Wood v. Penntex Resources, L.P.

• Decision Date: 23 October 2006
• Docket Number: Civil Action No. H-06-2198.
• Citation: 458 F.Supp.2d 355
• Parties: Scott Y. WOOD, v. PENNTEX RESOURCES, L.P., et al.
• Court: U.S. District Court — Southern District of Texas

458 F.Supp.2d 355

Scott Y. WOOD, v.PENNTEX RESOURCES, L.P., et al.

Civil Action No. H-06-2198.

United States District Court, S.D. Texas, Houston Division.

October 23, 2006.

John M. Zukowski, Zukowski & Bresenhan et. al., Houston, TX, for Scott Y. Wood.

J. Todd Shields, Fulbright & Jaworski, Houston, TX, for Penntex Resources L.P., Lance T. Shaner.

MEMORANDUM AND ORDER

ROSENTHAL, District Judge.

In this suit, plaintiffScott Y. Wood seeks a declaratory judgment that he is not required to participate in arbitration with PennTex Resources, L.P. and Lance T. Shaner.PennTex and Shaner began arbitration proceedings against Wood based on an arbitration provision in a contract that they allege binds Wood.In the arbitration, PennTex and Shaner seek to prevent Wood from continuing to prosecute claims he has asserted against a third party in a Texas state court.PennTex and Shaner assert that in the contract containing the arbitration clause, Wood agreed to dismiss or release the claims he is pursuing against the third party but has refused to do so.

In this suit, Wood asks this court to declare that he has no obligation to arbitrate with PennTex and Shaner; that he is entitled to continue to pursue the state-court claims against the third party; and, alternatively, that the arbitration is premature.PennTex and Shaner have counterclaimed and moved to compel arbitration and to stay this action, asserting that Wood is contractually bound to arbitrate whether he is required to dismiss or release the claims he is pursuing in the state court.(Docket EntryNo. 8).Wood has responded, (Docket EntryNo. 11), and PennTex and Shaner have replied, (Docket EntryNo. 15).Diversity jurisdiction is undisputed: Wood is a Texas citizen; PennTex is a limited partnership with no Texas partner; and Shaner is a Pennsylvania citizen.(Docket Entry No.at 1, 2).The parties stipulated that this court would determine arbitrability and an expedited briefing schedule was set.

Based on a careful review of the pleadings, the motion, response, and reply, the parties' submissions, and the applicable law, this court grants the motion to compel arbitration.¹Because this court has compelled arbitration as to all the claims at issue in this case, dismissal rather than stay may be appropriate.No later than October 30, 2006, the parties should advise whether, given the court's grant of the motion to compel arbitration, this case should be dismissed rather than stayed.

The reasons for these rulings are set out in detail below.

I.Background

On January 12, 2005, PennTex and Shaner acquired ERG Illinois, Inc. from ERG Illinois Holdings, Inc. through a Stock Purchase Agreement.(Docket EntryNo. 10, Ex.A).The Agreement identified PennTex Resources, L.P. and its general partner, PennTex Energy, Inc., as the "Buyer Parties" and identified PennTex Resources as the "Buyer."Shaner is the president of PennTex Energy.The Agreement identified ERG Holdings and ERG Illinois as the "Seller Parties" and ERG Illinois Holdings as the "Seller."Wood is the president, sole director, and sole shareholder of ERG Holdings and the president of its wholly owned subsidiary, ERG Illinois, the company that PennTex bought.

Wood and Shaner both signed the Stock Purchase Agreement.The signature line for Wood stated that he signed on behalf of ERG Illinois as its president and on behalf of ERG Holdings as its president.The signature line for Shaner stated that he signed on behalf of PennTex Resources by signing for PennTex Energy, the general partner, as its president.

Before the Stock Purchase Agreement was executed, Wood and ERG Illinois had been in litigation in Texas state court with Tsar Energy II, L.L.C. and its principal member, Richard Cheatham, over a joint venture between ERG Illinois and Tsar involving oil-producing properties in Illinois and Indiana.(Docket Entry No. 1, Ex. Aat 2-5).ERG Illinois prevailed on one part of the Texas case, relating to whether ERG Illinois was entitled as the operator to charge the joint account a fixed monthly overhead for certain producing wells.Final judgment has been entered as to that aspect of the case and it has been severed and is on appeal.The litigation as to the other part of the Texas case continues.This part of the case is the basis of PennTex's and Shaner's arbitration demand and this declaratory judgment suit.

In the other part of the state-court litigation, Wood and ERG Illinois claimed that Tsar and Cheatham tortiously interfered with a prospective contract Wood and ERG Illinois had with another entity.(Docket EntryNo. 11, Ex. 2).Wood sought almost $2 million in damages against Tsar and Cheatham.Tsar and Cheatham counterclaimed against Wood individually, asserting conspiracy with ERG Illinois to commit conversion and fraud.The Tsar litigation was pending when the 2005 Stock Purchase Agreement was executed.

Wood and ERG Illinois faced damages exposure in the Tsar state-court suit.The 2005 Stock Purchase Agreement addressed the Tsar case and any liability that might result.Section 9.4 of the Stock Purchase Agreement provided as follows:

9.4 Indemnification Provision For Seller's Benefit Regarding Specific Litigation.

Buyer acknowledges certain litigation is now pending in the 334th Judicial District Court of Harris County, Texas, bearing CauseNo.2004-39584, and styled "ERG Illinois, Inc. and Scott Y. Wood v. TSAR Energy II, L.L.C. and Richard Cheatham," and that future litigation may be brought or asserted regarding the subject matter of such Lawsuit in other forums or tribunals (all such pending or future litigation collectively referred to as the "Tsar case").Buyer Parties and their successors and assigns will:

(a) Pay any and all costs of the company, Scott Y. Wood, or any of the Buyer Indemnified Parties, which may be incurred in the Tsar Case after the Closing Date.Buyer Parties will pay directly to attorneys, court reporters, copy services, expert witnesses, and consultants and other providers or entities, all fees and expenses of the Buyer Indemnified Parties, or any of them, incurred after the Closing Date in connection with, arising out of or relating to the Tsar Case.Such payments by Buyer Parties, their successors or assigns, shall be made in accordance with the governing joint operating agreements within the time period stated on each invoice so that payment for such invoice shall not be past-due.

(b) Promptly pay all judgments, awards, sanctions, damages, expenses, and/or costs of any of the Buyer Indemnified Parties....

(c) Indemnify and hold the Buyer Indemnified Parties harmless from any and all harm, damage, loss, expense, liability, costs, awards, and judgment relating to or arising out of the Tsar Case

...

(d) Provide ... the amount of $1 million to secure the prompt payment and performance of all obligations of this Section 9.4.

(e) Provided that the Letter of Credit is in place and Buyer Parties have not breached this Section 9.4, Buyer will have full control of the representation of Seller Parties and Scott Y. Wood in the Tsar Case effective as of the Closing, with the right to cancel depositions and reschedule the hearing on Seller Parties' motion for summary judgment, and Scott Y. Wood and the other Buyer Indemnified Parties shall give their full cooperation to the Buyer in the Buyer's post-Closing prosecution and defense of the Tsar Case and Scott Y. Wood will, at Buyer's request and upon being furnished a full and complete release of all matters in the Tsar Case, either dismiss or release the claims that he has asserted individually in the Tsar Case.Upon request, Seller Parties will deliver to the Buyer an executed form of motion for the substitution of counsel substituting Fulbright & Jaworski L.L.P, for the current attorney for Seller Parties and Scott Y. Wood in the Tsar Case.

(Docket EntryNo. 10, Ex.A).

PennTex and Shaner assert that they negotiated Section 9.4 with Wood to avoid damages exposure from the Tsar litigation as a result of acquiring ERG Illinois and agreeing to indemnify Wood and the ERG entities.PennTex and Shaner argue that they negotiated the right to control the Tsar litigation after the Stock Purchase Agreement was executed.The Stock Purchase Agreement provided that PennTex would be responsible for damages, fees, costs, and expenses incurred by Wood and the other "Buyer Indemnified Parties" in the prosecution and defense of the Tsar litigation and required PennTex to post a $1 million letter of credit to secure this obligation.The Agreement defined "Buyer Indemnified Parties" as "Seller and its officers, directors, managers, employees, agents, representatives, controlling Persons, shareholders, and their Affiliates."Id.Wood was a "Buyer Indemnified Party."If PennTex met its Section 9.4 obligations, it would have "full control of the representation of Seller Parties and Scott Y. Wood in the Tsar Case effective as of the Closing ... and Scott Y. Wood and the other Buyer Indemnified Parties shall give their full cooperation to the Buyer in the Buyer's post-Closing prosecution and defense of the Tsar Case and Scott Y. Wood will, at Buyer's request and upon being furnished a full and complete release of all matters in the Tsar Case, either dismiss or release the claims that he has asserted individually in the Tsar Case."(Docket EntryNo. 10, Ex.A).

After the Stock Purchase Agreement was executed, PennTex posted the $1 million letter of credit.(Docket Entry No. 11, Ex. Aat 2).PennTex also paid the attorneys' fees ERG Illinois and Wood demanded.(Docket Entry No. 10, Ex. Iat 3).Wood asserts that PennTex paid the attorneys' fees to ERG Holdings, which paid Wood because of an indemnity obligation owed him as a director and officer under ERG Holdings's articles of incorporation and by-laws.PennTex asserts that it paid ERG Holdings not only the corporate entities' fees but also Wood's attorneys' fees because he was...