Branzan Alternative Investment Fund, LLLP v. Bank of New York Mellon Trust Company, N.A., The, et al

Filing 76

ORDER approving and adopting 57 Recommendation of United States Magistrate Judge; overruling 65 APPEAL OF MAGISTRATE JUDGE DECISION to District Court; granting 30 Defendant The Bank of New York Mellon Trust Company, N.A.'s Amended Motion To Dismiss; granting 32 Defendant Energy Corporation of America's Amended Motion To Dismiss. By Judge Robert E. Blackburn on 9/29/2015.(mlace, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Robert E. Blackburn
Civil Action No. 14-cv-02513-REB-MJW
BRANZAN ALTERNATIVE INVESTMENT FUND, LLLP, on behalf of itself and all others
similarly situated,
Plaintiff,
v.
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,
and ENERGY CORPORATION OF AMERICA,
Defendants.

ORDER OVERRULING OBJECTIONS TO AND ADOPTING
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Blackburn, J.
The matters before me are (1) the Report and Recommendation on Defendant
The Bank of New York Melon Trust Company, N.A.’s Amended Motion To Dismiss
(Docket No. 30) and Defendant Energy Corporation of America’s Amended Motion
To Dismiss (Docket No. 32) [#57],1 filed September 3, 2015; and (2) the objections
contained in Plaintiff’s Objections to Recommendation of Magistrate [#65], filed
September 21, 2015. I overrule the objections, approve and adopt the
recommendation, and grant the underlying motions to dismiss.2

1

“[#57]” is an example of the convention I use to identify the docket number assigned to a
specific paper by the court’s case management and electronic case filing system (CM/ECF). I use this
convention throughout this order.
2

Plaintiff requests oral argument on its objections. The issues raised by and inherent to the
objections are fully briefed, obviating the necessity for oral argument. Thus, the motions stand submitted
on the papers.

As required by 28 U.S.C. § 636(b), I have reviewed de novo all portions of the
recommendation to which objections have been filed, and have considered carefully the
recommendation, the objections, and the applicable caselaw. The recommendation is
exhaustively detailed and cogently reasoned. So thoroughly has the magistrate judge
considered and analyzed the issues raised by and inherent to the motion that any
extended exegesis on my part would be little more than a superfluous festooned
reiteration of his excellent work.
Plaintiff first objects to the magistrate judge’s conclusion that plaintiff and the
class of Unitholders it seeks to represent are not third party beneficiaries of the Royalty
Conveyance under West Virginia law, and therefore that Count 3 should be dismissed.
The West Virginia courts have taken a firm position on when a contract may be
considered to have been made for the benefit of a third party:
In the absence of a provision in a contract specifically stating
that such contract shall inure to the benefit of a third person,
there is a presumption that the contracting parties did not so
intend and in order to overcome such presumption the
implication from the contract as a whole and the surrounding
circumstances must be so strong as to be tantamount to an
express declaration.
Eatern Steel Constructors, Inc. v. City of Salem, 549 S.E.2d 266, 278 (W. Va. 2001).
Acknowledging that the Royalty Conveyance contains no express provision conferring
third-party beneficiary status on Unitholders, plaintiff nevertheless argues that the
surrounding circumstances pled in the complaint are sufficient to create a plausible
inference tantamount to such an express declaration.
I concur with the magistrate judge that they are not. Contrary to plaintiff’s
objection, the magistrate judge did not conflate the surrounding circumstances test with
2

a finding of contractual ambiguity. Indeed, as plaintiff recognizes, contractual ambiguity
itself is a prerequisite for application of the surrounding circumstances test. The
magistrate judge here properly considered the contractual provisions plaintiff suggested
conferred third-party beneficiary status on Unitholders, but found them insufficient to
create the necessary strong inference. I perceive no error in that determination.3
Moreover, even if the circumstances identified by plaintiff were sufficient in all
other respects to overcome the presumption, nothing in the Royalty Conveyance
properly may be considered to support the conclusion that the contract was made for
the sole benefit of the Unitholders. See id. at 277 (“We have . . . consistently given
force to the ‘sole benefit’ requirement.”). Plaintiff’s attempt to avoid this limitation of
West Virginia law by invoking a “creditor beneficiary” exemption is unconvincing. Even
if plaintiff had properly pleaded this separate equitable cause of action – which it has not
– the covenants which ECA allegedly breached here were not “in satisfaction of [a] legal
duty” owed to the Unitholders, such as is necessary to invoke that exception. See
Pettus v. Olga Coal Co., 72 S.E.d2d 881, 884 (W.Va. 1952). Accordingly, I approve
and adopt the magistrate judge’s recommendation to grant ECA’s motion to dismiss
Count 3 of the complaint.
I further concur with the magistrate judge that Counts 1 and 4 must be dismissed
as derivative claims as to which plaintiff has failed to comply with the prerequisites of
3

Plaintiff takes issue with the magistrate judge’s suggestion that its arguments in support of
third-party beneficiary status could apply to any IPO transaction, pointing out that no West Virginia court
has ever rejected such a claim. Nothing in that argument undermines the magistrate judge’s recognition
that third-party beneficiary status is not the norm under West Virginia law and therefore that
circumstances that are likely to arise frequently simply by virtue of the nature of the contract may not be
thought to support an inference. This court presumes that the laws of logic and common sense apply
equally in West Virginia as they do elsewhere.

3

Delaware law.4 The determinative test under Delaware law is that set forth in Tooley v.
Donaldson, Lufkin & Jenrette, Inc. 845 A.2d 1031 (Del. 2004):
Th[e] issue [whether a shareholder claim is derivative or
direct] must turn solely on the following questions: (1) who
suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the
benefit of any recovery or other remedy (the corporation or
the stockholders, individually)?
Id. at 1033 (emphasis in original). Stated more succinctly, “to bring a direct action, the
stockholder must allege something other than an injury resulting from a wrong to the
corporation.” Id. at 1038. Claims of corporate mismanagement harm all shareholders
equally and therefore are considered derivative. Because, despite much Sturm und
Drang, Counts 1 and 4 essentially allege no more than corporate waste and
mismanagement and do not assert any duty owed independently to the Unitholders, the
magistrate judge properly concluded that they were derivative and therefore should be
dismissed.
With respect to Count 1, the magistrate judge rejected plaintiff’s contention that
the Unitholders may enforce specific constraints on the Trustee’s authority contained in
the Trust Agreement, noting that, with one minor exception unrelated to the injury
complained of, none of the contractual duties allegedly breached were owed to the
Unitholders directly. (Recommendation at 20.) Plaintiff counters that under Delaware
law, “[s]tockholders . . . can sue directly to enforce a constraint on the board's authority.”

4

Count 1 alleges a cause of action for breach of contract against the Trustee for allowing ECA to
purchase the royalty interest without complying with provisions and procedures of the Trust Agreement.
Count 4 asserts a claim for breach of contractual duties allegedly owed by ECA to the trust, which plaintiff
maintains Unitholders can assert directly under equitable principles.

4

Allen v. El Paso Pipeline GP Co., L.L.C., 90 A.3d 1097, 1107 (Del. Ch. 2014). Yet
that proposition is not so broad as plaintiff’s out-of-context citation would make it
appear. As the Allen court itself went on to explain, stockholders’ rights in this regard
arise from “the Delaware Supreme Court's longstanding recognition that the DGCL
[Delaware General Corporation Law], the certification of incorporation, and the bylaws
together constitute a multi-party contract among the directors, officers, and stockholders
of the corporation . . . . [which] stockholders can enforce . . . directly.” Id. at 1107-08
(footnote omitted). No such structural rights are implicated here, however, because the
DGCL is not implicated by this statutory trust.
More importantly, “Allen did not expansively hold that all suits by a shareholder
to enforce contractual rights constitute a direct claim.” Halpert v. Zhang, 2015 WL
1530819 at *4 (D. Del. April 1, 2015), adopted, 2015 WL 1869755 (D. Del. April 21,
2015).5 Viewing the caselaw in this area more closely, as the magistrate judge did,
plainly shows that he focused appropriately on whether plaintiff alleged the breach of
duties owed directly to the Unitholders, as opposed to those running only between the
parties to the Trust Agreement. That analysis adequately addressed both prongs of the
Tooley standard. See Tooley, 845 A.2d at 1036 n.9. Because Count 1 at base is
simply a “creative attempt to recast the derivative claim . . . by alleging the same
fundamental harm in a slightly different way,” it is properly dismissed. Feldman v.

5

Indeed, the Allen court itself cautioned that its holding should not be read to “mean that all
intra-entity limited partnership claims become direct,” and “distinguished between suits for breach of the
limited partnership agreement [which are direct] and suits challenging the discretion afforded to the
general partner [which are derivative].” Allen, 90 A.3d at 1109.

5

Cutaia, 951 A.2d 727, 733 (Del. 2008).6
Plaintiff also objects that Counts 1 and 4 (which plaintiff admits would be
derivative had the Trust not been cancelled) should be allowed to proceed as a matter
of equity under the second prong of Tooley. It relies for this proposition primarily on
Gentile v. Rossette, 906 A.2d 91 (Del. 2006), in which the Delaware Supreme Court
stated, in dicta, that where a corporation had been dissolved,
there is no corporate entity to which a recovery of the fair
value of those shares could be paid. The only available
remedy would be damages[.] The only parties to whom that
recovery could be paid are the plaintiffs. Hence, although
under Tooley the claim could be brought derivatively or
directly, as a practical matter, the only claim available after
[the corporation] was liquidated is a direct action by the
plaintiffs.
Id. at 103. However, like the magistrate judge, I am unpersuaded that Gentile creates
the broad equitable exception plaintiff advocates. For one thing, as the magistrate
judge cogently explained, the cases on which plaintiff relies, including Gentile itself, are
distinguishable on their facts because they essentially alleged the breach of duties owed
directly and specifically to minority interests by controlling interests. (See
Recommendation at 12-14.)
Moreover, despite some loose language in Gentile characterizing a specific type
of breach of fiduciary duty claim having a “dual character,” id. at 99-100 & n.19, what

6

Nor am I convinced by plaintiff’s underdeveloped argument that the allegations of the complaint
are sufficient to state a direct claim under the rubric of a “fair dealing” or “fair price” claim. (Obj. at 10-11.)
See Feldman v. Cutaia, 951 A.2d 727, 734-35 (Del. 2008); Kramer v. Western Pacific Industries, Inc.,
546 A.2d 348, 353-54 & n.7 (Del. 1988). Plaintiff’s claims “clearly do[] not rise to an attack on the [sale]
itself,” Feldman, 951 A.2 at 735, even accepting plaintiff’s invitation (in the absence of specific
references) to read the complaint “as a whole.”

6

the court actually recognized is that one set of facts may give rise to two separate
harms and thus two separate claims, one derivative and the other direct, see id. (“[T]he
public (or minority) stockholders also have a separate, and direct, claim arising out of
that same transaction.”). See also Grimes v. Donald, 673 A.2d 1207, 1212 (Del. 1996)
(“Courts have long recognized that the same set of facts can give rise to both a direct
claim and a derivative claim.”). Thus, although the derivative claim in Gentile was
extinguished by the dissolution of the corporation, the direct claim of the minority
shareholders lived on. This is a far cry from plaintiff’s suggestion that, in the gap left by
cancellation of the trust, equity steps in to transform a previously derivative claim into a
direct one.7
I thus find and conclude that the arguments advanced, authorities cited, and
findings of fact, conclusions of law, and recommendation proposed by the magistrate
judge should be approved and adopted.
THEREFORE, IT IS ORDERED as follows:
1. That the recommendation contained within the magistrate judge’s Report and
Recommendation on Defendant The Bank of New York Melon Trust Company,
N.A.’s Amended Motion To Dismiss (Docket No. 30) and Defendant Energy
Corporation of America’s Amended Motion To Dismiss (Docket No. 32) [#57], filed
September 3, 2015, is approved and adopted as an order of this court;
2. That the objections contained in Plaintiff’s Objections to Recommendation
of Magistrate [#65], filed September 21, 2015, are overruled;
7

Moreover, cancellation of the trust would not appear to preclude pursuit of a derivative claim
under Delaware law. See 12 Del. Ch. § 3810(g)

7

3. That Defendant The Bank of New York Mellon Trust Company, N.A.’s
Amended Motion To Dismiss [#30], filed October 16, 2015, is granted;
4. That Defendant Energy Corporation of America’s Amended Motion To
Dismiss [#32], filed October 16, 2014, is granted’
5. That Counts 1, 3, and 4 of the complaint are dismissed with prejudice in their
entirety, and Count 5 is dismissed with prejudice as against defendant Energy
Corporation of America; and
6. That at the time judgment enters, judgment with prejudice shall enter as
follows:
a. As to Count 1, on behalf of defendant The Bank of New York Mellon
Trust Company, N.A., and against plaintiff, Branzan Alternative Investment
Fund, LLLP, on behalf of itself and all other similarly situated; and
b. As to Counts 3, 4, and 5, on behalf of defendant Energy Corporation of
America, and against plaintiff, Branzan Alternative Investment Fund,
LLLP, on behalf of itself and all other similarly situated.
Dated September 29, 2015, at Denver, Colorado.
BY THE COURT:

8