Miller v. Mercuria Energy Trading, Inc.

Citation: 291 F. Supp. 3d 509Docket: 17 Civ. 8859 (JSR)

Court: District Court, S.D. Illinois; March 4, 2018; Federal District Court

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Defendants Mercuria Energy Trading, Inc. and its affiliates, along with Upstream Latinoamérica, S.L. and Phoenix Global Resources PLC, have filed motions to dismiss plaintiff Jeffrey W. Miller's five-count complaint for breach of contract and breach of the duty of good faith and fair dealing. Miller claims entitlement to redeem his preferred Class A shares in ULA, which he alleges were denied in violation of ULA's Articles of Association and his separation agreement with the Mercuria Parties. 

Mercuria Energy Group Limited, a global energy trading company, is a non-party to the action but is the parent of the involved defendants, which are subsidiaries of Mercuria EG. Miller, an investment professional, joined Mercuria EG in 2008 and later worked with its U.S. affiliate, METI. He played a key role in acquiring Glacco Compania Petrolera S.A., which owns significant assets in Argentina, and continued to manage Glacco as its Director and President. 

ULA was established specifically to hold Glacco's assets and is incorporated in Spain. Miller acquired a carried interest in ULA's Class A preferred shares for a nominal fee from Guillaume Jean Roger Vermersch, ULA's sole director and founder, while Mercuria EAM holds the majority of ULA's ordinary shares.

Miller, as a Class A preferred shareholder in ULA, holds rights to redeem his shares upon the company's voluntary or compulsory dissolution or liquidation, which includes receiving a preferred liquidation quota. The Articles of Association specify dissolution events, such as transferring the company's share capital or the majority control to a third party or the majority asset transfer of any operating companies. Miller resigned from Mercuria in October 2012, leading to a Mutual Release and Settlement Agreement with several defendants, including Mercuria affiliates. This agreement addresses Miller's carried interests, particularly the JWM Glacco Carried Interest, and confirms that his Class A shares entitle him to a preferred liquidation quota of 7% of ULA's operating profit above a 10% return. It also grants him a redemption right contingent on specific reorganizations under Spanish law. The agreement outlines a potential merger between Mercuria and Roch, which could trigger Miller's redemption rights based on the final structure of the merger. Additionally, Miller may opt to exchange his ULA Preferred Shares for ordinary shares in the new entity, Mercuria/Roch NEWCO, in accordance with the Articles of Association and relevant laws.

"Redemption Events" are defined as either (1) an IPO Event, wherein HoldCo could go public via an IPO on the Toronto Stock Exchange or a reverse merger (though not guaranteed), or (2) a completed sale of HoldCo's equity to a third party under a fully negotiated and executed purchase agreement (the "Equity Sale"). Section V(B)(vi), titled "Governance of Preferred Shares," stipulates that Miller's Preferred Shares and related statutory rights in ULA (or its successor entity) will be governed by ULA's Articles of Association, which take precedence over any conflicting terms in this Settlement Agreement. A forum selection clause specifies that any legal action related to this Settlement Agreement must be filed in the United States Federal District Court for the Southern District of New York but clarifies that this clause does not modify any other agreements between the parties. 

Additionally, on July 24, 2017, Mercuria announced the consolidation of its Argentinian oil and gas interests with Andes Energia PLC through a transaction known as the "Phoenix Transaction." Mercuria EAM sold its shareholdings in ULA, excluding Miller's shares, to Trefoil Holdings B.V., which controlled 99.99% of PETSA, the operating company for Mercuria's Argentinian business. Trefoil's shares were subsequently sold to Andes Energia, which then sold about 75% of its shares to Upstream Capital Partners VI Limited, a subsidiary of Mercuria EG. Following the transaction, Trefoil Holdings became a wholly-owned subsidiary of Andes, and ULA became an indirect subsidiary of Andes. The combined entity was rebranded and is now publicly traded as Phoenix Global Resources PLC on the London and Buenos Aires Stock Exchanges.

Incorporated under the laws of England and Wales, with its principal business location in London, Phoenix Global Resources PLC is involved in a legal dispute initiated by Miller, who filed a complaint on November 14, 2017, after sending a demand letter to Mercuria Energy Trading SA on September 8, 2017, which was rejected. The complaint includes five claims: breach of the Articles of Association against ULA (Count I), breach of contract and implied covenant of good faith against Mercuria Parties (Counts II and III), and breach of contract and implied covenant of good faith against Phoenix Global (Counts IV and V). The defendants, including the Mercuria Parties, Phoenix Global, and ULA, have filed motions to dismiss the complaint. 

The Court heard arguments regarding the motions on February 8, 2018. The Mercuria Parties seek dismissal of Counts II and III based on Federal Rule of Civil Procedure 12(b)(6), which requires that a complaint must present sufficient factual matter to state a plausible claim for relief. The Court can consider documents referenced in the complaint, such as the Separation Agreement. Under New York law, to establish a breach of contract, the plaintiff must show an agreement, adequate performance, breach by the defendant, and damages. The dispute centers on whether the Mercuria Parties breached the Separation Agreement, which they argue only granted Miller rights contingent upon the Roch Merger, while Miller asserts his rights were triggered by the Phoenix Transaction, citing incorporation of the ULA Articles of Association and arguing that references to the Roch Merger were illustrative. The legality of incorporating terms from other agreements is acknowledged under contract law.

Courts assess whether a contract incorporates a document by reference using an objective standard, focusing on whether a reasonable person would recognize the referenced document. Two key factors are evaluated: (1) whether the incorporated document is clearly identified and described, allowing for unequivocal identification, and (2) whether the language indicates a clear intent to incorporate the referenced material into the contract. The Separation Agreement explicitly identifies the ULA Articles of Association multiple times and discusses its provisions, demonstrating clear intent to incorporate them. The references include details about Class A Preferred Shares and rights governed by the Articles of Association. The Court concludes that the ULA Articles of Association are expressly referenced and that the intent to incorporate them is clearly communicated. However, incorporation by reference is limited to the specific section and purpose for which the document is identified. In this case, the Separation Agreement incorporates the ULA Articles solely for determining when Miller's redemption rights are activated, thereby triggering the Mercuria Parties' obligations regarding the JWM Glacco Carried Interest.

The Separation Agreement clearly states that the Mercuria Parties do not intend to assume ULA's obligations under the Articles of Association. Consequently, the limited incorporation of these Articles does not impose obligations on the Mercuria Parties concerning the JWM Glacco Carried Interest, except in the event of the Roch Merger, which did not occur. The Agreement does not confer any rights to Miller regarding the JWM Glacco Carried Interest absent the Roch Merger. Legal principles dictate that the parties' intentions control contract interpretation, and the contract itself is the best evidence of intent. If a contract is clear and unambiguous, it should be enforced according to its plain meaning, and interpretation becomes a question of law for the court without needing extrinsic evidence.

Miller contends that the valuation methodology in the Separation Agreement applies to the redemption of the JWM Glacco Carried Interest due to the Phoenix Transaction, asserting that the Mercuria/Roch merger example was only illustrative. However, all defined terms in Section V that trigger a "Redemption Event" are based on the Roch Merger. The Agreement explicitly limits Miller's rights concerning his JWM Glacco Carried Interest to specific scenarios following the Roch Merger, which never happened. Therefore, Miller is not entitled to redemption of his preferred shares or any liquidation rights under the Agreement. As the Mercuria Parties do not breach the Separation Agreement, Count II is dismissed.

Count III alleges that due to the Phoenix Transaction, the Mercuria Parties are obligated to redeem the JWM Glacco Carried Interest under the Separation Agreement and have acted in bad faith by rejecting Miller's demands for payment.

A claim for breach of the implied covenant of good faith and fair dealing cannot proceed if it is based on the same conduct as a breach of contract claim and is linked to the same damages. In the case at hand, Miller's claims are intertwined, as both Count II (breach of the Separation Agreement) and Count III (breach of the implied covenant of good faith and fair dealing) arise from the same actions and assert identical damages of at least $32,600,000 plus interest. Miller argues that Count III is distinct because it addresses the Mercuria Parties' failure to redeem his preferred shares per the ULA's Articles of Association, while Count II relies on the specific terms of the Separation Agreement. However, the court finds that either the Articles are incorporated into the Separation Agreement, making Count III duplicative, or they are not, in which case there is no obligation to redeem, negating any claim of bad faith. Consequently, Count III must also be dismissed. Furthermore, Phoenix Global and ULA seek to dismiss Counts I, IV, and V due to lack of personal jurisdiction and, for Counts IV and V, for failure to state a claim.

To withstand a motion to dismiss for lack of personal jurisdiction, a plaintiff must establish a prima facie case that jurisdiction exists, requiring good faith allegations with factual specificity rather than mere conclusory assertions. The court first examines the long-arm statute of the forum state, which in this case is New York. General jurisdiction in New York allows for a court to exercise authority over a non-domiciliary defendant engaged in continuous and systematic business activities within the state. A corporate defendant is generally subject to jurisdiction only in its place of incorporation and principal place of business, unless exceptional circumstances exist that render it "at home" in the forum state.

Specific jurisdiction under New York's CPLR § 302(a)(1) requires that the defendant transacts business in New York and that the cause of action arises from that transaction. For the first prong, the defendant must purposefully avail itself of the privilege of conducting activities in New York. For the second prong, there must be a substantial relationship or articulable nexus between the business transaction and the claim.

Miller claims jurisdiction over ULA and Phoenix Global, but ULA, incorporated in Spain with its principal business in Madrid, has no business connections to New York. Similarly, Phoenix Global, incorporated in England and Wales with its principal business in London, only has a minimal connection through its arrangement with the Bank of New York for American Depository Receipts related to its shares traded in London.

Miller asserts personal jurisdiction based on a forum selection clause in the Separation Agreement, arguing that non-signatories can still be bound if their conduct is closely related to the contractual relationship. Legal precedents indicate that the standard for being "closely related" is stringent. A non-party must be sufficiently connected to the dispute, making it foreseeable they would be bound. Specifically, a non-party's interests must be derived from or directly related to the signatory's interests.

Regarding Count I against ULA, the court determines it does not need to assess ULA's relationship to the Mercuria Parties, as the forum selection clause explicitly does not apply to claims arising from the ULA Articles of Association. The clause states it governs only the Settlement Agreement and does not alter the jurisdiction governing other contracts, meaning the court lacks personal jurisdiction over ULA for this count.

For Counts IV and V against Phoenix Global, Miller presents three arguments for why Phoenix Global is closely related to the Mercuria Parties and should be bound by the forum selection clause: 1) Mercuria EG, which owns Phoenix Global, is a majority stakeholder; 2) Phoenix Global possesses the Glacco oil field assets and ULA shares previously owned by Mercuria EAM; and 3) Mercuria holds three board seats at Phoenix Global, with key executives from Mercuria in leadership positions.

Mercuria EAM holds a small number of shares in Phoenix Global, which contends it is not closely related to the forum selection clause due to its lack of foresight regarding the clause, as the Separation Agreement predated its involvement in the contested transactions. However, the court finds that this lack of foresight does not negate the definition of "closely related," applicable to successors-in-interest. The court identifies two primary reasons for ruling that Phoenix Global does not meet the "closely related" criteria. First, the relationship between Phoenix Global and the Mercuria Parties is less direct than relationships in prior cases where non-signatories were bound by forum selection clauses. Notable examples include cases where non-signatories acted as subsidiaries or alter egos of the signatories. In contrast, the connection between Phoenix Global and the Mercuria Parties is horizontal rather than vertical, lacking a direct ownership or derivative interest. Second, Phoenix Global's role in the transaction leading to the claims was passive; most cases binding non-signatories involved more active participation in the relevant transaction. The court emphasizes that foreseeability of enforcement of the forum selection clause against a non-signatory requires some level of involvement in the transaction, which Phoenix Global did not have.

In Recurrent Capital Bridge Fund I, LLC v. ISR Sys. Sensors Corp., the court examined the relationship between Phoenix Global and ULA regarding a preferred liquidation quota claimed by Miller. It was noted that although Phoenix Global's transaction could invoke such rights under the ULA Articles of Association, there were no allegations that Phoenix Global conspired with the Mercuria Parties to deny Miller this quota. Moreover, Phoenix Global was not presumed to be aware of a forum selection clause in a separation agreement involving Mercuria entities and a former employee, despite the agreement referencing ULA's Class A preferred shares. Miller's assertion that Phoenix Global is a successor-in-interest to ULA, potentially binding it to the forum selection clause, was addressed. However, the court highlighted that there is no precedent for enforcing such clauses against a non-signatory successor based solely on a transactional relationship.

Corporate law principles emphasize the separateness of corporations from their owners, which limits liability unless specific circumstances are met, such as piercing the corporate veil. Under New York law, a corporation can acquire another's business through stock purchase, asset purchase, or merger. The general rule is that a purchaser is not liable for the seller's debts unless certain conditions are met, including express assumption of liability or evidence of a merger. The successor liability doctrine provides narrow exceptions, which include express assumption, consolidation, continuity of the corporation, or fraudulent intent. Phoenix Global contended that the doctrine did not apply since the transaction involved a share purchase, where Andes Energia acquired Trefoil Holdings, the parent company of ULA, thereby purchasing 99.6% of ULA's shares.

Miller argues that the Phoenix Transaction, though executed as a share exchange, should be viewed as a combination of assets because Mercuria's Upstream Capital received Phoenix Global shares in exchange for Trefoil holdings, leading to a 75% ownership stake. However, he fails to clarify why a share exchange equates to an asset purchase. While documents refer to the transaction as a combination of asset bases between Mercuria and Andes Energia, Miller does not provide case law supporting the treatment of a share purchase as an asset purchase for successor-in-interest purposes. Consequently, Phoenix Global is not deemed ULA's successor-in-interest, and any binding effect of the forum selection clause on Phoenix Global hinges on whether the corporate structures of ULA and Phoenix Global should be disregarded through veil-piercing. The burden to pierce the corporate veil is significant, requiring proof of domination and resulting fraud or inequity, yet Miller does not argue for veil-piercing in his opposition nor does the complaint present relevant allegations. Therefore, Counts IV and V are dismissed due to lack of jurisdiction, leading to the full dismissal of the Complaint. Additionally, regarding the interpretation of contracts, the excerpt notes that courts have upheld the incorporation of external agreements when explicitly stated within a contract. Miller's assertion that the Separation Agreement should cover more than just the merger between Mercuria and Roch contradicts the clear language of the Agreement, and industry custom cannot alter the explicit terms outlined in the contract.

Section V outlines the valuation formula for Miller's Preferred Shares in the event of an IPO Event or an Equity Sale, which are defined as the sale of HoldCo equity to a third party under a purchase agreement and HoldCo's initial public offering on the Toronto Stock Exchange or a reverse merger. HoldCo serves as the holding company for Mercuria/Roch NEWCO, a new entity formed by Mercuria and Roch. The Separation Agreement specifies that there will be no re-valuation or adjustment of the JWM Glacco Carried Interest until either the IPO Event or Equity Sale occurs. In relation to the Redemption Events, Miller is entitled to fully redeem his Preferred Shares if a JWM Share Exchange Election has not been made at the Merger. If neither Redemption Event occurs and the JWM Share Exchange Election is not exercised, the JWM Glacco Carried Interest will be governed by ULA's Articles of Association, despite allegations of breach of good faith and fair dealing being presented as an alternative claim. Jurisdictional arguments regarding ULA and Phoenix Global are also addressed, noting that Miller's claims for jurisdiction rely solely on the forum selection clause, as their only ties to New York are through Phoenix Global's ADRs, which do not suffice to establish jurisdiction. The prevailing case law indicates that foreign corporations listing securities on New York exchanges do not automatically subject themselves to jurisdiction. Additionally, Miller's counsel acknowledged during oral arguments that the only basis for jurisdiction over ULA is the forum selection clause, with the Court indicating it would dismiss Counts IV and V for failure to state a claim, similar to Counts II and III.