Cardinal Point, LLC v. Edgewood Partners Ins. Ctr.

ORDER SETTING FORTH FINDINGS OF FACT AND CONCLUSIONS OF LAW

CECILIA M. ALTONAGA CHIEF UNITED STATES DISTRICT JUDGE.

THIS CAUSE came before the Court for a non-jury trial beginning March 4, 2024. The Court has carefully considered the testimony of the witnesses, the exhibits admitted in evidence, the parties' written submissions, and applicable law. Based on its review of the record and pursuant to Federal Rule of Civil Procedure 52(a)(1), the Court makes the following findings of fact and conclusions of law.

I. INTRODUCTION

This case is about a failed business relationship between Plaintiffs, Cardinal Point, LLC (“Cardinal”), Alex Soria, Tony Rodriguez, Kenneth Knopp, and Randy Baker (the “Cardinal Members”); and Defendants, Edgewood Partners Insurance Center, Inc. and its parent company, EPIC Holdings, Inc. (in most instances referred to collectively as “EPIC”), following EPIC's 2019 acquisition of Cardinal, a Florida limited liability company that sold healthcare-related reinsurance policies.

Plaintiffs filed this suit in September 2022. In Count I of their Amended Complaint [ECF No. 5], Plaintiffs allege EPIC breached an Asset Purchase Agreement (the “APA”)^[1] entered with Cardinal; and in Count II, they allege EPIC breached the APA's implied covenant of good faith and fair dealing. In Count III, Plaintiffs allege EPIC breached Employment Agreements^[2] entered with the Cardinal Members concurrent with the APA. Upon review, the Court finds EPIC did not breach the APA, although it breached the Employment Agreements, and the Cardinal Members are entitled to damages. The Court awards the Cardinal Members nominal and compensatory damages totaling $1,035.86 to Soria; $848.25 to Rodriguez; and $753.44 each to Knopp and Baker.

The Court will enter a separate money judgment in favor of Plaintiffs and against Edgewood Partners, dismiss the claims against EPIC Holdings, and reserve jurisdiction to address requests for costs and attorney's fees.

II. FINDINGS OF FACT

1. EPIC Holdings is a Delaware corporation with its principal place of business in Delaware. EPIC Holdings is a national retail insurance brokerage and consulting firm. Edgewood Partners is EPIC Holdings' subsidiary and is a California corporation with its principal place of business in California. Edgewood Partners is registered to do business in Florida and has an office in Miami-Dade County, Florida. Edgewood Partners is a non-operational, pass-through entity that makes certain acquisitions and hires employees. Functionally, Edgewood Partners is inseparable from EPIC Holdings.

2. Cardinal is a Florida limited liability company with its principal place of business in Miami-Dade County, Florida. The Cardinal Members own 100 percent of the membership

interests of Cardinal. Soria and Rodriguez reside in and are citizens of Florida. Knopp resides in and is a citizen of Tennessee. Baker resides in and is a citizen of Colorado.

3. The Cardinal Members operated a managing general underwriter business known as RBS, which sold health maintenance organization (“HMO”) reinsurance and stop loss policies. In 2006, HM Life Insurance Company (“HM Life”) purchased RBS for an upfront payment of approximately $10 million and a five-year earnout arrangement. At the time of HM Life's purchase, RBS had a book of business and was profitable.

4. In 2012, the Cardinal Members formed Cardinal and entered a mutually exclusive arrangement with HM Life, whereby Cardinal served as the sole distributor of HM Life's HMO reinsurance product. Any customer who wanted HM Life products had to buy through Cardinal. Cardinal sold HM Life products directly to health plans and providers and through brokers.

5. In December 2015, HM Life gave Cardinal notice that it was terminating Cardinal's exclusive arrangement, and Cardinal could not write new business for a two-year period, from January 2, 2018, through some time in 2019. Consequently, Cardinal experienced a downward trend in revenue and EBITDA^[3] each year since 2017, as well as a downward trend in customers after 2015.

6. In 2018, Cardinal began negotiating the sale of its operations to Integro USA, a national retail insurance broker like EPIC. The proposed transaction contemplated that Cardinal would operate as a broker.

7. Cardinal had never operated as an insurance broker - representing the customer, rather than the insurance carrier - and the Cardinal Members had never competed with other brokers selling the same insurance policies.

8. In 2019, EPIC acquired Integro and continued negotiations with Cardinal.

9. In late 2018, Soria, Cardinal's President, created projections for Cardinal's performance as a broker from 2019 through 2022. Soria represented Cardinal would obtain 12 customers in the first 12 months and 25 to 30 customers over three years. Soria's projections showed substantial year over year revenue and profit growth for Cardinal:

2019	2020	2021	2022
Revenue	$1,495,710	$2,354,274	$3,626,267	$5,035,750
Profit (Loss)	($123,205)	$310,477	$1,033,661	$2,173,302
EBITDA Percentage	-8%	13%	29%	43%

10. Undisclosed to EPIC, Soria's projections were based largely on his “experience.” Soria did not seek the input of Cardinal's primary salespeople when preparing the projections. EPIC relied on Soria's projections in negotiating the Cardinal transaction.

11. EPIC supplied the initial draft of the APA. The parties - represented by counsel - exchanged multiple drafts of the Indication of Interest, the APA, and Employment Agreements. The final versions of the APA and Employment Agreements were executed on August 16, 2019.

12. In the parties' final Indication of Interest for the transaction, EPIC agreed to purchase Cardinal for its “profitable top line revenue growth.”

13. The APA stated the Cardinal purchase price was based on future performance under an earnout formula measured in the fourth year after closing, with a minimum threshold of $2.5 million in revenue and EBITDA above 20 percent. EBITDA was the driving factor of the purchase price.

14. The Cardinal purchase price was allocated entirely to intangible assets such as goodwill, as Cardinal contributed no hard assets or existing revenue streams. Cardinal's existing business stayed with HM Life, and Cardinal was starting from zero as a first-time broker. The purchase price formula aligned the parties' interests: the more Cardinal produced, the more money EPIC and Cardinal would make.

15. Under section 8.09 of the APA, the parties agreed that Cardinal would be EPIC's “featured platform” for health plan reinsurance and stop loss products. EPIC rejected a prior version of the APA that designated Cardinal as the “exclusive platform” for health plan reinsurance and stop loss products because EPIC does not enter exclusivity arrangements.

16. Soria knew Cardinal would not be EPIC's exclusive platform. EPIC already employed other specialty brokers, including Blake Kirk, who overlapped with Cardinal's market. EPIC nonetheless agreed it would not target or acquire a competing “business” unless it was part of a larger acquisition.^[4]

17. In section 8.12 of the APA, EPIC agreed to provide Cardinal support and resources consistent with EPIC's budgets.^[5]

18. Under Section 8.05 of the APA and sections 5 and 12 of the Employment Agreements, the Cardinal Members were employed “at-will” and could be terminated “at any time for any reason.”

19. The Cardinal Members knew they could be terminated at any time, including during the earnout period. Defendants insisted on the protection of at-will employment provisions in case the Cardinal Members did not perform as anticipated. The Cardinal Members negotiated and received the protection of a severance benefit - the difference between three years' salary and what they were paid through the termination date - if terminated without cause.

20. Section 10 of the Employment Agreements prevented the parties, during the Term and any time thereafter, from directly or indirectly (a) making any statement, whether in commercial or noncommercial speech, disparaging or criticizing in any way the other party, or any products or services offered by the Employer; or (b) knowingly engaging in any other conduct or making any other statement that was likely to impair the goodwill or reputation of the other party.

21. While the Cardinal Members' annual salaries totaled $900,000,^[6] the parties agreed that EPIC would have the right to reduce the Members' salaries so that compensation would not exceed 75 percent of revenue in months 12 through 24, and 65 percent in months 24 through 36.^[7]

22. Given industry purchasing practices, over 80 percent of Cardinal's business was determined as of January 1 each year, when customers purchased annual policies. As of January 1, 2020, Cardinal secured seven customers for $1.2 million in revenue to EPIC.

23. Although Soria had projected a modest profit of $310,477.00 for the year, Cardinal's first-year performance resulted in EPIC sustaining a $400,000.00 loss.

24. Cardinal was unable to generate and retain business, and it did not perform profitably after joining EPIC.

25. The COVID-19 pandemic began in March 2020, after approximately 80 percent of Cardinal's annual revenue was known. Cardinal blames the pandemic, citing its impact on health plans' hesitation to switch brokers. Yet, similar production teams at EPIC remained profitable and continued to generate new business. For example, Kirk exceeded the revenue of Cardinal's four producers each year....