Paul Holman, Robert Fickas, James Cook v. Ocwen Financial Corporation, William Erbey
Published: Feb. 18, 2004 | Result Date: Aug. 25, 2003 | Filing Date: Jan. 1, 1900 |Case number: 32Y1480018301 Arbitration – $10,352,200
Court
American Arbitration Association
Attorneys
Plaintiff
Robert H. Fairbank
(Fairbank ADR)
Scott H. Carr
(Greene, Broillet & Wheeler LLP)
Bruce A. Broillet
(Greene, Broillet & Wheeler LLP)
Defendant
Experts
Plaintiff
Harley S. Tropin
(Kozyak, Tropin & Throckmorton)
(technical)
Rosalind Auzenne
(technical)
Michael G. Kaplan
(technical)
Defendant
Michael Trickey
(technical)
Thomas G. Schultz
(technical)
Facts
The claimants are the former owners of Admiral Home Loan, a loan origination company specializing in the origination of sub-prime loans. Admiral Home Loan was in a declining position financially at the time of negotiating the asset purchase in 1997. They did not have sufficient resources to compete in the market and they either needed to find new capitalization or a merger partner or some other source of funds in order to survive. Like similar companies at this point in time in a highly competitive market, Admiral was suffering substantial financial difficulty. On Oct. 29, 1996, the claimants executed an Asset Purchase Agreement allowing Admiral to be sold to the respondent Ocwen Financial Corporation (OFC) a NYSE company. Under the terms of the agreement, as amended, on March 17, 1997, the claimants were to receive a cash payment of $6,750,000 plus 20 percent of the stock of a new corporation to be formed primarily from the assets of Admiral, called Ocwen Financial Services (OFS). The asset purchase transaction closed on April 30, 1997. During negotiations and prior to the closing, the respondents developed a business plan for OFS that contemplated securitization of all loans, rather than a combination of whole loan sales and securitizations. Securitizations were cash consumptive. Beginning on Nov. 21, 1997, seven months after the closing of the transaction, the Board of Directors of OFS voted to raise additional capital. The failure of claimants to additionally contribute capital resulted in their interest in OFS being reduced from a 20 percent stake in OFS to less than one-half of one percent.
Settlement Discussions
The claimants originally demanded $16,250,000 in 1998 and $9,750,000 in 1999. In May 1998, the respondents offered $9,300,000 but this was subsequently withdrawn. One of the respondents testified that he was not aware of any offer.
Damages
The claimants sustained a loss of their 20 percent interest in OFS. The 20 percent interest was valued by two of the three arbitrators at approximately $6 million. In addition, the claimants incurred attorney fees and costs in protecting their rights to their share of OFS.
Result
The arbitration panel, composed of Joseph M. Matthews, Jerald S. Beer and Stanley A. Beiley, concluded that the respondents breached their fiduciary duties and the duty of good faith and fair dealing which were owed to the claimants. Two of the three arbitrators determined that even though the releases destroyed any claims of justifiable reliance prior to the date the asset purchase agreement was amended on March 17, 1997, the respondents' duty to disclose information continued to exist subsequent to the date of the releases and continued thereafter through the closing on April 30 1997 when the duty became part of the duty owned by majority shareholders to minority shareholders. They further determined that the claimants were successful in proving breaches of fiduciary duty and that actions of the respondents had the effect of diluting the claimants' interest in OFS. The respondents counterclaimed against the claimants for breach of fiduciary duty, breach of contract and fraudulent inducement. Two of the three arbitrators found in favor of the claimants on each of those counterclaims as set forth below, the third arbitrator found in favor of the respondents on the counterclaim.
Other Information
DISSENT: Arbitrator Jerald S. Beer found that claimants had failed to prove any liability of respondents for any actions taken prior to the closing. Specifically, Beer found no evidence that respondents developed any plan prior to the closing to somehow divest claimants of their stock. He noted that during the course of running OFS after closing, the market changed dramatically and respondents were attempting to respond to that change by focusing solely on securitization of loans as opposed to partial bulk sales of loans. The unrebutted testimony of respondents demonstrated that this business approach was supported by the conventional wisdom in the industry at the time. With regard to actions taken after the closing, Beer determined that respondents had breached their fiduciary duty for failing to provide financial information to claimants and failing to perform under the contract in good faith and fair dealing. Beer found for respondents on their counterclaim, concluding that claimant Holman had breached his fiduciary duties to respondents as a board member of OFS by voting against the raising of additional capital simply to avoid dilution of his group share of the company. Beer observed the unequivocal that OFS needed a capital infusion to keep the corporation viable and that the alternative was to close OFS down and render claimants' shares worthless, which OFS had an absolute right to, yet chose not to do. Holman failed to articulate a business reason why the raising of additional capital was not in OFS's best interests. Beer determined that the majority had incorrectly calculated the value of claimants' damages by valuing their 20 percent interest in OFS at $6 million. The majority erroneously relied on respondents' purchase back of 10 percent of the stock for $3 million shortly before the closing, ignoring that payment reflected a premium and that claimants had themselves valued their 20 percent interest in OFS at $1,756,500 in documents submitted to the Internal Revenue Service. Accordingly, Beer would have awarded claimants $1,756,500.
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