and fatal to the Defendants’ proffered interpretation of the provision.
Section 3.21(d) of the Merger Agreement is a representation and warranty of
RoundPoint regarding mortgage loans that “[n]o payment of principal or interest on
the mortgage loan has been forgiven, suspended, or rescheduled.”59 Section
58
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1233 n.11 (Del. 1997), (citing
Demetree v. Commonwealth Tr. Co., 1996 WL 494910 (Del. Ch. Aug. 27, 1996)) (emphasis in
original).
59
Merger Agreement, § 3.21(d) (emphasis added).
14
3.06(b)(vi) of the Merger Agreement is a representation and warranty that none of
RoundPoint or its subsidiaries has “cancelled, compromised, waived or released any
right or claim or any Indebtedness owed to it, in any instance involving more than
$100,000.”60 Clearly, where the parties sought to impose restrictions on the
forgiveness or modification of RoundPoint’s debt obligations they knew how to do
so.61 Consequently, because Section 7.02(f), as most naturally read, does not impose
a restriction on debt forgiveness, and because the Merger Agreement shows that
where the parties sought to impose such restrictions they knew how to do so, I find
that the parties did not intend Section 7.02(f) to prohibit forgiveness of debt under
the RPFG Facility.62
Before moving onto the Defendants’ implied covenant claim, it is important
to note that my construction of Section 7.02(f) of the Merger Agreement is limited
60
Id. § 3.06(b)(vi) (emphasis added).
61
See Roseton OL, LLC v. Dynegy Hldgs. Inc., 2011 WL 3275965, at *10 (Del. Ch. July 29, 2011)
(“This demonstrates that when the parties intended to make a particular restriction applicable to
both DHI and its subsidiaries, they knew how to do so and readily could accomplish that
objective.”); ITG Brands, LLC v. Reynolds Am., Inc., 2017 WL 5903355, at *11 (Del. Ch. Nov.
30, 2017) (“There, the parties placed a modifier (‘as of the Closing’) next to a verb (‘will assume’)
to define when that action would occur, demonstrating that they knew how to place a temporal
modifier on an action when they wished to do so.”); El Paso Nat. Gas Co. v. Amoco Prod. Co.,
1992 WL 43925, at *7 (Del. Ch. Mar. 4, 1992) (“Clearly, when the negotiators meant to address
most-favored-rates protection, they knew how to do so directly.”).
62
I note that the record reflects that the Merger Agreement was negotiated heavily by sophisticated
entities with the assistance of counsel, and consequently the doctrine of contra proferentem has no
application here. Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2014 WL 2919333,
at *26 n.192 (Del. Ch. June 25, 2014), aff’d, 116 A.3d 1244 (Del. 2015) (“As an initial matter, I
do not consider it appropriate to apply the doctrine of contra proferentem to this dispute because
the License Agreement and the consent both were negotiated heavily by sophisticated entities with
the assistance of counsel.”).
15
to that clause only. While I have found that Section 7.02(f) does not prohibit
forgiveness of RPFG Facility debt, this does not mean that such a restriction cannot
be found elsewhere in the Merger Agreement, outside Section 7.02(f); that issue
remains.63 Nor does it mean that all conditions to closing the Merger have been met.
I have read and considered the contract as a whole as it bears on the language in
question. Because this matter was bifurcated,64 however, I have not considered here
(nor have the parties yet litigated) whether the Merger Agreement as a whole permits
RoundPoint to meet all conditions to closing considering RPFG’s forgiveness of
debt under the RPFG Facility. All I can say at this point is that the obligation
expressed in the language of Section 7.02(f) itself will be fulfilled if RoundPoint
repays any amount outstanding under the RPFG Facility, thus bringing indebtedness
under the RPFG Facility to $0.
B. The Implied Covenant Counterclaim
The Defendants have counterclaimed that implicit in RoundPoint’s obligation
to repay all amounts outstanding under the RPFG Facility pursuant to Section 7.02(f)
is the covenant of good faith and fair dealing not to engage in what the Defendants
term the “debt forgiveness scheme.”65 The covenant of good faith and fair dealing
63
For example, the Defendants assert that the Plaintiffs have used forgiveness, then reborrowing,
to borrow in the aggregate in excess of the contractual debt limits on the RPFG Facility. I do not
address that issue here.
64
I bifurcated the matter in the belief that efficiency would result; sadly, that belief has proved
deluded.
65
Answ. and Countercls., ¶ 102.
16
inheres in all contracts, but the doctrine does not provide a court with the authority
to “rewrite or supply omitted provisions to a written contract.”66 The implied
covenant is “used to infer contract terms to handle developments of contractual gaps
that the asserting party pleads neither party anticipated,” and applies “when the party
asserting the implied covenant proves that the other party has acted arbitrarily or
unreasonably, thereby frustrating the fruits of the bargain that the asserting party
reasonably expected. The reasonable expectations of the contracting parties are
assessed at the time of contracting.”67
To prevail on their implied covenant claim, the Defendants must prove “a
specific implied contractual obligation, a breach of that obligation by the [Plaintiffs],
and resulting damage to the [Defendants].”68 The Defendants must show “from what
was expressly agreed upon that the parties who negotiated the express terms of the
contract would have agreed to proscribe the act later complained of had they thought
to negotiate with respect to that matter.”69
The implied covenant will imply “only those terms that the parties would have
agreed to during their original negotiations if they had thought to address them.”70
66
Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998).
67
Buckeye Partners, L.P. v. GT USA Wilmington, LLC, 2020 WL 2551916, at *7 (Del. Ch. May
20, 2020) (quoting Dieckman v. Regency GP, 155 A.3d 358, 367 (Del. 2017)).
68
Id. at *8 (quoting Fitzgerald, 1998 WL 842316, at *1).
69
Id. (quoting Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986)) (internal alterations
omitted).
70
Id. (quoting Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013)).
17
Thus, the Defendants must show it is clear that the parties would have agreed to
prohibit forgiveness of RPFG Facility debt.71 That is, that the parties would not have
agreed to some other contract term. The Defendants have the burden to show that
RPFG’s debt forgiveness constituted a breach of the implied covenant.72 It is vital
to the freedom of contract that the implied covenant be so limited. The value of
contracts is based on certainty and enforceability. The promiscuous employment of
equity to amend contracts to make them “fair” or “reasonable” would be fatal to
those qualities.
The Plaintiffs concede that some unfairness results from the forgiveness of
RPFG Facility debt under the Merger Agreement. That is because the purchase price
is calculated by taking the book value of RoundPoint and multiplying it by 107.5%
(and subtracting a fixed amount from the product). RPFG is both RoundPoint’s
controlling stockholder and is owed the RPFG Facility debt obligation. Where debt
is forgiven by RPFG it increases the book value—i.e. net asset value—of
RoundPoint. Every dollar of debt that RoundPoint is no longer obligated to repay
increases the book value of RoundPoint by one dollar. If RoundPoint was to use a
dollar of assets to extinguish the debt, the impact on book value is neutral—a dollar
71
See Katz, 508 A.2d at 880.
72
See Caldera Properties-Lewes/Rehoboth VII, LLC v. Ridings Dev., LLC, 2009 WL 2231716, at
*29 (Del. Super. May 29, 2009), aff’d sub nom. Ridings Dev., LLC v. Caldera Properties -
Lewes/Rehoboth VII, LLC, 998 A.2d 851 (Del. 2010).
18
of debt disappears but so does a dollar of assets. But where only a dollar of debt
disappears due to forgiveness, book value rises by a dollar because there is no
offsetting drop in assets. Thus, RoundPoint’s controlling stockholder (RPFG)
benefits (almost) 7.5 cents per dollar of debt it forgives.73 Further, although Freedom
upon closing would receive an additional dollar of assets for every dollar that is
forgiven—because that dollar need not be used to extinguish RPFG Facility debt—
each such dollar requires Freedom to come up with an additional dollar (plus
premium) in cash at closing in order to meet its obligation to close, which is not a
neutral result. But these facts, to my mind, do not imply that the parties therefore
clearly would have provided a “no forgiveness” term; it only suggests that the
parties, had they considered the issue, would likely have addressed it in some form.
One plausible and less restrictive way to address the issue, for instance, would
simply have been to agree to excuse the Defendants from payment of the 7.5%
premium on amounts forgiven.
The Plaintiffs dispute that they would have agreed to an outright prohibition
on RPFG forgiving RPFG Facility debt, had the matter been considered. Consistent
with the problematic outcome described above, the Plaintiffs suggest that
RoundPoint may have agreed to forgo the premium on forgiven amounts—this, I
73
As noted, supra, RPFG owns approximately 79% of the voting power of RoundPoint and over
99% of RoundPoint’s common stock.
19
note, they have offered to do in this litigation.74 The Defendants, unsurprisingly,
argue otherwise. The Defendants specifically cite the Merger Agreement’s
restrictions on indebtedness, and certain terms of the RPFG Facility term sheet in
the Merger Agreement. These are not helpful, I find, to demonstrate that the parties
clearly would have prohibited forgiveness of RPFG Facility debt. As the parties did
not even discuss such forgiveness, it is unsurprising that no useful evidence exists in
this regard. Nonetheless, one can posit conceivable business reasons (other than a
bad-faith “forgiveness scheme”) for RoundPoint to have preferred flexibility in this
regard. RoundPoint’s Chairman did state under oath: “I believe Tavistock
[RoundPoint’s ultimate parent] would have refused [a prohibition on RPFG Facility
forgiveness].”75
“The implied covenant is well-suited to imply contractual terms that are so
obvious that the drafter would not have needed to include the conditions as express
terms in the agreement.”76 But it is not obvious what terms the parties would have
agreed to regarding forgiveness of RPFG Facility debt, and no evidence exists from
which to conclude that RoundPoint clearly would have agreed on an outright
74
Pls.’ Answering Pre-Trial Br., D.I. 95, at 33–34 (“[I]f RoundPoint were in fact seeking to collect
the premium on forgiven amounts, it would be because it is a function of the variable purchase
price formula to which Freedom willingly agreed. But RoundPoint could not be clearer that it is
not seeking it.” (italics in original)).
75
Reisman Decl., ¶ 12.
76
Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, 2019 WL 4927053, at *22 (Del.
Ch. Oct. 7, 2019) (quoting Dieckman v. Regency GP LP, 155 A.3d 358, 361 (Del. 2017)) (internal
alterations and ellipses omitted).
20
prohibition on forgiveness. A prohibition on forgiveness would have obligated
RoundPoint to repay all amounts borrowed from RPFG under the RPFG Facility. I
note that the very reason for the creation of the RPFG Facility—restrictions on
RoundPoint’s ability to sell assets to meet margin calls—suggests that RoundPoint
would have been likewise restricted from selling assets to retire RPFG Facility debt.
But there is nothing in the record to suggest how a prohibition on forgiveness would
have otherwise required a deviation from RoundPoint’s business practices before the
Merger Agreement, and thus no suggestion of how amenable RoundPoint would
have been to a prohibition of RPFG Facility debt forgiveness.
In order to employ the implied covenant to impose an unwritten term in a
contract, I must find that the parties, had they engaged on the issue, would clearly
have imposed that term.77 I have no doubt that the Defendants would have been
willing to agree to modifications of the Merger Agreement to address the issue,
77
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005). It is the burden of a party
who invokes the implied covenant to show that “it is clear from what was expressly agreed upon
that the parties who negotiated the express terms of the contract would have agreed to proscribe
the act later complained of as a breach of the implied covenant of good faith—had they thought to
negotiate with respect to that matter.” Gerber v. Enter. Prod. Hldgs., LLC, 67 A.3d 400, 418 (Del.
2013), overruled in part on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del.
2013) (quoting ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC,
50 A.3d 434, 440 (Del. Ch. 2012) (quoting Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch.
1986))) (emphasis added); but see Murfey v. WHC Ventures, LLC, 2020 WL 3957837, at *8 (Del.
July 13, 2020) (citing Schwartzberg v. CRITEF Assocs. Ltd. P’ship, 685 A.2d 365, 376 (Del. Ch.
1996)) (“[U]nder Delaware law, an obligation may be inferred from a contract when, given the
terms of the express contract made and the circumstance of the contracting process, it is more
likely than not, that if the parties had thought to address the subject, they would have agreed to
create the obligation that is under consideration by the court ex post facto.”).
21
including prohibiting forgiveness of RPFG Facility debt, because that was in their
interest considering the premium on forgiven amounts. But that is not the inquiry.
To grant relief on the implied covenant claim I would need to conclude it is clear
that RoundPoint would have likewise agreed to such a term—the Defendants have
not met their burden to show that RoundPoint and Freedom “would have agreed to
proscribe [forgiveness] had they thought to negotiate with respect to that matter.”78
Consequently, the Defendants’ implied covenant claim must fail.
III. CONCLUSION
The Plaintiffs are entitled to a declaratory judgment on the limited issues
before me. The Defendants are not entitled to relief on their implied covenant
counterclaim. This matter should proceed to the second phase of trial.
78
Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 184 (Del. Ch. 2014) (quoting Gerber, 67 A.3d
at 418).
22