United States District Court, S.D. New York
December 28, 2005.
CONTINENTAL ENERGY CORPORATION, Plaintiff,
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.
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.
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
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 support the commitment fees Continental
obligated itself to pay, whether or not it ever called upon the
financing that Cornell pledged to provide.
III. Impossibility of Performance
In its opposition to Cornell's motion for summary judgment,
Continental shifts ground, essentially abandoning the argument of
lack of consideration in favor of a claim that the Agreement is
unenforceable because of impossibility of performance.*fn1
Continental argues that performance of the Agreement was
frustrated because it was legally impossible for it to file a
registration statement, since the transaction contemplated in the
Agreement "was not consistent with applicable SEC regulations."
(Pl. Mem. Opp. Summ. J. 5.) According to Continental, the
Agreement "was executed in a form no longer approved by the SEC,"
as the "pricing mechanism . . . set forth in the . . . Agreement
would not be acceptable to the SEC," and there was thus "no way a
registration statement would be approved by the SEC with that
pricing mechanism in it." (Id.) Continental's argument,
however, is completely devoid of legal or factual support.
It is common ground that "[p]arties cannot ordinarily contract
to perform the impossible; the doctrine of impossibility is
implicated where performance is forbidden or prevented by law or
decree or administrative action in that location. . . . So long
as the contracting party is acting in good faith, it is
discharged from duty when the performance could not be effected
pursuant to local law." In re Flag Telecom Holdings Ltd., 320 B.R. 763, 771
(S.D.N.Y. 2005) (internal citations and quotations omitted).
Indeed, the Agreement itself contains a provision requiring that
the transaction comply with applicable laws and SEC regulations.
(Agreement § 7.2(e).) Thus, if SEC regulations in fact prohibited
the registration of the Continental stock that is the condition
precedent to the performance of the Agreement, Continental would
be correct that its performance would be excused.
However, Continental offers no evidence whatsoever of any SEC
regulation to that effect. Nowhere in its brief does it cite or
refer to a single SEC regulation, decision, or pronouncement of
any kind, nor does it identify the source of the prohibition that
it claims prevented registration of stock priced according to the
mechanism set forth in the Agreement. Nor does Continental
present an affidavit or testimony from any expert witness
knowledgeable in SEC practice to support the proposition that the
SEC has a policy or practice of refusing registration to
securities so priced. The closest thing to evidence of this kind
proffered by Continental is testimony by its CEO Richard McAdoo
that he was advised by a lawyer named Clay Parker that
registration would be impossible. (McAdoo Dep. 92-97.) This
statement, however, is inadmissible hearsay if offered to prove
the truth of the matter asserted that is, that SEC regulations
or policies would in fact prevent registration of the securities
with the pricing mechanism contained in the Agreement.
Fed.R.Evid. 801(c), 802. "[O]nly admissible evidence need be considered
by the trial court in ruling on a motion for summary judgment."
Raskin v. Wyatt Co., 125 F.3d 55, 66 (2d Cir. 1997); see also
Fed.R.Civ.P. 56(e) (summary judgment affidavits "shall set forth such facts as would be admissible in
Continental thus provides neither admissible evidence nor
citation to legal authority to support its bald assertion that
SEC regulations prevented the registration of the securities and
the performance of the Agreement.*fn3 It has had ample
opportunity to do so. Cornell demanded compliance with the
commitment fee provisions of the Agreement in July 2002; this
action has been pending since January 2004. Nevertheless,
Continental proffered in its opening brief no supporting legal
analysis, evidentiary support, or expert opinion to back up its
claims regarding SEC regulations or policy. Cornell's submission
in opposition to Continental's cross-motion, which calls
attention to the absence of supporting authority or evidence, was
filed in June 2005; Continental has not filed a reply brief. On
this record, Continental has raised no genuine issue of material
fact regarding impossibility of performance. IV. Remaining Claims
Continental's claims for unjust enrichment, conversion, and
replevin, which seek return of the one million shares already
provided to Cornell, are all premised on the invalidity or
frustration of the Agreement. Since Continental's position in
this regard is without merit, Cornell is entitled to summary
judgment on those claims as well. As there is no dispute that
Continental has not performed its promise to deliver the second
portion of the commitment fee, and its defense to Cornell's claim
for breach of contract is premised solely on its claims of
invalidity of the contract, Continental is entitled to a
declaratory judgment not only that the Agreement is valid and
enforceable but also that Continental has breached the contract.
In light of that determination, Cornell's counterclaim sounding
in promissory estoppel and detrimental reliance is dismissed as
Accordingly, for the reasons stated above, defendants' motion
for summary judgment dismissing plaintiff's claims is granted;
defendants' motion for summary judgment in their favor on their
counterclaims is granted as to Count One and Count Two, and Count
Three is dismissed as moot; and plaintiff's cross-motion for
summary judgment is denied.
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