PR Acquisitions, LLC v. Midland Funding LLC and Operating Partners Co., LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PR ACQUISITIONS, LLC, )
)
Plaintiff/Counterclaim Defendant, )
)
v. ) C.A. No. 2017-0465-TMR
)
MIDLAND FUNDING LLC, )
)
Defendant/Counterclaim )
Plaintiff/Third-Party Plaintiff, )
)
v. )
)
OPERATING PARTNERS CO., LLC, )
)
Third-Party Defendant. )
MEMORANDUM OPINION
Date Submitted: January 23, 2018
Date Decided: April 30, 2018
Garvan F. McDaniel and Daniel K. Hogan, HOGAN MCDANIEL, Wilmington,
Delaware; Eric D. Herschmann, Michael P. Bowen, and Olga Lucia Fuentes Skinner,
KASOWITZ BENSON TORRES LLP, New York, New York; Attorneys for
Plaintiff/Counterclaim Defendant PR Acquisitions, LLC and Third-Party Defendant
Operating Partners Co., LLC.
Matthew F. Boyer, Ryan P. Newell, and Mary I. Akhimien, CONNOLLY
GALLAGHER LLP, Wilmington, Delaware; Alan F. Kaufman and Joseph G.
Silver, HINSHAW & CULBERTSON LLP, New York, New York; Attorneys for
Defendant/Counterclaim Plaintiff/Third-Party Plaintiff Midland Funding, LLC.
MONTGOMERY-REEVES, Vice Chancellor.
In this action, a seller of consumer debt accounts alleges that a buyer’s failure
to release escrow funds to seller violates the parties’ purchase agreement. Seller
moves for summary judgment asserting that buyer did not comply with the notice
provisions of a contemporaneously executed escrow agreement, that any claims
against the escrow are untimely, and that the escrow funds therefore should be
released. Buyer cross-moves for partial summary judgment arguing that it provided
actual notice to seller by sending a letter to the escrow agent, which seller learned of
before the notice deadline expired.
Buyer also asserts counterclaims for fraud, negligent misrepresentation,
breach of contract, indemnification, and unjust enrichment against seller. Buyer
asserts the same claims and an aiding and abetting fraud claim against a servicer to
the purchased accounts, which was party to a contemporaneously executed servicing
agreement. Buyer alleges that seller and servicer fraudulently induced buyer to
agree to the sale by not disclosing changes to collection practices and
misrepresenting the value of the purchased accounts in documents and
communications, causing buyer in excess of $6 million in damages. Buyer also
alleges that seller and servicer owe buyer an additional $350,000 for failing to remit
payments and pay adjustments for repurchases of certain purchased accounts under
the relevant agreements. Seller and servicer move to dismiss buyer’s counterclaims
and third-party claims. Seller contends that buyer’s fraud and misrepresentation
1
allegations lack the requisite particularity, that buyer’s indemnification right has
expired, and that buyer’s failure to comply with the notice provisions of the purchase
and escrow agreements bars its breach of contract claims. Servicer contends it is not
bound by the terms of the purchase and escrow agreements and that buyer fails to
identify any actions by servicer related to buyer’s counterclaims or third-party
claims.
Buyer also moves to amend its complaint to bolster its claims against seller
and servicer.
For the reasons discussed herein, I conclude that buyer fails to state a claim
for fraud and negligent misrepresentation because certain of buyer’s allegations lack
the requisite particularity and because buyer admits that it possessed data that would
have allowed it to discern the remaining purported misrepresentations. The breach
of contract and indemnification claims fail because buyer did not give the notice
required by the purchase and escrow agreements. Buyer’s unjust enrichment claims
are dismissed as duplicative. Buyer also fails to state claims against servicer.
Buyer’s fraud and negligent misrepresentation claims against servicer fail for the
same reasons buyer’s fraud and negligent misrepresentation claims against seller
fail, and because buyer does not identify any specific acts of servicer in furthering
seller’s purported fraud. Buyer’s aiding and abetting fraud claim also fails because
buyer does not adequately allege any underlying tortious conduct. Buyer’s breach
2
of contract claims against servicer fail because servicer is not a party to the purchase
or escrow agreements and buyer alleges no facts whatsoever relating to a purported
breach of the servicing agreement. Buyer’s indemnification claim against servicer
fail because buyer does not allege conditions requiring indemnification under the
servicing agreement, and buyer’s unjust enrichment claim against servicer is
duplicative. Finally, I conclude that buyer’s proposed amendments to its
counterclaims and third-party claims are futile because the amendments would not
change the Court’s analysis of the claims. Therefore, I grant seller’s Motion for
Summary Judgment to release the escrow funds, deny buyer’s Motion for Partial
Summary Judgment to hold the escrow funds, grant seller and servicer’s Motion to
Dismiss buyer’s counterclaims and third-party claims, and deny buyer’s Motion to
Amend.
I. BACKGROUND
For purposes of the Motion for Summary Judgment, the facts are drawn from
the pleadings and the evidence submitted by the parties. 1 For purposes of the Motion
to Dismiss, the facts are drawn from Defendant’s Amended Counterclaims and
Third-Party Complaint and the documents incorporated by reference therein.2
1
See Ct. Ch. R. 56(c).
2
On a motion to dismiss under Rule 12(b)(6), the Court may consider a document
outside the pleadings if “the document is integral to a plaintiff’s claim and
incorporated into the complaint” or “the document is not being relied upon to prove
the truth of its contents.” Vanderbilt Income & Growth Assocs., L.L.C. v.
3
A. Parties
Plaintiff PR Acquisitions, LLC (“PRA”) is a Nevada limited liability company
that holds a number of consumer debt accounts in Puerto Rico. 3 Third-Party
Defendant Operating Partners Co., LLC (“OPC”) is an affiliate of PRA that serviced
the purchased accounts,4 but it has since been replaced as servicer by Midland Credit
Management, Inc. (“MCM”), an affiliate of Defendant Midland Funding LLC
(“Midland”).5 Midland is one of the nation’s largest buyers of unpaid debt.6
B. Facts
PRA first approached Midland about a possible sale of PRA’s debt accounts
sometime in 2013 and, later that year, the parties entered into discussions.7 The
accounts consist of “auto loans, charged-off consumer receivables, and charged-off
credit card accounts owned by [PRA]” and include, among other things, the right to
Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996) (citing In re Santa Fe
Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del. 1995)); see Allen v. Encore
Energy P’rs, L.P., 72 A.3d 93, 96 n.2 (Del. 2013).
3
Pl. & Third-Party Def.’s Mot. to Expedite 6.
4
Def.’s Am. Countercls. & Third-Party Compl. ¶ 25.
5
Id. ¶ 24.
6
Pl.’s Verified Compl. ¶ 2.
7
Id.; Def.’s Am. Countercls. & Third-Party Compl. ¶ 28.
4
collect “in any litigation or bankruptcy[.]” 8 On November 18, 2013, PRA sent
Midland an offering memorandum (the “Offering Memorandum”) 9 regarding the
potential sale, which expressly disclaimed the “accuracy or completeness” of the
information therein.10
Due diligence occurred in the “first and second quarters of 2014, with many
of the meetings and other interactions concentrated in March, April and May of
2014.” 11 During this time, Midland employees “spent months conducting multiple
due-diligence sessions at [PRA and OPC’s] offices in Puerto Rico.” 12 “Representing
[PRA and OPC] at these meetings were, among others, owners Nicolas Kogan and
Rodolfo Sanchez-Colberg, and employees Alejandro Uriarte and Maribel Ortiz-
Castro.”13 PRA and OPC provided data to Midland and “made numerous other
representations, including written statements in the form of offering memoranda,
emails and other deal-related documents, and oral statements during in-person and
8
Purchase Agreement § 1.3.
9
Pl. & Third-Party Def.’s Mot. to Dismiss Ex. 7.
10
Offering Memorandum 1.
11
Def.’s Am. Countercls. & Third-Party Compl. ¶ 2.
12
Id.
13
Id. It is unclear from Midland’s filings whether these individuals are owners and
employees of PRA or OPC.
5
telephone conversations.”14 Among this data were “liquidation curves” purportedly
showing the “liquidation rates” of the part of the purchased accounts that were “in
the legal channel.”15 Midland reviewed the diligence provided and did not raise any
objections at the time. 16
On May 30, 2014, PRA sold the debt accounts to Midland pursuant to a
purchase agreement (the “Purchase Agreement”)17 and an escrow agreement (the
“Escrow Agreement”). 18 On that same day, MCM and OPC entered into an account
servicing agreement (the “Servicing Agreement”), 19 which provides that OPC
service the purchased accounts under the auspices of MCM. 20 Several provisions of
these agreements are relevant to the pending motions.
14
Id. ¶ 3.
15
Id. ¶¶ 4, 7.
16
Pl.’s Verified Compl. ¶ 16. Midland made certain representations and warranties in
the Purchase Agreement, including that “(i) it is a sophisticated purchaser of
consumer charged-off accounts and has the expertise to evaluate the risks and merits
of the transaction . . .; (ii) in making its decision to purchase . . . it made an
independent investigation of them; and (iii) the information provided by PRA to
Midland was adequate and a sufficient basis on which to determine to acquire, as it
did, the Accounts.” Id. ¶ 15; Purchase Agreement § 6.1.
17
Pl. & Third-Party Def.’s Mot. to Dismiss Ex. 1.
18
Id. at Ex. 2.
19
Id. at Ex. 6.
20
Servicing Agreement § 2. OPC was later terminated as servicer. Def.’s Am.
Countercls. & Third-Party Compl. ¶ 45.
6
The Purchase Agreement provides in Section 8.2 that PRA shall indemnify
Midland “from and against any and all liability and losses” Midland may suffer “as
a result of . . . the inaccuracy of any of [PRA’s] representations and warranties
contained in this Agreement . . . the breach of any of [PRA’s] covenants contained
in this Agreement . . . [or] the origination, servicing, maintenance or administration
of the Accounts prior to the Closing Date[.]” 21 “The obligations of [PRA] under this
Section 8.2 shall survive until [May 30, 2017].” 22 Midland provided no written
request to PRA for indemnification under Section 8 before May 30, 2017.23
The Purchase Agreement requires in Section 5.1 that PRA repurchase
“Ineligible Accounts” 24 within 180 days after May 30, 2014.25 “[Midland] shall
notify [PRA] of each Purchased Account which [Midland] seeks to have [PRA]
repurchase in a mutually agreed upon format accompanied by the following
applicable documentary evidence in support of [Midland’s] Ineligibility
Determination.”26 The Purchase Agreement then lists acceptable forms of
21
Purchase Agreement § 8.2(a).
22
Id. § 8.2(b).
23
See Pl.’s Mot. for Summ. J. & Pl. & Third-Party Def.’s Mot. to Dismiss Ex. 3.
24
Purchase Agreement § 1.24.
25
Id. § 5.1.
26
Id.
7
documentary evidence: (1) a copy of “[PRA] letter verifying action[,]” “canceled,
final check[,]” “[PRA] provided 1099[,]” or “other evidence as mutually agreed”
verifying a settlement with an account holder; (2) a case number or court papers
verifying the bankruptcy of an account holder; (3) “police report or an FTC executed
affidavit” verifying fraud; or (4) “[d]eath certificate or satisfactory evidence from an
approved third party service” verifying a deceased account holder. 27 PRA must pay
the “Adjustment Amount for each Purchased Account being repurchased to
[Midland] not later than thirty (30) days after [Midland] provides reasonable
evidence to [PRA] in support of [Midland’s] determination that the Purchased
Accounts in question are Ineligible Accounts[.]” 28
In addition, Section 12 of the Purchase Agreement provides the following
requirements for notice under any provision of that agreement:
Any and all notices, consents or other communications
required or permitted under this Agreement shall be in
writing and shall be delivered by either (a) Federal Express
or similar nationally recognized overnight carrier; or (b)
certified U.S. mail, postage prepaid and return receipt
requested; and addressed as indicated below or otherwise
indicated by the parties in writing. 29
27
Id. § 5.2.
28
Id. § 5.1.
29
Id. § 12.
8
The Purchase Agreement then lists an address for Midland to send notice to PRA.30
Midland provided no written request or documentary evidence to PRA for
repurchase of “Ineligible Accounts” under Section 5.1 before November 26, 2014,
180 days after May 30, 2014.
The Purchase Agreement also requires in Section 2.6.1 that PRA “forward to
[Midland] all funds received by [PRA] with respect to the Purchased Accounts . . .
following the Closing Date.”31 PRA also made certain representations in Sections
7.5, 7.12, 7.13 and 7.14 of the Purchase Agreement as to the accuracy of the
diligence provided and the character of the purchased accounts, including that the
purchased accounts were bought, sold, and maintained in compliance with
“Applicable Laws.”32
The Purchase Agreement then provides that “[PRA’s] total liability” and
“[Midland’s] exclusive remedy with respect to th[e] [Purchase] Agreement, any
provision hereof, or the transactions contemplated herein (including, without
limitation, with respect to repurchase of ineligible accounts, indemnification of
[Midland] . . . and any other obligations of [PRA] pursuant thereto) is limited to the
30
Id.
31
Id. § 2.6.1.
32
Id. §§ 7.5, 7.12-14.
9
amount held in escrow . . . pursuant to the Escrow Agreement[.]” 33 The Escrow
Agreement requires that $6 million be held in escrow for the satisfaction of any
claims related to the Purchase Agreement,34 provides the terms for reduction of the
escrow funds, and requires that Midland provide PRA with notice of each claim it
has against the escrow funds. 35 To establish a timely claim, Midland must “provide
written notice of each Pending Claim and each Anticipated Claim . . . to the Escrow
Agent and to [PRA] prior to [May 31, 2017].” 36 The Escrow Agreement states the
following requirements for notice:
All notices or other communications hereunder shall be
deemed to have been duly given and made if in writing and
if served by personal delivery upon the party for whom it
is intended, if delivered by registered or certified mail,
return receipt requested, or by a national courier service,
or if sent by facsimile, provided, however, that the
facsimile is promptly followed by telephone confirmation
thereof to the appropriate person at the address set forth
below, or at such other address as may be designated in
writing hereafter, in the same manner, by such person.37
33
Id. § 10. This limitation of liability provision provides that “[Midland’s] obligations
under Section 8.2(c)” are excluded, but neither party argues that any of the claims
arise from Section 8.2(c). Id.
34
Escrow Agreement § 1.1.
35
Id. § 1.3.
36
Id.
37
Id. § 4.7.
10
The Escrow Agreement then gives PRA’s address. 38 In the absence of a timely claim
by Midland, the escrow agent must release the escrow funds “together with any
interest, dividends and any other income earned thereon” to PRA on May 31, 2017.39
Also on May 30, 2014, OPC and MCM entered in the Servicing Agreement.
Several provisions of this agreement are relevant to Midland’s third-party claims
against OPC. The Servicing Agreement provides in Section 3.2 that OPC shall
“remit and account for all Net Proceeds to MCM in a mutually agreeable format and
timeframe” and that OPC shall deposit all “Net Proceeds” by “the end of the next
Business Day after [OPC’s] receipt thereof.” 40 For purposes of this agreement, “Net
Proceeds” means any payment by a “consumer” to OPC, less certain costs incurred
by OPC. 41 In addition, Section 5.1 provides that OPC shall indemnify Midland
“from and against any and all losses, claims, damages, expenses (including
reasonable attorneys’ fees) and costs suffered or incurred (whether suit is instituted
or not) as a result of, arising out of or otherwise relating in any way to[,]” among
other things, OPC’s breach of the Servicing Agreement, “any intentional, reckless
38
Id.
39
Id. § 1.3.
40
Servicing Agreement § 3.2.
41
Id. §§ 1.45, 1.58, 3.2.
11
or negligent acts or omissions” by OPC, or OPC’s “violation of any Applicable Law
in connection with its performance of this Agreement.” 42
On May 26, 2017, Midland drafted a letter43 identifying “legal claims [against
the escrow] in relation to the [Purchase Agreement].” 44 In this letter, Midland claims
that PRA breached: (1) Section 2.6.1 by not forwarding funds received by PRA with
respect to the purchased accounts; (2) Section 5 by not paying the “Adjustment
Amount” for “Ineligible Accounts;” and (3) Sections 7.5, 7.10, 7.11, 7.13 and 7.14
by “misrepresent[ing] the character of the Purchased Accounts . . . engag[ing] in
Mass Settlement activities . . . adversely select[ing] accounts to be sold . . . [and]
exclud[ing] certain information relating to [PRA’s] activities from [PRA’s] records
provided to [Midland].” 45 The letter did not contain any indemnification claim.
Midland’s senior vice president and general counsel gave the letter to his executive
assistant to send. 46 The executive assistant then sent the letter only to the escrow
42
Id. § 5.1.
43
Pl.’s Mot. for Summ. J. & Pl. & Third-Party Def.’s Mot. to Dismiss Ex. 3.
44
Def.’s Answering Br. in Opp’n to Summ. J. 8. While the claims in this letter overlap
with certain of Midland’s counterclaims and third-party claims, Midland only cites
it in discussing whether it provided adequate notice to PRA and does not otherwise
specifically discuss the claims therein in setting forth its counterclaims and third-
party claims.
45
Pl.’s Mot. for Summ. J. & Pl. & Third-Party Def.’s Mot. to Dismiss Ex. 3.
46
Def.’s Answering Br. in Opp’n to Summ. J. 9.
12
agent by facsimile and Federal Express. 47 Midland never sent a copy of the letter or
any other form of notice to PRA.48 On May 30, 2017, the escrow agent informed
PRA of the letter containing Midland’s claims. 49 Midland concedes that the sole
reason for its failure to provide notice pursuant to the Purchase Agreement and
Escrow Agreement was “[h]uman error” on Midland’s side.50 On June 7, 2017, PRA
asked Midland to release the escrow funds and disputed the claims set forth in
Midland’s letter. 51 Midland refused to release the escrow funds, and PRA filed this
action.
C. Procedural History
On June 21, 2017, PRA filed a complaint seeking the release of the escrow
funds. On July 25, 2017, Midland brought counterclaims against PRA and third-
party claims against OPC. The counterclaims and third-party claims allege
contractual breaches, fraud, aiding and abetting fraud, negligent misrepresentation,
indemnification claims, and unjust enrichment arising from the sale of the accounts.
On August 11, 2017, PRA moved for summary judgment on its request to release
47
Id. at 9-10.
48
Id.
49
Oral Arg. Tr. 7.
50
Id. at 34.
51
Pl.’s Verified Compl. ¶¶ 36-41.
13
the escrow funds, and PRA and OPC moved to dismiss the counterclaims and third-
party claims, respectively. On September 15, 2017, Midland amended its
counterclaims and third-party claims, and PRA and OPC moved to dismiss the
amended counterclaims and third-party claims, respectively, on October 4, 2017. On
December 8, 2017, Midland moved for partial summary judgment seeking
declaratory judgment that the escrow funds should not be released until Midland’s
counterclaims and third-party claims are adjudicated. On December 19, 2017,
Midland moved to amend its counterclaims and third-party claims a second time.
Following the completion of briefing for all four motions, the Court held oral
argument on January 23, 2018.
II. MOTION FOR SUMMARY JUDGMENT ANALYSIS
PRA moves for summary judgment and seeks the release of the escrow funds
arguing that Midland failed to give proper notice of any claims against the escrow
under the terms of the Purchase Agreement and Escrow Agreement.52 Midland
cross-moves for partial summary judgment on the issue of notice, arguing that PRA
received actual notice of Midland’s claims and that actual notice substantially
complies with the requirements of the Purchase Agreement and Escrow
52
Pl. & Third-Party Def.’s Br. in Support of Pl.’s Mot. for Summ. J. & Pl. & Third-
Party Def.’s Mot. to Dismiss 1.
14
Agreement. 53 Midland further “seek[s] a declaration that the escrow funds should
remain in escrow pending the resolution of Midland’s claims against [PRA and
OPC].” 54
Summary judgment will be “granted if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, show that there
is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.”55 The movant bears the initial burden of
demonstrating that there is no question of material fact. 56 When the movant carries
that burden, the burden shifts to the nonmoving party “to present some specific,
admissible evidence that there is a genuine issue of fact for a trial.”57 When
considering a motion for summary judgment, the evidence and the inferences drawn
from the evidence are to be viewed in the light most favorable to the nonmoving
53
Def.’s Answering Br. in Opp’n to Summ. J. 15.
54
Id. at 3.
55
Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14,
2007) (citing Ct. Ch. R. 56(c)).
56
Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009).
57
Id.
15
party. 58 Even so, the non-moving party may not rely on allegations or denials in the
pleadings to create a material factual dispute. 59
The pending motions for summary judgment require me to examine the
Purchase Agreement and Escrow Agreement. “Delaware law adheres to the
objective theory of contracts, i.e., a contract’s construction should be that which
would be understood by an objective, reasonable third party.” 60 “When interpreting
a contract, this Court ‘will give priority to the parties’ intentions as reflected in the
four corners of the agreement,’ construing the agreement as a whole and giving
effect to all its provisions.”61 The terms of the contract control “when they establish
the parties’ common meaning so that a reasonable person in the position of either
party would have no expectations inconsistent with the contract language.”62
Standard rules of contract interpretation state that “a court must determine the intent
58
Ct. Ch. R. 56(e); Judah v. Del. Trust Co., 378 A.2d 624, 632 (Del. 1977); Fike v.
Ruger, 754 A.2d 254, 260 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000).
59
Fike, 754 A.2d at 260.
60
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
61
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (quoting GMG Capital Invs.,
LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)).
62
Id. at 368 (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228,
1232 (Del. 1997)).
16
of the parties from the language of the contract.” 63 “In giving sensible life to a real-
world contract, courts must read the specific provisions of the contract in light of the
entire contract.” 64
The applicable provisions in the Purchase Agreement and Escrow Agreement
are express and clear. The Purchase Agreement provides that the escrow funds will
be held in accordance with the Escrow Agreement. 65 The Escrow Agreement
requires the release of the escrow funds if there is no timely claim before the
expiration date on May 31, 2017.66 To establish a timely claim, the Escrow
Agreement requires that notice be sent either by a nationally recognized courier
service or by certified mail to a specified PRA address, or by facsimile to a specified
PRA location followed by a telephone call to confirm receipt thereof.67 If Midland
63
Id. (quoting Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del.
2003)).
64
Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 913-14
(Del. 2017).
65
Purchase Agreement § 10.
66
Escrow Agreement § 1.13. Compliance with the Purchase Agreement notice
provision is not relevant to whether the escrow funds should be released. As
discussed above, Midland also had to provide written notice to PRA to enforce
certain provisions of the Purchase Agreement. The Purchase Agreement notice
provision requires written notice of any “Ineligible Accounts” under Section 5.1 by
November 26, 2014, and written notice to enforce its indemnification rights under
Section 8.2 by May 30, 2017. Purchase Agreement §§ 5.1, 8.2.
67
Escrow Agreement § 4.7.
17
fails to provide notice by these methods by the expiration date, then the terms of the
transaction documents negotiated by the parties dictate that the escrow funds should
be released. 68
Midland acknowledges that it did not comply with these requirements.69 But
Midland notes that the escrow agent made PRA aware of Midland’s escrow claims
before the expiration date. 70 Midland argues that because PRA received actual
notice, case law allows the Court to ignore the terms of the notice requirements in
the Escrow Agreement. Midland further argues that the actual text of the Purchase
Agreement and Escrow Agreement do not require strict compliance with the notice
provision. These arguments fail.
The cases upon which Midland relies to argue that actual notice reflects
substantial compliance with the requisite notice provision in the Escrow Agreement
are inapposite and inapplicable here. Corporate Property Associates 6 v. Hallwood
Group Inc. concerned the validity of an agreement to prepay the principal on certain
debt in exchange for a release of claims. 71 The plaintiffs argued that the agreement
was invalid because the opposing party did not follow the precise terms of the notice
68
Id. § 1.3.
69
Oral Arg. Tr. 34.
70
Def.’s Answering Br. in Opp’n to Summ. J. 1.
71
792 A.2d 993 (Del. Ch. 2002), rev’d on other grounds, 817 A.2d 777 (Del. 2003).
18
provision contained in a prior settlement agreement.72 But this Court found that
“literal compliance with th[e] [notice] provision would have been impossible”
because the named individual to whom notice was directed no longer worked at the
organization to which notice was due.73 In the instant case, Midland does not argue
that compliance with the notice provision was impossible; instead, Midland admits
that the cause of non-compliance was “[h]uman error.”74
In Kelly v. Blum, the plaintiff contended that a merger was void for failure to
comply with notice provisions in a contract, which required that certain classes of
LLC interests receive notice at least five business days before a merger.75 This Court
found that the express terms of the contract allowed for several different forms of
notice, including by commercial delivery service.76 Thus, this Court found that the
plaintiff could not complain that he received notice by commercial delivery service
instead of by U.S. mail under the terms of that contract.77 Additionally, while the
plaintiff in that case alleged that notice was not timely sent, this Court simply
72
Id. at 1000.
73
Id.
74
Oral Arg. Tr. 34.
75
2010 WL 629850, at *8 (Del. Ch. Feb. 24, 2010).
76
Id.
77
Id.
19
disagreed with the plaintiff’s contention about the proper count of calendar days
around a holiday, concluding that the notice met the terms of the contract regarding
timing as well. 78 In the instant case, Midland never directly gave notice to PRA in
any form before the expiration date.
HCR-Manor Care v. Fugee involved a son who took his mother to a
rehabilitation center following an injury. 79 At the time of admission, the son “stated
his intention to take his mother home at the conclusion of her therapy[.]” 80 He
executed an “Admission Agreement” with the rehabilitation center that required
written notice of termination in advance of a patient’s departure. 81 In the middle of
an ensuing guardianship fight with his sister, the son requested that the hospital move
his mother to a new facility. 82 The son later delivered written notice to the hospital
and moved his mother. 83 The hospital attempted to bill the son for the time between
his first verbal request to move his mother and the second written request on the
78
Id.
79
2010 WL 780020, at *1 (Del. Super. Jan. 26, 2010), recons. granted in part, denied
in part, 2010 WL 1175209 (Del. Super. Mar. 25, 2010).
80
Id.
81
Id. at *2.
82
Id.
83
Id.
20
grounds that the son had failed to provide written notice at the earlier date. 84 The
Delaware Superior Court began its analysis by noting that the Admission Agreement
was a contract of adhesion, arising from the imbalance of bargaining power. 85 The
Superior Court then concluded that the son’s earlier notice substantially complied
with the notice requirement in the Admission Agreement.86 But the instant case does
not involve a contract of adhesion. PRA and Midland are sophisticated parties who
negotiated the Purchase Agreement and Escrow Agreement at arm’s length. Further,
in each case to which Midland points, the party actually transmitted notice to whom
it was due. Here, Midland sent notice to a third party (the escrow agent) who then
informed PRA of Midland’s escrow claims. Thus, I reject Midland’s argument that
Midland substantially complied with the notice provision in the Escrow Agreement.
Midland’s argument that the contract does not call for strict compliance with
its own terms also fails.87 Midland relies on Eurofin Panlabs, Inc. v. Ricerca
Biosciences, LLC for the proposition that failure to comply with a notice requirement
should not be strictly construed. 88 But that case is inapplicable. In Eurofin, the
84
Id.
85
Id. at *5.
86
Id. at *6.
87
Def.’s Answering Br. in Opp’n to Summ. J. 15, 19.
88
2014 WL 2457515 (Del. Ch. May 30, 2014).
21
contract at issue “d[id] not define reasonable notice or explain how the Court should
enforce a failure to comply with the provision.” 89 In the instant case, however, the
Escrow Agreement specifies what constitutes notice and requires the release of the
escrow funds if such notice is not provided by May 31, 2017.
Midland offers no reason other than its own error for its failure to comply with
the notice provision it negotiated in the Escrow Agreement. Thus, I grant PRA’s
Motion for Summary Judgment and deny Midland’s Motion for Partial Summary
Judgment. I need not address Midland’s request that funds not be released pending
resolution of the counterclaims and third-party claims because I dismiss all those
claims for the reasons discussed below.
III. MOTION TO DISMISS ANALYSIS
Midland asserts fraud, negligent misrepresentation, breach of contract,
indemnification, and unjust enrichment counterclaims and third-party claims against
PRA and OPC, respectively, regarding the accounts Midland purchased. Midland
also asserts an aiding and abetting fraud claim against OPC. PRA and OPC move
to dismiss Midland’s counterclaims and third-party claims pursuant to Court of
Chancery Rule 12(b)(6) and, with respect to fraud and negligent misrepresentation,
Rule 9(b).
89
Id. at *4.
22
In considering a motion to dismiss under Rule 12(b)(6), “(i) all well-pleaded
factual allegations are accepted as true; (ii) even vague allegations are ‘well-pleaded’
if they give the opposing party notice of the claim; [and] (iii) the Court must draw
all reasonable inferences in favor of the non-moving party.” 90 While I must draw all
reasonable inferences in Midland’s favor, I need not “accept as true conclusory
allegations ‘without specific supporting factual allegations.’” 91 “[D]ismissal is
inappropriate unless the ‘plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.’” 92
Court of Chancery Rule 9(b) states that “[i]n all averments of fraud or mistake,
the circumstances constituting fraud or mistake shall be stated with particularity,”
while “[m]alice, intent, knowledge and other condition of mind of a person may be
averred generally.” 93 “To satisfy Rule 9(b), a complaint must allege: (1) the time,
place, and contents of the false representation; (2) the identity of the person making
the representation; and (3) what the person intended to gain by making the
90
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
91
Id. (quoting In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65-66 (Del.
1995)).
92
Id. (quoting Savor, 812 A.2d at 896-97).
93
Ct. Ch. R. 9(b); Trusa v. Nepo, 2017 WL 1379594, at *9 (Del. Ch. Apr. 13, 2017)
(citing Addy v. Piedmonte, 2009 WL 707641, at *19 (Del. Ch. Mar. 18, 2009); Abry
P’rs V, L.P. v. F & W Acquisitions LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006)).
23
representations.”94 “Despite these particularity requirements for the circumstances,
though, state of mind and knowledge may be averred generally pursuant to Rule 9(b)
because ‘any attempt to require specificity in pleading a condition of mind would be
unworkable and undesirable.’” 95
A. Midland’s Counterclaims Against PRA
All of Midland’s counterclaims against PRA relate to the purchased accounts
and PRA’s sale of those accounts to Midland pursuant to the Purchase Agreement.
The Purchase Agreement, however, provides that Midland’s “exclusive remedy” for
claims arising from the Purchase Agreement or any transactions contemplated
thereby “is limited to the amount held in escrow . . . pursuant to the Escrow
Agreement.” 96 As discussed, the Escrow Agreement requires that Midland provide
notice of any escrow claim arising from the sale in a particular manner by May 31,
2017. The Escrow Agreement further requires the release of all escrow funds to
PRA if Midland fails to give the necessary notice of the claims before that date.97
Midland did not provide the necessary notice of its claims in time. Thus, unless
94
Abry P’rs, 891 A.2d at 1050 (citing H-M Wexford LLC v. Encorp, Inc., 832 A.2d
129, 145 (Del. Ch. 2003)).
95
Id. (citing Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P.,
624 A.2d 1199, 1208 (Del. 1993)).
96
Purchase Agreement § 10.
97
Escrow Agreement § 1.3.
24
Midland can present a reason for the Court not to enforce the terms of the Purchase
Agreement, Midland cannot sustain its claims against PRA.
1. Midland fails to state a claim for fraud
Midland alleges several fraudulent “schemes” by PRA and OPC in connection
with the sale of the purchased accounts. 98 PRA contends that it “may not be held
liable for any amount beyond the funds held in escrow at the time the claim is
asserted” and that “[t]o the extent the escrow is released by grant of summary
judgment in PRA’s favor, Midland cannot sustain any claims for damages on any
grounds against PRA.” 99 Midland responds that its failure to provide proper notice
should not bar Midland’s claims because PRA fraudulently induced Midland into
agreeing to the sale.
Midland argues that the limitation of liability provision in the Purchase
Agreement cannot bar Midland’s claims, because this Court, in Abry Partners V,
L.P. v. F & W Acquisitions LLC held that “to the extent that the Stock Purchase
Agreement purports to limit the [s]eller’s exposure for its own conscious
participation in the communication of lies to the [b]uyer, it is invalid under the public
98
Def.’s Am. Countercls. & Third-Party Compl. ¶ 1. Midland does not distinguish
between PRA’s and OPC’s actions in these “schemes”—referring to them as “PRA
Defendants”—but for purposes of this discussion I will only refer to PRA because
Midland’s fraud claims are primarily directed at PRA.
99
Pl. & Third-Party Def.’s Mem. of Law in Support of Mot. to Dismiss 19.
25
policy of this State.” 100 That is, public policy in Delaware prohibits a seller from
“insulat[ing] itself from the possibility that the sale would be rescinded if the [b]uyer
can show either: 1) that the [s]eller knew that the Company’s contractual
representations and warranties were false; or 2) that the [s]eller itself lied to the
[b]uyer about a contractual representation and warranty.” 101 To make such a
showing, a buyer must “prove that the [s]eller acted with an illicit state of mind, in
the sense that the [s]eller knew that the representation was false and [] communicated
it to the [b]uyer.” 102 “The [b]uyer may not escape the contractual limitations on
liability by attempting to show that the [s]eller acted in a reckless, grossly negligent,
or negligent manner.”103
As discussed, the limitation of liability clause provides that PRA’s total
liability and Midland’s exclusive remedy with respect to the Purchase Agreement is
limited to the amount held in escrow pursuant to the Escrow Agreement. Thus to
avoid this limit on its recovery, Midland must sufficiently allege fraud by PRA with
respect to the sale. To state a claim for fraud, a claimant must:
[P]lead facts supporting an inference that: (1) the
defendant falsely represented or omitted facts that the
100
891 A.2d at 1064
101
Id.
102
Id.
103
Id.
26
defendant had a duty to disclose; (2) the defendant knew
or believed that the representation was false or made the
representation with a reckless indifference to the truth; (3)
the defendant intended to induce the plaintiff to act or
refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was
injured by its reliance. 104
As explained above, fraud claims must be stated with particularity.
a. The legal channel scheme
Midland alleges that PRA misrepresented the value of the purchased accounts
by omitting information about its collection practices and falsely representing the
performance of the purchased accounts in the “legal channel.” Midland claims that
PRA failed to disclose during due diligence that it had changed its “long-standing
practice[] of only filing collection litigation on higher-quality accounts and began to
flood the ‘legal channel’ with lawsuits related to lower-quality accounts.”105
Midland alleges that this omission made various purported representations in
the Offering Memorandum false. First, Midland claims that PRA provided
misleading “liquidation curves” that “purported to show the rate at which the
Accounts could be expected to be converted to cash.” 106 Midland claims this rate
104
Id. at 1050.
105
Def.’s Am. Countercls. & Third-Party Compl. ¶ 7.
106
Id. ¶ 3. Midland alleges that PRA also provided the “liquidation curves” under
separate cover. Id. ¶ 8.
27
would have been much different if the “liquidation curves” had included that “[PRA
and OPC] had [] begun suing on low-quality Accounts that they had historically
avoided pursuing.”107
Second, Midland alleges that PRA misrepresented that “there was an
opportunity to create additional value by filing more collection lawsuits in the
future.”108 Midland states that the following excerpts of the Offering Memorandum
reflect the false statements regarding the opportunity to file more collection lawsuits:
OPC has steadily identified and sent a growing population
of accounts to the legal process . . . OPC has not pursued
legal activity on almost 400,000 accounts. With an
average age since charge-off of approximately 80 months
(6.67 years) there is plenty of time and material to continue
to build upon a robust legal stream. OPC was unable to
pursue all that were deemed to be suit-worthy due to
budgetary constraints – leaving opportunity to ramp up
legal efforts in the short-term.
***
[Liquidation rates] achieved from 2008-2012 have been
relatively constant and early results on 2013 litigation
appear to be tracking prior years.
***
Conventional wisdom would generally assume that as the
time between legal placement and the charge-off gets
more distant that returns available from litigation would
get progressively lower or more volatile. The data from
107
Id. ¶ 9.
108
Id. ¶ 33.
28
OPC’s performance on PR Acquisitions’ accounts
suggests that while there may be some modest softening
in liquidation rates, accounts deemed suitworthy have
relatively stable liquidation rates and consistent curves
until they push towards the outer-end of Puerto Rico’s [15
year] statute [of limitations]. 109
Third, Midland claims that PRA misrepresented that the purchased accounts
“contained ‘substantial legal opportunity.’” 110 Midland states that the following
parts of the Offering Memorandum reflect the false statements regarding the
substantial legal opportunity in the purchased accounts.
With a 15-year statute of limitations, litigation can be
successfully deployed over an extended period of time –
even on an aging portfolio . . . Significant inventory – and
time – are still available for pursuit of litigation . . .
Liquidation rates through the legal process are sustainable
– even with an aging portfolio . . . Liquidation rates aren’t
just stable based on the calendar year accounts were placed
into legal, but have also been stable based on the time
difference between legal assignment and charge-off . . .
Low level of dismissals and fallouts – and many are
curable over time. 111
Midland alleges that the omission and the resulting misstatements in the Offering
Memorandum inflated Midland’s valuation of the purchased accounts because it
109
Id. ¶ 33 (citing Offering Memorandum 44, 46, 47).
110
Id. ¶ 5.
111
Id. ¶ 32 (citing Offering Memorandum 1).
29
“created the misimpression that the Accounts were of far higher-quality, and would
generate far greater cash flows, than was likely in reality.” 112
Midland has stated the facts regarding the alleged misrepresentations in the
Offering Memorandum with the requisite particularity under Rule 9(b). Midland
alleges that it incurred $6 million in damages, and, with the Offering Memorandum,
Midland “can readily identify who made what representations where and when [and]
what the defendant gained, which was to induce the plaintiff to enter into the
contract.”113 PRA provided the Offering Memorandum to Midland on November
18, 2013 to induce it to enter into the Purchase Agreement. The Offering
Memorandum contained the purported false statements—the “liquidation curves,”
112
Id. ¶ 1; see also id. ¶ 29. Midland defines “Accounts” as the totality of PRA’s
“charged-off credit accounts . . . related to Puerto Rican consumers[,]” as
distinguished from the purchased accounts that Midland bought from PRA pursuant
to the Purchase Agreement.
113
LVI Grp. Invs., LLC v. NCM Grp. Hldgs., LLC, 2017 WL 1174438, at *4 (Del. Ch.
Mar. 29, 2017) (quoting Prairie Capital III, L.P. v. Double E Hldg. Corp., 132 A.3d
35, 62 (Del. Ch. 2015)). Midland also alleges that PRA made these
misrepresentations throughout the due diligence process. Midland alleges that these
misrepresentations occurred during a six-month period, with the “interactions
concentrated in March, April and May of 2014,” in “written statements in the form
of offering memoranda, emails and other deal-related documents, and oral
statements during in-person and telephone conversations” and in “multiple due-
diligence sessions” attended by four identified individuals “among others” at PRA
and OPC’s offices in Puerto Rico. Def.’s Am. Countercls. & Third-Party Compl.
¶¶ 2-3; see also id. ¶¶ 28-32. Midland fails to identify any reasonable limited date
range that any individual made any specific misrepresentation, other than its
Offering Memorandum claims. These claims lack the requisite particularity. They
also fail for the same reason as the Offering Memorandum claims fail.
30
information about PRA’s collection practices, and information about the
performance of the purchased accounts—that support Midland’s fraud claim. But
Midland’s claim still fails because Midland cannot allege that it justifiably relied on
the purported misrepresentations in the Offering Memorandum.
In its Amended Counterclaims and Third-Party Complaint, Midland alleges
that PRA and OPC “intentionally omitted detailed data that would have made it
possible for Midland to discover that [PRA and OPC] had begun filing collection
litigation on lower-quality accounts.”114 Specifically, PRA and OPC “failed to
provide detailed ‘back book’ data (i.e., detailed account-level data showing the past
performance) for the [purchased accounts].” 115 Midland then alleges that had PRA
given Midland “complete ‘back book’ data, it would have determined not only that
[PRA and OPC] had begun filing a slew of collection litigation on lower-quality
accounts, but that the liquidation curves provided were inaccurate.” 116 Midland also
states that the “back book” data would have allowed it to determine “that there was
only a very limited probability that Midland would be able to increase the [purchased
accounts’] value in the future by filing additional collection litigation.”117 But,
114
Def.’s Am. Countercls. & Third-Party Compl. ¶ 8.
115
Id.
116
Id. ¶ 38.
117
Id.
31
according to Midland, PRA and OPC failed to “provide the ‘robust’ data they
promised, and, therefore left Midland in the dark about the true nature and value of
the [purchased accounts].” 118
In response to a written notice from PRA to Midland of PRA’s intention to
file a motion for sanctions under Court of Chancery Rule 11, however, Midland has
now admitted that it indeed received the “back book” data for the purchased
accounts. 119 In fact, Midland now admits that it also received the “back book” data
for all the accounts marketed by PRA, not just the ones that it purchased. 120 Thus,
because by its own admission Midland possessed the data that would have
illuminated “the true nature and value of the [purchased accounts],” 121 Midland
cannot credibly allege that it justifiably relied on the purported false statements, and
Midland’s fraud claim relating to this scheme fails. 122
118
Id.
119
Def.’s Mot. to Amend ¶ 3; Oral Arg. Tr. 64-68.
120
Oral Arg. Tr. 64-68; Pl. & Third-Party Def.’s Mot. for Rule 11 Sanctions Ex. 6.
121
Def.’s Am. Countercls. & Third-Party Compl. ¶ 38.
122
At oral argument, Midland asserted yet another theory related to the “back book”
data that does not appear in Midland’s Counterclaims and Third-Party Complaint,
the Amended Counterclaims and Third-Party Complaint, the proposed second
amended counterclaims and third-party complaint, or any of the briefing. Midland
argued that although it received the data for the marketed accounts, it did not receive
the data for the non-marketed accounts. Oral Arg. Tr. 64-68. I will not consider
this argument because Midland may not amend its complaint through oral argument
in opposition to a fully-briefed motion to dismiss, see Stern v. LF Capital P’rs, LLC,
32
b. The collections scheme
Midland also argues that PRA omitted material information regarding its
collection practices. In particular, Midland alleges that PRA and OPC employed
“various questionable (and perhaps even unlawful) collection methods, designed to
give the false appearance of increased cash flows. [PRA and OPC] knew that
Midland would not use such questionable methods and therefore would never be
able to achieve the same cash flows as represented by [PRA and OPC].” 123 Midland
further alleges that PRA and OPC failed to “disclose that their agents were not
abiding by certain consumer collection laws, including the [Telephone Consumer
Protection Act], which prohibits, among other things, calling consumers on their cell
phones using automatic dialers.”124 Similarly, Midland contends, PRA and OPC
concealed the fact that its agents “were using ‘burner’ cell phones (i.e., cell phones
that are used and then disposed so that their source cannot be traced), which enabled
them to contact consumers without fear of violating laws such as the [Telephone
820 A.2d 1143, 1146 (Del. Ch. 2003), and “[i]ssues not briefed are deemed waived.”
Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (citing Murphy v. State,
632 A.2d 1150, 1152 (Del. 1993); Loudon v. Archer, 700 A.2d 135, 140 (Del.
1997)). I note, however, that PRA filed a motion for sanctions under Court of
Chancery Rule 11 in which it alleges that Midland did in fact have the “back book”
data for all of PRA’s accounts.
123
Def.’s Am. Countercls. & Third-Party Compl. ¶ 58.
124
Id. ¶ 40; see also id. ¶ 10.
33
Consumer Protection Act] regulating the permissible timing and frequency of
contact with consumers.”125 Midland argues that these methods generated “the
perception during due diligence that the cash flows being generated by the
[purchased accounts] were far higher than they actually were.” 126
Although unclear, Midland seems to allege that the “cash flows being
generated” were unsustainable because PRA used “questionable (and perhaps even
unlawful) collection methods” that Midland would not use. 127 But Midland does not
allege that PRA had an affirmative duty to disclose “questionable” collection
practices.128 Likewise, Midland does not allege that PRA lied about any
“questionable” collection practices. 129 Further, although Midland alleges that PRA
represented in the Offering Memorandum that it had a “[l]ong-term track record of
125
Id. ¶ 40.
126
Id.
127
Id. ¶ 58.
128
Trusa, 2017 WL 1379594, at *10 (“In an arm’s length negotiation, where no special
relationship between the parties exists, ‘a party has no affirmative duty to speak’
and ‘is under no duty to disclose facts of which he knows the other is ignorant even
if he further knows the other, if he knew of them, would regard them as material in
determining his course of action in the transaction in question.’ Thus, ‘any claim of
fraud in an arms’ length setting necessarily depends on some form of
representation,’ and ‘[a] fraud claim in that setting cannot start from an omission.’”)
(quoting Prairie Capital III, L.P., 132 A.3d at 52).
129
Id. (“But, if a party ‘chooses to speak then it cannot lie,’ and ‘once the party speaks,
it also cannot do so partially or obliquely such that what the party conveys becomes
misleading.’”) (quoting Prairie Capital III, L.P., 132 A.3d at 52).
34
regulatory compliance[,]” 130 Midland fails to adequately allege that PRA used
“illegal” or “unlawful” collection methods. Simply providing examples of illegal
conduct, without actually stating that PRA engaged in that illegal conduct, fails to
state a claim. 131 Likewise, pointing to conduct that Midland disapproves of, but that
is not illegal, also fails to state a claim. Such a lack of any facts regarding the
purported fraud fails to apprise PRA and OPC of sufficient information concerning
the circumstances of the alleged fraud and, thus, does not satisfy the particularity
requirement of Rule 9(b).
2. Midland fails to state a claim for negligent
misrepresentation
Midland also alleges negligent misrepresentation claims. But Midland “may
not escape the contractual limitations on liability by attempting to show that [PRA]
acted in a reckless, grossly negligent, or negligent manner.” 132 Even assuming the
130
Def.’s Am. Countercls. & Third-Party Compl. ¶ 34.
131
Id. ¶¶ 10, 40, 58. See Spring Real Estate, LLC v. Echo/RT Hldgs., LLC, 2013 WL
6916277, at *7 (Del. Ch. Dec. 31, 2013) (“The Complaint does not state a claim . .
. because the[] allegations are conclusory and mere recitations of the . . . statute.”);
Hospitalists of Del., LLC v. Lutz, 2012 WL 3679219, at *13 (Del. Ch. Aug. 28,
2012) (“In the circumstances of this case, even under Delaware’s minimal notice
pleading standard, simply reciting the statutory or common law elements of [a
fraudulent transfer], as Plaintiffs have here, is insufficient to state a claim upon
which relief may be granted.”).
132
Abry P’rs, 891 A.2d at 1064.
35
limitation of liability clause in the Purchase Agreement does not preclude Midland’s
negligent misrepresentation claim, Midland’s claim still fails.
To plead negligent misrepresentation, Midland must allege that “(1) the
defendant had a pecuniary duty to provide accurate information, (2) the defendant
supplied false information, (3) the defendant failed to exercise reasonable care in
obtaining or communicating the information, and (4) the plaintiff suffered a
pecuniary loss caused by justifiable reliance upon the false information.” 133 “A
claim of negligent misrepresentation, or equitable fraud, requires proof of all the
elements of common law fraud except that plaintiff need not demonstrate that the
misstatement or omission was made knowingly or recklessly.” 134 A negligent
misrepresentation claim must be stated with the same particularly required for
fraud. 135 For all the reasons stated above, Midland fails to (1) adequately allege that
133
Steinman v. Levine, 2002 WL 31761252, at *15 (Del. Ch. Nov. 27, 2002), aff’d, 822
A.2d 397 (Del. 2003).
134
Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *9 (Del.
Ch. Jan. 30, 2015) (citing Williams v. White Oak Builders, Inc., 2006 WL 1668348,
at *7 (Del. Ch. June 6, 2006)) (internal quotation marks omitted).
135
Id. at *9 n.57 (“See Zebroski v. Progressive Direct Ins. Co., 2014 WL 2156984, at
*7 (Del. Ch. Apr. 30, 2014) (applying Rule 9(b) pleading standard to equitable fraud
claim); see also Those Certain Underwriters at Lloyd’s London v. National
Installment Ins. Svcs., 2007 WL 1207106, at *5 (Del. Ch. Feb. 8, 2007) (‘Court of
Chancery Rule 9(b) requires that fraud be pled with particularity. This rule almost
certainly extends to negligent misrepresentation (equitable fraud) as well.’) (citing
In re Dataproducts Corp. S’holders Litig, 1991 WL 165301 (Del. Ch. Aug. 22,
1991), reprinted at 17 Del. J. Corp. L. 1159, 1170 [n.5]).”).
36
it justifiably relied on the supposed false information in the Offering Memorandum
and (2) allege with the requisite particularity that PRA omitted material information
regarding its collection practices. Thus, for the same reasons its fraud claim fails,
Midland’s negligent misrepresentation claim also fails.
3. Midland fails to state a claim for breach of contract
Midland asserts breach of contract claims against PRA for breaching the
following provisions of the Purchase Agreement in the following ways: (1) Section
5 by failing to repurchase certain “Ineligible Accounts;” (2) Section 2.6.1 by failing
to remit certain funds received by creditors; and (3) Sections 7.5, 7.12, 7.13 and 7.14
by misrepresenting the accuracy of the diligence provided and the character of the
purchased accounts. 136
Section 5.1 required Midland to provide written notice and documentary
evidence of the “Ineligible Accounts” by November 26, 2014 to trigger PRA’s
obligation to repurchase the “Ineligible Accounts.” 137 Midland does not argue that
it sent anything to PRA by November 26, 2014. Further, even though Midland stated
repurchase claims in its May 26, 2017 letter to the escrow agent,138 Midland does
not argue that that letter attached the documentary evidence required by Section 5.1
136
Def.’s Am. Countercls. & Third-Party Compl. ¶¶ 71-92.
137
Purchase Agreement §§ 5.1-5.2.
138
Pl.’s Mot. for Summ. J. & Pl. & Third-Party Def.’s Mot. to Dismiss Ex. 3.
37
or that it has otherwise provided that evidence. As a result, Midland’s claims under
Section 5 are untimely.
The limitation of liability clause in the Purchase Agreement provides that
Midland’s “exclusive remedy” for claims arising from the Purchase Agreement or
any transactions contemplated thereby “is limited to the amount held in escrow . . .
pursuant to the Escrow Agreement.” 139 This requires that claims related to the
remittance of payments under Section 2.6.1 and representations made in Section 7
had to be raised in a particular manner by May 31, 2017 per the Escrow Agreement
notice provision. As discussed, Midland’s escrow claims were not timely. Thus,
Midland cannot sustain its breach of contract claims against PRA.
4. Midland fails to state a claim for indemnification
Midland asserts a separate claim for indemnification under Section 8.2 of the
Purchase Agreement.140 But this claim is untimely. As the Purchase Agreement
makes clear: “The obligations of [PRA] under this Section 8.2 shall survive until the
third anniversary of the Closing Date.”141 In other words, any obligation for PRA to
indemnify Midland expired on May 30, 2017. Midland did not seek indemnification
from PRA by that date. Thus, Midland’s indemnification claim also fails.
139
Purchase Agreement § 10.
140
Def.’s Am. Countercls. & Third-Party Compl. ¶¶ 93-97.
141
Purchase Agreement § 8.2.
38
5. Midland fails to state a claim for unjust enrichment
Midland asserts an unjust enrichment claim against PRA for “(1) causing
Midland to overpay for the [purchased accounts], (2) failing to remit funds related
to Putback/Buyback Claims, and/or (3) failing to remit the Bankruptcy
Payments.”142 “Unjust enrichment is ‘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.’” 143 To assert a claim for unjust
enrichment, a plaintiff must prove the following elements: “(1) an enrichment, (2)
an impoverishment, (3) a relation between the enrichment and impoverishment, (4)
the absence of justification, and (5) the absence of a remedy provided by law.’”144
But the Court “must first determine ‘whether a contract already [comprehensively]
142
Def.’s Am. Countercls. & Third-Party Compl. ¶ 99. The terms “Putback/Buyback
Claims” and “Bankruptcy Payments” are not defined or otherwise used in the
Purchase Agreement. Midland states that PRA’s failure to remit the funds
associated with these terms is a breach of Section 2.6.1 of the Purchase Agreement.
Id. ¶ 81, 89. Midland also suggests that the “Putback/Buyback Claims” relate to
repurchases of “Ineligible Accounts” purportedly due under of the Purchase
Agreement. Id. ¶ 49. For purposes of this discussion, I treat “Bankruptcy
Payments” as creditor payments due to Midland by operation of Section 2.6.1, and
“Putback/Buyback Claims” as creditor or repurchase payments due under Sections
2.6.1 or 5.
143
RCS Creditor Tr. v. Schorsch, 2018 WL 1640169, at *7 (Del. Ch. Apr. 5, 2018)
(quoting Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010)).
144
Id.
39
governs the relevant relationship between the parties.’” 145 If so, “then it alone must
provide the measure of the plaintiff’s rights and any claim of unjust enrichment will
be denied.” 146 If, however, the contract itself is the unjust enrichment, then “the
existence of the contract does not bar the unjust enrichment claim.” 147 “In other
words, ‘[t]he contract itself is not necessarily the measure of [the] plaintiff’s right
where the claim is premised on an allegation that the contract arose from wrongdoing
(such as breach of fiduciary duty or fraud) or mistake and the [defendant] has been
unjustly enriched by the benefits flowing from the contract.’” 148
PRA argues that Midland’s unjust enrichment claim must be dismissed
because the conduct at issue is governed by the Purchase Agreement. 149 Midland’s
claim that PRA “caus[ed] Midland to overpay for the Portfolio” 150 appears related to
Midland’s fraud claim. The Purchase Agreement cannot be the measure of
Midland’s right where Midland claims that PRA secured the Purchase Agreement
145
Id. (quoting BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp.,
2009 WL 264088, at *7 (Del. Ch. Feb. 3, 2009)).
146
Id.
147
Id.
148
Id. (citing Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery § 12.01[b] (2016)).
149
Pl. & Third-Party Def.’s Mem. of Law in Support of Mot. to Dismiss 32.
150
Def.’s Am. Countercls. & Third-Party Compl. ¶ 99.
40
through fraud.151 But, for the reasons discussed above, Midland’s counterclaims fail
to adequately state a claim for fraud. Midland’s allegations that PRA failed to remit
“Bankruptcy Payments” and funds related to “Putback/Buyback Claims” are
sufficiently covered by the Purchase Agreement in Sections 2.6.1 and 5, and they
are duplicative of Midland’s breach of contract claims with respect to those sections.
Thus, because Midland fails to sufficiently plead fraud and the Purchase Agreement
“comprehensively governs the parties’ relationship”152 with respect to the purported
non-remittances and repurchases, Midland’s unjust enrichment claim fails.
B. Midland’s Third-Party Claims Against OPC
Midland asserts the following third-party claims against OPC: (1) fraud, (2)
negligent misrepresentation, (3) aiding and abetting fraud, (4) breach of contract, (5)
indemnification, and (6) unjust enrichment.
First, Midland’s fraud and negligent misrepresentation claims fail. Midland
lumps PRA and OPC together in its fraud and negligent misrepresentation claims
and does not identify any specific acts by OPC to further the purported fraudulent
schemes. Thus, for all the reasons stated above in my analysis of the fraud and
negligent misrepresentation claims against PRA, Midland’s fraud and negligent
misrepresentation claims against OPC fail.
151
RCS Creditor Tr., 2018 WL 1640169, at *7.
152
Id. (citing BAE Sys. Info. & Elec. Sys. Integration, Inc., 2009 WL 264088, at *7).
41
Next, Midland’s aiding and abetting fraud claim also fails. The elements of
aiding and abetting fraud are “(i) underlying tortious conduct, (ii) knowledge, and
(iii) substantial assistance.”153 Because the underlying tortious conduct claim fails,
Midland’s aiding and abetting claim against OPC also fails.
As discussed more fully above, Midland alleges that OPC and PRA breached
the Purchase Agreement by failing to remit certain funds, not repurchasing certain
purchased accounts, and misrepresenting the accuracy of the diligence provided and
the character of the purchased accounts. OPC, however, is not a party to the
Purchase Agreement. Midland acknowledges this fact, but it nonetheless argues that
OPC should be liable because PRA and OPC “act[ed] in disregard of their corporate
form.” 154 Thus, Midland seems to argue that this Court should pierce the corporate
veil and hold OPC liable for PRA’s actions. “Persuading a Delaware court to
disregard the corporate entity is a difficult task.”155 To assert a claim to pierce the
corporate veil, Midland must allege facts that, if taken as true, demonstrate PRA’s
153
Trusa, 2017 WL 1379594, at *12 (citing Great Hill Equity P’rs IV, LP v. SIG
Growth Equity Fund I, LLLP, 2014 WL 6703980, at *22 (Del. Ch. Nov. 26, 2014)).
154
Def.’s Answering Br. in Opp’n to Mot. to Dismiss 42 n.13.
155
Wallace ex rel. Cencom Cable Income P’rs II, Inc., L.P. v. Wood, 752 A.2d 1175,
1183 (Del. Ch. 1999) (citing Harco Nat’l Ins. Co. v. Green Farms, Inc., 1989 WL
110537, at*4 (Sept. 19, 1989)).
42
“complete domination and control” of OPC. 156 “The degree of control required to
pierce the veil is ‘exclusive domination and control . . . to the point that [OPC] no
longer ha[s] legal or independent significance of [its] own.’” 157 Piercing the
corporate veil under the alter ego theory requires showing that the corporation is “a
sham and exist[s] for no other purpose than as a vehicle for fraud.” 158
Midland argues that PRA and OPC “have affirmatively provided sworn facts
that suggest that they act in disregard of their corporate form.” 159 The only “facts”
that Midland identifies are that: (1) “in the context of their Motion to Expedite, PRA
claimed it needed the immediate release of the Escrow Funds to benefit other
companies owned by the principals of PRA (a limited liability company), Rodolfo
Sanchez-Colberg and Nicolas Kogan[;]” and (2) “in the context of PRA’s Motion
for Summary Judgment, PRA submitted the Affidavit of Monica B. Romero, who
testified that she is Corporate Legal Counsel employed with Americas Leading
Finance, LLC (an entity owned by Mr. Kogan), yet was tasked with attempting to
156
Id. at 1183-84.
157
Id. at 1184 (citing Hart Hldg. Co. v. Drexel Burnham Lambert, Inc., 1992 WL
127567, at *11 (Del. Ch. May 28, 1992)).
158
Id.
159
Def.’s Answering Br. in Opp’n to Mot. to Dismiss 42 n.13.
43
collect the Escrow Funds on behalf of PRA.” 160 These facts do not suggest in any
way that PRA dominates or controls OPC or that OPC exists as a vehicle for PRA’s
purported fraud. Thus, Midland’s claims for breach of the Purchase Agreement fail
because OPC is not party to that agreement, and Midland’s allegations do not support
a reasonably conceivable claim for piercing the corporate veil.161
Next, Midland attempts to plead breach of contract claims relating to the
Servicing Agreement. Midland argues that OPC breached Section 3.2 of the
Servicing Agreement by failing to remit “received proceeds ‘by the end of the next
Business Day’ after receipt.” 162 This is the extent of Midland’s allegations with
respect to OPC’s purported breach of the Servicing Agreement. Midland fails to
allege any facts whatsoever about the proceeds supposedly withheld by OPC. In
fact, Midland actually lumps this purported breach in with alleged breaches by PRA
160
Id.
161
See Kleinberg v. Aharon, 2017 WL 4444216, at *4 (Del. Ch. Oct. 4, 2017)
(ORDER).
162
Def.’s Am. Countercls. & Third-Party Compl. ¶¶ 82, 90 (quoting Servicing
Agreement § 3.2). Midland is not a party to the Servicing Agreement, but it is a
designated third-party beneficiary. Servicing Agreement § 6.9.
44
and OPC of the Purchase Agreement. 163 Thus, Midland fails to state a claim for
breach of the Servicing Agreement by OPC. 164
Midland also alleges an indemnification claim against OPC under Section 5.1
of the Servicing Agreement. 165 That section requires that OPC indemnify Midland
“from and against any and all losses, claims, damages, expenses (including
reasonable attorneys’ fees) and costs suffered or incurred (whether suit is instituted
or not) as a result of, arising out of or otherwise relating in any way to,” among other
things, OPC’s breach of the Servicing Agreement, “any intentional, reckless or
negligent acts or omissions” by OPC, or OPC’s “violation of any Applicable
Law.” 166 Midland asserts no allegations whatsoever that OPC specifically violated
any “Applicable Law,” committed any “intentional, reckless or negligent acts or
163
Specifically, Midland alleges, in the same counts it discusses PRA’s purported
breach of Sections 2.6.1 and 5.1 of the Purchase Agreement, that “[a]s a direct and
proximate result of [PRA and OPC’s] breaches, Midland has suffered or will suffer
actual damages in an amount to be determined at trial but not less than” $300,000
for “Breach of Contract (With Respect To Putback/Buyback Claims)” and $50,000
for “Breach of Contract (With Respect to Bankruptcy Payments).” Def.’s Am.
Countercls. & Third-Party Compl. ¶¶ 84, 92.
164
See Hospitalists of Del., LLC, 2012 WL 3679219, at *15 (“[E]ven under Delaware’s
minimal notice pleading standard, simply reciting the statutory or common law
elements of an offense, as Plaintiff has here, is insufficient to state a claim upon
which relief may be granted.”).
165
Def.’s Am. Countercls. & Third-Party Compl. ¶¶ 93-97.
166
Servicing Agreement § 5.1.
45
167
omissions,” or breached the Servicing Agreement. Thus, Midland’s
indemnification claim also fails.
Finally, Midland’s unjust enrichment claim against OPC also fails. Midland
does not adequately state a claim for fraud against OPC, and Midland’s non-
remittance claims are covered by the Servicing Agreement and duplicative of its
failed breach of contract claims. 168 Thus, I grant the Motion to Dismiss the third-
party claims against OPC.
IV. MOTION TO AMEND ANALYSIS
Midland moves to amend its counterclaims and third-party claims under Court
of Chancery Rule 15(a), which states that leave to amend “shall be freely given when
justice so requires.”169 “A court will not grant a motion to amend, however, if the
amendment would be futile.”170 “In exercising its discretion, the court also considers
167
Id. Even if the Court assumes that the collections practices allegations in Section
III.A.1.b. are stated specifically against OPC, they fail for the reasons stated.
168
The Servicing Agreement does not require OPC to repurchase ineligible accounts.
169
Ct. Ch. R. 15(a). Midland withdrew its original counterclaims and third-party
claims that were filed on July 25, 2017 and amended and substituted those
counterclaims and third-party claims on September 15, 2017.
170
Cartanza v. Lebeau, 2006 WL 903541, at *2 (Del. Ch. Apr. 3, 2006) (citing
Zimmerman v. Braddock, 2005 WL 2266566, at *6 (Del. Ch. Sept. 8, 2005), rev’d
on other grounds, 906 A.2d 776 (Del. 2006)).
46
factors such as bad faith, undue delay, dilatory motive, repeated failures to cure by
prior amendment, undue prejudice, and futility of amendment.” 171
Midland seeks to amend four areas of its counterclaims and third-party claims.
First, Midland attempts to clarify that, while it alleged that PRA and OPC did not
provide “back book” data for accounts that Midland did not purchase, Midland did
receive such data for the purchased accounts.172 Second, Midland wants to clarify
that Midland personnel observed PRA and OPC employees using cellphones on a
call center floor, and that those calls allegedly were “not monitored/recorded by the
call center.”173 Third, Midland seeks to remove language in its counterclaims and
third-party claims indicating that PRA requested that OPC remain an account
servicer following the sale.174 Fourth, Midland wants to state that it gave notice to
the escrow agent of its claims against the escrow and did not merely “send notice.”175
PRA and OPC contend that Midland’s “third rewrite of its countercharges against
PRA and OPC” should be denied because Midland’s amendments are futile.176
171
NACCO Indus., Inc. v. Applica Inc., 2008 WL 2082145, at *1 (Del. Ch. May 7,
2008).
172
Def.’s Mot. to Amend ¶ 3.
173
Id.
174
Id.
175
Id.
176
Pl. & Third-Party Def.’s Opp’n to Mot. to Amend 1 (emphasis omitted).
47
All of Midland’s amendments are futile. First, as discussed more fully above,
Midland’s correction that it did receive “back book” data of the purchased accounts
strengthens my fraud analysis above because it shows that Midland had access to
data underlying the relevant portions of the Offering Memorandum, which Midland
could have used to discern the purported fraudulent schemes in the Offering
Memorandum. Second, Midland’s clarification that PRA employees used
cellphones at the call center that were not monitored, like its allegation that PRA
used “burner” cellphones, fails to sufficiently allege that PRA or OPC changed its
collection practices in an illegal way and failed to disclose the same to Midland,
even in view of the other facts plead by Midland. Third, Midland’s proposed
removal of its claim that PRA requested that OPC remain servicer of the purchased
accounts is irrelevant to my analysis. Even if PRA had made such a request, my
analysis of Midland’s third-party claims would not change because OPC is only
party to the Servicing Agreement, Midland does not state a claim to pierce the
corporate veil, and Midland fails to identify any actions by OPC in its counterclaims
and third-party claims, except that OPC serviced the purchased accounts. Fourth,
Midland’s clarifications that it specifically sent notice to the escrow agent, and not
to PRA, merely reinforces Midland’s failure to provide proper notice under the
Escrow Agreement. Thus, these amendments do not change my above analyses of
48
the Motion for Summary Judgment, the Motion for Partial Summary Judgment, or
the Motion to Dismiss, and the Motion to Amend is denied as futile.
V. CONCLUSION
For the reasons stated above, I grant PRA’s Motion for Summary Judgment
and order release of the $6 million from the escrow fund, deny Midland’s Motion
for Partial Summary Judgment, grant PRA and OPC’s Motion to Dismiss Midland’s
counterclaims and third-party claims, and deny Midland’s Motion to Amend.
IT IS SO ORDERED.
49