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DNV Investment Partnership v. Field

United States District Court, S.D. New York

September 7, 2017

DNV INVESTMENT PARTNERSHIP, Plaintiffs,
v.
LAWRENCE FIELD, et al., Defendants.

          OPINION & ORDER

          HONORABLE PAUL A. CROTTY, UNITED STATES DISTRICT JUDGE

         Plaintiffs, 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.

         BACKGROUND [1]

         On 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.

         In an 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.

         Moreover, 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.

         Metl3 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.

         CDM at 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.

         As 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.

         Consistent 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 Agreement.

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.

         On 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.

         On 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.

         On 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 ...


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