EnerJex Resources, Inc. v. Jeffery Haughey

IN THE MISSOURI COURT OF APPEALS
WESTERN DISTRICT
ENERJEX RESOURCES, INC., )
)
Appellant, )
)
v. ) WD77228
)
JEFFERY HAUGHEY, ET AL., ) Opinion filed:
)
Respondents. )
APPEAL FROM THE CIRCUIT COURT OF JACKSON COUNTY, MISSOURI
THE HONORABLE JOHN M. TORRENCE, JUDGE
Before Division Two: Joseph M. Ellis, Presiding, Judge,
Victor C. Howard, Judge and Mark D. Pfeiffer, Judge
Appellant EnerJex Resources, Inc. appeals from a judgment entered by the
Circuit Court of Jackson County granting summary judgment in favor of Respondents
Jeffrey Haughey, Robert Green, and Husch Blackwell, L.L.P. Appellant contends that
the trial court erred in granting summary judgment because its damages theory is
supported by Missouri law and is not otherwise inherently speculative. For the following
reasons, the judgment is affirmed.
Formed in 2006, Appellant is an oil development and production corporation that
operates primarily in Kansas and Missouri. In 2007, Appellant decided to attempt its
first public stock offering on the American Stock Exchange. Appellant intended to offer
five million new shares of common stock at $5 per share. Thus, Appellant hoped to
raise $25 million in equity from the public offering.
A California investment banking firm ("the banking firm") agreed to underwrite the
$25 million public offering. The banking firm further provided Appellant with a projected
timeline for the public offering that showed the "road show" presentation for potential
investors and the public offering occurring in June 2008.
Appellant originally engaged a Nevada firm to prepare the necessary filings for the
Securities and Exchange Commission ("SEC"). The banking firm, however, requested
that Appellant engage a large law firm to handle the offering. Appellant then sought
counsel from Respondent Husch Blackwell. Appellant's CEO Stephen Cochennet met
with Respondent Haughey and discussed the timeline projecting the public stock
offering to occur in June. Following the meeting, Respondents agreed to provide legal
services to Appellant in relation to the public offering, but their agreement made no
mention of the timeline. Respondents did provide the services, but Appellant's public
offering did not occur until September 2008. By that time, the oil market had crashed,
and Appellant's offering failed.
In 2012, Appellant filed suit against Respondents alleging legal malpractice,
breach of contract, breach of fiduciary duty, and fraud. During discovery, Appellant
disclosed the damages calculations of its expert, Charles Brettell. Brettell calculated
consequential damages based on a "market cap" theory, which Appellant describes as
"the lost market value . . . of the company flowing from the failed securities offering."
Brettell's calculation ultimately valued Appellant's "market cap" or "enterprise value"
between $202,339,588 and $358,421,781.
2
In 2013, Respondents filed a motion for partial summary judgment on Appellant's
consequential damages theory. In their motion, Respondents asserted that Appellant
could not recover any consequential damages because Appellant's expert calculated
the damages as to Appellant's shareholders, not to Appellant as a corporation.
Respondents further averred that Appellant's damages calculation is inherently
speculative in that it assumes lost profits when Appellant, as a company, has no history
of prior profitability.
Appellant opposed the motion. In doing so, Appellant contended that its expert
calculated the market loss sustained by Appellant as a corporation as a result of the
failed offering, not any damages suffered by its shareholders. Appellant further
asserted that, despite its history of "negative cash flow," it was "an established
business" that was "increasing in value." Thus, Appellant contended that Brettell's
damages calculations were not inherently speculative.
On October 3, 2013, the trial court entered partial summary judgment in favor of
Respondents. In its judgment, the trial court determined that "it is undisputed that
[Appellant] was never profitable prior to the 2008 proposed stock offering and therefore
cannot recover lost profits because the projection is inherently speculative." The trial
court further determined that Brettell "quantified the alleged damages of [Appellant]
based on the projected value of shares of stock held by EnerJex stockholders who are
not parties to this case." Thus, the trial court granted Respondents' motion for partial
summary judgment on Appellant's consequential damages theory.
Respondents then filed several motions in limine to exclude expert opinion and
Appellant's "stock sale theory" of damages from trial. The trial court subsequently
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granted the motions and excluded "any evidence relating to the loss of $25 million in
damages because of the cancelled stock offering" from trial.
On January 2, 2014, Appellant voluntarily dismissed its fraud, fee disgorgement,
and punitive damages claims after reaching a partial settlement agreement with
Respondents. Respondents then requested the trial court grant summary judgment in
their favor on Appellant's remaining claims of legal malpractice, breach of contract, and
breach of fiduciary duty because, based upon the trial court's previous rulings, Appellant
could not establish damages. On January 6, 2014, the trial court entered its final
judgment in which it granted summary judgment in favor of Respondents "based on the
absence of any recoverable actual damages."
Appellant now raises two points of error on appeal. Before we can address those
points, however, we must first take up Respondents' motion to dismiss this appeal. In
their motion, Respondents contend that Appellant lacks standing to bring this appeal
because Appellant assigned its claims against Respondents to Appellant's shareholders
when, as part of a merger deal, Appellant declared a special dividend equal to
Appellant's "Net Recovery" in this case. Appellant opposes the motion, contending that
the declaration of the special dividend to pre-merger stockholders does not constitute
an assignment in that Appellant remains in complete control of the litigation and will
receive and control all proceeds recovered from the lawsuit.
In September 2013, Appellant merged with Black Raven, Inc. As part of the
merger agreement, Appellant created a special stock dividend for its pre-merger
stockholders. The provision provides:
[Appellant] may declare a dividend payable to [Pre-merger EnerJex
stockholders], under which [Appellant] will issue such stockholders shares
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of stock . . . entitling such stockholders to receive in the aggregate a
number of shares of [Appellant] Common Stock equal to the quotient
determined by dividing (x) [Appellant's] "Net Recovery" in the [Husch]
litigation, by (y) $0.70.1
The term "Net Recovery" is defined as:
[T]he gross amount received by [Appellant] in settlement of its claim in the
[Husch] litigation or in satisfaction of any judgment entered in favor of
[Appellant] . . . reduced by litigation expenses and the portion of such
gross amount that [Appellant] is obligated to pay to counsel representing
[Appellant] in the [Husch] litigation.
Although the merger and declaration of the special dividend occurred prior to the
trial court's final grant of summary judgment, Respondents did not raise this issue
before the trial court.
At the outset, we note that assignment of legal malpractice claims is against
Missouri public policy. VinStickers, LLC v. Stinson Morrison Hecker, 369 S.W.3d
764, 767 (Mo. App. W.D. 2012). Moreover, some Missouri courts have found that the
assignment of the proceeds from a personal injury claim is no different from the
assignment of a personal injury claim. See Schweiss v. Sisters of Mercy, St. Louis,
Inc., 950 S.W.2d 537, 538 (Mo. App. E.D. 1997); see also Hays v. Mo. Highways &
Transp. Comm'n, 62 S.W.3d 538, 542 (Mo. App. W.D. 2001) (recognizing the holding
in Schweiss that the difference between assignment of a claim and assignment of the
potential proceeds of a personal injury claim is a distinction without a difference).
However, under the present set of circumstances, we cannot say an assignment of
Appellant's legal malpractice claim or the proceeds therefrom occurred as a result of
Appellant's declaration of the special dividend.
1
According to Appellant, the dividend is contingent upon Appellant realizing a recovery from the lawsuit
prior to December 31, 2014.
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Respondents contend that Appellant's declaration of this special dividend to its pre-
merger shareholders constitutes an assignment of Appellant's legal malpractice claim
because any damages Appellant receives from the lawsuit will be given to the pre-
merger shareholders, thus evidencing Appellant's intent to assign its legal malpractice
claim to the pre-merger shareholders. In doing so, Respondents emphasize that "no
particular form of words is necessary to accomplish an assignment, so long as there
appears from the circumstances an intention on the one side to assign and on the other
side to receive." Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112,
125 (Mo. banc 2010).
However, "assignment occurs only when one party transfers to another all or part
of one's property, interest, or rights." Hagar v. Wright Tire & Appliance, Inc., 33
S.W.3d 605, 610 (Mo. App. W.D. 2000) (internal quotation omitted). Assignment
"divests the assignor of all interest in the thing assigned, and vests the same in the
assignee." Schaffer v. Bd. of Educ. of City of St. Louis, 869 S.W.2d 163, 168 (Mo.
App. E.D. 1993) (internal quotations omitted).
Here, the special dividend does not divest Appellant of its interest in the
proceeds of the lawsuit. Any damages awarded to Appellant would remain with the
corporation. Furthermore, not all the damages recovered from the lawsuit would be
converted into stock shares. Rather, based on the definition of "Net Recovery,"
Appellant would first pay off its litigation expenses and attorneys' fees from the
damages recovered in the lawsuit. Therefore, because the special dividend does not
divest Appellant of its interest in the lawsuit, no assignment occurred. Accordingly,
Respondents' motion to dismiss this appeal is denied.
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We now address Appellant's points on appeal. In its first point, Appellant
contends that the trial court erred in granting summary judgment in favor of
Respondents. We review grants of summary judgment de novo. Cent. Trust & Inv.
Co. v. Signalpoint Asset Mgmt., LLC, 422 S.W.3d 312, 319 (Mo. banc 2014) (citing
ITT commercial Fin. Corp. v. Mid-Am. Marine Supply Corp., 854 S.W.2d 371, 376
(Mo. banc 1993)). We view the evidence and all reasonable inferences therefrom in the
light most favorable to the party against whom summary judgment was entered. Id. at
320. "However, facts contained in affidavits or otherwise in support of the party's
motion are accepted as true unless contradicted by the non-moving party's response to
the summary judgment motion." Id. (internal quotation omitted).
"Summary judgment is only proper if the moving party established that there is no
genuine issue as to the material facts and that the movant is entitled to judgment as a
matter of law." Id. at 319 (internal quotation omitted). A defending party is entitled to
summary judgment upon establishing one of the following:
(1) facts negating any one of the elements of the non-movant's claim; (2)
that the non-movant, after an adequate period for discovery, has not been
able and will not be able to produce sufficient evidence to allow the trier of
fact to find the existence of any one of the elements of the non-movant's
claim; or (3) that there is no genuine dispute as to the existence of the
facts necessary to support movant's properly pleaded affirmative
defense."
Id. at 319-20 (internal quotation omitted). "Summary judgment . . . can be affirmed on
appeal by any appropriate theory supported by the record." Roberts v. BJC Health
Sys., 391 S.W.3d 433, 437 (Mo. banc 2013).
Appellant asserts that the trial court erred in granting summary judgment on the
basis that Appellant could not recover under its consequential damages theory because
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Appellant had no history of profitability. The trial court determined that all of Brettell's
damages calculations necessarily include a lost profits component. It further concluded
that, because Appellant had reported net losses every year since Appellant's inception,
Appellant failed to establish a history of prior profitability and, thus, could not recover
damages that included lost profits.
Under Missouri law, lost or anticipated profits of a commercial business are
generally deemed "too remote, speculative, and too dependent upon changing
circumstances to warrant a judgment for their recovery." Anderson v. Abernathy, 339
S.W.2d 817, 824 (Mo. 1960) (internal quotation omitted). Lost profits "may be
recovered only when they are made reasonably certain by proof of actual facts, with
present data for a rational estimate of their amount." Id. "[P]roof of the income and
expenses of the business for a reasonable time anterior to its interruption, with a
consequent establishing of the net profits during the previous period, is indispensable."
Coonis v. Rogers, 429 S.W.2d 709, 714 (Mo. 1968). Thus, "[w]ith no history of
profitability, [a p]laintiff cannot present sufficient evidence to prove lost profits from an
existing commercial business." Midwest Coal, LLC ex rel. Stanton v. Cabanas, 378
S.W.3d 367, 370 (Mo. App. E.D. 2013).
Appellant does not contest that Brettell's calculations include a lost profits
component. Instead, Appellant contends that it does not need to establish prior
profitability in order to recover under its damages theory because it is alleging damages
flowing directly from a specific transaction – namely the failed public stock offering. As
explained in BMK Corp. v. Clayton Corp., 226 S.W.3d 179, 195 (Mo. App. E.D. 2007),
the general rule that a plaintiff must establish a history of profitability to recover lost
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profit damages "applies in cases where the loss of expected profits flows from the
destruction or injury to a business." However, "[w]hen a plaintiff sues for damages
arising directly out of a breach of contract, he or she need not prove past profits or
expenses." Id. Thus, a plaintiff may seek lost profits arising from a breach of contract
without proof of prior profitability "where loss is ascertainable with reasonable certainty
from the breach and the profits claimed are not speculative or conjectural and were
within the contemplation of the parties when the contract was made." Id. (internal
quotation omitted).
Although Appellant avers that the "lost proceeds" in its damages calculation are
tied to a specific transaction, Brettell's damages model includes lost profits resulting
from transactions far removed from the public offering. In determining Appellant's
"market cap," Brettell's model assumes that Appellant would have used the $25 million
(less $3 million to pay preexisting debt) to acquire new oil field leases and drill new
wells to expand its oil production. Brettell then assumes that those expansions and
acquisitions would have generated a profit that would then allow Appellant to receive
additional financing from lenders. Appellant would then use those additional loans
combined with the assumed profits from the expansions and acquisitions to make
further acquisitions and expansions that would, in turn, generate further profit. Thus,
the lost profits component of Brettell's calculations did not flow directly from any specific
contract or transaction. Rather, they flowed from projected loans, expansions, and
acquisitions that Brettell assumed Appellant would be successful in obtaining and
securing over the course of the two-year period following the public offering. Without
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any evidence of a prior history of profitability of engaging in similar business dealings,
Brettell's assumed lost profit figures are inherently speculative.
Likewise, Appellant cannot rely upon the "specific transaction" standard or
exception to claim $25 million in lost profits from the failed public offering.2 As
explained by the Eastern District, recovery of lost profits without evidence of prior
profitability has been permitted where a plaintiff "recovered its loss of profits flowing
directly from a breach of or interference with a specific contract." Midwest Coal,, 378
S.W.3d at 371. Proof of income and expenses for a reasonable anterior period has not
been required in such cases only because "(1) the evidence clearly established the fact
of damages; and (2) the amount of damages was readily ascertainable since [the] cases
involved products for which profits were calculable based on past and future sales of the
same items." Id. The cases permitting recovery of lost profits without evidence of prior
profitability all "involved known commodities with demonstrable market prices." Id. at
372.
Here, the contract allegedly breached was one in which Respondents agreed to
provide Appellant with legal services. Thus, the contract at issue does not involve a
product for which profits were readily calculable based on past and future sales of an
item. Therefore, while a breach of contract is alleged in this case, Appellant is not
seeking lost profits on the contract itself. Instead, Appellant is seeking the $25 million it
believed it would receive in stock sale proceeds as the injury to its business after
2
To the extent Appellant is claiming direct damages from the failed public stock offering, we note that
"[u]nissued stock has no value to the corporation, because stock only represents portions of equity in the
corporation itself." 18 C.J.S. Corporations § 203 (2007); see also I.R.C. § 1032(a) ("No gain or loss shall
be recognized to a corporation on the receipt of money or other property in exchange for stock (including
treasury stock) of such corporation.").
0
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Respondents' alleged malpractice and breach of fiduciary duties. See Harvey v.
Timber Res., Inc., 37 S.W.3d 814, 818 (Mo. App. E.D. 2001) (explaining that proof of
prior income and expenses was necessary in a case where a business alleged lost
profits as a result of a breach of a noncompete clause). Under such circumstances,
proof of prior profitability is necessary as Appellant is not seeking lost profits directly
flowing from a breach of or interference with a specific contract.
Thus, as found by the trial court, Appellant's alleged damages include lost profit
components even though Appellant failed to establish a history of profitability prior to the
public offering.3 Therefore, the trial court did not err in granting summary judgment on
the basis that Appellant could not establish damages because its alleged damages
based on lost profits are inherently speculative.
Judgment affirmed.4
________________________________
Joseph M. Ellis, Judge
All concur.
3
Appellant also contends that whether it was profitable prior to the public stock offering constitutes an
issue of material fact improperly decided by the trial court. However, in their motion for summary
judgment, Respondents offered Appellant's SEC filings to establish that Appellant had reported net losses
since its inception in 2006. Appellant offered no evidence in its opposition to the summary judgment
motion to contradict that fact. Rather, Appellant alleged only that it had been "successful." Now on
appeal, Appellant contends that whether it was profitable is a factual issue because there was evidence in
the record that its stock has been actively traded in a public market since 2006, a Husch attorney
considered its stock a good investment, it was able to obtain the $25 million financing necessary for the
public offering, and all parties associated with the public offering were confident the stock would sell
easily. Such facts, however, do nothing to contradict the fact that, prior to the public offering, Appellant
had never reported a net profit. Thus, Appellant's contention that a factual dispute exists as to its history
of profitability is without merit.
4
Due to our disposition of Appellant's first point, we need not address Appellant's remaining points and
contentions on appeal.
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