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Petrohawk Energy Corp. v. Law Debenture Trust Co. of New York

January 29, 2007

PETROHAWK ENERGY CORPORATION, PLAINTIFF,
v.
LAW DEBENTURE TRUST COMPANY OF NEW YORK, DEFENDANT.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION & ORDER

In bringing this action, plaintiff Petrohawk Energy Corporation ("Petrohawk") seeks the return of $1.2 million that defendant Law Debenture Trust Company of New York ("Law Debenture"), acting as indenture trustee for certain noteholders, received from Petrohawk's paying agent, the Bank of New York Trust Company, N.A. ("Bank of New York"). This lawsuit follows on the heels of litigation between the parties in the Delaware Court of Chancery, where Law Debenture has sued Petrohawk and others over issues arising under an indenture. Law Debenture intends to use the $1.2 million to fund its Delaware action against Petrohawk.

Law Debenture has filed a motion to dismiss this action for lack of standing under Rule 12(b)(1), Fed. R. Civ. P., and for failure to state a claim under Rule 12(b)(6).*fn1 For the following reasons, defendant's motion is granted.

Background

The following facts are undisputed or taken from the complaint. Pursuant to an April 1, 2004 indenture (the "Indenture"), KCS Energy, Inc. ("KCS") issued $275 million in aggregate principal amount of 7.125% Senior Notes due 2012 (the "Notes"). On July 12, 2006, KCS merged with and into Petrohawk, and Petrohawk assumed KCS's rights and obligations relating to the Notes and the Indenture. The Indenture named U.S. Bank National Association ("U.S. Bank") as Indenture Trustee and Bank of New York as the "Paying Agent." The Paying Agent's duties included its obligation to "hold in trust for the benefit of Holders or the Trustee all money held by such Paying Agent for the payment of principal, premium, if any, and interest (if any)" on the Notes.

On August 24, 2006, Petrohawk received a letter from an attorney at Dechert LLP, which is the law firm representing the defendant, purporting to represent certain "institutions which collectively hold in excess of fifty percent (50%) of the outstanding principal amount" of the Notes. The letter stated that U.S. Bank was removed as Indenture Trustee, and defendant Law Debenture was being appointed as successor Indenture Trustee in its place. Petrohawk advised Law Debenture by a September 1 letter that the purported removal of U.S. Bank was invalid and ineffective on its face. On September 14, Law Debenture commenced an action in the Delaware Court of Chancery against Petrohawk and certain present and former members of the board of directors of Petrohawk and KCS, alleging that following the merger, a "change of control" under the Indenture had occurred, triggering the Noteholders' redemption rights, and claiming breach of the Indenture and related causes of action. Among other things, the subject of the Delaware action includes the question of whether Law Debenture is a validly appointed Indenture Trustee.

On October 1, Petrohawk deposited with Bank of New York approximately $9.8 million, in accordance with the Paying Agent Agreement between Petrohawk and Bank of New York, for the sole and exclusive purpose that such funds be held in trust and disbursed to Noteholders in satisfaction of Petrohawk's semi-annual interest obligation. Petrohawk was obligated to deposit "by 11:00 a.m. on or prior to the due date . . . a sum in same day funds sufficient to pay the principal of, premium, if any, or interest so becoming due," with such funds being "considered paid on the date due if on such date the Paying Agent holds in accordance with this Indenture money sufficient to pay."

In order to fund the Delaware litigation, Law Debenture obtained $1.2 million of the deposited funds from Bank of New York. Law Debenture informed Petrohawk of this transfer through an October 6 letter. Petrohawk complains that the Indenture "does not authorize the advancement of a seven-figure war chest for Defendant to conduct litigation against Petrohawk."

Petrohawk filed this complaint on October 13, 2006, seeking relief for conversion, tortious interference, and constructive trust. Petrohawk seeks an order compelling Law Debenture to return the funds that were wrongfully appropriated, restitution and disgorgement of the funds, imposition of a constructive trust and/or equitable lien on the funds, damages for injury to business reputation, punitive damages, interest, and attorneys' fees and costs. Law Debenture filed this motion to dismiss, claiming that Petrohawk lacks Article III standing under Rule 12(b)(1) and that it has failed to state a claim upon which relief may be granted, under Rule 12(b)(6).

Discussion

Under the pleading standard set forth in Rule 8(a) of the Federal Rules of Civil Procedure, a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). "[A] plaintiff is required only to give a defendant fair notice of what the claim is and the grounds upon which it rests." Leibowitz v. Cornell Univ., 445 F .3d 586, 591 (2d Cir. 2006). Article III standing is properly challenged through a motion to dismiss under Rule 12(b)(1). Alliance for Envtl. Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 88 n.6 (2d Cir. 2006). A district court must generally establish that the plaintiff has Article III standing first, before deciding a case on the merits, such as on a Rule 12(b)(6) motion to dismiss. See id. at 85 (citing Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 101 (1998)).

A. Article III Standing Law Debenture Claims Petrohawk lacks Article III Standing*fn2

Standing is challenged on the basis of the pleadings, and thus the court accepts as true "all material allegations of the complaint, and must construe the complaint in favor of the complaining party." Bldg. & Constr. Trades Council v. Downtown Dev., Inc., 448 F.3d 138, 144 (2d Cir. 2006). "Under Article III of the Constitution, it is 'axiomatic' that a federal court may not exercise jurisdiction over a dispute unless the plaintiff shows 'that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant.'" Jones v. Unum Life Ins. Co. of Am., 223 F.3d 130, 141 (2d Cir. 2000) (citing Blum v. Yaretsky, 457 U.S. 991, 999 (1982)). "To meet the Article III standing requirement, a plaintiff must have suffered an 'injury in fact' that is 'distinct and palpable'; the injury must be fairly traceable to the challenged action; and the injury must be likely redressable by a favorable decision." Denney v. Deutsche Bank AG, 443 F.3d 253, 263 (2d Cir. 2006) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). "An injury-in-fact must be 'distinct and palpable,' as opposed to 'abstract,' and the harm must be 'actual or imminent,' not 'conjectural or hypothetical.'" Id. at 264 (citing Whitmore v. Arkansas, 495 U.S. 149, 155-56 (1990)).

Petrohawk claims it has Article III standing because Law Debenture diverted funds that Petrohawk had provided for the benefit of its Noteholders. According to Petrohawk, the Noteholders retain their right to receive those funds, and Petrohawk has an ongoing obligation to provide those funds. The injury-in-fact that ...


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