Frio Energy Partners, LLC v. Fin. Tech. Leverage, LLC

680 F.Supp.3d 322

FRIO ENERGY PARTNERS, LLC, Plaintiff, v. FINANCE TECHNOLOGY LEVERAGE, LLC, Defendant.

22-cv-9766 (LJL)

United States District Court, S.D. New York

Signed June 27, 2023

K. Knox Nunnally, Matthew Allen, Allen & Nunnally LLP, Houston, TX, Levi Downing, Kelley Drye & Warren LLP, New York, NY, for Plaintiff.

Jonathan Allan Klein, Sweta H. Patel, Klein, Hockel, Iezza & Patel P.C., Walnut Creek, CA, Scott Alan Ziluck, Halperin Battaglia Benzija LLP, New York, NY, for Defendant.

OPINION AND ORDER

LEWIS J. LIMAN, United States District Judge:

Defendant Finance Technology Leverage LLC ("Defendant" or "FTL") moves, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the complaint ("Complaint") filed against it by Plaintiff Frio Energy Partners, LLC ("Plaintiff" or "Frio Energy"). Dkt. No. 17. Defendant also moves to strike portions of the Complaint pursuant to Federal Rule of Civil Procedure 12(f). Id.

BACKGROUND

The Court accepts as true for purposes of this motion the well-pleaded allegations of the Complaint, as supplemented by the documents incorporated by reference.

I. The Relevant Parties

Defendant FTL is a global private equity firm, established in 2013; it is primarily engaged in creating structured financings for projects in aerospace, energy, and industrial technology. Dkt. No. 1 ¶ 9. In or around early 2021, it developed an interest in investment opportunities in non-operated oil- and gas-producing properties in the Permian Basin located in West Texas and New Mexico. Id. ¶ 10. Plaintiff Frio Energy is a limited liability company formed in June 2021 by non-party Aaron Davis ("Davis") to source and operate new oil and gas opportunities in the Permian Basin. Id. ¶¶ 4, 13, 14. Davis is an oil and gas executive with significant experience managing, acquiring, and exploiting oil and gas opportunities in and around the Permian Basin. Id. ¶ 11.

II. The Discussions Between Plaintiff and Defendant

In or around April 2021, FTL approached Davis to head up an experienced management team to assist FTL in sourcing and acquiring non-operating working interests in oil and gas investment opportunities in the Permian Basin, performing due diligence on those opportunities, negotiating the acquisition of those opportunities, and eventually developing and operating those opportunities. Id. At the time, Davis was actively managing an exploration and production company for another Texas private equity group, but he agreed to stay in touch and let FTL know if and when he became available. Id. ¶ 12. On June 22, 2021, Davis informed FTL that he was available to look at new opportunities with FTL, and the two parties began discussing forming a formal business partnership. Id. ¶ 13. Davis formed Frio Energy and began recruiting others to join in its management team. Id. ¶ 14.

During July 2021, Davis, on behalf of Plaintiff, and Frederick Giarrusso ("Giarrusso"), the Chief Executive Officer of Defendant, participated in a series of telephone conference calls (the "July 2021 Conference Calls") to discuss the details of their proposed partnership for the acquisition of non-operated working interests in oil- and gas-producing properties in the Permian Basin. Id. ¶¶ 15-16. During the July 2021 Conference Calls, Giarrusso, on behalf of Defendant, represented to Davis and Plaintiff the following: (1) FTL was a reliable and trustworthy partner; (2) FTL was raising a $150 million to $300 million fund to invest in non-operated oil and gas development projects in Texas and New Mexico (the "Investment Fund"); (3) FTL had already raised some capital and had firm commitments to raise the remaining capital to close the Investment Fund with at least $150 million of deployable capital by January 2022; (4) FTL would execute a formal partnership agreement with Plaintiff by the end of January 2022 or soon thereafter in exchange for Plaintiff's agreement to contribute up to $740,000 as an advance deposit to the Investment Fund while Plaintiff identified, conducted due diligence, negotiated the acquisition, and eventually developed and operated the newly-identified investment opportunities; and (5) FTL would fully compensate Plaintiff for its general and administrative ("G&A") costs and any other reasonable out-of-pocket expense incurred in sourcing investment opportunities and performing work for FTL from January 2022 forward. Id. ¶ 17.

III. The Term Sheet

On August 6, 2021, Plaintiff and Defendant executed a $150,000,000 Financial Proposal Indicative Term Sheet (the "Term Sheet"). Id. ¶¶ 7, 18. The Term Sheet states at the outset:

This indicative Term Sheet indicates the basic parameters for a contemplated Transaction and is neither an offer nor a commitment to engage in the Transaction. Indicative terms herein are for discussion purposes, and do not represent final contractual wordings. Final terms for the Transaction will be as expressed in a set of definitive documents at the close of the Transaction.

Id. ¶ 19. The Term Sheet contemplated a transaction in which Plaintiff (defined as the "Company") and FTL Capital Ltd. or a related entity (defined as "Investor") would develop a set of parameters to define projects which may be acquired by the Investment Fund. Dkt. No. 1-1 at 1. The Investment Fund would have a $150 million debt facility with the option to increase to $300 million with a mutual election. Id. The Company would use those funds to acquire interests in non-operated oil and gas development projects within the United States. Id. The Term Sheet also provided that the Company and the Investor would establish an investment committee (the "Investment Committee") with members from both the Company and the Investor to ensure that the project parameters were met, and the Term Sheet provided that each project required unanimous approval of the Investment Committee prior to an acquisition. Id.

The Term Sheet also provided that upon the signing of the Term Sheet, Plaintiff would "pay the Structuring Agent [Defendant] a Structuring Deposit of $100,000 per month, for a maximum of 6 months, followed by $70,000 for each of months 7 and 8." Id. at 2. The Term Sheet continued that "[f]or clarity, the Structuring Deposit is only paid until the Close, or month 8, whichever comes sooner." Id. Upon the close, Plaintiff was required to pay Defendant, "by using proceeds from the debt, a fee equal to 1% of the Fund Size, less any Structuring Deposit paid to date." Id. at 3. The Term Sheet stated that the close would be "initially targeted . . . for 15 January 202[2],"¹ but acknowledged that "this is a target, and not a guaranteed date." Id. at 1.

The Term Sheet further stated that "[f]unds will be available for investment for a period of 18 months following the Close" with "[a]ll Debt to be repaid in full within 5 years of the Close." Id. at 2. Each side had the right not to proceed with the transaction "at any stage," by "notify[ing] the other party in writing as soon as reasonably practicable." Id. at 3. If Defendant chose not to proceed, "[80]% of the company-paid Structuring Deposit" would be refunded. Id. If Plaintiff chose not to proceed, "then [75]% of the Structing [sic] Fee, prorated for 6 months, shall be considered fully earned and the unpaid balance payable immediately." Id. The Term Sheet provided with respect to expenses the following:

Upon the Close, Company, by using proceeds from the debt, will pay Investor's and Company's reasonable legal, accounting, travel, and other professional service fees, up to $500,000. After the Close, budgeted G&A expenses associated with pre-deal expenses will be reimbursed.

Id.

The Term Sheet provided that except for the provisions regarding the Structuring Deposit, expenses, governing law, and jurisdiction, "this term sheet is not intended to create any legally binding relationship between the Parties or any legal obligations on the part of either of them."² Id.

IV. Plaintiff Makes Cash Payments and Identifies Investment Opportunities

Beginning on August 10, 2021, and continuing until January 14, 2022, Plaintiff made monthly cash payments to Defendant of $100,000. Dkt. No. 1 ¶ 118. On each of February 25, 2022 and March 14, 2022, Plaintiff made payments to Defendant of $70,000. Id.

On or about October 22, 2021, Plaintiff requested that Defendant provide proof of capital to show potential third-party sellers that Plaintiff was a legitimate buyer capable of bidding and acquiring multi-million dollar oil and gas assets that were available for sale. Id. ¶ 28. In response, representatives of Defendant verbally assured Plaintiff that it had secured or would secure the minimum requisite $150 million of capital by January 2022. Id. ¶ 30. In addition, in or around October 22, 2021, Defendant sent letters of commitment ("Letters of Commitment"), signed by Giarrusso, to third-party sellers, including Occidental Petroleum, Occidental Oil & Gas, Varde Partners, EOG Resources, and One Energy Partners. Id. ¶ 33. The Letters of Commitment were stated to "clarify" the relationship between Defendant and Plaintiff and could be shown to "prospective counterparties." Dkt. No. 1-2. The Letters of Commitment touted FTL's credentials, including that its principals had worked with several of the major energy companies and "collectively invested over $10 Billion." Id. They also stated: "FTL has partnered with Frio for the acquisition of non-operated working interests in oil and gas producing properties located in the Permian Basin. Our initial commitment is for $150 million in the first phase, though we anticipate taking that to a second phase of over $300 million in the next 12 months." Id.

According to the Complaint, Defendant knew or had reason to know that it had not secured the minimum requisite $150 million of capital to invest through the Investment Fund by on or about October 22, 2021. Id. ¶ 31. Plaintiff claims that Defendant made representations that it had secured the funding with full knowledge that Plaintiff...