Major Energy Elec. Servs., LLC v. Horowitz

MAJOR ENERGY ELECTRIC SERVICES, LLC,MAJOR ENERGY SERVICES, LLC, RESPOND POWER, LLC,NATIONAL GAS & ELECTRIC, LLC,and SPARK HOLDCO, LLC, Plaintiffs, v. SAUL HOROWITZ, individually and as Sellers' Representative,MARK WIEDERMAN, ASHER FRIED, MICHAEL BAUMAN,and MARK JOSEFOVIC, Defendants.

19 Civ. 10431 (NRB)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

July 31, 2020

MEMORANDUM AND ORDER

NAOMI REICE BUCHWALD UNITED STATES DISTRICT JUDGE

Saul Horowitz, Mark Wiederman, Asher Fried, Michael Bauman, and Mark Josefovic (collectively, "Sellers") move to dismiss the complaint of Major Energy Electric Services, LLC ("MEES"), Major Energy Services, LLC ("MES"), Respond Power, LLC ("RP"), National Gas & Electric, LLC ("NGE"), and Spark Holdco, LLC ("Spark," and, collectively with MEES, MES, RP, and NGE, the "Indemnified Parties"). Sellers' motion is granted in part and denied in part for the reasons stated herein.

I. BACKGROUND

MEES, MES, and RP, which the parties refer to collectively as "Major Energy," sell electricity and natural gas to residential and commercial customers throughout the United States. Sellers previously owned the membership interests in Major Energy, with Wiederman and Horowitz having served as Major Energy's President and Senior Advisor, respectively, since before 2012. Compl. ¶ 12. On March 18, 2016, Sellers sold their membership interests in Major Energy to NGE for $80 million pursuant to a Membership Interest Purchase Agreement, which sale closed on April 15, 2016. See Compl., Ex. A ("MIPA"). After NGE purchased Major Energy, it resold it to its affiliate Spark. Spark and NGE are under the common control of W. Keith Maxwell III, and Spark is the sole member of each of the three limited liability companies that comprise Major Energy. The Indemnified Parties are thus under the common control of W. Keith Maxwell III. Sellers Wiederman and Horowitz continued to serve as Major Energy's President and Senior Advisor, respectively, following its sale. See Compl. ¶ 12.

In the MIPA, Sellers made certain representations and warranties about Major Energy to NGE. This litigation concerns whether Sellers breached those representations and warranties -- i.e., whether those representations were untrue when the parties executed the MIPA or when the sale closed -- and, if so, whether the MIPA obligates Sellers to indemnify the Indemnified Parties for the resulting losses.

1. The Membership Interest Purchase Agreement

In Article 4 of the MIPA, Sellers made certain representations and warranties about Major Energy to NGE. Pertinent to the instant dispute are three such representations and warranties.

First, Sellers represented in Section 4.4 that:

Except as set forth in Schedule 4.4:

(a) Each Company has filed (taking into account any valid extensions) all Tax Returns required to be filed by it in all jurisdictions in which such returns are required to be filed. Such Tax Returns are true, complete and correct in all material respects and, accordingly, accurately and correctly reflect the Taxes of such Company for the periods covered thereby. No Company is currently the beneficiary of any extension of time within which to file any Tax Return. All Taxes due and owing by each Company which are attributable to the Pre-Closing Tax Periods either (i) shall have been paid as of the Closing Date, whether or not such Taxes are shown to be payable on such Company's Tax Returns or on subsequent assessments thereto, or (ii) are or shall be accrued on the Financial Statements. The term "Pre-Closing Tax Period" means all taxable periods or portions thereof ending on or prior to the Closing Date.

MIPA § 4.4. Sellers disclosed in Schedule 4.4 that:

The following Tax Returns are not expected to be filed by Closing and an extension has been requested in each case as of the Closing Date:

1. 2015 Form 1065 and all related state and local returns for MES, MEES and RP

2. Any 2016 interim Tax Returns for such entities

[MEES] received a notice from the New York City Department of Finance dated February 24, 2016, advising MEES that the NYC Dept. of Finance wishes to examine thebook and records of MEES for the tax periods 07/01/13 through 12/31/15, and requesting certain information from MEES as set forth in such notice. This audit is currently ongoing.

Declaration of Israel Dahan ("Dahan Decl."), Ex. 1.

Second, Sellers represented in Section 4.7 that:

Except as set forth in Schedule 4.7, (a) there is no pending or, to the Knowledge of the Sellers, threatened Legal Proceeding to which any Company is a party (either as plaintiff or defendant), to which its assets are subject, or to which any Seller or any Affiliate of any Seller is a party, relating to the Companies, including any claims, demands, disputes, lawsuits, judicial, regulatory, or other Legal Proceedings, Orders, or other breaches of Legal Requirements or similar matters; . . . (d) no event has occurred or circumstances exist that may give rise to, or serve as a basis for, any such Legal Proceeding; . . . .

MIPA § 4.7. The MIPA defined the phrase "Legal Proceeding" to include "any judicial . . . actions, suits or proceedings (public or private) by or before a Governmental Body," and defined the phrase "Governmental Body" to include "any . . . court or tribunal in any jurisdiction." MIPA § 1.1.

Third, Sellers represented in Section 4.8(a) that "[e]ach Company [was] in compliance in all material respects with all Laws applicable to it or its business, properties or assets." MIPA § 4.8(a). Section 8.1(a) required that the representations in Sections 4.4, 4.7, and 4.8 be true also when the sale closed. See MIPA § 8.1.

Article 9 of the MIPA included certain indemnification provisions. Under Section 9.2(a), Sellers agreed that if they breached any representation in Article 4 -- i.e., if any of those representations were untrue when the parties executed the MIPA or when the sale closed -- they would indemnify the Indemnified Parties for the resulting losses. Specifically, Section 9.2(a) states that:

Each Seller . . . shall indemnify and hold harmless [NGE] and its directors, officers, employees, Affiliates, owners, agents, attorneys, representatives, successors and permitted assigns (collectively, the "Buyer Indemnified Parties"), from and after the date of this Agreement, against and in respect of all claims, demands, Legal Proceedings, Liens, judgments, penalties, damages, losses, costs, and expenses (including reasonable attorneys' fees in connection therewith or in pursuing right to indemnification hereunder) (collectively, "Losses") that the Buyer Indemnified Parties incur to the extent caused by . . . the breach of any representation or warranty of the Sellers contained in Article 4 of this Agreement . . . ."

MIPA § 9.2(a). Because the MIPA defines an "Affiliate" of an LLC to include any LLC that is "under common control with" it, MIPA § 1.1, Section 9.2(a)'s defined term "Buyer Indemnified Parties" includes, in addition to NGE, Spark, MEES, MES, and RP, because each of those entities is under common control with NGE. Section 9.2(a)'s defined term "Buyer Indemnified Parties" accordingly includes the Indemnified Parties.

Section 9.2(a) was subject to Section 9.4(a), which stated that:

[T]he Sellers shall have no liability pursuant to Section 9.2(a) . . . until the Losses incurred by the Buyer Indemnified Parties shall exceed Six Hundred Thousand Dollars ($600,000.00) ("Losses Threshold"), in which event the Sellers shall be liable to the Buyer Indemnified Parties solely for all Losses in excess of such amount."

MIPA § 9.4(a). Section 9.4(a)'s losses threshold, however, did not apply to "any breach of the Fundamental Representations," MIPA § 9.4(c), which the MIPA defined to include Section 4.7 but not Sections 4.4 and 4.8, MIPA § 9.1.

2. MEES's Allegedly Fraudulent Marketing

On March 9, 2018, the Attorney General of the State of Illinois filed a lawsuit against MEES alleging that it had fraudulently marketed its services to Illinois residents since at least 2012. See Compl., Ex. B ¶¶ 1-6. The Illinois Attorney General's complaint was replete with concrete examples, including excerpts of recorded telephone calls, of MEES sales representatives systematically employing a range of fraudulent tactics to deceive Illinois residents into switching to MEES's more expensive utility services. See Compl., Ex. B ¶¶ 115-129.

On May 30, 2018, while the Illinois Attorney General's lawsuit was ongoing, the Indemnified Parties requested that Sellersindemnify them for the attorneys' fees and costs they were incurring. Compl. ¶ 28. Sellers refused to do so. Compl. ¶ 29. On October 10, 2018, the Illinois court presiding over the litigation denied MEES's motion to dismiss the case, see People v. Major Energy Elec. Servs., LLC, 2018 WL 8544536 (Ill. Cir. Ct. Oct. 10, 2018), after which Wiederman and Horowitz "deci[ded] to cease MEES marketing in Illinois and evaluate pretrial resolution options" with the Illinois Attorney General, Compl. ¶ 32.

During July 2019, the Indemnified Parties allegedly "informed [Sellers] of the progress toward settlement and the monetary amount being contemplated for the settlement," in response to which Sellers allegedly "advised that they did not intend to object or stand in the way of [the Indemnified Parties'] effort to finalize [a] settlement with the State of Illinois." Compl. ¶¶ 38-39. The Indemnified Parties then allegedly informed Sellers that they had reached a settlement with the Illinois Attorney General and provided Sellers a copy of the draft settlement agreement, reminding Sellers of their indemnification obligations under the MIPA. Compl. ¶ 40.

The Illinois Attorney General and MEES settled the litigation in the summer of 2019, and, on August 16, 2019, the Illinois court entered a Final Judgment and Consent Decree requiring MEES to paya $2 million civil monetary penalty and permanently enjoining it from a range of conduct in Illinois. See Compl., Ex. C (the ...