Lenois v. Sommers as Trustee for Erin Energy Corporation

Decision Date09 December 2021
Docket Number33, 2021
Parties Robert LENOIS, on behalf of himself and all other similarly situated stockholders of Erin Energy Corporation, and derivatively on behalf of Erin Energy Corporation, Plaintiff-Below, Appellant, v. Ronald J. SOMMERS, AS Chapter 7 TRUSTEE FOR Nominal Defendant-Below ERIN ENERGY CORPORATION, Movant-Below, Appellant, v. Kase Lukman Lawal, Lee P. Brown, William J. Campbell, J. Kent Friedman, John Hofmeister, Ira Wayne McConnell, Hazel R. O'Leary, and CAMAC Energy Holdings, Limited, Defendants-Below, Appellees, and Erin Energy Corporation, Nominal-Defendant-Below, Appellee.
CourtUnited States State Supreme Court of Delaware

Michael J. Barry, Esquire, Rebecca A. Musarra, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware. Of Counsel: David Tejtel, Esquire (argued), Friedman Oster & Tejtel PLLC, Bedford Hills, New York for Appellants.

Myron T. Steele, Esquire, Jaclyn C. Levy, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware. Of Counsel: David T. Moran, Esquire, Christopher R. Bankler, Esquire (argued), Jackson Walker L.L.P., Dallas, Texas for Appellees Kase Lukman Lawal and CAMAC Energy Holdings, Limited.

Srinivas M. Raju, Esquire, Robert L. Burns, Esquire, Andrew J. Peach, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: Greg Waller, Esquire, Hunton Andrews Kurth L.L.P., Houston, Texas for Appellees John Hofmeister, Ira Wayne McConnell, and Hazel O'Leary.

David J. Teklits, Esquire, Kevin M. Coen, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. Of Counsel: Mark Oakes, Esquire, Ryan Meltzer, Esquire, Norton Rose Fulbright US LLP, Austin, Texas for Appellees Lee P. Brown, William J. Campbell, and J. Kent Friedman.

Before SEITZ, Chief Justice; VALIHURA, and TRAYNOR, Justices.

VALIHURA, Justice:

Introduction

In this appeal, Appellants claim that their well-pleaded claims arising from a controlling stockholder's "egregious, self-dealing transaction that bankrupted a Delaware corporation" have been condemned to perish in a "procedural blackhole."

In 2017, the Court of Chancery held that Plaintiff Robert Lenois ("Lenois") had pled with particularity that the controlling stockholder of Erin Energy Corporation ("Erin" or the "Company") had acted in bad faith.1 It further held that Lenois had pled either "very serious claims of bad faith" or "a duty of care claim" against the remainder of Erin's board in connection with two integrated transactions.2 In those transactions, the controller allegedly obtained an unfair windfall by selling certain Nigerian oil assets to Erin. The trial court dismissed the derivative claims on standing grounds, i.e., holding that demand was not excused.

Lenois timely appealed that decision. During the pendency of the appeal, Erin voluntarily filed for bankruptcy. The Chapter 7 Trustee, Ronald J. Sommers, obtained the permission of the Bankruptcy Court to pursue, on a direct basis, the claims that had been asserted in the Lenois action in the Court of Chancery (the "Chancery Action"). As a result of the bankruptcy proceedings, which now vested the Trustee with control over the claims, this Court determined, on May 18, 2020, that the sole issue on appeal, namely, whether the trial court was correct that Lenois had failed to adequately plead demand futility, was moot.3 We remanded the case to the Court of Chancery to resolve two pending motions — a Rule 60(b) motion and the Trustee's motion pursuant to Rule 25(c) to be substituted for nominal defendant Erin and then realigned as plaintiff (the "Realignment Motion"). The Court of Chancery denied the Rule 60(b) motion and summarily denied the Rule 25(c) motion.

We now reverse and hold that the Court of Chancery should have granted the Trustee's Substitution and Realignment Motion. The Trustee was vested with the legal right to control the derivative litigation as this litigation was part of the bankruptcy estate's assets. Further, the Trustee obtained an order from the Bankruptcy Court to pursue these claims. The Appellants refiled both motions in this Court during the pendency of the appeal to make clear the Trustee's desire to prosecute the claims directly on behalf of the estate. The parties and the Trustee agreed that the question at issue on appeal — whether demand was excused — was now moot. We ordered that dismissal of the appeal would return jurisdiction to the Court of Chancery where the Trustee's motions remained pending.

Rather than address the motions at the appellate level, we remanded the case to the Court of Chancery to rule on those motions in the first instance. Because the dismissal was being challenged on appeal when the bankruptcy petition was filed, and because we remanded the case for further proceedings, we do not agree with Appellees that the case was "finally over." Implicit in our remand order was the recognition that the case remained open, that there were pending motions to be resolved and that one possible outcome was that the Trustee would be allowed to prosecute the claims, which he had the right to control. The 2017 dismissal with prejudice, in any event, was with prejudice as to Lenois only.4 Given the circumstances, we think the Trustee should have been permitted to be substituted for nominal defendant Erin, realigned as plaintiff, and allowed to proceed. After all, Appellees told the Court of Chancery in a March 3, 2020 hearing that they did not dispute that the Trustee could be substituted for Erin.

Given the highly unusual facts presented here, this opinion should pose no threat to the finality of judgments as Appellees portend. Rather, it is an equitable resolution of a confluence of unusual procedural circumstances specific to this case. In particular, the complications arose after the nominal defendant was thrown into bankruptcy proceedings (allegedly as a result of the controller's actions) during the pendency of an appeal challenging dismissal of Lenois's derivative claims solely on derivative standing grounds and during which appeal, Lenois was divested of standing due to that intervening bankruptcy. Under these circumstances, the Trustee's persistent requests to pursue these serious claims as the legal representative of the bankrupt estate, after obtaining permission from the Bankruptcy Court to do so, should be, and hereby is, granted.

I. Relevant Facts and Procedural Background5
A. The Parties to the Appeal and Underlying Transactions

Erin is an oil and gas exploration company. Kase Lukman Lawal ("Lawal") was the Company's Chairman and Chief Executive Officer. At the time of the challenged transactions, Lawal is alleged to have been the Company's controlling stockholder. Lawal and his family owned a majority of CAMAC International Limited ("CIL"), which indirectly owned 100% of Defendant CAMAC Energy Holdings Limited ("CEHL"). Lawal and CEHL owned 58.86% of the Company's outstanding shares prior to the transactions challenged in Lenois's Complaint.

In June 2013, Public Investment Corporation Limited ("PIC"), a quasi-public South African pension fund manager, and Lawal, on behalf of Allied Energy Plc ("Allied"), a wholly owned subsidiary of CEHL, negotiated a transaction through which PIC would invest $300 million in the Company in exchange for a 30% ownership stake in Erin. Erin would then transfer the money invested by PIC and additional Erin stock to Allied in exchange for certain oil assets held by Allied (the "Assets").

On June 14, 2013, Allied and PIC presented the proposed transactions to the Erin board of directors (the "Board"). On June 17, 2013, the Board formed a Special Committee consisting of Defendants John Hofmeister, Ira Wayne McConnell, and Hazel R. O'Leary to consider and negotiate the proposal.

On November 18, 2013, after five months of negotiations with Lawal and Allied, the Special Committee approved and recommended to the Board a series of related transactions with PIC and Allied (the "Transactions"). The Transactions provided for: (1) PIC to invest $270 million in Erin in exchange for approximately 377 million shares of Erin; (2) Erin to pay $170 million in cash and provide a $50 million convertible subordinated note to Allied; and (3) Erin to issue additional stock and a stock dividend, ultimately resulting in post-closing Erin ownership of approximately 30% for PIC, 60% for Allied/CEHL, and 13% for other stockholders. The Transactions also provided that Allied would fund the drilling costs of a particular oil well (with Erin to bear the costs of completion for the well) and that certain contract rights would be terminated in exchange for Erin's agreement to make two $25 million payments to Allied. The Board approved the Transactions, with Lawal and Defendant Lee P. Brown recusing themselves.

On January 15, 2014, Erin filed a proxy statement with the United States Securities and Exchange Commission (the "SEC") recommending that Erin stockholders approve certain proposals necessary to effectuate the Transactions (the "Proxy"). On February 13, 2014, Erin held a special meeting of stockholders to vote on a Transfer Agreement, a Share Purchase Agreement, and an amendment to the Company's certificate of incorporation. The proposals were subject to approval by a majority of the minority of stockholders. Each of the proposals received the requisite stockholder approvals, and the Transactions closed about a week later.

On July 30, 2015, nearly a year-and-a-half after the Transactions closed, Lenois made a stockholder demand to inspect Erin's books and records pursuant to 8 Del. C. § 220. Counsel for Lenois and Erin negotiated and ultimately agreed upon the scope of the production in response to the demand. Erin produced minutes and presentations of board meetings and other records specifically requested by Lenois. Lenois did not request any version of the contracts related to the Transactions or any attachments to the contracts.

B. The First Round of Litigation

On February 5, 2016, Lenois filed a...

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    ...decision, the Delaware Supreme Court discussed and endorsed this general framework. See generally Lenois v. Sommers as Tr. for Erin Energy Corp. , 268 A.3d 220, 232–36 (Del. Dec. 9, 2021). Giving priority to Rules 59(e) and 60 after judgment has been entered promotes the finality of judgmen......

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