United States District Court, S.D. Texas, Houston Division
DAVID H. RUSSELL FAMILY LTD. PARTNERSHIP, LLLP, and NORTHSTAR GAS VENTURES, LLC, Plaintiffs,
STEPHEN H DERNICK, et al, Defendants.
ORDER AND OPINION ON SUMMARY JUDGMENTS
MELINDA HARMON UNITED STATES DISTRICT JUDGE.
the Court are two summary judgments in the
consolidated. Pending before the Court, under Cause No.
4:17-CV-1230 is Plaintiff David H. Russell Family Limited
Partnership, LLLP's (“Russell”) Motion for
Summary Judgment, Doc. 12, Defendants Stephen H. Dernick and
David D. Dernick's (collectively, the
“Dernicks” or “Defendants”) Response
and Cross-Motion for Summary Judgment, Doc. 16, Russell's
Response to Cross-Motion and Reply, Doc. 17, the
Dernicks' Reply in support of their Cross-Motion, Doc.
19, and Russell's Motion to Strike the Dernicks'
Reply in support of their Cross-Motion, Doc. 20. Also pending
before the Court, under Cause No. 4:17-CV-1266, is Plaintiff
Northstar Gas Ventures, LLC's (“Northstar”)
Motion for Summary Judgment, Doc. 10, Dernicks' Response
and Cross-Motion for Summary Judgment, Doc. 12,
Northstar's Response and Reply, Doc. 16, and the
Dernicks' Reply, Doc. 17. After considering these
documents and the applicable law, the Court grants Russell
and Northstar's Motions for Summary Judgment, denies the
Dernicks' Cross-Motions for Summary Judgment, and denies
Russell's Motion to Strike as moot.
and Northstar asks for the court to award promissory note
principal along with pre- and post-judgment interest, and any
other relief allowed, such as attorney's fees and costs.
case involves the interpretation of two unpaid promissory
notes, and the relevant facts are not in dispute. Docs. 1,
12, 16-1, 16-2. Thus, the Court will cite to, but not
separately identify each document cited.
Dernicks, on behalf of Dernick Land, LLC, borrowed funds from
Russell and Norsthar to capitalize Dernick Encore, LLC, an
oil and gas company based in Houston, Texas. Doc. 1. All
parties executed an Amended and Restated Dernick Land Pledge
Agreement, Doc. 1-3, and the Dernicks individually issued
promissory notes to Russell and Northstar (collectively, the
“Notes, ” Doc. 1 at 3.
Dernicks also do not dispute the initial amounts of the
Notes. Stephen Dernick promised to pay Russell $4, 939, 484,
Doc. 1-1, and David Dernick promised to pay Russell $3, 978,
975, Doc. 1-2. Stephen Dernick promised to pay Northstar $1,
549, 733, Cause No. 4:17-CV-1266, Doc. 1-1, and David Dernick
promised to pay Northstar $1, 248, 385, Cause No.
4:17-CV-1266, Doc. 1-2. All Notes accrued at an interest rate
of 18% per annum or the maximum amount of allowable by law,
compounded annually. See, e.g., Doc. 1-1.
Notes were secured by the Dernicks' pledge of interest in
Dernick Land and Dernick Land's interest in Dernick
Encore. Doc. 1 at 3-4; Docs. 1-1 & 1-2, Cause Nos.
4:17-CV-1230 & 1266. Section 4 “expressly
waived” any “notice of demand” or
requirement of “demand” upon “Event of
default.” Section 5 holds the Dernicks
“personally liable” if they do not pay all
“all outstanding principal, accrued but unpaid
interest, and/or accrued and unpaid costs and
expenses.” But, Section 5 also requires that the
Defendants to “first” look to the
“interests in Dernick Land and Dernick Encore” to
satisfy the “obligations hereunder.” Section 6
provides for how the conversion of and appraisal of the
“Member Interests” in “Dernick
Encore” should be made in satisfaction of the debt.
Docs. 1-1 & 1-2, Cause Nos. 4:17-CV-1230 & 1266.
5 makes the Dernicks personally liable for any outstanding
debt after Russell and Northstar look to the Member Interests
for satisfaction of the debt. Section 5 is as follows:
5. Recourse. If Maker is unable to pay in
full all outstanding principal, accrued but unpaid interest,
and/or accrued and unpaid costs; and expenses to which Payee
is legally entitled under this Note and under the Pledge
Agreement, Maker shall be personally liable and Payee will
have full recourse against any real, personal, tangible or
intangible assets of Maker for such deficiency; provided,
however, that Payee agrees to look first solely to the units
and member interests in Dernick Land and Dernick Encore
pledged under the Pledge Agreements to satisfy Maker's
conversion, Section 6 provided that, absent an election by
Russell and Northstar, the balance would be converted
immediately into Dernick Encore Member Interests following
January 5, 2016, at a discount rate of seventy percent (70%)
of the then-current fair market value, as follows:
6. Conversion Right.
Absent an election by Payee to have less than its entire
outstanding balance due converted immediately following the
Maturity Date, any outstanding principal and accrued interest
shall be automatically converted into additional member
interests in Dernick Encore to be transferred out of Dernick
Land's interest therein at a conversion discount rate of
seventy percent (70%) of the then-current fair market value
of said Dernick Encore Member Interests pursuant to the terms
of this Paragraph 6….
appraisal, Section 6 then outlines the steps to determine the
value of the transferred interests. First, Russell and
Northstar should notify the Dernicks that they seek
appraisal. Second, each party selects an appraiser, and those
two appraisers select a third appraiser. Third, using Dernick
Encore's financials and industry standard methods, the
appraisers are to complete the appraisal no later than
February 4, 2016, thirty days after maturity. Fourth,
following appraisal, Dernick Land's Member Interests in
Denrick Encore are transferred. But, fifth, if the appraisal
is not completed after thirty days, then any unpaid amount
accrues at twenty-four (24%) percent annually from February
pertinent portions of Section 6 are as follows:
If on November 1, 2015, any part of this Note is still owing
and outstanding, Maker shall notify Payee in writing that
Maker is commencing the fair market valuation of Dernick
Encore as provided herein. The fair market value of Dernick
Encore will be determined by using the average calculation of
three (3) independent oil and gas appraisers, to be selected
below, each with a minimum of ten (10) years' experience
appraising exploration and production companies in the oil
and gas industry. Within ten (10) business days after
Maker's notification to Payee above, each of Maker and
Payee shall select an appraiser, which appraisers shall in
turn select a third appraiser within ten (10) business days
after having been selected. In addition to using Dernick
Encore's most currently available and updated reserve
report and financials (pro forma and forecast where necessary
as of the Maturity Date), the appraisers will use best
efforts to determine the fair market value of Dernick Encore
Member Interests using industry standard methods and
presuming industry and company conditions as of 12/31/2015.
The reasonable expenses of the appraisal process shall be
borne by Maker. The appraisal process shall be completed no
later than thirty (30) days after the Maturity Date and
transfer of Dernick Land's discounted Member Interests in
Dernick Encore in payment of any remaining balance due on the
Notes (or part thereof if elected by Payee), shall be
completed as soon as possible thereafter. If the appraisal is
not completed by such date (except if any delay is caused by
Payee's appraiser), the interest on any outstanding
unpaid amount hereunder will accrue at twenty-four percent
(24%) annually (in lieu of the eighteen percent (18%) above)
at the end of such 30-day period and until the final
appraisal process is complete. Maker shall take, and cause to
be taken, all reasonable actions necessary, and shall execute
all documents required, to effectuate any transfer of Dernick
Encore Member interest hereunder.
to satisfaction of the debt, should the “Member
Interests” be insufficient to “satisfy all
remaining claims, ” payment priority “shall be in
accordance with Schedule 1, ” and payment would not
limit “other creditor remedies.” Id. The
pertinent portion of Section 6 is as follows:
The parties recognize that the discounted fair market value
of Dernick Land's Member Interests may not be sufficient
to satisfy all remaining claims and hereby agree that payment
priority shall be in accordance with Schedule 1 of the Pledge
Agreements, and further, that said payment shall not limit or
exclude any or all other creditor remedies available to
Notes matured unpaid and the member interests transferred.
Docs. 12 at 10-12, 52; 16-1 at 3; 16-2 at 3. Neither Russell
nor Northstar made an election, and so triggered Section
6's conversion and appraisal provisions. But BSP Agency,
LLC (“BSP”) had a lien on all the assets of
Dernick Encore and a Subordination Agreement that
subordinated Russell and Northstar's rights to BSP's
rights. Docs. 16-1 at 3; 16-2 at 3. Subsequently, Russell
issued a Standstill agreement (“Standstill”) that
was signed by the parties and BSP. Docs. 12 at 11, 43-51;
16-1 at 3-4; 16-2 at 3-4.
the Standstill, the parties agreed to modify the Section 6
appraisal process at step two by limiting the appraisal to
“two appraisers” and at the third step, requiring
the appraisal “to be completed thirty (30) days from
the Effective Date [January 19, 2016], ” instead of the
Maturity Date. They added that the “failure to complete
the Appraisal in thirty (30) days from the Effective Date
will result in a zero-value valuation.” Doc. 12 at 43.
Russell and Northstar also agreed not to take any action
regarding default until “fifty (50) days” from
January 19, 2016. Doc. 12 at 43-45. But no appraisal was ever
completed. Docs. 16-1 at 4; 16-2 at 4.
filed this lawsuit on April 19, 2017, and the Dernicks
Answered on May 17, 2017. Docs. 1 & 11. Northstar filed
its lawsuit on April 24, 2017, and the Dernicks Answered on
May 26, 2017. CA 4:17-CV-1266, Docs. 1 & 9.
Complaint, Russel asserts diversity jurisdiction pursuant to
28 U.S.C. §§ 1332(a), with the controversy
exceeding $75, 000. Doc. 1 at 2. In support of that
assertion, Russell alleges that its “principal place of
business [is] located in Aventura, Florida, ” and its
limited partners, “David H. Russell, Susan T. Russell[,
] and David H. Russell III” are “citizens and
residents of Florida, ” and its general partners are
“[t]he David H. Russell Revocable Living Trust and the
Susan T. Revocable Living Trust.” Id. at 1-2.
David H. Russell and Susan T. Russell are the trustees for
the respective living trusts. Id. at 2. Russell also
alleges that the Dernicks reside in Houston, Texas.
Complaint, Northstar also asserts diversity jurisdiction
pursuant to 28 U.S.C. §§ 1332(a), with the
controversy exceeding $75, 000. Doc. 1 at 2. In support of
that assertion, Northstar alleges that it is organized under
“the laws of the State of Delaware, with its principal
place of business located in Boston, Massachusetts, ”
and its members, “Brent, LLC, Harrisburg Partners, LLC,
Kemosable, LLC and RSIS Business Trust” are not
“Texas entit[ies], ” and each “has its
principal place of business in Massachusetts.”
Id. at 1. Northstar also alleges that the Dernicks
reside in Houston, Texas. Id.
Supplemental Certificate of Interested Parties, Northstar
expands upon the residency of its members' members. Doc.
13. According to the Certificate, Brent, LLC's members
reside in Massachusetts; Harrisburg Partners, LLC's
members reside in Massachusetts and Washington; Kemosabe, LLC
members reside in New Hampshire; and the RSIS Business
Trust's Trustee and Sole beneficiary resides in
Massachusetts. Doc. 13 at 2-3.
parties filed Motions for Summary judgments, Cross-Motions
for Summary Judgment, Responses, and Replies. In their
Motions for Summary Judgment, Russell and Northstar allege
that the Dernicks failed to pay as required by the Notes
after the transfer of the Dernick Land Member Interests, and
which the Standstill valued at zero. Docs. 12 & 10, Cause
Nos. 4:17-CV-1230 & 1266. The Dernicks assert that
Russell and Northstar insufficiently plead jurisdiction, and
that the debt was satisfied when the Dernick Land Member
Interests transferred, regardless of the valuation. Docs. 16
& 12, Cause Nos. 4:17-CV-1230 & 1266. On March 7,
2018, the Court consolidated these two cases. Doc. 37.
Motions are now ripe for review. The Court first addresses
the jurisdiction, then contract interpretation issue.
Dernicks contend, under 12(b)(1), that the Court lacks
subject matter jurisdiction because both Russell and
Northstar failed to allege facts sufficient to support the
diversity aspect of diversity jurisdiction. Id.
fundamental that federal courts must establish subject matter
jurisdiction prior to reaching the substantive claims of a
lawsuit. Arena v. Graybar Elec. Co., Inc., 669 F.3d
214, 223 (5th Cir. 2012). If the court lacks either the
statutory or constitutional authority to adjudicate a claim,
then the claim shall be dismissed pursuant to Federal Rule of
Civil Procedure 12(b)(1). Krim v. pcOrder.com, Inc.,
402 F.3d 489, 494 (5th Cir. 2005). When considering such a
jurisdictional challenge, a “court is free to weigh the
evidence and resolve factual disputes in order to satisfy
itself that it has the power to hear the case.”
Montez v. Dept't of Navy, 392 F.3d 147, 149 (5th
Cir. 2004). Thus, a court “has the power to dismiss for
lack of subject matter jurisdiction on any one of three
separate bases: (1) the complaint alone; (2) the complaint
supplemented by undisputed facts evidenced in the record; or
(3) the complaint supplemented by undisputed facts plus the
court's resolution of ...