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CONTINENTAL ENERGY CORPORATION v. CORNELL CAPITAL PARTNERS

December 28, 2005.

CONTINENTAL ENERGY CORPORATION, Plaintiff,
v.
CORNELL CAPITAL PARTNERS, L.P. and YORKVILLE ADVISORS MANAGEMENT, LLC, Defendants.



The opinion of the court was delivered by: GERARD LYNCH, District Judge

OPINION AND ORDER

Plaintiff Continental Energy Corporation ("Continental"), an oil and gas exploration firm, brings this action against defendants Cornell Capital Partners, L.P. and Yorkville Advisors Management, LLC (collectively, "Cornell"), a private equity fund, seeking a declaratory judgment that a an investment contract between Continental and Cornell is void for lack of consideration, and related relief. Cornell counterclaims for a declaration that the contracts are valid and enforceable, and have been breached by Continental. The parties have cross-moved for summary judgment on all claims. Defendants' motion will be granted and plaintiff's denied.

  BACKGROUND

  The facts are straightforward and essentially uncontested. Seeking to raise capital to drill for oil in Indonesia, Continental approached a number of investors. Eventually, Cornell (a group composed of former members of another investment firm that had negotiated an abortive transaction with Continental) entered an equity finance agreement with Continental. The terms of the transaction were embodied in a series of written agreements centered on an Equity Line of Credit Agreement (the "Agreement"), which were signed on September 18, 2001.

  Under the terms of the Agreement, Cornell committed to purchase up to $20 million worth of Continental common stock, at Continental's discretion, over the following three years. The Agreement authorized Continental to issue shares of its stock to Cornell, which Cornell was obliged to purchase at a share price equal to 91% of the lowest closing bid price of Continental stock during a specified trading period. (Agreement § 2.1(a).) As a condition precedent to Continental's right to issue stock to Cornell, Continental was obligated to file a registration statement with the Securities and Exchange Commission ("SEC") that would permit Cornell to resell any stock issued pursuant to the Agreement. (Id. § 7.2(a).) In this regard, Continental agreed to "use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration" of the securities. (Registration Rights Agreement § 3n.) In exchange for Cornell's commitment to provide such capital on demand, Continental agreed to pay certain commitment fees, including issuing one million shares of its common stock upon execution of the Agreement, and $250,000 worth of additional shares either six months after the filing of an effective registration statement or nine months after the execution of the Agreement, whichever was earlier. (Agreement § 12.4(b).)

  The Agreement includes a merger clause, providing that the Agreement supersedes all prior oral or written agreements among the parties, and further providing that "[n]o provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement." (Id. § 12.2.) The Agreement also contains a choice of law clause providing that the Agreement shall be governed by and interpreted according to New York law. (Id. § 9.1.)

  On or about the date of the execution of the Agreement, Continental did deliver the one million shares of stock as promised. However, Continental never filed a registration statement as required by the Agreement. Accordingly, it never became empowered to demand capital from or issue stock to Cornell as contemplated by the Agreement. In July 2002, Cornell demanded that Continental provide the $250,000 worth of stock constituting the second portion of the commitment fee, which (given that a registration statement had not been filed) had come due nine months after the execution of the Agreement. Continental never complied with this demand, and this action followed.

  DISCUSSION

  I. Summary Judgment Standard

  Summary judgment shall be granted if the Court determines that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A "genuine issue of material fact" exists if the evidence is such that a reasonable jury could find in favor of the non-moving party. Holtz v. Rockefeller & Co., 258 F.3d 62, 69 (2d Cir. 2001). The moving party bears the burden of establishing the absence of any genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). In deciding a summary judgment motion, the Court must "resolve all ambiguities and draw all reasonable inferences in the light most favorable to the party opposing the motion." Cifarelli v. Babylon, 93 F.3d 47, 51 (2d Cir. 1996). In addition, the Court is not to make any credibility assessments or weigh the evidence at this stage. Weyant v. Okst, 101 F.3d 845, 854 (2d Cir. 1996).

  That both parties have moved for summary judgment does not necessarily mean that summary judgment is appropriate for either side. Home Ins. Co. v. Aetna Casualty & Surety Co., 528 F.2d 1388, 1390 (2d Cir. 1976). In this case, however, the mutual agreement that the case can be resolved on summary judgment is correct. The dispute between the parties turns entirely on the interpretation of the Agreement, and the legal effect of a handful of additional undisputed facts.

  II. Validity of the Agreement

  Continental's claim that the Agreement is void for lack of consideration is totally lacking in merit. Under New York law, "[i]t is well established that the `slightest consideration is sufficient to support the most onerous obligation' and that the courts are not to inquire into the adequacy of consideration." Caisse Nationale de Credit Agricole v. Valcorp, Inc., 28 F.3d 259, 265 (2d Cir. 1994), quoting Mencher v. Weiss, 306 N.Y. 1, 8 (1953). "Generally, parties are free to make their own bargains, and, absent a claim of fraud or unconscionability, it is enough that something of real value in the eye of the law was exchanged." Ferguson v. Lion Holdings, Inc., 312 F. Supp. 2d 484, 494 (S.D.N.Y. 2004) (internal citations and quotations omitted).

  Here, there is no question that the Agreement provided to Continental extremely valuable legal rights, far beyond the "slightest consideration" requisite to create a binding contract. Under the Agreement, Continental acquired the right to demand and receive from Cornell infusions of capital of up to $20 million, at its sole discretion. Like an agreement to create a line of credit in exchange for the payment of a fee, the Agreement provided Continental with an ability to draw down financing as needed. This is more than ample consideration to ...


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