Former J.G. Wentworth (JGW) executives and Directors, Michael Goodman and Gary Veloric, (Plaintiffs) have filed a Complaint in the Court of Chancery of the State of Delaware against current CEO David Miller, three current JGW Directors and multiple JGW affiliate companies seeking to enforce a Tax Receivables Agreement (TRA) under which they claim they are owed approximately $35 million.
In addition to Miller, other Defendants include: Paul S. Levy, Francisco J. Rodriguez and Alexander R. Castaldi (Defendant Directors); J.G. Wentworth, Inc. (Wentworth Inc.); J.G. Wentworth LLC (JGW LLC); JGW Holdco LLC (Holdco); JLL JGW Distribution LLC (JLL Distribution); JLL Partner Fund V L.P. (Fund V, and together with JLL Distribution, JLL Entities); and JGWPT Holdings LLC (JGW Peachtree).
The Complaint alleges:
- Plaintiffs and other principals sold the J.G. Wentworth family of companies in 2005 to JLL Distribution, an affiliate of private equity firm JLL Partners, Inc.
- Although Plaintiffs continued as senior officers thereafter, JLL Entities henceforth controlled all J.G. Wentworth affiliate companies.
- Anticipating an eventual public stock offering, JLL Entities in 2007:
- Formed 1) Holdco to own all the J.G. Wentworth subsidiaries; and 2) Wentworth, Inc. as a vehicle for the public offering. Wentworth Inc.also served as Managing Member of Holdco and never had any assets of its own except for its interest in Holdco.
- Determined they could maximize the value of their JGW investment by separating the value of equity from the value of various tax benefits.
- For tax purposes, factoring companies recognize: 1) revenue over the term of the structured settlement payment rights they purchase; and 2) operating expenses when they occur.
- This timing difference generates potential tax deferrals which, for LLCs like the JGW affiliates, are passed through to individual members.
- Various exchanges of membership interests among JGW affiliates increased the tax basis of certain assets and resulted in additional tax benefits for Wentworth Inc.
- Implemented a TRA in conjunction with the sale of stock in Wentworth, Inc. to participants (including Plaintiffs) in a private offering.
- TRAs are frequently used to monetize tax benefits in IPOs because public stockholders may not pay full value for a company's tax attributes.
- TRAs allow pre-IPO equity owners to receive the value of a company's tax attributes as those tax attributes are utilized following an IPO.
- Under the TRA, Wentworth Inc. agreed to pay to Plaintiffs and other principals 85% of its tax benefit upon certain circumstance including a change in corporate control.
- Because Wentworth, Inc. (a holding company) had no assets of its own, Holdco (another holding company) agreed in its LLC Agreement to provide Wentworth, Inc. with the money needed to satisfy the TRA obligation.
- Following the 2008 financial crisis, Wentworth, Inc., Holdco and JGW LLC filed for Chapter 11 bankruptcy with a prepackaged plan of reorganization.
- The Bankruptcy Plan expressly stated that Plaintiffs' interests in the TRA and the debtors obligations to Plaintiffs remained "unimpaired" and Holdco, JGW LLC and Wentworth Inc. became jointly and severally liable for the TRA obligations.
- J.G. Wentworth and Peachtree Financial Solutions merged in 2011 leaving JGW LLC as the surviving entity with JGW Peachtree as a subsidiary.
- To avoid TRA payments to Plaintiffs, Wentworth Inc.'s controlling stockholder and Directors structured the JGW Peachtree entities so that Holdco would not be able to fund the TRA payments.
- Without making any TRA payments to Plaintiffs, JGW Peachtree distributed $459.6 million to its principals in 2013.
- Defendants have advised Plaintiffs that no TRA payments will be made because:
- The TRA obligations were extinguished in bankruptcy.
- The TRA obligation is limited to Wentworth Inc. which is insolvent.
- Wentworth Inc. has not earned enough money to pay taxes and therefore cannot receive the tax benefits.
- Loaning money to Wentworth Inc. is not feasible because Wentworth Inc. is insolvent.
- JGWPT Holdings, Inc.'s November 8, 2013 public offering of common stock (or alternatively the 2011 merger with Peachtree) constitutes a "change in control" triggering the TRA payments due plaintiffs under the TRA.
The Complaint additionally sets forth:
- Causes of action against the various Defendants including: Breach of Contract; Breach of Implied Covenant of Good Faith and Fair Dealing; Breach of Fiduciary Duty; Aiding and Abetting Breach of Fiduciary Duty; and Unjust Enrichment.
- Prayer for relief seeking: to enforce the terms of the Wentworth Inc. TRA and the Holdco LLC Agreement; to award damages including interest, costs and expenses; and to impose a constructive trust or equitable lien of $35 million on the proceeds of the JGWPT Holdings, Inc. IPO.