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Veloric v. J.G. Wentworth, Inc.

Court of Chancery of Delaware

September 18, 2014


Submitted: June 25, 2014

Russell C. Silberglied, Rudolph Koch and Christopher H. Lyons of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Plaintiffs.

Robert S. Saunders, Michelle L. Davis and Sarah R. Martin of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware, Attorneys for Defendants and Nominal Defendant.




This action involves a dispute between two co-founders and former executives of the J.G. Wentworth operating companies and several entities in the current J.G. Wentworth corporate family, which are in the business of buying and selling structured settlements and annuity payments.

In 2007, Plaintiffs Gary Veloric, Michael Goodman, The Goodman 2007 Grantor Retained Annuity Trust One and The Goodman 2007 Grantor Retained Annuity Trust Two (collectively, the "Plaintiffs") became parties to a Tax Receivable Agreement (the "TRA") entitling them to receive payments derived from certain tax benefits that defendant J.G. Wentworth, Inc. ("Wentworth") may realize in the future. Significantly, Plaintiffs are not entitled to receive any such payments until after the tenth anniversary of the TRA unless there has been a change of control (as defined in the TRA) in the interim and, as things turned out, the amount of such payments stands to be substantially greater for Plaintiffs if a change of control has occurred (approximately $35 million according to Plaintiffs) than if they must wait until after the tenth anniversary of the TRA (potentially $0). This is because the payments owed to Plaintiffs under the TRA are calculated based on certain assumed tax benefits in the event of a change of control as opposed to the actual tax benefits realized if the TRA runs its course.

In October 2013, Plaintiffs filed this action asserting that Wentworth and other defendants breached the TRA because they failed to pay Plaintiffs after a purported change of control that occurred in 2011 or, alternatively, in 2013. Plaintiffs also advance a litany of other claims against defendants arising from the same underlying events for anticipatory repudiation, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, aiding and abetting, and unjust enrichment. For these claims, Plaintiffs seek approximately $35 million in damages and a declaratory judgment.

Defendants moved to dismiss the complaint in its entirety for failure to state a claim upon which relief may be granted under Court of Chancery Rule 12(b)(6).[1] They primarily contend that no obligation has been triggered under the TRA to pay Plaintiffs because there has been no change of control as defined in the TRA.

In this opinion, I conclude that Plaintiffs have failed to state a claim for breach of contract because they have not alleged facts establishing a change of control that would give rise to liability under the plain and unambiguous terms of the TRA. Additionally, I find that Plaintiffs remaining claims, which largely duplicate and/or are governed by their contract claims, fail to state a claim upon which relief may be granted.


The reader is forewarned that this case involves a maze of corporate entities and an alphabet soup of corporate names. Charts depicting the corporate structures at relevant points in time are set forth below in an effort to simplify the underlying facts as much as possible.

A. JLL Acquires the J.G. Wentworth Companies in 2005

In 1992, plaintiffs Gary Veloric ("Veloric") and Michael Goodman ("Goodman") co-founded the operating companies now popularly known as J.G. Wentworth. The J.G. Wentworth companies were (and remain today) in the business of buying and selling structured settlements and annuity payments. Their television commercials are well known to those who may "need cash now."

In 2005, non-party JLL Partners, Inc. ("JLL"), a private equity firm, formed defendant JLL JGW Distribution, LLC, a Delaware limited liability company ("JLL Distribution"), to acquire the J.G. Wentworth operating companies from Veloric, Goodman, and certain non-parties. At all times relevant to this case, JLL Distribution has been wholly-owned by three limited partnerships affiliated with JLL that the parties collectively refer to as "Fund V."[3] Through another series of JLL-affiliated entities, Fund V is, and at all times relevant to this case has been, managed by defendant Paul S. Levy ("Levy"), a managing director of JLL.[4]

In connection with JLL Distribution's acquisition of the J.G. Wentworth operating companies, Veloric and Goodman purchased minority interests in defendant J.G. Wentworth, LLC, a Delaware limited liability company ("JGW LLC"), which owns and operates the J.G. Wentworth operating companies through various non-party subsidiaries. Veloric and Goodman remained senior executives of the J.G. Wentworth companies.

B. The J.G. Wentworth Companies Conduct a Private Offering

In 2007, Fund V and JLL Distribution sought to offer equity in the J.G. Wentworth companies through a private offering, to be followed soon thereafter by a public offering. In doing so, they allegedly wanted to maximize their investment by separating the to-be-offered equity interests from the value of the companies' favorable tax treatment.

They initiated a restructuring that involved several steps. Fund V and JLL Distribution first formed defendant JGW Holdco, LLC, a Delaware limited liability company ("Holdco"), to wholly-own JGW LLC.[5] Fund V and JLL Distribution next incorporated J.G. Wentworth, Inc., a Delaware corporation ("Wentworth"), [6] as a holding company. Wentworth had two classes of voting stock: Class A shares and Class B shares. It offered its Class A shares in a private offering in August 2007 pursuant to Rule 144A of the Securities Act of 1933. Wentworth's Class B shares, which JLL Distribution, Veloric, and Goodman obtained, had "extremely limited economic rights: they are not entitled to dividends, and are entitled only to par value on liquidation or dissolution, or on redemption."[7]

At all times relevant to this case, Wentworth has served as the sole managing member of Holdco, and individual defendants Levy, David Miller ("Miller"), Francisco J. Rodriguez ("Rodriguez"), and Alexander R. Castaldi ("Castaldi") (collectively, the "Director Defendants") have served as the directors of Wentworth. The Director Defendants are managing directors of JLL and serve on the Wentworth board allegedly at the pleasure of Fund V and JLL Distribution.

After the private offering, JLL Distribution owned 52.4% of Wentworth's outstanding common stock, and Verolic and Goodman each owned 9.9%. The balance of Wentworth's equity (approximately 27.8%) was issued in the private offering.

JLL Distribution also owned a majority of Holdco's membership interests. Wentworth obtained a 13.9% economic interest in Holdco and became Holdco's sole managing member. Finally, Veloric and Goodman each obtained 9.9% membership interests in Holdco.

The corporate structure resulting from the transactions described above, as it existed when the TRA (discussed below) was signed, is depicted in Chart 1 below:

(Image Omitted)

Plaintiffs allege that Wentworth's "equity interest in and contractual rights with Holdco are its only material assets."[8] In the Third Amended and Restated Limited Liability Company Agreement of Holdco (the "Holdco LLC Agreement"), Wentworth agreed it would not conduct business other than that related to its position as Holdco's sole managing member.[9] The Holdco LLC Agreement also required Holdco to provide funds for Wentworth to pay its debt, and it specifically references Wentworth's obligations under the TRA that is the subject of this action.[10] In the Rule 144A offering memorandum, Wentworth further "represented that it would cause Holdco to make distributions to it, to permit [it] to pay its debts and obligations."[11]

C. The Key Provisions of the TRA

Under the federal tax code, an exchange of membership interests in Holdco for Class A shares in Wentworth would allegedly cause a favorable adjustment to the tax basis of Holdco's assets. It also would cause corresponding, favorable tax benefits to Wentworth.

On August 9, 2007, in conjunction with the private offering (and the anticipated public offering), JLL Distribution, Wentworth, and Plaintiffs executed the Tax Receivable Agreement (as defined above, the "TRA") to capture some of the tax benefits that might accrue to Wentworth in a public offering.[12] This public offering ultimately did not occur.

Under the TRA, Wentworth is obligated to make "Tax Benefit Payments" to the principals, including JLL Distribution and Plaintiffs, following a "Covered Taxable Year." The Tax Benefits Payments represent 85% of actual or assumed savings in taxes (depending on the context) realized from the tax basis step-ups that result from an exchange of Holdco membership interests for Wentworth Class A shares.

The TRA defines a Covered Taxable Year as a "Taxable Year" (a tax year under applicable tax laws) "ending (i) after the earlier to occur of the closing of the Taxable Year that includes the 10th anniversary of the Original Sale Date and the date of a Change of Control, and (ii) on or before an Early Termination Date."[13] The tenth anniversary of the original sale date would fall in 2017, which means that Wentworth would be required to make annual Tax Benefit Payments starting in 2018, unless a Change of Control occurs before then.

The TRA defines a "Change of Control" to occur in one of four enumerated situations. The parties agree that a Change of Control has not occurred with respect to the first two provisions, which correspond to a change in the voting control or board composition of Wentworth. The two Change of Control provisions relevant here are the first part of the third definition ("Paragraph 3(x)") and the fourth definition ("Paragraph 4"). Paragraph 3(x) provides that a Change of Control occurs if:

there is consummated a merger or consolidation of [Wentworth] or any direct or indirect subsidiary of [Wentworth] (including [Holdco]) with any other corporation or other entity, and, immediately after the consummation of such merger or consolidation, . . . (x) the board of directors of [Wentworth] immediately prior to the merger or consolidation does not constitute at least a majority of the board of directors of the company surviving the merger or, if the surviving company is a subsidiary, the ultimate parent thereof[.][14]

Paragraph 4 provides that a Change of Control occurs if:

there is consummated an agreement or series of related agreements for the sale or other disposition, directly, or indirectly, by [Wentworth] of all or substantially all of [Wentworth's] assets, other than such sale or other disposition by [Wentworth] of all or substantially all of [Wentworth's] assets to an entity, at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by shareholders of [Wentworth] in substantially the same proportions as their ownership of [Wentworth] immediately prior to such sale.[15]

Plaintiffs allege the TRA was drafted almost exclusively by Fund V, JLL Distribution, and their counsel and they did not make any changes to the definition of "Change of Control" in the draft that was presented to them.[16]

If there is no Change of Control, then the Tax Benefit Payments owed to the principals (starting in 2018) are calculated by comparing Wentworth's actual tax liability for a Covered Tax Year with its hypothetical liability had there been no tax basis step-up. In contrast, if there is a Change of Control, then the Tax Benefit Payments are calculated pursuant to a formula in the TRA that assumes Wentworth would have sufficient taxable income to utilize all the deductions created by the tax basis step-ups.

Several defendants allegedly told Plaintiffs in 2012 that Wentworth might not generate enough income to take advantage of the tax basis step-ups created by their exchange of membership interests—meaning that Plaintiffs' proportionate share of Wentworth's actual savings might be worthless.[17] If this were true, it would be desirable for Plaintiffs that a Change of Control occur because they would get paid faster (within months rather than sometime after 2017) and stand to be paid significantly more (a defined amount Plaintiffs estimate to be approximately $35 million rather than a percentage of actual tax savings, which could be zero).

If a Change of Control occurs, Wentworth has forty-five days from filing its federal tax return for the relevant Covered Tax Year to provide to the principals a "Tax Benefit Schedule."[18] A Tax Benefit Payment is then due within five days of delivery of a Tax Benefit Schedule. The TRA provides for a ninety-day grace period before the failure to make a Tax Benefit Payment can be deemed a material breach of the TRA, in which case Wentworth's obligations are accelerated and it must make an "Early Termination Payment."[19]

D. Veloric and Goodman Exchange their Holdco Membership Interests for Wentworth Class A Shares

In approximately April 2009, Veloric and Goodman exchanged their membership interests in Holdco and their Class B shares in Wentworth for Class A shares in Wentworth. By this time, they were no longer executives of Wentworth.

These exchanges triggered Wentworth's obligation under the TRA to provide an "Exchange Basis Schedule" that reflected its resulting tax basis step-ups. The Exchange Basis Schedules, which were provided by Wentworth's accounting firm in 2011, stated that the tax basis step-ups created by Veloric's and Goodman's exchanges were $43, 464, 817 each.[20] Based on the relevant valuation assumptions set forth in the TRA, and calculated as a net present value as of October 2012, Wentworth would allegedly owe $35, 232, 353 to Plaintiffs "in the event of an acceleration of the payments under the TRA arising from a breach."[21] This calculation is the basis of Plaintiffs' request for approximately $35 million in damages.

E. The J.G. Wentworth Corporate Family is Reorganized through a Prepackaged Bankruptcy Plan

In May 2009, Wentworth, Holdco, and JGW LLC filed petitions for a Chapter 11 bankruptcy. The debtors filed a consensual, prepackaged plan of reorganization.

The plan did not impair Plaintiffs' interest in the TRA, and the plan expressly provided that it "shall not constitute a 'change of control' under any provision of any contract . . . of the Debtors, "[22] which would include the TRA. In addition, the plan provided that each debtor "shall be deemed to have assumed each executory contract and unexpired lease to which one or more of the Debtors is a party."[23] Plaintiffs thus contend that Holdco and JGW LLC assumed Wentworth's obligations under the TRA.

In June 2009, the bankruptcy court approved the debtors' plan of reorganization. Pursuant to the plan, JLL Distribution invested $100 million in Holdco to fund JGW LLC's obligations to certain creditors and its acquisition of additional structured settlements and annuity payments; that investment "entitled JLL Distribution to $100 million worth" of Holdco membership interests.[24] Also pursuant to the plan, the capital structures of certain defendants were restructured. Veloric's and Goodman's interests in Wentworth were diluted to 0.0000037% each, with JLL Distribution owning 99.999985%.[25] Similarly, although Wentworth remained Holdco's sole managing member, its 13.9% interest in Holdco was diluted to 0.000015%. JLL Distribution also owned the remaining 99.999985% of Holdco. Finally, Holdco's 100% economic and voting interest in JGW LLC was diluted to 70%. A class of creditors whose interests were impaired in the reorganization plan became preferred stockholders of JGW LLC, collectively owning a 30% economic and voting interest in it.

(Image Omitted)

F. The Peach Merger and the JGW ...

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