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IN THE SUPREME COURT OF THE STATE OF HAWAI?I
—o0o—

BANK OF AMERICA, N.A., SUCCESSOR BY MERGER TO BAC HOME LOANS
SERVICING, LP FKA COUNTRYWIDE HOME LOANS SERVICING LP,
Respondent/Plaintiff-Appellee,

vs.

GRISEL REYES-TOLEDO,
Petitioner/Defendant-Appellant,

and

WAI KALOI AT MAKAKILO COMMUNITY ASSOCIATION;
MAKAKILO COMMUNITY ASSOCIATION; and
PALEHUA COMMUNITY ASSOCIATION,
Respondents/Defendants-Appellees.

SCWC-15-0000005

CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-15-0000005; CIVIL NO. 12-1-0668)

FEBRUARY 28, 2017

NAKAYAMA, ACTING C.J., McKENNA, POLLACK, AND WILSON, JJ., AND CIRCUIT
COURT JUDGE GARIBALDI, IN PLACE OF RECKTENWALD, C.J., RECUSED
OPINION OF THE COURT BY POLLACK, J.

This case raises issues of standing and appellate
jurisdiction that pertain to foreclosure proceedings. We
consider whether a foreclosing plaintiff seeking summary
judgment must prove it had standing to foreclose on the
homeowner’s property at the commencement of the lawsuit to be
entitled to foreclosure of the subject property. We also
determine the extent of appellate jurisdiction over
interlocutory orders leading up to a foreclosure decree.

[…]

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Huffington Post-

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EDGAR R. JACOBS and 4721 WESTWOOD DRIVE TRUST, Gulf Coast Home Sites, Inc. as Trustee, Dated November 22, 2002, Appellants,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION, Appellee.

Case No. 2D15-4918.District Court of Appeal of Florida, Second District.Opinion filed February 22, 2017.Appeal from the Circuit Court for Charlotte County; Michael T. McHugh, Judge.

Eric J. Chrisner, David C. Hicks, and Vincent Carl LoBue of Alliance Legal Group, PL, Sarasota, for Appellants.

Wm. David Newman, Jr. of Choice Legal Group, P.A., Fort Lauderdale, for Appellee.

BLACK, Judge.

In this appeal from a final judgment of foreclosure, Federal National Mortgage Association appropriately concedes that it failed to establish standing at the time the original plaintiff, JP Morgan Chase Bank, N.A., filed the complaint. As a result, we reverse and remand for dismissal of the foreclosure action. See Segall v. Wachovia Bank, N.A., 192 So. 3d 1241, 1245-46 (Fla. 4th DCA 2016); Fiorito v. JP Morgan Chase Bank, Nat’l Ass’n, 174 So. 3d 519, 521-22 (Fla. 4th DCA 2015).

Reversed and remanded.

KELLY and BADALAMENTI, JJ., Concur.

NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION AND, IF FILED, DETERMINED.

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NYT-

Here is something to celebrate: The United States Supreme Court just handed whistle-blowers one of their bigger wins in a long time.

People who expose wrongdoing in the workplace or among government contractors have taken a beating in recent years. The Obama Administration was especially assiduous in its pursuit of whistle-blowers, and President Trump has also singled them out for scorn.

So it was gratifying to see the Feb. 21 ruling from the nation’s top court on an important bank whistle-blower case dating back to the financial crisis. In its opinion, which vacated two lower courts’ dismissals of the case, the Supreme Court essentially confirmed that some courts have been using too narrow a legal standard when weighing whistle-blower suits under the False Claims Act, which is meant to punish those who defraud the government.

By highlighting a more expansive standard for what constitutes a false claim under …

[NEW YORK TIMES]

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3:00 PM HAWAII
5:00 PM PACIFIC
8:00 PM EASTERN
ON KHVH-AM
(830 ON THE DIAL)
AND ON
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WAPO-

Fannie Mae and Freddie Mac shares plunged Tuesday after a federal appeals court denied legal claims by investors who were seeking to stop the U.S. government from seizing the profits of the mortgage giants.

Fannie shares sank 35 percent to $2.71. Freddie shares tumbled 38 percent to $2.47.

Hopes for reform of the government-sponsored enterprises had lifted shares of Fannie and Freddie following President Trump’s election. Shares of Fannie went from a low of $1.26 to a high of $5.00, only to retreat after Tuesday’s ruling.

[WASHINGTON POST]

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Law360-

Wells Fargo’s board of directors has voted to fire four senior managers in connection with an ongoing investigation stemming from last year’s scandal over 1.5 million phony bank accounts opened in customers’ names, the bank announced Tuesday.
The bank issued a press release announcing that the board voted unanimously to terminate the employees as part of its independent investigation “into the company’s retail banking sales practices and related matters.”

The employees are Claudia Russ Anderson, former community bank chief risk officer; Pamela Conboy, Arizona lead regional president; Shelley Freeman, former Los Angeles regional president and head of consumer credit solutions; and Matthew Raphaelson, head of community bank strategy and initiatives.

Each of the four employees will forfeit their unvested equity awards and vested outstanding options, the press release said. None will receive a 2016 bonus.

[LAW 360]

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The Charlotte Observer –

With a ruling Tuesday, the U.S. Supreme Court revived a long-running whistleblower lawsuit that accused Wachovia’s investment bank of violating accounting rules and skirting internal controls to pursue short-term profits.

The Supreme Court vacated a judgment in August 2016 by the U.S. Appeals Court for the Second Circuit that had affirmed a lower court’s decision to dismiss the case filed by two whistleblowers, including one who had worked in Charlotte.

The high court ordered the appeals court to give the case further consideration in light of a June 2016 Supreme Court ruling that interpreted an aspect of the federal whistleblower law called the U.S. False Claims Act.

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Maria Jilma URIBE and Jose Carlos Uribe, Appellants,
v.
CARRINGTON MORTGAGE SERVICES, LLC on behalf of Wells Fargo Bank NA, as Trustee for Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates, Appellee.

No. 04-16-00060-CV.Court of Appeals of Texas, Fourth District, San Antonio.

Delivered and Filed: February 15, 2017.David Kirkendall, for Jose Carlos Uribe, Appellant.

David Kirkendall, for Maria Jilma Uribe, Appellant.

Jonathan M. Williams, for Carrington Mortgage Services, LLC, Appellee.

Jonathan M. Williams, for Marinosci Law Group P.C., Appellee.

Jonathan M. Williams, for New Century Mortgage Corporation, Appellee.

Jonathan M. Williams, for Wells Fargo Bank, N.A. as Trustee for Carrington Mortgage Loan Trust Series 2006-NC4 Asset Backed Pass through Certificates, Appellee.

Appeal from the 73rd Judicial District Court, Bexar County, Texas, Trial Court No. 2014CI18492, Honorable Dick Alcala, Judge Presiding.

REVERSED AND REMANDED.

Sitting: Sandee Bryan Marion, Chief Justice, Karen Angelini, Justice, Irene Rios, Justice.

MEMORANDUM OPINION

KAREN ANGELINI, Justice.

Maria Jilma Uribe and Jose Carlos Uribe appeal a summary judgment granted in favor of Carrington Mortgage Services, LLC on behalf of Wells Fargo Bank NA, as Trustee for Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates (the “Trust”). In their brief, the Uribes contend the trial court erred in granting the summary judgment because: (1) the summary judgment evidence fails to conclusively establish the Trust was the owner and holder of the Texas Home Equity Note and Texas Home Equity Security Instrument^[1] executed by the Uribes or what entity owned the note and security instrument prior to the assignment to the Trust; (2) the assignment of the note and security instrument to the Trust occurred after the Trust’s closing date; and (3) the summary judgment evidence raised a genuine issue of material fact with regard to whether Mr. Uribe’s signature on the security instrument was forged. The Uribes also contend the appellee’s motion for summary judgment did not address their fraud claim, and the trial court erred in overruling their motion for continuance. We reverse the trial court’s judgment and remand the cause for further proceedings.

BACKGROUND

On November 25, 2014, the Uribes filed the underlying lawsuit to prevent the appellee from foreclosing on their home. The appellee obtained an order allowing the foreclosure in a separate lawsuit. In their petition, the Uribes alleged the appellee failed to produce a valid chain of title showing the transfer of the note and security instrument to the Trust. The Uribes also alleged the appellee committed fraud by filing fraudulent documents in the deed records.

On August 13, 2015, the appellee moved for summary judgment asserting it was entitled to proceed with its non-judicial foreclosure as a matter of law. As evidence to support its motion, the appellee attached the note, the security instrument, the assignment of the note and security instrument, and a limited power of attorney.

On October 12, 2015, the Uribes filed a response again challenging the chain of title and asserting Mr. Uribe’s signature on the security instrument was forged. Mr. Uribe’s affidavit was attached to the response. In his affidavit, Mr. Uribe states, “Moreover, after reviewing my alleged signature on the Security Agreement, I am sure it is not mine and that someone forged my signature upon this instrument.”

On November 19, 2015, the Uribes filed a motion to compel production of documents, asserting they served a request for production on the appellee on September 25, 2015. The motion further asserted the appellee refused to produce any documents other than those attached to its motion for summary judgment which was set for a hearing on November 20, 2015. The Uribes also filed a motion for continuance seeking to continue the hearing on the motion for summary judgment until their motion to compel was heard and the appellee produced the requested documents.

On November 20, 2015, the trial court held a hearing. At the hearing, the trial court denied the motion for continuance, noting the Uribes had not requested any discovery until ten months after their lawsuit was filed. At the conclusion of the hearing, the trial court signed a final judgment granting the appellee’s motion. The Uribes appeal.

SUMMARY JUDGMENT STANDARD OF REVIEW

We review a trial court’s granting of a summary judgment de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). To prevail on a traditional motion for summary judgment, the movant must show “there is no genuine issue as to any material fact and the [movant] is entitled to judgment as a matter of law.” TEX. R. CIV. P. 166a(c); see also Diversicare Gen. Partner, Inc. v. Rubio, 185 S.W.3d 842, 846 (Tex. 2005). In reviewing a summary judgment, we take as true all evidence favorable to the non-movant, indulging every reasonable inference and resolving any doubts in the non-movant’s favor. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 157 (Tex. 2004).

DENIAL OF MOTION FOR CONTINUANCE

The Uribes contend the trial court erred in denying their motion for continuance because the appellee had failed to provide the documents requested in their request for production.

The trial court may order a continuance of a summary judgment hearing if it appears “from the affidavits of a party opposing the motion that he cannot for reasons stated present by affidavit facts essential to justify his opposition.” TEX. R. CIV. P. 166a(g). “When reviewing a trial court’s order denying a motion for continuance, we consider whether the trial court committed a clear abuse of discretion on a case-by-case basis.” Joe, 145 S.W.3d at 161. “A trial court abuses its discretion when it reaches a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law.” Id. The following nonexclusive factors are considered in deciding whether a trial court abused its discretion in denying a motion for continuance seeking additional time to conduct discovery: (1) the length of time the case has been on file; (2) the materiality and purpose of the discovery sought; and (3) whether the party seeking the continuance has exercised due diligence to obtain the discovery sought. Id.

In this case, the Uribes’ lawsuit had been on file for almost a year when the trial court heard the motion for summary judgment. The Uribes waited almost ten months before they sent their first discovery request, and that discovery request was sent only after the appellee filed its motion for summary judgment. The Uribes did not file their motion to compel the appellee’s response to that discovery request until the day before the hearing on the appellee’s motion. Based on the foregoing, we hold the trial court did not clearly abuse its discretion in denying the Uribes’ motion for continuance.

CHAIN OF TITLE AND CHALLENGES TO ASSIGNMENT

In several issues, the Uribes challenge the summary judgment on the basis that the summary judgment evidence did not properly establish the Trust’s status as the owner and holder of the note and security instrument. Although the Uribes contend the business records affidavit attached to the appellee’s motion contains conclusory statements, the Uribes do not challenge the trial court’s consideration of the documents attached to that affidavit.

The note and security instrument executed by the Uribes state the lender is New Century Mortgage Corporation. The summary judgment evidence contains an assignment from New Century Mortgage Corporation, as assignor, to Wells Fargo Bank NA as Trustee for Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates, as assignee. Finally, the summary judgment evidence contains a limited power of attorney in which Wells Fargo Bank NA appoints Carrington Mortgage Services, LLC as its attorney-in-fact to take action on its behalf as trustee for Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates.

In its effort to challenge this chain of title, the Uribes first challenge the capacity of the individual who executed the assignment, asserting the assignment does not clearly identify one of the entities named in the assignment. Under Texas law, the Uribes only have standing to challenge the assignment on a ground that renders the assignment void. See Vasquez v. Deutsche Bank Nat’l Trust Co., 441 S.W.3d 783, 786-87 (Tex. App.-Houston [1st Dist.] 2014, no pet.); Glass v. Carpenter, 330 S.W.2d 530, 537 (Tex. Civ. App.-San Antonio 1959, writ ref’d n.r.e.); Reinagel v. Deutsche Bank Nat’l Trust Co., 735 F.3d 220, 224-25 (5th Cir. 2013). In this case, the assignment reflects that Elizabeth A. Osterman executed the assignment as a vice president of Carrington Mortgage Services, LLC, which was the attorney in fact for New Century Liquidating Trust as successor-in-interest to New Century Mortgage Corporation. Therefore, the assignment reflects Osterman executed the assignment as an officer for the successor-in-interest to New Century Mortgage Corporation. To the extent Osterman fraudulently purported to execute the assignment as an officer of New Century Mortgage Corporation’s successor-in-interest, this lack of authority makes the assignment voidable, not void. Reinagel, 735 F.3d at 226. Therefore, the Uribes lack standing to challenge the assignment on this basis.

The Uribes next contend the limited power of attorney only purported to apply to mortgages owned by the trusts listed in an attached exhibit. The assignment, however, reflects that the Uribes’ note and security instrument were assigned to Wells Fargo NA as Trustee for Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates. One of the trusts listed in the exhibit to the limited power of attorney is the Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates. Accordingly, the limited power of attorney establishes that it applied to the Uribes’ note and security instrument.

The Uribes also contend the assignment to the Trust occurred after the closing date of the Trust. Even assuming the assignment violated the terms of the Pooling and Service Agreement pursuant to which the Trust operates, such a violation would not render the assignment void. Id. at 228. Therefore, the Uribes lack standing to challenge the assignment on this basis. Vasquez, 441 S.W.3d at 786-87; Glass, 330 S.W.2d at 537; Reinagel, 735 F.3d at 224-25, 228.

Finally, the Uribes contend the summary judgment evidence fails to establish what entity owned the note and security instrument between the closing date of the Trust and the date of the assignment. As previously noted, the Uribes have no standing to challenge the assignment on the basis that it was executed after the closing date of the Trust. And, the assignment reflects the Uribes’ original lender, New Century Mortgage Corporation, was the assignor. Accordingly, the summary judgment evidence establishes that New Century Mortgage Corporation owned the note and security instrument until it was assigned to Wells Fargo Bank, NA as Trustee for Carrington Mortgage Loan Trust, Series 2006-NC4 Asset Backed Pass Through Certificates.

FRAUD CLAIM

The Uribes contend the trial court erred in granting a final judgment because the appellee’s motion for summary judgment did not address their fraud claim. This contention ignores that the fraud claim is based on the allegation that the Trust was not the owner and holder of the note and security instrument. Because the trial court determined the Trust was the owner and holder of the note and security instrument, the granting of the summary judgment also disposed of the Uribes’ fraud claim.

FORGERY

The final ground on which the Uribes challenge the summary judgment is their contention that Mr. Uribe’s signature on the security instrument was forged. As previously noted, the Uribes attached Mr. Uribe’s affidavit to their response in which he states his signature was forged.

A forged security instrument or deed of trust “is void ab initio, a nullity, and passes no title.” See Yarbrough v. Household Fin. Corp. III, 455 S.W.3d 277, 282 (Tex. App.-Houston [14th Dist.] 2015, no pet.); see also Johnson v. Coppel, No. 01-09-00392-CV, 2012 WL 344757, at *6 (Tex. App.-Houston [1st Dist.] Feb. 2, 2012, no pet.)(mem. op.). Although the appellee asserts Mrs. Uribe did not corroborate Mr. Uribe’s statement regarding his signature being forged, we must view the evidence in the light most favorable to the Uribes and take as true all evidence favorable to them. Joe, 145 S.W.3d at 157. Therefore, we accept the statement made by Mr. Uribe in his affidavit to be true and hold the Uribes raised a genuine issue of material fact with regard to whether Mr. Uribe’s signature was forged, rendering the security instrument void.

In its brief, the appellee asserts the Uribes “provided no credible evidence that the notarization [of] the security agreement was forged with knowledge of or by the public notary that would invalidate the security agreement.” In support of this assertion, the appellee cites the Texas Rules of Evidence and a case holding a deed of trust is admissible as evidence because it is self-authenticating. See TEX. R. EVID. 902(8); Roper v. CitiMortgage, Inc., No. 03-11-00887-CV, 2013 WL 6465637, at *11 (Tex. App.-Austin Nov. 27, 2013, pet. denied). The admissibility of the security instrument as self-authenticating evidence, however, does not conclusively negate Mr. Uribe’s statement that his signature was forged.^[2]

CONCLUSION

Because Mr. Uribe’s affidavit raised a genuine issue of material fact as to whether the security instrument relied upon by the appellee to establish its right to foreclose was forged and therefore void, the trial court erred in granting the appellee’s motion for summary judgment. Accordingly, the trial court’s judgment is reversed, and the cause is remanded for further proceedings consistent with this opinion.

[1] The security instrument is equivalent to a deed of trust.

[2] We note that the law provides that “a forged deed may be adopted by the grantor when the grantor subsequently acknowledges the deed,” and “[c]lear and unmistakable proof that either the grantor did not appear before the notary or that the notary practiced some fraud or imposition upon the grantor is necessary to overcome the validity of a certificate of acknowledgment.” 1st Coppell Bank v. Smith, 742 S.W.2d 454, 461 (Tex. App.-Dallas 1987, no writ), overruled on other grounds, Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 678 (Tex. 2000). The appellee, however, did not raise this argument or reference this law in its motion for summary judgment. See TEX. R. CIV. P. 166a (“Issues not expressly presented to the trial court . . . shall not be considered on appeal as grounds for reversal.”); McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 343 (Tex. 1993) (noting “[a]n appellate court cannot read between the lines, infer or glean from the pleadings or the proof any grounds for granting the summary judgment other than those grounds expressly set forth before the trial court [in the motion for summary judgment]”) (internal citations omitted); Roberts v. Sw. Tex. Methodist Hosp., 811 S.W.2d 141, 146 (Tex. App.-San Antonio 1991, writ denied) (noting “[w]hen a motion for summary judgment asserts grounds A and B, it cannot be upheld on grounds C and D, which were not asserted”).

 

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

CONSUMER FINANCIAL PROTECTION
BUREAU,
Petitioner,

v.

HARBOUR PORTFOLIO ADVISORS,
LLC; NATIONAL ASSET ADVISORS, LLC;
and NATIONAL ASSET MORTGAGE,
LLC;
Respondents.

OPINION AND ORDER GRANTING PETITION TO ENFORCE CIVIL INVESTIGATIVE
DEMANDS [1]

On November 29, 2016, Petitioner Consumer Financial Protection Bureau (the
“Bureau”) petitioned this Court to enforce Civil Investigative Demands (“CIDs”) that the
Bureau issued to Respondents on September 8, 2016. (Id.) For the reasons that follow,
the Bureau’s petition is GRANTED.

[…]

C. Undue Burden

Harbour finally argues that, even if the Bureau has the authority to issue the CIDs, the
CID it received should be modified because it is unduly burdensome. (See Dkt. 13, at 22-
24.) Specifically, Harbour contends that the length of coverage (almost seven years of
information) is overbroad and that the production deadlines (30 days) are unreasonable.
(Id.) For the following reasons, the Court finds that the CID is not unduly burdensome.

 

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Thanks to Dubin Law Offices

Filed 2/16/17

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR

BANK OF NEW YORK MELLON,
Plaintiff and Appellant,

v.

CITIBANK, N.A.,
Defendant and Respondent.

Bank of New York Melon appeals from the judgment of
dismissal of its lawsuit against respondent Citibank, N.A.
The case arose out of the simultaneous refinancing of a home
equity line of credit by two different lenders in 2006, which
resulted in a dispute over the priority of their recorded deeds
of trust. Appellant challenges the orders sustaining
respondent’s demurrers to appellant’s first and second
amended complaints. The demurrers alleged that all of
appellant’s causes of action were barred by the three-year
statute of limitations in Code of Civil Procedure section 338
(hereafter, section 338). We reverse the judgment because
appellant has stated a claim for equitable subrogation, which
is not subject to that statute.

[…]

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2017 NY Slip Op 30251(U)

U.S. BANK NATIONAL ASSOCIATION, as Indenture Trustee for the Benefit of the Insurers and Noteholders of GreenPoint Mortgage Funding Trust 2006-HE1, Home Equity Loan Asset-Backed Notes, Series 2006-HE1, et al., Plaintiffs,
v.
GREENPOINT MORTGAGE FUNDING, INC., Defendant.

Docket No. 600352/2009.Supreme Court, New York County.February 3, 2017.Filed February 7, 2017.

DECISION/ORDER

MARCY FRIEDMAN, Judge.

In this RMBS putback action, defendant originator GreenPoint Mortgage Funding, Inc. (GreenPoint) moves, pursuant to the Part 60 Putback and Monoline Cases Case Management Order, dated December 7, 2015 (the CMO) (Master File Index. No. 777000/15, NYSCEF No. 17), for an order reversing an August 12, 2016 ruling of Hon. Theodore H. Katz, the Special Discovery Master for the RMBS putback and monoline cases (the Ruling). The Ruling denied GreenPoint’s application to compel the plaintiff indenture trustee, U.S. Bank National Association (U.S. Bank), to produce all Custodial Files in its possession relating to the GreenPoint Mortgage Funding Trust 2006-HE1 securitization (the Trust).

The Custodial Files are maintained by U.S. Bank in its separate capacity as Custodian pursuant to a Custodial Agreement, dated as of August 1, 2006. (Aff. of Cameron R. Matheson [Counsel for GreenPoint] In Supp. [Matheson Aff.], Exh. B.) The files contain certain original documents pertaining to each of the loans in the Trust, including the original credit line agreement and title policies and, for non-MERS loans, original recorded mortgages, assignments, and other documents. (Id., § 2.)

The parties’ arguments on this motion are substantially similar to the arguments they made before Judge Katz. In support of its application to Judge Katz, GreenPoint argued that production of all of the Custodial Files is required by this court’s CMO. In the alternative, GreenPoint argued that the Custodial Files are highly relevant and should be produced in their entirety. For example, GreenPoint argued that “[o]ne of the most often-alleged breaches by plaintiffs’ experts in RMBS putback litigation are [sic] documents missing from the loan files,” and that “U.S. Bank would have its re-underwriting expert allege breaches based on alleged missing documents that could very well be hiding in U.S. Bank’s possession.” (Ltr. from Daniel M. Payne [Counsel for GreenPoint], dated July 29, 2016, at 2 [Matheson Aff., Exh. D].)

U.S. Bank, in opposition, disputed that the CMO makes production of the Custodial Files mandatory and argued that production of the complete files would be extraordinarily burdensome. According to U.S. Bank, there are 29,000 Custodial Files in this case, each consisting of original documents kept solely in hard copy form in a secured vault with strict access controls. (Ltr. from Constance M. Boland [Counsel for U.S. Bank], dated Aug. 4, 2016, at 1-2 [Matheson Aff., Exh. C].) U.S. Bank further argued that production of the Custodial Files would be duplicative, as copies of the documents should also be contained in the loan files produced by GreenPoint. U.S. Bank acknowledged, however, that if GreenPoint’s loan file “does not contain material otherwise contained in a Custodial File, or if GreenPoint otherwise raises an issue with respect to one or more origination files, the production of, or access to, a Custodial File may be warranted.” (Id., at 2.)

In his Ruling, Judge Katz stated that he was “not persuaded that the en masse production” of the Custodial Files maintained by U.S. Bank was either “compulsory” under the CMO or “in accordance with the imperative of proportionality in discovery.” (Ruling, at 1 [Matheson Aff., Exh. A].) Judge Katz further found that, “[g]iven the procedural posture of this case, the custodial files maintained by U.S. Bank are relevant only to the extent that they may contain some missing component of the loan files produced by Greenpoint that could reasonably impact upon the reunderwriting process.” (Id.) In light of this relevance finding and the “unusually-weighty burden that U.S. Bank would necessarily bear to produce those custodial files in their entirety,” due to their being maintained only in hard copy and under secure conditions, Judge Katz concluded that “a more narrow protocol is appropriate with regards to the relevant contents of the custodial files.” (Id.) He accordingly directed the parties to meet and confer and to agree upon a protocol whereby “(1) any relevant missing components of the loan files are identified with reasonable specificity; and (2) a reasonably targeted search of the custodial files is undertaken to produce those missing components.” (Id.)

Pursuant to section III(E) of the CMO, this court must review decisions of the Special Discovery Master “consistent with the standards applicable to review of orders from a `master’ pursuant to Federal Rule of Civil Procedure 53(f)(3)(A), (4), (5), reviewing factual findings for clear error, conclusions of law made or recommended de novo, and rulings on procedural matters for abuse of discretion.” The parties do not dispute that the de novo review standard applies to Judge Katz’s ruling as to whether production of the Custodial Files is mandatory under the CMO, and that the clear error standard applies to his determination as to whether the requested production would violate the proportionality standard. (See Def.’s Memo. In Supp., at 4-5; Pl.’s Memo. In Opp., at 4-6.) Applying these standards of review to the Ruling, the court holds that the Ruling should be upheld.

Judge Katz did not err in ruling that this court’s CMO does not require the en masse production of Custodial Files under these circumstances, in which the files are held by U.S. Bank in its separate capacity as Custodian and consist solely of original hard copy documents that substantially overlap with the documents contained in the electronically-stored loan origination files of GreenPoint.

This is the first dispute to reach this court regarding the meaning of the CMO’s reference to “loan files,” a term which the parties have been afforded latitude to define among themselves. Section V(B)(1)(a) of the CMO provides, in pertinent part, that within the specified time period, “each party will complete its production of what it understands to be the loan tapes and loan files within its possession, custody or control for all loans in the supporting loan group(s) at issue conveyed to each relevant trust. . . .”

The CMO does not provide a definition of “loan files.” The CMO does, however, provide that “[l]oan files will be produced in the manner set forth in the Master ESI Order,” i.e., the Stipulation and Order Regarding the Format of Document Productions, dated August 21, 2015. (Id.; Boland Aff., Exh. 3.) The Master ESI Order governs the format of production of hard copy documents (section II) and electronically stored information (ESI) (section III) across all the putback and monoline cases. The section of that order regarding the production of hard copy documents does not set forth a definition of loan files, although it does refer to the production of such files. (See Master ESI Order, § II [B] [“OCR [Optical Character Recognition] text files need not be provided for Loan Files, as defined below].) The section of the order regarding the production of ESI defines “Loan Files” as “Loan Origination Files (which may contain, inter alia, documents that were created or received during, and in connection with, the loan’s origination, underwriting, approval and funding, including supplemental materials connected to the loan’s origination and received post-funding) and/or Loan Servicing Files (which may contain documents that were created or received in connection with the servicing of the loan).” (Id., § III [L].)

U.S. Bank argues that the documents in the Custodial Files are duplicative of the contents of GreenPoint’s Loan Origination Files, which unquestionably constitute Loan Files under the Master ESI Order. However, U.S. Bank also argues that there is an important difference between Loan Origination Files and the Custodial Files: Whereas Loan Origination Files generally are stored electronically and contain documents pertinent to the underwriting of the loans, the Custodial Files are smaller and contain original hard copy documents “to be used by the servicer in case there’s a foreclosure or a pay off of the loan and an original mortgage or an original note is required to take action.” (Transcript of Teleconference Hearing before Judge Katz on Aug. 11, 2016 [Katz Tr.], at 10-11 [Matheson Aff., Exh. E]; Transcript of Oral Argument on Dec. 6, 2016 [Tr.], at 43-44.) Due to the importance of the original documents, they are kept in a secure location and access to them is restricted.^[1]Notably, GreenPoint does not dispute the substantial overlap between the hard copy Custodial Files and the electronically-stored Loan Origination Files.

As Judge Katz correctly cautioned in deciding this issue, the CMO should not be read to endorse the concept of “work that [isn’t] necessary.” (Katz Tr., at 15.) Special concerns are raised where, as here, the documents sought to be produced consist of original, sensitive, hard copy files that substantially overlap with electronically-stored documents produced by another party. In such circumstances, production of the files should be carefully limited to minimize the risk of damage to the documents and unnecessary production costs.

For these reasons, Judge Katz correctly held that the CMO does not make en masse production of Custodial Files compulsory. Nor did Judge Katz err in balancing the relevance of the files against the burden on U.S. Bank of wholesale production. On the contrary, Judge Katz’s directive that the parties meet and confer on a protocol for more targeted discovery of the Custodial Files was a practical and reasonable resolution of GreenPoint’s application, designed to ensure that GreenPoint is able to review the information necessary for it to litigate this action and for the parties to commence reunderwriting, while protecting the sensitive documents at issue and avoiding undue burden. To the extent that GreenPoint seeks documents not in its possession that could reasonably affect the reunderwriting process, the Ruling establishes a protocol for the identification of, and search of the Custodial Files for, such documents. To the extent that GreenPoint contends that documents in the Custodial Files may be relevant to a breach claim by U.S. Bank based on documents that U.S. Bank may identify as missing from its loan files (see supra, at 2; see also Tr., at 33, 37-38, 42, 45-46), the Ruling does not appear to foreclose targeted discovery of such documents. Any request for clarification of the Ruling with respect to such discovery should be addressed to the Special Discovery Master.

It is accordingly hereby ORDERED that the motion of GreenPoint Mortgage Funding, Inc. to reverse the August 12, 2016 ruling of the Special Discovery Master is denied.

This constitutes the decision and order of the court.

[1] U.S. Bank represented to Judge Katz that it had not identified any Part 60 RMBS case in which a Custodian has been required to produce copies of the original safeguarded Custodial Files. (Katz Tr., at 12; Tr., at 37.)

 

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

 

LANE A. HOUK, Appellant,
v.
PENNYMAC CORP., substituted as party plaintiff for CitiMortgage, Inc.; SHANNON HOUK; BELLE MEADE OWNERS ASSOCIATION, INC., and MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Appellees.

Case No. 2D15-2583.District Court of Appeal of Florida, Second District.Opinion filed February 10, 2017.Appeal from the Circuit Court for Lee County; Thomas S. Reese, Senior Judge.

Mark P. Stopa of Stopa Law Firm, Tampa, for Appellant.

Nancy M. Wallace of Akerman LLP, Tallahassee; William P. Heller and Marc J. Gottlieb of Akerman LLP, Fort Lauderdale; and Kathryn B. Hoeck of Akerman LLP, Orlando, for Appellee, PennyMac Corp.

No appearance for remaining Appellees.

WALLACE, Judge.

Lane A. Houk challenges a final summary judgment of foreclosure entered in favor of PennyMac Corp., an entity that was substituted as the party plaintiff in place of CitiMortgage, Inc., during the pendency of the litigation in the circuit court. Because a genuine issue of material fact exists regarding PennyMac’s standing to foreclose, we reverse.

I. THE FACTUAL AND PROCEDURAL BACKGROUND

On September 27, 2005, Mr. Houk executed a note for $584,800 in favor of Cherry Creek Mortgage Co., Inc. Mr. Houk and his wife executed a mortgage on real property in Lee County to secure payment of the note on the same day. A stamp with a signature appearing on a copy of the note indicates that Cherry Creek indorsed the note to the order of CitiMortgage.

On January 11, 2008, CitiMortgage filed a two-count complaint against Mr. and Mrs. Houk and other defendants. Count I of the complaint sought the foreclosure of the note and mortgage. Count II requested the reestablishment of the note that CitiMortgage alleged had been lost. In an affidavit of lost note that was subsequently filed in the case, a document control officer for CitiMortgage stated that the note had been lost or destroyed while it was in the possession of the law firm that was responsible for filing the foreclosure action.^[1]

On May 20, 2013, CitiMortgage filed an unsworn motion to substitute party plaintiff seeking the substitution of PennyMac as plaintiff. The motion stated, in pertinent part: “Subsequent to the filing of the present action, the underlying note and mortgage were transferred.” A copy of a recorded assignment of mortgage from CitiMortgage to PennyMac was attached to the motion. The circuit court entered an order granting the motion on the same day that it was filed.

After the entry of the order of substitution, PennyMac filed a second amended verified complaint seeking both foreclosure and reestablishment of the lost note. In Count I, PennyMac alleged, in pertinent part:

4. CitiMortgage, Inc. subsequently transferred all rights in the note and mortgage to PennyMac Corp.

5. PennyMac Corp. is entitled to enforce the mortgage and mortgage note pursuant to Florida Statutes § 673.3011(3) as a person not in possession of the instrument who is entitled to enforce the instrument. PennyMac Corp. is entitled to enforce the instrument, but has lost the Mortgage Note pursuant to Florida Statutes § 673.3091.

In paragraph 25 of Count II, PennyMac alleged, in pertinent part: “Plaintiff was in possession of the Note and entitled to enforce it when loss of possession occurred or Plaintiff has been assigned the right to enforce the Note.”

Mr. Houk filed an answer to the second amended complaint. In his answer, Mr. Houk generally denied the material allegations of the complaint. He also raised ten affirmative defenses, including the defense that PennyMac lacked standing and that CitiMortgage lacked standing to enforce the note when it filed the action.

PennyMac filed a motion for summary judgment with supporting affidavits. It subsequently filed an amended motion for summary judgment. In its motion, PennyMac sought both foreclosure of the mortgage and reestablishment of the note. On February 25, 2015, the circuit court held a hearing on the amended motion for summary judgment. There is no transcript of this hearing, and the parties have not prepared a statement of the proceedings in accordance with Florida Rule of Appellate Procedure 9.200(b)(4). At the conclusion of the hearing, the circuit court entered a final judgment of foreclosure. Strangely, the final judgment does not include a provision reestablishing the lost note. Mr. Houk filed a motion for rehearing that was denied. This appeal followed.

II. THE ISSUES ON APPEAL

On appeal, Mr. Houk raises two issues. First, he argues that the circuit court erred in entering the summary judgment because PennyMac failed to refute his affirmative defenses in its amended motion for summary judgment. Second, Mr. Houk contends that the entry of the summary judgment was error because PennyMac failed to establish its standing to foreclose. We need address only Mr. Houk’s second issue.

III. THE APPLICABLE LAW

Before considering the parties’ arguments regarding the issue of standing, it is appropriate to review what PennyMac was required to demonstrate in order to establish its entitlement to enforce the note. PennyMac had to establish that CitiMortgage had standing when the complaint was filed and its own standing when the final judgment was entered. See Lamb v. Nationstar Mortg., LLC, 174 So. 3d 1039, 1040 (Fla. 4th DCA 2015). Section 673.3011, Florida Statutes (2012), addresses the question of how one may qualify as a person entitled to enforce an instrument:

The term “person entitled to enforce” an instrument means:

(1) The holder of the instrument;

(2) A nonholder in possession of the instrument who has the rights of a holder; or

(3) A person not in possession of the instrument who is entitled to enforce the instrument pursuant to s. 673.3091 or s. 673.4181(4).

A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.

In this case, PennyMac’s claim was that the note had been lost after it had been indorsed by Cherry Creek to the order of CitiMortgage. Therefore, PennyMac had to satisfy the requirements outlined in section 673.3091 in order to prevail. See Federal Nat’l Mortg. Ass’n v. McFadyen, 194 So. 3d 418, 420 (Fla. 3d DCA 2016).

Section 673.3091 provides, in pertinent part, as follows:

(1) A person not in possession of an instrument is entitled to enforce the instrument if:

(a) The person seeking to enforce the instrument was entitled to enforce the instrument when loss of possession occurred, or has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;

(b) The loss of possession was not the result of a transfer by the person or a lawful seizure; and

(c) The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

(2) A person seeking enforcement of an instrument under subsection (1) must prove the terms of the instrument and the person’s right to enforce the instrument. If that proof is made, s. 673.3081 applies to the case as if the person seeking enforcement had produced the instrument.

It was CitiMortgage—not PennyMac—that was entitled to enforce the note when it was lost. Therefore, PennyMac had to establish that it had directly or indirectly acquired ownership of the note from CitiMortgage. See § 673.3091(1).

In the Lamb case, the Fourth District outlined what a substituted plaintiff seeking to enforce an instrument indorsed to the original plaintiff must establish as follows:

“When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person.” § 673.2051(1), Fla. Stat. (2013). Where a bank is seeking to enforce a note which is specially indorsed to another, it may prove standing ” `through evidence of a valid assignment, proof of purchase of the debt, or evidence of an effective transfer.'” Stone v. BankUnited, 115 So. 3d 411, 413 (Fla. 2d DCA 2013) (quoting BAC Funding Consortium Inc. ISAOA/ATIMA v. Jean-Jacques, 28 So. 3d 936, 939 (Fla. 2d DCA 2010)); see also Hunter v. Aurora Loan Servs., LLC, 137 So. 3d 570, 573 (Fla. 1st DCA), review denied, 157 So. 3d 1040 (Fla. 2014); Dixon [v. Express Equity Lending Grp., LLLP], 125 So. 3d [965, 967 (Fla. 4th DCA 2013)] (“`[T]he plaintiff must submit the note bearing a special [i]ndorsement in favor of the plaintiff, an assignment from payee to the plaintiff or an affidavit of ownership proving its status as holder of the note.'”) (quoting Rigby v. Wells Fargo Bank, N.A., 84 So. 3d 1195, 1196 (Fla. 4th DCA 2012)). “A witness who testifies at trial as to the date a bank became the owner of the note can serve the same purpose as an affidavit of ownership.” Sosa v. U.S. Bank Nat’l Ass’n, 153 So. 3d 950, 951 (Fla. 4th DCA 2014).

Lamb, 174 So. 3d at 1040-41. With these principles in mind, we turn to the parties’ arguments about whether PennyMac established the nonexistence of a material fact about its entitlement to enforce the note.

IV. DISCUSSION

A. Introduction

Mr. Houk concedes that the affidavit of lost note with the copy of the note attached was sufficient to establish CitiMortgage’s entitlement to enforce the note when the complaint was filed. Instead, Mr. Houk contends that PennyMac failed to establish its entitlement to enforce the note at the time of the entry of the summary judgment of foreclosure. In response to Mr. Houk’s challenge to its entitlement to enforce the note, PennyMac raises five arguments. First, the absence of a transcript of the hearing on the motion for summary judgment “demands affirmance.” Second, the order substituting PennyMac as the party plaintiff was sufficient to give it standing to enforce the lost note. Third, the assignment of mortgage was sufficient to establish its standing to foreclose. Fourth, the allegations of the motion to substitute and the verified second amended complaint were sufficient to establish its entitlement to enforce the lost note. Finally, PennyMac had standing to foreclose as the servicer of the loan. We will consider PennyMac’s arguments separately below.

B. The Absence of a Transcript

PennyMac correctly notes that the record on appeal does not include a transcript of the hearing on the amended motion for summary judgment or a statement of the proceedings prepared in accordance with Florida Rule of Appellate Procedure 9.200(b)(4). “However, hearing transcripts ordinarily are not necessary for appellate review of a summary judgment.” Shahar v. Green Tree Servicing LLC, 125 So. 3d 251, 254 (Fla. 4th DCA 2013). We join the Fourth District in agreeing with the Third District, which has addressed this question as follows:

It is the burden of the appellant to bring up a proper record for consideration of the issues presented on appeal. Where the appeal is from a summary judgment, the appellant must bring up the summary judgment record, that is, the motion, supporting and opposing papers, and other matters of record which were pertinent to the summary judgment motion. Those are the portions of the record essential to a determination whether summary judgment was properly entered. However, the hearing on a motion for summary judgment consists of the legal argument of counsel, not the taking of evidence. Consequently, it is not necessary to procure a transcript of the summary judgment hearing, although it is permissible and often helpful to do so.

Seal Prods. v. Mansfield, 705 So. 2d 973, 975 (Fla. 3d DCA 1998) (citations omitted); see also Inglis v. Casselberry, 200 So. 3d 206, 212 (Fla. 2d DCA 2016) (citing Mansfield for the foregoing proposition with approval).

In this case, the record includes the operative complaint, Mr. Houk’s answer and affirmative defenses, the motion and the order for substitution of the plaintiff, the amended motion for summary judgment, and the supporting and opposing affidavits, including the affidavit of lost note. Thus we have all of the portions of the record necessary for us to determine whether the summary judgment was properly entered. Under these circumstances, a transcript of the hearing on the motion for summary judgment is not critical to a determination of this appeal.

C. The Sufficiency of the Order of Substitution

PennyMac asserts that it “became entitled to enforce the lost note when it was substituted as party plaintiff.” According to PennyMac, its standing derives from CitiMortgage, the holder of the note when it was lost or destroyed.

Mr. Houk concedes that CitiMortgage had standing to enforce the note when it filed the original complaint. But PennyMac also had to establish its standing to enforce the note at the time of the entry of judgment. See Russell v. Aurora Loan Servs., LLC, 163 So. 3d 639, 642 (Fla. 2d DCA 2015). Here, the lost note had been specially indorsed to CitiMortgage. In order to establish its entitlement to enforce the lost note, PennyMac could establish standing “through evidence of a valid assignment, proof of purchase of the debt, or evidence of an effective transfer.” BAC Funding Consortium, 28 So. 3d at 939. PennyMac’s filings in support of its motion for summary judgment did not present evidence of any of these things. In the absence of such evidence, the order of substitution standing alone was ineffective to establish PennyMac’s entitlement to enforce the lost note. See Geweye v. Ventures Trust 2013-I-H-R, 189 So. 3d 231, 233 (Fla. 2d DCA 2016); Creadon v. U.S. Bank, N.A., 166 So. 3d 952, 953-54 (Fla. 2d DCA 2015); Sandefur v. RVS Capital, LLC, 183 So. 3d 1258, 1260 (Fla. 4th DCA 2016); Lamb, 174 So. 3d at 1040-41.

In support of its argument that it has standing to enforce the lost note derived from CitiMortgage through the order of substitution, PennyMac relies on the decision in Brandenburg v. Residential Credit Solutions, Inc., 137 So. 3d 604 (Fla. 4th DCA 2014). We find the decision in Brandenburg to be distinguishable because its facts are substantially different from the facts in this case. In Brandenburg, the Fourth District affirmed a final judgment of foreclosure in favor of Residential Credit Solutions, Inc. (RTS). Id. at 606. The original plaintiff in the action and prior holder of the note was Amtrust Bank (Amtrust). Id. at 605. During the course of the litigation, RTS was substituted as the party plaintiff in place of Amtrust. Id. The issue before the Fourth District in Brandenburg was whether Amtrust had standing at the inception of the foreclosure action. Id. The Fourth District concluded that the evidence established that Amtrust had standing to foreclose when it filed the complaint. Id. at 605-06. In affirming the final summary judgment of foreclosure, the Fourth District specifically noted that RTS had standing because it had “acquired the note and mortgage from the prior holder.” Id. at 605. In Brandenburg, it was RTS’s acquisition of the note and mortgage from the prior holder—coupled with the order substituting it as party plaintiff—that enabled RTS to pursue the foreclosure to judgment. In the case before us, PennyMac failed to make a sufficient showing that it had acquired the note from the prior holder, CitiMortgage. Thus, unlike in Brandenburg, the order of substitution was unavailing to give PennyMac standing to enforce the note. It follows that PennyMac’s reliance on Brandenburg is misplaced.

D. The Assignment of Mortgage

PennyMac relies on the copy of the recorded assignment of mortgage that was attached to its motion to substitute plaintiff as being sufficient to establish its standing. According to PennyMac, “[t]he assignment of mortgage showed the mortgage was assigned `with all rights due or to become due thereon.’ This would include monies owed on the note. See § 701.01, Fla. Stat. [(2012)].” This argument falls short of the mark for several reasons.

First, the assignment transferred only the mortgage, not the note. “The mortgage follows the assignment of the promissory note, but an assignment of the mortgage without an assignment of the debt creates no right in the assignee.” Tilus v. AS Michai LLC, 161 So. 3d 1284, 1286 (Fla. 4th DCA 2015) (citing Bristol v. Wells Fargo Bank, Nat’l Ass’n, 137 So. 3d 1130, 1133 (Fla. 4th DCA 2014)). PennyMac did not acquire standing to foreclose based on an assignment of only the mortgage. See Eaddy v. Bank of America, N.A., 197 So. 3d 1278, 1280 (Fla. 2d DCA 2016); Caballero v. U.S. Bank Nat’l Ass’n ex rel. RASC 2006-EMX7, 189 So. 3d 1044, 1046 (Fla. 2d DCA 2016); Geweye, 189 So. 3d at 233; Lamb, 174 So. 3d at 1041.

Second, the only evidence of the assignment of the mortgage was the copy attached to the unsworn motion for substitution. Mr. Houk’s pleadings did not admit the genuineness of the assignment. The copy of the assignment was not a certified copy, and none of the affidavits filed by PennyMac attested to the authenticity of the document. “Merely attaching documents which are not `sworn to or certified’ to a motion for summary judgment does not, without more, satisfy the procedural strictures inherent in [Florida Rule of Civil Procedure] 1.510(e).” Bifulco v. State Farm Mut. Auto. Ins. Co., 693 So. 2d 707, 709 (Fla. 4th DCA 1997). In the absence of an admission or appropriate proof of the authenticity of the assignment, it could not properly be considered as evidence in support of PennyMac’s amended motion for summary judgment. See DiSalvo v. SunTrust Mortg., Inc., 115 So. 3d 438, 439-40 (Fla. 2d DCA 2013); Bryson v. Branch Banking & Trust Co., 75 So. 3d 783, 786 (Fla. 2d DCA 2011); Toyos v. Helm Bank, USA, 187 So. 3d 1287, 1290 (Fla. 4th DCA 2016); Rodriguez v. Tri-Square Const., Inc., 635 So. 2d 125, 126-27 (Fla. 3d DCA 1994).

E. The Motion to Substitute and the Verified Complaint

PennyMac points out that “[b]oth the motion to substitute plaintiff and the verified [second] amended complaint stated CitiMortgage transferred its interest in the note and mortgage to PennyMac.” PennyMac contends that the allegations in these papers were sufficient to establish its entitlement to enforce the lost note. We disagree for several reasons.

First, the motion to substitute was unsworn. Therefore, it was plainly insufficient as a basis for supporting a motion for summary judgment. See Fla. R. Civ. P. 1.510(e). However, PennyMac’s second amended complaint was verified. With regard to the sufficiency of a verified complaint to support a motion for summary judgment, this court has said:

We acknowledge that “[a] verified complaint may serve the same purpose as an affidavit supporting or opposing a motion for summary judgment.” “However, in order to be so considered, the allegations of the verified complaint must meet the requirements of the rule governing supporting and opposing affidavits.” Rule 1.510(e), in turn, provides that affidavits must be based on personal knowledge and shall “show affirmatively that the affiant is competent to testify to the matters stated therein.” A verification which is improperly based on information and belief is insufficient to entitle the verifying party to relief because the verification is qualified in nature.

Ballinger v. Bay Gulf Credit Union, 51 So. 3d 528, 529 (Fla. 2d DCA 2010) (citations omitted). In this case, the verification of the complaint in accordance with Florida Rule of Civil Procedure 1.110(b) stated: “Under penalty of perjury, I declare that I have read the foregoing, and the facts alleged therein are true and correct to the best of my knowledge and belief.” Where, as in this case, a verification of a complaint is based on knowledge and belief and fails to show that the affiant had personal knowledge of the matters stated in the complaint, the trial court cannot consider the verified complaint as a basis for the entry of summary judgment. See Ballinger, 51 So. 3d at 530; Colon v. JP Morgan Chase Bank, N.A., 162 So. 3d 195, 199 (Fla. 5th DCA 2015); see also Lindgren v. Deutsche Bank Nat’l Trust Co., 115 So. 3d 1076, 1076 (Fla. 4th DCA 2013) (finding a verification based on “information and belief” to be insufficient for purposes of summary judgment).

Second, the allegations of the second amended complaint regarding PennyMac’s standing to enforce the note were conclusory in nature. The pertinent allegations did not state any facts regarding PennyMac’s claim that CitiMortgage had “transferred all rights in the note and mortgage to PennyMac Corp.” This conclusory statement was insufficient to sustain PennyMac’s burden for summary judgment. See Jones Constr. Co. of Cent. Fla., Inc. v. Fla. Workers’ Comp. JUA, Inc., 793 So. 2d 978, 980 (Fla. 2d DCA 2001) (holding that an affidavit containing “only conclusory statements of ultimate fact [was] insufficient to sustain the movant’s burden of demonstrating the absence of any genuine issue of material fact”); Seinfeld v. Commercial Bank & Trust Co., 405 So. 2d 1039, 1041 (Fla. 3d DCA 1981) (stating that general statements in an affidavit, which are framed only in conclusions of law, do not satisfy the movant’s burden on a motion for summary judgment).

Third, the allegations of the second amended complaint regarding PennyMac’s claim to entitlement to enforce the note are in hopeless conflict with one of the affidavits that PennyMac itself filed in support of its amended motion for summary judgment. PennyMac filed an Affidavit of Indebtedness sworn to by a “default specialist” for PennyMac Loan Services, LLC, the alleged servicer of the loan for PennyMac. In this affidavit, the default specialist stated that PennyMac “is the holder of said Note and Mortgage.”^[2] Thus PennyMac’s own affidavit undercut and contradicted the theory advanced in the complaint that it qualified under section 673.3011(3) as a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 673.3091. Unquestionably, PennyMac could not meet its burden to establish the nonexistence of a material fact regarding its standing when the affidavit that it filed in support of its motion was in express and irreconcilable conflict with the theory of standing alleged in its operative complaint.

F. Standing as the Loan Servicer

Finally, PennyMac asserts that it “had standing as the loan servicer.” This argument is without merit. We recognize that “[a] servicer that is not the holder of the note may have standing to commence a foreclosure action on behalf of the real party in interest, but it must present evidence, such as an affidavit or a pooling and servicing agreement, demonstrating that the real party in interest granted the servicer authority to enforce the note.” Rodriguez v. Wells Fargo Bank, N.A., 178 So. 3d 62, 63 (Fla. 4th DCA 2015) (citing Elston/Leetsdale, LLC v. CWCapital Asset Mgmt. LLC, 87 So. 3d 14, 17 (Fla. 4th DCA 2012)). But in this case, two of the affidavits filed in support of the amended motion for summary judgment recite that the servicer for Mr. Houk’s loan is PennyMac Loan Services, LLC, not the plaintiff, PennyMac Corp. In making the argument about its purported standing as the loan servicer, PennyMac seems to have forgotten or ignored its own affidavits.

V. CONCLUSION

For the foregoing reasons, PennyMac failed to meet its burden of showing the nonexistence of a genuine issue of material fact regarding its entitlement to enforce the lost note. Accordingly, we reverse the final summary judgment of foreclosure and remand this case to the circuit court for further proceedings.

Reversed and remanded.

MORRIS and ROTHSTEIN-YOUAKIM, JJ., Concur.

NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION AND, IF FILED, DETERMINED.

[1] Counsel for PennyMac had no involvement in the loss of the note.

[2] Because the note had been lost long before the alleged transfer from CitiMortgage, it would be a physical impossibility for PennyMac to be a holder of the note. “`Holder’ means: (a) The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession. . . .” § 671.201(21)(a), Fla. Stat. (2012). “To hold a note under the Uniform Commercial Code ordinarily connotes possession of the document itself.” Phan v. Deutsche Bank Nat’l Trust Co., ex rel. First Franklin Mortg. Loan Trust 2006-FF11, 198 So. 3d 744, 747 (Fla. 2d DCA 2016).

 

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

 

JAMES OBER, Appellant,
v.
TOWN OF LAUDERDALE-BY-THE-SEA a Florida Municipality, Appellee.

No. 4D14-4597.District Court of Appeal of Florida, Fourth District.January 25, 2017.Appeal from the Circuit Court for the Seventeenth Judicial Circuit, Broward County; Thomas M. Lynch, IV, Judge; L.T. Case No. 14-006782(05).

ON MOTION FOR REHEARING

Manuel Farach of McGlinchey Stafford, Fort Lauderdale, for appellant.

Susan L. Trevarthen, Laura K. Wendell, Eric P. Hockman and Adam A. Schwartzbaum of Weiss Serota Helfman Cole & Bierman, P.L., Coral Gables, for appellee.

Heather K. Judd and Jordan R. Wolfgram, Assistant City Attorneys, Office of the City Attorney For The City of St. Petersburg, St. Petersburg, for Amicus Curiae City of St. Petersburg.

Alexander L. Palenzuela of Law Offices of Alexander L. Palenzuela, P.A., for Amicus Curiae City of Coral Gables.

Chris W. Altenbernd, Marty J. Solomon and Nicholas A. Brown of Carlton Fields Jorden Burt, P.A., Tampa, for Amicus Curiae The Florida Land Title Association.

Irwin R. Gilbert of Kelley Kronenberg, West Palm Beach, for Amicus Curiae The Business Law Section of the Florida Bar.

Joseph E. Foster and Carrie Ann Wozniak of Akerman LLP, Orlando, and Richard H. Martin of Akerman LLP, Tampa, for Amicus Curiae Florida Bankers Association.

Kenneth B. Bell and John W. Little, III of Gunster, West Palm Beach, and Robert W. Goldman of Goldman, Felcoski & Stone, P.A., Naples, for Amicus Curiae The Real Property Probate & Trust Law Section of the Florida Bar.

David Rosenberg and Robert R. Edwards of Robertson, Anschutz & Schneid, PL, Boca Raton, Andrea R. Tromberg and Jason Joseph of Gladstone Law Group, P.A., Boca Raton, and David Newman and Ari Miller of Choice Legal Group, P.A., Fort Lauderdale, for Amicus Curiae The American Legal and Financial Network.

Julia C. Mandell, City Attorney, City of Tampa, and Ernest Mueller, Senior Assistant City Attorney, Tampa, and Victoria Méndez, City Attorney, City of Miami, Miami, for Amicus Curiae City of Tampa, and The City, County and Local Government Section of the Florida Bar.

PER CURIAM.

We grant appellant James Ober’s motion for rehearing, withdraw our opinion of August 24, 2016, and substitute the following. This case involves the application of section 48.23, Florida Statutes (2014), the lis pendens statute, to liens placed on property between a final judgment of foreclosure and a judicial sale. We hold that such liens are discharged by section 48.23(1)(d).

Background

On November 26, 2007, a bank, which is not a party in this lawsuit, recorded a lis pendens on certain property as part of a foreclosure lawsuit against a homeowner, also not a party in this case. On September 22, 2008, the bank obtained a final judgment of foreclosure. From July 13, 2009 through October 27, 2011, appellee Town of Lauderdale-by-the-Sea, recorded seven liens on the subject property related to various code violations occurring after the entry of the final judgment.

On September 27, 2012, the bank purchased the property at a foreclosure sale. It later sold the property to Ober. Ober filed suit to quiet title, attempting to strike the liens against his property. The Town’s counterclaim sought to foreclose the liens. The trial court granted the Town’s motion, denied Ober’s motion, and entered a final judgment of foreclosure on the seven liens recorded prior to the judicial sale, as well as on three liens imposed after the sale of the property. Ober does not argue that those three post-judicial sale liens were discharged, and on remand the trial court may enter judgment on them.

Analysis

Insofar as this case concerns the interpretation of a statute, the standard of review is de novo. Brown v. City of Vero Beach, 64 So. 3d 172, 174 (Fla. 4th DCA 2011). Section 48.23(1)(d) states, in pertinent part:

[T]he recording of . . . notice of lis pendens . . . constitutes a bar to the enforcement against the property described in the notice of all interests and liens . . . unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens.

(Emphasis added).

We reject the Town’s argument that the statute applies only to liens existing or accruing prior to the date of the final judgment. The language of the statute is broad, applying to “all interests and liens.” Significantly, the statute expressly contemplates that its preclusive operation continues through a “judicial sale.” This is consistent with how foreclosure suits operate in the real world. As the amicus brief of the Florida Bankers Association points out, foreclosures are unlike many civil lawsuits in that “much remains to be accomplished after entry of final judgment, including the foreclosure sale, the issuance of certificates of sale and title, and, in many instances, the prosecution of a deficiency claim, all under court supervision.” In a foreclosure lawsuit, the final judgment is not the end of the road, but merely a way station to the final result. See Park Fin. of Broward, Inc. v. Jones, 94 So. 3d 617, 618 (Fla. 4th DCA 2011) (stating that mortgage foreclosure actions are different from typical civil actions).

A proper reading of section 48.23(1)(d) is, as the Florida Land Title Association suggests, that “when a foreclosure action is prosecuted to a judicial sale, that sale discharges all liens, whether recorded before the final judgment or after, if the lienor does not intervene in the action within 30 days” after the recording of the notice of lis pendens.

This view is in accord with Form 1.996(a) of the Florida Rules of Civil Procedure. The form provides a sample foreclosure judgment, with a provision stating:

On filing the certificate of sale, defendant(s) and all persons claiming under or against defendant(s) since the filing of the notice of lis pendens shall be foreclosed of all estate or claim in the property . . ., except as to claims or rights under chapter 718 or chapter 720, Florida Statutes, if any.

As the Business Law Section of the Florida Bar notes, this form reflects the common understanding of the operation of the lis pendens statute. See Hancock Advert., Inc. v. Dep’t of Transp., 549 So. 2d 1086, 1089 (holding that the court is “entitled to consider” the “practical construction which has in fact been adopted by the industry” when dealing with a statutory interpretation issue). The form was first adopted in 1971. See In re Fla. Rules of Civil Procedure, 253 So. 2d 404, 419 (Fla. 1971). It has been reviewed and revised by the Florida Supreme Court since 1971, most recently in January 2016. See In re Amendments to Fla. Rules of Civil Procedure, 190 So. 3d 999 (Fla. 2016). The January 2016 revisions maintained the language quoted above. Id. at 1010.

Conclusion

The practical problem in this case is the long lag time between the foreclosure judgment and the foreclosure sale. Resolution of the competing interests—of the Town, the lending and title insurance industries, property owners, and buyers at foreclosure sales—is in the province of the legislature.

We reverse the final judgment and remand to the circuit court for further proceedings.

GROSS, FORST and KLINGENSMITH, JJ., concur.

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

BBC-

Former business clients of the Royal Bank of Scotland are accusing the bank of systematically manipulating documents to cover up wrong doing.

In an exclusive interview with the BBC, a former RBS employee has come forward to support allegations of document manipulation within the bank.

RBS says it categorically denies document manipulation and forgery.

Mark Wright started working for NatWest Bank in 1988 and was still there in 2000 when it was taken over by RBS.

[BBC]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

WSJ-

The new Republican leader of the Securities and Exchange Commission has imposed fresh curbs on the agency’s enforcement staff, scaling back their powers to initiate investigations of alleged financial misdeeds.

The move by Michael Piwowar—named acting head of the agency in late January by the Trump administration—narrows actions launched during the Obama administration designed to make it easier for the Wall Street regulator to launch probes in the wake of the financial crisis and a series of colossal investment scandals.

The SEC last year pursued a record number of enforcement cases, drawing criticism from Republicans who said the agency was overly aggressive in seeking ever-higher corporate penalties.

[WALL STREET JOURNAL]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

The Denver Post-

Colorado’s attorney general’s office says former foreclosure attorney Larry Castle, his wife and two businesses in which he allegedly held a financial interest should have to pay $16 million to $26 million if the state wins its long-running lawsuit against them.

The amount could grow even larger if a Denver district court judge sides with Colorado and awards the state its legal fees for an investigation and lawsuit that’s taken more than five years to complete.

In a 12-page document filed in Denver District Court, Colorado Senior Assistant Attorney General Erik Neusch lays out millions of dollars in fines, “unjust profits,” and illegitimate gains the state says Castle, his law firm and other associated enterprises pocketed over a seven-year period.

[THE DENVER POST]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

 

MERTON CAPITAL L.P. and MERTON CAPITAL II L.P., Petitioners,
v.
LENDER PROCESSING SERVICES, INC., Respondent.

C.A. No. 9320-VCL.Court of Chancery of Delaware.Submitted: September 21, 2016.Decided: December 16, 2016.Steven T. Margolin, GREENBERG TRAURIG, LLP, Wilmington, Delaware; Stephen E. Jenkins, Richard D. Heins, Marie M. Degnan, Peter H. Kyle, ASHBY & GEDDES, Wilmington, Delaware; Counsel for Petitioners.

Bradley R. Aronstam, S. Michael Sirkin, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; John A. Neuwirth, Evert J. Christensen, Jr., Matthew S. Connors, Elizabeth Kerwin-Miller, WEIL, GOTSHAL & MANGES LLP, New York, New York; Counsel for Respondent.

MEMORANDUM OPINION

LASTER, Vice Chancellor.

Petitioners Merion Capital L.P. and Merion Capital II L.P. (together, “Merion”) brought this statutory appraisal proceeding to determine the fair value of their shares of stock in Lender Processing Services, Inc. (“LPS” or the “Company”). The valuation date is January 2, 2014, when Fidelity National Financial, Inc. (“Fidelity” or “FNF”) completed the merger by which it acquired the Company (the “Merger”). This post-trial decision determines that the fair value of the Company’s common stock at the effective time of the Merger is $37.14.

I. FACTUAL BACKGROUND

Trial took place over four days. The parties submitted 357 exhibits and lodged eight depositions. Four fact witnesses and two experts testified live. The following facts were proven by a preponderance of the evidence.

A. The Company

At the time of the Merger, the Company provided integrated technology products, data, and services to the mortgage lending industry, and it had a market leading position in mortgage processing in the United States. Its business operated through two principal divisions: Transaction Services (“Services” or “TS”) and Technology, Data & Analytics division (“Analytics” or “TD&A”).

The primary segment within the Services division focused on loan originations. It supported lenders by facilitating many of the steps necessary to originate a loan. Most of the originations, however, were not new loans, but refinancings of existing loans. The Services division also had a segment that supported lenders, servicers, and investors by facilitating many of the steps necessary to foreclose on a property.

The Analytics division focused on providing ongoing support to lenders and loan servicers. Its “MSP platform” automated many of the loan servicing functions performed during the life of a loan. A smaller business segment specialized in troubled loans.

B. The Company’s Origins

The Company started as the financial and mortgage services division of Alltel Information Services. PTO ¶ 11. In 2003, Alltel sold that division to Fidelity, which is a leading provider of (i) title insurance, escrow, and other title-related services, and (ii) technology and transactional services for the real estate and mortgage industries. Id. ¶¶ 6, 11. Thomas H. Lee Partners (“THL”) is a private equity firm that worked with Fidelity on the acquisition but did not co-invest at the time of the deal.

Fidelity reorganized the former Alltel division as part of a subsidiary called FNF National Information Services, Inc. (“FNF Services”). PTO ¶ 11. In 2005, THL invested in FNF Services. In 2006, Fidelity spun off FNF Services. Id.

In 2008, FNF Services spun off the Company. Its shares traded on the New York Stock Exchange until the Merger closed. Id. Because of the Company’s historic ties to Fidelity, the Company continued to share an office campus with its former parent (although occupying separate buildings). The two companies also shared private jets, hangar facilities, and server space.

C. The Effect Of The Great Recession On The Company’s Business

The Company’s spinoff coincided with the Great Recession of 2008. Although devastating to many households, the financial crisis was a boon to the Company, because loan defaults drove key segments of its business. Revenue grew by approximately 80% from pre-recession levels to peak in 2010. JX 111 at 21.

But the Company also was involved in some of the problematic loan protocols that led to the Great Recession, colloquially known as “robo-signing.” In 2010, the United States Department of Justice, the Federal Bureau of Investigation, and attorneys general from all fifty states commenced civil and criminal investigations into the Company’s practices. Stockholders also filed lawsuits. PTO ¶ 12.

D. Fidelity’s Early Overtures

In April 2010, amidst the negative publicity from the robo-signing allegations, Fidelity, THL, and the Blackstone Group made an unsolicited offer to buy the Company. The Company’s board of directors (the “Board”) retained the Goldman Sachs Group, Inc. (“Goldman”) as its financial advisor. The discussions did not go far. PTO ¶ 13.

In early 2011, THL and Blackstone approached the Company again. Goldman continued in its advisory role. Again, no deal was reached. PTO ¶ 14.

In late 2011, the Company’s CEO retired due to medical issues. In October, the Board hired Hugh Harris to serve as President and CEO. He also became a director.

Harris had ties to Fidelity. In 2003, he worked for Fidelity and THL as a consultant on the Alltel deal. Afterwards, Fidelity hired Harris to run one of the new business units. Harris continued to work for FNF Services after its spinoff. He retired in 2007, before the Company’s spinoff in 2008.

Harris also had ties to THL. In addition to consulting on the Alltel deal, he worked with THL for several years in the mid-1990s. Tr. 9 (Harris). He also was a friend of and owned hunting land with one of THL’s principals. Tr. 12 (Harris). Given these relationships, the Board excluded Harris from its deliberations about any potential transaction with THL and Fidelity, and Harris recused himself from voting as a director. The Board determined that Harris could, however, “do all the normal things that the CEO would do as far as presenting the company, the business, what was going on with the company, our projections, our results, et cetera.” Tr. 25 (Harris); see PTO ¶ 7.

In late November 2011, THL reached out to Harris. He referred the call to Lee Kennedy, the Company’s Chairman. This time, the discussions progressed further. In December, the Company and THL signed a confidentiality agreement. In February 2012, after conducting due diligence, THL offered to buy the Company for $26.50 per share. THL’s offer noted that Blackstone and Fidelity would participate in the deal, and THL later explained that Fidelity would contribute its ServiceLink business to the surviving entity. The ServiceLink business competed with LPS and was a source of synergies.

On February 28, 2012, the Board met to discuss the offer. Goldman continued in its advisory role. The Board determined that a transaction was potentially attractive, but not at that price. PTO ¶ 19. The Board decided to explore whether someone might pay more by reaching out to other financial sponsors and strategic buyers. Tr. 27 (Harris).

In March 2012, Goldman reviewed the Company’s financial performance with the Board. After analyzing several market-based metrics, Goldman opined that “the Company was fully valued at current trading prices.” JX 33 at 2. Goldman’s illustrative discounted cash flow analysis, which used LPS’s historical discount rate and assumed a 1% perpetuity growth rate, produced a valuation of $25.91 per share. Id. at 17. The Company’s stock closed at $24.66 that day. Id. at 13.

In April 2012, after additional due diligence, THL, Blackstone, and Fidelity increased their offer to $28.00 per share, comprising $26.00 in cash and $2.00 in Fidelity stock. The Board rejected that price as inadequate. PTO ¶¶ 22-23.

In May 2012, THL, Blackstone, and Fidelity increased their offer to $29 per share, payable entirely in cash or in a combination of $27.00 in cash and $2.00 in Fidelity stock. JX 38 at 2. The bidding group explained that the premium depended in part on anticipated synergies with the ServiceLink business. JX 260 at 53.

By this point, with the country emerging from the Great Recession, management was concerned that the Company’s performance would deteriorate. During a series of meetings in May 2012, management provided the Board with updated financial forecasts that contemplated revenue declining approximately 25% by 2017. JX 44 at 927. The forecasts projected that EBITDA would decrease by 7.2% through 2017 before increasing by 7.5% through 2022. Id. Despite the weaker forecasts, the Board told THL that the proposed consideration “was inadequate and should be raised to a price in the $30s.” JX 44 at 3.

During the last week of May 2012, Goldman contacted three financial sponsors: Texas Pacific Group Capital (“TPG”), Kohlberg Kravis Roberts & Co. L.P. (“KKR”), and Advent International. Goldman also contacted seven potential strategic buyers: Accenture, Berkshire Hathaway, IBM, Infosys, Oracle, Tata Consultancy Services, and Total Systems Services. Several of the parties entered into confidentiality agreements, conducted due diligence, and received management presentations. None made an offer. Five of the strategic buyers had no interest. Two said they needed more time to evaluate the opportunity. KKR and Advent said they could not pay a premium and meet their internal hurdle rates. TPG was only interested if it could be part of the THL/Blackstone/Fidelity consortium.

On June 8, 2012, THL told the Company that the consortium would not offer more than $29.00 per share. PTO ¶ 25. The directors felt that was a good price but remained committed to $30.00 per share. They rejected THL’s offer, but decided to negotiate the terms of the transaction documents in case the consortium changed its collective mind.

In June 2012, two strategic bidders — Total Systems Services and Infosys— expressed interest in buying the Company, only to promptly change their minds. Total Systems wanted to team up with a financial sponsor but said it could not find one. Infosys cited LPS’s size, lack of strategic fit, and legacy issues.

The Board and the consortium negotiated a draft merger agreement that included a go-shop, but neither would budge on price. One critical issue dividing the parties was the extent of the Company’s legal risk due to the pending investigations and lawsuits. In August 2012, discussions terminated. PTO ¶ 27.

E. The Board Hires BCG.

In October 2012, the Board hired the Boston Consulting Group (“BCG”) to evaluate the Company’s core businesses, research market trends, assess the legal and regulatory environment, and test the reliability of management’s projections. The Board also asked BCG to evaluate the Company’s strategic alternatives with a focus on two particular opportunities: (i) continuing to operate the Company in its existing configuration, or (ii) splitting up the Company’s two businesses.

BCG would spend the next six months conducting an in-depth review of the Company’s business that included over 120 interviews with LPS employees, customers, and investors. Based on its work, BCG generated a report that spanned more than 200 pages. See JX 111. Through this process, BCG “pressure tested” each element of the Company’s five-year projections based on macroeconomic factors, industry trends, and the Company’s specific product lines. See Tr. 226 (Schilling); Tr. 19 (Harris).

F. The Company Addresses Its Legal Problems.

On January 31, 2013, the Company announced that it had entered into a settlement agreement with the attorneys general from forty-six states and the District of Columbia. PTO ¶ 31. As part of the settlement, the Company agreed to make a settlement payment of $127 million. The Company also entered into a non-prosecution agreement with the Department of Justice that contemplated a payment of $35 million. The Company settled the outstanding stockholder litigation for a payment of $14 million. Although the regulators charged some of the Company’s employees with criminal activity, they did not charge the Company. The settlement was profoundly good news, and the Company’s shares rose 7.5% to $24.08 on the announcement. JX 71 at 1.

Part of the settlement with the Department of Justice required the Company to operate under the terms of a consent order. Ironically, the consent order gave the Company “a competitive advantage” because many loan servicers were still trying to adjust to the new post-financial crisis regulatory regime. Tr. 61 (Harris). The Company’s settlement signaled that the Company had achieved compliance. Management believed this would result in a “flight to quality” as customers chose the Company over competitors whose systems had not yet been validated. See Tr. 61 (Harris).

Around this time, Harris told the Board he planned to retire at the end of 2013.

G. Offers From Fidelity And Altisource

After the Company announced the settlements, two of the Company’s competitors expressed interest in buying the Company. Fidelity was first out of the gate. On January 31, 2013, Fidelity and THL made a joint proposal to acquire the Company for $30.00 per share, consisting of $13.20 in cash and $16.80 in Fidelity common stock. PTO ¶ 32. The proposal represented a premium of approximately 32% over the Company’s average closing stock price during the five previous trading days. JX 72 at 3.

Four days later, Altisource Portfolio Solutions S.A. (“Altisource”) proposed to acquire the Company in a transaction valued at $31.00 per share, consisting of $21.50 in cash and $9.50 in Altisource common stock. PTO ¶ 33. The offer represented a 28% premium over the Company’s closing price on February 1 and a 32% premium over its trailing 30-day weighted average. JX 74 at 2. Altisource competed with the Company’s Analytics business. Tr. 30 (Harris).

During a meeting on February 6, 2013, the Board received a presentation from the Company’s finance team. They advised the Board that 2013 would “continue to be a challenging year for the mortgage industry and for LPS.” JX 75 at 464. They noted that “new entrants will emerge” and that the Company would face continuing competition from entities like Ocwen and NationStar. Id. They projected that the Company’s revenue for 2013 would be “down about 4% compared to 2012, with a 4% increase in [Analytics] revenue being offset by a 9% decline in [Services] revenue.” Id. They expected EBITDA to be flat, EBITDA margin to increase from 26.7% to 27.5%, and earnings per share to decline from $2.80 to $2.74 due to increased shares outstanding. Id.

The Board also heard from the Company’s investor relations team. Although the Company’s stock had risen by 63% in 2012 versus only a 12% increase for the S&P 500, the investor relations team believed that the market did not appreciate the Company’s strong fundamentals. To address this, the team had launched a strategy to explain to the market that “LPS is a stronger company today” with “[s]ustainable competitive advantages” and “[l]ong-term growth opportunities.” JX 76 at 497. The goal for 2013 was to “Achieve Fair Value of LPS Securities.” Id. at 509; see Schilling Dep. 151; see also Tr. 358 (Schilling).

Against this backdrop, the directors considered the offers from Fidelity and Altisource. In light of Harris’ prior ties to Fidelity and THL, the Board limited his role to responding to the overtures in his capacity as CEO. Lee Kennedy was the Company’s Chairman, had previously served as a director of a THL portfolio company, and had served as CEO of Information Services from 2006 until 2009. The Board determined that he did not have a conflict. James Hunt was a non-management director who had served as an officer of one of THL’s portfolio companies. The Board determined that he should not be involved in any discussions about a sale. The Board decided to tell Fidelity and Altisource that their offers undervalued the Company and that the Company was not interested. PTO ¶¶ 7, 34, 35.

H. More Expressions Of Interest

Over the ensuing weeks, four more unsolicited expressions of interest arrived. One was an increased bid from Fidelity and THL. By letter dated February 26, 2013, they increased their proposal by 7% to $32.00 per share, with $14.72 paid in cash and $17.28 in Fidelity common stock. PTO ¶ 36. Their letter stated that $32.00 was the highest price they would offer. JX 89 at 99.

In March 2013, First American National Financial Corporation expressed interest in a joint venture between its mortgage servicing arm and the Services business. First American’s proposal valued the Services business at $450-$600 million. First American said it could complete diligence in four to six weeks. Also in March, two private equity firms expressed interest in the Services business. Flexpoint Ford LLC proposed to buy the business on a cash-free, debt-free basis for 5.0x-5.5x normalized EBITDA. PTO ¶¶ 41-42. Golden Gate Capital also proposed to buy the business but did not suggest a price. PTO ¶¶ 37, 41-42.

Having received a flurry of proposals, the Board engaged Credit Suisse Securities (USA) LLC (“Credit Suisse”) as a second financial advisor. The Board decided to defer considering the offers until after BCG completed its strategic review.

I. The March 2013 Board Meeting

On March 21, 2013, the Board met to consider the Company’s alternatives. The meeting began with a presentation from BCG. Based on its six months of work, BCG projected that without any new business initiatives, “[m]arket headwinds” would cause the Company’s revenue to decline by $470 to $510 million by 2015 and $580 to $680 million by 2017. JX 111 at 37. BCG attributed the declines to a 75-80% drop in refinancings and a 60-70% drop in defaults. Id. at 31. The declines would affect the Services business disproportionately, which would suffer 95% of the net impact. Id. at 70. The Analytics business would experience slow and steady growth, but not enough to offset the decline in the Services business.

BCG next presented three sets of five-year projections created in collaboration with management: (i) a Reduced Base Case, (ii) a Base Case, and (iii) an Optimistic Case. BCG regarded its Base Case as “the most likely scenario.” Id. at 27. The Base Case started with the macro-economic trend line then added “additional initiatives and opportunities” to increase revenue. Id. at 28. BCG identified ten initiatives, almost all involving the Analytics business, that could generate roughly $350 million in revenue. To succeed, the Company would have to devote resources to all ten and capture market share with new products. Because the Analytics division’s two biggest products already had captured 56% and 80% of their respective markets, the bulk of the Company’s growth would come from new initiatives. See Tr. 20 (Harris); Tr. 511 (Geller); JX 111 at 51, 65. Even then, under the Base Case, 2017 revenue still would be less than 2012 revenue: Projected 6% compound annual growth rate for the Analytics business and -11% compound annual growth rate for the Services business, resulting in combined compound annual growth for the Company of -3%. JX 111 at 66.

The Reduced Base Case contemplated a forecast between doing nothing and the Base Case in which the initiatives did not fully succeed and revenue decreased by $485 million by 2017. JX 196 ¶ 89. The Optimistic Case contemplated that the initiatives would succeed to a greater degree than the Base Case and generate between $651 million to $1 billion in new revenue. JX 111 at 66. BCG believed the Optimistic Case was “achievable” but “not the most likely outcome.” Id. at 66-67. Ultimately, “everyone got comfortable with the [B]ase [C]ase.” Tr. 20 (Harris).

During the same meeting, Credit Suisse and Goldman made a joint presentation. Their view of industry trends matched BCG’s. See JX 114 at 4; JX 113 at 19. They also examined stock market trends and concluded that analysts appeared to understand the Company well because there was little difference between their consensus forecasts and the Company’s actual performance. See JX 113 at 11. The bankers observed that since March 2012, most analysts had maintained a “hold” rating on the Company. The median price target was $25.00 with a high price target of $31.00.

Using the three cases from the BCG Report, the bankers prepared valuation models and analyzed alternatives, including an expanded share repurchase plan, a leveraged recapitalization, a spinoff of the Analytics business, a joint venture involving the Services business, a sale of the Services business, a sale of the entire Company, and a leveraged buy-out. One analysis estimated the present value of the Company’s future stock price. Using an EBITDA multiple of 6.0x, the bankers estimated that if LPS achieved the Base Case, its stock would trade at $29.43 in 2015 and $41.35 in 2017. Discounted at 11%, those figures equated to present values of $23.88 and $28.70 respectively, with the former representing a 3% discount to the Company’s current market price and the latter a 10% premium over market. JX 113 at 23. Using an EBITDA multiple of 7.0x, the Company’s stock would trade at $35.07 in 2015 and $47.76 in 2017. Discounted at 11%, those figures equated to present values of $28.46 and $31.45 respectively, implying a 15% or 28% premium over market. Id.

Another analysis used a discounted cash flow methodology to value the Company using the Base Case. Id. at 25. It generated the following range of values:

   Discount Rate    Terminal Value Next Twelve Month EBITDA Multiple:

                   5.00x      6.00x      7.00x      8.00x

    8.0%          $27.14     $31.78     $36.36     $40.83

    9.0%          $25.76     $30.23     $34.63     $38.93

    10.0%         $24.45     $28.76     $32.96     $37.12

The bankers separately analyzed the ability of strategic bidders and financial sponsors to finance a transaction. For strategic bidders, the bankers examined the level of accretion or dilution that a transaction would involve and the acquirer’s post-transaction debt-to-equity levels, without accounting for synergies, and assuming either an all-cash deal or a transaction involving 50% cash and 50% stock at prices ranging from $30 to $34 per share. Id. at 42. For financial sponsors, the bankers calculated the internal rates of return that a sponsor could expect at prices of $28 to $33 per share, assuming total leverage of 5.0x and a January 1, 2018 exit. They following chart summarizes the results:

                               Illustrative Purchase Price Per Share

   Exit Multiple   $28.00    $29.00   $30.00    $31.00   $32.00   $33.00

   6.0×            20.3%     18.1%    16.2%     14.4%    12.8%    11.3%

   6.5×            23.3%     21.0%    19.0%     17.2%    15.5%    14.0%

   7.0×            26.0%     23.7%    21.6%     19.8%    18.0%    16.5%

   7.5×            28.4%     26.1%    24.0%     22.1%    20.4%    18.8%

   8.0×            30.7%     28.4%    26.2%     24.3%    22.5%    20.9%

Id. at 43. A financial sponsor thus could not pay $33 or more per share and still clear a hurdle rate of 20% unless it projected an exit at 8.0x EBITDA.

At the conclusion of the Board meeting, Credit Suisse and Goldman recommended “in light of the strategic plan review, the indications of interest that the Company had received and the Company’s prior negotiating history with certain of the interested parties, that the Company would be best off if it could proceed with soliciting and evaluating offers for the sale of the Company (or its Transaction Services business).” JX 114 at 5. BCG “concurred that in their view, the best alternative for the Company would be to pursue a potential sale of the Company at an attractive price.” Id. Management agreed, citing the “unfavorable macroeconomic trends and the market and execution risks inherent in the strategic initiatives.” Id.

The directors decided to task Credit Suisse with contacting parties about a sale of the Company or the Services business. They asked the bankers to develop a recommendation for a sale process that the Board could evaluate and approve. PTO ¶ 43.

J. The Recommended Sale Process

To implement the Board’s directive, Company management and the financial advisors developed a list of the most likely bidders. It included six strategic buyers (Fidelity, Altisource, First American, Nationstar, CoreLogix, and IBM) and one financial sponsor (Golden Gate). All had expressed interest earlier in 2013; most had also expressed interest in 2012.

The financial advisors recommended a three-step sale process. They proposed that “given the history of discussions with [Fidelity],” the Company should first reach out to First American, Altisource, Nationstar, and Golden Gate “to create credible competitive tension in the process.” JX 115 at 1. After getting “feedback” from those firms, the bankers would contact Fidelity. Then, after receiving a first round of bids, the bankers would contact CoreLogix and IBM. The bankers also contemplated approaching other parties that were less likely to be interested in or capable of completing a transaction, such as Infosys. Tr. 515 (Geller). The bankers envisioned announcing a deal on June 11, 2013.

On March 25, 2013, the Board approved the process. PTO ¶ 44.

K. The Actual Sale Process

The Company and its bankers did not follow the recommended process. Rather than delaying the approach to Fidelity, management met with Fidelity on April 1, 2013. JX 121 at 3. During the same period, the bankers reached out to the other parties. Everyone but Altisource expressed interest. Altisource said it would not participate, citing the Company’s exposure to declining refinancings and defaults. PTO ¶ 46.

The Company entered into confidentiality agreements with Fidelity, THL, Nationstar, Golden Gate, and First American. Management made presentations to Fidelity and Golden Gate. Management was scheduled to make a presentation to Nationstar, but they dropped out on April 9, 2013. PTO ¶ 51.

Fidelity and THL took less than two weeks to update their analysis of the Company and make a revised offer. By letter dated April 18, 2013, they offered to acquire LPS for $32.00 per share, consisting of $16.00 in cash and $16.00 in Fidelity common stock. PTO ¶ 53. It was the same price they offered in late February, but with more cash. Fidelity and THL made their offer more than a month-and-a-half faster than the timeline that the bankers had recommended.

On April 25, 2013, the Company announced results for the first quarter. Compared to the prior quarter, revenue decreased by 6% and EBITDA decreased by 7%. JX 133 at 3. Year over year, revenue decreased by 3% and EBITDA increased by 7%. As expected, the bulk of the decline came from the Services business. The numbers matched management’s guidance and the analysts’ consensus.

Management updated the Base Case in light of the Company’s first quarter (the “Updated Base Case”). The new projections lowered the numbers for 2013 and 2014 but kept the figures for 2015:

    Revenue:              2013         2014         2015

    Updated Base Case   $1,868.3     $1,789.5     $1,669.7

    Analyst Consensus   $1,861.1     $1,795.7     $1,845.9

    % Difference            0.4%        -0.3%        -9.5%

    EBITDA:

    Updated Base Case     $523.0      $536.9        $506.6

    Analyst Consensus     $493.7      $485.8        $503.1

    % Difference            5.9%       10.5%          0.7%

    EBITDA Margin:

    Updated Base Case      28.0%       30.0%         30.3%

    Analyst Consensus      26.5%       27.1%         27.3%

    %Difference             5.5%       10.9%         11.3%

“[T]he modifications did not result in any significant impact” on the bankers’ valuations of the Company. JX 149 at 2. The Company provided the Updated Base Case to Fidelity, First American, and Golden Gate. PTO ¶ 45; JX 189.

L. The Board Decides To Sell The Company.

On May 1 and 2, 2013, First American and Golden Gate submitted their indications of interest. First American proposed to buy the Services business for $450-550 million in cash. PTO ¶ 55; JX 145. First American said that it preferred a joint venture and would increase its valuation of Services by 15-20% as part of that structure. Golden Gate proposed to have the Company contribute the Services business to a Golden Gate controlled entity in which LPS would retain a “substantial interest.” JX 146 at 2. Golden Gate valued its proposal at $800 million. PTO ¶ 54.

On May 3, 2013, the Board met with its financial advisors to discuss the proposals. The bankers generated a range of values, including:

• Comparable companies: $21.46 to $30.35 per share.

• Precedent transactions: $28.09 to $34.00 per share.

• DCF analysis: $27.95 to $40.11 per share.

JX 147 at 16. At the time, LPS’s stock was trading around $27.28. The Company’s 52-week low was $21.14 and its 52-weeks high was $30.88.

To enable the Board to compare a sale of the Company with a transaction involving the Services business, the bankers analyzed the EBITDA trading multiples that the latter implied for the Analytics business, which ranged from 8.0× to 9.1×. The Fidelity offer implied a range of EBITDA trading multiples for Analytics of 9.3× to 10.4×. The Board concluded that selling the Company as a whole was the better course.

In their original plan for the sale process, the bankers envisioned using a bid from Altisource to create competition for Fidelity. Without Altisource, the Board decided to counter at $34.50 per share and ask Fidelity for a collar to support the stock component. PTO ¶ 56; JX 150. After the Board meeting on May 3, 2013, Credit Suisse conveyed this proposal to Fidelity’s banker.

Instead of having its banker respond, Fidelity’s Chairman called the Company’s Chairman directly. Fidelity’s Chairman was Foley, who previously had served as the Chairman of FNF Services. The Company’s Chairman was Kennedy, who had served as Chairman, President, and CEO of a company that Fidelity acquired in 2006 in connection with the spinoff of FNF Services. Kennedy then served as CEO of FNF Services under Foley from 2006 through 2009. The petitioners perceive Foley’s call as a way for Fidelity to capitalize on Foley’s history with Kennedy and to take advantage more generally of the relationships among Fidelity, THL, and the members of the LPS Board.

The call took place on Sunday, May 5, 2013. Foley proposed to split the difference between Fidelity’s offer and the Company’s counter by increasing the proposed consideration to $33.25 per share. PTO ¶ 57. The composition would remain 50% cash and 50% stock, but with a one-way collar that would provide protection against a decline in Fidelity’s stock price of more than 7.5%. He conveyed that Fidelity wanted the right to increase the cash component to offset the dilutive effect of issuing additional shares.

The next day, after a meeting of the Board, Credit Suisse contacted Fidelity’s banker to ask for a price increase and a reduction in the percentage decline necessary to trigger the collar. Fidelity refused to increase its price but offered to improve the collar. Fidelity also agreed that if the average price of its stock increased by more than 6% and Fidelity substituted cash for shares, then the cash would reflect the upside that the Company’s stockholders would have enjoyed if they received shares.

On May 14, 2013, the Board held a telephonic meeting. Credit Suisse reported on the negotiations, and the Board instructed management and the deal team to begin due diligence on Fidelity and negotiate a merger agreement. The parties used the merger agreement they had negotiated in 2012 as a template, which included a go-shop. The parties kept the go-shop largely because of legal advice the Board received regarding its ability to mitigate potential legal risk. See Carpenter Dep. 124. The concept of a go-shop was not part of the bankers’ design for the sale process.

On May 22, 2013, the Wall Street Journal reported that Fidelity and the Company were in merger talks. JX 171 at 1. In response, Macquarie Capital (USA) Inc. issued a report titled, “Best Outcome for LPS is to be Acquired.” JX 173 at 1. Macquarie argued that “the [loan] cycle has peaked” and the deal would “rescue[] shareholders from pending fundamental slowdown.” Id. At the time, Macquarie valued LPS at $22 per share. Id.

M. The Board Approves The Merger Agreement.

On May 27, 2013, the Board met to consider the agreement and plan of merger (the “Merger Agreement”). It contemplated consideration of $33.25 per share, paid 50% in cash and 50% in Fidelity stock (the “Original Merger Consideration”). The formula for the stock component built in a one-way collar that protected against a decline of more than 5% in the value of Fidelity’s common stock and established a floor for the stock component at $15.794 per share. The Merger Agreement gave Fidelity the right to increase the cash portion and contained a formula that specified how much gain from an increase in Fidelity’s stock price would flow through to the Company’s stockholders.

The Merger Agreement provided for (i) a 40-day go-shop that would expire on July 7, 2013, (ii) a five-day initial match right that fell back to a two-day unlimited match right, and (iii) a $37 million termination fee for a deal generated during the go-shop. Otherwise the termination fee was $74 million. The lower fee represented 1.27% of the equity value of the deal ($2.9 billion); the higher fee represented 2.5% of equity value. Once the go-shop ended, LPS could continue negotiating with any party that had achieved excluded party status or if a party made a bid that met the terms of the fiduciary out.

Credit Suisse and Goldman opined that the transaction consideration was fair. The bankers’ valuations had not changed materially since their earlier assessments. Credit Suisse’s ranges included:

• Comparable companies: $21.25 to $32.93 per share.

• Precedent transactions: $27.81 to $33.67 per share.

• DCF analysis: $27.67 to $39.76 per share.

JX 175 at 12. Goldman’s ranges included:

• Comparable companies: $20.35 to $31.74 per share.

• Precedent transactions: $25.42 to $34.41 per share.

• DCF analysis: $26.50 to $37.25 per share.

• Present value of future share price: $21.32 to $32.97 per share.

JX 177 at 17.

The Board unanimously adopted and approved the Merger Agreement and recommended that the LPS stockholders vote in favor of the transaction.

N. The Go-Shop

On May 28, 2013, the bankers started the go-shop process. They contacted twenty-five potential strategic buyers and seventeen potential financial buyers. JX 213 at 5. Only Altisource and two financial sponsors expressed interest and executed confidentiality agreements. PTO ¶ 61.

The discussions with the financial sponsors never gained traction. Altisource, however, brought in a large team and conducted a “very rigorous level of diligence.” Tr. 277 (Schilling). Altisource accessed the data room, received a management presentation, and was given the Company’s projections. JX 194; JX 202; Tr. 123 (Harris). Altisource appeared serious and said they would make an offer that included an equity component. In response, the Company began conducting reverse due diligence on Altisource. Tr. 279 (Schilling); JX 199. Management generally preferred Altisource over Fidelity because they thought they would keep their jobs after a deal with Altisource. Tr. 419 (Carpenter).

On June 21, 2013, Altisource withdrew without explaining why. JX 206; Tr. 42 (Harris). There were rumors that several LPS clients did not want a competitor to acquire LPS. See JX 357 at 1; Tr. 189 (Harris). Credit Suisse had previously estimated that Altisource would face “a net revenue dis-synergy” from acquiring the Company because many of LPS’s clients would have concerns if it were owned by a competitor, and “any theoretical cost synergy” available to Altisource “would likely be more than offset by the revenue dis-synergy with customers.” JX 103.

On July 7, 2013, the go-shop ended. No one had submitted an indication of interest, much less a topping bid.

O. The Period Leading Up To The Stockholder Vote

In July 2013, management reported on the Company’s second quarter results. Revenues decreased by 1% and EBITDA remained flat. Year over year, revenue decreased by 9% and EBITDA by 13%. These results were consistent with management guidance and the consensus forecast.

On August 29, 2013, Fidelity filed a Form S-4 in connection with the transaction. The filing included the Updated Base Case, marking the first time it was publicly disclosed.

In October 2013, management reported on the Company’s third quarter results. Revenue declined by 10.6% and EBITDA by 18.4%. Year over year, revenue declined by 15.8% and EBITDA by 25%. The results fell within management’s guidance but at the lower end of the range. They came in below analysts’ consensus estimates.

On October 31, 2013, LPS filed its definitive proxy statement relating to the Merger. The proxy statement included the Updated Base Case.

Institutional Shareholder Services and Glass Lewis & Co. recommended that stockholders vote in favor of the Merger. At a meeting of stockholders held on December 19, 2013, holders of 78.6% of the outstanding shares voted in favor of the deal. Of the shares that voted, 98.4% voted in favor.

Goldman received $22.8 million for its work on the transaction. The proxy statement revealed that Goldman had a lucrative relationship with THL that generated $97 million during the previous two years. Goldman had not previously disclosed these amounts to the Board or LPS management. They learned about the figures when they saw the proxy statement. Tr. 171 (Harris).

Credit Suisse received $21.8 million for its work on the deal. The proxy statement revealed that Credit Suisse had received $26 million from THL during the previous two years. Credit Suisse had not previously disclosed these amounts to the Board or LPS management. The directors learned about the figures when they saw the proxy statement.

P. The Merger Closes.

On January 2, 2014, the Merger closed. Fidelity’s stock price had increased in the interim, resulting in an increase in the merger consideration. Fidelity elected twice to increase the cash component, which ended up at $28.10 per share. The collar yielded a stock component valued at $9.04 per share. The aggregate merger consideration received by the Company’s stockholders at closing was $37.14 per share (the “Final Merger Consideration”). The equity value of the final deal was $3.4 billion, an increase of approximately $500 million over the value at signing. Net of $287 million in cash and $1.1 billion in debt, the enterprise value of the deal was $4.2 billion.

The Initial Merger Consideration of $33.25 per share and the Final Merger Consideration of $37.14 per share represented premiums of 14% and 28% respectively over the Company’s unaffected market price on May 22, 2013, the last trading day before the Wall Street Journal reported on the merger discussions. The Final Merger Consideration provided a premium of approximately 20% over Altisource’s expression of interest in February 2013.

Evidence in the record indicates that the Initial Merger Consideration and the Final Merger Consideration included a portion of the value that Fidelity and THL expected to generate from synergies.

• In May 2012, when THL, Blackstone, and Fidelity made an offer of $29 per share to acquire the Company, they explained that the offer price depended in part on anticipated synergies with Fidelity’s ServiceLink business. JX 260 at 53.

• In March 2013, Credit Suisse made a preliminary estimate that a transaction with Fidelity could generate annual synergies of $50 to $65 million, with $40 to $50 million coming from the combination of Services and ServiceLink and another $10 to $15 million from reduced corporate overhead. JX 103.

• In May 2013, in its presentation to the Board, Credit Suisse estimated “Potential Synergies—$50mm in cost synergies in 2013E, $100mm in 2014E and $100mm thereafter. JX 180 at 45. Goldman estimated that “net synergies include $100mm in run-rate cost savings.” JX 178 at 34.

• In May 2013, Fidelity made a presentation to the rating agencies that forecasted “$75 million of [annual] cost synergies” from the transaction. JX 164 at 4. Fidelity cited its “strong history of overachieving forecasted synergies.” Id. at 8.

• The press release announcing the deal attributed the following quote to Foley, Fidelity’s Chairman: “We believe there are meaningful synergies that can be generated through the similar businesses in centralized refinance and default related products, elimination of some corporate and public company costs and the shared corporate campus. We have set a target of $100 million for cost synergies and are confident that we can meet or exceed that goal.” JX 186, Ex. 99.1 at 2.

• Merion internally modeled $100 million in synergies as part of its investment analysis. JX 310.

• The respondent’s expert cited an analyst report which described the synergy estimate as “conservative, considering business overlap between [Services] and ServiceLink (~$2B in combined revenue) and the potential elimination of corporate and management cost redundancies.” JX 296 ¶ 126.

The prospect of $100 million in synergies was a significant source of value. Using a higher discount rate than this decision adopts, the Company’s expert calculated that the $100 million target would translate into approximately $660.4 million of present value, or $7.50 per share. Id. ¶ 128.

Q. The Company’s Post-Closing Performance

Post-closing, Fidelity divided the Company’s operations into two separate subsidiaries, combined the Services business with its ServiceLink business, and issued a 35% interest in each subsidiary to THL. On March 31, 2014, KPMG LLP issued a final financial report for the combined entity. Across the board, the Company’s results came in below the Updated Base Case.

                              Actual      Updated Base Case   Actual v. Updated
                                                                                      Base Case

    TD&A                      $757.2        $800.9             ($43.7)     (5.5%)

    Transaction Services      $965.8      $1,067.3            ($101.5)     (9.5%)

    Total Revenue           $1,723.5      $1,868.3            ($144.8)     (7.8%)

    Operating Expense       $1,285.1      $1,345.3             ($60.2)     (4.5%)

    EBITDA                    $438.4        $523.0              ($84.6)    (16.2%)

    % Margin                  25.4%         28.0%             (2.6%)     (9.1%)

    EBIT                      $333.0        $415.1             ($82.1)    (19.8%)

JX 296 Ex. 15 (summarizing documents).

R. This Litigation

Merion purchased 5,682,276 shares after the announcement of the Merger and before the stockholder vote. Merion demanded appraisal, did not withdraw its demand or vote in favor of the Merger, and eschewed the Final Merger Consideration. Merion pursued this appraisal action to obtain a judicial determination of the fair value of its shares.

II. LEGAL ANALYSIS

“An appraisal proceeding is a limited legislative remedy intended to provide shareholders dissenting from a merger on grounds of inadequacy of the offering price with a judicial determination of the intrinsic worth (fair value) of their shareholdings.” Cede & Co. v. Technicolor, Inc. (Technicolor I), 542 A.2d 1182, 1186 (Del. 1988). Section 262(h) of the Delaware General Corporation Law (the “DGCL”) states that

the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.

8 Del. C. § 262(h).

Because of the statutory mandate, the allocation of the burden of proof in an appraisal proceeding differs from a liability proceeding. “In a statutory appraisal proceeding, both sides have the burden of proving their respective valuation positions by a preponderance of evidence.” M.G. Bancorporation, Inc. v. Le Beau, 737 A.2d 513, 520 (Del. 1999).

Each party also bears the burden of proving the constituent elements of its valuation position by a preponderance of the evidence, including the propriety of a particular method, modification, discount, or premium. If both parties fail to meet the preponderance standard on the ultimate question of fair value, the Court is required under the statute to make its own determination.

Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in Mergers & Consolidations, 38-5th C.P.S. §§ IV(H)(3), at A-89 to A-90 (BNA) (collecting cases) [hereinafter Appraisal Rights]. “Proof by a preponderance of the evidence means proof that something is more likely than not. It means that certain evidence, when compared to the evidence opposed to it, has the more convincing force and makes you believe that something is more likely true than not.” Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010) (Strine, V.C.) (internal quotation marks omitted). “Under this standard, [a party] is not required to prove its claims by clear and convincing evidence or to exacting certainty. Rather, [a party] must prove only that it is more likely than not that it is entitled to relief.” Triton Constr. Co. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *6 (Del. Ch. May 18, 2009),aff’d, 988 A.2d 938 (Del. 2010) (TABLE).

The standard of “fair value” is “a jurisprudential concept that draws more from judicial writings than from the appraisal statue itself.” Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 310 (Del. Ch. 2006) (Strine, V.C.). “The concept of fair value under Delaware law is not equivalent to the economic concept of fair market value. Rather, the concept of fair value for purposes of Delaware’s appraisal statute is a largely judge-made creation, freighted with policy considerations.” Finkelstein v. Liberty Dig., Inc., 2005 WL 1074364, at *12 (Del. Ch. Apr. 25, 2005) (Strine, V.C.).

In Tri-Continental Corp. v. Battye, 74 A.2d 71 (Del. 1950), the Delaware Supreme Court explained in detail the concept of value that the appraisal statute employs:

The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder’s proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents the true or intrinsic value, . . . the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value. Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholder’s interest, but must be considered. . . .^[1]

When applying this standard, the corporation “must be valued as a going concern based upon the operative reality’ of the company as of the time of the merger, taking into account its particular market position in light of future prospects.” M.G. Bancorporation, 737 A.2d at 525. A determination of fair value assesses “the value of the company . . . as a going concern, rather than its value to a third party as an acquisition.” M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999).

“The statutory obligation to make a single determination of a corporation’s value introduces an impression of false precision into appraisal jurisprudence.” In re Appraisal of Dell Inc. (Dell Fair Value), 2016 WL 3186538, at *22 (Del. Ch. May 31, 2016). “The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.” Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *2 (Del. Ch. July 9, 2004), aff’d in part, rev’d on other grounds, 884 A.2d 26 (Del. 2005).

A. The Deal Price As Evidence Of Fair Value

The Company contends that the Final Merger Consideration establishes a ceiling for the fair value of the Company. As the proponent of this valuation methodology, the Company bears the burden of establishing its reliability. In this case, the Initial Merger Consideration provides reliable evidence of the Company’s fair value at the time of signing, and the Final Merger Consideration provides reliable evidence of the Company’s fair value at the effective time.

1. Deal Price As One Form Of Market Evidence

“The consideration that the buyer agrees to provide in the deal and that the seller agrees to accept is one form of market price data, which Delaware courts have long considered in appraisal proceedings.” Dell Fair Value, 2016 WL 3186548, at *22. See generally Appraisal Rights, supra, at A-57 to A-59. Chancellor Allen summarized the law on the use of market price data as follows:

It is, of course, axiomatic that if there is an established market for shares of a corporation the market value of such shares must be taken into consideration in an appraisal of their intrinsic value. . . . It is, of course, equally axiomatic that market value, either actual or constructed, is not the sole element to be taken into consideration in the appraisal of stock.^[2]

Numerous cases support Chancellor Allen’s observations that (i) pricing data from a thick and efficient market should be considered^[3] and (ii) market price alone is not dispositive.^[4] The trial court “need not accord any weight to [values derived from the market] when unsupported by evidence that they represent the going concern value of the company at the effective date of the merger.” M.P.M., 731 A.2d at 796.

“Recent jurisprudence has emphasized Delaware courts’ willingness to consider market price data generated not only by the market for individual shares but also by the market for the company as a whole.” Dell Fair Value, 2016 WL 3186548, at *23. If the merger giving rise to appraisal rights “resulted from an arm’s-length process between two independent parties, and if no structural impediments existed that might materially distort the `crucible of objective market reality,'” then “a reviewing court should give substantial evidentiary weight to the merger price as an indicator of fair value.”^[5]

“Here too, however, the Delaware Supreme Court has eschewed market fundamentalism by making clear that market price data is neither conclusively determinative of nor presumptively equivalent to fair value.” Dell Fair Value, 2016 WL 3186548, at *23.

Section 262(h) neither dictates nor even contemplates that the Court of Chancery should consider the transactional market price of the underlying company. Rather, in determining “fair value,” the statute instructs that the court “shall take into account all relevant factors.” Importantly, this Court has defined “fair value” as the value to a stockholder of the firm as a going concern, as opposed to the firm’s value in the context of an acquisition or other transaction. Determining “fair value” through “all relevant factors” may be an imperfect process, but the General Assembly has determined it to be an appropriately fair process. . . .

Section 262(h) unambiguously calls upon the Court of Chancery to perform an independent evaluation of “fair value” at the time of a transaction. It vests the Chancellor and Vice Chancellors with significant discretion to consider “all relevant favors” and determine the going concern value of the underlying company. Requiring the Court of Chancery to defer—conclusively or presumptively—to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent. It would inappropriately shift the responsibility to determine “fair value” from the court to the private parties. Also, while it is difficult for the Chancellor and Vice Chancellors to assess wildly divergent expert opinions regarding value, inflexible rules governing appraisal provide little additional benefit in determining “fair value” because of the already high costs of appraisal actions. . . . Therefore, we reject . . . [the] call to establish a rule requiring the Court of Chancery to defer to the merger price in any appraisal proceeding.

Golden Telecom, Inc. v. Glob. GT LP (Golden Telecom II), 11 A.3d 214, 217-18 (Del. 2010) (footnotes omitted).

Since Golden Telecom II, the Court of Chancery has regularly considered the deal price as a relevant factor when determining fair value, but it has not deferred automatically or presumptively to the deal price. The court also has not equated satisfying the standards of review that govern fiduciary duty claims with carrying the burden of proof in an appraisal proceeding. Because the two inquiries are different, a sale process might pass muster for purposes of a breach of fiduciary claim and yet still constitute a sub-optimal process of an appraisal.^[6]

In evaluating the persuasiveness of the deal price, this court has cautioned that “[t]he dependability of a transaction price is only as strong as the process by which it was negotiated.” Merlin P’rs LP v. AutoInfo, Inc., 2015 WL 2069417, at *11 (Del. Ch. Apr. 30, 2015). What is required is “a proper transactional process likely to have resulted in an accurate valuation of [the] acquired corporation.” LongPath Capital, LLC v. Ramtron Int’l Corp., 2015 WL 4540443, at *21 (Del. Ch. June 30, 2015). Under this standard, the court will rely “on the merger price itself as evidence of fair value, so long as the process leading to the transaction is a reliable indicator of value and any merger-specific value in that price is excluded.” Merion Capital LP v. BMC Software, Inc., 2015 WL 6164771, at *11 (Del. Ch. Oct. 21, 2015). “[T]he Court will give little weight to a merger price unless the record supports its reliability.” AutoInfo, 2015 WL 2069417, at *11. The deal price “is informative of fair value only when it is the product of not only a fair sale process, but also of a well functioning market.” In re Appraisal of DFC Glob. Corp., 2016 WL 3753123, at *21 (Del. Ch. July 8, 2016).

Evaluating the reliability and persuasiveness of the deal price for purposes of establishing fair value in an appraisal proceeding is a multifaceted, fact-specific inquiry. The relevant factors can vary from case to case depending on the nature of the company, the overarching market dynamics, and the areas on which the parties focus. The last is perhaps an underappreciated aspect of appraisal jurisprudence. Because an appraisal decision results from litigation in which adversarial parties advance arguments and present evidence, the issues that the court considers and the outcome that it reaches depend in large part on the arguments that the advocates make and the evidence they present. An argument may carry the day in a particular case if counsel advance it skillfully and present persuasive evidence to support it. The same argument may not prevail in another case if the proponents fail to generate a similarly persuasive level of probative evidence or if the opponents respond effectively.

2. The Persuasiveness Of The Initial Merger Consideration

The Company demonstrated at trial that the Initial Merger Consideration provides a reliable indicator of the Company’s fair value at the time of the signing of the Merger Agreement. Multiple factors contribute to this court’s determination that the sale process that the Board conducted provided an effective means of price discovery.

a. Meaningful Competition During The Pre-Signing Phase

The first factor supporting the persuasiveness of the Company’s sale process is the existence of meaningful competition among multiple bidders during the pre-signing phase.^[7] Scholars who study auction design agree on the importance of creating competition among multiple bidders.^[8] Renowned M&A practitioner Marty Lipton has contrasted the effects of adding another interested party at the front end of a negotiation with the effect of bargaining more vigorously with a single counterparty at the back end. Lipton even roughly quantified the added value of adding another interested party: “The ability to bring somebody into a situation is far more important than the extra dollar a share at the back end. At the front end, you’re probably talking about 50%. At the back end, you’re talking about 1 or 2 percent.”^[9]

Equally important, the Company’s process involved different types of bidders, which is critical for promoting competition.^[10] “[T]he most important driver of market efficiency for [change of control] transactions [is] heterogeneous buyers.” Subramanian, supra, at 713. Among homogenous bidders, a sale process functions as a common-value auction, but with heterogeneous bidders, the sale process functions as a private-value auction.^[11] The latter is better for the seller because in a private-value auction, “honest reporting of values is a dominant strategy for bidders.”^[12] Finding heterogeneous bidders generally means involving strategic buyers.^[13]Financial sponsors, by contrast, predominantly use the same pricing models, the same inputs, and the same value-creating techniques.^[14] Absent distorted market conditions, “strategic bidders are systematically willing to pay more than financial bidders,”^[15] and the fact that “average returns to [strategic] acquirers are close to zero or even negative” suggests that acquirers pay full value for targets, inclusive of the benefits of control and synergies. See Gorbenko & Malenko, supra, at 2537. Financial buyers, by contrast, generally pay lower premiums^[16] and are hampered by limitations on leverage and the need to achieve their internal hurdle rates.^[17]

In this case, the Board conducted a sale process that involved a reasonable number of participants and created credible competition among heterogeneous bidders during the pre-signing phase. The process began after the Board received five unsolicited indications of interest, with three from strategic buyers (Fidelity, Altisource, and First American) and two from financial sponsors (Flexpoint and Golden Gate). The Board did not immediately enter into negotiations or launch a sale process. Instead it awaited the results of BCG’s analysis and obtained input from management and its financial advisors about strategic alternatives. With the benefit of that information, including estimates of the Company’s standalone value based on BCG’s scenarios, the Board was well-positioned to solicit bids for the Company and its Services business and to evaluate those bids against other possibilities, including remaining a standalone entity. Having decided to solicit bids, the Board went beyond the parties who had submitted unsolicited expressions of interest by identifying three additional strategic buyers. The Board’s financial advisors approached all of the potential bidders on equal terms, and all knew that the Board was conducting a sale process and so faced the prospect of competition when formulating their offers.

The petitioners have argued that although the Board may have set out to generate competition, its efforts failed because Altisource decided not to bid. They say that this left Fidelity without any competition as the only strategic bidder for the whole Company. It is possible that a single-bidder process, even one that would be defensible from a fiduciary duty standpoint, could be unpersuasive for purposes of price discovery for an appraisal. In CKx, for example, the court relied exclusively on the market price, but stressed that the case involved meaningful pre-signing competition and was not one in which “the only evidence that a merger price was the result of `market’ forces was a post-signing go-shop period (which failed to produce competing bids). . . .” 2013 WL 5878807, at *13. Likewise in Orchard Enterprises, the court declined to give weight to the merger price in an appraisal action where “the trial did not focus extensively on the quality of marketing . . . or the utility of the `go shop’ provision in the merger agreement, which could obviously have been affected by [a large stockholder’s] voting power and expressed interest to acquire all of [the company] for itself.” 2012 WL 2923305, at *5.

Importantly, however, if bidders perceive a sale process to be relatively open, then a credible threat of competition can be as effective as actual competition:

Even when there is only one buyer, that buyer could feel compelled to act as if there were more. In a perfectly contestable market, competitive pressures exerted by the perpetual threat of entry (as well as by the presence of actual rivals) induce competitive behavior. Free entry is a sufficient condition for a market to be perfectly contestable. . . .

Aktas et al., supra, at 242-43. Consequently, “competition need not be observed ex post for the M&A market to be efficient.” Id. at 242. “Competition, or the threat of competition, is a strong incentive for buyers to make higher bids for sellers.” Bulletproof, supra, at 884 (emphasis added); see also id at 879-80 (surveying literature on auction theory and concluding that “[t]he two key insights are that competition, or the threat of competition, will lead to a price closer to the buyer’s reservation price and that the price effect of one additional competitor is greater than the price effects attributable to bargaining”).

During the pre-signing phase, Fidelity and THL did not know that Altisource had dropped out. They instead knew that the Company was conducting a sale process involving multiple parties, and they also knew that the merger agreement that they had negotiated with the Company in 2012 and planned to use as the framework for their 2013 deal included a go-shop, which could create a path for post-signing competition by a strategic competitor.^[18] In this case, the Company established the presence of a competitive dynamic during the pre-signing phase that that generated meaningful price discovery.

Reinforcing the threat of competition from other parties was the realistic possibility that the Company would reject the Fidelity/THL bid and pursue a different alternative. Fidelity and THL had approached the Company previously in 2010, 2011, and 2012. Each time, the Board had declined to pursue a transaction. In 2012, the Board had rejected premium bids of $26.50, $28.00, and $29.00 per share, choosing instead to continue operating the Company on a stand-alone basis. In early 2013, the Board also rejected Fidelity/THL’s preliminary indication of interest of $30.00 per share. The Board’s track record of saying “no” gave Fidelity/THL a credible reason to believe that the Board would not sell below its internal reserve price. See Tr. 483 (Carpenter) (“And I might add that [Fidelity] had learned in prior times that we would walk away when they didn’t raise their bid.”).

By citing the involvement of multiple, heterogeneous bidders during the pre-signing phase, this decision is not suggesting any legal requirement to engage with multiple bidders. There may be sound business reasons for not doing so, and “[n]othing in our jurisprudence suggests that an auction process need conform to any theoretical standard.” CKx, 2013 WL 5878807, at *14. As this court has observed, “a multi-bidder auction of a company” is not a “prerequisite to finding that the merger price is a reliable indicator of fair value.” Ramtron, 2015 WL 4540443, at *21. The point of citing the involvement of multiple bidders in this case is more limited. It is simply that because the Company contacted a reasonable number of heterogeneous bidders during the pre-signing phase, its argument for reliance on the deal price (all else equal) is more persuasive.^[19]

b. Adequate And Reliable Information During The Pre-Signing Phase

Another factor supporting the effectiveness of the sale process in this case was that adequate and reliable information about the Company was available to all participants, which contributed to the existence of meaningful competition. Delaware cases have questioned the validity of a sale process when reliable information is unavailable for reasons that have included regulatory uncertainty^[20] and persistent misperceptions about the corporation’s value.^[21] A company also can create informational inadequacies by providing disparate information to bidders. See Goeree & Offerman, supra, at 600. If a seller only makes information available to one bidder, then the seller has given that bidder a subsidy. See id. The effect of disparate information is greater in a common value auction than in a private value auction.^[22]Strategic buyers, who have their own private sources of value and trade-based informational advantages, are less affected by information disparities than financial buyers, who are more susceptible to the winner’s curse. See Dell Fair Value, 2016 WL 3186538, at *42; Denton, supra, at 1546.

In this case, all bidders received equal access to information about the Company. All had the opportunity to conduct due diligence before submitting their bids, and several did so. There is no evidence in the record suggesting that the Company or its advisors provided any particular bidder with informational advantages. This is also not a case where the size of the Company or the nature of its business made it difficult to understand and assess. Cf. Dell Fair Value, 2016 WL 3186538, at *40-41. Every bidder who submitted an indication of interest, including Altisource in early 2013, identified a limited amount of time for conducting due diligence, typically four weeks.

The record in this case lacked persuasive evidence of factors that would undermine the reliability of information that bidders received, such as a regulatory overhang or a significant disconnect between the Company’s unaffected market price and informed assessments of fair value by insiders. Compare DFC Glob., 2016 WL 3753123, at *21; Dell Fair Value, 2016 WL 3186538, at *32-36. The petitioners have pointed to the legal uncertainty that surrounded the Company and the proximity of the sale process to the settlements that the Company announced in January 2013. They argue that stockholders did not sufficiently understand the Company’s significant value once its legal risk had been addressed. It is true that there was a regulatory overhang from the investigations in the Company’s involvement in robo-signing and related stockholder litigation, but the settlements cleared up those issues. The weight of the evidence at trial indicated that the settlements made the Company easier to understand, and the Company’s stock price increased substantially following the announcement of the settlements.

The record in this case lacked persuasive indications of irrational or exaggerated pessimism, whether driven by short-termism or otherwise, that could have anchored the price negotiations at levels below fair value.^[23] A variety of factors indicated that the market price was providing a reliable valuation indicator. Management believed that its efforts to educate the market had succeeded, that the Company’s stockholders understood its business, and that they were focused on its long-term prospects. Since 2011, analysts had established a pattern of accurately predicting the Company’s performance. The valuation ranges that the Company’s advisors generated in 2012 and 2013 using DCF analyses were also generally consistent with market indicators. See JX 33 at 17.

c. Lack Of Collusion Or Unjustified Favoritism Towards Particular Bidders

A third factor supporting the effectiveness of the sale process in this case was the absence of any explicit or implicit collusion, whether among bidders or between the seller and a particular bidder or subset of bidders.^[24] Under Delaware law, only an “arms-length merger price resulting from an effective market check” is “entitled to great weight in an appraisal.” Glob. GT LP v. Golden Telecom, Inc. (Golden Telecom I), 993 A.2d 497, 508-09 (Del. Ch. 2010) (Strine, V.C.), aff’d, 11 A.3d 214 (Del. 2010). A common risk in corporate sale processes is the possibility that management will favor a particular bidder for self-interested reasons, even if the favoritism does not rise to the level of an actionable breach of duty; a reliable sales process avoids that taint.^[25]

The Merger was not an MBO. To the contrary, the Company’s management team believed that Fidelity would not retain them if it acquired the Company. This gave the management team a powerful personal incentive not to favor Fidelity and not to seek (consciously or otherwise) to deliver the Company to Fidelity at an advantageous price. Instead it gave the management team an additional incentive to seek out other bidders and create competition for Fidelity.

The petitioners have pointed to ties among Fidelity, THL, and members of the Board which they say undermined the sale process in general and the price negotiation in particular. It is true that there were relationships among Fidelity, THL, and members of the Board, in large part because of the Company’s history. Recall that Fidelity purchased the Alltel financial division that eventually became the Company in 2003, reorganized it as part of FNF Services, then spunoff FNF Services in 2006. FNF Services in turn spun off the Company in 2008. The Company’s CEO, Harris, had consulted for Fidelity and THL on the Alltel acquisition and managed FNF Services from 2002 through 2006. Kennedy, the Company’s Chairman, had served as CEO of FNF Services from 2006 through 2009, and during that time Foley, the Chairman of Fidelity, was Executive Chairman of FNF Services. Hunt, another outside director, served as an officer of one of THL’s portfolio companies. The Company and Fidelity also shared a common business campus in Jacksonville, Florida (although they occupied separate office buildings).

These relationships warranted close examination, but they did not compromise the sale process. Harris interacted with Fidelity and other bidders in his capacity as CEO, but he recused himself from deliberating as a director during the 2013 sale process. Hunt also recused himself. Kennedy participated only after the Board determined that he did not have a conflict. All of the members of the Board and management were net sellers in the deal, and they collectively expected to receive approximately $100 million from the Merger in stock-based compensation. See JX 260 at 91-99; Tr. 784 (Hausman). Harris in particular had an incentive to maximize the value of his shares, because he planned to retire. As noted, the management team as a whole believed that if Fidelity acquired the Company, they would not retain their positions, meaning that maximizing the value of the merger consideration was the best way for them to obtain value from the deal. There also was a history of competition between Fidelity’s ServiceLink business and the Company, and during the sale process management resisted providing sensitive information to what it regarded as its closest competitor. See JX 46.

The petitioners complain the loudest about the call that Foley made to Kennedy, where Foley proposed consideration of $33.25 per share, essentially splitting the difference between Fidelity’s offer of $32 per share and the Company’s counteroffer of $34.50 per share. Although the Company’s bankers made one more try to get more consideration, the headline price term was effectively set during that telephone call, and negotiations from that point on revolved around the collar and other aspects of the deal. The petitioners seem to believe that during that call, Kennedy committed to $33.25 per share, ending the negotiations at a point below where they would have ended up otherwise. But Kennedy did not have authority to lock the Board in to $33.25 per share, and the Board in fact had its bankers push back once more. Nor is it clear that the negotiations would have ended in a different place if Fidelity’s banker had responded to Credit Suisse, as the petitioners would have preferred.

More importantly, the record indicates that even at $33.25 per share, the deal price included a portion of the synergies that Fidelity and THL hoped to achieve from the transaction, including revenue synergies from combining the Company’s Services business with Fidelity’s ServiceLink unit. Assuming for the sake of argument that a negotiator without a historical relationship with Foley might have extracted more than $33.25 per share, the record indicates that the additional amount would have represented a portion of the combinatorial value of the Company to Fidelity, not increased going concern value to which the petitioners would be entitled in an appraisal. “A merger price resulting from arms-length negotiations . . . is a very strong indication of fair value,” but it “must be accompanied by evidence tending to show that it represents the going concern value of the company rather than just the value of the company to one specific buyer.” M.P.M., 731 A.2d at 797. “The fact that a board has extracted the most that a particular buyer (or type of buyer) will pay does not mean that the result constitutes fair value.” Dell Fair Value, 2016 WL 3186538, at *29. Likewise, the fact that a negotiator has failed to extract the most a particular buyer (or type of buyer) will pay does not mean that what the negotiator obtained did not already exceed fair value. In Dell, the former was true. In this case, the latter was true.

d. Conclusion Regarding The Initial Merger Consideration

The evidence at trial established that the Initial Merger Consideration is a reliable indicator of fair value as of the signing of the Merger Agreement. The evidence indicating that the transaction price included synergies suggests that the fair value of the Company as of the signing of the Merger Agreement would not have exceeded the value of the Initial Merger Consideration. The valuation date for purposes of an appraisal, however, is not the date on which the Merger Agreement was signed, but rather the date on which the merger closes.

3. Evidence From The Post-Signing Period

Over seven months elapsed between the signing of the Merger Agreement on May 27, 2013, and the closing of the merger on January 2, 2014. The parties have to address this temporal gap, because “[t]he time for determining the value of a dissenter’s shares is the point just before the merger transaction `on the date of the merger.'” Appraisal Rights A-33 (quoting Technicolor I, 542 A.2d at 1187). Consequently, if the value of the corporation changes between the signing of the merger and the closing, the fair value determination must be measured by the “operative reality” of the corporation at the effective time of the merger. Cede & Co. v. Technicolor, Inc. (Technicolor II), 684 A.2d 289, 298 (Del. 1996).

Neither side presented analyses of the potential for valuation change between signing and closing. Neither analyzed changes in value of market indices or (arguable) peer companies. Neither attempted to use these metrics to bring the Company’s market price forward, as parties sometimes historically did under the Delaware Block Method. See Appraisal Rights, supra, at A-58 (collecting cases). The petitioners pointed to the existence of the temporal gap as a reason not to rely on either the deal price or market-based metrics associated with the signing of the deal. They argued that in light of the temporal gap, the court should construct its own valuation as of the closing date.

The respondent approached the temporal gap differently. They argued that (i) the failure of a topping bid to emerge between announcement of the deal and the stockholder vote validated the deal price, (ii) the Company’s performance declined during the gap period, and (iii) Fidelity’s stock traded up, resulting in the Company’s stockholders receiving the higher Final Merger Consideration. The respondent argued that the Final Merger Consideration therefore exceeded fair value, particularly because of evidence that the deal included combinatorial synergies.

Taken as a whole, the evidence at trial established that the Final Merger Consideration was a reliable indicator of fair value as of the closing of the Merger and that, because of synergies and a post-signing decline in the Company’s performance, the fair value of the Company as of the closing date did not exceed the Final Merger Consideration.

a. The Absence Of A Topping Bid

During the seven-month period between signing and closing, no other bidder submitted an indication of interest or made a competing proposal. During the first forty days of the post-signing period, the Company conducted a go-shop. After that, until the meeting of stockholders on December 19, 2014, the Company was free to respond to a topping bid that constituted a Superior Proposal. The time leading up to the meeting of stockholders amounted to a five-month window-shop.

A go-shop period is less common in deals involving strategic buyers like Fidelity than in MBOs involving private equity sponsors.^[26] MBOs in which a management team has affiliated with an incumbent financial sponsor rarely generate topping bids, particularly from other financial sponsors.^[27] It is not clear how a go-shop in a deal with a strategic acquirer would affect the behavior of other strategic bidders. It seems logical that relative to a deal without a go-shop, a strategic buyer would be more likely to compete when a deal involved a go-shop.

In this case, however, several factors undermined the efficacy of the go-shop. First, it was not part of the bankers’ plan for the sale process. The parties appear to have kept the go-shop because of legal advice indicating that it would help mitigate litigation risk in the event a stockholder sued the board for breach of fiduciary duty. The bankers gave no advice regarding the timing or structure of the go-shop, and the respondent’s counsel invoked the attorney-client privilege to block discovery into discussions regarding the go-shop. The go-shop appears to have been a lawyer-driven add-on.

Second, the quality of the contacts during the go-shop is suspect. It is true that the Company’s financial advisors contacted twenty-five potential strategic buyers and seventeen potential financial buyers, which are impressive headline numbers. The bulk of those companies, however, already had demonstrated that they were not interested in acquiring the Company, had been ruled out by the Board and its bankers as unlikely transaction partners, or were “the usual opportunities.” Carpenter Dep. 129-30.

Only Altisource and two financial buyers expressed interest during the go-shop period. Neither bid. One could view the lack of interest and absence of bidding during the go-shop phase as providing support for the proposition that the Initial Merger Consideration equaled or exceeded fair value. See Highfields Capital, Inc. v. AXA Fin., Inc., 939 A.2d 34, 62 (Del. Ch. 2007) (“The more logical explanation for why no bidder ever emerged is self-evident: MONY was not worth more than $31 per share.”). The more logical explanation on the facts of this case is that potential overbidders did not see a realistic path to success. To make it worthwhile to bid, a potential deal jumper must not only value the target company above the deal price, but also perceive a pathway to success that is “sufficiently realistic to warrant incurring the time and expense to become involved in a contested situation, as well as the potential damage to professional relationships and reputation from intervening and possibly being unsuccessful.” Dell Fair Value, 2016 WL 3186538, at *39. The lack of a realistic path to success explains why a bidder “would choose not to intervene in a go-shop, even if it meant theoretically leaving money on the table by allowing the initial bidder to secure an asset at a beneficial price.” Id.

In this case, the most persuasive explanation is that the existence of an incumbent trade bidder holding an unlimited match right was a sufficient deterrent to prevent other parties from perceiving a realistic path to success.^[28] Put differently, for another bidder to warrant intervening, the bidder would have had to both (i) value the Company more highly than $33.25 per share and (ii) believe that it could outbid Fidelity, recognizing that Fidelity could achieve synergies from acquiring the Company and therefore would be likely to be able to outbid any competitor that lacked similar access to synergies or a comparable source of private value. Without the second half of the equation, an overbidder could force Fidelity to pay more, but it could not ultimately prevail. Without a realistic path to success, it made no sense to get involved.

At first blush, Altisource’s decision not to bid during the go-shop phase appears to suggest that the Initial Merger Consideration exceeded fair value. Altisource was a trade bidder and therefore might have been expected to generate synergies from a transaction with the Company. If so, and if the Initial Merger Consideration was equivalent to or less than fair value, than Altisource could have contested Fidelity’s position. But there is also evidence in this case that because Altisource competed with some of the Company’s clients, Altisource actually faced revenue dis-synergies as part of a potential deal, and that those dis-synergies would outweigh any cost savings that Altisource might achieve.

On the facts presented, the probative value of the go-shop is inconclusive. The same is true for the post-signing period between the end of the go-shop and the stockholder vote. During that nearly six-month period, the Company could no longer solicit additional bids, and the termination fee doubled from $37 million to $74 million, but otherwise the Company could entertain a bid that qualified as a Superior Proposal. Just as during the go-shop period, however, a topping bidder needed a realistic path to success to make it rational to intervene. The marginally greater impediments to a topping bid made that path less realistic, rather than more realistic, than during the post-go-shop phase.

b. Post-Closing Performance And The Operation Of The Collar

Immediately after the announcement of the Merger, Fidelity’s stock price rose. It continued to rise during the post-signing period. Due to the collar, these increases caused the value of the merger consideration to increase. Fidelity twice exercised its right to increase the cash component, resulting in the Final Merger Consideration of $37.04 per share.

During the same time period that Fidelity’s stock price was going up, the Company’s financial performance was going down. In October 2013, the Company announced that quarter over quarter, revenue had declined by 10.6% and EBITDA by 18.4%. Compared to the Updated Base Case’s projections for FY 2013, actual revenues were down 7.8% and EBITDA was down 16.2%.

The petitioners might have sought to address these issues. They might have attempted to show by reference to other companies or indices that but for the Merger, the Company’s stock price would have risen as well, perhaps even more than Fidelity’s. Or they might have sought to show that the declines in the Company’s performance resulted from the Merger itself and therefore should be excluded as a valuation consideration, perhaps because the sale process diverted management’s attention and harmed employee morale. They petitioners did not advance these or other arguments, which they would have had to support with persuasive evidence. The record rather indicates that Fidelity’s performance improved, causing an increase in the value of the merger consideration, while the Company’s performance declined.

Instead, the petitioners argued the declines in the Company’s performance post-closing did not require any adjustments to the Updated Base Case and that management reaffirmed the Company’s belief in the reliability of its projections. Accepting that as true, it suggests that the going concern value of the Company did not change such that the Initial Merger Consideration remained a reliable indicator of fair value and the Final Merger Consideration established a ceiling for fair value. See Union Ill., 847 A.2d at 343 (relying on merger price in appraisal case despite six-month lag between signing and closing because “nothing occurred between the signing of the Merger Agreement and the effective date of the Merger that resulted in an increase in the value of UFG”).

A final factor pertinent to the Company’s post-signing, pre-closing performance is the extensive evidence indicating that the Initial Merger Consideration included a portion of the value that Fidelity and THL expected to generate from synergies. The Final Merger Consideration logically incorporated an additional portion of this value because of the component consisting of Fidelity stock, which drew some (admittedly unquantified) portion of its value from the synergies that Fidelity and its stockholders would enjoy. The existence of combinatorial synergies provides an additional reason to think that the Final Merger Consideration exceeded the fair value of the Company.

B. The DCF Analysis As Evidence Of Fair Value

Both the petitioners and the Company submitted valuation opinions from distinguished experts. The petitioners’ expert, Professor Jerry A. Hausman, used a DCF analysis to opine that the Company’s fair value at closing was $50.46 per share. The respondent’s expert, Daniel Fischel, used a DCF analysis to opine that the Company’s fair value at closing was $33.57 per share. The Final Merger Consideration was $37.14 per share.

“[T]he DCF . . . methodology has featured prominently in this Court because it is the approach that merits the greatest confidence within the financial community.” Owen v. Cannon, 2015 WL 3819204, at *16 (Del. Ch. June 17, 2015) (quotation marks omitted).

Put in very simple terms, the basic DCF method involves several discrete steps. First, one estimates the values of future cash flows for a discrete period. . . . Then, the value of the entity attributable to cash flows expected after the end of the discrete period must be estimated to produce a so-called terminal value, preferably using a perpetual growth model. Finally, the value of the cash flows for the discrete period and the terminal value must be discounted back. . . .

Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *9 (Del. Ch. Aug. 19, 2005)(Strine, V.C.) (footnote omitted). This decision does not exhaustively describe the DCF methodology; it only addresses the areas of substantial disagreement between the experts.

1. The Projection Period

The first issue for any DCF analysis is to determine the appropriate forecasts to use for the projection period. Both experts used the Updated Base Case with minor adjustments. Hausman added back deferred income taxes and subtracted accounts payable, accrued liabilities, and other liabilities for 2014. JX 297 ¶ 67. Fischel added back deferred tax income and other investments. JX 296, Ex. 23. Neither provided a detailed explanation for their adjustments. This decision adopts the Updated Base Case and averages the adjustments that the experts made.

2. The Terminal Period

The next challenge for a DCF analysis is to extend the forecasts beyond the projection period to derive an estimate of cash flows during the terminal period. The experts disagreed on two aspects of the calculation.

The experts disagreed initially over the level of capital expenditures needed to sustain the Company’s business during the terminal period. Over the long run, capital expenditures should equal depreciation. Robert W. Holthausen & Mark E. Zmijewski, Corporation Valuation Theory, Evidence & Practice 232 (2014). In the last year of the projection period, however, the Updated Base Case contemplated an amount for depreciation that exceeded capital expenditures. To bring the two into harmony, Hausman assumed that capital expenditures would exceed depreciation over time by an amount sufficient to cause net amortizable assets to grow at the Company’s long-term growth rate. Fischel chose to increase capital expenditures to equal depreciation. The record shows that the Company historically had high levels of depreciation relative to capital expenditures, so it is more reasonable to assume depreciation would decrease during the terminal period to match capital expenditures. This decision adopts that approach.

The experts also disagreed over the perpetuity growth rate. Hausman used 3.4%, which he derived from the projected rate of loan originations. Fischel used 2.2%, equal to the long-term rate of inflation.

“This Court often selects a perpetuity growth rate based on a reasonable premium to inflation.” DFC Glob., 2016 WL 3753123, at *17. This is because “[i]n a steady state, it is typically assumed that future business growth will approximate that of the overall economy.” In re Trados S’holder Litig., 73 A.3d 17, 73 (Del. Ch. 2013). “[O]nce an industry has matured, a company will grow at a steady rate that is roughly equal to the rate of nominal GDP growth.” Golden Telecom I, 993 A.2d at 511. The risk-free rate is a viable proxy for expected nominal GDP growth. See DFC Glob., 2016 WL 3753123, at *17.

The Company was a mature firm, so ordinarily it would grow at a rate approximating GDP growth. The Company’s operative reality on the closing date, however, included the Services business, which had declining prospects, and a smaller Analytics business, which was growing. Given this business mix, the Company should grow over the long-term at a rate between inflation and nominal GDP that is closer to the latter. Hausman’s rate of 3.4% better fits the operative reality of the Company, so this decision adopts his figure.

3. The Discount Rate

The final issue is the appropriate discount rate, which the experts derived by calculating the Company’s weighted average cost of capital (“WACC”). They disagreed on virtually every input except the appropriate tax rate, where they both used 37%.

Hausman used a capital structure consisting of 81.1% equity, relying on the Company’s financial statements from 2013 and the equity value implied by his DCF analysis. Fischel used a capital structure consisting of 70% equity, relying on the Company’s pre-announcement debt-to-equity ratio. This decision adopts Fischel’s approach, which is consistent with precedent and avoids the circularity in Hausman’s method.

Hausman opined that the Company’s cost of debt was 5.0% without citing any support. Fischel used a cost of debt of 5.02%, explaining that the Company’s was rated BB+ from 2008 through 2014 and that the yield to maturity of a BB-rated bond index as of January 2, 2014 was 5.02%. Fischel provided a better justification for his number, so this decision uses it.

The experts disagreed about the risk-free rate. Hausman used 3.63%, which was the return on a 20-year U.S. Treasury bond as of December 2013. Fischel used 3.68%, which was the return on a 20-year U.S. Treasury bond as of January 2, 2014. Fischel’s measurement was closer to the closing date, so this decision adopts it.

Both experts used the supply-side equity risk premium. Hausman used 6.11%, which he obtained from Ibbotson’s 2013 Valuation Yearbook. Fischel used 6.18%, which he obtained from the 2014 Duff & Phelps Valuation Handbook. Fischel’s figure better captures the Company’s operative reality on the closing date. See Ancestry.com, 2015 WL 399726, at *21 (rejecting argument that court should have used 2012 Ibbotson Yearbook instead of 2013 Yearbook for merger that closed on December 28, 2012, because the 2013 Yearbook would not have been available to investors yet when the merger closed).

The experts chiefly disagreed over beta. Hausman derived a beta of 0.845 from five years of daily observations. Fischel used a beta of 1.395, which represented the average of (i) a beta derived from five years of monthly observations and (ii) a beta derived from two years of weekly observations. The beta drives the bulk of the valuation difference between the experts. Inserting Hausman’s beta into Fischel’s model generates a value of $51.18 per share.

“Beta, like cost of capital itself, is a forward-looking concept. It is intended to be a measure of the expected future relationship between the return on an individual security (or portfolio of securities) and the overall market.” Duff & Phelps, 2015 Valuation Handbook: Guide to Costs of Capital 5-3 (2015). The Company’s performance during the measuring period therefore should match, to the extent possible, the anticipated performance of the Company going forward. The financial literature indicates that using a five-year measurement period is both acceptable and common, but that a shorter period should be used if a five-year look back encompasses significant changes in the macroeconomic environment^[29] or the company’s business.^[30] In this case, five years covers the Great Recession and attendant housing crisis, which benefitted the Company and caused it to outperform the S&P 500. Company management and BCG anticipated that the Company would perform going forward at substantially lower levels. Looking back five years also covers a period when the Company was more dependent on Services, while going forward the Company will rely more on Analytics. These factors counsel in favor of using a two-year period as a better predictor of the Company’s operative reality at the time of the Merger.

Discarding the five-year betas leaves Fischel’s measurement of 1.503, which relied on weekly observations. The financial literature supports using a two-year beta with weekly observations, so this decision could adopt this estimate.^[31] Fischel, however, used a lower beta of 1.395. By doing so, Fischel favored the petitioners. That fact enhances the credibility of his selection, so this decision uses his figure.

The last input is the size premium. Hausman added a size premium of 0.92%. Fischel did not add a size premium, arguing that there “is no consensus in the academic literature as to whether such a premium still exists.” JX 296 ¶ 113 n.163. Adding a size premium increases the discount rate and lowers the value of the Company. As with his estimate of beta, Fischel’s judgment favored the petitioners, so this decision uses it.

These inputs result in a WACC of 9.56%, which this decision adopts. Adding a size premium of 0.92% to the cost of equity would increase the WACC to 10.2%.

4. The DCF Valuation

A DCF valuation using the foregoing inputs produces a value of $38.67 per share, which is 4% higher than the Final Merger Consideration of $37.14 per share. Using a WACC of 10.02% would produce a value of $34.50 per share, or 8% less than the Final Merger Consideration. These figures bracket what the stockholders received. Nevertheless, the figure of $38.67 per share is my best estimate of the fair value of the Company based on the DCF method.

B. The Weight Given To The Methodologies

When presented with multiple indicators of fair value, the court must determine how to weigh them. “In discharging its statutory mandate, the Court of Chancery has discretion to select one of the parties’ valuation models as its general framework or to fashion its own.” M.G. Bancorporation, 737 A.2d at 525-26. “The Court may evaluate the valuation opinions submitted by the parties, select the most representative analysis, and then make appropriate adjustments to the resulting valuation.”^[32] The court also may “make its own independent valuation calculation by either adapting or blending the factual assumptions of the parties’ experts.” M.G. Bancorporation, 737 A.2d at 524. “When . . . none of the parties establishes a valuation that is persuasive, the Court must make a determination based on its own analysis.”^[33]

Delaware law does not have a rigid hierarchy of valuation methodologies, nor does it have a settled formula for weighting them. “Appraisal is, by design, a flexible process.” Golden Telecom II, 11 A.3d at 218. The statute “vests the Chancellor and Vice Chancellors with significant discretion to consider `all relevant factors’ and determine the going concern value of the underlying company.” Id. (quoting 8 Del. C. § 262(h)).

In a series of decisions since Golden Telecom II, this court has considered how much weight to give the deal price relative to other indications of fair value. In five decisions since Golden Telecom II, the Court of Chancery has given exclusive weight to the deal price, particularly where other evidence of fair value was unreliable or weak. In five other decisions since Golden Telecom II, the court has declined to give exclusive weight to the deal price in situations where the respondent failed to overcome the petitioner’s attacks on the sale process and thus did not prove that it was a reliable indicator of fair value.

CKx was the first post-Golden Telecom II decision to rely exclusively on the merger price. The court found that “[t]he company was sold after a full market canvass and auction,” the process was “free of fiduciary and process irregularities,” and “the sales price [was] a reliable indicator of value.” 2013 WL 5878807 at *1. By contrast, the parties’ experts in CKx did not establish the reliability of their methods. The court found that (i) the company lacked sufficiently comparable peers and (ii) that “the evidence [was] overwhelming” that a key element of management’s projections “was not prepared in the ordinary course of business” and “was otherwise unreliable.” Id. at *10. “In the absence of comparable companies or transactions to guide a comparable companies analysis or a comparable transactions analysis, and without reliable projections to discount in a DCF analysis,” the court relied “on the merger price as the best and most reliable indication of [the company’s] value.” Id. at *11. The court stressed that the “conclusion that merger price must be the primary factor in determining fair value is justified in light of the absence of any other reliable valuation analysis.” Id. at *13.

In Ancestry.com, the court again relied exclusively on the merger price. The court found that the company was sold after an “auction process” which involved “a market canvass and uncovered a motivated buyer. 2015 WL 399726, at *1. The court concluded that the sale process “represent[ed] an auction of the Company that is unlikely to have left significant stockholder value unaccounted for.” Id. at *16. As in CKx, there were “no comparable companies to use for purposes of valuation.” Id. at *18. The court also had “reason to question management[‘s] projections, which were done in light of the transaction and in the context of obtaining a fairness opinion,” and where “management did not create projections in the normal course of business.” Id. at *18. The court prepared its own DCF analysis, which it regarded as a reliable indicator of value, but the answer was reasonably close to the deal price. That outcome gave the court “comfort that no undetected factor skewed the sales process.” Id. at *23. The court found that “fair value in these circumstances [was] best represented by the market price.” Id.

In AutoInfo, the court again relied exclusively on the merger price. The company conducted an extensive sale process in which its financial advisor contacted 165 potential strategic and financial acquirers, seventy signed NDAs, ten submitted indications of interest after conducting due diligence, nine received management presentations, five submitted verbal valuations or written letters of intent, and the company ultimately negotiated exclusively with the highest bidder. 2015 WL 2069417, at *3-6. The court concluded that “evidence regarding AutoInfo’s sales process substantiates the reliability of the Merger price.” Id. at *11. The court later reiterated that “the sales process was generally strong and can be expected to have led to a Merger price indicative of fair value.” Id. at *14. The expert’s valuation methodologies lacked similar persuasiveness. Management had prepared projections as part of the sale process, but management had never prepared projections before, and the court found them unreliable. Id. at *8. The court also found that there were no comparable companies that could be used for valuation purposes. Id. The court rejected both sides’ valuation analyses as unreliable, but as in Ancestry, prepared its own DCF analysis. Id. at *16. Despite noting that the “[u]nder Delaware law, it would be appropriate to provide weight to the value as implied by the Court’s DCF analysis,” the decision elected to put “full weight” on the deal price as “the best estimate of value.” Id.

In Ramtron, the court once again relied exclusively on the merger price. The company conducted a “thorough” sale process in response to an unsolicited tender offer. 2015 WL 4540443, at *1. The company rejected the hostile bid on multiple occasions and “actively solicited every buyer it believed could be interested in a transaction.” Id. at *21. The company ultimately agreed to a transaction with the unsolicited bidder only after extracting five separate price increases. Id. at *24. As in CKx, management’s projections were “not reliable,” and the parties’ experts agreed that there were “no comparable companies.” Id. at *1, *18.

In BMC, the court relied exclusively on the merger price yet again. The company engaged in “a thorough and vigorous sales process” that involved outreach to financial and strategic buyers. 2015 WL 6164771, at *1. The court found that the merger price was “sufficiently structured to develop fair value” and hence a reliable indicator of value. Id. at *16. The court also constructed a DCF analysis based on a set of management projections, which the court believed represented “the best DCF valuation based on the information available to me.” Id. at *18. The court nevertheless declined to give weight to the DCF valuation, reasoning as follows:

My DCF valuation is a product of a set of management projections, projections that in one sense may be particularly reliable due to BMC’s subscription-based business. Nevertheless, the Respondent’s expert, pertinently, demonstrated that the projections were historically problematic, in a way that could distort value. The record does not suggest a reliable method to adjust these projections. I am also concerned about the discount rate in light of a meaningful debate on the issue of using a supply side versus historical equity risk premium. Further, I do not have complete confidence in the reliability of taking the midpoint between inflation and GDP as the Company’s expected growth rate.

Taking these uncertainties in the DCF analysis—in light of the wildly-divergent DCF valuation of the experts—together with my review of the record as it pertains to the sales process that generated the Merger, I find the merger price . . . to be the best indicator of fair value. . . .

Id. at *18.

In five other decisions since Golden Telecom II, the Court of Chancery has considered the deal price, but has either not relied on it or given it limited weight. In Orchard Enterprises, the court declined to give weight to the merger price in an appraisal proceeding that followed a merger between a corporation and an affiliate of a large stockholder, observing that “the trial did not focus extensively on the quality of marketing. . . or the utility of the `go shop’ provision in the merger agreement, which could obviously have been affected by [a large stockholder’s] voting power and expressed interest to acquire all of [the company] for itself.” 2012 WL 2923305, at *5. Similarly in 3M Cogent, the court gave no weight to a deal price of $10.50 per share where the respondent corporation did not seek to have the court award that amount as fair value and relied instead on its experts’ opinions that proposed a fair value award of $10.12 per share. Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *5 (Del. Ch. July 8, 2013). The court also noted that the respondent corporation and its experts had not made any attempt to adjust the merger price for synergies or similar elements of value that arose from the merger.^[34]

In Dell, I gave limited weight to the deal price, finding that the respondent corporation “did not establish that the outcome of the sale process offer[ed] the most reliable evidence of the Company’s value as a going concern.” Dell Fair Value, 2016 WL 3186538, at *44. I nevertheless found that the market data was sufficient

to exclude the possibility, advocated by the petitioners’ expert, that the Merger undervalued the Company by $23 billion. Had a value disparity of that magnitude existed, then [a strategic bidder] would have emerged to acquire the Company on the cheap. What the market data [did] not exclude is an underpricing of a smaller magnitude.

Id. A confluence of multiple factors caused me not to give greater weight to the deal price, including (i) the transaction was an MBO, (ii) the bidders used an LBO pricing model to determine the original merger consideration, (iii) there was compelling evidence of a significant valuation gap driven by the market’s short-term focus, and (iv) the transaction was not subjected to meaningful pre-signing competition. See id. at *29-37. Although the deal price increased as a result of post-signing developments, the pattern of bidding by financial sponsors during the go-shop reinforced the conclusion that the consideration did not represent fair value, and the petitioners proved that there were structural impediments to a topping bid on the facts of the case, particularly in light of the size and complexity of the company and the sell-side involvement of the company’s founder. See id. at *37-44. I relied instead on a DCF analysis to determine fair value. Id. at *51.

More recently, in DFC Global, the court gave equal weight to the deal price, the court’s DCF valuation, and one of the expert’s comparable companies analysis. 2016 WL 3753123, at *23. The court found that the merger giving rise to the appraisal proceeding had been “negotiated and consummated during a period of significant company turmoil and regulatory uncertainty, calling into question the reliability of the transaction price as well as management’s financial projections.” Id. at *1. The company’s competitors faced similar challenges, and the resulting uncertainty undermined the projections. Id. at *22. It also meant that the company was sold during a valuation trough, which suggested that “the transaction price would not necessarily be a reliable indicator.” Id. The court also noted that the financial sponsor who acquired the company had focused “on achieving a certain internal rate of return and on reaching a deal within its financing constraints,” which could generate an outcome different from fair value. Id. To a lesser degree, the uncertainly also undermined the multiples-based valuation, because that valuation relied on two years of management projections. The court concluded that “all three metrics suffer from various limitations but . . . each of them still provides meaningful insight into [the company’s] value.” Id. at *23. The court also observed that “all three of them fall within a reasonable range.” Id. The court therefore elected to weight them equally.

Most recently, in Dunmire v. Farmers & Merchants Bancorp of Western Pennsylvania, Inc., 2016 WL 6651411 (Del. Ch. Nov. 10, 2016), the court declined to rely on the deal price where a controlling stockholder set the exchange ratio for a stock-for-stock transaction between the company and another entity controlled by the same family. The decision noted that (i) “the Merger was not the product of an auction,” (ii) no third parties were solicited, (iii) a controlling stockholder stood on both sides of the deal, (iv) although a special committee negotiated with the controller, the record did “not inspire confidence that the negotiations were truly arms-length,” and (v) the transaction was not conditioned on a majority-of-the minority vote. Id. at *7-8. The only surprising aspect of Dunmire is the respondent argued in favor of deference to the deal price.

This case is most similar to AutoInfo and BMC. The Company ran a sale process that generated reliable evidence of fair value. The Company also created a reliable set of projections that support a meaningful DCF analysis. Small changes in the assumptions that drive the DCF analysis, however, generate a range of prices that starts below the merger price and extends far above it. My best effort to resolve the differences between the experts resulted in a DCF valuation that is within 3% of the Final Merger Consideration. The proximity between that outcome and the result of the sale process is comforting. See S. Muoio & Co. LLC v. Hallmark Entm’t Invs. Co.,2011 WL 863007, at *19 (Del. Ch. Mar. 9, 2011) (“[W]hat you actually like to see when you’re doing a valuation is some type of overlap between the various methodologies.” (quotation marks omitted)), aff’d, 35 A.3d 419 (Del. 2011) (TABLE).

As noted, a DCF analysis depends heavily on assumptions. Under the circumstances, as in AutoInfo and BMC, I give 100% weight to the transaction price.

C. Whether To Make An Adjustment For Combinatorial Synergies

The Company argued belatedly that the court should make a finding regarding the value of the combinatorial synergies and deduct some portion of that value from the deal price to generate fair value. That is a viable method. See, e.g., Union Ill., 847 A.2d at 353 n.26; Highfields, 939 A.2d at 61. In this case, however, the Company litigated on the theory that the Final Merger Consideration represented the “maximum fair value” of the shares. JX 296 ¶ 128. In his expert report, Fischel declined to offer any opinion on the quantum of synergies or to propose an adjustment to the merger price. Id. At trial, Fischel affirmed that he did not have any basis to opine regarding a specific quantum of synergies. Tr. 982 (Fischel). Having taken these positions, it was too late for the Company to argue in its post-trial briefs that the court should deduct synergies.

III. CONCLUSION

The fair value of the Company on the closing date was $37.14 per share. The legal rate of interest, compounded quarterly, shall accrue on this amount from the date of closing until the date of payment. The parties shall cooperate on preparing a final order. If there are additional issues that need to be resolved before a final order can be entered, the parties shall submit a joint letter within two weeks that identifies them and recommends a schedule for bringing this matter to a conclusion, at least at the trial court level.

[1] Id. at 72. Subsequent Delaware Supreme Court decisions have adhered consistently to this definition of value. See, e.g., Montgomery Cellular Hldg. Co. v. Dobler, 880 A.2d 206, 222 (Del. 2005); Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 553 (Del. 2000); Rapid-Am. Corp. v. Harris, 603 A.2d 796, 802 (Del. 1992); Cavalier Oil Corp. v. Hartnett, 564 A.2d 1137, 1144 (Del. 1989); Bell v. Kirby Lumber Corp., 413 A.2d 137, 141 (Del. 1980); Universal City Studios, Inc. v. Francis I. duPont & Co., 334 A.2d 216, 218 (Del. 1975).

[2] Cede & Co. v. Technicolor, Inc., 1990 WL 161084, at *31 (Del. Ch. Oct. 19, 1990) (quoting In re Del. Racing Ass’n, 213 A.2d 203, 211 (Del. 1965) (citing Tri-Cont’l, 74 A.2d; Chicago Corp. v. Munds, 172 A. 452 (Del. Ch. 1934)), rev’d on other grounds, 636 A.2d 956 (Del. 1994).

[3] See ONTI, Inc. v. Integra Bank, 751 A.2d 904, 915 (Del. Ch. 1999); Gonsalves v. Straight Arrow Publ’rs, Inc., 793 A.2d 312, 316 (Del. Ch. 1998), aff’d in pertinent part, rev’d on other grounds, 725 A.2d 442 (Del. 1999) (TABLE); Cooper v. Pabst Brewing Co., 1993 WL 208763, at *8 (Del. Ch. June 8, 1993). Relatedly, when this court considers comparable company analyses in valuations, it effectively relies upon the market prices of the comparable companies to generate valuation metrics. See, e.g., Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *18-20 (Del. Ch. Aug. 19, 2005) (Strine, V.C.); Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *8 (Del. Ch. May 20, 2004); Taylor v. Am. Specialty Retailing Gp., Inc., 2003 WL 21753752, at *9 (Del. Ch. July 25, 2003).

[4] See, e.g., Rapid-Am. Corp., 603 A.2d at 806 (“[T]he Court of Chancery long ago rejected exclusive reliance upon market value in an appraisal action.”); Kirby Lumber, 413 A.2d at 141 (“[M]arket value may not be taken as the sole measure of the value of the stock.”); Del. Racing, 213 A.2d at 211 (“It is, of course, equally axiomatic that market value, either actual or constructed, is not the sole element to be taken into consideration in the appraisal of stock.”); Jacques Coe & Co. v. Minneapolis-Moline Co., 75 A.2d 244, 247 (Del. Ch. 1950) (observing that market price should not be exclusive measure of value); Munds, 172 A. at 455 (“There are too many accidental circumstances entering into the making of market prices to admit them as sure and exclusive reflectors of fair value.”).

[5] Highfields Capital, Inc. v. AXA Fin., Inc., 939 A.2d 34, 42 (Del. Ch. 2007); see also M.P.M., 731 A.2d at 796 (“A merger price resulting from arms-length negotiations where there are no claims of collusion is a very strong indication of fair value.”); Prescott Gp. Small Cap, L.P. v. Coleman Co., 2004 WL 2059515, at *27 (Del. Ch. Sept. 8, 2004) (explaining that “the price actually derived from the sale of a company as a whole . . . may be considered as long as synergies are excluded”); see also Van de Walle v. Unimation, Inc., 1991 WL 29303, at *17 (Del. Ch. Mar. 6, 1991) (commenting in an entire fairness case that “[t]he fact that a transaction price was forged in the crucible of objective market reality (as distinguished from the unavoidably subjective thought process of a valuation expert) is viewed as strong evidence that the price is fair”).

[6] See In re Appraisal of Ancestry.com, Inc., 2015 WL 399726, at *16 (Del. Ch. Jan. 30, 2015) (“[A] conclusion that a sale was conducted by directors who complied with their duties of loyalty is not dispositive of the question of whether that sale generated fair value.”); Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807, at *13 (Del. Ch. Nov. 1, 2013) (“[T]he issue in this case is fair value, not fiduciary duty.”); In re Orchard Enters., Inc., 2012 WL 2923305, at *5 (Del. Ch. July 18, 2012) (Strine, C.) (“[Respondent] makes some rhetorical hay out of its search for other buyers. But this is an appraisal action, not a fiduciary duty action, and although I have little reason to doubt [respondent’s] assertion that no buyer was willing to pay Dimensional $25 million for the preferred stock and an attractive price for [respondent’s] common stock in 2009, an appraisal must be focused on [respondent’s] going concern value”); see also M.P.M., 731 A.2d at 797 (“A fair merger price in the context of a breach of fiduciary duty claim will not always be a fair value in the context of determining going concern value.”); In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 30 (Del. Ch. 2014) (“A price may fall within the range of fairness for purposes of the entire fairness test even though the point calculation demanded by the appraisal statute yields an award in excess of the merger price.”). Compare Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1176-77 (Del. 1995) (affirming that merger consideration of $23 per share was entirely fair), with Cede & Co. v. Technicolor, Inc., 884 A.2d 26, 30 (Del. 2005) (awarding fair value in appraisal of $28.41 per share). See generally Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of Public Company M&A, 92 Wash. U.L. Rev. 1551, 1608 (2015) (explaining that “[s]atisfying one of the various Revlon-type tests . . . is not necessarily a market test” sufficient to establish fair value for purposes of appraisal); Lawrence A. Hamermesh & Michael L. Wachter, The Fair Value of Cornfields in Delaware Appraisal Law, 31 J. Corp. L. 119, 154 (2005) (“The dissenting shareholders need not prove breach of fiduciary duty, although such a claim is available to them, but only that the sale process was defective in some manner.”).

[7] See, e.g., BMC, 2015 WL 6164771, at *14-15 (giving exclusive weight to merger process where the company conducted “a robust, arm’s-length sales process” that involved “two auctions over a period of several months,” where the company “was able to and did engage multiple potential buyers during these periods,” and where the lone remaining bidder “raised its bid multiple times because it believed the auction was still competitive”); AutoInfo, 2015 WL 2069417, at *12 (giving exclusive weight to merger price that “was negotiated at arm’s length, without compulsion, and with adequate information” and where it was “the result of competition among many potential acquirers”); Ancestry.com, 2015 WL 399726, at *1 (giving exclusive weight to the deal price where the transaction resulted from an “auction process, which process itself involved a market canvas and uncovered a motivated buyer”); id. at *18 (describing sale effort as “an open auction process”); CKx, 2013 WL 5878807, at *14 (evaluating sale process and concluding that “the bidders were in fact engaged in a process resembling the English ascending-bid auction” involving direct competition between bidders); see also Ramtron, 2015 WL 4540443, at *9 (relying on “thorough” sale process initiated in response to “a well-publicized hostile bid and a target actively seeking a white knight”); id. at *21 (observing that “Ramtron actively solicited every buyer it believed could be interested in a transaction” before signing a merger agreement with the hostile bidder); Union Ill. 1995 Inv. Ltd. P’ship v. Union Fin. Gp., Ltd., 847 A.2d 340, 359 (Del. Ch. 2003) (Strine, V.C.) (using merger price as “best indicator of value” where the merger “resulted from a competitive and fair auction” in which “several buyers with a profit motive” were able to evaluate the company and “make bids with actual money behind them”); cf. In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 840 n.5 (Del. Ch. 2011) (noting “the importance of the pre-signing phase to developing price competition among private equity bidders”). See generally Brian JM Quinn, Bulletproof: Mandatory Rules for Deal Protection, 32 J. Corp. L. 865, 879-80 (2007) [hereinafter Bulletproof] (surveying literature on auction theory and concluding that “[t]he two key insights are that competition, or the threat of competition, will lead to a price closer to the buyer’s reservation price and that the price effect of one additional competitor is greater than the price effects attributable to bargaining”).

[8] See Jacob K. Goeree & Theo Offerman, Competitive Bidding in Auctions with Private and Common Values, 113 Econ. J. 598, 611 (2003) (explaining that having “all potentially interested bidders participate” before signing produces “more competition [and] results in a more efficient allocation” of surplus between the buyer and seller); id. at 600 (“Another factor improving efficiency is an increase in competition: expected efficiency and expected revenue increase with each extra bidder. In the limit when the number of bidders goes to infinity, an efficient allocation again materializes. Interestingly, the effect of more competition on efficiency and revenues is stronger than the effect of information provided by the auctioneer. When the seller has the choice between finding more interested bidders or providing information about the value of the commodity, she should choose the former.”); Jeremy Bulow & Paul Klemperer, Auctions Versus Negotiations, 86 Am. Econ. Rev. 180, 180 (1996) (conducting empirical study and concluding that “a single extra bidder more than makes up for any diminution in negotiating power” such that “there is no merit in arguments that negotiation should be restricted to one or a few bidders to allow the seller to maintain more control of the negotiating process, or to credibly withdraw the company from the market”); cf. Nihat Aktas et al., Negotiations Under the Threat of an Auction, 98 J. Fin. Econ. 241, 242 (2010) (finding that “that target-initiated deals are more often auctions while negotiations are more frequently initiated by bidders”).

[9] Guhan Subramanian, The Drivers of Market Efficiency in Revlon Transactions, 28 J. Corp. L. 691, 691 (2003) (quoting Author’s Interview with Martin Lipton, Senior Partner, Wachtell, Lipton, Rosen & Katz, in New York, NY (June 14, 2000)).

[10] See DFC Glob., 2016 WL 3753123, at *21 (giving weight to deal price where sale process “involved DFC’s advisor reaching out to dozens of financial sponsors as well as several potential strategic buyers”); BMC, 2015 WL 6164771, at *14 (giving exclusive weight to merger process where the company conducted “a robust, arm’s-length sales process” that included “two auctions over a period of several months” and involved both financial sponsors and strategic buyers); AutoInfo, 2015 WL 2069417, at *3 (relying exclusively on deal price where financial advisor contacted 164 potential strategic and financial acquirers, approximately 70 signed NDAs and received a confidential information memorandum, interested parties received several weeks of due diligence, ten bidders submitted indications of interest, and nine moved on to a second round); Ramtron, 2015 WL 4540443, at *23 (relying exclusively on deal price where financial advisor “(1) contacted twenty-four third parties . . .; (2) sent non-disclosure agreements (`NDAs’) to twelve . . .; (3) received executed NDAs from six . . .; and (4) remained in discussions with [three]”); Ancestry.com, 2015 WL 399726, at *3 (relying exclusively on deal price where process that involved discussion with fourteen potential bidders, including six potential strategic buyers and eight financial sponsors); CKx, 2013 WL 5878807, at *4-5(relying exclusively on deal price where sale process in which sell-side financial advisor reached out to multiple financial and strategic buyers). Compare Dell Fair Value, 2016 WL 3186538, at *7-10, *29, *36-37 (giving limited weight to deal price where pre-signing phase involved no strategic bidders and only two financial sponsors, one of which dropped out, as did the firm invited to replace it).

[11] A common value auction is one in which “every bidder has the same value for the auctioned object.” Peter Cramton & Alan Schwartz, Using Auction Theory to Inform Takeover Regulation, 75 L. Econ. & Org. 27, 28-29 (1991). A private value auction is one in which “the value of the auctioned object differs across potential acquirers.” Id.

[12] Jeremy Bulow & John Roberts, The Simple Economics of Optimal Auctions, 97 J. Pol. Econ. 1060, 1065 (1989); accord Paul Klemperer, Auction Theory: A Guide to the Literature, 13 J. Econ. Survs. 227, 230 (1999).

[13] See Paul Povel & Rajdeep Singh, Takeover Contests with Asymmetric Bidders, 19 Rev. Fin. Stud. 1399, 1399-1400 (2006); Christina M. Sautter, Auction Theory and Standstills: Dealing with Friends and Foes in A Sale of Corporate Control, 64 Case W. Res. L. Rev. 521, 529 (2013).

[14] See Dell Fair Value, 2016 WL 3186538, at *30 (“[T]he outcome of competition between financial sponsors primarily depends on their relative willingness to sacrifice potential IRR.”); see also Povel & Singh, supra, at 1399-1400. See generally Paul Gompers, Steven N. Kaplan, & Vladimir Mukharlyamov, What Do Private Equity Firms Say They Do?, 121 J. Fin. Econ. 449, 450 (2016) (noting predominance of similar techniques and strategies across private equity firms). An exception would be a financial buyer with a synergistic portfolio company, which would provide a source of private value.

[15] Alexander S. Gorbenko & Andrey Malenko, Strategic & Financial Bidders in Takeover Auctions, 69 J. Fin. 2513, 2514 (2014); see id. at 2532 (finding that the “average valuation of a strategic (financial) bidder of an average target is 16.7% (11.7%) above its value under the current management”); id. at 2538 (“Not only do strategic acquirers pay, on average, higher premiums than financial acquirers, but the maximum premiums that they are willing to pay are considerably higher.”); Mark E. Thompson & Michael O’Brien, Who Has the Advantage: Strategic Buyers or Private Equity Funds?, Financier Worldwide (Nov. 2005) (“Strategic buyers have traditionally had the advantage over private equity funds, particularly in auctions, because strategic buyers could pay more because of synergies generated from the acquisition that would not be enjoyed by a fund.”).

[16] See Steven N. Kaplan & Per Strömberg, Leveraged Buyouts and Private Equity, 23 J. Econ. Perspectives 121, 122 (2009) (“[T]here is also evidence consistent with private equity investors taking advantage of market timing (and market mispricing) between debt and equity markets particularly in the public-to-private transactions of the last 15 years.”); id. at 136 (“[P]rivate equity firms pay lower premiums than public company buyers in cash acquisitions. These findings are consistent with private equity firms identifying companies or industries that turn out to be undervalued. Alternatively, this could indicate that private equity firms are particularly good negotiators, and/or that target boards and management do not get the best possible price in these acquisitions.”); id. at 135-36 (“[P]ost-1980s public-to-private transactions experience only modest increases in firm operating performance, but still generate large financial returns to private equity funds. This finding suggests that private equity firms are able to buy low and sell high.”).

[17] See DFC Glob., 2016 WL 3753123, at *22; Dell Fair Value, 2016 WL 3186538, at *29; see also Joshua Rosenbaum & Joshua Pearl, Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions 235-36 (2009) (explaining that a sponsor’s ability to pay in a leveraged buy-out is constrained by “leverage capacity, credit market conditions, and the sponsor’s own IRR hurdles”).

[18] See Dell Fair Value, 2016 WL 3186538, at *36 (“[T]he prospect of post-signing competition can help raise the price offered during the pre-signing phase.”); Brian JM Quinn, Omnicare: Coercion and the New Unocal Standard, 38 J. Corp. L. 835, 844 (2013) (“[K]nowing that a transaction will include a go-shop, wherein the seller will treat the initial bidder as a stalking horse to generate an active post-signing auction, may incent initial bidders to offer a preemptive bid to deter subsequent bids. In that view, the prospect of competition, even if no competition subsequently emerges, should be sufficient incentive for a bidder to shift transaction surplus to the seller.”).

[19] The focus is on a reasonable number of bidders, rather than all potential bidders, because as the number of bidders increases, the marginal value of each additional bidder declines. “At about 10 bidders, you’ll get 85% of the revenue that you could expect to get from an auction with 50 bidders.” Guhan Subramanian, Negotiation? Auction? A Deal Maker’s Guide, Harv. Bus. Rev. (Dec. 2009), https://hbr.org/2009/12/negotiation-auction-a-deal-makers-guide.

[20] See DFC Glob., 2016 WL 3753123, at *21.

[21] See Dell Fair Value, *32 (“A second factor that undermined the persuasiveness of the Original Merger Consideration as evidence of fair value was the widespread and compelling evidence of a valuation gap between the market’s perception and the Company’s operative reality.”). In the Dell Fair Value decision, the misperception resulted from “(i) analysts’ focus on short-term, quarter-by-quarter results and (ii) the Company’s nearly $14 billion investment in its transformation, which had not yet begun to generate the anticipated results.” Id.

[22] J. Russel Denton, Note, Stacked Deck: Go-Shops & Auction Theory, 60 Stan. L. Rev. 1529, 1536 (2008) (citing Jeremy Bulow, Ming Huang & Paul Klemperer, Toeholds and Takeovers, 107 J. Pol. Econ. 427, 430 (1999)). In an ascending private value auction, the winning bidder is more likely to have prevailed because it has a greater private value than the next highest bidder. See Denton, supra, at 1536. In common value auctions, the prospect of information asymmetries drives the winner’s curse. See Dell, 2016 WL 3186538, at *42; Paul Povel & Rajdeep Singh, Takeover Contests with Asymmetric Bidders, 19 Rev. Fin. Stud. 1399-1400 (2006).

[23] See Dell Fair Value, 2016 WL 3186538, at *33-36 (explaining why record supported existence of significant valuation gap, driven by short-term pessimism, that depressed the market price and anchored price negotiations below fair value); Malcom Baker, Xin Pan, & Jeffery Wurgler, The Effect of Reference Point Prices on Mergers and Acquisitions, 106 J. Fin. Econ. 49, 50 (2012) (finding the “26-week high price [of a particular stock] has a statistically and economically significant effect on offer prices [in mergers and acquisitions], and the 39-, 52-, and 65-week high prices also have independent explanatory power” and speculating as to the causes of this reference point effect); id. at 64-65 (finding that deals with higher premiums tend to close more often, which is “consistent with reference point behavior.”); Inga Chira & Jeff Madura, Reference Point Theory and Pursuit of Deals, 50 Fin. Rev. 275, 277, 299 (2015) (“Our analysis reveals that a higher target 52-week reference point, relative to the target’s current stock price, . . . increases the likelihood of a management buy out (MBO). . . . Overall, the results from our analyses offer strong evidence that target and bidder reference points serve as potent anchors that shape the outcomes and structures of mergers.”); Sangwon Lee & Vijay Yerramilli, Relative Values, Announcement Timing, and Shareholder Returns in Mergers and Acquisitions 2 (January 2016) (unpublished manuscript) (adopting finding of Baker, Pan, & Wurger, supra, that “key decision makers in the bidding and target firms and investors are likely to use recent prices as reference points”). See generally Guhan Subramanian, Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace, 16-18 (2010) (explaining that anchoring “works by influencing your perceptions of where the [zone of possible agreement] lies”).

[24] See M.P.M., 731 A.2d at 796 (“A merger price resulting from arms-length negotiations where there are no claims of collusion is a very strong indication of fair value.”); Paul Klemperer, What Really Matters in Auction Design, 16 J. Econ. Persp. 169, 170 (2002) (citing “the risk that participants may explicitly or tacitly collude to avoid bidding up prices”).

[25] See DFC Glob., 2016 WL 3753123, at *21 (giving weight to deal price where “[t]he deal did not involve the potential conflicts of interest inherent in a management buyout or negotiation to retain existing management”); CKx, 2013 WL 5878807, at *13 (giving exclusive weight to sales process where “[t]he record and the trial testimony supports a conclusion that the process by which [the company] was marketed to potential buyers was thorough, effective, and free from any spectre of self-interest or disloyalty.”). For these and other reasons, “the weight of authority suggests that a claim that the bargained-for price in an MBO represents fair value should be evaluated with greater thoroughness and care than, at the other end of the spectrum, a transaction with a strategic buyer in which management will not be retained.” Dell Fair Value, 2016 WL 3186548, at *28. See Iman Anabtawi, Predatory Management Buyouts, 49 U.C. Davis L. Rev. 1285, 1320 (2016) (discussing factors that undermine pricing efficiency in the market for corporate control when the transaction is an MBO); Matthew D. Cain & Steven M. Davidoff, Form Over Substance? The Value of Corporate Process and Management Buy-outs, 36 Del. J. Corp. L. 849, 862 (2011) (“There is a more concrete argument against MBOs on fairness grounds. It is the prospect that management is utilizing inside information when it arranges an MBO. Management by its inherent position has in its possession non-public knowledge of the corporation, and management can use this informational asymmetry between itself and public shareholders to time the buy-out process. MBOs can thus be arranged at advantageous times in the business cycle or history of the corporation.” (footnotes omitted)); Marcel Canoy, Yohanes E. Riyanto & Patrick van Cayseele, Corporate Takeovers, Bargaining and Managers’ Incentives to Invest, 21 Managerial & Decision Econs. 1, 2, 14 (2000) (“Long-term investments, such as R&D investments, are slow yielding and more difficult to be evaluated by the market, despite the fact that they could generate higher profits. Consequently, firms investing heavily in long-term projects may be more susceptible to a takeover attempt. . . . If being taken over is better than taking over [for target management] . . . then obviously, [management] would like to overinvest to facilitate a takeover. . . .”); Deborah A. DeMott, Directors’ Duties in Management Buyouts and Leveraged Recapitalizations, 49 Ohio St. L.J. 517, 536 (1988) (explaining that overhang from past acquisitions may artificially depress a company’s stock market price and make the buyout price appear generous); James R. Repetti, Management Buyouts, Efficient Markets, Fair Value, and Soft Information, 67 N.C. L. Rev. 121, 125 (1988) (“Other methods for management to realize large gains in management buyouts are not as innocuous as the use of leverage or as apparently innocuous as increasing cash flow. Management may actively depress the price of the shares prior to the management buyout in order to reduce the price they have to pay. Management may accomplish this by . . . channeling investments into long-term projects which will not provide short-term returns.”); James Vorenberg, Exclusiveness of the Dissenting Stockholder’s Appraisal Right, 77 Harv. L. Rev. 1189, 1202-03 (1964) (“Far more difficult is ensuring to departing stockholders the benefit of improved prospects, where, at the time of appraisal, the evidence of improvement is more intuitive than tangible. . . . The appraisal process will tend to produce conservative results where the values are speculative, and the majority’s power to pick the time at which to trigger appraisal may encourage them to move when full values may be temporarily obscured.” (footnote omitted)); see also Benjamin Hermalin & Alan Schwartz, Buyouts in Large Companies, 25 J. Legal Stud. 351, 356 (1996) (“With respect to timing, the firm could initiate a freeze-out (i) before it invests effort, (ii) after it invests effort but before the value of the firm conditional on effort is revealed, or (iii) after the value of the firm is revealed but before earnings are realized. We generally assume that the firm would wait until point iii because waiting in the model is costless but produces gains: were the firm to initiate a freeze-out before it learns its value, it might have to pay too much.”).

[26] See JX 296 ¶ 79 (finding that a merger agreement contained a go-shop in only 4% of sample of transactions that involved a strategic entity buying a publicly traded U.S. target for a deal price above $100 million); id. ¶ 80 (finding that only 1% of transactions had an auction and a go-shop where strategic buyers acquired a U.S. publicly traded target for a deal price above $100 million).

[27] See Denton, supra, at 1547 (“In the sixty-three deals that utilized go-shop provisions, there have been nine deals with jump bids. Furthermore, there were jump bids in none of the MBOs containing go-shops. . . . Of the nine jump bids that were made, strategic buyers made seven.” (footnotes omitted)); id. at 1549 (“[G]o-shops have structures that discourage bidding wars between financial buyers. Management involvement with the initial private equity bidder only increases the advantages that are given to the initial bidder, since it gives the initial bidder better information about the value of the target. Despite appearing to encourage additional bidders and a post-signing auction, go-shop provisions are structured in a way that discourages financial buyers from bidding for the company.”).

[28] A matching right is the functional equivalent of a right of first refusal and can foreclose a topping bidder from having a realistic path to success. See Bulletproof, supra, at 870 (“The presence of rights of first refusal can be a strong deterrent against subsequent bids. . . . Success under these circumstances may involve paying too much and suffering the `winner’s curse.'”); see also Frank Aquila & Melissa Sawyer, Diary Of A Wary Market: 2010 In Review And What To Expect In 2011, 14 M & A Law. Nov.-Dec. 2010, at 1 (“Match rights can result in the first bidder `nickel bidding’ to match an interloper’s offer, with repetitive rounds of incremental increases in the offer price. . . . Few go-shops are successful as it is . . . and match rights are just one more factor that may dissuade a potential competing bidder from stepping in the middle of an already-announced transaction.”); Marcel Kahan & Rangarajan K. Sundaram, First-Purchase Rights: Rights of First Refusal and Rights of First Offer, 14 Am. L. & Econ. Rev. 331, 331 (2012) (finding “that a right of first refusal transfers value from other buyers to the right-holder, but may also force the seller to make suboptimal offers”); David I. Walker, Rethinking Rights of First Refusal, 5 Stan. J.L. Bus. & Fin. 1, 20-21 (1999) (discussing how a right of first refusal affects bidders); cf. Steven J. Brams & Joshua R. Mitts, Mechanism Design in M&A Auctions, 38 Del. J. Corp. L. 873, 879 (2014) (“The potential for a bidding war remains unless interlopers are restricted-say, to one topping bid, which then can be matched.”).

[29] Duff & Phelps, 2015 Valuation Handbook, supra, at 5-7 (“If a fundamental change in the business environment in which an individual company (or even an industry) operates occurs, the valuation analyst should consider whether using historical data from before the change should be included in the overall [beta] analysis.”). As an example, the Duff and Phelps 2015 Valuation Handbook cites the effect of the Great Recession on the financial sector, suggesting it would not be appropriate for an analyst to include pre-crisis data. Id.

[30] Holthausen & Zmijewski, supra, at 300 (“Using more recent data might better reflect a company’s current (and more forward-looking) systematic risk. Betas can shift because of changes in capital structure or because of changes in the underlying business risk of the company, or because of fundamental changes in the market. . . .”); Tim Koller, Marc Goedhart & David Wessels, Valuation: Measuring and Managing the Value of Companies 247 (5th ed. 2010) (advocating for five-year monthly but noting that “changes in corporate strategy or capital structure often lead to changes in risk for stockholders. In this case, a long estimation period would place too much weight on irrelevant data”); Shannon P. Pratt & Roger J. Grabowski, Cost of Capital: Applications and Examples 208 (5th ed. 2014) (“Most services that calculate beta use a two- or five-year sample measurement or look-back period. Five years is the most common . . . But if the business characteristics change during the sampling period . . ., it may be more appropriate to use a shorter sampling period. However, as the sampling period used is reduced, the accuracy of the estimate is generally reduced.”); see DFC Glob., 2016 WL 3753123, at *10 n.124 (“[L]ong estimation period may be inappropriate when analysis of the five-year historical chart shows changes in corporate strategy or capital structure that could render prior data irrelevant.” (citing Koller, Goedhart & Wessels, supra, at 247)); see also James R. Hitchner, Financial Valuation: Applications and Models 256 (3d ed. 2011) (noting that in measuring closely-held companies, sources “use anywhere from a two- to five-year period to measure beta, with the five-year period being the most common”).

[31] John Y. Campbell, Andrew W. Lo & A. Craig Mackinlay, The Econometrics of Financial Markets 184 (1997); Holthausen & Zmijewski, supra, at 301 (noting that Bloomberg’s default is to use “104 weeks of weekly observations or two years of data”); id. at 300 (“The most commonly used intervals for estimating betas are monthly, weekly, and, to a lesser extent, daily returns. The precision of regression parameters tends to increase with more observations; hence, all else equal, we prefer to use more observations.”); id. at 302 (“When using daily beta, a common rule of thumb is to use one to two years of data. . . . When using weekly data, it is a fairly common practice to use two years of data. . . .); see also Hitchner, supra, at 256 (noting that in valuing closely-held companies, “the frequency of the data measurements varies, with monthly data being the most common, although some sources use weekly data”).

[32] Appraisal Rights, supra, at A-31 (citing ONTI, 751 A.2d at 907) (basing fair value calculation on one expert’s valuation, “modifying it where appropriate by the primary adjustment claims asserted by [the company]”); Kleinwort Benson Ltd. v. Silgan Corp., 1995 WL 376911, at *5 (Del. Ch. June 15, 1995) (“I will not construct my own DCF model. From the evidence presented by [the] experts, I will choose the DCF analysis that best represents Silgan’s value. Next, . . . I will scrutinize that DCF analysis to remove the adversarial hyperbole that inevitably influences an expert’s opinion in valuation proceedings.” (citation omitted))).

[33] Pabst Brewing Co., 1993 WL 208763, at *8; accord Del. Open MRI Radiology Assocs., 898 A.2d at 310-11 (“I cannot shirk my duty to arrive at my own independent determination of value, regardless of whether the competing experts have provided widely divergent estimates of value, while supposedly using the same well-established principles of corporate finance.”).

[34] Id. If the respondent corporation had relied affirmatively on the deal price and made some attempt to deal with synergies, it seems likely that the court would have given the deal price at least some weight. The transaction resulted from a process that involved a pre-signing outreach to twenty-five potential strategic and financial partners, followed by competition among four strategic bidders to acquire the company. See id. at *2-3. Using a DCF analysis, the court ultimately determined that the fair value of the company as $10.87 per share, just above the deal price. Id. at *26. If the respondent had made a different tactical decision, the 3M Cogent court could well have relied on the deal price.

 

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
——————————————————-x
MORTGAGE RESOLUTION SERVICING,
LLC, et al.,
Plaintiffs,

-v-                     No. 15 CV 293-LTS-JCF

JPMORGAN CHASE BANK, N.A., et al.,
Defendants

Excerpts:
Plaintiffs Mortgage Resolution Servicing, LLC (“MRS”), S&A Capital Partners,
Inc. (“S&A”), and 1st Fidelity Loan Servicing, LLC (“1st Fidelity” and, collectively with MRS
and S&A, “Plaintiffs”), are in the business of purchasing from financial institutions and
servicing portfolios of nonperforming residential mortgage loans. (TAC ¶¶ 11-12.) All three
companies are Florida corporations whose president is Laurence Schneider. (TAC ¶¶ 2-4.)
S&A and Chase entered into a Master Mortgage Loan Sale Agreement (the “MMLSA”) in
approximately April 2005. (TAC ¶¶ 13-14.) S&A and 1st Fidelity bought loans from Chase
pursuant to the MMLSA from 2005 through 2010. (TAC ¶¶ 14-17.)
In 2008, Eddie Guerrero, a Loss Recovery Supervisor at Chase, contacted
Schneider to discuss Chase’s interest in selling a portfolio of first-lien residential mortgage
loans. (TAC ¶ 19.) Guerrero represented that this set of loans included mortgages on low-value
properties in areas experiencing a significant housing crisis as well as some more valuable loans
that had erroneously been charged off by Chase. (TAC ¶¶ 19-20.) Schneider provided Chase
with an application to purchase the pool of loans. (TAC ¶ 21.)
In October 2008, Guerrero sent Schneider preliminary information on the loan
portfolio, but the information was incomplete. (TAC ¶ 22.) A more complete spreadsheet
(though one still missing some information) was sent to Schneider in November 2008. The
November 2008 spreadsheet indicated that the portfolio included 5,785 first-lien mortgages with
an aggregate balance of approximately $230 million. (TAC ¶ 24.) Chase represented that the
reason for the missing information in the November spreadsheet was that Chase was still
processing information it received during its acquisition of Washington Mutual, Inc. (TAC
¶ 26.)
In December 2008, Schneider told Guerrero that he would not make an offer to
purchase the mortgage portfolio. (TAC ¶ 29.) In response, Guerrero offered to sell the portfolio
for $200,000. (TAC ¶ 30.) Based on an analysis of the November data set, which included
several loans Schneider believed to be valuable, Schneider agreed to purchase the portfolio for
$200,000. (Id.) On December 22, 2008, Schneider formally communicated an offer to purchase
a $100 million portfolio of first-lien mortgages,1
and sent a cashier’s check for $200,000 to
Chase the following day. (TAC ¶¶ 32-33.)
On February 4, 2009, Chase sent Schneider a Mortgage Loan Purchase
Agreement (the “MLPA”), which contract would govern the sale of the mortgage portfolio.
(TAC ¶ 35.) The February 4 draft of the MLPA contained a placeholder for “Exhibit A”, which
was to list the mortgages being sold. (Id.) The draft did, however, represent that Chase would
be conveying 4,271 loans with an aggregate balance of $172,093,033.13.2
(Id.) Chase told Schneider that the final version of Exhibit A would not be provided until after the MLPA was
signed. (TAC ¶ 36.)
The final version of the MLPA, signed by Chase and MRS, was sent to Schneider
on February 25, 2009. (TAC ¶¶ 37-38.) The final MLPA provided for the sale of 3,529
mortgages with an aggregate balance of $156,324,399.24 (per the nomenclature used by the
TAC, the “MRS Loans”). (TAC ¶ 38.) The TAC alleges that Chase included an additional $56
million in mortgages above Schneider’s $100 million purchase offer, without requesting any
additional consideration, was that Chase knew that the MRS Loans had been serviced in
violation of state and federal law, and Chase was therefore transferring to MRS a significant set
of liabilities. (TAC ¶¶ 40-41.) The TAC alleges that this represented a violation of the MLPA’s
representations and warranties, which provided that the mortgages complied with applicable
laws. (TAC ¶¶ 41-43.) The TAC alleges that the allegedly false statements made by Chase prior
to the signing of the MLPA represent both fraudulent inducement and negligent
misrepresentation. (TAC ¶¶ 176-192.)
On February 25, 2009, after the MLPA had been fully executed, Chase sent
Schneider the list of mortgages that was Exhibit A to the agreement. (TAC ¶ 46.) The version
of Exhibit A Schneider received was missing significant data, however, including the
outstanding balance of the loans and the addresses of the mortgaged properties. (TAC ¶ 46.)
Chase represented to Schneider that the missing information was due to Chase’s difficulty in
converting information from Washington Mutual’s system, as had been the case with the
November 2008 data set. (TAC ¶ 47.) MRS was forced to spend its own resources to complete
the information for the Exhibit A mortgages. (TAC ¶ 49.)
The TAC alleges that the list of mortgages contained in Exhibit A violated
multiple provisions, representations, and warranties contained in the MLPA. As relevant to the
instant motion to dismiss, the TAC alleges:
• Chase never provided a complete Exhibit A, and its representations that the
reason Exhibit A was incomplete was due to Washington Mutual’s systems were
false because none of the MRS Loans contained in Exhibit A had been originated
by Washington Mutual (TAC ¶¶ 46-48);
• Chase had serviced the MRS Loans unlawfully (TAC ¶ 60);
• After the MLPA was executed, Chase contacted borrowers of MRS Loans, as
well as loans previously purchased by S&A and 1st Fidelity under the MMLSA,
and represented that Chase was forgiving the entire balance of their mortgage
loan pursuant to the National Mortgage Settlement (“NMS”) between Chase and
the federal government (TAC ¶¶ 97-109);
• After the MLPA was executed, and also pursuant to the terms of the NMS, Chase
released liens on properties whose mortgages had been sold to MRS, S&A, and
1st Fidelity (TAC ¶¶ 134-140).

Plaintiffs’ Tort Claims (Counts Four through Eight)

As to Plaintiffs’ claims for fraudulent inducement and negligent
misrepresentation, however, Plaintiffs have sufficiently identified underlying facts separate and
apart from those on which their breach of contract claims are based. Under New York law, a
plaintiff may plead fraud claims alongside contract claims if they “allege misrepresentations of
present fact, not merely misrepresentations of future intent to perform under the contract.” Wyle
Inc. v. ITT Corp., 130 A.D.3d 438, 439 (N.Y. App. Div. 1st Dep’t 2015). Such
misrepresentations can support a separate fraud claim where, as here, “a plaintiff alleges that it
was induced to enter into a transaction because a defendant misrepresented material facts,”
because such misrepresentations are “collateral to the contract (though [they] may have induced
the plaintiff to sign the contract) and therefore involve[] a separate breach of duty.” First Bank
of Ams. v. Motor Car Funding, 257 A.D.2d 287, 291 (N.Y. App. Div. 1st Dep’t 1999). MRS
adequately alleges that Defendants made false and/or misleading representations concerning the
characteristics of the mortgage pool prior to the signing of the MLPA, which induced MRS to
sign the MLPA. These allegations suffice to state claims that are not duplicative of the breach of
contract claim, and Defendants’ motion to dismiss the fraud and negligent misrepresentation
counts (nos. five and six in the TAC) are therefore denied.

[…]

CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss is denied with respect to counts six and seven of the TAC, … Plaintiffs may move for leave to amend by March 6, 2017, which motion must be accompanied by a proposed amended complaint and a blackline comparison of the proposed amended complaint to the Complaint.

 

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