Sun River Energy, Inc. v. McMillan
| Decision Date | 25 September 2014 |
| Docket Number | Civil Action No. 3:13-CV-2456-D |
| Parties | SUN RIVER ENERGY, INC., Plaintiff, v. HARRY NEAL McMILLAN, et al., Defendants. |
| Court | U.S. District Court — Northern District of Texas |
The instant cross-motions for summary judgment present questions concerning plaintiff's claims to recover short-swing profits under § 16(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78p(b). The court must also decide whether defendants are relying on unpleaded, waived affirmative defenses, and, if so, whether to modify the scheduling order to enable defendants to plead these affirmative defenses. For the reasons that follow, the court denies defendants' motion to amend the scheduling order and for leave to file an amended answer, and it grants in part and denies in part the parties' motions for summary judgment.
Plaintiff Sun River Energy, Inc. ("Sun River") brings this action against defendants Harry Neal McMillan ("McMillan"), Cicerone Corporate Development, LLC ("Cicerone"), and CE McMillan Family Trust ("the Trust"), alleging that defendants are liable under § 16(b) of the Exchange Act for short-swing profits derived from the purchase and sale of Sun River common stock. McMillan co-founded Cicerone and served as its sole member andmanager from approximately April 1, 2011 to May 2, 2011.1 In May 2011 McMillan transferred his interest in Cicerone to the Trust, for which he served as the sole trustee. Consequently, whether as Cicerone's sole member and manager, or as the Trust's trustee, McMillan had sole control or shared control over Cicerone and the Trust at all relevant times.
Sun River is a publicly-traded corporation whose stock is registered under § 12 of the Exchange Act, 15 U.S.C. § 78l, and listed for trading on the Over-the-Counter Bulletin Board.2 As of August 2010, before executing the transactions at issue in this dispute, Robert Doak ("Doak") directly or indirectly owned 6,117,233 shares of Sun River's stock, which comprised about one-quarter of Sun River's outstanding shares. Doak owned approximately one-half of these shares directly and owned the other one-half indirectly through his ownership of New Mexico Energy, LLC ("NME").
In 2009 Sun River and Cicerone entered into a consulting agreement under which Sun River agreed to periodically issue common stock and stock warrants to Cicerone in exchange for consulting services. Between September 2010 and February 2011, Sun River issued 100,000 shares and 120,000 stock warrants to Cicerone under this agreement.
In August 2010 Cicerone acquired two option contracts that permitted it to purchase the Sun River shares held by Doak and NME. One option contract permitted Cicerone to purchase all 3,175,567 shares owned directly by Doak, and the other permitted Cicerone to purchase all 2,941,666 shares owned by NME for the exercise price of $1.50 per share on or before August 4, 2012. After acquiring these options, Cicerone held more than 10% of the outstanding shares of Sun River common stock. Just over one month later, Cicerone and Doak agreed to amend the terms of the second option to extend the exercise date from August 4 to September 12, 2012, and to change the exercise price from $1.50 per share to a price equal to $1.00 per share for the first 1,000,000 shares, $2.00 per share for the second 1,000,000, and $1.50 per share for the remaining 941,666 shares.
On August 6, 2010 Cicerone and Sun River entered into an agreement under which Cicerone agreed to cancel $468,541.48 of principal and accrued interest due on Sun River promissory notes that Cicerone owned in exchange for 312,363 new shares of Sun River common stock.
On January 14, 2011 McMillan and Doak signed an option to purchase agreement that gave McMillan the right to purchase NME from Doak for $1,000. At the time, NME's sole asset was a portfolio of 2,851,666 shares of Sun River stock. McMillan exercised this option, and he and Doak signed a purchase agreement (the "Doak Agreement") on February 8, 2011, in which Doak transferred NME to McMillan.3
Throughout January and February of 2011, Cicerone made a number of open-market sales of Sun River common stock. On March 7, 2011 Cicerone exercised the stock warrants it had received from Sun River over the past year to purchase shares of Sun River common stock. Cicerone elected to exercise 360,000 of these warrants on a cashless basis, whereby Cicerone paid the exercise price of the warrants by permitting Sun River to retain a portion of the shares issuable upon exercise.
On April 1, 2011 Cicerone and McMillan entered into an agreement with Joshua Pingel ("Pingel") under which Pingel agreed to transfer to McMillan all of Pingel's interest in Cicerone in exchange for 350,000 shares of Sun River common stock, $50,000 in cash, and a truck.
In July 2011 McMillan signed an agreement ("Silver Creek Agreement") with Silver Creek Holdings ("Silver Creek"), a Texas trust, in which McMillan agreed to sell NME to Silver Creek for $2,851,666.00.4 At the time, NME's only asset was its portfolio of Sun River stock. The Silver Creek Agreement provided that, if closing did not "take[] place on or before June 30, 2011, either party [could] terminate this Agreement." P. Nov. 23, 2013 App. 143.5 The Silver Creek Agreement also provided that the parties would amend the option agreement that Cicerone had previously signed with Doak. Pursuant to this term,Cicerone and Silver Creek executed an option agreement on July 11, 2011 that gave Cicerone the right to buy 2,851,666 shares of Sun River stock from NME for $3.00 per share on or before December 27, 2011. McMillan and Silver Creek did not exchange the closing documents specified in the Silver Creek Agreement until July 15, 2011.
On February 10, 2012 Sun River initiated an adversary proceeding in the bankruptcy court against McMillan, Cicerone, and the Trust. Sun River chose to assert its claims in the bankruptcy court because a purported creditor of McMillan had filed an involuntary bankruptcy petition against him. The bankruptcy court dismissed the involuntary petition against McMillan and dismissed Sun River's adversary complaint. Sun River moved unsuccessfully for the bankruptcy court to reconsider the dismissal of the adversary complaint. On June 26, 2011—22 days after the bankruptcy court finally dismissed the adversary proceeding—Sun River filed this lawsuit in this court.
Sun River and defendants cross-move for summary judgment, and defendants move to amend the scheduling order and for leave to file an amended answer.
The court will first decide defendants' motion to amend the scheduling order and for leave to file an amended answer because the disposition of this motion impacts the court's resolution of the parties' summary judgment motions.
Defendants maintain in response to Sun River's summary judgment motion and in support of their own motion that statutory or regulatory provisions exempt them fromliability under § 16(b) for a number of the transactions at issue. Sun River contends that defendants have waived these arguments because they are affirmative defenses that defendants did not plead in their answer to Sun River's complaint, as Fed. R. Civ. P. 8 requires. Sun River posits that defendants cannot now amend their answer because the time provided in the court's scheduling order for seeking leave to amend pleadings has expired. Defendants respond that these exemptions are not affirmative defenses. Alternatively, they move to amend the scheduling order and for leave to amend their answer.
The court must initially decide whether the statutory exemptions on which defendants rely are affirmative defenses that they were obligated to plead.
Defendants cite the following statutory and regulatory provisions to defeat Sun River's § 16(b) claims: (1) the exemption under SEC Rule 16a-13 for a transaction that is a mere change in the form of beneficial ownership, 17 C.F.R. § 240.16a-13; (2) the exemption for the disposition or closing of a long derivative security position, provided in SEC Rule 16b-6, 17 C.F.R. § 240.16b-6(b); and (3) the exemption for securities acquired in good faith in connection with a debt previously contracted, found in § 16(b), 15 U.S.C. § 78p(b). Under Rule 8(c)(1), a party must affirmatively state any avoidance or affirmative defense, or it waives the defense. See Woodfield v. Bowman, 193 F.3d 354, 362 (5th Cir. 1999) (citing Trinity Carton Co. v. Falstaff Brewing Corp., 767 F.2d 184, 194 (5th Cir. 1985)). Rule 8(c)(1) identifies certain affirmative defenses, but it makes clear that the list is not exhaustive. See Rule 8(c)(1) () (emphasis added).
Among the affirmative defenses that are not included in Rule 8(c)(1), but that must be pleaded, are statutory and regulatory exemptions. See, e.g., Ingraham v. United States, 808 F.2d 1075, 1078 (5th Cir. 1987) (); Suiter v. Mitchell Motor Coach Sales, Inc., 151 F.3d 1275, 1279 (10th Cir. 1998) (). Additionally, courts "have generally treated statutory exemptions from remedial statutes as affirmative defenses." Jackson v. Seaboard Coast Line R.R. Co., 678 F.2d 992, 1013 (11th Cir. 1982) (collecting cases); see Oden v. Oktibbeha Cnty., Miss., 246 F.3d 458, 467 (5th Cir. 2001) (). Section 16(b) is a remedial statute. See Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 434 (1972) (). A number of courts have characterized the statutory exemptions provided in the regulatory scheme...
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