Contogouris et al v. WestPac Resources, LLC et al

Filing 141

ORDER AND REASONS denying 116 Motion to Bifurcate. Signed by Judge Martin L.C. Feldman on 11/9/2011. (tsf, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
SPYRIDON C. CONTOGOURIS, ET AL.

CIVIL ACTION

Versus

NO: 10-4609

WESTPAC RESOURCES, ET AL.

SECTION “F”
ORDER & REASONS

Before the Court is Pacific West Resources, LLC’s motion to
bifurcate discovery.

For the reasons that follow, the motion is

DENIED.
Background
This case arises out of a marketing agreement inspired in
the wake of the Deepwater Horizon oil spill.

Despite its initial

success, it soon soured.
The details of this case are ample, yet still seem to be
emerging.

At some time in the 1990s, Kevin Costner, through his

corporation C.I.N.C., Inc., financed and oversaw the development
of technology which could separate oil from water.

Toward the

beginning of the 2000s, Costner coordinated with Spyridon
Contogouris, a New Orleans-area resident, to market the
technology and the separation device which implements it.
Contogouris and C.I.N.C. entered into an agreement under which
Contogouris would receive a commission for any units he sold.

It

is unclear how long this agreement was to endure.
Flashforward to Spring 2010.

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Contogouris and his family met

Costner for a meal on April 17, 2010 in Biloxi, Mississippi.
Costner told Contogouris that he had sold his rights to the
separator technology and his ownership stake in C.I.N.C. to Bret
Sheldon after attempts to market the oil-separation system were
not successful.

Providentially, only three days later, a now-

infamous drilling rig called Deepwater Horizon exploded.

The

result: a catastrophic oil spill that saturated much of the Gulf
of Mexico.

In the first days of the spill, Contogouris claims

that contacts within the oil-and-gas industry revealed to him the
extent of the catastrophe before it was public knowledge; he
quickly recognized a significant opportunity for C.I.N.C. and
himself.

He first tried to reach Costner to discuss marketing

the technology for its use in the unfolding clean-up effort.
When that was unsuccessful, Contogouris contacted Sheldon and
C.I.N.C. directly to discuss obtaining an exclusive agreement to
acquire the units for use in the Gulf of Mexico region.

It is

unclear what came of that conversation.
Unsuccessful in his attempts to approach BP directly,
Contogouris determined that he would need to bring in partners
who could lend assistance in gaining access to BP.

He formed a

joint-venture agreement, which eventually transformed into a
partnership under the name of Ocean Therapy Solutions, LLC (OTS),
comprising the following people and entities, some based in
Louisiana, some not:

Stephen Baldwin, John Houghtaling, Patrick

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Smith, WestPac Resources, LLC (an organization in which both
Costner and Smith owned shares), and L&L Properties (an entity
formed by WestPac together with locals Frank Levy and Franco
Valobra).

OTS quickly accomplished a threshold goal:

On May 3,

2010, OTS and C.I.N.C. entered into a marketing agreement,
granting OTS exclusive rights to market the oil-separation system
in the Gulf of Mexico.
By May 10, 2010, Contougoris registered OTS with the
Louisiana Secretary of State.

An operating agreement soon

resettled and established their ownership stakes as follows:
Contougoris, 28 percent; Baldwin, 10 percent; Houghtaling, 21.5
percent; Valobra, 5 percent; L&L Properties, 15.5 percent; and
WestPac, 20 percent.

The agreement required a 60 percent super-

majority for OTS to take any action.

From this point through his

withdrawal from OTS, Contogouris asserts that he was OTS’s “first
founding member, managing member, and largest shareholder.”

Levy

was installed as OTS’s CEO.
OTS soon suffered from internal disagreement and distrust
among its membership.

On the one hand, Contogouris, holding the

largest stake in OTS, and Levy, OTS’s CEO, wanted the company to
use a business model which would insure recurring business and
the possibility of marketing the device to other major oil
companies.

They proposed renting units to BP at a fair price in

a long-term agreement.

Houghtaling and Smith, together

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representing 41.5 percent of total shares, on the other hand,
favored a less complicated approach involving a one-time sale of
the equipment to BP at a higher price.

As a result of this

disagreement (along with a separate conflict between Levy and
Hougtaling), Levy withdrew from OTS, conveying all his shares to
Houghtaling.

Houghtaling took Levy’s place as CEO and eventually

transferred Levy’s share to Costner.
At the same time, Contogouris and Smith began to clash.
Beginning in late May, Costner and Smith allegedly told
Contogouris and Baldwin that they needed to each make a $1.14
million cash contribution to fund OTS’s operation without
explaining why.

Contogouris agreed to raise part of this money,

but insisted upon being told to what uses the cash would be put.
The explanation never came.

Eventually, Smith notified

Contogouris and Baldwin that if they did not respond to the cash
call, their shares would be diluted.

Alternatively, Smith and/or

WestPac proposed to buy Contogouris’s and Baldwin’s shares for
$1.4 million and $500,000, respectively.

(Contogouris alleges

that these interests were to be acquired for Costner’s benefit.)
Fueling their conflict was Contogouris’s growing suspicion that
Costner and Smith were trying to maximize their own profit, by
hoodwinking Contogouris and Baldwin into selling their shares
while at the same time finalizing an undisclosed deal with BP.
Contogouris contends that he felt added pressure because Costner

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and Smith were in the position to force a cash call in that they
now had the support of Houghtaling and Valobra; collectively,
they had the needed sixty-percent super-majority called for in
the operating agreement.

(None of these people or the entities

they represented, however, independently held the necessary share
to form a super-majority.)
From an outsider’s perspective, however, BP had not yet been
particularly responsive to OTS.

OTS members pressed forward with

promoting the technology through the media and Costner’s
appearance before Congress to discuss the technology and his
efforts to have BP employ it to help deal with the oil spill.
These outreach efforts seemed to have their desired effect:
Before Costner testified, BP agreed to meet with OTS members at
Houghtaling’s house and signed a letter of intent to purchase
several units of the device.

Contogouris claims he was excluded

from this meeting at the last minute; only Houghtaling, Smith,
and Costner were present to advocate OTS’s interests.

The next

morning, when Baldwin and Contogouris asked Costner about his
meeting with BP, Costner allegedly denied that they had reached a
binding deal, responding only that a non-binding letter of intent
had issued.

Contogouris and Baldwin suspected that something

resembling a binding deal had in fact been reached.

Contogouris

further complains that no one told him that the letter of intent
would make OTS self-funding, possibly obviating the need for any

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investor cash contributions to the company.
Costner testified before Congress on June 9, 2010 and
announced that BP had placed an order for the technology.
Costner reiterated to the press his statement that BP had placed
an order.

Contogouris attempted to contact Costner without

success.

Costner’s attorney allegedly relayed to Contogouris

that no deal had been reached with BP and hoped public pressure
would cause BP to yield to a binding agreement.

It is clear from

the complaint, however, that Contogouris knew of the likelihood
of a binding deal by June 8.

That same day, because of continued

demands for a cash contribution without sufficient explanation of
the use to which it would be put—and perhaps due in part to
Costner’s (alleged) unraveling pattern of untruths—Contogouris
made a trip to Los Angeles to sell his interests.
The original proposed agreement called for WestPac or Smith
to pay the purchase price of $1.9 million ($500,000 of which
represented Baldwin’s share) upon execution of the agreement.
But by June 10, Smith sought to change the payment terms,
offering to pay a ten percent deposit by the next day, followed
by the remaining payment a week after that.

It appears

Contogouris had no objection to this arrangement at the time.
But Contogouris alleges now that Costner, Smith, and WestPac
orchestrated a nefarious scheme to acquire Contogouris’s and
Baldwin’s interests without having to pay any cash of their own,

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simultaneously depriving Contogouris and Baldwin of their share
of any profits from BP; as the story goes, Costner, Smith, and
WestPac scrambled to acquire Contogouris’s and Baldwin’s
interests knowing that BP soon would pay an $18 million deposit
to OTS; they would use part of BP’s deposit to buy the shares.
The ten percent deposit reached the Contogouris and Baldwin
bank account through a transfer from WestPac’s account with
Rabobank, N.A. in California on June 11, 2010, as promised.

The

next day, BP executed a purchase agreement with OTS for thirtytwo units.

The gross price was over $52 million; BP promised to

make an advance deposit of $18 million and publicly announced the
deal on June 15, 2010.
Rather than arrange for a deposit to an account already
opened by Contogouris for OTS in Louisiana, a different bank
account was opened in OTS’s name at Rabobank in California,
apparently without Houghtaling’s, Contogouris’s, or Baldwin’s
knowledge or authorization.

It was into this unauthorized

account that BP paid its $18 million deposit on June 16.
members of OTS received a distribution.
Contogouris.

All

All except Baldwin and

Baldwin and Contogouris claim that at the time the

$18 million deposit was made, they were still members of OTS and
thus entitled to a distribution because full payment for their
surrendered interests was still pending (even though they reached
a final agreement to sell their interests before the deposit was

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made).
That same day, Smith e-mailed Contogouris to let him know
that “he had the cash” and was prepared to close on the sale of
Contogouris’s and Baldwin’s interests.
was complete:

On June 18, 2010, payment

OTS transferred funds from its Rabobank account to

WestPac’s Rabobank account, and then transferred from the WestPac
Rabobank account to Contogouris and Baldwin.

The parties signed

documents to finalize the transfer.
Alleging a federal securities claim and other claims arising
under Louisiana state law, Contogouris and Baldwin have sued
Costner, Smith, WestPac, and Rabobank.
Defendants moved the Court to dismiss the plaintiffs’
claims.

By Order and Reasons dated June7, 2011, the Court denied

Costner’s motion and WestPac and Smith’s motion.
granted Rabobank’s motion.

The Court

Defendant WestPac now moves to

bifurcate discovery between liability and damages.
II.
WestPac is concerned that allowing discovery to be used for
damages determinations would require significant additional time
and expense for the parties, and could expose WestPac’s
confidential information.
The Court is unpersuaded that bifurcation of discovery would
help the efficient resolution of this bloated case.

Many of the

witnesses who would give testimony as to liability and damages

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appear to overlap, and bifurcation of discovery may require that
the same witnesses be deposed twice.
time nor expense.

This would save neither

Additionally, the plaintiffs needs to prove

economic loss in order to show liability on their Rule 10(b)(5)
claim.

Stoneridge Partners, LLC v. Scientific Atlanta, 552 U.S.

148, 157 (2008).

Bifurcating discovery between liability and

damages, and imposing a June 15, 2010 cut-off date could limit
the plaintiffs’ ability to support their liability argument.

To

the extent that WestPac wishes to maintain its sensitive
information confidential, the Court notes that plaintiffs have
offered to enter into a confidentiality order.
Accordingly, IT IS ORDERED: WestPac’s motion to bifurcate is
DENIED.
New Orleans, Louisiana, November 9, 2011

______________________________
MARTIN L. C. FELDMAN
UNITED STATES DISTRICT JUDGE

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