Sole Energy Co. v. Petrominerals Corp.

• Decision Date: 05 April 2005
• Docket Number: No. G031877.,G031877.
• Citation: 128 Cal.App.4th 212,26 Cal.Rptr.3d 798
• Court: California Court of Appeals Court of Appeals
• Parties: SOLE ENERGY COMPANY et al., Plaintiffs and Appellants, v. PETROMINERALS CORPORATION et al., Defendants and Appellants.

26 Cal.Rptr.3d 798

128 Cal.App.4th 212

SOLE ENERGY COMPANY et al., Plaintiffs and Appellants, v. PETROMINERALS CORPORATION et al., Defendants and Appellants.

No. G031877.

Court of Appeal, Fourth District, Division 3.

April 5, 2005.

Review Denied July 20, 2005.^*

Hornberger & Brewer, Nicholas W. Hornberger and James F. Lindsay, Los Angeles, for Plaintiffs and Appellants.

Mazda Butler, Mark N. Mazda and Mark J. Butler, Irvine, for Defendants and Appellants.

OPINION

FYBEL, J.

INTRODUCTION

May putative shareholders recover as damages the corporation's future profits allegedly lost as a result of tortious conduct directed to the shareholders individually and occurring before the corporation was formed? We conclude, under the facts of this case, any such lost profits belong to the corporation and cannot be recovered as damages by individual shareholders in a nonderivative suit.

The jury returned a verdict against defendants Petrominerals Corporation (Petrominerals) and Daniel H. Silverman in an amount in excess of $20 million on causes of action for interference with contractual relations and interference with prospective economic advantage. Plaintiffs contended Petrominerals and Silverman tortiously interfered in a transaction by which a corporation called Sole Energy Company (Sole Energy Corporation) was to acquire the stock and assets of a corporation called Hillcrest Beverly Oil Corporation (HBOC). Two of the plaintiffs were to be shareholders of Sole Energy Corporation, but it never issued stock. Plaintiffs sought as damages the future profits Sole Energy Corporation purportedly would have earned had the transaction been consummated.

The trial court granted a nonsuit in favor of Silverman on the causes of action for fraud and conspiracy, granted some of the motions for judgment notwithstanding the verdict (JNOV) brought by Petrominerals and Silverman, denied other of their JNOV motions, denied Silverman's motion for a new trial, and granted Petrominerals' motion for a new trial on any causes of action not covered by the rulings on the JNOV motions.

We conclude: (1) None of the plaintiffs could recover Sole Energy Corporation's alleged lost profits in this nonderivative lawsuit; (2) plaintiffs failed to present evidence that Silverman interfered with a contractual relationship; and (3) plaintiffs failed to present evidence that Silverman interfered with a prospective economic relationship or engaged in conduct that was wrongful apart from the interference itself. We therefore affirm the granting of JNOV motions, reverse the denial of JNOV motions, and remand with directions to the trial court to strike the punitive damages awarded against Petrominerals. Plaintiffs do not challenge the nonsuit in Silverman's favor on the fraud and conspiracy causes of action, and we lack jurisdiction to address plaintiffs' challenge to the order granting Petrominerals a new trial.

FACTS

Thomas A. Swaney is the sole owner and president of Harwood Capital Corporation (Harwood), a subchapter S corporation. Swaney, Harwood, and Richard F. Borghese, a petroleum engineer, were the partners of Sole Energy Company, an informal partnership (referred to as Sole Energy Partnership to distinguish it from Sole Energy Corporation) that was formed sometime in the spring of 1999.¹ On December 30, 1999, Sole Energy Corporation was incorporated in the State of Texas. Sole Energy Corporation never issued stock.

HBOC is an oil and gas company. Kaymor Petroleum Products (Kaymor) owns a gas processing plant abutting HBOC's wells. Morris V. Hodges was the president of both HBOC and Kaymor. Nevadacor Energy, Inc. (Nevadacor) is a Nevada corporation and apparently owned HBOC's stock.²

Petrominerals is a California corporation engaged in the acquisition, development, and production of crude oil and natural gas. During the events that are the subject of this case, Hodges was Petrominerals' president and chief executive officer. Silverman worked as a consultant for HBOC in the capacity of an independent contractor from April 1999 to August 31, 1999. Silverman was Petrominerals' vicepresident of business development and chief operating officer from September 1, 1999 through October 2000.

While working as a consultant for HBOC, Silverman analyzed a potential joint venture between Petrominerals and HBOC. On July 8, 1999, Silverman prepared a letter to HBOC regarding share valuations resulting from such a joint venture, stating: "[T]here is good potential for Petrominerals shareholders and the [HBOC] shareholders to see significant appreciation. This should make the story more convincing for both boards as why this combination would benefit both entities."

In July 1999, Borghese and Swaney met with Hodges to discuss acquiring HBOC's stock and oil- and gas-related assets from Nevadacor. Borghese and Swaney had learned that Hodges was a principal of Petrominerals, that Petrominerals had cash but no other assets, and that Petrominerals intended to use its cash to buy oil and gas properties. So, when Borghese and Swaney met with Hodges, they asked him whether Petrominerals had plans to purchase HBOC. Hodges replied that Petrominerals would not purchase HBOC because (1) there was a conflict of interest, and (2) Petrominerals did not have enough money to buy HBOC. Hodges told Borghese and Swaney to continue the negotiations with Silverman.

Borghese and Silverman met on August 12, 1999. Silverman told Borghese that Petrominerals had no interest in buying HBOC due to a conflict of interest. Silverman also said he did not know whether Petrominerals had in the past been interested in buying HBOC. But on the day before meeting with Borghese, Silverman had faxed a letter to Hodges, stating: "Not to belabor the point with Petrominerals, but I do think it is possible for P[etrominerals] to purchase [HBOC] if I can go out and bring in some of that mezzanine financing." According to Silverman, he did not tell Borghese about that potential transaction because Borghese did not ask about it.

On December 16, 1999, Borghese submitted a letter of intent to Nevadacor. The letter of intent proposed an entity named Sole Energy Company purchase HBOC's stock and oil- and gas-related assets from Nevadacor for $7.5 million. Although Borghese signed the letter of intent on behalf of "Sole Energy Company," the letter was prepared on letterhead stationery with the name Sole Energy Company, LLC, an entity which never was formed.

The letter of intent stated it was "non-binding" and included the following language regarding expiration and termination: "Except as provided in sections 6 through 11, both inclusive, this letter shall represent a non-binding letter of intent between the parties. This letter of intent shall expire on December 17, 1999, 5:00 CST. Any party may terminate this letter of intent after January 31, 2000, upon written notice to the other parties, or at any time by all parties with their mutual written consent." The letter of intent concluded: "If the foregoing accurately represents your understanding of our agreement, please indicate by signing in the spaces provided below, and return a copy to us for our records. Upon receipt of a signed copy of this letter of intent, we will instruct our attorneys to begin preparation of a definitive Stock Purchase Agreement."

On December 23, 1999, Hodges signed the letter of intent on behalf of HBOC and Kaymor. On December 27, 1999, William Herder signed the letter of intent on behalf of Nevadacor. Sole Energy Corporation was incorporated on December 30, 1999. Borghese intended Sole Energy Corporation to assume Sole Energy Company's position in the letter of intent, and later drafts of an agreement to purchase HBOC's stock identify Sole Energy Corporation as the buyer.

Silverman was not involved in negotiating the terms of the letter of intent and, after the meeting with Borghese in August 1999, did not speak with Borghese or Swaney until February 3, 2000. On that date, Silverman spoke with Swaney at a trade show and congratulated him on obtaining mezzanine financing for the transaction contemplated by the letter of intent. Neither Borghese nor Swaney had further contact with Silverman.

On February 18, 2000, Borghese and Swaney received a formal commitment to provide financing for purchasing HBOC. According to Borghese, obtaining financing "represent[ed] 80-some percent of putting the deal together." Borghese telephoned Hodges to tell him about the financing commitment. The conversation turned into an argument over deal points and ended with Hodges hanging up. On the same day, an attorney for Sole Energy Corporation wrote a letter to Nevadacor's attorney, stating: "[I]t seems to me that our clients are at opposite ends of the spectrum on this transaction.... If your clients have changed their minds and if the deal can only go forward on the basis of your comments, one of two things must happen—either there will be no transaction between the parties because of their failure to agree or our clients see the necessity for a very substantial reduction in the purchase price to reflect the increased risks they will have to take in the transaction, as well as increased due diligence costs and delay."

On February 22, 2000, Swaney telephoned Hodges to discuss the transaction. During their telephone conversation Swaney and Hodges reached an oral agreement for Sole Energy Corporation to purchase HBOC's stock and oil- and gas-related assets. Swaney took notes of the conversation but Swaney did not send his notes to Hodges. The notes did not contain a purchase price or a closing date and did not include all the terms of the proposed sale. On February 23, lawyers for Borghese and Swaney prepared a draft stock purchase agreement that did not include a purchase price.

On February 25, 2000, Nevadacor and Kaymor informed Sole Energy Corporation in writing "they wish[ed] to terminate the negotiations and the Letter of Intent dated ...