United States District Court, S.D. New York
OPINION & ORDER
HONORABLE PAUL A. CROTTY, UNITED STATES DISTRICT JUDGE
who are limited partners, allege that Defendants conspired to
fraudulently induce them to invest in a partnership. They
contend that Defendants misrepresented and omitted facts
about the viability of the investment partnership. Defendants
move for dismissal based on Plaintiffs' supposed (1) lack
of standing, (2) release of their claims, and (3) failure to
adequately allege fraud. For reasons stated below, the Court
denies Defendants' motion to dismiss.
March 1 2011, Lawrence Field, on behalf of his company Regent
Private Capital, LLC ("Regent"), entered into an
agreement with Richard Featherly, on behalf of his company,
Syndicated Geo Management, Inc. ("SGM"), for Regent
to help SGM exploit Ohio oil and gas properties on which SGM
had options. See Third Am. Compl. ("TAC")
¶¶ 44-45; TAC Ex. 1, Dkt. 98-1. Field turned to
Metropolitan Equity Partners, LLC ("MEP") and its
managing partner, Paul Lisiak, to raise capita] to finance
the endeavor. Id. ¶ 49. To acquire the
financing, MEP created Metropolitan EIH13, LP
("Metl3"). Id. ¶ 50. Metl3 was to use
the capital it raised to lend money at ¶ 20% interest
rate to its 52%-owned subsidiary, Reed Energy, LLC
("Reed"). Confidential Disclosure Memorandum
("CDM"), TAC Ex. 4 at 1, 3, 5, Dkt. 98-4. And Reed,
in turn, was to acquire shallow and deep drilling rights from
SGM Holdings, LLC ("SGM Holdings") on which SGM
Holdings had options. Id. at 1-2.
effort to raise the money, Field allegedly made a series of
misrepresentations and omissions to Plaintiffs, Lisiak, MEP,
and Metl3. He had calls with various plaintiffs where he told
them that his other company, defendant Premier Natural
Resources, LLC ("Premier"), had conducted diligence
on the land and that the transaction would be lucrative, as
it would be easy to flip the property to any number of
potential buyers. See, e.g., Van Menard Decl. ¶
18, Dkt. 98-5; Crawford Decl. ¶¶ 16-17, Dkt. 98-7.
Field also said that the shallow drilling rights had been
neglected, but with funding, they could produce a large
amount of cash flow. See, e.g., Van Menard Decl.
¶ 22; see also Crawford Decl. ¶¶
18-19. In fact, Field stated that because of an exclusive
arrangement Premier had with Kohlberg Kravis & Roberts,
he was unable to do the transaction himself, but otherwise,
he would have. See, e.g., Van Menard Decl.
¶¶ 23-24; Crawford Decl. ¶ 20. All of this was
a lie, according to Plaintiffs; Defendants had never
conducted any diligence. TAC ¶¶ 56, 86.
Plaintiffs allege that Defendants hid contrary information
from them. In June 2011, Defendants arranged for Bays water
Exploration and Production ("Bayswater") to tour
the property with MEP. TAC ¶ 66. Defendants sought to
have Bayswater operate and manage the operation of the
shallow rights and represented that Bayswater was willing to
do so. Id. ¶ 67. But after the tour, Bayswater
doubted the project's viability and declined to
participate. Id. ¶¶ 69-70. Defendants lied
to MEP about the reason that Bayswater did not want to
participate: Field told MEP that Bayswater wanted to do the
project by itself, but that he saved the deal for MEP.
Id. ¶ 71. And in September 2011, Field sent
Lisiak a purged version of a report Bayswater prepared
("Bayswater Report") that excluded negative
information, such as that the "[e]xisting deal
structure, upfront capital, coupon on debt doesn't fit
the asset and opportunity." See Id.
¶¶ 72, 76; Bayswater Report, TAC Ex. 2 at 6, Dkt.
98-2; TAC Ex. 3, Dkt. 98-3.
then drafted a CDM, dated December 15, 2011, which was sent
to and relied upon by Plaintiffs in deciding to invest in
Metl3. CDM at i; TAC ¶¶ 73, 75. The CDM described
the investment opportunity, and stated, among other things:
As of today, a small portion of the 171 wells are not fully
functioning and the remainder are producing at sub-standard
production levels due to a lack of ongoing investment in
required capital expenditures and proper maintenance. While
neglected, the General Partner's diligence in conjunction
with industry experts suggests that basic improvements may
result in a material increase in current production. Further
the diligence suggests that there are unproven but probable
unexploited reserves on the acreage.
1. The CDM later identified its industry experts as including
Regent, "the Company's advisor on energy sector
specific decisions." Id. at 2. Met 13
supplemented the CDM on May 22, 2012 ("CDM Supp.")
to issue Class B limited partnership interests and solicit
additional funds from investors. TAC ¶ 74; CDM Supp.,
TAC Ex. 8, Dkt 98-8. The CDM Supp. "supplemented] and
modifie[d] the information contained in the" CDM. CDM
Supp. at 1. Investors were directed not to "rely upon
the information contained in [the CDM Supp.] without also
reviewing the risk factors and other information contained in
the CDM." Id. Following their investment in
Metl3, Plaintiffs claim that they "have since been
notified that their investments are a complete loss."
TAC ¶ 87.
limited partners in Metl 3, Plaintiffs granted Metl3's
general partner ("GP"), Metropolitan GP Holdings,
LLC ("MetGP"), and its delegee, MEP, authority to
sign documents on behalf of Metl3. See TAC¶ 88;
First Amended & Restated Partnership Agreement of Metl 3
("Met 13 LP Agreement"), Schulman Decl. Ex. 2
§ 5.03, Dkt. 104-2. The Metl3 LP agreement states that
"[t]he approval of the General Partner or, if the
General Partner has delegated such authority to the
Management Company, the Management Company shall be the only
approval of the Partnership necessary to approve a matter or
an action with respect to the Partnership." Metl3 LP
Agreement § 5.03.
with this authority, MetGP signed a Global Settlement
Agreement ("GSA"), dated as of November 30, 2012,
which released SGM Holdings and its affiliates from any
liability. See TAC ¶ 91; Global Settlement
Agreement ("GSA"), Schulman Decl. Ex. 1, Dkt.
104-1. Specifically, the GSA provided:
MET13, MEP and Paul Lisiak, for themselves and their
respective, assigns, representatives and agents (as
applicable) ..,, hereby fully and finally release, forgive
and forever discharge SGM [Holdings] and its successors,
assigns, subsidiaries, affiliates, members, managers,
shareholders, officers, directors, employees and agents and
any and all persons or entities acting by, through, under or
in concert with any of them . . . from any and all actions,
suits, prosecutions, claims, liabilities, damages or other
legal or equitable remedies, whether known or unknown,
foreseeable or unforeseeable, arising or claimed to arise out
of any act or failure to act of any SGM Released Party from
the beginning of time to the date of the execution of this
GSA § 11(b). The GSA further provided that "MET13,
MEP and Paul Lisiak hereby warrant that each is the legal and
equitable holder of all claims released by them under the
terms of this Section 11(b)." Id. And the
parties acknowledged that the GSA "shall be binding upon
each Party and their heirs, predecessors, successors,
subsidiaries, parties, affiliates, assigns, past and present
officers, directors, agents, servants, employees, attorneys
and any and all persons or entities acting in concert or
participation with the foregoing entities and
individuals." Id. § 21.
April 2, 2014, plaintiffs filed this action in the United
States District Court for the Western District of Tennessee.
On May 26, 2014, the plaintiffs filed an amended complaint,
stating three causes of action: (1) fraudulent
misrepresentation and concealment and fraud in the
inducement; (2) violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") Act, 18 U.S.C.
§1961, et seq.; and (3) conspiracy. Second Am.
Compl. ¶¶ 112-35, Dkt. 22. On February 13, 2015,
District Judge Sheryl H. Lipman ordered the Tennessee action
transferred to this Court. Dkt. 46. Judge Lipman relied in
part on the GSA's forum-selection provision, which she
held to be "applicable and enforceable" against the
plaintiffs. Id. at 13.
March 17, 2016, the Court dismissed all of Plaintiffs'
claims, holding that Plaintiffs lacked standing to sue. Dkt.
85. The Court concluded that Plaintiffs' injuries were
purely derivative of injuries suffered by Metl 3 - in
contrast to direct injuries suffered in their individual
capacities - and that, without direct injuries, Plaintiffs
could not state a direct claim against Defendants.
Id. at 4-5.
appeal, the Second Circuit vacated Court's ruling that
Plaintiffs lacked standing to sue, affirmed the dismissal of
the Plaintiffs' RICO claim on a separate ground, and
remanded for further consideration. Dkt. 93. The Second
Circuit explained that Plaintiffs had standing to state a
direct claim that they were misled into making the investment
to Metl 3, and that Plaintiffs did not have to allege
"the precise amount of the overvaluation, but must only
plausibly allege that there was a distinct overvaluation of
the opportunity presented by Metl 3 on the date of their
investment due to Defendants' identified allegedly
fraudulent misstatements and omissions in the CDM."
Id. at 2-3. The Second ...