In Re: ClassicStar Mare Lease Litigation MDL No. 1877
Filing
2478
MEMORANDUM OPINION & ORDER: ( 77 in 5:08-cv-00074-JMH-REW, 1611 in 5:07-cv-00353-JMH-REW) MOTION for Partial Summary Judgment is GRANTED in part and DENIED in part as set forth above. Signed by Judge Joseph M. Hood on 4/11/2012.Associated Cases: 5:07-cv-00353-JMH-REW, 5:08-cv-00074-JMH-REW(SCD)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
IN RE CLASSICSTAR MARE LEASE
LITIGATION
and
LARRY MCNEILL,
Plaintiff,
v.
GEOSTAR CORPORATION; FIRST
SOURCE WYOMING, INC; and
GASTAR EXPLORATION LIMITED,
Defendants.
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MDL No. 1877
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Master File:
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) Civil Action No. 5:07-cv-353-JMH
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Civil Action No. 08-74-JMH
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) MEMORANDUM OPINION AND ORDER
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)
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This action is before the Court on Plaintiff’s Motion for
Partial
Summary
Judgment
(hereinafter
“Motion”).
[DE
77].
Plaintiff has filed a Response [DE 84], and Defendant has made a
Reply in further support of its Motion [DE 88].
This motion is now
ripe for decision and, for the reasons stated below, will be
granted in part.
I.
FACTUAL BACKGROUND
In early 2001, Plaintiff McNeill invested in a horse breeding
investment vehicle (hereinafter “mare lease program”) developed by
Classicstar, L.L.C., an affiliate of Defendant Geostar. As part of
McNeill’s investment in the mare lease program, he was given the
opportunity to convert all or a portion of that investment into a
working interest in natural gas wells with First Source Wyoming
(“First Source”), a subsidiary of Geostar.
In March of 2002,
McNeill exercised this option and converted $1,643,000 of his
interest in the mare lease program into a working interest in First
Source’s natural gas well program.
Pursuant to his agreement with
First Source, McNeill had the right, starting in 2003, to convert
his working interests into 1,493,636 restricted shares of Defendant
Gastar Exploration, Ltd. common stock.
2003,
McNeill
invested
an
Additionally, in 2002 and
additional
programs offered by ClassicStar.
$900,000
in
mare
lease
McNeill financed each of these
acquisitions, in substantial part, with loans from National Equine
Lending
Company
(“NELC”),
yet
another
affiliate
of
the
aforementioned business enterprises.
On December 15, 2004, McNeill and Geostar entered into a
Purchase
Agreement
(hereinafter
“Contract”)
in
which
Geostar
accepted McNeill’s offer to sell his right to convert his working
interests
into
Gastar
stock,
as
well
as
his
2002
and
2003
Classicstar mare lease interests (collectively “the Assets”).
Geostar was to pay McNeill according to the following schedule:
Total payable of Three Million Nine Hundred Sixteen
Thousand Seven Hundred Fifteen Dollars and No Cents
($3,916,715.00) at 4% interest with $500,000.00 payable
on or before December 15, 2004. It is expressly agreed
and understood that this Agreement shall not become
effective until Seller receives the first payment of
$500,000, and it is a condition precedent to the
formation and effect of this Agreement that Seller
receives and Buyer pays the first payment of $500,000 and
the balance payable monthly in the amount of $34,592.58
with the entire remaining balance of One Million Eight
Hundred Eighty Four Thousand Six Hundred Five Dollars and
2
Seventy Seven Cents ($1,884,605.77) which includes
interest to be paid in full on or before January 15,
2010.
Working interest payments owed to Seller will
continue until paid in full.
In addition, all 2001, 2002, and 2003 National Equine
Lending Company, L.C. (“NELC”) loans shall be considered
paid in full as of January 1, 2005. . .
[Contract, p. 2].
The Contract goes on to provide that “[McNeill]
shall further deliver an Assignment (provided by [Geostar]) duly
executed for all of McNeills’s right, title and interest in and to
the Powder River Basin Assets and the ClassicStar Mare Lease
Assets.”
Id. at 2-3.
Geostar paid McNeill the initial $500,000 and made fourteen
monthly payments of $34,592.58 before the payments ceased in
February 2006.
Pursuant to the Contract’s default provision,
McNeill gave Geostar written notice of default based on its failure
to continue making payments.
Having received no response to the
initial notice, McNeill waited forty-five days (the time to cure
allotted under the Contract) and gave a second written notice,
which also failed to yield a response from Geostar.
Accordingly,
McNeill asks for damages due to Geostar’s alleged breach of
contract.
Geostar has filed a counterclaim against McNeill, upon which
McNeill also moves for summary judgment.
In its counterclaim,
Geostar avers that McNeill acquired the working interests from
First Source by paying with mare lease interests that he did not
rightfully own. Further, Geostar avers, McNeill obtained his stake
3
in the working interests through “materially false omissions or
representations of fact” and that, on various occasions, McNeill
purported to have made larger investments in ClassicStar’s mare
lease program than he actually did.
Geostar asserts that, as a
result of McNeill’s purported misrepresentation, McNeill was not
the lawful owner of the Assets that comprised his consideration for
the Contract.
Geostar also avers that it made payments to McNeill
of no less than $995,797, exceeding McNeill’s “actual investment”
by at least $320,959.1
makes
vague
Although Geostar, in its counterclaim,
references
representations,”
it
to
does
“material
not
omissions”
identify,
in
its
and
“false
Response
to
Plaintiff’s Motion, the facts to which it refers.
Based on all of
the
that
documents
before
it,
the
Court
concludes
Geostar’s
counterclaim refers to the fact that large portions of McNeill’s
investments were financed by loans from NELC, and that he paid
relatively little of the investment costs out of pocket.
Relying
on theories of unjust enrichment and conversion, Geostar contends
that
it
is
entitled
to
at
least
$320,959
in
damages
–
the
difference between the total of the payments Geostar made to
McNeill and the amount of McNeill’s investments, not including the
portions borrowed from NELC.
1
McNeill does not dispute that Geostar paid $995,797 of its
obligation under the Contract.
4
II.
APPLICABLE STANDARD OF REVIEW
The standard for summary judgment mirrors the standard for
directed verdict.
251 (1986).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
A grant of summary judgment is proper “if the
pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that there is
no genuine issue as to any material fact and that the moving party
is entitled to judgment as a matter of law.”
Fed. R. Civ. P.
56(c).
The moving party bears the initial burden to show the absence
of a genuine issue of material fact.
Celotex Corp. v. Catrett, 477
U.S. 317, 323 (1986). Once that burden is met, the nonmoving party
must “come forward with some probative evidence to support its
claim.”
Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir.
1994).
A material fact is one that may affect the outcome of the
issue at trial, as determined by substantive law.
See Niemi v. NHK
Spring Co., Ltd., 543 F.3d 294, 298 (6th Cir. 2008).
A genuine
dispute exists on a material fact, and thus summary judgment is
improper, if the evidence shows “that a reasonable jury could
return a verdict for the nonmoving party.”
Anderson, 477 U.S. at
249; Summers v. Leis, 368 F.3d 881, 885 (6th Cir. 2004).
The judge’s function is not to weigh the evidence, but to
decide whether there are genuine issues for trial.
Anderson, 477
U.S. at 249; Multimedia 2000, Inc. v. Attard, 374 F.3d 377, 380
5
(6th Cir. 2004).
The evidence should be construed in the light
most favorable to the nonmoving party when deciding whether there
is enough evidence to overcome summary judgment.
Anderson, 477
U.S. at 255; Summers, 368 F.3d at 885.
III. DISCUSSION
A.
There is no genuine issue that Geostar breached its
Contract with McNeill.
Under Utah law, the following elements constitute breach of
contract: “(1) a contract; (2) performance by the party seeking
recovery; (3) breach of the contract by the other party; and (4)
damages.”
2001).
of
Bair v. Axiom Design, L.L.C., 20 P.3d 388, 392 (Utah
Neither McNeill nor Geostar disputes that their agreement
December
15,
2004
was
a
fully
integrated
contract
with
unambiguous terms. Further, Geostar does not deny that it deviated
from the agreed payment schedule when it ceased making payments to
McNeill in early 2006. According to McNeill, these facts amount to
a clear breach of contract on the part of Geostar.
Geostar now
argues, in response to McNeill’s Motion – and apparently for the
first time since this dispute arose – that McNeill actually
breached the Contract first, by failing to execute proper documents
to assign the Assets to Geostar. McNeill’s alleged breach, Geostar
claims, relieved it of its obligation to continue making payments
pursuant to the payment schedule.
The record reveals, however,
that Geostar indeed breached first, when it ceased making payments
6
as required by the terms of the Contract.
As a result, McNeill is
entitled to judgment as a matter of law on his breach of contract
claim.
Geostar’s claim that McNeill made the initial breach is
without merit.
The Contract provides, in pertinent part, “Seller
shall further deliver an Assignment (provided by [Geostar]) duly
executed for all of Seller’s right, title and interest in and to
the Powder River Basin Assets and the ClassicStar Mare Lease
Assets.”
Because McNeill failed to deliver an assignment, Geostar
claims, it was relieved of its obligation to continue making
payments pursuant to the payment schedule.
Geostar claims the
Contract required that it make payments to McNeill after the
execution of an assignment of the assets.
The plain language of
the Contract, however, sets no fixed time at which McNeill was to
formally assign the Assets.
Further, Geostar fails to acknowledge
that the Contract language required it to provide the assignment
documents to McNeill.
Accordingly, Geostar makes no claim that it
ever provided any such documents or that it ever asked McNeill
execute an assignment.
Further, if Geostar believed McNeill to be
in default, the terms of the Contract required that it provide him
written notice of the default.
Not only did Geostar not provide
written notice of McNeill’s failure to assign the Assets, it did
not respond to either of McNeill’s written notices when it ceased
making payments in 2006.
Certainly Geostar’s failure to make
7
payments pursuant to the parties’ agreement constituted a material
breach, and thus, McNeill is entitled to rescind the contract or to
collect damages.
See Polyglycoat Corp. v. Holcomb, 591 P.2d 449,
451 (Utah 1979)(“As a general proposition, a party to a contract
has a right of rescission and an action for restitution as an
alternative to an action for damages where there has been a
Material breach of the contract by the other party.”).
B.
DAMAGES
Plaintiff
asks
the
Court
to
award
him
damages
of:
$3,476,314.45 (the unpaid cash installments due pursuant to the
payment schedule); 74.6 percent of the Gastar stock that was to be
transferred pursuant to the Contract; $262,880.14 for working
interest payments due under the Contract; and prejudgment interest
at the Contract rate of four percent.
For the following reasons,
Plaintiff’s prayer for damages will be granted in part.
According to McNeill’s affidavit, Geostar is delinquent with
respect to all remaining monthly installment payments in the amount
of $1,591,258.68 and as to the final payment of $1,884,605.77,
which totals
$3,475,864.45.2
Additionally, the Contract provides
2
In Plaintiff’s Memorandum, the figure that represents this
amount varies.
While the unpaid installment total and final
contract payment amount are represented consistently with the
figures above, the total amount owed is stated as both
$3,476,314.45 and $3,440,692.00.
Because Plaintiff does not
attempt to explain any significance of the variation in these
figures, the Court takes notice, on its own, that $1,591,258.68
added to $1,884,605.77 equals $3,475,864.45.
8
that “[w]orking interest payments owed to [McNeill] will continue
until paid in full.”3
McNeill claims damages for unpaid working
interest payments in the amount of $262,880.14.
Affidavit, Plaintiff’s Exhibits D, E].
[See McNeill
Geostar does not dispute
these figures.
McNeill also asks that Geostar be required to deliver to him
1,114,252
common
shares
of
Gastar
Paragraph C.10 of the Contract.
stock,
as
provided
under
The Contract provides:
In the event of an uncured default, as set forth in
paragraph 9 above, buyer shall provide to seller all
shares for which seller has not been paid.
This
calculations shall be made on a pro rata basis and the
certificates evidencing the shares shall be returned to
seller within thirty (30) days from the date of the
default.
For example, if buyer has paid a total of $1,000,000 of
the $3,916,715.00, seller shall be entitled to receive
seventy four point five percent (74.5%) of all Gastar
shares owed to seller.
McNeill does not dispute that Geostar has paid $995,797 of the
$3,916,715 due under the Contract.
This means that Geostar has
“paid for” twenty-five point four percent (25.4%) of the Gastar
stock.
Accordingly, McNeill is asking for seventy-four point six
percent (74.6%) of the 1,493,636 Gastar shares4 – 1,114,252 shares.
As the breaching party, Geostar is liable to McNeill for the
3
McNeill also asks for prejudgment interest at the contract
rate of four percent.
4
Geostar does not dispute that the applicable number of
Gastar shares is 1,493,636.
9
amount necessary to place him in as good a position as if the
contract had been performed.
See Christiansen v. Holiday Rent-A-
Car, 845 P.2d 1316, 1320 (Utah App. 1992).
On the record, there is
no dispute that Geostar failed to pay installment payments after
February 2006 and the final payment, which was to be paid on or
before January 15, 2010.
Had Geostar performed according to the
payment schedule, McNeill would have received $3,475,864.45 more
than he actually did.
calculation
of
What at first blush seems to be a simple
contract
damages
is,
however,
complicated
by
McNeill’s demand, pursuant to Paragraph C.10 of the Contract, that
he be entitled to 74.6 percent of the Gastar stock at issue.
In his Memorandum, McNeill asserts that the return of stock
pursuant to Paragraph C.10 is not his exclusive remedy, and Geostar
does not dispute that.
While parties dealing at arm’s length
generally can contract on their own terms without the court’s
interference, the Court will not allow McNeill to recover twice for
the same loss.
1978).
See Biesinger v. Behunin, 584 P.2d 801, 803 (Utah
Said differently, McNeill cannot recover full expectation
damages under the contract and retain the bulk of the subject
matter of the contract.
While forfeiture provisions are often
upheld, they will not be enforced when the amount forfeited is “so
great as to be unconscionable or in the nature of a penalty.”
Themy v. Seagull Enter., Inc., 595 P.2d 526, 529 (Utah 1979).
In
his prayer for damages, McNeill essentially asks that Paragraph
10
C.10 be enforced as a forfeiture or liquidated damages clause.
In
the Court’s mind, the enforcement of this clause, combined with an
award
of
full
expectation
damages,
would
constitute
an
unconscionable remedy and will not be permitted.
While the Court will not permit McNeill double recovery for
his losses on the Contract, it recognizes that contracts should be
enforced according to the parties’ intent.
Wilson v. Johnson, 234
P.3d 1156, 1163-64 (Utah 2010) (citing Coulter & Smith, Ltd. v.
Russell, 966 P.2d 852, 857 (Utah 1998)).
Paragraph C.10 clearly
reflects the parties’ intent that, in the event of an uncured
default, Geostar would provide to McNeill all shares for which
Geostar had not paid.
There is no evidence that the parties dealt
with one another at anything other than arm’s length. As a result,
McNeill, as the nonbreaching party, will have the right to enforce
Paragraph C.10 if he wishes.
If he chooses to do so, however, his
award of money damages must be reduced by the value of the Gastar
stock.
equal
In McNeill’s Complaint, he asks for damages, in an amount
to
the
number
of
Gastar
shares
that
should
have
been
delivered to him, multiplied by the highest trading price achieved
by those shares since Geostar’s default.
[DE 1-5, p. 16].
Motion, however, he asks for delivery of the actual shares.
In his
Under
Utah law, the date that the defendant breaches a contractual
obligation to deliver stock is the date by which damages are
measured.
Coombs & Co. of Ogden v. Reed, 303 P.2d 1097, 1099 (Utah
11
1956).
Under this rule, the most McNeill could recover is the
value of the shares on the date of Geostar’s breach.
In actions such as this, where the damage is complete and the
amount
of
loss
is
fixed,
the
prevailing
permitted to collect prejudgment interest.
Inc., 560 P.2d 315, 317 (Utah 1977).
party
is
generally
Bjork v. April Indus.
The award of prejudgment
interest and the amount thereof “may be allowed at the rate and
from the date determined by the court to be equitable.”
Peterson
v. Jackson, 253 P.3d 1096, 1102 (Utah App. 2011)(quoting Utah Code
Ann. § 16-10a-1435(5)(c)).
Because the parties agreed upon a
contract interest rate of four percent, and Geostar does not take
issue with this rate in its Response, the Court deems four percent
to be an equitable rate for prejudgment interest.
C.
GEOSTAR’S COUNTERCLAIMS
McNeill
moves
counterclaims.
for
summary
judgment
on
all
of
Geostar’s
Geostar asserts three causes of action against
McNeill – “Unjust enrichment,” “Money Had and Received,” and
“Conversion.”
“overpayment.”
Each of the claims is based on Geostar’s theory of
The
gist
of
the
overpayment
theory
is
that
McNeill’s “actual investment” in the Assets consisted of the cash
he paid out of pocket.
In other words, the amounts borrowed from
NELC did not amount to actual investments.
Geostar asserts that
McNeill led Geostar to believe that he had invested more cash outof-pocket in the Assets than he actually had.
12
By making payments
that
totaled
nearly
one
million
dollars,
Geostar
avers,
it
“overpaid” McNeill by at least $320,959.
McNeill has met his initial burden by demonstrating to the
Court the absence of a genuine issue of material fact.
Celotex, 477 U.S. at 323.
See
Paragraph 1 of the Contract states that
McNeill “invested” $1,643,000 to purchase the working interests.
It goes on to state that McNeill “invested” $900,000 in the
Classicstar 2002 and 2003 mare lease programs.
There is no
suggestion, based on the plain language of the contract, that
McNeill had paid those amounts in cash.
Further, McNeill obtained
financing for the purchases from NELC, an affiliate of Geostar.
Making Geostar’s claims even more puzzling is the fact that,
according to the plain language of the Contract, Geostar was to
have the NELC loans forgiven, as part of the parties’ bargain.
An
appendix listing each of the loans is attached to the Contract.
As the party bearing the ultimate burden of proof with respect
to these claims, Geostar is obligated to go beyond the pleadings
and present some evidence that raises a genuine issue for trial.
Instead, Geostar failed entirely to respond to McNeill’s motion for
summary judgment with respect to its counterclaims.
Accordingly,
the Court finds no genuine issue that would warrant these claims
proceeding to trial.
IV.
CONCLUSION
For the foregoing reasons, Plaintiff Larry McNeill’s Motion
13
for Partial Summary Judgment [De 77] is GRANTED in part and DENIED
in part, as set forth above.
This the 11th day of April, 2012.
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