Sun River Energy Inc v. McMillan et al
Filing
71
MEMORANDUM OPINION AND ORDER granting summary judgment dismissing claim of plaintiff Sun River Energy, Inc. under § 16(b) of the Securities Exchange Act of 1934 based on defendant Harry Neal McMillan's purchase and subsequent sale of New Mexico Energy, LLC. (Ordered by Chief Judge Sidney A Fitzwater on 11/3/2014) (Chief Judge Sidney A Fitzwater)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
SUN RIVER ENERGY, INC.,
Plaintiff,
VS.
HARRY NEAL McMILLAN, et al.,
Defendants.
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§ Civil Action No. 3:13-CV-2456-D
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MEMORANDUM OPINION
AND ORDER
In a prior memorandum opinion and order in this case, the court raised sua sponte that
defendants are entitled to partial summary judgment dismissing plaintiff Sun River Energy,
Inc.’s (“Sun River’s”) claim that defendant Harry Neal McMillan’s (“McMillan’s”) purchase
and subsequent sale of New Mexico Energy, LLC (“NME”) violated § 16(b) of the Securities
Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78p(b), and it granted Sun River leave
to submit supplemental briefing opposing summary judgment on this basis. See Sun River
Energy, Inc. v. McMillan, 2014 WL 4771852, at *1, *16 (N.D. Tex. Sept. 25, 2014)
(Fitzwater, C.J.) (“Sun River I”). Having considered the supplemental briefing, the court
grants summary judgment dismissing this claim.
I
The pertinent background facts and procedural history are set out in Sun River I. See
id. at *1-2. Sun River alleges that McMillan violated § 16(b) of the Exchange Act by
purchasing and then selling NME within a six-month period, while McMillan was an insider
or beneficial owner of the securities that made up the entirety of NME’s assets at the time
of the purchase and sale. Defendants maintain that, although McMillan purchased and sold
a security while he was an insider or beneficial owner, the purchase and subsequent sale did
not occur within a six-month time period, as is necessary to prove a violation of § 16(b).
In Sun River I the court granted defendants’ motion for summary judgment that the
purchase of NME occurred on January 14, 2011. Id. at *14. The court denied Sun River’s
motion for summary judgment that the sale of NME occurred within six months of
McMillan’s purchase on January 14, 2011. The court concluded that a reasonable trier of
fact could only find that the sale of NME occurred on July 15, 2011. Id. at *15. Because
defendants did not move for summary judgment on this issue, the court raised it sua sponte
and permitted Sun River to file a supplemental brief and supporting appendix opposing
summary judgment on this basis. Sun River has made these filings, and the motion is now
ripe for decision.
II
When a summary judgment movant will not have the burden of proof on a claim at
trial, it can obtain summary judgment by pointing the court to the absence of evidence on any
essential element of the nonmovant’s claim. See Celotex Corp. v. Catrett, 477 U.S. 317, 325
(1986). Once it does so, the nonmovant must go beyond its pleadings and designate specific
facts demonstrating that there is a genuine issue for trial. See id. at 324; Little v. Liquid Air
Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc) (per curiam). An issue is genuine if the
evidence is such that a reasonable jury could return a verdict for the nonmovant. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The nonmovant’s failure to produce proof
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as to any essential element renders all other facts immaterial. Trugreen Landcare, LLC v.
Scott, 512 F.Supp.2d 613, 623 (N.D. Tex. 2007) (Fitzwater, J.). Summary judgment is
mandatory where the nonmoving party fails to meet this burden. Little, 37 F.3d at 1076.
III
To recover under § 16(b) based on McMillan’s purchase and sale of NME, Sun River
must prove that McMillan (1) purchased an equity security, (2) sold the same, (3) while an
insider or beneficial owner, (4) within a six-month period. See Gwozdzinsky v. Zell/Chilmark
Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). In Sun River I the court concluded that Sun
River had established beyond peradventure the first three elements, and it held that the
purchase of NME occurred on January 14, 2011. Sun River I, 2014 WL 4771852, at *14.
The court now considers only whether there is a genuine issue of material fact with respect
to the date on which the sale of NME occurred.
To avoid summary judgment, Sun River must present evidence that would enable a
reasonable trier of fact to find that the sale of NME occurred within six months of January
14, 2011, the date of McMillan’s purchase. As the court explained in Sun River I, to
determine when a sale is complete for purposes of § 16(b), the court looks to “that point at
which the insider has relinquished his ability to control the transaction to the extent that he
no longer has the potential to use inside information to his own advantage and to the
detriment of the public or outside shareholders.” Id. at *15 (quoting Provident Sec. Co. v.
Foremost-McKesson, Inc., 506 F.2d 601, 606-07 (9th Cir. 1974)). “This ability to control
is generally relinquished when the insider is irrevocably bound to sell a specific number of
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shares at a fixed price, even though the formalities necessary for the transfer of title may not
have yet occurred.” Id. (quoting Foremost-McKesson, 506 F.2d at 607). Thus the date of
the sale of NME is the date on which McMillan became irrevocably bound to sell NME to
Silver Creek Holdings (“Silver Creek”).
The agreement between McMillan and Silver Creek that provided for the sale of NME
(“Silver Creek Agreement”) required that a number of conditions be met before the
transaction could close. It was necessary for McMillan to provide, inter alia, certain
corporate documents, acquire certain releases and resignations, and deliver the share
certificates to Silver Creek. It was required that Silver Creek, inter alia, execute a wire
transfer for the cash payment, and provide a note and a pledge. The Silver Creek Agreement
also included the following provision: “Unless the Closing of this transaction takes place on
or before June 30, 2011, either party may terminate this Agreement.” Ps. Nov. 23, 2013 App.
143.
It is undisputed that closing did not occur before June 30, 2011, and therefore
McMillan and Silver Creek both retained the right to terminate the Silver Creek Agreement
until closing occurred. It is also undisputed that all the conditions precedent to closing were
fulfilled prior to July 15, 2011, except McMillan’s delivery of the share certificates.
Therefore, according to the terms of the Silver Creek Agreement, both McMillan and Silver
Creek retained the right to terminate the agreement until the point when McMillan delivered
the share certificates and the transaction closed. Because the delivery of the share certificates
did not occur until July 15, 2011, the Silver Creek Agreement became irrevocable on July
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15, 2011, not before.
Sun River argues that delivery of the share certificates was a purely ministerial act that
was not material for purposes of § 16(b), and thus a reasonable trier of fact could find that
the Silver Creek Agreement became irrevocable prior to July 15, 2011. Sun River correctly
points out that where an agreement is irrevocable, but the mere formalities of transfer of title
have not yet occurred, the date of the sale will not be governed by the ministerial acts that
transfer title. See Foremost-McKesson, 506 F.2d at 607. But where, as here, a specific
provision in the agreement explicitly gives either party the right to terminate the agreement
before all conditions precedent are met, and delivery of the shares is an explicit condition
precedent, the agreement remains revocable until all conditions for closing have occurred,
including conditions that might otherwise be considered merely ministerial acts in other
circumstances.* Because closing could not occur until the share certificates were delivered,
and either party had the right to terminate the Silver Creek Agreement up to the point of
closing, the agreement did not become irrevocable until the share certificates were delivered
on July 15, 2011.
*
The cases Sun River cites in support of its assertion that “[e]very single authority”
supports the conclusion that “a reasonable factfinder could easily find that the July 15, 2011
handover of share certificates was not a ‘material’ condition,” P. Br. 4-5, are distinguishable.
This is so because none of these cases involved an agreement that explicitly gave the parties
the right to revoke the agreement up to the point that all conditions precedent to closing had
occurred. These cases do recognize, however, that it is the time at which the obligation to
sell becomes irrevocable that controls for purposes of determining the effective date of sale.
See, e.g., Foremost-McKesson, 506 F.2d at 607; Riseman v. Orion Research, Inc., 749 F.2d 915,
920 (1st Cir. 1984); Prager v. Sylvestri, 449 F. Supp. 425, 431-33 (S.D.N.Y. 1978).
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The court therefore holds that a reasonable trier of fact could only find that the sale
of NME occurred on July 15, 2011, and it grants summary judgment in favor of defendants
dismissing Sun River’s claim that McMillan’s purchase and subsequent sale of NME violated
§ 16(b) of the Exchange Act.
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For the reasons explained, the court grants summary judgment dismissing Sun River’s
claim that McMillan’s purchase and subsequent sale of NME violated § 16(b) of the
Exchange Act.
SO ORDERED.
November 3, 2014.
_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE
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