Cunningham Energy, LLC v. Vesta O&G Holdings, LLC
| Decision Date | 05 January 2022 |
| Docket Number | CIVIL ACTION NO. 2:20-cv-00061 |
| Citation | 578 F.Supp.3d 798 |
| Parties | CUNNINGHAM ENERGY, LLC, et al., Plaintiffs, v. VESTA O&G HOLDINGS, LLC, et al., Defendants. |
| Court | U.S. District Court — Southern District of West Virginia |
Gerald M. Titus, III, Spilman Thomas & Battle, Wesley A. Shumway, Charleston, WV, for Plaintiffs Cunningham Energy, LLC, Cunningham Lease Acquisitions, LLC.
Alex J. Zurbuch, Jared M. Tully, Mary Claire Davis, Frost Brown Todd, Charleston, WV, for Defendants.
Pending before the Court is Defendants Vesta O&G Holdings, LLC, Vesta VFO, LLC, Rick Cott, and Joshua W. Coleman's (collectively "Defendants" or "Vesta") Motion to Dismiss. (ECF No. 11.) For the reasons discussed more fully below, the Court GRANTS IN PART and DENIES IN PART Defendants’ Motion.
A. Factual Background
This action arises out of a contract dispute between Plaintiffs Cunningham Energy, LLC, and Cunningham Lease Acquisitions, LLC (collectively "Plaintiffs" or "Cunningham Energy") and Defendants. The following factual allegations are taken from Cunningham Energy's Verified Complaint. (ECF No. 1.)
According to the Verified Complaint, representatives of Cunningham Energy entered into negotiations with representatives of Vesta in 2018 concerning the possibility of Vesta funding certain oil and gas assets and operations conducted or planned by Cunningham Energy in West Virginia. (Id. at 3, ¶ 14.) At the time of these negotiations, Cunningham Energy owned several oil and gas interests in Clay, Wood, Gilmer, Kanawha, and Roane counties in West Virginia, as well as several real property interests. (Id. at 3, ¶ 16.) One such real property interest included a surface interest in a parcel of land located in Big Sandy District, Kanawha County, West Virginia (hereinafter the "School Property"). (Id. at 3, ¶ 17.) Cunningham Energy alleges that it provided Vesta with copies of its operating budget requirements, a list of all its oil and gas operations in West Virginia, a drilling budget for seven new oil wells to be drilled, and an accounting of certain outstanding accounts payable ("Tier One Payables") throughout these negotiations. (Id. at 4, ¶ 19.)
Cunningham Energy contends that these negotiations resulted in the execution of a letter of intent on November 29, 2018, under which Vesta allegedly agreed to perform several obligations (hereinafter the "First LOI"). (Id. at 4, ¶ 20.) First, Cunningham Energy alleges that Vesta agreed to form a new limited liability company (referred to in the First LOI, and hereinafter, as "Holdings"), controlled and funded by Vesta, that would offer certain "equity interests" to Cunningham Energy in exchange for the transfer of specific oil and gas assets1 owned by Cunningham Energy to Holdings ("Holdings Assets"). (Id. at 4, ¶ 20, 22.) Second, Cunningham Energy asserts that Vesta committed to fund all operational expenses and overhead costs associated with the operation of Holdings. (Id. at 4, ¶ 23.) Third, Cunningham Energy contends that Vesta agreed to extinguish and eliminate certain debt referred to as the "Tier One Payables,"2 totaling $1,980,804.53. (Id. ) Finally, Cunningham Energy alleges that Vesta agreed to contribute capital to fund the drilling and completion costs of seven wells in West Virginia. (Id. )
The First LOI states "[e]xcept as specifically provided herein , this Letter is not intended to be [ ] binding but is instead intended only to serve as basis for negotiation of mutually acceptable agreements to be entered into...." (ECF No. 18-2 at 1) (emphasis added). The First LOI also contains a "General Transaction Description," which generally describes the terms of the purported agreement between Cunningham Energy and Vesta. (Id. at 2.) The terms of the First LOI appear to confirm the commitments Cunningham Energy alleges Vesta agreed to. Under the First LOI, Vesta would "receive certain equity interests in Holdings," labeled as "Investor's Equity Interest,"3 in exchange for a commitment "to fund certain operational expenses and overhead costs associated with the operations of Holdings[.]" (Id. ) This operational funding, labeled as "Investment Amount," consists of the following items: (1) "capital ... to extinguish and eliminate certain debt of Cunningham Energy commonly known as the Tier One Payables[;]" (2) "capital ... to fund the drilling and completion costs of seven wells in West Virginia[;]" and (3) "capital ... to engage and pay Cunningham Energy for the drilling of the wells owned by Holdings for a period of one year starting at the Closing Date[.]" (Id. )
The First LOI also provided that "[i]n consideration for contribution, transfer and assignment of the [Holdings] Assets ..., Cunningham Energy will receive certain equity interests in Holdings[.]" (Id. at 2–3.) Cunningham Energy's "equity interests," which are labeled as "Cunningham Equity Interests" under the First LOI, (see id. at 3), are defined as 20% of the total "Equity Interest" in Holdings, after repayment of Vesta's Cost Overrun Loan, until Holdings distributes to Vesta an amount equal to its "Preferred Return." (Id. at 3.) Once Holdings distributes to Vesta an amount equal to its "Preferred Return," Cunningham Energy's equity interest in Holdings would increase to 50% of the total "Equity Interest" in Holdings. (Id. )
Cunningham Energy alleges that on December 4, 2018, Vesta began funding this new venture under the terms of the First LOI, and it assigned and transferred its assets to the control of Vesta. (ECF No. 1 at 5, ¶ 26.) Vesta allegedly funded Cunningham Energy's drilling operations, partially extinguished its Tier One Payables, and performed in accordance with the terms set forth in the First LOI from December 2018 through February 2019. (Id. at 5–6, ¶¶ 29–31.)
However, on March 1, 2019, the agreement began to fall apart, and Vesta allegedly ceased funding Cunningham Energy's operations and debt obligations. (Id. at 6, ¶ 33.) Cunningham Energy contends Vesta failed to extinguish $385,841.22 in its Tier One Payables, failed to fund its operating expenses for March and April 2019, and failed to fund the payments incurred in drilling the first of the seven wells. (Id. at 6, ¶ 34–36.) Cunningham Energy alleges it demanded that Vesta fulfill its investment and funding obligations, but, in response, Vesta ceased all communications. (Id. at 7, ¶¶ 39–40.) As a result, in May of 2019, Cunningham Energy sued Vesta for breach of contract and other related claims (hereinafter the "First Lawsuit"). (Id. at 7, ¶ 44.)
Cunningham Energy claims that the First Lawsuit was settled through the execution of a second letter of intent (hereinafter the "Second LOI") and a "memorandum of understanding" (hereinafter the "MOU"), which were understood by Cunningham Energy to govern the further negotiation and closure of the transaction proposed in the First LOI. (Id. at 8, ¶ 45.) The MOU provides for the settlement of the First Lawsuit as follows:
[s]hould the [ ] proposed terms be agreeable and if Vesta and Cunningham Energy agree upon a Letter of Intent currently being negotiated regarding the closing of the Proposed Transactions, Cunningham Energy, following the execution of this [MOU], will promptly dismiss, without prejudice , its claims against Vesta in the [first lawsuit][.] In turn, Vesta will dismiss, without prejudice , the counterclaim it has asserted against Cunningham Energy entities in the [first lawsuit].
(ECF No. 18-8) (emphasis in original).
Cunningham Energy contends that, under the Second LOI, the parties agreed to close the proposed transaction contemplated in the First LOI no later than November 15, 2019, and if they failed to timely close the transaction, all real property and leases constituting "Holding Assets" were to be immediately assigned back to Cunningham Energy. (Id. at 8, ¶¶ 46–47.)
The "Holdings Assets" clause in the Second LOI provides that "[i]n the event the parties do not consummate the Proposed Transaction by the Closing Date, the Holdings Assets shall be immediately assigned back to Cunningham Energy...." (ECF No. 18-7 at 1.) The Second LOI defines the "Closing Date" as November 15, 2019. (Id. at 3.) The "Proposed Transaction," though, contains items that were not originally contemplated by the First LOI.4 (Id. at 2.)
Cunningham Energy claims that it "repeatedly demanded that [Vesta] negotiate in good faith to close the transaction proposed in the [First LOI]." (ECF No. 1 at 8, ¶ 48.) Cunningham Energy alleges that Vesta breached the Second LOI and MOU by failing to exercise good faith in the negotiation and attempted closure of the Proposed Transaction. (Id. at ¶ 49.) By letter dated December 19, 2019, and e-mail dated January 9, 2020, counsel for Cunningham Energy demanded that Vesta assign the Holdings Assets back to Cunningham Energy pursuant to the Second LOI due to the parties’ failure to close the Proposed Transaction. (Id. at ¶ 50–51.) Vesta has allegedly refused to assign the Holdings Assets back to Cunningham Energy and is still in possession of these assets. (Id. at 9, ¶ 53.)
Because Vesta has purportedly refused to assign the Holdings Assets back to Cunningham Energy, Plaintiffs filed their Verified Complaint on January 24, 2020, alleging fourteen causes of action: including breach of contract claims for both the First LOI and the Second LOI and MOU. (Id. at 9–19.) On February 18, 2020, Defendants filed their Motion to Dismiss. (ECF No. 11.) Plaintiffs timely responded, (ECF No. 18), but Defendants did not file a reply. As such, Defendants’ Motion has been fully briefed and is now ripe for adjudication.
A motion to dismiss for failure to state a claim upon which relief may be granted tests the legal sufficiency of a civil complaint. Fed. R. Civ....
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