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Tide Natural Gas Storage I, L.P. and Tide Natural Gas Storage Ii, L.P v. Falcon Gas Storage Company

September 29, 2011

TIDE NATURAL GAS STORAGE I, L.P. AND TIDE NATURAL GAS STORAGE II, L.P., PLAINTIFFS/COUNTERCLAIM DEFENDANTS,
v.
FALCON GAS STORAGE COMPANY, INC.; DEFENDANT/COUNTERCLAIM AND CROSS-CLAIM PLAINTIFF,
ARCAPITA BANK B.S.C.; AND ARCAPITA, INC.; DEFENDANTS, AND
HSBC BANK USA, NATIONAL ASSOCIATION, DEFENDANT/CROSS-CLAIM DEFENDANT.



The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.:

Opinion & Order

Plaintiffs/Counterclaim Defendants Tide Natural Gas Storage I, L.P. and Tide Natural Gas Storage II, L.P. (collectively, "Tide") bring this action against Defendant/Counterclaim/Cross-claim Plaintiff Falcon Gas Storage Company, Inc. ("Falcon") and Defendants Arcapita Bank, B.S.C.(c) and Arcapita, Inc. (together, "Arcapita"). Tide's claims-which sound in common law fraud, securities fraud, breach of warranty, and breach of contract-arise out of Tide's purchase of Falcon's interest in the NorTex Gas Storage Company, LLC ("NorTex").

Four motions are now before the Court. First, Falcon and Arcapita (collectively "Defendants") move for judgment on the pleadings dismissing Tide's Complaint, pursuant to Federal Rule of Civil Procedure Rule 12(c).

The remaining three motions relate to funds that are currently being held in escrow pursuant to the purchase agreements for NorTex. Tide, in the Fifth Cause of Action of its Complaint, seeks a permanent injunction restraining the disbursement of the escrowed funds. Falcon and Arcapita move for partial summary judgment dismissing Tide's claim for a permanent injunction. Falcon has also filed a Counterclaim and Cross-claim, the First Cause of Action of which seeks a judgment declaring that Defendant HSBC Bank USA, National Association ("HSBC") must disburse the escrowed funds to Falcon. Falcon moves for partial summary judgment on this request for declaratory relief. Finally, Tide cross-moves for an order of attachment against the debts and property of Falcon and Arcapita, in the event that the escrowed funds are released.

For the reasons stated below, the Court (a) DENIES Falcon's and Arcapita's motion for judgment on the pleadings; (b) DENIES Falcon's and Arcapita's motion for partial summary judgment dismissing the Fifth Cause of Action of Tide's Complaint; (c) DENIES Falcon's motion for partial summary judgment on the First Cause of Action of its Counterclaim and Cross-claim; and (d) DENIES Tide's cross-motion for an order of attachment.

BACKGROUND

I.The Underlying Dispute*fn1

A. Tide's Purchase of NorTex

On March 15, 2010, Tide and Falcon entered into a Purchase Agreement in which Tide agreed to purchase Falcon's 100 percent interest in NorTex, an operator of two natural gas storage reservoirs in Texas for $515 million. (Compl. ¶¶ 12-13.) On March 29, 2010-two days before the NorTex acquisition was scheduled to close-a group of Falcon's minority shareholders filed lawsuits in Texas courts (collectively, the "Hopper Litigation") in an effort to stop the deal from closing. (Plaintiff's Response to Defendants' Statement of Undisputed and Material Facts Pursuant to Rule 56.1 ("Pl.'s 56.1 Resp.") ¶ 15.) The Hopper Litigation plaintiffs also filed notices of lis pendens in Jack and Eastland Counties, in which the NorTex facilities (the "Facilities") are located. (Id. ¶ 18.)

In order to ensure that the NorTex deal would close despite the Hopper Litigation, the parties to the instant action entered into an amended Purchase Agreement ("Amended Agreement") and an Escrow Agreement (collectively, the "Agreements"). The parties designed the Escrow Agreement to protect Tide from any expenses or liability that might be incurred in connection with the Hopper Litigation. (Id. ¶¶ 24, 36.) The Escrow Agreement provided that $70 million of the purchase price (the "Escrowed Amount") would be placed into escrow with HSBC. (Id.)

Disbursement of the Escrowed Amount is governed by Section 3.7(a) of the Amended Agreement. That provision states that Tide and Falcon "shall deliver to [HSBC] joint instructions to disburse the balance of the Escrowed Amount" upon the occurrence of either one of the following "Escrow Breakage Triggers":

(i) a final non-appealable order of each court of competent jurisdiction with respect to the Hopper Claim or

(ii) (A) an agreed dismissal with prejudice of the Hopper Claim . . . ,

(B) a complete release by all of the Participants under the Hopper Claim . . . , and

(C) the final non-appealable release or expungement of the Lis Pendens . . . . (Anderson Decl., Ex. B § 3.7(a).) With the foregoing agreements in place, and with the Escrowed Amount deposited at HSBC, the NorTex transaction closed on April 1, 2010. (Pl.'s 56.1 Resp. ¶ 35.)

On July 27, 2010, Falcon and the Hopper Litigation plaintiffs entered into a written settlement agreement. (Id. ¶ 39.) The actions were dismissed with prejudice when the Hopper Litigation plaintiffs filed nonsuits in each of the courts in which their actions were pending, and the court in Eastland County entered orders expunging the notices of lis pendens. (Id. ¶¶ 40, 42.)

On August 2, 2010, Tide filed this lawsuit against Falcon and Arcapita. (Dkt. No. 1.)

II.Procedural History

Tide's Complaint contains five claims for relief based on misstatements allegedly made by Falcon and Arcapita in connection with the sale of NorTex. (Compl. ¶¶ 10-11.) Tide states that Falcon made specific representations regarding the quantities and value of "pad gas"*fn2 contained in the storage facilities, the operating costs associated with the consumption of fuel in the facilities' operation, and the source of hydrocarbons extracted during the operation of NorTex's natural gas liquid extraction plants. (Id. at ¶ 14.) Tide states that, after closing on the purchase of NorTex, it conducted engineering analyses that revealed a shortfall of billions of cubic feet of NorTex's pad gas. (Id. at ¶ 25.) Tide says that it also discovered that Falcon had neither recorded nor accounted for the fuel used to compress the gas for storage and that the consumption of fuel in that compression process had further depleted the quantities of gas within the facilities. (Id. at ¶ 27.) Finally, Tide states that it also learned that Falcon did not calculate or account for "shrinkage" in gas quantities resulting from the extraction of natural gas liquids from the storage facilities. (Id. at ¶ 30.) Tide estimates the combined economic impact of the gas shortfalls and omitted operating expenses at more than $70 million. (Id. at ¶¶ 37-39.)

Tide brings five claims for relief based on these misstatements. First, Tide alleges that Falcon and Arcapita fraudulently misrepresented material facts about the value of NorTex on which Tide relied in its decision to purchase the facility. Second, Tide alleges that Falcon breached express warranties that Falcon made in the Amended Agreement for NorTex. Third, Tide brings a breach of contract claim, on the ground that Falcon failed to deliver all of the assets represented in the Amended Agreement. Fourth, Tide claims that Falcon's misrepresentations violated section 10 and Rule 10b-5 of the Securities Exchange Act of 1934. Finally, Tide seeks a permanent injunction restraining HSBC from disbursing any funds from the Escrow Account, except pursuant to Section 3.7 of the Purchase Agreement.

Defendants Falcon and Arcapita answered Tide's Complaint, and Defendant Falcon filed a Counterclaim and Cross-claim (1) seeking a declaratory judgment ordering the disbursement of the funds in the Escrow Account and (2) alleging breach of contract by Tide. (See Defs.' Ans. & Countercl., Dkt. No. 6.) Tide asserted various affirmative defenses to Falcon's counterclaims, including that: (1) "Falcon's claims fail because [Falcon] is not entitled to enforce the provisions of agreements procured by fraud"; (2) "Falcon's claims fail because the fraud in the underlying transaction supersedes the obligations set forth in the Escrow and Purchase Agreements"; and (3) "Falcon's claims are barred because Tide is entitled to rescission of the Purchase Agreement." (See Pl.'s Ans. to Defs.' Countercl., Dkt. No. 29, ¶¶ 46, 48, 52.)

DISCUSSION

I.Defendants' Motion for Judgment on the Pleadings

A. Overview

Defendants move, pursuant to Rule 12(c), for judgment on the pleadings dismissing Claims I through IV of Tide's Complaint. Defendants offer four main grounds on which they argue that the claims should be dismissed. First, Defendants note that, in the Amended Agreement, Tide expressly disclaims reliance on any representations or warranties outside of Section IV of the Amended Agreement. Defendants argue that Claims I through IV of the Complaint are not actionable because they are based on alleged misrepresentations that were not included in Article IV. Second, Defendants note that because the Amended Agreement limits Tide's remedies to actions for breach of the indemnity provisions, Tide's common law fraud claim should be dismissed. Third, Defendants contend that Tide failed to plead its federal securities fraud claims with the particularity required under applicable law. Finally, Defendants argue that Tide failed to support its common law fraud and securities fraud claims with adequate allegations of scienter.

B. Rule 12(c) Standard

In deciding a Rule 12(c) motion, courts "apply the same standard as that applicable to a motion under Rule 12(b)(6)." Hayden v. Paterson, 594 F.3d 150, 160 (2d Cir. 2010). In order to survive a motion for judgment on the pleadings, a plaintiff must have pleaded sufficient factual allegations "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Desiano v. Warner-Lambert & Co., 467 F.3d 85, 89 (2d Cir. 2006). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, -- U.S. --, 129 S.Ct. 1937, 1949 (2009). The Court must accept as true all well-pleaded factual allegations in the complaint, and "draw[ ] all inferences in the plaintiff's favor." Allaire Corp. v. Okumus, 433 F.3d 248, 249-50 (2d Cir. 2006) (quotations omitted).

In considering a motion to dismiss, a court may consider "any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference." Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991). In addition, a court may consider a particular document, which is integral to the claims at issue, of which the plaintiff has notice. Yak v. Bank Brussels Lambert, 252 F.3d 127, 130-31 (2d Cir. 2001).

C. Discussion

1. Sections 4.26 and 5.5 Do Not Bar The Claims Asserted Here

Defendants first argue that Claims I through IV of Tide's Complaint must be dismissed because, in Sections 4.26 and 5.5 of the Amended Agreement, Tide disclaims reliance on any representations except those set forth in Article IV of the Amended Agreement. (Defs.' Mem. of Law in Support of Their Mot. for Judgment on the Pleadings ("Defs.' Mem.") at 10-14.) Section 4.26 of the Amended Agreement ("Section 4.26"), entitled "Disclaimer of Additional Representations and Warranties," provides, in pertinent part, that Falcon shall not be deemed to have made to [Tide] any representation or warranty other than as expressly made in this Article IV or the schedules accompanying Article IV. Except as expressly set forth in this Article IV, [Falcon] disclaims all liability and responsibility for any representation, warranty, projection, forecast, statement, or information made, communicated or furnished . . . to [Tide] . . . . (Declaration of Richard T. Marooney dated October 27, 2010 ("Marooney Decl.")

Ex. 2 § 4.26 (emphasis added) (capitalization omitted).)*fn3 Section 5.5 of the Amended Agreement ("Section 5.5"), entitled "Reliance," provides that Tide "has not relied on, nor is it relying on any statement, representation or warranty, either express or implied, concerning [NorTex], . . . other than those expressly made in Article IV or the Schedules accompanying Article IV." (Id. § 5.5 (emphasis added).)

Tide, however, specifically alleges in its Complaint that it relied on two representations made by Defendants in Article IV. Tide states that it relied on representations in Section 4.9 of the Amended Agreement ("Section 4.9") regarding the accuracy of the Financial Statements Falcon provided in order to ascertain the value of the pad gas in the storage reservoirs and the cost of fuel used to operate the facilities. (Compl. ¶¶ 15, 20-21, 51-52.) Tide also states that it relied on representations in Section 4.11 of the Amended Agreement ("Section 4.11") that there had not been any disposition of material NorTex assets between March 31, 2009 and the closing. In its complaint, Tide alleges that both of those Article IV representations were false. (Compl. ¶¶ 15, 20-21, 51-52.)

a. Alleged Misrepresentation in Section 4.9 In pertinent part, Section 4.9 states:

[e]ach balance sheet included in the Financial Statements (including the related notes and schedules) has been prepared in accordance with GAAP and fairly presents in all material respects the consolidated financial position of [NorTex] and its Subsidiaries as of the date of each such balance sheet. . . .

(Marooney Decl. Ex. 2 § 4.9 (emphasis added).) *fn4

Tide alleges that Section 4.9 contains misrepresentations because, contrary to its terms, the Financial Statements (and related notes and schedules) do not "fairly present[ ] in all material respects the consolidated financial position of [NorTex] and its Subsidiaries . . . ." (Id. ยง 4.9.) Tide contends that at least ...


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