John J. Ellerton, C&J Res., Inc. v. Sefton Res., Inc.
| Decision Date | 29 December 2016 |
| Docket Number | Civil Action No. 15-cv-01212-RM-NYW |
| Court | U.S. District Court — District of Colorado |
| Parties | JOHN J. ELLERTON, C&J RESOURCES, INC. C&J RESOURCES PENSION PLAN & TRUST, Plaintiffs, v. SEFTON RESOURCES, INC., MARK R. SMITH, THOMAS G. MILNE, and KEITH A. MORRIS, Defendants. |
RECOMMENDATION AND ORDER OF UNITED STATES MAGISTRATE JUDGE
This civil action is before the court on the following motions:
These motions were referred to the undersigned pursuant to the Order Referring Case dated August 17, 2015 and memoranda dated May 12, 2016 [#76], June 3, 2016 [#86], June 17, 2016 [#90], and July 26, 2016 [#94]. For the following reasons, I respectfully RECOMMEND that the Motion to Dismiss be DENIED, Motion for Summary Judgment be GRANTED, and the First Motion for Sanctions be DENIED as moot, and ORDER that the Second Motion for Sanctions is GRANTED IN PART and DENIED IN PART.
This court finds that the factual and procedural history of this action is particularly relevant to the various pending motions and the requested relief, and thus provides an extensive discussion of the background of this lawsuit as follows.
The following facts derive from the Verified Complaint, which is signed by Mr. Ellerton "under oath," but does not include an attestation verifying the factual contentions under penalty of perjury. See [#4]. Mr. Ellerton is a founding member of Sefton, which was formed in January 1995. [Id. at ¶ 12]. Sefton became a public company traded on the London Exchange in December 2000. [Id. at ¶ 17]. After Sefton went public, Mr. Ellerton maintained his position as its largest individual shareholder. [Id. at ¶ 20]. In October 2010, Sefton and Plaintiff C&J Resources, Inc. ("C&J") entered into a Consultancy Agreement, whereby Mr. Ellerton contracted his services as an independent contractor to Sefton and its subsidiaries. [Id. at ¶ 35]. Mr. Ellerton alleges that pursuant to the Consultancy Agreement, C&J agreed to provide his services as Sefton's Chief Executive Officer and/or Chairman of the Board of Directors, provide his skill and expertise in running Sefton, promote the interests of Sefton, and insure Sefton's compliance with all applicable laws and regulations. [Id. at ¶ 36]. C&J and Plaintiff C&J Resources Pension Plan & Trust (the "Trust") (collectively, "Corporate Plaintiffs") are shareholders of Sefton. [Id. at ¶ 39].
Following an Annual General Meeting in June 2013, Sefton's Board of Directors was comprised of Mr. Ellerton and Mark R. Smith, Thomas G. Milne, and Keith A. Morris (collectively, "Individual Defendants"). [#4 at ¶ 28]. In August 2013, Mr. Ellerton agreed to temporarily step down as Sefton's Chairman and Chief Executive Officer "to allow Sefton's Board of Directors sufficient time to investigate certain allegations made against [him] on the internet in a personal lawsuit brought by a third party against [him] some years before." [Id. at ¶ 40]. Mr. Ellerton alleges that his agreement to temporarily step down was premised on two conditions: "that the Board act in such manner as to preserve the terms of the Consultancy Agreement with C&J," and that "the Board conduct a full and thorough investigation into the allegations as outlined in the August 22, 2013 press announcement by Sefton." [Id.] On August 20, 2013, "without Mr. Ellerton's or C&J's approval or consent," Sefton's Board announced that Mr. Ellerton's departure was permanent. [Id. at ¶ 42]. Mr. Ellerton alleges that Sefton unilaterally terminated and thereby breached the Consultancy Agreement on or about October 23, 2013. [Id. at ¶¶ 44, 49]. C&J thereafter initiated an arbitration proceeding ("Arbitration Proceeding") to assert a breach of contract claim. [Id. at ¶ 51]. Plaintiffs claim damages arising from the alleged breach as follows: Sefton owes C&J "in excess of $316,700," for breaching the Consultancy Agreement; Sefton owes C&J "over $40,000 for legal expenses and costs incurred by C&J" in "actions against Mr. Ellerton while performing his duties for Sefton"; and "Sefton owes the Trust approximately $19,546, for the unpaid pension plan contributions required under the Consultancy Agreement." [Id. at ¶¶ 52, 53, 54].
In addition, on or about August 29, 2013, while Mr. Ellerton served as an officer and director of Sefton, he provided a personal loan worth $10,000 to Sefton (the "Ellerton Loan"). [#4 at ¶ 56]. Mr. Ellerton expected that Sefton would repay the Ellerton Loan "upon demand with interest thereon at the current market rate." [Id. at ¶ 58]. Mr. Ellerton also incurred business expenses on behalf of Sefton (the "Ellerton Expenses"), for which he used his personal credit cards. [Id. at ¶ 59]. Plaintiff alleges that he incurred the Ellerton Expenses with the expectation that Ellerton would repay such funds upon demand, and claims that the total principal amount of the Ellerton Expenses approximates $35,700 as of the filing of the Verified Complaint. [Id. at ¶¶ 59, 61].
Of particular relevance to this Recommendation and Order, Mr. Ellerton alleges that the Board "engaged in several short term financing transactions and borrowings" in 2014 that increased the balance of Sefton's subordinated debt. [#4 at 10-11]. For instance, Hawker Energy, LLC, now known as Hawker Energy, Inc. ("Hawker"), advanced approximately $1,500,000 to Sefton in the first half of 2014. [Id. at ¶¶ 78, 79]. In July of 2014, the Board called an Extraordinary General Meeting (the "Meeting") to approve a restructuring of Sefton's activities and the financing from Hawker ("Hawker Transaction No. 1"). The restructuring proposed that Hawker acquire 80 percent of an oil field owned by Sefton's principal asset, TEG USA. TEG USA would own the remaining 20 percent. Hawker would pay TEG $3,000,000 in an unsecured promissory note to acquire a controlling interest in the oil field. [Id. at ¶ 80]. Mr. Ellerton alleges that prior to the Meeting, the Board issued new shares to the Individual Defendants, who then back dated the issuance to July 18, 2014 so as to vote the shares at the Meeting. [Id. ¶ 82]. Mr. Ellerton alleges that the Board "was in possession of price sensitive information, including Sefton's production and revenues, status of [debt], the engineering evaluation of Sefton's assets and reserves, and other pertinent financial data, as well as knowledge of the [Meeting] voting," and did not share this information with Sefton's shareholders, and did not share relevant information about Hawker's financial status. [Id. at ¶ 83]. According to Mr. Ellerton, the issuance of additional stock to the Individual Defendants diluted the shares held by him and the Corporate Plaintiffs and caused the price of Sefton's stock to decline. [Id. at ¶ 84]. The Board voted to approve the sale of 80 percent of the oil field to Hawker. Hawker was "effectively insolvent" at the time of the Meeting, and the insolvency was not disclosed to Sefton shareholders. [Id. at ¶¶ 86-88]. Following the Meeting, Hawker provided Sefton and TEG USA "with approximately $600,000 as a loan." [Id. at ¶ 92].
In January 2015, Sefton and Hawker entered into a revised agreement ("Hawker Transaction No. 2"), by which Hawker would acquire 100 percent of TEG USA "in exchange for an assumption of certain liabilities..., the issuances of 3,000,000 shares of stock in Hawker, and 5,000,000 warrants for Hawker stock," and would loan funds to TEG USA to acquire an additional forbearance of bank debt. [#4 at ¶¶ 93, 96]. Mr. Ellerton alleges that Hawker was insolvent at the time of Hawker Transaction No. 2, and the Board again failed to provide sufficient information to Sefton's shareholders to facilitate an informed decision. [Id. at ¶¶ 96, 97]. Furthermore, Sefton's "true financial condition" was not disclosed to the company's shareholders. [Id. at ¶ 98]. Ultimately, Mr. Ellerton asserts, the "net result of Hawker Transaction No. 2, left Sefton still liable on [bank debt], and holding worthless stock of an insolvent company." [Id. at ¶ 100]. Mr. Ellerton alleges that, "[b]ased upon the filings to the [Securities Exchange Commission] by Hawker and Sefton's own press releases, Sefton lacks sufficient assets to pay all of its liabilities, including the liabilities owed to the Plaintiffs," and that Sefton is insolvent. [#4 at ¶¶ 110, 111].
Mr. Ellerton alleges that he is a shareholder of Sefton and was a shareholder at all times relevant to the Verified Complaint, and that he has commenced this action "to enforce the rights that Sefton may properly assert but has failed to enforce." [#4 at ¶ 120]. Mr. Ellerton further alleges that he made "numerous written demands upon Sefton and its Board of Directors, including [the Individual Defendants], to correct the actions taken, including, but not limited to, restoring Mr. Ellerton to his status as Chairman and CEO of Sefton." [Id. at ¶ 124]. Mr. Ellerton participated in the July 2014 Meeting "but was denied the ability to ask questions or seek any additional information concerning the transactions approved by the Board." [Id.] Plaintiffs made demand upon Sefton for, and have been refused, the corporation's books, records, and financial information. [Id. at ¶ 125]. They assert that any additional demand that may be required would be fruitless because the Board is not disinterested and independent. [Id. at ¶ 126].
On May 14, 2015, Mr. Ellerton and the Corporate Plaintiffs initiated this action, through counsel,...
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