Arapahoe Res., LLC v. Prof'l Land Res., LLC

ARAPAHOE RESOURCES, LLC, Plaintiff, v. PROFESSIONAL LAND RESOURCES, LLC, et al., Defendants.

Civil No. 15-10-ART

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY SOUTHERN DIVISION PIKEVILLE

August 17, 2015

MEMORANDUM OPINION AND ORDER*** *** *** ***

Eastern Kentucky houses some of the world's great natural resources. Coal is often the first thing that comes to mind when people think of Eastern Kentucky. But Arapahoe Resources had other things in mind when they employed Jonathan Mann's company, Professional Land Resources ("PLR"): they were hoping to find oil and gas. Arapahoe is in the business of acquiring oil and gas properties, and PLR's primary function is to broker such acquisitions. So, at first blush, this seems like a match made in heaven. Unfortunately, according to Arapahoe's complaint, the match was anything but heavenly.

BACKGROUND

Arapahoe's complaint paints a picture of hope and broken promises. It all began when Mann approached Arapahoe in 2014 about acquiring oil and gas properties on Arapahoe's behalf. R. 21 ¶¶ 10-11 (amended complaint). Mann proposed that PLR perform customary land and title services for Arapahoe in exchange for payment. Id. ¶ 11. Arapahoe, however, was concerned about the "speculative nature of the gas play," so Mannpromised to limited his search "in accordance with Arapahoe's concerns." Id. ¶¶ 11-12. With that assurance in hand, Arapahoe entered into the agreement with PLR. Id. ¶ 11.

Once the parties reached that agreement, Mann took off like a wild roller coaster, disregarding any promises of smooth sailing and a cautionary approach. He (1) instructed PLR's contractors to use Arapahoe's name to "acquire as much oil and gas leasehold acreage in eastern Kentucky as they could"; (2) directed his contractors to perform hundreds of hours of leasehold work "far exceeding the scope of the project contemplated by Arapahoe"; (3) hired more contractors than necessary; and (4) charged Arapahoe for full days of work, regardless of whether the contractors worked at all that day. Id. ¶¶ 13, 15. Arapahoe expressed concerns to PLR about its billing practices, but the excessive work continued. Id. ¶ 13. Despite Arapahoe's concerns, it paid every invoice PLR submitted to it. Id. ¶ 25. But PLR did not pay its contractors, claiming that Arapahoe had refused to pay the invoices. Id. As a result, Arapahoe faces possible litigation from PLR's contractors. Id.

According to the complaint, it did not end there. Mann and PLR also improperly instructed their contractors to act as representatives of Arapahoe while performing leasehold services. Id. ¶ 14. PLR's contractors executed payments and offered oil and gas leases using Arapahoe's name, without any knowledge or permission from Arapahoe. Id. For example, Mann and his contractors visited with mineral interest owners and claimed that Arapahoe would honor oil and gas leases for the 3,500 acres on the schedule. Id. ¶ 21. But PLR only presented Arapahoe with one potential lease for review. Id. ¶ 19. That lease was for 70 net mineral acres. Id. For the remaining 3,430 acres, PLR represented to various owners that Arapahoe would honor oil and gas leases with them, and honor orders of payment that PLRissued in Arapahoe's name. Id. ¶ 21. PLR, however, refused to provide Arapahoe with the proposed lease agreements or supporting title information. Id. ¶ 20. Mann and PLR have also refused to provide Arapahoe with any documents "relating to ownership reports, take off sheets, broker notes, abstracts, or even copies or images of the supposed lease and order of payment documents [Mann and PLR] entered into using Arapahoe's name." Id.

Finally, Mann used PLR's work for Arapahoe to gain benefits for other companies he owned. For example, PLR's contractors created work product to negotiate leases on behalf of Arapahoe in eastern Kentucky. Id. ¶ 24. Arapahoe paid for the work product, so it was Arapahoe's property. Id. But Mann used that work product for another of his companies without Arapahoe's permission. Id. Also, on one of his visits to Kentucky, Mann negotiated on behalf of Arapahoe with a property owner for a lease of approximately 1,000 acres. R. 33-1 ¶ 3 (Keeton affidavit).¹ After the negotiations, Mann told his contractor to change the first page of the lease from Arapahoe's name to the name of another company he owned. Id.

In the end, Arapahoe paid PLR over $300,000 for its services. R. 21 ¶ 26. Arapahoe, however, never obtained an acceptable lease as a result of these services. Id. So Arapahoe filed the instant action against Mann and PLR. See R. 1; R. 21 (amended complaint).

DISCUSSION

Mann moves to be dismissed from this case for lack of personal jurisdiction under Federal Rule of Civil Procedure 12(b)(2). R. 32-1 at 1 (motion to dismiss). Mann also moves to dismiss two of Arapahoe's claims—Count X for alter ego and Count III forfraudulent inducement—for failure to state a claim upon which relief may be granted under Federal Rule of Civil Procedure 12(b)(6). Id. For the reasons stated below, this Court has personal jurisdiction over Mann. And Arapahoe has pled sufficient facts to state a claim for alter ego and fraudulent inducement. So Mann's motion to dismiss must be denied.

I. Arapahoe sufficiently pled a claim for alter ego.²

Arapahoe seeks to hold Mann liable for the sins of PLR under the alter ego theory. Before addressing the merits of the alter ego claim, the Court must first determine which state's law applies. State law controls here because the Court's jurisdiction derives from the diversity of citizenship of the parties. Garden City Hosp. v. HBE Corp., 55 F.3d 1126, 1130 (6th Cir. 1995). Mann suggests that West Virginia law may apply here because PLR is a West Virginia corporation, yet Mann applies Kentucky law. R. 32-1 at 19 & n.3. The Court applies Kentucky's choice-of-law rules to resolve the question. Sec. Ins. Co. of Hartford v. Kevin Tucker & Assocs., Inc., 64 F.3d 1001, 1005 (6th Cir. 1995) ("In a diversity action, the district court is obligated to apply the choice of law rules of the state in which it sits."). Under Kentucky law, a choice-of-law analysis is only required if the state laws conflict. See Asher v. Unarco Material Handling, Inc., 737 F. Supp. 2d 662, 667 (E.D. Ky. 2010). Both West Virginia and Kentucky look to similar non-exhaustive lists of factors to determine whether to pierce the corporate veil. Compare Kubican v. The Tavern, 752 S.E.2d 299, 312 (W. Va. 2013), with Inter-Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152, 163 (Ky. 2012). First, both states require courts to determine if there is a loss of corporateseparateness. See Kubican, 752 S.E.2d at 313; Inter-Tel Techs., 360 S.W.3d at 165. If so, both states also require a showing of fraud or injustice. See Kubican, 752 S.E.2d at 313; Inter-Tel Techs., 360 S.W.3d at 164. Given the parallels between West Virginia and Kentucky law pertaining to piercing the corporate veil, West Virginia's and Kentucky's laws do not conflict here. So the Court will apply Kentucky law.

Under Kentucky law, a corporation is generally treated as distinct from its shareholders, officers, and directors. White v. Winchester Land Dev. Corp., 584 S.W.2d 56, 60 (Ky. 1979), overruled on other grounds by Inter-Tel Tech., Inc., 360 S.W.3d 152. But in certain circumstances, a court may pierce the corporate veil to hold shareholders or officers liable for the corporation's wrongdoing. Inter-Tel Techs., Inc., 360 S.W.3d at 155; see also Schultz v. Gen. Elec. Healthcare Fin. Servs. Inc., et al., 360 S.W.3d 171, 179 (Ky. 2012) (applying Inter-Tel in cases attempting to hold officers liable for acts of corporation). A court may pierce the corporate veil if: (1) the shareholder or officer has "exercised dominion over the corporation to the point that [the corporation] has no separate existence," and (2) "circumstances [exist] in which continued recognition of the corporation as a separate entity would sanction fraud or promote injustice." Id.

Mann argues that Arapahoe has not sufficiently stated a claim for relief under alter ego theory. R. 32-1 at 18. Under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must allege sufficient facts to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). In other words, Arapahoe must plead enough facts to allow the court to draw the reasonable inference that the defendants are liable for the alleged misconduct. Id. (citingTwombly, 550 U.S. at 556). The Court construes factual allegations "in the light most favorable to the plaintiff" and draws "all reasonable inferences in favor of the plaintiff." Watson Carpet & Floor Covering, Inc. v. Mohawk Indus., Inc., 648 F.3d 452, 456 (6th Cir. 2011) (quoting In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 903 (6th Cir. 2009)).

A. Mann exercised domination over PLR that resulted in a loss of corporate separateness.

First, Arapahoe alleges sufficient facts to show that Mann exercised domination of PLR that resulted in a loss of corporate separateness. See Inter-Tel, 360 S.W.3d at 155. While the Kentucky Supreme Court has listed 11 facts to consider, id. at 163 (citation omitted), the most critical factors are "grossly inadequate capitalization, egregious failure to observe legal formalities and disregard of distinctions between parent and subsidiary, and a high degree of control by the parent over the subsidiary's operations and decisions, particularly those of a day-to-day nature." Id. at 164 (citation omitted). However, the court emphasized that courts should consider all 11 factors in their analysis. Id. at 165. Arapahoe alleges facts that support most of the eight applicable factors, and two of the three most crucial factors.

Does the parent own all or most of the stock of the subsidiary? On its face, this factor does not apply because there is no stock issued by PLR. See R....