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Mergers and Acquistion Services, Inc. v. Eli Global, LLC

United States District Court, S.D. New York

March 27, 2017

MERGERS AND ACQUISITION SERVICES, INC., Plaintiff,
v.
ELI GLOBAL, LLC, and its successors in interest, alter egos and affiliates, SOUTHLAND NATIONAL HOLDINGS, LLC, SNA CAPITAL, LLC, SOUTHLAND NATIONAL INSURANCE CORPORATION, and GREG E. LINDBERG, Defendants.

          MEMORANDUM OPINION AND ORDER

          GREGORY H.WOODS UNITED STATES DISTRICT JUDGE.

         I. INTRODUCTION

         In November 2014, Paul Procops, Vice-President of Plaintiff Mergers and Acquisitions Services, Inc. (“M&A”) received an email from an employee of M&A’s former client Eli Global, LLC (“Eli Global”). In that email, the employee indicated that Eli Global had purchased an insurance company. Procops was taken aback. Earlier that year, M&A and Eli Global had worked together, pursuant to a contract, to find an insurance company for Eli Global to buy. In Procops’ view, M&A had introduced the insurance company mentioned in the email to Eli Global; as a result, under the contract, Eli Global owed M&A fees for its assistance. That Eli Global terminated its contract after it signed a stock purchase agreement to acquire its target-but before the deal technically closed-may reasonably have been considered by M&A as sneaky, even underhanded. Being sneaky, however, does not necessarily amount to a breach of contract as a matter of law, and in this case, M&A cannot recover under the contract. This is primarily because the contract, which was drafted by M&A, contained a provision-a “fee tail”-that was included to protect against similar behavior by Defendants. Because M&A did not satisfy the conditions that it established to earn payment following termination of its agreement with Eli Global, Plaintiff’s motion for summary judgment is denied, and Defendants’ motion for summary judgment is granted in part.

         II.BACKGROUND[1]

         Plaintiff in this case is M&A, a small corporation that provides advisory and financial services to other companies. Pl.’s Resp. to Defs.’ Local Rule 56.1 Statement (“Pl.’s 56.1”), Dkt. No. 112 at ¶ 1. Specifically, M&A specializes in advising and assisting clients that are interested in acquiring insurance companies. Defs.’ Resp. to Pl.’s Local Rule 56.1 Statement (“Defs.’ 56.1”), at ¶ 1. Defendant Eli Global was one such client. Eli Global was founded by Defendant Greg E. Lindberg (“Lindberg”), an entrepreneur who has founded or acquired over 195 corporations. Pl.’s 56.1 at ¶ 7; see also Affidavit of Betty Rodriguez, Dkt. No. 169 (“Rodriguez Aff.”) Ex. 1 (“Lindberg Dep. Tr.”) at 16:1-5. Lindberg’s “enterprise of portfolio companies” in the “Eli family of businesses” operates in multiple sectors of the economy. Pl.’s 56.1 at ¶ 9-10; Defs.’ 56.1 at ¶ 4.

         A. Eli Global and M&A Begin Working Together

         Around late 2012 and early 2013, Eli Global became interested in acquiring an insurance company to add to its portfolio. Despite Eli Global’s experience in buying other companies, it had never acquired an insurance company. See Lindberg Dep. Tr. at 95:6-12. Eli Global therefore turned to M&A for help identifying potential acquisition targets in the insurance industry. Affidavit of Donald A. Emeigh, Dkt. No. 93 (“Emeigh Aff.”) Ex. 1. Chris Herwig, the “Portfolio Manager for the investments and potential investments of Eli Global and its affiliated entities,” and Paul Procops, M&A’s Vice President, began discussions over email about the scope of Eli Global’s interest and how M&A could help with a potential deal. Affidavit of Chris Herwig, Dkt. No. 97 (“Herwig Aff.”) at ¶ 2; see also id. Ex. I.

         To document the relationship between M&A and Eli Global, on April 17, 2013, the two companies executed a “Fee Agreement” related to one particular acquisition target-Defendant Southland National Insurance Corporation (“SNIC”). Pursuant to that agreement, Eli Global would pay M&A a flat fee of $500,000 in the event that a transaction occurred between Eli Global and SNIC or its parent company, Collateral Holdings, Ltd. (“Collateral”). Pl.’s 56.1 at ¶ 37; Am. Compl., Dkt. No. 38 Ex. A (the “Fee Agreement”). While only Eli Global signed the Fee Agreement, the parties to the agreement were defined as M&A and Eli Global “and its subsidiaries and affiliates.” Pl.’s 56.1 at ¶ 38; Fee Agreement. M&A got to work right away. That same day, in order to help Eli Global learn about SNIC, Procops sent Herwig a “briefing book” about SNIC, which he explained “compiles the five year statutory data and provides some expository information pulled from prior AM Best reports when the company was covered.” Pl.’s 56.1 at ¶ 61; Herwig Aff. Ex. I at ¶ 00385.

         Less than two weeks later, on April 29, 2013, Procops told Herwig that he had spoken to Mike Anderson, an executive at Collateral. See Herwig Aff. Ex. H; Pl.’s 56.1 at ¶ 41. By email, Procops stated the following: “Spoke with the President of Southland National today. He needs to speak with ownership, but he’s open minded to an introductory call. I will be back to you when I hear something concrete.” Herwig Aff. Ex. H; Emeigh Aff. Ex. 9. Three days later, on May 2, 2013, Herwig responded to this email, “Sounds good, thanks Paul.” Id. In his deposition, Procops testified that he received a call from Herwig soon after this email exchange during which Herwig told Procops that Eli Global was “finalizing [its] structure” for an insurance company acquisition and therefore did not want M&A to move forward with its discussions with Collateral. Rodriguez Aff. Ex. 14 (“Procops Dep. Tr.”) at 13:24 – 14:8. Herwig did not recall any specific phone calls with Procops in April or May of 2013, but did not dispute that the call occurred. Rodriguez Aff. Ex. 7 (“Herwig Dep. Tr.”) at 365:2-11.

         After the April exchanges, communication between M&A and Eli Global ceased until August 6, 2013, when Herwig reached out to Procops to say that Eli Global had “just about finalized our structure” and was therefore interested “in acquiring or reinsuring a block of life business.” Emeigh Aff. Ex. 10 at ¶ 02034. Procops responded that he would “circle the email around the office, [and] see if any of my colleagues are working on anything.” Id.

         B. Eli Global and M&A Enter into a New Agreement

         After Herwig and Procops’ August email exchange, discussions between M&A and Eli Global again went quiet; it was not until early December 2013 that Herwig reached out to Procops to “just check[] back in” about a potential acquisition of an insurance company. Emeigh Aff. Ex. 11 at ¶ 02009. Eli Global explained that it had “broadened [its] scope” in its search for acquisition targets since entering into the Fee Agreement. Id. at ¶ 02007. Herwig and Procops discussed, via email and a telephone call, a new potential engagement between the companies that would reflect this broader scope.

         On December 13, 2013, Procops sent Herwig a proposed “Consulting and Advisory Agreement” (the “Consulting Agreement”) for review. Emeigh Aff. Ex. 12 at ¶ 01938. The agreement was “an M&A form agreement” that had been used by M&A with other clients. Procops Dep. Tr. at 127:23 – 128:25. While perhaps a “form” agreement, the Consulting Agreement was by no means a model agreement, as it was rife with typographical errors and failed to define a number of capitalized terms. Regardless, on December 16, 2013, Herwig returned the signed engagement letter without making any changes and asked for instructions for wiring the retainer required pursuant to the agreement. Id.; Emeigh Aff. Ex. 12 at ¶ 01938. The Consulting Agreement expressly superseded “all prior understandings and agreements,” including the Fee Agreement. Consulting Agreement at § 13; Pl.’s 56.1 at ¶ 45.

         The Consulting Agreement was “both advisory and success based,” and the contract divided M&A’s obligations and Eli Global’s duty to provide compensation for M&A’s services into two parts. Emeigh Aff. Ex. 12 at ¶ 01948. First, the agreement provided that M&A would provide advisory services to Eli Global, including identifying and contacting potential “Target” insurance companies on behalf of the “Company,” defined as “Eli Global LLC.” See Am. Compl. Ex. B (the “Consulting Agreement”) at §§ 1(a)-(b). The Consulting Agreement did not identify a particular target company, but instead defined “Target” as “any insurance company or the assets and liabilities of any insurance business (asset sale).” Pl.’s 56.1 at ¶ 49; Consulting Agreement, Definitions. In exchange for this service, Eli Global was required to pay M&A a “monthly advisory fee” of $15,000 during the term of the agreement. Id. at § 3(a).

         Second, the Consulting Agreement imposed an obligation on Eli Global to compensate M&A in the event that Eli Global entered into a transaction with a Target. Specifically, section 3 of the Consulting Agreement provided that if Eli Global pursued such a transaction, M&A would act as Eli Global’s advisor for the acquisition, and would be paid a “Success Fee” of $500,000 or 3% of the total consideration referenced in a definitive Stock Purchase or Asset Purchase Agreement at closing of that transaction. Id. at § 3(b).

         The Consulting Agreement contained a termination provision that allowed either party to terminate the agreement with 30-days’ notice but provided no other restraints on termination. Id. at § 2. In order to protect itself against an attempt by Eli Global to circumvent its obligations under the Consulting Agreement by terminating the agreement and shortly thereafter closing a deal with a company identified by M&A, M&A included in its termination section a “fee tail” provision. That provision of the agreement would allow M&A to capture its fee if Eli Global closed a transaction after the agreement’s termination. The fee tail applied only in limited circumstances described in the agreement. Specifically, if Eli Global were to terminate the Consulting Agreement by writing, it would be obligated to pay M&A a Success Fee for “any Transaction with a Target Introduced to the Company by M&A, which Closes within the period ending 18 months after the date of the termination of this Agreement.” Id. (emphasis added).

         Further, section 3(d) of the agreement stated that “[t]he Company agrees that no affiliate and/or subsidiary shall enter into a Transaction with a Target Introduced by M&A without M&A’s written approval.” Id. at § 3(d) (emphasis added). So, both section 2 and section 3(d) of the Consulting Agreement applied exclusively to a Target “Introduced” by M&A. As used in those sections, the word “Introduce” was defined as:

[A] Target company presented by M&A to the company where M&A provides (i) financial information on the Target (such as statutory statements, briefing books, etc), and (ii) arranges meeting (face to face or telephonic) between the Company and a Target, or (iii) facilities a non disclosure and/or confidentiality agreement between the Company and a Target.

         Consulting Agreement, Definitions.

         C. M&A’s Work Under the Consulting Agreement

         In late January 2014, the two companies continued discussions about potential acquisition targets for Eli Global. Pursuant to its obligations under the Consulting Agreement, on January 22, 2014, Procops sent Herwig a “preliminary life and health .xl screen.” This Excel spreadsheet listed almost 100 insurance companies and contained information about each of those companies’ assets and income. Emeigh Aff. Ex. 15 at 4-5. M&A color-coded the companies on the spreadsheet to indicate viability for acquisition by Eli Global. See Herwig Aff. Ex. L at ¶ 01822 (“As a guide, companies in red M&A, [sic] has an active engagement with, or knows they’re expanding, or is part of a larger insurance group, or is part of a large organization such as a church or state fund. Companies in yellow are companies M&A believes to be ‘maybe’s’ based on prior conversations. Finally, companies in green, M&A believes are available.”). SNIC was of the companies highlighted in green on this spreadsheet. Emeigh Aff. Ex. 15 at 4-5.

         Herwig acted on this information promptly, and emailed Procops the next day, explaining that he “went back through [his] notes on Southland from when [Procops] sent it over the summer . . .” and noted that Southland “could be interesting.” See Herwig Aff. Ex. L at ¶ 01821-P01822. On January 27, 2014, Herwig requested to speak to Procops about three companies listed on the Excel spreadsheet that Eli Global “would like to go after and arrange meetings with . . .,” one of which was SNIC. Id. at ¶ 01820. A call between Herwig and Procops took place the next day. See id.

         On January 29, 2014, Procops contacted SNIC. Pl.’s 56.1 at ¶ 67. Procops did not immediately provide an update to Eli Global, so a few days later, Eli Global followed up to ask whether any progress had been made arranging a meeting with SNIC. Id. at ¶ 68. Procops responded that M&A had reached out to Anderson, but “have yet to get a definitive response from either as to whether or not they would entertain discussions.” Herwig Aff. Ex. M. at ¶ 01801. Procops added that he thought it was “a bit preemptive to try and schedule a meeting at this point.” Id.

         In an attempt to pique SNIC’s interest in Eli Global, on February 10, 2014, M&A sent Anderson a one-page document containing general information about the Eli family of businesses. Pl.’s 56.1 at ¶¶ 71-72. Eli Global authored this document and had previously provided it to M&A. Id. M&A could not, however, arrange a meeting between Eli Global and Collateral because, as Anderson explained to Procops, SNIC was “currently under an exclusivity provision” in connection with another potential deal. Emeigh Aff. Ex. 13 at ¶ 01758. On February 21, 2014, Procops told Eli Global about the exclusivity provision, but stated that he “will be following up with Mike [Anderson] near the end of the 30 day exclusivity period, and Mike assured me that he would be circling back with us if problems arise with the party they’re currently in discussions with.” Id. Lindberg thanked Procops for the update and noted that “Southland would be an ideal target” for Eli Global. Id.

         D. Eli Global Independently Engages with Collateral

         At the same time that M&A was reaching out to SNIC and other potential targets on Eli Global’s behalf, a separate and independent company-the Cathcart Group-was also looking into acquiring SNIC. The Cathcart Group, however, did not have the funding to complete such a transaction on its own. Pl.’s 56.1 at ¶ 82; Rodriguez Aff. Ex. 6, Herwig Dep. Tr. at 282:24 – 284:8.

         As a result, in April 2014, the Cathcart Group reached out to Eli Global about securing funding for a transaction that would result in Eli Global gaining ownership over a percentage of an “insurance company.” Emeigh Aff. Ex. 20 at ELI0509. In an April 21, 2014 email from Dan Cathcart of the Cathcart Group to Herwig, Cathcart noted two potential deal structures with a company identified merely as “insurance company,” and asked for Herwig to provide financial documents indicating Eli Global’s source of capital for this anticipated transaction. Id. Later that same day, Cathcart replied to his previous email emailed and noted, for the first time that, “By the way, the company is Southland National Insurance Company.” Id. at ELI0508. In subsequent emails Lindberg asked Herwig, “So the game gets more interesting . . . [w]asn’t Southland one of those that ‘got away’?” Id. at ELI0507.

         Eli Global wasted no time acting on this potential deal. Promptly after this exchange, Eli Global had a phone call with Collateral, and on April 28, 2014, Defendant Southland National Holdings, LLC (“Southland Holdings”) was formed to acquire SNIC. Pl.’s 56.1 at ¶¶ 25, 85; Herwig Aff. Ex. D. The next day, on April 29, 2014, Lindberg, Herwig, and Eli Global associate Devin Solow met with Collateral executives Anderson, Will Ratliff, Henry Caldwell, and James Leitner for the first time in Birmingham, Alabama. Herwig Aff. Ex. T; Rodriguez Aff. Ex. 12, Anderson Dep. Tr. at 120:16 – 121:8. From there, things moved quickly. On April 30, 2013, Eli Global and Collateral entered into a Confidentiality Agreement. Pl.’s 56.1 at ¶ 91; Herwig Aff. Ex. U. The very next day, Collateral Holdings, Ltd., Southland National Holdings LLC, and Lindberg entered into a stock purchase agreement pursuant to which Collateral would sell SNIC to Southland Holdings. Pl.’s 56.1 at ¶ 96; Herwig Aff. Ex. E. While the stock purchase agreement was Dated: May 1, 2014, the closing of the acquisition was contingent on regulatory approval by the Alabama Department of Insurance, and thus the transaction did not close at signing. Herwig Aff. Ex. E at § 6.1(b). Later that month, Lindberg created Defendant SNA Capital, LLC (“SNA”) for the purpose of consummating the SNIC acquisition. Pl.’s 56.1 at ¶ 20; Herwig Aff. Ex. B.

         E. Eli Global Terminates the Consulting Agreement

         Eli Global did not tell M&A about the Cathcart Group’s invitation to take part in an insurance company acquisition, nor did it tell M&A that it had independently connected with SNIC. Despite the fact that Eli Global and M&A continued to actively discuss other potential acquisition targets and work to arrange meetings with those other targets in May and into June 2014, see, e.g., Emeigh Aff. Ex. 28, M&A was not aware of any of the negotiations, agreements, or in-person meetings between Eli Global and SNIC simultaneously taking place, and did not know that a stock purchase agreement had been signed between SNIC, Southland Holdings, and Lindberg. See Procops Dep. Tr. at 171:10-13.

         On June 10, 2014, over a month after that stock purchase agreement was signed, Eli Global chose to terminate the Consulting Agreement with M&A pursuant to section 2 of the agreement. Emeigh Aff. Ex. 18. The same day, M&A’s Joseph Murgio memorialized the cancellation in a letter, which stated that the effective termination date of the Consulting Agreement would be July 10, 2014. Emeigh Aff. Ex. 17. The letter contained a list of companies that would fall under the eighteen-month “fee tail” provision-that is, companies for whom a transaction with Eli Global would trigger the obligation for Eli Global to pay M&A a Success Fee. Those companies were “Mountain Life Insurance Company, Old United Life Insurance Company, [and] First Trinity Life Insurance Company.” Id. Tellingly, SNIC was not included in this list. Id.

         F. Eli ...


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