X BGOILANDGAS,LLC,FLTOILANDGAS, : LLC, and BCK OIL AND GAS, LLC, Index No.

Transcription

1 FILED: NEW YORK COUNTY CLERK 11/18/2011 INDEX NO /2011 NYSCEF DOC. NO. 4-1 RECEIVED NYSCEF: 11/18/2011 SUPREME COURT OF THE STATE OF NEW YOM COUNTY OF NEW YORK X BGOILANDGAS,LLC,FLTOILANDGAS, : LLC, and BCK OIL AND GAS, LLC, Index No Plaintiffs, AFFIDAVIT OF - against - LARRY HUTCHER ROBERT B. FIELDS, DONAL R. SCHMIDT, JR., THIMOTHY S. WAFFORD, FTP OIL AND GAS LP and SUN RIVER ENERGY, INC., : Defendants. : STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) LARRY HUTCHER, being duly sworn, deposes and says: 1. I am a member of Davidoff Malito & Hutcher LLP, attorneys for plaintiffs BG Oil and Gas, LLC ("BG Oil"), FLT Oil & Gas, LLC ("FLT Oil") and BCK Oil and Gas, LLC ("BCK Oil") (collectively, the "Plaintiffs"). As such, I am fully familiar with the facts and circumstances set forth herein. I respectfully submit this affidavit in support of Plaintiffs' order to show cause which seeks an order permanently enjoining defendants, Robert B. Fields ("Fields"), Dona1 R. Schmidt, Jr. ("Schmidt"), Thirnothy S. Wafford ("Wafford"), FTP Oil and Gas LLP ("FTP Oil") and Sun River Energy, Inc. ("Sun River") (collectively, the "Defendants"), from fbrther prosecuting an action against Plaintiffs filed by Defendants on or about September 7,20 1 1, in the County Court at Law, Dallas County, Texas, bearing Cause No. CC E (the "Texas Action"). 2. Submitted herewith by Plaintiffs is a memorandum of law, dated November 1 8, ("PI. Mem.").

2 3. Annexed as Exhibit A hereto is a true and correct copy of Plaintiffs' Summons and Complaint in this action, dated September 20,2011 (the "Complaint"). I. Preliminary Statement 4. The simple issue presented by this motion is whether this Court will permit Defendants to continue to prosecute an identical out-of-state lawsuit, commenced duplicitously, as a preemptive strike, after Defendants' counsel had received a draft complaint from me and responded by affirmatively misleading me into believing that Defendants were interested in discussing settlement. By so doing, Defendants induced my clients and I to delay the filing of this action. Thus, Defendants won the race to the courthouse before Plaintiffs even heard the starting gun. Abundant authority cited in the accompanying memorandum of law counsels that this Court need not (and should not) reward such deceptive behavior. Defendants' misconduct contravenes public policy that encourages settlement discussions and discourages procedural gamesmanship. 5. Plaintiffs are investors in certain oil wells operated by Defendants. Collectively, Plaintiffs have invested nearly $1 million to date. However, the project has gone bust and Plaintiffs expect to lose their entire investment. 6. By their first cause of action, Plaintiffs seek compensatory damages from the individual Defendants (the principals of the entity Defendants) who came to New York and made numerous material misrepresentations as a result of which Plaintiffs were fraudulently induced to invest. In particular, the individual Defendants misrepresented their (lack of) knowledge and expertise, and the material economics of the investment -- including its costs, expected rates of return and the time frame required to realize such returns.

3 7. By their second cause of action, Plaintiffs seek equitable relief in the form of an injunction directing the entity Defendants to undo an assignment made in violation of the parties' agreements (the "Assignment"), together with an accounting of the unlawfully assigned assets. Specifically, Plaintiffs had the right to approve any assignment of its interests by Defendant FTP Oil to any assignee other than to an affiliate or subsidiary of FTP Oil. In fact, Plaintiffs further had a right of first refusal to acquire for themselves the interests sought by FTP Oil to be assigned. However, without obtaining Plaintiffs' approval, and in violation of Plaintiffs' rights of first refusal, FTP Oil unlawfully assigned its interests to Defendant Sun River, an entity which is not an affiliate or subsidiary of FTP Oil. 8. As explained in detail below and in the accompanying memorandum of law, Plaintiffs are entitled to a permanent injunction restraining Defendants from further prosecuting the identical Texas Action for at least the following reasons: (a) such relief is necessary to prevent the waste of judicial resources, unnecessary legal expenses and duplicative litigation that might lead to conflicting results; (b) the Texas Action was not brought in good faith and therefore this Court should disregard the fact that the Texas Action was brought first (by a de minimis 13 days); (c) New York has a significant nexus to the parties and to their dispute; (d) Plaintiffs' fraudulent inducement claim is outside the scope of a limited forum selection clause in the parties' agreements which provides for venue in Texas for "claim[s] hereunder;" and (e) Plaintiffs' causes of action relating to the unlawfbl Assignment should be heard in New York because Sun River is not a party to the relevant agreements and therefore is not entitled to enforce the forum selection clause. 9. In short, the Texas Action is nothing more than an ill conceived and poorly designed effort by Defendants to seek a tactical advantage in their dispute with Plaintiffs and do

4 an impermissible "end run" around the legitimate jurisdiction of this Court. The Texas Action need not and should not have ever been filed. The parties' differences can and should be litigated in Plaintiffs' chosen forum, New York, and not in Texas. 11. Statement of Facts A. Background i) The Parties And Their Connections To New York 10. The Managing Members of Plaintiffs BG Oil, FLT Oil and BCK Oil are, respectively, Barbara Goldfarb-Tepperman ("Goldfarb"), Fred L. Tepperman ("Tepperman") and Bernard R. Kossar ("Kossar"). The principal places of business of BG Oil and FLT Oil are located in New York where Teppeman and Goldfarb (husband and wife) reside. (See Compl. at n 6-8.) 11. The individual Defendants, Fields, Schmidt and Wafford, are partners of Defendant FTP Oil and directors/officers of Defendant Sun River. Fields is a New York resident. (a. at fl9-1 1.) ii) The 2008 Investment 12. In or about 2008, the individual Defendants solicited Kossar's investment in the development of certain oil wells located in the East Texas area. This solicitation was made via in-person meetings between Kossar and Fields in New York, and via telephone calls between Kossar, on the one hand, and combinations of Fields, Schmidt and Wafford, on the other, during which Kossar was present in New York. (a, at 7 16.) 13. As a result of that solicitation, Kossar invested approximately $100,000 in Defendants' project. At the project's conclusion, Kossar received back his entire investment plus a profit of approximately $50,000. (a. at )

5 iii) Plaintiffs Are Induced In New York To Make The Investment At Issue 14. In or about mid-2009, the individual Defendants again solicited Kossar to invest in the development of certain oil wells, this time located in Tom Green County, Texas (the "Pecan Station Project"). Tom Green County is located in the West Texas area. (Id. at fl 1 8.) 15. This solicitation, like the prior one, was made via in-person meetings between Kossar and Fields in New York (at the Friars Club as well as at other locations), and via telephone calls between Kossar, on the one hand, and combinations of Fields, Schmidt and Wafford, on the other, during which Kossar was present in New York. (Id, at 7 19.) 16. To further induce the investment, Wafford prepared, at Schmidt's and Fields' direction, a written summary of the "Expected Economics" of the Pecan Station Project (the "Summary"). A true and correct copy of the Summary, together with a transmittal , is annexed hereto as Exhibit B. Among other things, the Summary made certain representations concerning the costs associated with the project, the expected rates of return on the investment and the amount of time necessary to realize said profits. In particular, the Summary projects a rate of return of 5.7 to 1 realized within 7 months in connection with the first of two specified wells ("Stansberry"). As to the specified second well ("Lora"), the Summary projects a rate of return of 4.5 to 1 realized within 8 months. These projections were based on Kossar receiving a 15% working interest and an 11.25% net revenue interest in the Pecan Station Project in exchange for his investment. (Id, at 7 20 and Ex. B.) 17. The individual Defendants also represented to Kossar that they possessed the knowledge and expertise necessary to make the Pecan Station Project a success. (kj. at 121.) 18. The individual Defendants intended that Kossar would rely on their representations. (Id. at 7 22.)

6 iv) Plaintiffs Make The Investment 1 9. Based on the representations made by the individual Defendants, Kossar determined to invest in the Pecan Station Project through his entity, BCK Oil. (Id. at 7 23.) 20. Kossar also introduced the Pecan Station Project investment opportunity to his friend, Tepperman, for Tepperman's potential co-participation. Kossar relayed to Tepperman all of the representations made by the individual Defendants. The individual Defendants were aware of and consented to the potential involvement in the investment of Tepperman (and his wife, Goldfarb), were aware that Kossar relayed their representations to Tepperman, and intended for Tepperman and Goldfarb to rely, like Kossar, on said representations in determining whether to invest in the Pecan Station Project. (a. at 7 24.) 21. Additionally, Defendants repeated the representations to Tepperman directly via telephone calls during which Teppeman was located in New York. (Id, at 1] 25.) In particular, in addition to conversations with Fields, Tepperman spoke with Schmidt and requested the backup for the one-page "Expected Economics" analysis previously provided to Plaintiffs. Schmidt referred Tepperman to Wafford, who, after their conversation, sent Plaintiffs the additional pages which, together with the initial one-page analysis, form the Summary annexed as Exhibit B. 22. Based on the representations made by the individual Defendants, Tepperman and Goldfarb determined to invest in the Pecan Station Project through their entities, FLT Oil and BG Oil, respectively. (Id. at 7 26.) 23. Beginning in November 2009, each of Tepperman, Goldfarb and Kossar have invested, through their respective entities, to date, approximately $305,000 in the Pecan Station Project, for a total investment of approximately $91 5,000 to date. (Id. at 7 27.)

7 v) The Participation Agreements 24. Plaintiffs' investment in the Pecan Station Project was accomplished through three substantially identical Participation Agreements each dated November 6,2009, between Defendant FTP Oil on the one hand and the particular entity Plaintiff on the other (collectively, the "Participation Agreements"). (Id, at 7 28.) A true and correct copy of the Participation Agreement between FTP Oil and BG Oil is annexed hereto as Exhibit C. 25. Pursuant to Paragraphs 2,5 and 6 of the Participation Agreements, Plaintiffs each purchased "a 15% working interest out of a 100% working interest of the wellbore" in the Stansbeny and Lora wells (which 100% working interests had previously been acquired by FTP Oil in October 2008) "subject to the royalties and overriding royalties affecting the Interests as of the date of execution of [the Participation Agreements] aggregating not more than 25% of 8/8ths." (a. at 729 and Ex. C at 1-2.) 26. Paragraph 3 of the Participation Agreements gives Plaintiffs the right of first refusal to purchase a 15% working interest in the wellbore of certain additional oil wells which are also a part of the Pecan Station Project. (Id. at 7 30 and Ex. C at 1.) 27. Paragraph 1 8 of the Participation Agreements, which concerns assignments, provides in relevant part: (u. at and Ex. C at 4.) Unless an assignment is made to an affiliate or subsidiary of a party hereto, this Agreement and interests in the leases may not be assigned or transferred, in whole or in part, without the prior written consent of the non- assigning Party which consent shall not be unreasonably withheld or delayed.... Unless an assignment is made to an affiliate or subsidiary of a party hereto, any purported Assignment shall not be effective unless and until approved in writing by the non-assigning party, whose consent shall not be unreasonably withheld

8 28. In addition to giving the non-assigning party the right to approve an assignment to someone other than a subsidiary or affiliate of the assigning party, Paragraph 18 also gives the non-assigning party the right of first refusal such that the non-assigning party may elect to acquire for itself the interest sought to be assigned by the assigning party. (kj. at 7 32 and Ex. B. at 4.) 29. The Participation Agreements contain a limited choice of forum clause specifying Dallas County, Texas, as the venue for "any claim hereunder." (See Ex. C at 4 (y 1 7), emphasis added.) vi) The Assignment 30. On or about August 3,20 10, Defendant FTP Oil assigned its interests in the Participation Agreements to Defendant Sun River. Simultaneously, FTP Oil sold the interests that are the subject of the Participation Agreements to Sun River by a Purchase and Sale Agreement. (Compl. at 33.) 3 1. Upon information and belief, Sun River is not an affiliate, nor is Sun River a subsidiary, of FTP Oil. (Id, at 7 34.) 32. FTP Oil did not seek, and did not obtain, Plaintiffs' prior written approval to assign the interests in the Pecan Station Project to Sun River. (Id. at 7 35.) 33. As a result, FTP Oil and Sun River deprived Plaintiffs of their right of first refusal to purchase the interests in the Pecan Station Project conveyed by FTP Oil to Sun River. (u, at 7 36.) 34. Had FTP Oil sought Plaintiffs' prior written approval for the Assignment, Plaintiffs would have reasonably denied their consent and/or exercised their rights of first rehsal. (a. at 7 37.)

9 vii) Plaintiffs' Discovery Of The Fraud 35. Plaintiffs have recently learned that Defendants do not, despite their explicit representations to the contrary, have the knowledge and expertise necessary to make the Pecan Station Project a success. In particular, Defendants' expertise and experience is with the development of oil wells located in the East Texas area, such as the project in which Kossar invested in Prior to the Pecan Station Project, Defendants had no experience or expertise concerning the development of oil wells located in the West Texas area. Upon information and belief, the difference is substantial, both from a geological perspective and otherwise. (a. at 1 38.) 36. Moreover, to date, the costs associated with the Pecan Station Project have exceeded 130% of the amount stated in the Summary and represented to Plaintiffs by the individual Defendants. Further, upon information and belief, additional costs are expected to continue to accrue with no end in sight. (Id. at 7 39.) 37. To date, Plaintiffs have received a paltry $500 each return on their investment, despite the fact that significantly more than the 8 months set forth in the Summary and represented to Plaintiffs by the individual Defendants have elapsed since Plaintiffs began to make their investment in the Pecan Station Project (in November 2009). (Id. at 7 40.) 38. Upon information and belief, the individual Defendants knew, at the time they made their representations, that they did not have the knowledge and expertise which they professed to have, and that their statements concerning the cost of the Pecan Station Project, the rates of return on the investments and the length of time necessary to realize the returns were untrue. In furtherance of their fraudulent scheme, the individual Defendants caused FTP Oil to falsely represent in the Participation Agreements that FTP Oil "has acted in good faith with

10 respect to its compilation of geological, engineering and economic data and the presentation to" Plaintiffs. (Id. at and Ex. C at 2 (7 7).) 39. Upon information and belief, the Lora well has been closed down after producing nothing of value and the Stansberry well has produced nothing so far but salt water and a de minimis amount of natural gas (the basis for the $500 return to Plaintiffs). Upon information and belief, Plaintiffs expect not only to not realize any profits from their investments in the Pecan Station Project, but rather, that they will lose the entire collective principal investment amount of approximately $9 15,000 to date (such amount continuing to increase as Plaintiffs are contractually obligated to continue to financially support the Pecan Station Project). (Id. at 7 42.) B. The "Settlement Negotiations" 40. On September 2,20 11, I sent a letter to Sun River's General Counsel, James E. Pennington, Esq., seeking to ascertain whether this dispute could be amicably resolved prior to the filing of any litigation. I attached a draft complaint to my letter. (A true and correct copy of the letter and draft complaint are annexed hereto as Exhibit D.) 41. On or about September 7,20 11, after exchanging voic s over the prior couple of days, Mr. Pennington and I had a telephone conversation. After some preliminary discussions, Mr. Pennington told me to give him a week or two to discuss settlement with his clients (specifically, Schmidt) and then he would get back to me. Acting in good faith and on the presumption that Mr. Pennington would also so act, I secured the consent of my clients to withhold from immediately filing this action and instead waited for further communication from Mr. Pennington. 42. Unfortunately, as set forth below, the promised communication never happened.

11 C. Acting In Bad Faith, Defendants Launch A Preemptive Strike In Texas 43. The next time I heard anything with regard to this matter was ten days later, on September 17,2011, when my clients informed me that BG Oil had been served with the Texas Action. A true and correct copy of the Citation and Original Petition, with a cover letter to BG Oil from the Texas Secretary of State, is annexed hereto as Exhibit E. Of note, the Texas Action appears to have been filed on September 7,2011, the very day that I had spoken to Mr. Pennington. 44. By letter dated September 20,2011, I requested Mr. Pennington to discontinue the Texas Action. (A true and correct copy of the letter is annexed hereto as Exhibit F.) However, Mr. Pennington refbsed my request. 45. In their Texas Action, Defendants recited the fact that Plaintiffs had threatened to bring an action in New York, and, on that basis, asserted a cause of action seeking a declaratory judgment declaring that the Participation Agreements require Plaintiffs to bring their claims in Texas. Among other things, the Texas Action further requests declaratory judgments: (i) declaring that the terms of the Participation Agreements preclude Plaintiffs from asserting fraud claims; and (ii) declaring that Defendants did not breach the assignment provision of the Participation Agreements. (& Ex. E at ) 46. To date, the Texas Action has not progressed beyond the pleadings stage. Attached as Exhibit G hereto is a true and correct copy of Plaintiffs' answer to the petition in the Texas Action. D. PIaintiffs Immediately File This Action 47. On September 20, 201 1, Plaintiffs filed the Complaint, The Complaint asserts three causes of action against Defendants. First, Plaintiffs seek compensatory damages from the

12 individual Defendants for fraudulent inducement to enter into the Participation Agreements. (See Compl. at 1Tfi ) Second, Plaintiffs seek: (a) a declaratory judgment against the entity Defendants declaring that the Assignment violated the Participation Agreements and is thus null, void and unenforceable; and (b) an injunction directing the entity Defendants to undo the Assignment (id. at ). Third, Plaintiffs seek an accounting from Sun River concerning all of the assets transferred to it by FTP Oil and all of the revenues generated therefrom. (a. at fl ) 48. True and correct copies of the affidavits of service, annexed as Exhibit H hereto, evidence service of process in this action upon the individual Defendants. On October 1 1,20 1 1, my associate, Gary I. Lerner, Esq., reached an agreement with Mr. Pennington for Mr. Pennington to accept service of process in this action on behalf of the entity Defendants, in exchange for an extension to December 8,201 1, of all Defendants' time to respond to the complaint. (See ernails annexed as Exhibit I.) 111. Defendants Should Be Permanently En-joined From Further Prosecuting The Texas Action 49. Based upon the above-stated facts and the authorities cited in the accompanying memorandum of law, this Court should issue an order which permanently restrains Defendants from further prosecuting the Texas Action. In particular, as explained in greater detail in the memorandum: this Court possesses equitable powers to enjoin Defendants from prosecuting the Texas Action in order to prevent the waste of j udicial resources, unnecessary legal expenses and duplicative litigation that might lead to conflicting results; it is well-settled that the issuance of such an injunction is appropriate when an action (such as the Texas Action here) is not brought in good faith; the fact that the Texas Action was filed first (by a de minimis 1 3 days) does not militate against granting the requested injunction because New York courts

13 (& P1. Mem. at ) routinely deviate from the "first-in-time" rule where, as here, a party duplicitously files the first action preemptively, after learning of the opposing party's intent to commence litigation; the requested injunction would prevent the waste of j udicial resources, unnecessary legal expenses and duplicative litigation that might lead to conflicting results because the parties to the Texas Action herein are identical, as are the issues to be litigated (k, the individual Defendants' liability to Plaintiffs for fraud and the validity of the Assignment); these issues should be litigated in New York because New York has a significant and substantive nexus to the parties and to this dispute, including the facts that: (a) two of the Plaintiffs and one of the Defendants are residents of New York; and (b) the fraudulent misrepresentations made by Defendants were made in New York and the damages caused thereby have had their effects here. Additionally, the Texas Action has not progressed beyond Plaintiffs' filing of an answer to the petition; Plaintiffs' first cause of action alleging fraudulent inducement is not within the scope of the limited forum selection clause set forth in the Participation Agreements, which provides only that Texas is the forum for "claim[s] hereunder;" and though they allege that the Assignment breached the Participation Agreements, Plaintiffs' second and third causes of action should be litigated in New York because Sun River is not a party to the Participation Agreements and therefore should not be permitted to enforce the forum selection clause. IV. Conclusion 50. No previous application has been made to this or any other court for the relief sought by this order to show cause.

14 WHEREFORE, for all of the reasons set forth herein and in the accompanying memorandum of law, it is respectfblly prayed that Plaintiffs' motion be granted in its entirety and that Defendants be permanently restrained from further prosecy'6hg the Texas Action. Sworn to before me this 18th day of November, / NARCISSUS F. THOMAS i Commissioner of Deeds City of New York, No Ceniircate Filed In Kings County.Commission Expires Nov. I.a6