Discover Growth Fund, LLC v. Camber Energy, Inc.

602 F.Supp.3d 982

DISCOVER GROWTH FUND, LLC, and Antilles Family Office, LLC, Plaintiffs,

v.CAMBER ENERGY, INC., Defendant.

Civil Action No. 4:22-CV-755

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

Signed May 12, 2022

Jesse Z. Weiss, Ryan Trent Shelton, Edmundson Shelton Weiss PLLC, Austin, TX, for Plaintiffs.

Daniel David, Emily Arleen Rohles, Amy Pharr Hefley, Anthony Joseph Lucisano, Baker Botts LLP, Houston, TX, for Defendant.

ORDER ON JOINT MOTION FOR APPROVAL OF SETTLEMENT AGREEMENT

Andrew S. Hanen, United States District Court Judge

The Joint Motion for Approval of Settlement Agreement ("Motion") filed by plaintiffs Discover Growth Fund, LLC and Antilles Family Office, LLC, and defendant Camber Energy, Inc. came on for hearing on May 12, 2022 before the Honorable Andrew S. Hanen, U.S. District Court Judge.

The court, having considered the Verified Complaint, the Motion, the Settlement Agreement between plaintiffs and defendant (Exhibit 1 to the Motion), the Declaration of John Burke (Exhibit 2 to the Motion), the Declaration of James A. Doris (Exhibit 3 to the Motion) and arguments of counsel, and having conducted a hearing on the motion, and, good cause appearing therefor, the Motion will be granted for the reasons explained below.

I. FINDINGS OF FACT

Defendant is a Nevada corporation based in Houston, Texas, that is engaged in the oil and gas business. Motion, Ex. 3 at ¶ 4. Its stock is publicly traded on the NYSE American stock exchange under the trading symbol "CEI." Id. Plaintiff Discover is an institutional investor and plaintiff Antilles is a family office, both of which invested their own money in Defendant. Motion, Ex. 2 at ¶ 5.

Trading in defendant's shares is volatile and unpredictable. Motion, Ex. 2 at ¶14. Over the last year, the market price for CEI shares has fluctuated substantially from $0.33 to $4.85, and as of April 13, 2022 was $0.82 per share. Id. Trading volume has been even more volatile, ranging from 1,163,100 to 988,353,200 shares traded per day. Id.

The parties entered into stock purchase agreements, pursuant to which each of the plaintiffs purchased shares of defendant's convertible preferred stock.¹ Plaintiff Discover holds 30 shares of the Defendant's Series C convertible preferred stock, and the Plaintiff Antilles holds 1,575 shares and 7,908 shares of the Defendant's Series C convertible preferred stock and Series G convertible preferred stock, respectively. Motion, Ex. 2 at ¶ 11. Under the agreements and the Certificates of Designation for the preferred stock, plaintiffs have the right to convert their preferred shares into shares of defendant's common stock, which they can then sell to recoup their investment and, depending on market conditions, earn a profit.² See Motion, Ex. 2 at ¶ 19.

To ensure that plaintiffs can sell the common stock in the public market in compliance with federal securities laws, the agreements require defendant to timely file all necessary reports under the Securities Exchange Act of 1934, including annual reports on Form 10-K and quarterly reports on Form 10-Q.³ Providing current public information is necessary for plaintiffs to be able to rely on Rule 144 under the Securities Act of 1933 to sell their shares without registration. See 17 CFR § 144(c).⁴ However, defendant has not filed certain of its required periodic reports for more than a year.⁵ Plaintiffs therefore claim to have been unable to obtain the benefit of their bargain, and consequently have asserted claims against defendant for its breaches of the agreements.⁶

Defendant acknowledges that plaintiffs have the right to exchange their preferred stock for free-trading shares of common stock, that plaintiffs' claims against defendant for breaches of the agreements are bona fide outstanding claims that resulted from arms-length agreements that were negotiated in good faith, as was the settlement agreement. Motion, Ex. 3 at ¶¶ 5, 7, 8, 10, 14.

Plaintiffs and their attorneys have worked cooperatively with defendant and its attorneys to reach a mutually-beneficial agreement. Motion, Ex. 2 at ¶ 15; Motion, Ex. 3 at ¶ 9. The parties have agreed to the terms of the Settlement Agreement to settle the claims in exchange for stock, subject to court approval following a fairness hearing. See Motion, Ex. 1. Defendant's chief executive officer and board of directors have determined that the settlement is fair to defendant and in the best interests of its stockholders. Motion, Ex. 3 at ¶ 14.

Plaintiffs are highly sophisticated and fully aware of the significant risks involved. Motion, Ex. 2 at ¶ 18. Plaintiffs invested only their own money, can afford a complete loss of their investment and are willing to accept that risk, provided defendant abides by the terms of the Settlement Agreement. Id. at ¶¶ 5, 18. Plaintiffs have analyzed the provisions of the Settlement Agreement, defendant's business fundamentals and market dynamics, and determined that the negotiated agreement is fair and reasonable, and adequate to warrant exchange of their preferred stock and claims. Id. at ¶¶ 17-20.

II. CONCLUSIONS OF LAW

A. Proposed Settlement

The parties have agreed to settle this case pursuant to the Settlement Agreement, which requires defendant to exchange plaintiffs' shares of defendant's preferred stock into free-trading common stock, from time to time upon notice from plaintiffs. See Ex. 1 at ¶ 1. Because the settlement consideration will be in the form of unregistered shares of defendant's common stock, court approval is required under Section 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10), and the comparable provision of Nevada state "blue sky" law, NRS 90.280(6)(c). See Chapel Investments, Inc. v. Cherubim Interests, Inc. , 177 F. Supp. 3d 981, 987 (N.D. Tex. 2016).

B. Jurisdiction and Venue

This Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1332(a)(2) because there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332(c)(1) ; (Complaint at ¶ 8.) Defendant is a Nevada corporation with its headquarters in Houston, Texas. Motion, Ex. 3 at ¶ 4. Plaintiffs and their common parent are all based in the United States Territory of the Virgin Islands. Motion, Ex. 2 at ¶ 5; see 28 U.S.C. § 1332(e) ("The word ‘States,’ as used in this section, includes the Territories"). Accordingly, this Court has diversity jurisdiction. Chapel Invs. , 177 F. Supp. 3d at 984.

Venue is proper in this Court pursuant to 28 U.S.C. § 1391(b)(1) because Defendant's headquarters are within this district.

C. Application of the Exemption

Generally, public companies are not permitted to issue their stock without first filing a registration statement, nor are persons receiving it permitted to immediately resell the shares into the public markets. See 15 U.S.C. § 77e(c), 15 U.S.C. § 77d(a)(1). Section 3(a)(10) of the Securities Act provides an exemption for:

any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court....

15 U.S.C. § 77c(a)(10) (emphasis added).

The Section 3(a)(10) exemption is often used to effectuate settlements of claims against public company defendants. See, e.g., Discover Growth Fund, LLC v. Beyond Commerce, Inc. , 561 F.Supp.3d 1035, 1037–38 (D. Nev. 2021) ; YA II PN, Ltd. v. Taronis Techs., Inc. , 435 F. Supp. 3d 622, 626 n.5 (S.D.N.Y. 2020) ("The Settlement Shares are to be issued in exchange for bona fide outstanding claims; all parties to whom it is proposed to issue such securities have had the right to appear at the hearing on the fairness of the Settlement; and the Settlement Shares are therefore unrestricted and freely tradeable exempted securities pursuant to Section 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10)"); Chapel Invs. , 177 F. Supp. 3d at 987.

For the exemption to apply, the court must: (1) find that the person to receive shares holds securities, claims or property interests that were outstanding prior to the hearing, (2) conduct a fairness hearing at which all persons to whom the securities will be issued has the right to appear and be heard, and (3) find that the terms and conditions of the proposed exchange are fair. See Chapel Invs. , 177 F. Supp. 3d at 987. "Fundamentally, the court must find the proposed issuance and exchange of securities is fair after considering the totality of the evidence." See Oceana Capitol Group Ltd. v. Red Giant Entertainment, Inc. , 150 F.Supp.3d 1219, 1224 (D. Nev. 2015).

The Securities & Exchange Commission plays no role in connection with Section 3(a)(10) participants, because the exemption falls "entirely within the purview of the long-established court system." Oceana Capitol , 150 F.Supp.3d at 1223 ; Chapel Inus. , 177 F. Supp. 3d at 987.

D. Fairness of the Proposed Exchange

Here, the parties have entered into the Settlement Agreement for settlement of the outstanding claims by exchanging the outstanding shares of preferred stock for shares of common stock, subject to Court approval. The terms and conditions of the settlement are fully set forth in the Settlement Agreement. See Ex. 1. Upon receiving a notice of conversion from Plaintiffs, Defendant will promptly issue that plaintiff the appropriate number of shares of free-trading common stock pursuant to the conversion formulas in the applicable certificate of designation for the preferred stock being exchanged and converted. See id. at ¶ 1.

The plaintiffs purchased a fixed number of preferred shares, and the parties have already agreed upon the formulas to be used to determine the number of common shares that shall...