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NorthPointe Holdings, LLC v. Nationwide Emerging Managers, LLC

Superior Court of Delaware, New Castle

July 16, 2014

NORTHPOINTE HOLDINGS, LLC, Plaintiff/Counter-Defendant,

Submitted: April 23, 2014

Bartholomew J. Dalton, Esquire, Dalton & Associates, P.A., Wilmington, DE, and Rodger D. Young, Esquire, Jaye Quadrozzi, Esquire, Young & Associates, Farmington Hills, MI, Attorneys for NorthPointe Holdings, LLC, NorthPointe Capital, LLC, Peter Cahill, Mary Champagne, Robert Glise, Michael Hayden, Jeffrey Petherick, Stephen Roberts and Carl Wilk.

Colm F. Connolly, Esquire, Morgan, Lewis & Bockius LLP, Wilmington, DE, and Jay H. Calvert Jr., Esquire, Bahar Shariati, Esquire, Jessica A. Stow, Esquire, Morgan, Lewis & Bockius LLP, Philadelphia, PA, Attorneys for Nationwide Emerging Managers, LLC, Nationwide Corporation, and Nationwide Mutual Insurance Company.


Rocanelli, J.


NorthPointe Capital, LLC ("NP Capital") was created in 1999 to invest in publicly traded stocks and act as a mutual fund advisor to a variety of mutual funds. Nationwide Emerging Managers, LLC owned the majority interest in NP Capital, specifically sixty-five percent (65%). The remaining thirty-five percent (35%) of NP Capital was owned by four individuals who were the persons who managed the day-to-day operations of NP Capital.

Nationwide Emerging Managers is a Defendant, Counter-Plaintiff, and Third-Party Plaintiff. Nationwide Mutual Insurance Company and Nationwide Corporation are also Defendants. (Collectively, these Nationwide entities are referred to as "Nationwide.")

When NP Capital was created, it was consistent with Nationwide's investment strategy of direct management of assets. In or about 2006, Nationwide sought to divest its interest in NP Capital and offered the four NP Capital individuals the opportunity to purchase Nationwide's interests in a Management Buy-Out ("MBO"). The divestment from NP Capital was consistent with Nationwide's strategic shift to be divested of its direct asset management role.

In response to Nationwide's expressed interest to divest from NP Capital, the four individuals with an ownership interest in NP Capital created a new company, NorthPointe Holdings, LLC, for the purpose of purchasing the shares in NP Capital. Three additional individuals were brought in as investors/owners.

NorthPointe Holdings, LLC is the Plaintiff and Counter-Defendant. The seven individuals with an ownership interest in NorthPointe Holdings, LLC are Third-Party Defendants. They are Peter Cahill, Mary Champagne, Robert Glise, Michael Hayden, Jeffrey Petherick, Stephen Roberts, and Carl Wilk. (NorthPointe Holdings, LLC and the seven individual parties are collectively referred to as "NorthPointe"). NP Capital is also a Third-Party Defendant.

By 2006, prior to the MBO, seven funds were managed by NP Capital; five of the funds were branded as Nationwide funds and two of the funds were branded as NorthPointe funds. The seven funds were:

1. Nationwide Large Cap Value Fund
2. Nationwide Value Opportunities Fund
3. Nationwide Mid Cap Growth Fund
4. Nationwide Micro Cap Equity
5. NorthPointe Small Cap Value Fund
6. NorthPointe Small Cap Growth Fund
7. Nationwide NVIT Mid Cap Growth Fund ("NorthPointe NVIT").

Of the seven funds under management prior to the MBO, six had approximately $100 million or less of assets under management ("AUM"). The seventh fund, NorthPointe NVIT, had over $400 million in AUM. NorthPointe NVIT was a variable annuity/variable life ("VA/VL") trust fund in which Nationwide, not direct individual investors, owned the AUM on behalf of individuals. The NorthPointe NVIT was an option on the VA/VL funds menu at Nationwide. The NorthPointe NVIT was a very important part of NP Capital's business model and was a key to NorthPointe's success as a company independent from Nationwide.

After Nationwide proposed the MBO of NP Capital in June 2006, the parties negotiated terms and conditions of the MBO. The Purchase Agreement was signed on July 19, 2007 and the Closing Date was September 28, 2007. The Purchase Agreement did not transfer ownership of the funds. Rather, it transferred advisory management of the funds from NP Capital, in which Nationwide had an ownership interest, to NorthPointe, which was independent of Nationwide.


This lawsuit was filed by NorthPointe on November 17, 2009. Thereafter, a Second Amended Complaint was filed. In lieu of an answer, Nationwide moved to dismiss or, in the alternative, sought a more definitive statement. The Court issued a memorandum opinion on September 14, 2010 upon Nationwide's motion to dismiss or for a more definite statement, which was granted in part and denied in part.

Nationwide filed a motion for summary judgment. On May 24, 2012, the Court denied Nationwide's motion for summary judgment and granted NorthPointe's motion to amend the complaint.

The Third Amended Complaint was filed on May 31, 2012. Nationwide filed another motion for summary judgment, which was denied by Court Order dated May 20, 2013 on the grounds that there were material issues of fact in dispute.[1] A n on-jury trial on the Third Amended Complaint took place as scheduled in January 2014. The parties submitted post-trial briefs rather than closing arguments at the conclusion of the trial. This is the Court's decision after trial.


The Court begins with the fundamental observation that each party bears the burden of proving its claims by a preponderance of the evidence. In this regard, the Court must be mindful that, if the evidence presented by the parties during trial is inconsistent and the opposing weight of the evidence is evenly balanced, then "the party seeking to present a preponderance of [the] evidence has failed to meet its burden."[2]

The Court heard the testimony of nineteen witnesses and considered scores of documents and demonstrative exhibits. As fact-finder, the Court followed the direction that is regularly given to juries when assessing the evidence and the credibility of witness testimony:

I must judge the believability of each witness and determine the weight [to be] given to all trial testimony. I considered each witness's means of knowledge; strength of memory and opportunity for observation; the reasonableness or unreasonableness of the testimony; the motives actuating the witness; the fact, if it was a fact, [that] the testimony was contradicted; any bias, prejudice or interest, manner or demeanor upon the witness stand; and all other facts and circumstances shown by the evidence which affect the believability of the testimony. After finding some testimony conflicting by reason of inconsistencies, I have reconciled the testimony, as reasonably as possible, so as to make one harmonious story of it all. To the extent I could not do this, I gave credit to that portion of testimony which, in my judgment, was most worthy of credit and disregarded any portion of the testimony which, in my judgment[, ] was unworthy of credit.[3]


1. Nationwide's Changing Structure and Business Philosophy

Nationwide took great pains and went to great lengths to establish at trial that Nationwide is a vast and complex corporate entity, with scores of units, offices that are geographically widespread, and many employees.[4] Moreover, during the time period at issue in the dispute before the Court, there were several very significant management changes that were accompanied by tectonic shifts in investing strategies, philosophy, and approach to Nationwide's relationship to NorthPointe.

Nationwide Fund Advisors ("NFA") managed investment strategies for Nationwide. There were four presidents of N FA during the time before and after the MBO. In addition to the four different persons in the role and function of N FA president, NorthPointe eventually dealt with 16 different Nationwide accountants.

Paul Hondros was president of NFA when NorthPointe was first approached to buy-out Nationwide's ownership interest. In May 2007, Hondros left his position as president of NFA, and was replaced by John H. G r a d y. In January 2008, Grady was replaced by Stephen Timothy Grugeon, who was acting president on an interim basis. Subsequently, Michael P. Spangler became president o f N FA on June 30, 2008. He was the fourth president in only three years.[5]

Hondros drove the NFA strategy of a direct-management investment model in 1999 when NP Capital was first created.[6] While Hondros was president of NFA, in or about October 2006, Grady joined Nationwide as an independent contractor. In May 2007, Grady was named an officer of Nationwide. According to Nationwide, Grady's responsibility was to complete the strategic shift to a subadvised platform so that Nationwide would be divested of its direct asset management role.

Grady oversaw Nationwide's divestment of the funds it directly managed, while it moved to a subadvised model.[7] Grady was Nationwide's "face and voice for conversations with Michael Hayden."[8] Prior to the MBO, Hayden was NorthPointe's Managing Director. Hayden became NorthPointe's Chief Executive Officer after the MBO.

On January 31, 2008, Grady left Nationwide. While Grady was president of NFA, Tim Grugeon reported to Grady.[9] When Grady left Nationwide, Grugeon replaced Grady as acting president of N FA .[10] Spangler became president of NFA on June 30, 2008.[11]

The Court finds that high turn-over in key positions at Nationwide resulted in institutional incompetence. David Wetmore, who testified as a witness, has been Chairman of the Board of Trustees of Nationwide Mutual Funds ("Board") since 2005. He testified that he has more than 20 years of experience on boards related to investment vehicles for trust funds such as the NorthPointe NVIT. Wetmore conceded that he had concerns about the rotating presidency at NFA, suggesting that the turnover made it difficult for Nationwide to have consistent policies.

In addition to the turmoil at NFA, Nationwide's trial presentation emphasized the distinction between the business unit in the Columbus, Ohio office and the investment unit in the Conshohocken, Pennsylvania office. There was often a significant disconnect in business and strategy decisions. In about May 2006, at the same time that NFA in Conshohocken was pursuing the MBO as a mutually beneficial undertaking, certain persons within Nationwide's Columbus business office began recommending that NP Capital be replaced as a subadvisor by name-brand managers, such as Gartmore. Significantly, there were no Nationwide employees from the Columbus office who were involved in the MBO negotiations.

Grady acknowledged the disconnect between these two Nationwide offices and tried to correct it. Grady testified that he made efforts to bring the Columbus business unit under his direct authority as NFA president in order to correct the strategic disconnect. However, Grady's tenure was short-lived and his efforts did not come to fruition. To the contrary, the Court concludes that, ultimately, it was the decision-making in Columbus and at NFA under Spangler's leadership that brought about Nationwide's failure to meet its obligations under the Purchase Agreement. Once Spangler became NFA president, the tone of Nationwide's relationship with NorthPointe changed entirely and deteriorated completely. Communication ceased for all intents and purposes.

2. NorthPointe and Nationwide's Relationship prior to the MBO

Nationwide's ownership interest in NP Capital was profitable. Prior to the MBO, Nationwide received approximately $15 million in profits annually from NP Capital. As sixty-five percent (65%) owner of the entity, Nationwide had access to all of NP Capital's expense and financial information. Nationwide also monitored NP Capital's performance and was intimately familiar with NP Capital's performance history. From time to time, NP Capital's funds were placed on "watch lists" and "close review lists" if the funds were not meeting certain well-defined performance standards; but placement on these lists was temporary. Several witnesses for Nationwide and NorthPointe testified that it is not unusual for funds to be placed on these lists periodically.

The working relationship between NP Capital and Nationwide was excellent prior to the MBO. NP Capital managed seven funds for Nationwide and, from 1999-2007, Nationwide had a very "hands on" relationship with NP Capital. NorthPointe's Hayden spoke to Hondros or a member of Hondros' NFA team every business day. Hayden testified that he had a personal relationship with several Nationwide persons. NorthPointe had no reason to expect that its close working relationship with Nationwide would change after the MBO. Indeed, according to Grady who was directly involved in negotiating the MBO on Nationwide's behalf and according to NorthPointe, it was accepted by the parties on both sides of the transaction that the MBO would benefit both NorthPointe and Nationwide.

3. Nationwide's New Multi-Managed NVIT Mid Cap Growth Fund

In 2006, prior to the signing of the Purchase Agreement, Nationwide first began to plan a Multi-Managed NVIT Mid Cap Growth Fund ("Nationwide Multi-Managed NVIT"), which was a fund with a similar investment strategy as the NorthPointe NVIT. Although the mere creation of the new Nationwide Multi-Managed NVIT neither amounted to fraud nor breach of contract, as discussed below, Nationwide's strategic decision to keep the fees charged to investors artificially low in the Nationwide Multi-Managed NVIT created a tremendous incentive for investors to choose the Nationwide Multi-Managed NVIT over the NorthPointe NVIT. With respect to the cap on fees for investors, Grugeon claimed that Nationwide did not want new investors to experience a high expense ratio. Professor Russell Richard Wermers testified that, when everything else about two funds is virtually equal, most investors will gravitate to the fund with lower fees.

The Court finds that Nationwide did not disclose the creation of the Nationwide Multi-Managed NVIT to NorthPointe. Many Nationwide witnesses testified that the creation of the Multi-Managed NVIT was not disclosed to NorthPointe.[12] As discussed below, the Court finds that Nationwide breached the covenant of good faith and fair dealing, not by creating the Nationwide Multi-Managed NVIT and not by failing to disclose its existence to NorthPointe, but by setting up the fee structure as it did, and also for the other reasons discussed in detail below.

4. Nationwide's Proposal for the Management Buy-Out And Expectation for an Enhanced Business Relationship

Nationwide initiated the MBO discussions.[13] When presenting the MBO proposal to NorthPointe, Nationwide suggested that the relationship between Nationwide and NorthPointe would be enhanced. According to Nationwide, once NorthPointe was unaffiliated with Nationwide, Nationwide could direct more assets to the funds under NorthPointe's management. According to Cahill, Nationwide expressly suggested that the relationship between NorthPointe and Nationwide would be enhanced after the MBO Closing. Grady also stated that he discussed with Nationwide that the profile of certain funds would be improved, and would be "raised" by Nationwide under the new management agreement.

Grady was committed to maintaining–and even enhancing–the relationship between Nationwide and NorthPointe after the MBO. Grady specifically stated that it was not his intention to terminate the relationship with NorthPointe. Rather, the Purchase Agreement and related documents were the basis for an anticipated on-going business relationship.

NorthPointe was interested in acquiring the revenue stream from the management of the funds, but was also interested in an on-going affiliation with Nationwide. According to Peter Cahill, Chief Investing Officer of NorthPointe, the relationship with Nationwide provided NorthPointe with "instant credibility" with NorthPointe's institutional clients and would help NorthPointe manage larger volumes of assets.[14] Moreover, NorthPointe sought Nationwide's continued retail exposure after the Purchase Agreement was signed.

5. Price Negotiations

The MBO price negotiations between Nationwide and NorthPointe were extensive and took place over many months. Hallowell attended a June 2006 business dinner at which the MBO was first discussed. It was Bain and Michael Hayden who set up the dinner meeting in mid-2006 in Columbus at which the parties first discussed the proposed MBO. Hayden, who testified as a trial witness, was NP Capital's Managing Director at this time. Hayden became NorthPointe's CEO in 2007 after the MBO.

After the June 2006 business dinner, NorthPointe's Hayden continued purchase discussions with Nationwide's then-president Grady, presenting NorthPointe's first offer in December 2006 for $16 million cash.[15] This offer was based on "a [multiplier] of eight (8.00) times estimated Trailing Twelve Months EBITDA for subadvisory fee income and four (4.00) times estimated Trailing Twelve Months EBITDA for subadvisory fee income . . . with respect to the 65% ownership percentage of Nationwide."[16] The December 21, 2006 offer letter noted that NorthPointe would consider raising the offer price if Nationwide would include a full purchase-price clawback provision if the subadvisory agreement were cancelled any time during the five years following the MBO. This offer did not include any other protections for NorthPointe. The $16 million cash offer was rejected by Nationwide because Nationwide wanted a higher purchase price.

NorthPointe's second offer was made on February 2, 2007 for $21 million and included a $5 million clawback provision.[17] This offer included an increase in purchase price of $5.2 million in the form of a proposed note. According to Hayden, the note created an incentive for Nationwide to maintain the subadvisory agreement for 36 months because Nationwide would have an interest in NorthPointe repaying the note. This offer was rejected by Nationwide although the concept for the clawback provision was retained.

NorthPointe's final offer was in May 2007 for $25 million, and included the negotiated protections for NorthPointe, as discussed below. Per the final offer, NorthPointe would pay $16 million in cash and execute a note in the amount of $9 million personally guaranteed by the NorthPointe individual investor/owners.[18]

According to NorthPointe's Cahill and Hayden, as well as Nationwide's Grady, NorthPointe was paying significantly more to have additional protections included and was insistent on the protections that were ultimately ...

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