Chester County Employees' Retirement Fund v. New Residential Corp.
11058-VCMR
| Del. Ch. | Dec 1, 2016Background
- Plaintiff (Chester County Employees’ Retirement Fund) challenged transactions by New Residential tied to its acquisition of HLSS assets, alleging the board was beholden to Fortress and that the transactions increased fees to Fortress/affiliates under a Management Agreement.
- The Court previously granted Defendants’ motion to dismiss, holding the Amended Complaint failed to plead demand futility because it did not allege the alleged side benefits were material to Fortress; the Court allowed leave to replead.
- Plaintiff moved for reargument, arguing (1) the court erred in applying a materiality requirement to Fortress’s side benefits, (2) materiality was adequately alleged, and (3) repleading was undesirable because limited further facts were available and board composition had changed.
- Defendants opposed, asserting Plaintiff failed to identify any controlling legal authority or facts the Court overlooked and that reargument merely restated prior arguments.
- The Court denied reargument under Court of Chancery Rule 59(f), holding Plaintiff did not show the court misapprehended law or facts; the Court explained that materiality must be alleged with facts showing the benefit’s significance to Fortress and that Plaintiff may replead with specific public-filing facts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a materiality inquiry is required to assess whether side benefits to Fortress render New Residential directors non-independent for demand futility | Materiality should not be required; transactions were self-dealing or otherwise rendered directors beholden | Materiality is a relevant inquiry; Plaintiff must show the benefit was significant to Fortress | Court applied a materiality inquiry and rejected Plaintiff’s contention that materiality is unnecessary |
| Whether the Amended Complaint adequately pleads materiality of benefits to Fortress | The Amended Complaint (and public filings) show large fee increases and other benefits material to Fortress | The complaint lacks facts tying those amounts to Fortress’s overall economics; numbers alone do not establish materiality | Complaint insufficient on materiality; plaintiff may replead with concrete, contextualized facts from public filings |
| Whether the challenged transactions should be characterized as self-dealing (not mere side benefits) | Recharacterize transactions (e.g., recharacterization of HLSS income, renegotiated Management Agreement) as self-dealing, not side benefits | Plaintiff failed to raise or develop that argument in initial briefing; issues were not sufficiently pled | Court declined to reconsider novel characterizations on reargument; instructed Plaintiff to plead those theories in an amended complaint |
| Whether reargument is appropriate to avoid repleading | Reargument is proper because little new factual information is available and board composition changed | Rule 59(f) limits reargument to overlooked law/facts; repleading is the correct vehicle to add facts | Motion for reargument denied; repleading (second amended complaint) is the appropriate avenue to add facts and claims |
Key Cases Cited
- Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002) (defines materiality in director conflict context and asks whether a benefit was significant in the director’s economic circumstances)
- In re Gen. Motors Class H S’holders Litig., 734 A.2d 611 (Del. Ch. 1999) (discusses materiality standard for conflicts and self-dealing inquiries)