Chester County Employees Retirement Fund v. New Residential Investment Corp.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CHESTER COUNTY EMPLOYEES’ )
RETIREMENT FUND, )
)
Plaintiff, )
)
v. ) C.A. No. 11058-VCMR
)
NEW RESIDENTIAL )
INVESTMENT CORP., WESLEY R. )
EDENS, MICHAEL NIERENBERG, )
ALAN L. TYSON, DAVID )
SALTZMAN, KEVIN J. FINNERTY, )
DOUGLAS L. JACOBS, FIG LLC, )
FORTRESS INVESTMENT GROUP )
LLC and FORTRESS OPERATING )
ENTITY I LP, )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: July 7, 2017
Date Decided: October 6, 2017

Michael Hanrahan, Paul A. Fioravanti, Jr., Corinne Elise Amato, and Kevin H.
Davenport, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Marc
A. Topaz, Lee D. Rudy, Michael C. Wagner, and Stacey A. Greenspan, KESSLER
TOPAZ MELTZER & CHECK LLP, Radnor, Pennsylvania; Attorneys for Plaintiff.

Robert S. Saunders, Ronald N. Brown, III, Sarah R. Martin, and Elisa M.C. Klein,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware;
Scott D. Musoff, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New
York, New York; Attorneys for Defendants.

MONTGOMERY-REEVES, Vice Chancellor.
 In this action, a stockholder of New Residential Corp. (“New Residential”)

purports to assert direct and derivative breach of fiduciary duty claims against the

members of the New Residential board of directors, New Residential’s manager FIG

LLC (“FIG”), FIG’s owner Fortress Operating Entity I LP (“FOE I”), and Fortress

Investment Group LLC (“Fortress”), which allegedly controls New Residential,

FIG, and FOE I. Plaintiff alleges that the Defendants caused New Residential to

overpay for the assets of Home Loan Servicing Solutions, Ltd. (“HLSS”) in order to

advantage other real estate assets of Fortress and to maximize management fees,

incentive compensation, and stock option awards to Fortress and its affiliates.

Plaintiff also seeks a declaratory judgment that a termination agreement between

HLSS and New Residential purporting to release all New Residential stockholder

claims against HLSS is not a valid defense in this action.

Defendants move to dismiss this complaint under Court of Chancery Rules

23.1 and 12(b)(6). Defendants argue that all of Plaintiff’s claims are derivative

claims for corporate overpayment. Defendants contend that a majority of the New

Residential board is disinterested and independent, and that even if a majority of the

board is beholden to Fortress, Fortress is not interested in the underlying

transactions. Defendants also argue that the complaint should be dismissed as to

Fortress, FOE I, and FIG because they are not controlling stockholders and do not

owe fiduciary duties to New Residential. As to the declaratory judgment claim,

2
Defendants contend that Plaintiff’s claim is not ripe because Defendants have not

raised the termination agreement as a defense.

In this Memorandum Opinion, I hold that the facts alleged give rise to a

derivative claim. Plaintiff, however, has not pled particularized facts sufficient to

raise a reasonable doubt that a majority of the directors on the New Residential board

could have exercised their independent and disinterested business judgment in

responding to a demand. As a result, demand is not excused as futile. Further, I

hold that Plaintiff’s declaratory judgment claim is not ripe for judicial review. As

such, I grant Defendants’ Motion to Dismiss.

I. BACKGROUND
This is Plaintiff’s third opportunity to challenge New Residential’s purchase

of the HLSS assets and related transactions. Plaintiff filed its original Complaint in

this case on May 22, 2015 and its First Amended Complaint on October 30, 2015. I

granted Defendants’ Motion to Dismiss the First Amended Complaint with leave to

amend on October 7, 2016 (the “First Opinion”).1 After I denied Plaintiff’s Motion

for Reargument on December 1, 2016 (the “Second Opinion”),2 Plaintiff filed the

Second Amended Verified Class Action and Derivative Complaint (the

1
Chester Cnty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004
(Del. Ch. Oct. 7, 2016).
2
Chester Cnty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 7011350
(Del. Ch. Dec. 1, 2016).

3
“Complaint”) on February 27, 2017. On March 30, 2017, Defendants moved to

dismiss the Complaint pursuant to Court of Chancery Rule 23.1 for failure to bring

pre-suit demand and Rule 12(b)(6) for failure to state a claim upon which relief can

be granted, and I heard oral argument on the Motion to Dismiss on July 7, 2017.

This Memorandum Opinion assumes familiarity with the facts outlined in the First

and Second Opinions and focuses on those facts pertinent to the resolution of the

pending Motion to Dismiss.3 “The reader is forewarned that this case involves a

maze of corporate entities and an alphabet soup of corporate names.”4

A. Parties and Significant Non-Parties
Chester County Employees’ Retirement Fund (the “Plaintiff”) is, and at all

relevant times has been, a holder of New Residential common stock.5

3
Unless otherwise noted, the additional facts in this opinion derive from Plaintiff’s
Complaint and the documents it incorporates by reference. At times, I rely upon
certain extraneous documents that are properly before the Court because they are
integral to Plaintiff’s claims and incorporated by reference into the Complaint. In
re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013)
(“To be incorporated by reference, the complaint must make a clear, definite and
substantial reference to the documents.”); see In re Santa Fe Pac. Corp. S’holder
Litig., 669 A.2d 59, 69-70 (Del. 1995).
4
Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217, at *2 (Del. Ch. Sept. 18, 2014).
5
Compl. ¶ 11.

4
 Nominal defendant New Residential was spun-off to non-party Newcastle

Investment Corp.’s (“Newcastle”) stockholders on May 15, 2013.6 New Residential

is a Delaware publicly traded Real Estate Investment Trust (“REIT”) that primarily

invests in excess mortgage servicing rights (“Excess MSRs”), residential mortgage-

backed securities (“RMBS”), call rights for RMBS that are not backed by a

government agency, and a pool of consumer loans.7 New Residential is a permanent

capital vehicle in a web of Fortress entities.8 New Residential has no employees and

is “completely reliant on” FIG to manage its assets.9

Defendant FIG externally manages New Residential pursuant to a contractual

management agreement.10 Defendant FOE I “100% own[s]” FIG, is FIG’s sole

managing member, and holds New Residential stock options granted to FIG.11 Non-

6
Id. ¶ 12. Newcastle allegedly is controlled by Fortress. Id. Newcastle recently
changed its name to Drive Shack Inc., but I will refer to it as Newcastle to avoid
confusion. Id.
7
Id. ¶¶ 12, 107.
8
Id. ¶ 13.
9
Id. ¶¶ 13, 90.
10
Id. ¶ 13.
11
Id. ¶¶ 42, 44.

5
party FIG Corp. is the general partner of FOE I; FIG Corp. is a wholly owned

subsidiary of Fortress.12

Defendant Fortress is an asset-based investment management firm that was

founded in 1998 and went public in 2007.13 By the close of 2014, Fortress had $67.5

billion assets under management (“AUM”), and $70.5 billion AUM by the close of

2015.14 Fortress’s 2014 and 2015 financial disclosure documents reported 100% of

the income attributable to FIG and FOE I in Fortress’s income calculations.15

Fortress, its affiliates, and principals held a 7.4% and 5.5% interest in New

Residential’s common stock on a fully diluted basis by the close of 2014 and 2015,

respectively.16 Even with this minority equity stake, Plaintiff alleges Fortress

controls New Residential through (1) its control of FIG Corp, FOE I, and FIG; (2)

certain of New Residential bylaws; (3) certain articles of New Residential’s

certificate of incorporation; and (4) New Residential’s board composition.17

12
Id. ¶ 44.
13
Id. ¶¶ 46, 52.
14
Id. ¶ 46.
15
Id. ¶ 54.
16
Id. ¶ 58.
17
Id. ¶¶ 54-57.

6
 Defendant Wesley R. Edens is a founder, principal, and co-chairman of

Fortress.18 Edens owns 22.6% of the Class A shares of Fortress and 37.2% of its

Class B shares.19 Fortress paid Edens compensation of $4,022,688 in 2014 and

$13,405,669 in 2015.20 Additionally, Edens is chairman of the Newcastle board and

former chairman of Nationstar Mortgage Holdings, Inc. (“Nationstar”).21 He is a

director of both FIG and FIG Corp., and he is a beneficial owner of FOE I.22 Edens

served as a director and chairman of New Residential from its inception in 2013 until

he resigned in May 2016.23 As of April 2, 2015, Edens owned 6.4% of New

Residential’s outstanding stock.24 As of April 1, 2016, he owned 3.3% of New

Residential’s outstanding stock.25

18
Id. ¶ 15.
19
Id.
20
Id.
21
Id. ¶ 18. Fortress and Fortress’s private-equity funds own 75% of Nationstar. Id. ¶
2.
22
Id. ¶¶ 16-17.
23
Id. ¶ 14.
24
Id. ¶ 17.
25
Id.

7
 Defendant Michael Nierenberg has been a director and the Chief Executive

Officer of New Residential since November 2013.26 He replaced Edens as chairman

of the New Residential board in May 2016.27 He is also a managing director at

Fortress.28

Defendant Alan L. Tyson has been a director of New Residential since April

2013.29 He is chairman of the Compensation Committee and serves on the Audit

Committee, as well as the Nominating and Corporate Governance Committee.30

New Residential paid Tyson compensation of $125,009 in 2014 and $150,000 in

2015.31 He also serves on the Newcastle board, for which he received compensation

of $135,000 in 2014 and $125,000 in 2015.32 The Complaint alleges that Tyson is

retired and that his service on these two boards is his only source of employment.33

26
Id. ¶ 37.
27
Id.
28
Id. ¶ 38.
29
Id. ¶ 39.
30
Id.
31
Id.
32
Id. ¶ 40.
33
Id. ¶ 41.

8
 Defendant David Saltzman has been a director of New Residential since April

2013, and he serves on its Compensation Committee.34 New Residential paid

Saltzman compensation of $125,004 in 2014 and $150,000 in 2015.35 He also has

been the Executive Director of the Robin Hood Foundation since 1989.36 Michael

Novogratz—who was a Fortress principal until January 2016—allegedly is “a

significant donor to th[at] foundation.”37 Before Saltzman joined the Robin Hood

Foundation, Saltzman worked for New York City’s Board of Education, Department

of Health, and Department of Social Services.38 Plaintiff contends that “his

employment background indicates he has not accumulated great wealth.”39

Defendant Kevin J. Finnerty has been has been a director of New Residential

since April 2013.40 He serves on its Audit Committee, the Compensation

Committee, and the Nominating and Corporate Governance Committee.41 New

34
Id. ¶ 34.
35
Id.
36
Id. ¶ 35.
37
Id.
38
Id. ¶ 36.
39
Id.
40
Id. ¶ 19.
41
Id.

9
Residential paid Finnerty compensation of $125,009 in 2014 and $150,000 in

2015.42 Finnerty also has been involved with Fortress for nearly twenty years.43

Finnerty has served on the board of Newcastle Investment Holdings LLC

(“Newcastle LLC”)—the predecessor of Newcastle—since its inception in 1998.44

At Newcastle, he has served on the board since 2005, and he has served on its Audit

Committee, Nominating and Corporate Governance Committee, and Compensation

Committee.45 Finnerty received $125,000 in compensation from Newcastle in both

2014 and 2015.46 In 2009, Finnerty received a $500,000 loan from Edens and a

$500,000 loan from Randal A. Nardone (another principal, director, and officer of

Fortress).47 Finnerty apparently repaid the two loans in 2015.48 Plaintiff alleges that

the loans were unsecured and interest-free.49

42
Id.
43
Id. ¶ 21.
44
Id. While the Complaint states that “Newcastle LLC was substantially liquidated in
June 2013, its funds were distributed and it was cancelled on June 29, 2015,” it is
unclear when Finnerty’s service on the Newcastle LLC board ended. Id.
45
Id. ¶ 20.
46
Id.
47
Id. ¶ 23.
48
Id. ¶ 24.
49
Id. ¶ 23.

10
 Defendant Douglas L. Jacobs has been a director of New Residential since

June 2013.50 He currently serves as the chairman of the Audit Committee and a

member of the Nominating and Corporate Governance Committee. 51 New

Residential paid Jacobs compensation of $135,004 in 2014 and $160,000 in 2015.52

Jacobs has been a director of Fortress since February 2007, and he serves on

Fortress’s Audit Committee and Compensation Committee.53 He also is a director

of Springleaf Holdings, Inc. (“Springleaf”), chairman of its Audit Committee, and

member of its Compliance Committee.54 “Fortress and its funds” allegedly own a

majority equity stake in Springleaf, and Springleaf is managed by FIG.55 At the time

Plaintiff filed its Complaint, Jacobs held approximately 200,000 Class A shares of

Fortress stock, but fewer than 15,000 shares of New Residential stock.56

50
Id. ¶ 27.
51
Id.
52
Id.
53
Id. ¶ 29.
54
Id. ¶ 30.
55
Id. ¶¶ 43, 51.
56
Id. ¶ 29.

11
 Non-party Robert J. McGinnis has been a director on the New Residential

board since December 2016.57 McGinnis serves on the Audit Committee, the

Nominating and Corporate Governance Committee, and the Compensation

Committee.58 He served on the HLSS board from October 2011 to October 2015,

and he served as its chairman from January to October 2015.59 While chairman of

HLSS, he explained in a letter to HLSS stockholders in September 2015 that the

HLSS board unanimously approved the HLSS/New Residential merger, and that it

was “fair to, and in the best interests of, HLSS and HLSS’s shareholders.”60

McGinnis also received a portion of the merger consideration in exchange for his

18,000 HLSS shares.61 Lastly, upon joining the New Residential board, he received

continuing rights to indemnification, advancement, and exculpation from liabilities

for conduct during his service on the HLSS board.62

57
Id. ¶ 170.
58
Id.
59
Id. ¶ 171.
60
Id. (emphasis omitted).
61
Id. ¶ 172.
62
Pl.’s Answering Br. 27.

12
 Non-party Andrew Sloves has been a director on the New Residential board

since July 2016.63 He serves on the Audit Committee, the Nominating and Corporate

Governance Committee, and the Compensation Committee at New Residential.64

Sloves is alleged to be a “significant donor to and involved in the Samuel Waxman

Cancer Research Foundation, which Nierenberg chairs and in which both

Nierenberg and Edens are significant donors.”65

Non-party HLSS is a publicly traded Cayman Island exempted company that

invests in MSRs and Excess MSRs.66 HLSS appears to have no ties to Fortress or

anyone on the New Residential board other than McGinnis.

B. Pertinent Facts
On February 22, 2015, New Residential and HLSS entered into an Agreement

and Plan of Merger (the “Initial Merger Agreement”).67 Under the Initial Merger

Agreement, New Residential would acquire approximately 71 million outstanding

shares of HLSS stock for approximately $1.3 billion.68 But on March 18, NASDAQ

63
Compl. ¶ 178.
64
Id.
65
Id. ¶ 179.
66
Id. ¶ 108.
67
Id. ¶ 2.
68
Id. ¶ 127.

13
notified HLSS that it was non-compliant with NASDAQ listing requirements for its

failure to timely file its 10-K.69 On April 6, HLSS formally notified New Residential

that HLSS was likely to receive a going-concern qualification unless it entered into

an alternative transaction with New Residential.70 As such, New Residential and

HLSS entered into an agreement to terminate the Initial Merger Agreement (the

“Termination Agreement”).71 The Termination Agreement also contained a

provision whereby New Residential and HLSS mutually released all claims of their

stockholders related to the Initial Merger Agreement and the transactions

contemplated thereby.72

Also on April 6, 2015, New Residential and HLSS entered into the Share and

Asset Purchase Agreement (the “Acquisition Agreement”), whereby New

Residential purchased “all of the assets of HLSS (except cash) and assumed all

liabilities of HLSS except its term loan which was paid off and up to $50 million in

Post-Closing Liabilities.”73 New Residential paid HLSS $1,007,156,145.57 in cash

and 28,286,980 newly issued shares of New Residential common stock as

69
Id. ¶ 121.
70
Id. ¶ 122.
71
Id. ¶ 4.
72
Id. ¶¶ 4, 116.
73
Id. ¶ 123.

14
consideration for New Residential’s purchase of the assets of HLSS.74 HLSS

planned to sell the New Residential stock received as consideration in a public

offering “as soon as practicable” after the asset purchase.75 HLSS would then merge

into a New Residential subsidiary, and New Residential would pay an additional $50

million in cash to HLSS stockholders in the merger.76 By the end of this series of

transactions, the total purchase price for the HLSS assets was approximately

$1,441,200,000.77

Plaintiff alleges that in connection with New Residential’s purchase of the

assets of HLSS, Fortress and its affiliates received “large financial benefits,”

including increased management fees, increased incentive fees, millions of options

in New Residential stock, and advantages to the real estate assets of other Fortress-

related entities.78

II. ANALYSIS
Plaintiff alleges that Defendants have harmed New Residential and its

stockholders by forcing New Residential to overpay for the assets of HLSS in order

74
Id. ¶ 123.
75
Id. ¶ 124.
76
Id. ¶ 126.
77
Id. ¶ 127.
78
Id. ¶¶ 6, 129-31.

15
to provide Fortress and its affiliates with significant benefits. Defendants move to

dismiss Plaintiff’s derivative claims for failure to make a pre-suit demand.79

A. Rule 23.1 Standard of Review
“A cardinal precept of the General Corporation Law of the State of Delaware

is that directors, rather than shareholders, manage the business and affairs of the

corporation.”80 “Directors of Delaware corporations derive their managerial

decision making power, which encompasses decisions whether to initiate, or refrain

from entering, litigation, from 8 Del. C. § 141(a).”81 In order for a stockholder to

pursue a derivative action and deprive the board of its decision-making authority

regarding the company’s litigation assets, Court of Chancery Rule 23.1 requires

stockholders to “allege with particularity the efforts, if any, made by the plaintiff to

obtain the action the plaintiff desires from the directors or comparable authority and

the reasons for the plaintiff’s failure to obtain the action or for not making the

79
Plaintiff purports to bring a direct breach of fiduciary duty claim in Count I. In my
First Opinion, I concluded that Count I asserts a derivative claim under Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). Plaintiff
raises no additional facts to change my analysis. Chester Cnty. Emps.’ Ret. Fund,
2016 WL 5865004, at *6. Nor does the Delaware Supreme Court’s holding in El
Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016) change
my analysis. I thus conclude that Counts I and II are duplicative because they
challenge the same underlying behavior and an identical remedy would flow to the
corporation. As such, I dismiss Count I, but I consider any alleged misbehavior
nominally listed under Count I as derivative under Count II.
80
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (subsequent history omitted).
81
Zapata Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981).

16
effort.”82 Where, as here, the plaintiff has failed to make a pre-suit demand on the

board,83 the court must dismiss the complaint “unless it alleges particularized facts

showing that demand would have been futile.”84

The Supreme Court of Delaware articulated the test to analyze demand futility

in two seminal cases. Under Rales v. Blasband, a derivative plaintiff must allege

particularized facts raising a reasonable doubt that “the board of directors could have

properly exercised its independent and disinterested business judgment in

responding to a demand.”85 The Rales test has been said to apply “when a plaintiff

does not challenge ‘a decision of the board in place at the time the complaint is

filed.’”86 Under Aronson v. Lewis, demand is futile if the plaintiff alleges

particularized facts to raise a reasonable doubt that: “(1) the directors are

disinterested and independent [or] (2) the challenged transaction was otherwise the

product of a valid exercise of business judgment.”87 Aronson applies when the

82
Ct. Ch. R. 23.1.
83
Compl. ¶ 167.
84
Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128
A.3d 991 (Del. 2015).
85
634 A.2d 927, 934 (Del. 1993).
86
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 65 (Del. Ch.
2015) (quoting Ryan v. Gifford, 918 A.2d 341, 352 (Del. Ch. 2007)).
87
473 A.2d at 814.

17
plaintiff challenges an action taken by the board that would consider demand.88

Fundamentally, however, Aronson and Rales both “address the same question of

whether the board can exercise its business judgment on the corporate behalf.”89 The

“[d]emand futility analysis is conducted on a claim-by-claim basis.”90 The Court

must accept Plaintiff’s particularized allegations of fact as true and draw all

reasonable inferences that logically flow from such allegations in Plaintiff’s favor.91

The Parties’ briefings focus on the Aronson test, and I do the same for the

purpose of my analysis. Under the first prong of Aronson, a director is interested if

he or she appears “on both sides of a transaction” or expects “to derive any personal

financial benefit from it in the sense of self-dealing, as opposed to a benefit which

devolves upon the corporation or all stockholders generally.”92

It should be noted, however, that in the absence of self-
dealing, it is not enough to establish the interest of a
director by alleging that he [or she] received any benefit
not equally shared by the stockholders. Such benefit must

88
Rales, 634 A.2d at 933-34.
89
In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *14 (Del. Ch. Aug.
31, 2016); see In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514,
at *16 (Del. Ch. May 21, 2013) (explaining the Aronson and Rales tests are
“complementary versions of the same inquiry”); see also Brett Kandell v. Dror Niv,
et al., 2017 WL 4334149, at *11 (Del. Ch. Sept. 29, 2017).
90
Beam v. Stewart, 833 A.2d 961, 977 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del.
2003).
91
White v. Panic, 783 A.2d 543, 549 (Del. 2000).
92
Aronson, 473 A.2d at 812.

18
 be alleged to be material to that director. Materiality
means that the alleged benefit was significant enough “in
the context of the director’s economic circumstances, as to
have made it improbable that the director could perform
her fiduciary duties to the . . . shareholders without being
influenced by her overriding personal interest.”93

“Independence means that a director’s decision is based on the corporate merits of

the subject before the board rather than extraneous considerations or influences.”94

A lack of independence may be proven by alleging facts that create “a reasonable

doubt that a director is so beholden to an interested director that his or her discretion

would be sterilized.”95

Demonstrating demand futility under the second Aronson prong—that the

challenged transaction was not the exercise of valid business judgment—requires a

showing that the situation is one of the “rare cases [in which] a transaction may be

so egregious on its face that board approval cannot meet the test of business

93
Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002) (quoting In re Gen. Motors Class
H S’holder Litig., 734 A.2d 611, 617 (Del. Ch. 1999)); see Cambridge Ret. Sys. v.
Bosnjak, 2014 WL 2930869, at *5 (Del. Ch. June 26, 2014) (“[A] ‘plaintiff’s burden
of proof of a director’s self-interest in an arms-length third-party transaction should
be greater than in a classic self-dealing transaction where a director or directors
stand on both sides of a transaction.’”) (quoting Cede & Co. v. Technicolor, Inc.,
634 A.2d 345, 362 (Del. 1993)).
94
Aronson, 473 A.2d at 816.
95
Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006).

19
judgment, and a substantial likelihood of director liability exists.”96 The second

Aronson prong applies when the particularized facts are such that it is “difficult to

conceive” that a director could have satisfied his or her fiduciary duties.97

With respect to the second prong of Aronson, “the threat of liability that

directors face can be influenced in a substantial way if the corporate charter contains

an exculpatory charter provision authorized by 8 Del. C. § 102(b)(7).”98 Where, as

here,99 the company’s charter “insulates the directors from liability for breaches of

the duty of care, then a serious threat of liability may only be found to exist if the

plaintiff pleads a non-exculpated claim against the directors”100 such as a breach of

the duty of loyalty.101

96
Aronson, 473 A.3d at 815.
97
See Gifford, 918 A.2d at 355.
98
Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003).
99
Compl. ¶ 84; Brown Aff. Ex. 16, at 8 (“No director shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or limitation
thereof is not permitted under the [Delaware General Corporation Law] as the same
exists or may hereafter be amended.”).
100
Guttman, 823 A.2d at 501.
101
In re Lear Corp. S’holder Litig., 967 A.2d 640, 648 (Del. Ch. 2008).

20
 B. Demand Is Not Excused Under Aronson’s First Prong
Plaintiff argues that demand is excused as futile because a majority of the New

Residential board members are interested or lack independence.102 At the time

Plaintiff filed its Complaint, the following seven directors served on the New

Residential board: Kevin J. Finnerty, Douglas L. Jacobs, Robert J. McGinnis,

Michael Nierenberg, David Saltzman, Andrew Sloves, and Alan L. Tyson.103 As

explained below, I find that Plaintiff failed to allege particularized facts sufficient to

create a reasonable doubt as to the independence of McGinnis, Saltzman, Sloves,

and Tyson, which constitutes a majority of the board.

1. McGinnis
Plaintiff argues that McGinnis lacks the independence and disinterest

necessary to consider a demand because (1) the HLSS acquisition was “critical for

HLSS,” and thus he “would decline to pursue any corrective action that could

diminish the benefits he previously secured for HLSS” as the former chairman of

the HLSS board; (2) he would not want to undermine the “significant reputational

benefits among his peers in the mortgage industry and among HLSS’s investors” he

102
Compl. ¶ 167.
103
For purposes of this Motion to Dismiss, Plaintiff and Defendants briefed the demand
analysis based on the seven-member board in place at the time Plaintiff filed its
Complaint under Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006).
Notwithstanding this assumption, Plaintiff reserves its right to challenge this issue
on appeal. Pl.’s Answering Br. 21.

21
received from bestowing “a significant benefit upon stockholders who invested in a

deeply troubled and failing business;” (3) he received continuing rights to

indemnification, advancement and exculpation from liabilities for conduct during

his service on the HLSS board; (4) he had a business relationship with Fortress in

2004; and (5) he received a portion of the merger consideration because he held

18,000 HLSS shares.104

Plaintiff’s allegations fail to raise a reasonable doubt that McGinnis could not

exercise his independent and disinterested business judgment in considering a

demand for multiple reasons. First, the Complaint does not plead with particularity

how McGinnis would suffer reputational harm by bringing demand on behalf of New

Residential after he previously concluded that the transaction benefitted HLSS. Nor

does Plaintiff explain how his receipt of a portion of the merger consideration would

impugn his ability to consider demand. For example, there are no allegations that

McGinnis would be at risk of losing such merger consideration.

With respect to Plaintiff’s argument regarding McGinnis’s receipt of

indemnification and exculpation rights, this Court has held that “the receipt of

indemnification is not [normally] deemed to taint related director actions with a

presumption of self-interest. That is because indemnification has become

104
Compl. ¶¶ 172-75.

22
commonplace in corporate affairs, and because indemnification does not increase a

director’s wealth.”105

Additionally, Plaintiff’s assertion that McGinnis “shared a significant

business relationship with Fortress”106 because he oversaw the securitization of a

mortgage loan for Fortress in 2004—over twelve years ago—while working for

Greenwich Capital Markets similarly fails to plead with particularity how McGinnis

would not be able to use his independent business judgment to consider a demand.

Nor does Plaintiff explain how the prior business relationship was “significant.”

Such vague allegations do not raise a reasonable doubt that McGinnis is disinterested

and independent.

2. Sloves
Plaintiff alleges that Sloves lacks the requisite independence and disinterest

because he (1) is a “significant donor to and involved in the Samuel Waxman Cancer

Research Foundation, which Nierenberg chairs and in which both Nierenberg and

Edens are significant donors” and (2) has “several years of social connections” with

Nierenberg and Edens.107 But Plaintiff fails to plead any particularized facts

105
In re Sea-Land Corp. S’holders Litig., 642 A.2d 792, 804 (Del. Ch. 1993), aff’d sub
nom. Sea-Land Corp. S’holder Litig. v. Abely, 633 A.2d 371 (Del. 1993).
106
Compl. ¶ 177; Pl.’s Answering Br. 27.
107
Compl. ¶ 179.

23
regarding these “several years of social connections” to infer that Sloves had a long-

standing, close “personal friendship”108 with either Nierenberg or Edens that would

impugn his independence.

Similarly, Plaintiff fails to plead any particularized facts to indicate how or

why Nierenberg’s and Eden’s involvement in the Samuel Waxman Cancer Research

Foundation had any influence on Sloves during the relevant time period. For

example, Plaintiff vaguely asserts that Sloves, Nierenberg, and Edens are

“significant donors,” but Plaintiff does not provide details regarding their

contributions to the charity that might illuminate Plaintiff’s understanding of the

term “significant.”109 Because the Complaint lacks any particularized details that

might suggest this is something more than a “thin social-circle friendship,”110

Plaintiff fails to create a reasonable doubt as to Sloves’s independence.111

108
Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1021-22 (Del. 2015).
109
Compl. ¶ 179.
110
Sanchez, 124 A.3d at 1022.
111
Compare In re Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL 4826104, at *9
(Del. Ch. Oct. 12, 2011) (“Crucially, the Plaintiffs fail to provide any information
on how the amounts given influenced Bryan’s decision-making process. Because
the complaint lacks such particularized details, the Plaintiffs have failed to create a
reasonable doubt as to [director] Bryan’s independence.”), with Off v. Ross, 2008
WL 5053448, at *11 (Del. Ch. Nov. 26, 2008) (“Ross’s substantial donation [of
$100 million] raises considerable doubt as to the independence of Dolan. . . . [T]he
donation of such a prodigious sum coupled with the fact that Ross became the
eponym of the benefiting institution calls into question the independence of
Defendant Dolan.”).

24
 3. Saltzman
Plaintiff alleges that Saltzman lacks the requisite independence and disinterest

because he has been the Executive Director of the Robin Hood Foundation, a

charitable organization to which Novogratz (a retired Fortress principal) is a

“significant donor.”112 I reject this argument for the same reason I rejected such

allegations Plaintiff made with respect to Sloves.

Additionally, Plaintiff contends that the compensation Saltzman receives as a

New Residential director is material to him because he worked for New York City’s

Board of Education, Department of Health, and Department of Social Services

before joining the Robin Hood Foundation, and thus “his employment background

indicates he has not accumulated great wealth.”113 But as this Court explained in In

re Walt Disney, to find that a director lacks independence because he or she is not

wealthy would “discourage the membership on corporate boards of people of less-

than extraordinary means. Such ‘regular folks’ would face allegations of being

dominated by other board members, merely because of the relatively substantial

compensation provided by the board membership compared to their outside

112
Compl. ¶ 35.
113
Id. ¶ 36.

25
salaries.”114 And “I am especially unwilling to facilitate such a result.” 115 As such,

Plaintiff’s allegations are insufficient to raise a reasonable doubt that Saltzman is

interested or lacks independence.

4. Tyson
Plaintiff alleges that Tyson lacks independence because he received $125,009

in 2014 and $150,000 in 2015 for his service on the New Residential board, and

$135,000 in 2014 and $125,000 in 2015 for his service on the Newcastle board.116

But Tyson’s compensation from these two boards is insufficient to challenge

independence because “[u]nder Aronson, receiving reasonable compensation for

serving as a director for one other company related to an interested director, without

more, will usually not be enough to create a reasonable doubt as to director

independence.”117

Plaintiff argues that it has satisfied the requisite “more” because Tyson is

retired, and “the compensation from those board seats is a material part of his

income.”118 But Plaintiff has not articulated any reason why this Court should

114
In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 360 (Del. Ch. 1998), aff’d in part
and rev’d in part sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
115
Id.
116
Compl. ¶¶ 39-40.
117
Kahn v. Portnoy, 2008 WL 5197164, at *13 (Del. Ch. Dec. 11, 2008).
118
Compl. ¶ 41.

26
assume the materiality of this income to Tyson other than the fact that he is retired.

A ruling in Plaintiff’s favor with respect to Tyson essentially would be a blanket

determination that all retired board members lack independence; I decline to adopt

such a rule. As the Delaware Supreme Court has held, “allegations of payment of

director’s fees, without more, do not establish any financial interest.”119

Lastly, Plaintiff seeks to cast doubt on Tyson’s independence by arguing that

Tyson is reliant upon a Fortress-controlled Nominating and Corporate Governance

Committee for his nomination to the New Residential board.120 I disagree. The

Nominating and Corporate Governance Committee is comprised on Finnerty,

Jacobs, McGinnis, Sloves, and Tyson; I have already determined that McGinnis,

Sloves, and Tyson are independent, which constitutes a majority of Nominating and

Corporate Governance Committee.

In conclusion, Plaintiff fails to raise a reasonable doubt that a majority of the

board is independent or disinterested for purposes of demand futility under Rule

23.1; I now turn to the second prong of Aronson.

119
In re Walt Disney Co. Deriv. Litig., 731 A.2d at 360 (citing Grobow v. Perot, 539
A.2d 180, 188 (Del. 1988)).
120
Pl.’s Answering Br. 25.

27
 C. Demand Is Not Excused Under Aronson’s Second Prong
Plaintiff articulates two bases to establish that demand is excused as futile

under the second prong of Aronson. First, Plaintiff asserts that demand would be

futile because the entire fairness standard of review applies to the challenged

transactions since Fortress allegedly is a controlling stockholder of New

Residential.121 But even if I were to determine that Fortress is a controlling

stockholder and is interested in the challenged transactions—which I need not

determine—the potential resulting application of the entire fairness standard of

review does not automatically render demand futile. To hold otherwise would mean

that demand is futile “as a matter of law whenever a transaction between a

corporation and its putative controlling stockholder implicates the entire fairness

standard.”122 And while this argument has some “superficial appeal, it is inconsistent

with controlling authority” in this jurisdiction.123 As this Court explained in Baiera,

121
Compl. ¶ 182; Pl.’s Answering Br. 37.
122
Baiera, 119 A.3d at 65.
123
Id. at n.121 (“Given that the second prong of Aronson asks simply whether ‘the
challenged transaction was otherwise the product of a valid exercise of business
judgment,’ Aronson, 473 A.2d at 814, it is understandable how one might find that
test to be satisfied whenever entire fairness review might be triggered, irrespective
of the circumstances triggering such review or the nature of the claims to which
such review might apply. The sole authority on which Plaintiff relies consists of a
transcript ruling that appears to endorse this approach. I decline to follow this ruling
because it is inconsistent in my opinion with controlling Supreme Court precedent
. . . .”).

28
 the potential that the entire fairness standard may govern
Plaintiff’s breach of fiduciary duty claim against [] an
alleged controlling stockholder [] does not remove that
claim, or any of the other derivative claims [], from the
purview of the Demand Board to decide for themselves
under 8 Del. C. § 141(a) whether to exercise the
Company’s right to bring such a claim. The focus instead,
as explained in Aronson and repeated in Beam, is on
whether Plaintiff’s allegations raise a reasonable doubt as
to the impartially of a majority of the Demand Board to
have considered such a demand.124

Here, I have already determined that a majority of the board is independent and

disinterested; thus, Plaintiff fails to raise a reasonable doubt as to the impartiality of

a majority of the board to have considered such a demand.

Second, Plaintiff alleges that the decision of the New Residential board to

terminate the Initial Merger Agreement and enter into the Acquisition Agreement

and related transactions is not protected by the business judgment presumption

because the “terms of the revised HLSS acquisition are ‘so egregious on [their] face’

that there is ‘a substantial likelihood of director liability.’” 125 “A simple allegation

of potential directorial liability is insufficient to excuse demand, else the demand

requirement itself would be rendered toothless, and directorial control over corporate

litigation would be lost.”126 “Where, as here, the corporation’s charter includes an

124
Baiera, 119 A.3d at 68.
125
Pl.’s Answering Br. 52 (citing Aronson, 473 A.2d at 815).
126
Baiera, 119 A.3d at 62 (citing Goldman Sachs Gp., 2011 WL 4826104, at *18).

29
exculpatory provision pursuant to 8 Del. C. § 102(b)(7), a substantial likelihood of

liability ‘may only be found to exist if the plaintiff pleads a non-exculpated claim

against the directors based on particularized facts.’”127 Plaintiff’s theory to

challenge the board’s decisions appears to be one of bad faith.

Plaintiff asserts that the board acted irrationally because it “should have

extracted a much better price and improved terms compared to the Initial Merger

Agreement.”128 This “is precisely the type of ‘Monday morning quarterbacking’ that

this Court routinely rejects as insufficient to establish demand futility.”129 “In the

absence of well pleaded allegations of director interest or self-dealing, failure to

inform themselves, or lack of good faith, the business decisions of the board are not

subject to challenge because in hindsight other choices might have been made

instead.”130

Additionally, Plaintiff focuses on what it believes to be an overpayment of at

least $100 million131 under the subsequent Acquisition Agreement compared to what

127
Id. (quoting Wood v. Baum, 953 A.2d 136, 141 (Del. 2008)).
128
Compl. ¶ 127; Pl.’s Answering Br. 51, 53.
129
Baiera, 119 A.3d at 65.
130
In re Affiliated Computer Servs., Inc. S’holder Litig., 2009 WL 296078, at *10 (Del.
Ch. Feb. 6, 2009).
131
The amount Plaintiff alleges that New Residential overpaid differs in various filings.
Compare Compl. ¶ 127 (alleging it was “nearly $200 million more”), with Pl.’s
Answering Br. 38 (arguing it was “$100 million more”).

30
was contemplated initially under the Initial Merger Agreement for assets that had

become less valuable. Plaintiff tries to plead overpayment by comparing apples to

oranges. The Initial Merger Agreement contemplated a payment of $18.25 per share

for the approximately 71 million outstanding HLSS shares,132 totaling roughly $1.3

billion in cash, plus the “assum[ption] [of] all the . . . debts and liabilities” of

HLSS.133 This would include the assumption of HLSS’s $344 million term loan.

The threat of a going concern qualification threw a wrench into the process, which

would have “result[ed] in a default by HLSS on its term loan and its mortgage loan

repurchase and advance financing facilities.”134 The Parties then altered the deal

structure into a stock and asset purchase, under which HLSS would first “repay[] . .

. in full . . . [the $344 million] Term Loan,”135 only after which New Residential

would transfer roughly $1 billion in cash and 28.3 million New Residential shares136

and assume a number of specified liabilities.137 This $1 billion in cash includes

roughly $385 million for “HLSS Seller Financing,” which appears to correlate with

132
Brown Aff. Ex. 17, at Recitals.
133
Id. § 1.04.
134
Compl. ¶ 121.
135
Amato Aff. Ex. A, at § 2.01.
136
Id. § 2.02.
137
Id. § 1.04.

31
the value of HLSS’s term loan repayment and any associated prepayment

penalties.138 The total consideration paid for HLSS—which no longer had a term

loan for New Residential to assume—was $1.49 billion.139 Plaintiff seeks to

compare the equity purchase price in the initial scenario with the total consideration

actually paid for the entire HLSS enterprise, which now lacked a $344 million

liability in its term loan; these are inapposite. Thus, I am not convinced this decision

was “so far beyond the bounds of reasonable judgment that it seems essentially

inexplicable on any ground other than bad faith.”140

For both of the aforementioned reasons, I do not find the board’s decision to

purchase the assets of HLSS to be of the “rare cases [in which] a transaction may be

so egregious on its face that board approval cannot meet the test of business

judgment, and a substantial likelihood of director liability therefore exists.”141 Thus,

demand is not futile under Aronson’s second prong.

138
Brown Aff. Ex. 14, at 11.
139
Compl. ¶ 127.
140
Baiera, 119 A.3d at 63.
141
Aronson, 473 A.2d at 815.

32
III. CONCLUSION

For the foregoing reasons, Defendants’ Motion to Dismiss is granted. 142

IT IS SO ORDERED.

142
In Count III, Plaintiff seeks a declaratory judgment “that the Termination
Agreement could not and did not release the claims of” New Residential
stockholders against HLSS. Compl. ¶ 199. In my First Opinion, I dismissed this
same count as unripe because I dismissed Counts I and II without prejudice. Chester
Cnty. Emps.’ Ret. Fund, 2016 WL 5865004, at *13. Plaintiff provides no additional
facts or arguments that change my analysis in the First Opinion; thus, Count III is
dismissed.

33