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Partner Reinsurance Co. v. RPM Mortg.

United States District Court, S.D. New York
Dec 21, 2021
18-cv-5831-(PAE) (S.D.N.Y. Dec. 21, 2021)

Opinion

18-cv-5831-(PAE)

12-21-2021

PARTNER REINSURANCE COMPANY LTD., v. RPM MORTGAGE, INC. ET AL, Defendant.


ORDER

PAUL A. ENGELMAYER, District Judge:

Attached to and referenced by this Order are the following Court Exhibits:

• Exhibit 1: Plaintiffs PowerPoint presentation used during opening argument.

• Exhibit 2: Defendants' PowerPoint presentation used during opening argument.

• Exhibit 3: The affidavit of Lee fannarone. Dkt. 165-4.

• Exhibit 4: The affidavit of Basil Imburgia. Dkt. 165-2.

• Exhibit 4a: The supplemental affidavit of Basil Imburgia. Dkt. 181.

• Exhibit 5: The affidavit of Steven Palmer. Dkt. 165-5.

• Exhibit 6: The affidavit of Ava Noack. Dkt. 172.

• Exhibit 7: The affidavit of Bruce V. Bush.

• Exhibit 8: The affidavit of Joshua Fisher. Dkt. 165-3.

• Exhibit 9: The affidavit of Erwin Robert Hirt. Dkt, 174.

• Exhibit 10: The affidavit of Alan Berliner. Dkt. 165-1.

• Exhibit 11: The affidavit of Anthony Spina. Dkt. 175.

SO ORDERED.

(Image Omitted)

AFFIDAVIT OF BRUCE V. BUSH

State of Texas

v.

County of Rockwall

Bruce V. Bush, being duly sworn, says as follows:

PROFESSIONAL QUALIFICATIONS

1. I am currently employed as a Senior Director in a boutique litigation advisory firm, Fox Forensic Accounting, LLC (“FFA”), with offices in Chicago, Kansas City, and Dallas. I have more than 30 years of accounting experience on projects related to litigation, investigation, audit, accounting, and financial consulting.

2. My experience includes planning and executing financial statement audits; leading forensic accounting investigations into allegations of financial reporting improprieties and allegations of employee, customer, and vendor fraud and misconduct; conducting financial statement restatement engagements; and consulting with clients and providing expert testimony.

3. I have been qualified as an expert and testified regarding contract damages, lost profits damages, diminution of value damages, and intellectual property damages in Federal and State courts. Additionally, I have provided testimony concerning damages associated with purchase and sale agreement disputes in several arbitration matters.

4. I have severed as a neutral accountant and arbitrator in disputes involving numerous purchase and sale agreements.

5. Prior to joining FFA, my experience was with global accounting and consulting firms, including RSM U.S. LLP (“RSM”), KPMG, LLP (“KPMG”) and PwC, LLP (“PwC”).

6. At RSM I provided forensic accounting investigations involving allegations of fraud and misconduct, including financial institutions, and expert testimony in purchase and sale agreement disputes and contract disputes.

7. At KPMG I was a Partner and a member of their national investigative practice where I assisted audit committees, special committees of boards of directors and senior management in investigating alleged fraud and misconduct. I provided consulting services and expert testimony in purchase and sale agreement disputes and contract disputes.

8. At PwC I provided accounting and auditing services, including financial institutions, real estate companies, technology manufacturing companies and companies involved in wholesale and retail trade. Additionally, I provided consulting services and expert testimony in matters involving bankruptcy and contract disputes.

9. I earned a Bachelor of Science degree in accounting from Metropolitan State University of Denver and a Master in Business Administration degree, minor in economics, from Texas A&M University - Commerce.

10. I am a certified public accountant licensed in the states of Texas, Arizona, and Colorado, with reciprocity to practice throughout the U.S. excluding Hawaii.

11. I am Certified in Financial Forensics through the American institute of Certified Public Accountants (“AICPA”). I have a professional affiliation with the AICPA.

12. I have authored several white papers and have presented at speaking engagements on matters relating to expert witness testimony, forensic accounting investigations, and postacquisition disputes.

13. A copy of my curriculum vitae, which includes the speaking engagements at which I have presented during the prior 10 years, and cases in which I have testified in the prior 10 years is included in Attachment B to this Affidavit.

SUMMARY OF OPINIONS

A. Opinions Regarding Damages

14. Mr. Imburgia states “It is my opinion that the amount of total damages due to Plaintiff is $10.89 million.” Mr. Imburgia's damage calculation includes two elements: (i) the Cash Consideration Difference, which consists of the difference in cash consideration that would have been provided under the RPM Mortgage, Inc. (“RPM”) deal compared with the cash provided under the subsequent sale of Entitle to Radian Title Services, Inc. (“Radian”); and (ii) the planned Minority Equity Interest, which consists of the alleged value of the minority ownership Plaintiff would have retained under the RPM Merger Agreement, but did not retain under the Radian deal.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 4 [JX-221].

15. Mr. Imburgia calculates the Cash Consideration Difference to be $5,950,106. Mr. Imburgia arrives at this figure by taking his calculation of the cash provided in the Merger Agreement, $7,713,469, and subtracting his calculation of the cash provided in the sale to Radian, $1,763,363 ($7,713,469 - $1,763,363 = $5,950,106).

16. In my opinion, Mr. Imburgia's analysis is flawed because, among other reasons explained below, Mr. Imburgia inappropriately reduces the cash consideration provided in the Radian deal by the increased related-party debt and related-party payables arising subsequent to the failed RPM Merger. Once these errors are corrected, the damages associated with the difference in the cash sales price offered by RPM and the cash sales price offered by Radian is only $3,714,000.

17. Mr. Imburgia calculates the value of the Minority Equity Interest to be $4,939,180. In my opinion, Mr. Imburgia's opinion on this point is flawed for multiple reasons and significantly overstates the value of the Minority Equity Interest.

18. First, due to the uncertainties around the deterioration in the financial condition of EDG and Entitle, the uncertainties on whether the synergies from the Merger Agreement would create profitable operations, and the uncertainties on what actions ODI's Office of Risk Assessment might take given the deterioration in the financial condition of Entitle, I do not believe it is reasonable to calculate any value of the Minority Equity Interest.

19. Second, even if I make favorable assumptions with respect to each of these uncertainties, a cash flow analysis--utilizing the revised financial projections provided by EDG to the Defendants on June 2, 2017--demonstrates that the value of minority equity interest is at most $1.172 million.

20. The following table compares my damage calculations with those of Mr. Imburgia.

My Damage Calculations

Mr. Imburgia

Difference

Cash Sales Price

$3,714,000

$5,950,000

($2,236,000)

Equity Minority Interest

1, 172, 000

4, 939, 000

(3, 767, 000)

Total

$4,886,000

$10,889,000

($6,003,000)

OPINIONS REGARDING THE CASH SALES PRICE

21. Mr. Imburgia compares the cash sales price between the Merger Agreement and the subsequent sale to Radian, but inappropriately reduces the cash sales price in the sale to Radian by the increased amounts of related-party debt and related-party payables. After the Plaintiff cancelled the Merger Agreement, PartnerRe, EDG Shareholders and other related-parties provided additional cash to EDG in exchange for bridge notes. By providing the cash in the form of debt rather than an equity contribution, Plaintiff has artificially increased the alleged damages. The increase in debt after the Merger Agreement was $1,720,000. Mr. Imburgia does not identify this issue in his report.

Ibid.

22. In addition to treating the additional cash contributions as debt, instead of equity, the bridge notes issued after the termination of the Merger Agreement bore interest at 15.0%, compared to an interest rate for the bridge notes prior to the Merger Agreement of 10.5% to 10.75%. The accrued interest amount on the bridge notes increased to $308,885 from $213,556 at the date of the Merger Agreement, to $522,441 at the date of Radian sale. By increasing the interest rate on the additional bridge notes, the Plaintiff has artificially increased the alleged damages. Mr. Imburgia does not identify this issue in his report.

Ibid.

23. In addition to the accrued interest at 15.0%, the bridge notes issued after the Merger Agreement include minimum payments of $77,823. By adding these minimum payments to the bridge notes issued after the Merger Agreement, the Plaintiff has artificially increased the alleged damages. Mr. Imburgia does not identify this issue in his report.

Ibid.

24. The following is my summary of the comparative cash sales price between the Merger Agreement and the sale agreement with Radian, which does not include the inappropriate reductions of the Radian sales price. My calculation of the damages associated with the Cash Consideration Difference is $3,714,000.

Attachment C.

Damage Calculation (Based on Cash Sales Price)

RPM

Radian

Difference

Estimated Cash Sales Price

$12,022,000

$7,311,000

$4,711,000

Indemnification Escrow

(1, 000, 000)

33, 000

(1, 033, 000)

Bridge Note Paid - Not Converted to Equity

-

(1, 000, 000)

1, 000, 000

Employee Transaction Bonus

(577, 000)

-

(577, 000)

Legal Costs

(510, 000)

(273, 000)

(237, 000)

Shareholder Representative Expense

(250, 000)

(100, 000)

(150, 000)

Damage Calculation

$9,685,000

$5,971,000

$3,714,000

OPINION REGARDING THE MINORITY INTEREST EQUITY VALUE

25. As part of the Merger Agreement, the Plaintiff was to receive a minority equity interest equal to 33.0% of the combined entity. In addition, they converted a $1,000,000 bridge note into additional shares representing a 3.52% equity interest for a total minority equity interest of 36.52%. Mr. Imburgia incorrectly suggests that he performed a valuation of the minority equity consideration provided to EDG's stockholders. Mr. Imburgia stated that,

“Based on the above, the value of the total equity consideration to EDG stockholders under the planned merger is $6,585,573, or $18,032,652 multiplied by 36.52%. However, since EDG stockholders would control following the merger, the total equity consideration to EDG stockholders must be discounted. Valuation literature suggests a discount for lack of control within the range of approximately 20% to 30%, the average being 25%. As such, a discount of 25% for lack of control is applied.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 6, 8 [JX-221].

26. In my opinion, Mr. Imburgia does not provide a valuation in accordance with professional standards. Mr. Imburgia did not perform an independent, objective valuation analysis relying on either an income-based approach or market-based approach of EDG to confirm the reasonableness of his damages conclusions for the EDG stockholders.

Income-based approach is defined as “a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount.” [SSVS1, Appendix B.]

Market-based approach is defined as “a general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.” [SSVS1, Appendix B.]

27. Mr. Imburgia does not provide any relevant data that there were any market participants, other than RPM, willing to pay the potential synergistic value proposed in the deal price in the planned merger between EDG and RPM as of February 16, 2017.

28. Mr. Imburgia should also have included a deduction for lack of marketability for a minority interest in a closely-held company, which he did not include. According to Valuing A Business - The Analysis and Appraisal of Closely Held Companies, “Since merger and acquisition value analysis usually focuses on market value of invested capital, the value of the debt must be subtracted to reach the value of equity. . .If a noncontrolling interest is being valued, both lack of control and lack of marketability discounts should be considered.”

Discount for lack of marketability is define as “an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.” [SSVS1, Appendix B.]

Valuing A Business - The Analysis and Appraisal of Closely Held Companies, Fifth Edition, Shannon P. Pratt and Alina V. Niculita, 322-323.

29. EDG and its subsidiary Entitle had a history of losses prior to the acquisition. The common stockholders, common stock option holders, and common stock warrant holders received no consideration in the Merger Agreement. After incurring over $25 million in losses associated with EDG and its subsidiary Entitle, the current EDG stockholders were unwilling to provide any additional equity.

Merger Agreement, section 2.14(a), 21.

JX-347, at PR00015068.

30. Due to the continued losses of EDG and Entitle, Mr. Imburgia's value of $6.4 million assigned to the minority common ownership of EDG through the planned merger was completely dependent on the realization of synergies derived through the acquisition of EDG by RPM. These synergies included, but may not have been limited to, the ability of RPM to direct closing business to Entitle and the ability of Entitle to execute that business incurring only marginal costs.

“As explained below, the damages amount described in the previous section is reasonable because the price at which Entitle was to be sold to RPM under the Merger Agreement, and the price at which Entitle was actually sold to Radian, were both reasonable, based on financial projections available to the parties at the time and expected synergies.” Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 10-11 [JX-221].

31. Notwithstanding Mr. Imburgia's arguments that such synergies are reasonable, the damage associated with the minority common ownership of Entitle is flawed.

a. Mr. Imburgia does not use all relevant information available up to the date of the intended Merger, including but not limited to the:
i. deteriorating financial performance of EDG and Entitle,
ii. potential for additional capital requirements imposed by ODI's Office of Risk Assessment in June 2017, and
iii. revised and updated financial projections.
b. The revised projections indicate a decrease in revenues of 18.8%, 24.3%, and 18.7% for 2017, 2018, and 2019, respectively. More significantly the revised projections indicate a decrease in underwriting gain (loss) of 142.6%, 85.2%, and 14.4% for 2017, 2018, and 2019, respectively.
c. The decrease in the financial projections for the 2nd half of 2017, which would have been post-merger, were significant. The original projections indicated that Entitle
would have an underwriting gain of $401,000 in the 2nd half of 2017. The revised projections indicated that Entitle would have an underwriting loss of $476,000. The difference is $877,000, or 218.6%.
d. Given ODI's Office of Risk Assessment concern over the ongoing losses at Entitle and their discussions regarding the need for additional capital contributions, the postmerger projected loss in the 2nd half of 2017 would likely add to ODI's Office of Risk Assessment concerns regarding the violations of the Hazardous Financial Condition statutes.

32. In my opinion, because of the uncertainties around the deterioration in the financial condition of EDG and Entitle, the uncertainties of whether the synergies from the Merger Agreement would create profitable operations, and the uncertainties on what actions ODI's Office of Risk Assessment might take given the deterioration in the financial condition of Entitle in 2017, I do not believe it is reasonable to calculate a value on the minority equity interest.

33. However, even if I assume the accuracy of the revised financial projections provided by EDG to the Defendants on June 2, 2017, and I assume that the synergies portrayed in the revised financial projections are realized as of June 9, 2017, the present value of the available cash flow to the minority shareholders, including a terminal value, is $1.172 million on a minority-interest basis. The calculation for this value is set forth on Attachment D.

B. Rebuttal Opinions Regarding RPM's Financial Condition Generally and its Liquidity

34. Mr. Imburgia states,

“It is also my opinion that RPM's financial condition generally and its liquidity specifically were highly dependent upon the decisions made by shareholders Robert and Tracey Hirt regarding transactions between them on the one hand and RPM on the other. RPM had regular transactions with its shareholders during 2016 and 2017, which it recorded in an unusual manner and which resulted in millions of
dollars of receivables that the shareholders owed RPM.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 4 [JX-221].

35. I offer the following rebuttal opinions:

a. Mr. Imburgia does not state the accounting basis for his opinion that the transactions were recorded in an “unusual manner.” Each of the transactions Mr. Imburgia describes were recorded in the accounting books and records of RPM/LendUS, were subject to the audit procedures of the independent accounting firm and were reported and described in the notes to the audited financial statements of RPM/LendUS.
b. Mr. Imburgia states that “The general ledger of RPM reflects a write-off of $9,119,915 of receivables recorded on or around October 31, 2017.” The receivable of $9,119,915 was not subject to “write-off' as that accounting term is used when a receivable is not collectible. The underlying journal entry does not indicate that the receivable was subject to write-off. Nor does Ms. Noack say the receivable was subject to write-off. Rather as described in the footnotes to the audited financial statement of LendUS, the receivable was settled through the transfer of TRH Holdings LLC to LendUS. In addition to satisfying the amount of the receivable, the transfer resulted in an additional equity contribution.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 25 [JX-221].

JX-159, at LENDUS00015361-404, page 20.

36. Mr. Imburgia states “It is also my opinion that RPM's declining liquidity in 2017 significantly lessened its ability to acquire Entitle on the terms set forth in the parties' merger agreement.' I offer the following rebuttal opinions:

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 4 [JX-221].

a. Article IV, Section 4.7 of the Merger Agreement provides that “RPM has available on the date hereof and Parent will have available on the Closing Date funds on hand sufficient to pay the Closing Cash Merger Consideration and each of them will be able to pay or otherwise perform their respective obligations under this Agreement.'
b. RPM's consolidated cash balance on the date of the Merger Agreement, February 16, 2017, was approximately $27.9 million. As such, RPM's cash balance is in
compliance with the Representations and Warranties of RPM, Parent and Merger Sub as provided for in Article IV of the Merger Agreement as of February 16, 2017.
c. Mr. Imburgia does not state that RPM or its parent is in violation of Article IV, Section 4.7 of the Merger Agreement or that RPM's liquidity precluded its ability to acquire Entitle on the terms set forth in the Merger Agreement. Mr. Imburgia's own report states that “the cash balances of RPM, REG, MFI and AEM as of May 31, 2017, totaled $18.8 million” including $2.375 million in restricted cash. The net unrestricted cash balance amount, from Mr. Imburgia's calculation, of $16.425 million is in compliance with the Representations and Warranties of RPM, Parent and Merger Sub as provided for in Article IV of the Merger Agreement.

JX-57, ENT00014084-14453, at ENT00014133.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 21 [JX-221].

C. Opinions Regarding EDG's and Entitle's Deteriorating Financial Performance

37. In my opinion, EDG's and Entitle's losses in the first and second quarter of 2017 were significantly greater than the comparable period in the first and second quarter of 2016.

38. Entitle's net operating loss was $1.4 million and $1.9 million in the first six months of 2016 and 2017, respectively. That represents a comparable period increase in the net operating loss of 42.3% in the first six months of 2017 over 2016. Entitle's net operating loss was $796,000 and $1.0 million in the first three months of 2016 and 2017, respectively. That represents a comparable period increase in the net operating loss of 28.5% for the first three months of 2017 over 2016.

39. The deterioration in the financial condition of Entitle that began in the first three months of 2017 over the comparable period in 2016 ($796,000 - $1,023,000 = $227,000 increase in net operating loss) accelerated in April, May, and June of 2017 over the comparable period in 2016 ($572,000 - $918,000 = $346,000 increase in net operating loss). This represents a $119,000, or 52%, increase in net operating loss in April, May and June of 2017.

40. As of March 31, 2017, Entitle was in violation of Ohio's Hazardous Financial Conditions Standards for the previous 12 months, 9 months, and 6 months. As such, the ODI's Office of Risk Assessment communicated to Entitle on May 24, 2017 that equity contributions would be required. The full extent of these required equity contributions became known on June 28, 2017 and amounted to $5.5 million.

JX-316, at ENT00098430-31. Email from Jennifer Turner, Ohio Department of Insurance, to Maryse Jean-Pierre and Steve Palmer, Entitle, dated May 24, 2017.

JX-324, at PR00028639-41. Email from Jennifer Turner, Ohio Department of Insurance, to Maryse Jean-Pierre and Steve Palmer, Entitle, dated June 28, 2017.

41. The increased losses of Entitle in 2017 over 2016 had a significant impact on the financial projections.

42. A list of the documents I reviewed and relied on to reach my opinions is presented in Attachment A to the Affidavit.

Timeline of Events

43. The Key dates and events I considered in my analysis and opinions include, but are not limited to, the following:

a. May 31, 2016: Entitle and RPM executed a Letter of Intent (“LOI”);
b. September 30, 2016: LOI is updated and replaced;
c. February 16, 2017: The parties enter into the Merger Agreement, with a goal closing date by May 31, 2017;
d. March 9, 2017: Form A application filed with the Ohio Department of Insurance (“ODI”) Form A Review Group;
e. March 20, 2017: Entitle sends RPM financial projections through 2019;
f. May 1, 2017: Entitle files its Quarterly Statement as of and for the period ending March 31, 2017 with ODI's Office of Risk Assessment;
g. May 24, 2017: ODI's Office of Risk Assessment sends information to Entitle informing them of the potential need for additional capital;
h. May 25, 2017: RPM reviewed the “Draft Consideration Spreadsheet” which showed pre-closing losses of $2,355,674, and a projection of over $4,000,000 for the entire year, which was well in excess of the $800,000 that had been projected in the Form A application;
i. May 30, 2017: Rob Hirt emailed Lee Iannarone asking for additional financial information from Entitle;
j. June 1, 2017: Rob Hirt emailed Lee Iannarone setting out his concerns regarding the accuracy of the Form A submission and the potential for resubmitting the Form A to account for the losses that Entitle had already sustained in 2017 that were far in excess of what was anticipated;
k. June 2, 2017: ODI's Form A Review Group approved the Form A application;
l. June 2, 2017: Entitle sends RPM revised financial projections through 2019, “EIC Projections June 2017”;
m. June 9, 2017: Closing did not occur;
n. June 28, 2017: ODI's Office of Risk Assessment confirms the need for an additional $5.5 million capital contribution into Entitle, say's more may be necessary based on its review of the Q2 2017 financials;
o. June 29, 2017: Entitle terminates the Merger Agreement.

JX-13, at ENT00112459-112465.

JX-26, atLENDUS00023780-87.

JX-57, at ENT00014084-14453.

JX-354, at SPB00001341-1358.

JX-63, at MB000968-970.

JX-76, at ENT00088166.

JX-199, at ENT00098430-31.

JX-440, at BC_004604.

JX-399, at LENDUS00000999.

JX-337, at ENT00096157.

JX-105, at SPB00001919-22.

JX-107, at ENT00097792.

First Amended Complaint, pages 19-20.

JX-189, at PR00028639-41.

JX-208, at LENDUS00023865.

A. Financial Condition of Entitle Direct Group, Inc. and Entitle Insurance Company

44. EDG's and Entitle's financial condition declined from 2015 to 2016 and from 2016 to 2017. The financial condition decline accelerated in 2017. My analysis of EDG's and Entitle's financial condition has been summarized in Tables 1, 2, 3, and 4 below. A more complete analysis of EDG's and Entitle's financial condition can be found in Attachment E-1 and E-2 to my Affidavit.

45. As can be seen in Table 1, EDG's net operating income (loss) was $139,747, ($2,673,588), and ($5,446,429) for the years ended December 31, 2015, 2016 and 2017, respectively.

Table 1

Entitle Direct Group Financial Data

For the Year Ended December 31st

2015

2016

2017

Revenues

$17,553,054

$15,569,599

$11,588,110

% Year Over Year Decline

(11.3%)

(25.6%)

Operating Expenses

17, 413, 307

18, 243, 187

17, 034, 539

Net Operating Income (Loss)

$139,747

($2,673,588)

($5,446,429)

% Year Over Year Decline

(2013.2%)

(103.7%)

46. EDG's revenues declined from $17.6 million in 2015 to $15.6 million in 2016 or 11.3%. The revenues further declined from $15.6 million in 2016 to $11.6 million in 2017 or 25.6%. EDG's net operating income of $140,000 in 2015 declined to a net operating loss of $2.7 million in 2016. In 2017 there was a significant (over 100%) increase in the net operating loss over 2016 resulting in a net operating loss for 2017 of $5.4 million. EDG's equity position was $9.7 million on December 31, 2016 and decreased $5.8 million to $3.9 million on December 31, 2017.

47. As can be seen below in Table 2, EDG's net operating loss was $1.5 million and $2.5 million in the first six months of 2016 and 2017, respectively. That represents comparable period increase in the net operating loss of 67.3% in the first six months of 2017 over 2016. EDG's net operating loss was $883,000 and $1.3 million in the first three months of 2016 and 2017, respectively. That represents a comparable period increase in the net operating loss of 50.8% for the first three months of 2017 over 2016. The deterioration in the financial condition of EDG that began in the first three months of 2017 over the comparable period in 2016 ($883,000 - $1,332,000 = $449,000) accelerated in April, May, and June of 2017 over the comparable period in 2016 ($621,000 - $1,185,000 = $564,000).

48.

Table 2

Entitle Direct Group 3 Months and 6 Months Financial Data

For the Three and Six Month Periods Ended

March 31, 2016

March 31, 2017

June 30, 2016

June 30, 2017

Revenues

$3,226,310

$2,330,959

$ 7, 200, 888

$5,341,071

% Year Over Year Decline

(27.8%)

(25.8%)

Operating Expenses

4, 109, 284

3, 662, 533

8, 704, 992

7, 857, 674

Net Operating Income (Loss)

($ 882, 974)

($1,331,574)

($1,504,104)

($2,516,603)

% Year Over Year Decline

(50.8%)

(67.3%)

49. Entitle's financial condition had been declining for several years. The decline accelerated in 2017. As can be seen below in Table 3, Entitle's net loss was $312,000, $2,343,000, and $4,241,000 for the years ended December 31, 2015, 2016 and 2017, respectively.

50.

Table 3

Entitle Insurance Company Yearly Financial Data Filed with ODI's Office of Risk Assessment

For the Year Ended December 31

2015

2016

2017

Operating Income

$17,093,716

$15,309,569

$11,544,788

% Year Over Year Decline

(10.4%)

(24.6%)

Expenses

17, 405, 828

17, 652, 472

15, 785, 270

Net Operating Income (Loss)

$ 312, 112

$ 2, 342, 903

$ 4, 240, 482

% Year Over Year Decline

(650.7%)

(81.0%)

51. Entitle's revenues declined from $17.1 million in 2015 to $15.3 million in 2016 or 10.4%. The revenues further declined from $15.3 million in 2016 to $11.5 million in 2017 or 24.6%. The decline in Entitle's revenues in 2017 versus 2016 ($3,765,000) was significantly greater than the decline in Entitle's revenues from 2016 versus 2015 ($1,784,000). EDG's net operating loss of $312,000 in 2015 declined to a net operating loss of $2.3 million in 2016. There was a significant (81%) increase in the net operating loss in 2017 over 2016 resulting in a net operating loss for 2017 of $4.2 million. Entitle's capital and surplus position was $8.5 million on December 31, 2016, and decreased $3.1 million to $5.4 million on December 31, 2017. This decline would have been greater had EDG not contributed an additional $1,000,000 in capital.

52. As can be seen below in Table 4, Entitle's net operating loss was $1.4 million and $1.9 million in the first six months of 2016 and 2017, respectively. That represents comparable period increase in the net operating loss of 42.3% in the first six months of 2017 over 2016. Entitle's net operating loss was $796,000 and $1.0 million in the first three months of 2016 and 2017, respectively. That represents a comparable period increase in the net operating loss of 28.5% for the first three months of 2017 over 2016. The deterioration in the financial condition of Entitle that began in the first three months of 2017 over the comparable period in 2016 ($796,000 - $1,023,000 = $227,000 increase in net operating loss) accelerated in April, May, and June of 2017 over the comparable period in 2016 ($572,000 - $918,000 = $346,000 increase in net operating loss).

Table 4

Entitle Insurance Company 3 Months and 6 Months Financial Data Filed with ODI's Office of Risk Assessment

For the 3 Months Ended

For the 6 Months Ended

For the Three and Six Month Periods Ended

March 31, 2016

March 31, 2017

June 30, 2016

June 30, 2017

Revenues

$3,187,307

$2,352,937

$7,089,478

$5,346,413

% Year Over Year Decline

(26.2%)

(24.6%)

Operating Expenses

3, 983, 133

3, 375, 788

8, 461, 101

7, 298, 132

Net Operating Income (Loss)

($ 795, 826)

($1,022,851)

($1,371,623)

($1,937,645)

% Year Over Year Decline

(28.5%)

(42.3%)

53. As of March 31, 2017, Entitle was in violation of Ohio's Hazardous Financial Conditions Standards for the previous 12 months, 9 months, and 6 months. As such, the ODI's Office of Risk Assessment communicated to Entitle on May 24, 2017 that equity contributions would be required. The full extent of these required equity contributions became known on June 28, 2017 and amounted to $5.5 million.

JX-316, at ENT00098430-31. Email from Jennifer Turner, Ohio Department of Insurance, to Maryse Jean-Pierre and Steve Palmer, Entitle, dated May 24, 2017.

JX-324, at PR00028639-41. Email from Jennifer Turner, Ohio Department of Insurance, to Maryse Jean-Pierre and Steve Palmer, Entitle, dated June 28, 2017.

54. Ms. Noack, in her deposition, expressed concern over the deterioration in Entitle's financial position and its impact on any decision that ODI's Office of Risk Assessment might make regarding additional capital contributions to Entitle. For example:

a. Page 52 “Okay, so, for example, once we learned that Entitle and the Ohio Commissioners have been discussing financials, Entitle financial situation, and I had also learned that some of the communications were around the financial results of Entitle, and -and the determined or the-the deterioration of Entitle's financial
position that the Ohio Commissioner was-was looking for additional capital improvement due to the deterioration of Entitle financials.”

Deposition of Ava Noack, p. 52-53.

55. Mr. Hirt expressed concerns over the deterioration in Entitle's financial position and its impact on any decision that ODI's Office of Risk Assessment might make regarding additional capital contributions to Entitle. For example:

a. “The financials and the ability to talk to the ODI. And I think their financial situation was worsening far faster than even they had anticipated. And I think they were probably worried that I was getting nervous about the purchase price based on the numbers being so far off.”

EDG Bridge Notes and Entitle Capital Contributions

56. EDG reflects a total of $3,425,000 in bridge notes due to PartnerRe and a total of $800,000 in bridge notes due to Palmer ($250,000), Zicklin ($400,000), and Sulam ($150,000) as of December 31, 2017. A total of $1,500,000 in bridge notes were issued in 2016 and the remaining balance of $2,725,000 in bridge notes were issued in 2017. Three of the bridge notes due to PartnerRe bear interest at prime plus 7%. All other bridge notes bear interest at 15.0%. The issuance of these bridge notes coincides in part with capital contributions to Entitle by EDG.

JX-166, at PR00022494.

57. In partial satisfaction to meet ODI's Office of Risk Assessment equity contribution requirement detailed in the May and June 2017 emails; an additional capital contribution was made by EDG to Entitle in December 2017 in the amount of $1,000,000.

58. Table 5 summarizes the EDG bridge notes by issue date and the additional capital contributed to Entitle by EDG. As can be seen below in Table 5, the total bridge notes issued by EDG were $4,225,000 and the total capital contributed to Entitle was $3,500,000.

Table 5

Summary of Bridge Notes and EDG Capital Contributions to Entitle

Ibid.

Payee

Date of Bridge Note

Bridge Note $

Date Capital Contributed by EDG to Entitle Reflected in Entitle ODI Reports

Capital Contributed by EDG to Entitle $

12/2015

$1,000,000

PartnerRe Note 1

02/29/2016

$1,000,000

PartnerRe Note 2

08/12/2016

500, 000

12/2016

1, 500, 000

PartnerRe Note 3

02/16/2017

1, 000, 000

PartnerRe Note 4

11/09/2017

750, 000

Palmer

11/09/2017

250, 000

Zicklin

11/15/2017

400, 000

Sulam

11/15/2017

150, 000

PartnerRe Note 5

12/22/2017

175, 000

12/2017

1, 000, 000

Total

$4,225,000

$3,500,000

59. It should be noted that the capital contributions are reflected in Entitle's ODI reports for the years ended December 31, 2015 and 2016 for $1,000,000. However, the cash was contributed in February of 2016 and 2017, respectively.

60. In my opinion, EDG's and Entitle's losses in the first and second quarter of 2017 were significantly greater than the comparable period in the first and second quarter of 2016. The increased losses of Entitle in 2017 over 2016 had a significant impact on the financial projections.

B. Analysis of the Entitle Direct Group, Inc. Financial Projections

61. The increased losses of EDG and Entitle in early 2017 over corresponding period in 2016 had a significant impact on the post-merger financial projections that were prepared in this matter. There were two financial projections prepared by EDG and provided to RPM in 2017 that appear to be relevant for discussion. These include “EIC Form A Projections for RPM FINAL” which appeared to have been prepared by EDG and provided to RPM on March 20, 2017 and “EIC Projections June 2017” prepared by Mr. Palmer and provided to RPM on June 2, 2017.

JX-63, at MB000971-2 and JX-107, at ENT00097792.

62. Table 6 provides information on the financial projections noted in the preceding paragraph as shown below.

Table 6

Summarized Information From the Financial Projections

(thousands of dollars)

March 2017 Projections

June 2017 Revised Projections

Difference

%

2017 - Second Half

Total Revenues

$ 9, 640

$ 8, 096

$ (1, 544)

(16.0)%

Total Operating Expenses

9, 239

8, 571

(668)

(7.2)%

Underwriting Gain (Loss)

401

(476)

(877)

(218.6)%

2017 - Full Year

Total Revenues

16, 537

13, 429

(3, 108)

(18.8)%

Total Operating Expenses

17, 565

15, 923

(1, 642)

(9.3)%

Underwriting Gain (Loss)

(1, 028)

(2, 494)

(1, 466)

(142.6)%

2018 - Full Year

Total Revenues

23, 800

18, 025

(5, 775)

(24.3)%

Total Operating Expenses

22, 763

17, 872

(4, 891)

(21.5)%

Underwriting Gain (Loss)

1, 037

153

(884)

(85.2)%

2019 - Full Year

Total Revenues

26, 542

21, 568

(4, 973)

(18.7)%

Total Operating Expenses

25, 311

20, 515

(4, 797)

(19.0)%

Underwriting Gain (Loss)

1, 230

1, 053

(177)

(14.4)%

Totals 2017 - Second Half to 2019

Total Revenues

59, 981

47, 689

(12, 293)

(20.5)%

Total Operating Expenses

57, 313

46, 958

(10, 356)

(18.1)%

Underwriting Gain (Loss)

2, 668

731

(1, 937)

(72.6)%

63. The March 2017 financial projections for EDG indicate $60.0 million of revenue from July 1, 2017 through December 31, 2019. The revised financial projections for EDG indicate $47.7 million of revenue from July 1, 2017 through December 31, 2019 a decrease in revenue of 20.5%.

64. The March 2017 financial projections for EDG indicate $2.7 million of underwriting gain from

July 1, 2017 through December 31, 2019. The revised financial projections for EDG indicate $731,000 of underwriting gain from July 1, 2017 through December 31, 2019, a decrease in the net operating income of 72.6%. If this amount is distributed to the common shareholders, it represents only $267,000 ($731,000 x 36.52%) available to the minority equity common shareholders.

65. The revised projections indicate underwriting gain of $1.1 million for the full year ended December 31, 2019. Assuming this amount can be distributed to the shareholders, the amount available for the minority shareholders is $402,000 ($1,100,000 x 36.52%). Based on annual distributions of $402,000 beginning in 2020, it would take over 12 years (2032) on an undiscounted basis to recover Mr. Imburgia's assigned value of $4.9 million ($4.9 million/ $402,000 = 12.2 years). On a discounted basis the period would be much longer.

66. If the synergies incorporated in the revised financial projections, which were based on increased revenues rather than cost reductions, are not realized to their full potential as assumed by Mr. Imburgia, the distributions in the above paragraphs would be further reduced and the recovery of the minority equity interest value calculated by Mr. Imburgia would take longer and possibly never occur.

67. There is nothing in the Merger Agreement that stipulates that distributions must be made to the shareholders. There is nothing in the Merger Agreement that would allow the minority shareholders to compel the sale of Entitle after the acquisition by RPM.

C. My Rebuttal Analysis of Mr. Imburgia's Opinions on RPM's Cash Position During the Period Leading up to the Expected Merger

68. Mr. Imburgia states “It is also my opinion that RPM's declining liquidity in 2017 significantly lessened its ability to acquire Entitle on the terms set forth in the parties' merger agreement.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 4 [JX-221].

69. Additionally, Mr. Imburgia states, “Following the anticipated merger with Entitle for which RPM would have paid approximately $12 million, all of these entities were collectively forecast to have only $4,110,154 of non-restricted cash... is significantly lower than the minimum liquidity requirements included as covenants in agreements between RPM and its lenders in effect at the time.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 19 [JX-221].

RPM's Consolidated Cash Position

70. Article IV, Section 4.7 of the Merger Agreement provides that “RPM has available on the date hereof and Parent will have available on the Closing Date funds on hand sufficient to pay the Closing Cash Merger Consideration and each of them will be able to pay or otherwise perform their respective obligations under this Agreement.”

JX-57, at ENT00014084-14133.

71. The caption title of section VII(A) of Mr. Imburgia's report states, “Over the first five months of 2017, RPM's available (non-restricted) cash on hand decreased from $17.5 million to only $3.0 million, significantly impacting its ability to close the merger with Entitle on the terms set forth in the Merger Agreement.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 17 [JX-221].

72. Mr. Imburgia appears to be implying in the caption title of his report section VII(A) that cash on-hand at RPM Mortgage, Inc., as a stand-alone entity, is the only cash that should be considered as available for the purchase of Entitle, and not including that of RPM's consolidated subsidiaries. The caption title is misleading because Mr. Imburgia ignores the cash held at RPM's subsidiaries.

73. As Mr. Imburgia was well aware at the time of issuance of his report, and even acknowledges such in his report, the consolidated financial statements of RPM/LendUS consisted of more than only the RPM Mortgage, Inc., stand-alone entity. As detailed above in my report section IV(A) - RPM / LendUS Mortgage's Operations and Background, RPM Mortgage, Inc., LendUS, LendUSA, AEM, MFI, Regency and MM-Air, were all consolidated into the RPM/LendUS financials as of December 31, 2016, and after, and the cash available to these entities would all be available for the purchase of Entitle. I refer in this affidavit to the combined cash balances of all these entities as “consolidated cash balance.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 19, paragraph 54 [JX-221].

74. I reviewed and analyzed general ledger details produced by the Defendants, which provides cash and cash equivalents journal entry activity and derived balances, for RPM (standalone entity), LendUS (stand-alone entity), AEM, and MFI, from December 31, 2016 to October 31, 2017. Chart 1 below provides the consolidated cash and cash equivalents that would have been available to RPM at various dates between the Merger Agreement and June 30, 2017. The blue line represents the Estimated Cash Purchase Price, $12,021,768, required for RPM to have available at the date of the intended merger.

JX-155, at LENDUS00046126 (RPM); JX-156, at LENDUS00053390 (LendUS); JX-216, at LENDUS00053544-56078 (AEM); JX-40, at LENDUS00053543 (MFI).

(Image Omitted)

75. As shown in Chart 1, RPM had sufficient available cash to purchase Entitle at all times between the Merger Agreement date of February 16, 2017, through June 30, 2017, including at the intended merger date of May 31, 2017, and the scheduled merger date of June 9, 2017.

76. RPM's consolidated cash balance on the date of the Merger Agreement, February 16, 2017, was approximately $27.9 million. As such, RPM's cash balance is in compliance with the Representations and Warranties of RPM, Parent and Merger Sub as provided for in Article IV of the Merger Agreement.

77. Mr. Imburgia does not state that RPM or its parent is in violation of Article IV, Section 4.7 of the Merger Agreement or that RPM's liquidity precluded its ability to acquire Entitle on the terms set forth in the Merger Agreement. Mr. Imburgia's own report states that “the cash balances of RPM, REG, MFI and AEM as of May 31, 2017, totaled $18.8 million” including $2.375 million in restricted cash. The net unrestricted cash balance amount, from Mr. Imburgia's calculation, of $16.425 million is also in compliance with the Representations and Warranties of RPM, Parent and Merger Sub as provided for in Article IV of the Merger Agreement.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 21 [JX-221].

78. Mr. Imburgia's own admission that RPM had sufficient cash available for the purchase of Entitle, and the cash analysis provided in Chart 1, are contrary to Mr. Imburgia's opinion that “declining liquidity in 2017 significantly lessened its ability to acquire Entitle on the terms set forth in the parties' merger agreement.” In actuality, RPM had the consolidated cash balance available to acquire Entitle on the terms set forth in the parties' Merger Agreement.

RPM's Ability to Comply with Loan Covenants

79. Aside from Mr. Imburgia's misleading section VII(A) caption title, it appears that Mr. Imburgia's main point about “declining liquidity in 2017 significantly lessened its ability to acquire Entitle” is his concern that in the event that RPM did pay the $12.0 million Cash Merger Consideration, that RPM would potentially have failed to meet loan covenant requirements.

80. Mr. Imburgia points out two loan agreements with minimum liquidity requirements: “Some of the agreements (such as RPM's agreement with Waterfall) include a minimum liquidity requirement of $7,500,000, while others (like RPM's lending agreement with Everbank) include a minimum liquidity requirement of $10,000,000.”

See, e.g., JX-3, LENDUS00026518-6626 at 6548 and JX-161, LENDUS00056373-6396 at 6380.

a. Mr. Imburgia acknowledges that the loan covenants are only required to be complied with at the end of each quarter, by stating, “Under these agreements, RPM is required to provide financial statements to the lender at least quarterly demonstrating its compliance with all covenants. As the merger with Entitle was expected to close in June 2017, RPM was required to certify its compliance with all loan covenants by the end of that month and second calendar quarter.” [emphasis added]

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 19 [JX-221].

81. RPM/LendUS has, in the past, not met loan covenant requirements; however, RPM/LendUS have been able to obtain a waiver from its lenders. This is evidenced in the Audited Financial Statements of RPM/LendUS for December 31, 2015, 2016 and 2017, each of which is noted by the independent external auditors as “the Company failed to meet certain financial covenants... As a result, a financial covenant waiver was issued.”

82. Ms. Noack stated in her deposition, “if we would have been short, then the shareholders would immediately have to step in, just like what they always do and would have bring in more -- more capital.”

Deposition transcript of Ava Noack, July 18, 2019, 306.

83. Based on the aforementioned points, my opinion is that the risk of failing to meet financial covenant requirements would not have been a factor as an RPM liquidity concern.

D. My Rebuttal Analysis of Mr. Imburgia's Opinions on RPM/LendUS Transactions with Shareholders

84. Mr. Imburgia states “It is also my opinion that RPM's financial condition generally and its liquidity specifically were highly dependent upon the decisions made by shareholders Robert and Tracey Hirt regarding transactions between them on the one hand and RPM on the other. RPM had regular transactions with its shareholders during 2016 and 2017, which it recorded in an unusual manner and which resulted in millions of dollars of receivables that the shareholders owed RPM [emphasis added].”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 4 [JX-221].

85. Mr. Imburgia does not state the accounting basis for his opinion that the transactions were recorded in an “unusual manner.” Each of the transactions Mr. Imburgia describes were recorded in the accounting books and records of RPM/LendUS, were subject to the audit procedures of the independent accounting firm and the effects of those transactions were reported and described in the notes to the audited financial statements of RPM/LendUS.

86. Mr. Imburgia fails to provide any basis or facts as to why the receivables owed by the Hirts' to RPM/LendUS were concerning, especially since he had evidence to consider showing that the Hirts settled their debt, in entirety, to LendUS.

87. I have prepared Attachment F, which provides a detail of ‘Other Receivables' journal entry activity associated with receivables due from the Hirts', from December 31, 2015 to October 31, 2017. In summary, I observed the following from the analysis performed in creating Attachment F:

For the period of December 31, 2015 to December 31, 2016, I was provided only with the ‘Other Receivables' journal entry lines from the general ledger (not the full general ledger incorporating the offsetting journal entry lines of the ‘Other Receivables' entries). For the period of January 1, 2017 to October 31, 2017, I was provided with full general ledger journal entry data, incorporating both sides of each journal entry, including those of ‘Other Receivables'.

a. 30 individual transactions creating an increase or decrease to the ‘Other Receivables' balance due from the Hirts' to RPM/LendUS;
b. $17,502,745 in increases to ‘Other Receivables';
c. $19,011,915 in decreases to ‘Other Receivables';
d. Net balance in ‘Other Receivables' due from the Hirts', as of October 31, 2017, had a credit balance of $1,509,170. This infers there is a remaining balance due from LendUS to the Hirts'; and
e. $4,850,000 of debits to Other Receivables that had offsetting credits to Additional Paid in Capital (an equity account).

Credits to Additional Paid in Capital

88. Regarding the journal entries that resulted in an offset to Additional Paid in Capital, Mr. Imburgia states, “To record each of these transactions, RPM debited its Other Receivables account, which increased assets, and credited its Additional Paid capital account, which increased equity. RPM's general ledger does not reflect any cash payments to or from RPM in connection with these transactions and as such, the recording and timing of these transactions in this manner is unusual [emphasis added].”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 26 [JX-221].

a. In addition to Mr. Imburgia's failure to acknowledge LendUS's independent external auditor's acceptance of such journal entries, Mr. Imburgia also failed to point out in his report that Entitle also posted journal entries with this exact debit and credit combination . This is evidenced in the Audited Statutory Financial Statements of Entitle Insurance Company for December 31, 2015 and again for December 31, 2016, stating:

i. Audited Financial Statements for December 31, 2015, “The Company recorded a note receivable of $1,000,000 as of December 31, 2015, which was approved by the ODI, as a result of a capital contribution from EDG satisfied in cash during February 2016 [emphasis added].”
ii. Audited Financial Statements for December 31, 2016, “The Company recorded a note receivable of $1,000,000 as of December 31, 2016, which was approved by the ODI, as a result of a capital contribution from EDG satisfied in cash during February 2017 [emphasis added].”

JX-448, ENT00077456-86, at 77481.

JX-131, LENDUS00007497-7540, at 7522.

b. Mr. Imburgia is alone in the idea that transactions of such a nature are unusual and has thus painted a completely inaccurate and misleading picture that RPM/LendUS have unusual accounting practices. The following parties involved in this Matter have all considered transactions of this nature to be an appropriate accounting practice:

i. Entitle's accounting department;
ii. Entitle's fiscal year 2015 independent external auditors, Cohen & Company;
iii. Entitle's fiscal year 2016 independent external auditors, CliftonLarsonAllen LLP;
iv. RPM/LendUS's accounting department;
v. LendUS's independent external auditors, Moss Adams LLP; and
vi. The Ohio Department of Insurance.

Other Receivables Balances Owed by the Hirts

89. Mr. Imburgia makes several statements in his report alluding to the lack of timely promissory notes between the Hirts to RPM/LendUS to be abnormal. For instance, Mr. Imburgia makes the following statements:

a. “no promissory note was executed between RPM and the Hirts [for the 2016 transactions] until the note dated December 31, 2016.., ”
b. “no promissory notes have been produced in this matter to support these receivables [from the transactions crediting Additional Paid in Capital] or the Hirts' promise to repay the net outstanding principal amount with interest.'
c. “no promissory note has been produced in this matter to support this [January 5, 2017, $4,025,000, crediting Cash] transaction or the Hirts' promise to repay the outstanding principal amount with interest.'

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 24 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 26 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 27 [JX-221].

90. As Mr. Imburgia points out in his report, “On or around December 31, 2016, Robert Hirt executed a promissory note in which he promised to pay RPM....the principal sum of $3,056,744.89, together with interest on unpaid principal at the rate of five percent (5%) per annum' from the date of the promissory note.' This amount corresponds to the December 16, 2016, Hirts-related Other Receivables remaining balance shown on my Attachment F. All receivables owed by the Hirts to RPM were accounted for by this promissory note as of December 31, 2016. As noted in Attachment F, there was no remaining balance owed by the Hirts as of October 31, 2017.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 24 [JX-221].

The Hirts' Transfer of TRH Holdings

91. Mr. Imburgia states that “The general ledger of RPM reflects a write-off of $9,119,915 of receivables recorded on or around October 31, 2017” The receivable of $9,119,915 was not subject to “write-off' as that accounting term is used when a receivable is not collectible. The underlying journal entry does not indicate that the receivable was subject to write-off. Nor does Ms. Noack say the receivable was subject to write-off. Rather as described in the footnotes to the audited financial statement of LendUS, the receivable was settled through the transfer of TRH Holdings to LendUS. In addition to satisfying the amount of the receivable the transfer resulted in an additional equity contribution.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 25 [JX-221].

JX-159, at LENDUS00015361-404, page 20.

92. The Audited Financial Statements of LendUS for December 31, 2017, states “In connection with this [TRH Holdings] transfer, the Company settled its outstanding receivables due [from] owners in the amount of $8,687,464. The aforementioned transactions between controlled affiliates were reflected as contributed capital transactions of $1,863,221 in the consolidated statement of members' equity as of and for the year ended December 31, 2017.'

Ibid.

93. Further, the LendUS general ledger journal entry associated with this transaction did not reflect an increase to a bad debt expense as would be expected from a write-off, but rather provided an increase to assets of $10,550,685 (‘Investment in Partner') and an increase to equity of $1,438,770 (‘Additional Paid in Capital').

JX-156, at LENDUS00053390, Journal Entry ID ‘JE-010170', dated October 31, 2017.

94. I noted that there is a difference in amounts between the Audited Financial Statements of LendUS for December 31, 2017, and the provided journal entry activity made available through October 31, 2017. There is a difference of $432,451 for both ‘Other Receivables' and ‘Additional Paid in Capital' between the financial statements and journal entries. This difference could be related to activity after October 31, 2017, which I do not have. The difference does not impact the opinions I make in this matter.

Audited financial statements show Other Receivables as $432,451 less and Additional Paid in Capital as $432,451 more as compared to the journal entry on October 31, 2017.

E. Damages Calculation

OPINIONS REGARDING THE CASH SALES PRICE

95. Mr. Imburgia inappropriately compares the cash sales price between the Merger Agreement and the subsequent sale to Radian. The following table is an analysis of the comparison of the cash sales price as prepared by Mr. Imburgia.

Attachment C.

RPM

Radian

Difference

Base Price

$ 13, 125, 000

$ 7, 310, 573

$ 5, 814, 427

Cash Purchase Price Adjustment Amount

(1, 103, 232)

-

(1, 103, 232)

Estimated Cash Purchase Price

12, 021, 768

7, 310, 573

4, 711, 195

Indemnification Escrow

(1, 000, 000)

33, 237

(1, 033, 237)

11, 021, 768

7, 343, 810

3, 677, 958

Indebtedness - Related Party

(1, 971, 384)

(5, 207, 694)

3, 236, 310

Bridge Notes PartnerRe (Principal)

(1, 500, 000)

(3, 425, 000)

1, 925, 000

Bridge Notes - Zicklin (Principal)

-

(400, 000)

400, 000

Bridge Notes - Sulam (Principal)

-

(150, 000)

150, 000

Bridge Note - Palmer (Principal)

-

(250, 000)

250, 000

Accrued Interest on Bridge Notes

(213, 556)

(522, 441)

308, 885

Minimum Repayment on Bridge Notes

-

(77, 823)

77, 823

Partner Re Board Fees

(257, 828)

(292, 448)

34, 620

Broken Deal Legal Costs

-

(89, 982)

89, 982

Transaction Expenses

(1, 086, 915)

(272, 753)

(814, 162)

Estimated Legal Costs

(510, 006)

(272, 753)

(237, 253)

Employee Transaction Bonus

(576, 909)

-

(576, 909)

Stockholder Representative Expense - Related Part

(250, 000)

(100, 000)

(150, 000)

Sub-total

(4, 308, 299)

(5, 547, 210)

1, 238, 911

Cash Consideration

$ 7, 713, 469

$ 1, 763, 363

$ 5, 950, 106

96. Mr. Imburgia inappropriately reduces the cash sales price in the sale to Radian by the increased amounts of related-party debt and related-party payables. After the Plaintiff cancelled the Merger Agreement, PartnerRe, EDG Shareholders and other related-parties provided additional cash to EDG in exchange for bridge notes. A substantial portion of these bridge notes were used to make an additional $1,000,000 capital contribution to Entitle in the period after the merger. By providing the cash in the form of debt rather than an equity contribution, Plaintiff has artificially increased the alleged damages.

97. The increase in debt after the Merger Agreement was $1,725,000. This represents additional bridge notes from PartnerRe of $925,000, from Zicklin $400,000, from Sulam $150,000, and from Palmer $250,000. These bridge notes represent financing after the termination of the Merger Agreement and should not be included in the reduction of the cash provided in the sale to Radian. Mr. Imburgia does not identify this issue in his report.

Ibid.

98. In addition to treating the additional cash contributions as debt, instead of equity, the bridge notes issued after the termination of the Merger Agreement bore interest at 15.0%, compared to an interest rate for the bridge notes prior to the Merger Agreement of 10.5% to 10.75%. The accrued interest amount on the bridge notes increased to $308,885 from $213,556 at the date of the Merger Agreement, to $522,441 at the date of Radian sale. By increasing the interest rate on the additional bridge notes, the Plaintiff has artificially increased the alleged damages. The additional interest after the termination of the Merger Agreement should not be included in the reduction of cash from the sale to Radian. Mr. Imburgia does not identify this issue in his report.

Ibid.

99. In addition to the accrued interest at 15.0%, the bridge notes issued after the Merger Agreement include minimum payments of $77,823. By adding these minimum payments to the bridge notes issued after the Merger Agreement, the Plaintiff has artificially increased the alleged damages. These minimum payments on the bridge notes should not be included in the reduction of cash from the sale to Radian. Mr. Imburgia does not identify this issue in his report.

Ibid.

100. The following is a summary of the comparative cash sales price between the Merger Agreement and the sale agreement with Radian. My calculation of the damages associated with the cash sales price is $3,714,000.

Attachment C.

Damage Calculation (Based on Cash Sales Price)

RPM

Radian

Difference

Estimated Cash Sales Price

$12,022,000

$7,311,000

$4,711,000

Indemnification Escrow

(1, 000, 000)

33, 000

(1, 033, 000)

Bridge Note Paid - Not Converted to Equity

-

(1, 000, 000)

1, 000, 000

Employee Transaction Bonus

(577, 000)

-

(577, 000)

Legal Costs

(510, 000)

(273, 000)

(237, 000)

Shareholder Representative Expense

(250, 000)

(100, 000)

(150, 000)

Damage Calculation

$9,685,000

$5,971,000

$3,714,000

OPINION REGARDING THE MINORITY INTEREST EQUITY VALUE

101. Mr. Imburgia calculates the value of the Minority Equity Interest to be $4,939,180. In my opinion, Mr. Imburgia's opinion on this point is flawed because he fails to consider all relevant information available prior to the planned Merger.

102. Due to (1) the uncertainties around the deterioration in the financial condition of EDG and Entitle, (2) the uncertainties on whether the synergies from the Merger Agreement would create profitable operations, and (3) the uncertainties on what actions ODI's Office of Risk Assessment might take given the deterioration in the financial condition of Entitle; I do not believe a valuation of the Minority Interest Equity can meet the “Reasonable Certainty” threshold.

Forensic & Valuation Services Practice Aid, Attaining Reasonable Certainty in Economic Damages Calculations, 2018.

103. Even if I make favorable assumptions with respect to each of these uncertainties, a cash flow analysis--utilizing the revised financial projections provided by EDG to the Defendants on June 2, 2017--demonstrates that the value of minority equity interest is at most $1.172 million.

104. The following information is relevant to my valuation of the minority equity ownership in EDG resulting from the Merger Agreement:

a. Business Name: Entitle Direct Group, Inc. (which is parent company for Entitle Insurance Company)
b. Proposed Transaction: Agreement and Plan of Merger by and among RPM Mortgage, Inc. (“RPM”); Entitle Direct Holdco, Inc. (“Parent”); Entitle Direct Merger Sub, Inc. (“Merger Sub”); Entitle Direct Group, Inc. (the “Company”); Partner Reinsurance Company Ltd. (the “Stockholder Representative”) dated as of February 16, 2017. At closing, RPM agreed to pay cash consideration of $13.12 million (as adjusted) for 66.67% equity interest in Entitle Direct Group. Right after closing $1,000,000 of debt was to be converted into equity resulting in a 36.52% equity interest to stockholders of Entitle Direct Group, Inc.
c. Ownership Interest: 36.52% Planned Equity Interest in Entitle Direct Group, Inc.
d. SIC Code #: 6361-Title Insurance
e. Valuation Dated: June 9, 2017
f. Standard of Value: Fair Market Value
g. Methodology: Discounted Future Cash Flow Method
h. Premise of Value: Going Concern
i. Level of Value: Non-Controlling, Non-Marketable

Fair market value is defined as the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. [SSVS1, Appendix B.]

105. I have concluded that the fair market value of a 36.52% planned minority equity interest in Entitle Direct Group, Inc. to be approximately $1.172 million on a non-controlling, non- marketable basis assuming that the synergies portrayed in the revised financial projections are realized as of June 9, 2017.

Economic and Industry Factors Affecting the Company

106. One of the factors to consider in a valuation is the economic outlook in general and the condition of the specific industry. Although individual economic factors may or may not have a direct impact on a particular industry or business, the overall economy (and the outlook for it) strongly influences the actions of investors and the assessment of investment opportunities. All businesses are impacted in some way by the economy.

107. I have examined industry reports available to create an informed opinion regarding the general direction and scope of the demand determinants that influence the subject company. In general, the economy creates the environment within which the business must operate. It influences the size of the available market and company's growth potential.

108. The summary below provides an overview of some selected economic factors that prevailed near the date of the intended acquisition, as well as a discussion of the factors that are crucial over an extended period of time. The following narrative includes excerpts of the Economic Outlook Update™ 2Q 2017 and of IBISWorld's September 2017 Industry Report of Title Insurance in the U.S. (NAICS: OD4784). The full narrative is contained in our work files.

109. Overview of the Current U.S. Economy as of Q2 2017 and Outlook

a. The U.S. economy-as indicated by GDP-grew at an annual rate of 2.6% in the second quarter of 2017, which is faster than the 1.2% revised rate reported for the first quarter of 2017. The growth from the current quarter is due to an increase in consumer spending, which comprises about 70% of the economy. Consensus forecasters predict Real GDP to grow at 2.4% and 2.2% over 2018 and 2019, respectively.
b. The quarter ended with the economy in the third longest economic expansion in U.S. history. Private fixed investment, which includes residential and business spending, increased 2.2%. This marks the fifth consecutive quarter of increases.
c. Builder confidence declined 2.0 points in June but remains at levels that indicate that homebuilders continue to be positive about the housing market. The report noted
builders' confidence levels have remained consistently sound in 2017, reflecting the gradual recovery of the housing market.
d. Existing-home sales slipped in June, following their rise in May. Sales declined 1.8% for the month, as low supply kept potential buyers at bay. However, over the past 12 months, existing-home sales are up 0.7%. Despite the slowdown, the sales pace for 2017 is still running slightly above last year's pace, despite these persistent market challenges.

110. Overview of the Title Insurance Industry as of September 2017

a. The Title Insurance industry has grown substantially as a result of strengthening macroeconomic conditions and a healthier domestic consumer. Strong growth in existing home sales and the house price index have supported the growth in the industry.
b. As a result, Industry revenue in 2017 is expected to be 5.3% at the end of the year, which is higher than the five years to 2017 average of 4.6%.
c. Over the five years to 2022, industry revenue is forecast to rise at an annualized rate of 3.3%. This strong growth is primarily a result of anticipated increases in key housing market variables, including the number of existing home sales and access to credit. The following IBISWorld chart provides the actual and estimated annual revenue changes between 2009 to 2022.

Annual Change

Revenue (%)

2009

-7.1

2010

0.4

2011

-4.0

2012

19.4

2013

10.0

201 4

-12.7

2015

14.8

2016

7.7

2017

5.3

2018

4.5

2019

3.3

2020

2.5

2021

3.3

2022

2.8

d. Moreover, the industry's average gross profit margin is forecast to continue rising as a result of real estate market improvements.
e. Industry revenue was sourced by the following products and services segments in 2017:
(Image Omitted)
f. The following key external drivers apply to the Title Insurance market:
i. Existing homes sales - The provision of title insurance is predicated on the closing of a real estate transaction. Consequently, a rising volume of sales of existing single-family homes, condos and co-ops increases the need for mortgage lenders and buyers of real estate to be protected from loss or damage resulting from title defects. The number of existing home sales is expected to increase in 2017, representing a potential opportunity for the industry.
ii. House price index - According to Fidelity National Financial, Inc., premiums derived from title insurance policies are highly correlated with the value of the underlying property. As a result, increases in the prices of residential property tend to benefit the industry through rising title insurance premiums. The house price index is expected to increase in 2017.
iii. Access to credit - Access to credit is measured by the borrowing capacity advanced by commercial banks. Aggregate increases in credit access increase the likelihood of additional real estate transactions and chances for title insurers to collect premiums. Access to credit is expected to increase in 2017.
iv. 30-year conventional mortgage rate - As the most common type of loan for home purchases in the United States, changes in the 30-year conventional mortgage rate affect the willingness of consumers to take out mortgages. More specifically, increases in this key interest rate make purchasing a home more expensive, damaging the level of real estate transactions in the domestic market. The 30-year conventional mortgage rate is expected to increase substantially in 2017, posing a potential threat to the industry.

Historical Financial Analysis of EDG

111. I have analyzed the historical financial statement of EDG for the years ended December 31, 2014, through December 31, 2016, and for the quarter ending March 31, 2017. The financial statements are presented in Table 7 and Table 8, as shown below.

Industry data is sourced from The Risk Management Association (“RMA”), 2017 Annual Statement Study, for Industry 524127 - Direct Title Insurance Carriers.

Table 7 - EDG Balance Sheets

See JX-448, at ENT00077456-7486, JX-422, at ENT00015682-15709, JX-166 at PR00022494.

ENT00231588 PRO0022494

(in thousands)

12/31/2014

12/31/2015

12/31/2016

3/31/2017

Industry

Assets

Bonds

$3,030

15.0%

$4,172

25.4%

$3,663

23.6%

$3,658

24.5%

Cash and Cash equivalents

11, 225

55.4%

10, 547

64.3%

10, 310

66.5%

10, 101

67.5%

49.5%

Investment Inc Due and Accrued

4

0.0%

7

0.0%

6

0.0%

5

0.0%

Premiums Receivable

669

3.3%

438

2.7%

472

3.0%

261

1.7%

Reinsurance Recoverable

80

0.4%

14

0.1%

0

0.0%

0

0.0%

Other Assets

478

2.4%

474

2.9%

408

2.6%

343

2.3%

Deferred Tax Asset

4, 473

22.1%

0

0.0%

0

0.0%

0

0.0%

Property and Equipment

248

1.2%

719

4.4%

592

3.8%

550

3.7%

Title Plants

43

0.2%

43

0.3%

43

0.3%

43

0.3%

$20,250

100.0%

$16,414

100.0%

$15,493

100.0%

$14,960

100.0%

Liabilities and Equity

Known Claims and IBNR Reserve

$3,458

17.1%

$3,387

20.6%

$3,517

22.7%

$3,284

22.0%

Accounts Payable

72

0.4%

180

1.1%

139

0.9%

218

1.5%

Note Payable

0

0.0%

0

0.0%

1, 500

9.7%

2, 500

16.7%

Accrued Expenses

349

1.7%

801

4.9%

1, 059

6.8%

1, 008

6.7%

$3,879

19.2%

$4,369

26.6%

$6,214

40.1%

$7,010

46.9%

53.9%

Equity

Series B Convertible Preferred Stock

$263

1.3%

$263

1.6%

$263

1.7%

$263

1.8%

Series A Convertible Preferred Stock

168

0.8%

168

1.0%

168

1.1%

168

1.1%

Common Stock

158

0.8%

158

1.0%

158

1.0%

158

1.1%

Additional Paid-In Capital

37, 605

185.7%

37, 605

229.1%

37, 605

242.7%

37, 605

251.4%

Accumulated Deficit

(21, 823)

(107.8)%

(26, 148)

(159.3)%

(28, 914)

(186.6)%

(30, 243)

(202.2)%

$16,371

88 0.0%

$12,045

73 4 0.0%

$9,279

59 9 0.0%

$7,950

53 1 0.0%

46.1%

$20,250

100.0%

$16,414

100.0%

$15,493

100.0%

$14,960

100.0%

Source

ENT00217602

ENT00231588

RMA

112. Total assets have declined from $20.2 million on December 31, 2014 to $15.0 million on March 31, 2017. This decrease primarily results from the write-off of the deferred tax asset of $4.5 million in 2015. Notes payable has increased from $0.0 on December 31, 2014 to $2.5 million as of March 31, 2017. Equity has decreased from $20.2 million on December 31, 2014 to $14.9 million on March 31, 2017.

Table 8 - EDG Income Statements

See JX-448, at ENT00077456-7486, JX-422, at ENT00015682-15709, JX-166 at PR00022494

ENT00231589 PRO0022494

(in thousands)

12/31/2014

12/31/2015

12/31/2016

3/31/2017

Industry

Revenues

Agent premiums

$3,933

34%

$4,422

25%

$4,846

31%

$913

39%

Direct premiums

4, 586

39%

7, 832

45%

6, 964

45%

909

39%

Escrow and settlement services

3, 148

27%

5, 299

30%

3, 760

24%

509

22%

$11,666

100%

$17,553

100%

$15,570

100%

$2,331

100%

100%

Operating Expenses

Losses and loss adjustment exp

835

7%

(364)

(2)%

884

6%

127

5%

Agent commissions

3, 186

27%

3, 588

20%

3, 961

25%

752

32%

Search and settlement fees

2, 404

21%

3, 498

20%

2, 664

17%

367

16%

State license and permit fees

83

1%

103

1%

104

1%

41

2%

Premium taxes

221

2%

328

2%

338

2%

49

2%

Salaries and employee benefits

4, 392

38%

6, 106

35%

5, 861

38%

1, 340

57%

Consulting fees

158

1%

447

3%

649

4%

98

4%

Marketing and advertising

340

3%

492

3%

320

2%

60

3%

Professional fees

292

3%

356

2%

446

3%

195

8%

Bank fees

159

1%

285

2%

237

2%

51

2%

Rent and facilities expense

663

6%

617

4%

631

4%

151

6%

Depreciation and amortization

102

1%

124

1%

198

1%

43

2%

General, administrative and other

2, 021

17%

1, 836

10%

1, 951

13%

389

17%

$14,860

127%

$17,413

99%

$18,243

117%

$3,663

157%

81.4%

Net Operating Income (Loss)

($3,193)

(27)%

$140

1%

($2,674)

(17)%

($1,332)

(57)%

18.6%

Net Investment Income (Expense)

14

0%

8

0%

(93)

(1)%

3

0%

(1.4%)

Profit Before Tax

($3,179)

(27)%

$147

1%

($2,766)

(18)%

($1,328)

(57)%

19.9%

Deferred Income Tax Expense

0

0%

(4, 473)

(25)%

0

0%

0%

Net Income (Loss)

($3,179)

(27)%

($4,326)

(25)%

($2,766)

(18)%

($1,328)

(57)%

Source:

ENT00200130

ENT00231589

RMA

113. Revenues were $11.7 million, $17.6 million, and $15.6 million in 2014, 2015, and 2016, respectively. In the first quarter of 2017 revenues were $2.3 million. On an annual basis it appears that total revenues in 2017 will decline substantially from 2016. There was some growth in direct premium revenue in 2015 and 2016, increasing to 45% of total revenue in those years versus 39% in 2014. After growing in 2015 versus 2014, revenues are now declining.

114. Operating expenses were $14.9 million, $17.4 million, and $18.2 million for the years ended December 31, 2014, 2015, and 2016, respectively. This represented 127%, 99%, and 117% of revenues over the same three years. In the first quarter of 2017, operating expenses were 157% of revenues.

115. Most of the expense categories remain fairly constant over the three years of 2014, 2015 and 2016 except for losses and loss adjustment expense. In 2014, 2016 and the first quarter of 2017 the losses and loss adjustment expense was 7%, 6% and 5% of revenues, respectively. In 2015 the losses and loss adjustment expense was a reduction in total expense of $364,000 (2.0% of revenues). This reduction in total expense is the only reason EDG had operating income of $140,000 in 2015.

116. From 2014 through 2016, EDG incurred $5.7 million of operating losses and an additional $1.3 million of operating losses in the first quarter of 2017. The total net loss from 2014 through 2016 was $10.3 million, which included $4.5 million in deferred income tax expense. The net loss excluding the deferred income tax expense was $5.8 million. EDG incurred an operating loss of $3.2 million on revenues of $11.6 million in 2014, $4.3 million on revenues of $17.5 million in 2015, $2.8 million on revenues of $15.6 million in 2016, and $1.3 million on revenues of $2.3 million in the first quarter of 2017.

Valuation Methodology

117. I have considered the income (income-based), asset (asset-based), and market (marketbased) approaches for determining the value of the 36.52% minority equity interest in EDG after the Merger Transaction.

Statement on Standards for Valuation Services (“SSVS1”), 10.

118. After considering all three approaches, I have concluded that the best approach for determining value is to use a discounted cash flow method, which is an income-based approach. This method captures the potential future cashflows that could be available to the minority equity interest.

119. I have not utilized a market-based approach. EDG's uneven revenue trends and historical losses render the implementation of a market-based approach difficult. Additionally, it would be difficult if not impossible to capture the potential synergies, if any, in the merger with RPM. Finally, market transactions and market multiples unique to EDG and Entitle size are not readily available.

120. I have not utilized an asset-based approach because the minority stockholders cannot compel the sale of the sale of EDG assets or EDG. Additionally, EDG's wholly owned subsidiary is regulated entity and is subject to regulatory surveillance at the time of merger with RPM. As with the market-based approach, the asset-based approach would likely not capture potential synergies, if any, in the merger with RPM.

Determination of Value

121. The discounted cash flow method encompasses the following steps:

Thomson Reuters - Guide to Business Valuation, Chapter 5 Capitalization and Discounted Cash Flow Methods, paragraph 502.

a. Prepare or use an existing financial forecast
b. Adjust the financial forecast for any excess assets or shortage of assets
c. Compute state and federal income taxes
d. Consider any additional adjustments that might affect the cash flow
e. Estimate the discount rate applicable to the cash flow
f. Estimate the terminal value of the company during the terminal year
g. Estimate the current operating value of the company by discounting the cash flow and the terminal value using the determined discount rate

122. As a starting point for my discounted cash flow analysis, I utilized the EIC June 2017 Financial Projections prepared by EDG and provided to RPM. Information on the above steps is set forth on Attachment D to this Affidavit. Significant assumptions regarding my discounted cash flow analysis are summarized below.

a. Revenues in the financial projections grow from $13.2 million in 2017 to $21.5 million in 2019 (62.9%) due to anticipated synergies from RPM ownership. Revenues
are computed using an industry growth rate of 4.3% after 2019 through 2026. Expenses after 2019 through 2026 are equal to a percentage of sales based on 2019. This represents an operating profit margin of approximately 5%.
b. Based on the analysis of depreciation and amortization and property, plant, and equipment for 2013 through 2014, I note that the average depreciation is $139,000 per year and the average cost of new property, plant, and equipment is $224,000 per year. In my financial projections I have assumed that depreciation and amortization are equal to the cost of new property, plant, and equipment and have not made any additional adjustments to cash flow.
c. Revenue growth is sufficient to finance any additional needs pertaining to working capital.
d. There is no debt and corresponding interest expense.
e. The projections incorporate a combined state and federal tax rate of 25%. Taxable income has been reduced for preacquisition net operating losses. The preacquisition net operating losses have been limited based on a conservative fair market value of equity of $18.0 million times the June 2017 Long-Term-Tax-Exempt Rate of 2.09%.
f. Based on communications from the ODI's Office of Risk Assessment, I have limited the payment of cash flows to equity until the $5.5 million additional capital requirement has been met.
g. Cash flows and the terminal value have been discounted using a discount rate of 14.43%. This rate is comprised a of risk-free rate of 3.5% + equity premium rate of 5.5% - industry risk equity premium adjustment of (0.16%) + size risk premium of 5.59%.

Duff & Phelps Cost of Capital Navigator™ U.S. Cost of Capital Module, Industry: SIC 63 -Insurance Carriers, Valuation Date 6/9/2017.

123. As set forth on Attachment D, the present value of cash flows to ownership, including the terminal value of ownership is $4.278 million. The present value of the cash flows, including the terminal value available to the 36.52% minority equity interest is $1.562 million. Utilizing a lack of marketability discount of 25.0%, the present value of the 36.52% minority equity interest on June 9, 2017 is approximately $1.172 million on a non-controlling, non-marketable basis.

F. Significant Deficiencies of Mr. Imburgia's Damage and Valuation Opinions

124. Mr. Imburgia incorrectly suggests that he performed a valuation of the minority equity consideration provided to Entitle's stockholders. Mr. Imburgia stated that, “Based on the above, the value of the total equity consideration to EDG stockholders under the planned merger is $6,585,573, or $18,032,652 multiplied by 36.52%. However, since EDG stockholders would control following the merger, the total equity consideration to EDG stockholders must be discounted. Valuation literature suggests a discount for lack of control within the range of approximately 20% to 30%, the average being 25%. As such, a discount of 25% for lack of control is applied.”

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 6, 8 [JX-221].

125. In my opinion, Mr. Imburgia does not provide sufficient relevant data that there were any market participants, other than RPM, willing to pay the potential synergistic value proposed in the deal price in the planned merger between EDG and RPM as of February 16, 2017.

a. Mr. Imburgia's presumption is that the proposed deal price between EDG and RPM is the best and only indicator of the value of EDG.
b. Mr. Imburgia does not include any analysis of the evaluation of synergistic value from revenue enhancements, cost savings, and capital optimization.

126. Mr. Imburgia does not analyze the financial impact to EDG for the lost merger and acquisition deals with other potential buyers due to the planned merger between EDG and RPM not being consummated to the terms initially agreed in the merger agreement.

127. According to Valuing A Business - The Analysis and Appraisal of Closely Held Companies, “Merger and acquisition prices often, to some extent, reflect synergies and/or strategic advantages between acquirer and target. To the extent that this true, a transaction may be more reflective of investment value (value to that particular buyer) than fair market value (the value to a hypothetical buyer). For this reason, the circumstances and details of the merger and acquisition transactions must be carefully analyzed.” Mr. Imburgia did not sufficiently analyze the details with other potential buyers of EDG.

Investment value is defined as “the value to a particular investor based on individual investment requirements and expectations.” [SSVS1, Appendix B.]

Fair market value is defined as the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. [SSVS1, Appendix B.]

Valuing A Business - The Analysis and Appraisal of Closely Held Companies, Fifth Edition, Shannon P. Pratt and Alina V. Niculita, 323.

128. Mr. Imburgia should also have included a deduction for lack of marketability for a minority interest in a closely-held company, which he did not include. According to Valuing A Business - The Analysis and Appraisal of Closely Held Companies, “Since merger and acquisition value analysis usually focuses on market value of invested capital, the value of the debt must be subtracted to reach the value of equity. . .If a noncontrolling interest is being valued, both lack of control and lack of marketability discounts should be considered.”

Discount for lack of marketability is define as “an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.” [SSVS1, Appendix B.]

Valuing A Business - The Analysis and Appraisal of Closely Held Companies, Fifth Edition, Shannon P. Pratt and Alina V. Niculita, 322-323.

129. EDG had a history of losses prior to the acquisition. The common stockholders, common stock option holders, and common stock warrant holders received no consideration in the Merger Agreement. The damage value of $4.9 million assigned to the minority common ownership of Entitle through the planned merger was completely dependent on the realization of synergies derived through the acquisition of EDG by RPM. These synergies included but may not have been limited to, the ability of RPM to direct closing business to Entitle and the ability of Entitle to execute that business incurring only marginal costs.

JX-347, at PR00015068.. See also Merger Agreement section 2.6.

“As explained below, the damages amount described in the previous section is reasonable because the price at which Entitle was to be sold to RPM under the Merger Agreement, and the price at which Entitle was actually sold to Radian, were both reasonable, based on financial projections available to the parties at the time and expected synergies.” Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 10-11 [JX-221].

130. Notwithstanding Mr. Imburgia's arguments that such synergies are reasonable, the damage associated with the minority common ownership of Entitle is flawed.

a. Mr. Imburgia's minority equity damage calculation relies primarily upon a single data point, the estimated cash consideration RPM offered in exchange for the controlling interest in Entitle at the date of the merger.
b. Mr. Imburgia does not use all relevant information available up to the date of the intended Merger, including but not limited to, financial performance of EDG and Entitle, the potential for additional capital requirements imposed by ODI's Office of Risk Assessment in May and June 2017, and revised and updated financial projections. The revised projections indicate a decrease in revenues of 18.8%, 24.3%, and 18.7% for 2017, 2018, and 2019, respectively. More significantly the revised projections indicate a decrease in net operating income of 143.5%, 82.6%, and 12.8% for 2017, 2018, and 2019, respectively.
c. The decrease in the financial projections for the 2nd half of 2017, which would have been post-merger, were significant. The original projections indicated that Entitle would have a net income of $407,000 in the 2nd half of 2017. The revised projections indicated that Entitle would have a net loss of $466,000. The difference is $873,000.
d. Given ODI's Office of Risk Assessment concern over the ongoing losses at Entitle and their discussions regarding the need for additional capital contributions, the postmerger projected loss in the 2nd half of 2017 would likely add to ODI's Office of Risk Assessment concerns regarding the violations of the Hazardous Financial Condition statutes.

Mr. Imburgia's Damages and Valuation Conclusions Are Not In Compliance With SSFS1 and SSVS1

131. Despite Mr. Imburgia not representing his damages conclusions as a valuation opinion, the term, “value, ” is referred to in 32 instances in the Updated Imburgia Report. Some examples of the different contexts used by Mr. Imburgia for “value” and “valuation” include the following.

a. Total value for Entitle
b. Implied value of Entitle
c. Value of the total equity / current equity value
d. Target firm's value / values of the target firm
e. Estimating overall synergy value / value of the synergies
f. Combined firm's enterprise value
g. Book value of equity
h. Pre-merger value
i. Premium over book value
j. Acquired firm's value
k. Valuation literature suggests a discount for lack of control

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 8 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 9-10 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 9, 16 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 11 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 15-16 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 15 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 15, 17 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 15 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 16 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 16 [JX-221].

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 9 [JX-221].

132. Mr. Imburgia does not include any definition of the level of value in his damages/valuation analysis. The standard of value is defined as “the identification of the type of value being utilized in a specific engagement; for example, fair market value, fair value, investment value.”

SSVS1, Appendix B.

133. Mr. Imburgia's damages and valuation conclusions are subject to the American Institute of Certified Public Accountants (“AICPA”) Statement on Standards for Forensic Services No. 1 (“SSFS1”) effective for engagements accepted on or after January 1, 2020 and Statement on Standards for Valuation Services (“SSVS1”) for engagements accepted on or after January 1, 2008. In my opinion, Mr. Imburgia's damages and valuation conclusions are not in compliance with SSFS1 and SSVS1.

a. SSFS1: Mr. Imburgia's work is not in compliance with general standard as to sufficient relevant data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.”
b. SSVS1: Mr. Imburgia did not comply with these standards as identified in the following paragraphs.

SSFS1, 3.

134. SSVS1 applies to Mr. Imburgia's opinions in this Matter involving estimates of value.

135. As described in SSVS1, “the term engagement to estimate value refers to an engagement or any part of an engagement (for example, a tax, litigation, or acquisition-related engagement that involves estimate the value of a subject interest. An engagement to estimate value culminates in the expression of either a conclusion of value or calculated value (see paragraph .21).”

SSVS1, 2.

136. SSVS1 paragraph .12 states that the valuation analyst should consider, at a minimum, the following:

SSVS1, 4.

a. Subject entity and its industry
b. Subject interest
c. Valuation date
d. Scope of the valuation engagement
I. Purpose of the valuation engagement
II. Assumptions and limiting conditions that apply to the valuation engagement
III. Applicable standard of value (for example, fair value or fair market value) and the applicable premise of value (for example, going concern)
IV. Type of valuation report to be issued, intended use and users of the report, and restrictions on the use of the report

137. Mr. Imburgia did not comply with SSVS1 paragraph .12.

Mr. Imburgia's Flawed Attempt of Purported Market Approach

138. Mr. Imburgia improperly relied on market data from two studies published by Boston Consulting Group (“BCG”) and S&P Capital IQ, which were not relevant to his valuation analysis of Entitle as of June 9, 2017 (the date of alleged breach by the Defendants). These two studies' information on valuation multiples were not comparable in operations to Entitle.

139. Mr. Imburgia stated in paragraph 43 of the Updated Imburgia Report that “Based on a dataset of the 1, 000 largest public-to-public merger and acquisition deals between 2008 and 2017, the Boston Consulting Group (‘BCG') found that:

“Synergy estimates have increased to a new high every year since 2013, exceeding the ten-year average of 1.6% of combined sales during each year. The most recent peak of 2.1% in 2017 is almost double the low of 1.1 in 2011.”
(Image Omitted)

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 15 [JX-221].

140. The Boston Consulting Group survey data shown above is not relevant to the valuation of a small, unprofitable privately-held title insurance company as of June 9, 2017. This survey data is based on 1, 000 public-to-public merger and acquisition transactions from 2008 through 2017 with a majority stake acquired by a non-financial buyer. Furthermore, the size of the average transaction in this survey data had a run-rate equivalent of more than $400 million.

141. Mr. Imburgia stated in paragraph 45 of the Updated Imburgia Report that “Annualizing Entitle's $12,468,565 in revenue for the eleven months ended June 2017 yields $13.6 million, 2.1% of which would amount to approximately $286,000 in anticipated synergy value, in EBITDA terms. Multiplying that $286,000 by the average recorded acquisition multiple for the general insurance industry in 2017 - 8.0 times EBITDA - yields an estimated synergy-based increase to Entitle's pre-merger value of $2.29 million.” Furthermore, the 8.0 times EBITDA multiple was derived from S&P Capital IQ Company Screening Report (“S&P Capital IQ-CSR”) for Insurance (Primary). Values range from 5.0 to 12.5 for six transaction from 2013 through 2018.

Updated Expert Report and Disclosure of Basil Imburgia, January 28, 2021, 15 [JX-221].

142. The S&P Capital IQ-CSR for Insurance (Primary) data in the prior paragraph is not relevant to the valuation of a small, unprofitable privately-held title insurance company as of June 9, 2017. This transaction data was for six insurance companies (primary) from 2013 through 2018. Mr. Imburgia should have relied on guideline transactions of similar title insurance companies to Entitle in his valuation analysis as of June 9, 2017. None of Mr. Imburgia's selections were title insurance companies, and only two were from dates prior to June 9, 2017. Further, only one was from the United States, all other were international. The single company from the United States does not write any insurance policies, rather they investigate, manage, and control the claims process and serve the restaurant, bar, and tavern industries.

1 from 2020, 2 from 2018, 1 from November 2017, 1 from 2015 and 1 from 2003.

2 from Madrid, Spain, 1 from Latin America, 1 from Brazil, 1 from Canada, and 1 from Pennsylvania.

143. Mr. Imburgia does not appear to understand that title insurance companies have different profile than general insurance company.

a. “Title insurance provides protection to mortgage lenders and buyers of real estate from potential loss or damage resulting from defects in the title they intend to acquire. Potential defects covered by title insurance include adverse ownership claims, liens, and encumbrances. Industry operators rely extensively on both the volume and value
of domestic real estate transactions, given that the issuance of a title insurance policy requires a real property purchase to take place.”
b. “Since title insurance usually involves the acceptance of prior transaction-related risk rather than future risk, the underwriting process in the title insurance industry differs markedly from the typical property/casualty underwriting process. The title underwriting process is designed to limit risk exposure through a thorough search of the recorded documents affecting a particular property. The insurance component of a title product only indemnifies for existing - but unidentified, or specifically underwritten - defects in the condition of a property's title. In other words, title insurance - unlike typical property/casualty insurance - usually does not respond to future occurrences but only to past defects that were in place at the time the property was sold, and not recognized as a problem until after the property was transferred or was insured over.”
c. “The title industry is highly dependent on real estate markets, which, in turn, are highly sensitive to mortgage interest rates and the health of the overall economy. Typically, there is an inverse relationship between mortgage rate changes and real estate activity, and therefore, operating revenue for title insurers.”
d. “The demand for title insurance products is largely dependent on the demand for real estate transactions, which are, in turn, critically dependent on the financial factors described above, as well as on a healthy labor market characterized by low or decreasing unemployment rates and generally increasing wages. In addition, a stable inflation environment helps to ensure market stability and consumer purchasing power.”

“Title Insurance in the US, ” IBISWorld Industry Report of OD4784, September 2017, 4.

http://www.ambest.com/title/fundamentals.html

http://www.ambest.com/title/fundamentals.html

http://www.ambest.com/title/fundamentals.html

142. It appears that there was title insurance acquisition data involving 15 deals between 2002 and 2015. It does not appear that Mr. Imburgia considered guideline acquisition transactions of small, unprofitable privately-held title insurance companies to Entitle.

LENDUS_00041404.

143. Mr. Imburgia did not rely on market data of guideline title insurance transactions and publicly-traded title insurance companies in his purported valuation analysis. Instead, Mr. Imburgia improperly relied on one generic market study involving publicly traded company acquisitions of the top 1000 largest companies and general insurance company acquisition (not specific to title insurance companies).

Bruce V. Bush

October 28, 2021.

Attachment G - Appraiser's Certification

Bruce Bush, CPA, CFF

1. The statements of fact expressed herein are true and correct to the best of the appraiser's knowledge and belief.

2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are the appraiser's personal, impartial, unbiased opinions, professional analyses, opinions, and conclusions.

3. Bruch Bush and the engagement team of Fox Forensic Accounting, LLC, have no present or prospective interest in the subject property; nor any personal interest with respect to the parties, nor any other interest or bias which would impair their ability to perform this assignment.

4. Neither Bruce Bush or any employee of Fox Forensic Accounting, LLC, nor any of the appraisers who contributed to this report has any present or prospective interest in the subject property; nor any personal interest with respect to the parties, nor any other interest or bias which would impair a fair and unbiased appraisal.

5. Compensation paid to the appraiser for this appraisal is independent of the value reported. It is not contingent on the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of the appraisal.

6. The appraiser has not made a personal inspection of the subject property.

7. This appraisal has been conducted and this report issued pursuant to the Statement on Standards for Valuation Series No. 1 (“SSVS1”) promulgated by the American Institute of Certified Public Accountants (“AICPA”) in effect at the date this report is issued.

8. Cliff Porter, CPE, CFF; Shawn Fox, CPA, ABV, ASA, CFA; and Maria Patterson have assisted with research and analysis, but have not acted as an “appraiser.” No person except the undersigned participated materially in the conclusion of this appraisal.

The valuation considerations here are contingent upon the analysis, and limiting conditions as set forth in the body of the report.

Attachment H - Assumptions and Limiting Conditions

1. The conclusion of value (or the calculated value) arrived at herein is valid only for the stated purpose as of the date of the valuation.

2. Financial statements and other related information provided by RPM Mortgage, Inc. (“RPM”) and LendUS, LLC (“LendUS”) or its representatives, in the course of this engagement, have been accepted without any verification as fully and correctly reflecting the enterprise's business conditions and operating results for the respective periods, except as specifically noted herein. Fox Forensic Accounting, LLC, has not audited, reviewed, or compiled the financial information provided to us and, accordingly, we express no audit opinion or any other form of assurance on this information.

3. Public information and industry and statistical information have been obtained from sources we believe to be reliable. However, we make no representation as to the accuracy or completeness of such information and have performed no procedures to corroborate the information.

4. We do not provide assurance on the achievability of the results forecasted by RPM and LendUS because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.

5. The conclusion of value (or the calculated value) arrived at herein is based on the assumption that the current level of management expertise and effectiveness would continue to be maintained, and that the character and integrity of the enterprise through any sale, reorganization, exchange, or diminution of the owners' participation would not be materially or significantly changed.

6. This report and the conclusion of value (or the calculated value) arrived at herein are for the exclusive use of our client for the sole and specific purposes as noted herein. They may not be used for any other purpose or by any other party for any purpose. Furthermore, the report and conclusion of value (or the calculated value) are not intended by the author and should not be construed by the reader to be investment advice in any manner whatsoever. The stated valuation represents the considered conclusion of value (or the calculated value) of Fox Forensic Accounting, LLC, based on information furnished to them by RPM and LendUS and other sources.

7. Neither all nor any part of the contents of this report (especially the conclusion of value [or the calculated value], the identity of any valuation specialist(s), or the firm with which such valuation specialists are connected or any reference to any of their professional designations) should be disseminated to the public through advertising media, public relations, news media, sales media, mail, direct transmittal, or any other means of communication without the prior written consent and approval of Fox Forensic Accounting, LLC.

8. Future services regarding the subject matter of this report, including, but not limited to testimony or attendance in court, shall not be required of Fox Forensic Accounting, LLC, unless previous arrangements have been made in writing.

9. Fox Forensic Accounting, LLC, is not an environmental consultant or auditor, and it takes no responsibility for any actual or potential environmental liabilities. Any person entitled to rely on this report, wishing to know whether such liabilities exist, or the scope and their effect on the value of the property, is encouraged to obtain a professional environmental assessment. Fox Forensic Accounting, LLC, does not conduct or provide environmental assessments and has not performed one for the subject property.

10. Fox Forensic Accounting, LLC, has not determined independently whether RPM and LendUS are subject to any present or future liability relating to environmental matters (including, but not limited to CERCLA/Superfund liability) nor the scope of any such liabilities. Fox Forensic Accounting, LLC's valuation takes no such liabilities into account, except as they have been reported to Fox Forensic Accounting, LLC, by RPM and LendUS or by an environmental consultant working for RPM and LendUS, and then only to the extent that the liability was reported to us in an actual or estimated dollar amount. Such matters, if any, are noted in the report. To the extent such information has been reported to us, Fox Forensic Accounting, LLC, has relied on it without verification and offers no warranty or representation as to its accuracy or completeness.

11. Fox Forensic Accounting, LLC, has not made a specific compliance survey or analysis of the subject property to determine whether it is subject to, or in compliance with, the American Disabilities Act of 1990, and this valuation does not consider the effect, if any, of noncompliance.

12. No change of any item in this report shall be made by anyone other than Fox Forensic Accounting, LLC, and we shall have no responsibility for any such unauthorized change.

13. Unless otherwise stated, no effort has been made to determine the possible effect, if any, on the subject business due to future Federal, state, or local legislation, including any environmental or ecological matters or interpretations thereof.

14. If prospective financial information approved by management has been used in our work, we have not examined or compiled the prospective financial information and therefore, do not express an audit opinion or any other form of assurance on the prospective financial information or the related assumptions. Events and circumstances frequently do not occur as expected and there will usually be differences between prospective financial information and actual results, and those differences may be material.

15. Except as noted, we have relied on the representations of the owners, management, and other third parties concerning the value and useful condition of all equipment, real estate, investments used in the business, and any other assets or liabilities, except as specifically stated to the contrary in this report. We have not attempted to confirm whether or not all assets of the business are free and clear of liens and encumbrances or that the entity has good title to all assets.


Summaries of

Partner Reinsurance Co. v. RPM Mortg.

United States District Court, S.D. New York
Dec 21, 2021
18-cv-5831-(PAE) (S.D.N.Y. Dec. 21, 2021)
Case details for

Partner Reinsurance Co. v. RPM Mortg.

Case Details

Full title:PARTNER REINSURANCE COMPANY LTD., v. RPM MORTGAGE, INC. ET AL, Defendant.

Court:United States District Court, S.D. New York

Date published: Dec 21, 2021

Citations

18-cv-5831-(PAE) (S.D.N.Y. Dec. 21, 2021)