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David Russell Family Ltd. v. Dernick

United States District Court, S.D. Texas, Houston Division

March 31, 2018

DAVID H. RUSSELL FAMILY LTD. PARTNERSHIP, LLLP, and NORTHSTAR GAS VENTURES, LLC, Plaintiffs,
v.
STEPHEN H DERNICK, et al, Defendants.

          ORDER AND OPINION ON SUMMARY JUDGMENTS

          MELINDA HARMON UNITED STATES DISTRICT JUDGE.

         Before the Court are two summary judgments in the consolidated.[1] 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.

         Russell 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.

         I. Background

         This 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.

         The 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.

         The 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.

         The 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.

         Section 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 obligations hereunder.

Id.

         As to 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….

Id.

         As to 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 5, 2016.

         The 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.

Id.

         And as 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 Payees.

Id.

         The 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.

         Within 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.

         Russell 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.

         In its 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. Id.

         In its 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.

         In its 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.

         The 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.

         These Motions are now ripe for review. The Court first addresses the jurisdiction, then contract interpretation issue.

         II. Jurisdiction

         The 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.

         It is 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 ...


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