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Warberg Opportunistic Trading Fund L.P. v. Georesources, Inc.

Supreme Court of New York, First Department

June 8, 2017

Warberg Opportunistic Trading Fund L.P., et al., Plaintiffs-Appellants-Respondents,
v.
GeoResources, Inc., Defendant-Respondent-Appellant. Waterstone Capital Management, L.P., Plaintiff-Respondent, Warberg Opportunistic Trading Fund L.P., et al., Plaintiffs-Respondents-Appellants, Waterstone Capital Management, L.P., Plaintiff-Respondent,
v.
GeoResources, Inc., Defendant-Appellant-Respondent.

          O'Melveny & Myers LLP, New York (Gary Svirsky of counsel), for appellants-respondents/respondents-appellants and respondent.

          Simpson Thacher & Bartlett LLP, New York (George S. Wang of counsel), for respondent-appellant/appellant-respondent.

          Richter, J.P., Mazzarelli, Kahn, Gesmer, JJ.

         Judgment, Supreme Court, New York County (Saliann Scarpula, J.), entered March 24, 2016, awarding plaintiff Waterstone Capital Management, L.P. (Waterstone) the sum of $1, 845, 428.51, plus interest from July 2, 2012 in the sum of $619, 305, 58, for the total sum of $2, 464, 734.09, unanimously reversed, on the law, with costs and the judgment vacated. Order, same court and Justice, entered December 1, 2015, which, to the extent appealed from as limited by the briefs, denied plaintiffs' motion for summary judgment on their cause of action for reformation as to plaintiffs Warberg Opportunistic Trading Fund L.P. (Warberg) and Option Opportunities Co. (OOC) and granted the motion as to plaintiff Waterstone Capital Management, L.P. (Waterstone), and granted defendant GeoResources, Inc.'s motion for summary judgment dismissing the reformation cause of action with respect to Warberg and OOC and denied the motion as to Waterstone, unanimously modified, on the law, to deny summary judgment to all parties, and otherwise affirmed, without costs. Appeal from order, same court and Justice, entered February 29, 2016, which determined the damages awarded Waterstone, unanimously dismissed, without costs, as subsumed in the appeal from the judgment.

         This appeal concerns a pool of warrants to purchase shares in defendant GeoResources. The warrants, which were issued in June 2008, gave their holders the right to purchase a specified number of shares at any time from six months after the purchase date until June 9, 2013, at an exercise price of $32.43 per share. Each warrant included "anti-dilution" provisions, which were intended to protect the holder's investment in the event that defendant issued or sold stock, or took any of the several specified actions deemed to be an issuance or sale of stock. Section 8(f) of the warrants contained a formula that provided for the adjustment of the exercise price in such a circumstance. However, section 8(h) established a floor below which the exercise price could not drop, by providing as follows:

         "Notwithstanding any other provisions of Section 8(f) to the contrary, no adjustment provided for in Section 8(f) shall result in a reduction of the Exercise Price to an amount less than $32.43 per Warrant Share (as appropriately adjusted for the occurrence of any events listed in [other anti-dilution clauses of Section 8])."

         That the floor price was the same as the exercise price, a result which would appear to defeat the very purpose of the anti-dilution provision, is the subject of this appeal.

         Plaintiff Waterstone purchased its warrants directly from defendant at the time of issuance. Plaintiffs Warberg and OOC, on the other hand, did not acquire their warrants directly from defendant, but on the secondary market, in seven separate transactions. Four of the transactions entered into by Warberg and OOC were pursuant to agreements with other secondary purchasers of the warrants, which provided that the sellers "shall sell, convey, assign and deliver to the Buyer, and the Buyer shall purchase from the Seller, the Securities and any and all rights and benefits incident to the ownership thereof." The three remaining transactions were with initial investors such as Waterstone (but not Waterstone itself). The agreements governing those transactions employed the above language, and further provided that, with respect to title to the securities, the seller "is the lawful owner" of the securities with "good and marketable title, and "has the absolute right to sell, assign, convey, transfer and deliver the Securities and any and all rights and benefits incident to the ownership thereof... all of which rights and benefits are transferable by the Seller to the Buyer pursuant to this Agreement, free and clear of all [claims], " including "security interests, liens, pledges, claims (pending or threatened), charges, escrows, encumbrances."

         As provided for in the purchase agreements governing the Warberg and OOC warrant purchases, the sellers of those warrants first delivered them to defendant, which cancelled them and issued new warrants, transferring them to Warberg and OOC pursuant to "Assignment Forms." Two of those forms provide that "for value received, the foregoing Warrant and all rights evidenced thereby are hereby assigned to [Warberg and OOC]." The remaining Assignment Forms state that plaintiffs were transferred "all of the rights of [the assignor] under this Warrant."

         In December 2009 and January 2011, defendant sold shares for less than the exercise price of $32.43. After the January 2011 sale of stock, Waterstone raised with defendant the possibility that the purchase price in its warrants would need to be reduced pursuant to the anti-dilution provision, and discussions among the parties about a possible adjustment continued over the following year. However, no accommodation was reached. Plaintiffs, in communications among themselves, focused on an unsigned, draft warrant that had been circulated to the initial investors in June 2008, right before defendant issued the warrants. The draft was attached to an email from Nicholas Wunderlich, an executive at Wachovia Securities, which defendant had hired as its placement agent in connection with the issuance of the warrants. Wunderlich wrote to the investors that "[i]t has been brought to my attention that when final docs for the... transaction were distributed last week, certain information (such as date, share count, and exercise price of warrant) was left blank. These amounts do not differ from what was communicated to you last week. However, attached for your records are the documents in their final form with this information inserted."

         Section 8(h) of the draft warrant that was attached to the email stated $28.07 as the floor price, in contrast to the $32.43 figure contained in the final, issued warrant.

         Plaintiffs initiated this action asserting that defendant had breached the contract by failing to adjust the exercise price, and seeking damages and specific performance. The complaint alleged causes of action for breach of contract, specific performance, declaratory relief, fraudulent inducement, promissory estoppel, and unjust enrichment. Defendant moved to dismiss the complaint, on the basis that the warrants were unambiguous and set a floor price of $32.43. Supreme Court granted the motion to the extent of dismissing plaintiffs' claims for declaratory relief, promissory estoppel, fraudulent inducement, and unjust enrichment only. This Court unanimously affirmed (112 A.D.3d 78');">112 A.D.3d 78 [1st Dept 2013]). We found that "the notwithstanding' provision in section 8(h) clearly overrides any conflicting provisions in section 8(f), " even though "it renders the adjustment formula in section 8(f) impotent" (id. at 83). The breach of contract claim was allowed to proceed based on the draft warrant attached to the Wunderlich email. We noted that "the email appears to have been sent only to employees of Waterstone and not to Warberg or OOC. Unless there is evidence to prove that the floor price error applies to all plaintiffs' warrants, then the claims by Warberg and OOC should be dismissed because the floor price in their warrants would remain $32.43. However, that is an issue to be determined by the trial court after some discovery" (112 A.D.3d at 85 n4).

         Following this Court's decision, plaintiffs filed amended complaints, the second of which whose cause of action for reformation is the sole issue on this appeal. Plaintiffs claim that the floor price was intended to be $28.07, but that through a scrivener's error, the warrants were issued with an erroneous floor price of $32.43. In support of their claim of scrivener's error, plaintiffs cited the Wunderlich email and the attachment thereto. Defendant moved for summary judgment dismissing the amended complaint, arguing, as relevant here, that the evidence of the parties' intent with respect to the floor price term was not sufficient to support a claim of reformation. Plaintiffs opposed the motion for summary judgment, and, as relevant here, moved for summary judgment on their reformation claims, arguing that the evidence conclusively established that the parties intended the floor price to be $28.07.

         The court granted Waterstone summary judgment on its reformation cause of action, and granted defendant's motion to the extent of dismissing the complaint with respect to Warberg and OOC. The court cited the Wunderlich email, as well as other emails between Waterstone and its representatives. The court emphasized that Wachovia was defendant's agent with respect to the transactions at issue, regardless of the fact that its engagement letter with defendant included a limitation-of-engagement clause stating that Wachovia was to serve as an independent contractor and disclaiming the creation of a fiduciary duty or agency relationship. The court concluded that this only limited the scope of the agency, and that the documentary evidence "plainly shows that [defendant] had an agency relationship with Wachovia such that it made binding offers with respect to the warrants at issue here." Given that agency relationship, the court found it clear that the parties had agreed to the $28.07 floor price, and that the $32.43 price was a scrivener's error made by defendant's counsel. The court rejected as "nonsensical" the argument that the parties intentionally nullified the anti-dilution ...


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