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PA Realty Group, LLC v. Hornbeck

United States District Court, D. Connecticut

September 19, 2017

PA REALTY GROUP, LLC, in capacity As Successor Agent under those Certain 12% Series A Senior Secured Convertible Promissory Notes, Plaintiff,
H. LEE HORNBECK, in capacity as Agent, Defendants.


          Vanessa L. Bryant United States District Judge.

         This case involves a dispute over the rightful Agent for the holders (the “Note Holders” or "Series Holders") of the Stratex Oil and Gas Holding, Inc. (“Stratex”) 12% Series A Senior Secured Convertible Promissory Note (the “Notes” or “Series A Notes”). Before the Court are the parties' cross-motions for summary judgment. Plaintiff filed a Motion for Partial Summary Judgment requesting the Court rule on Count One of the First Amended Complaint and Count One of Defendant's Counterclaim, which both seek declaratory judgment under 28 U.S.C. § 2201 regarding Defendant's role as Agent to Series A Note Holders. [Dkt. 33 (Pl.'s Mot. Summ. J.) at 1]. Defendant opposes this motion and further submitted a Motion for Summary Judgment seeking “judgment in his favor on the complaint and on his counterclaim.” [Dkt. 39-1 (Def.'s Mem. Mot. Summ. J.) at 9]. However, Defendant only addresses the issue of revocation and does not address Plaintiff's Counts Two through Four: unjust enrichment, accounting, and the imposition of a constructive trust. The Court thus construes his motion as one for partial summary judgment as well. For the foregoing reasons, the Court GRANTS Defendant's Motion for Summary Judgment and DENIES Plaintiff's Partial Motion for Summary Judgment.

         I. Background

         A. The Parties

         Stratex is a publicly traded energy company. [Dkt. 33-2 (Pl.'s L. R. 56(a)(1) Stmt.) ¶ 1; Dkt. 37 (Def.'s L. R. 56(a)(2) Stmt.) ¶ 1]. Defendant H. Lee Hornbeck (“Defendant” or “Hornbeck”) is an individual holder of Notes in the original principal amount of $105, 000 and was appointed in February 2014 as the Agent for the Note Holders. See [Dkt. 40 (Def.'s L. R. 56(a)(1) Stmt.) ¶¶ 4, 7, 9; 44-1 (Pl.'s L. R. 56(a)(2) Stmt.) ¶¶ 4, 7, 9]. Plaintiff PA Realty Group, LLC (“Plaintiff” or “PA Realty”) is a limited liability company that purchased Notes in the original principal amount of $250, 000, and it purports to be the current Agent for the Note Holders after having organized Defendant's removal as Agent. See [Dkt. 40 ¶¶ 1, 9-10; Dkt. 44-1 ¶¶ 1, 9-10; 33-3 (Apr. 17, 2016 Letter) at 6 of PDF]. PA Realty is a limited liability company formed on April 13, 2016, under Connecticut law whose sole member is PA Realty Group, LLC (“Pennsylvania LLC”), a limited liability company formed in 2008 under Pennsylvania law. [Dkt. 40 ¶ 2; Dkt. 44-1 ¶ 2]. Yakov Plotnikov is the managing member of the Pennsylvania LLC and the only person authorized to speak on behalf of Plaintiff. [Dkt. 40 ¶ 2; Dkt. 44-1 ¶ 2].

         B. Facts

         In January 2014, Stratex issued a private placement memorandum (“PPM”) summarizing its offer of up to $10 million worth of Units consisting of the Notes and Series A Warrants convertible into common stock of the Company. [Dkt. 40 ¶ 4; Dkt. 44-1 ¶ 4]. The PPM included a Subscription Agreement containing the statement that by signing the Subscription Agreement each Note Holder represented and warranted that the Unit, including the Notes, are restricted securities and that each “is acquiring the Unit(s) subscribed solely for the Subscriber's own beneficial account, for investment purposes, and not with view to, or for resale in connection with, any distribution of the Units.” [Dkt. 10-2 (Mot. TRO Ex. 2, Funk Aff. and Exs.) at 87 of PDF].

         The Notes Holders were to complete and submit to Stratex a Subscription Agreement and purchase the Notes. See generally, id. at 82-98. The Note submitted into evidence provides that it is “one of a series of duly authorized and issued promissory notes” designated as Series A Notes with an aggregate principal face value up to a maximum amount of $10, 000, 000. Id. at 125 of PDF. Pursuant to the Note, the principal matured two years after the closing on the Minimum ($2, 000, 000) occurs and that the principal will be paid in one lump-sum payment on the Maturity Date, while the interest rate is 12% per annum to be paid quarterly in arrears.[1] Id. 20-21, 125 of PDF. The Note provides that payments made by the Company shall be made to all Note Holders at the same time. Id. at 126 of PDF.

         Within six months from the Original Issue Date, the Note Holder had “the right, at the Note Holder's option, to convert all or any portion of the Principal Amount hereof and any accrued but unpaid interest thereon into shares of common stock, par value $.01 per share, ” of Stratex. Id. at 127 of PDF. This conversion would in function lead to the reduction of the principal amount and/or accrued interest of the Notes in exchange for certificates of common stock. Id. at 127 of PDF. Upon any partial conversion of a Note, Stratex was required to issue a “new promissory note containing the same date and provisions” of the original note “for the principal balance of this Note and interest which shall not have been converted or paid.” Id. at 128 of PDF. There is no evidence on the record that any Note was converted for Stratex stock.

         The Notes were secured by a Security Agreement, under which Stratex pledged a first perfected security interest in its assets to secure payment of the Notes and reiterated many of the pertinent provisions of the Notes. Id. at 186, et. seq., of PDF. Stratex was charged in the Note to maintain the Note Register at its principal office in Houston, Texas, reflecting the principal amount of the Notes held by each Note Holder. Id. at 137 of PDF. In the Note, Stratex agreed to execute the Security Agreement in favor of the Agent for the benefit of the Note Holders. Id. at 125 of PDF.

         The Notes appoint and the Security Agreement contemplate the appointment of an Agent expressly and irrevocably authorized to act on behalf of the Note Holders “to act or refrain from acting” on matters designated to the Agent; “[t]o distribute promptly to the Series Holders, if required by the terms of the Notes, all written information, requests, notices, payments, prepayments, documents and other items received from the Company”; and to deliver to Stratex any requests, demands, approvals, notices, or consents of the Note Holders. Id. at 131, 179 of PDF. The Note and the Security Agreement authorizes the Agent to exercise on behalf of each Note Holder “all rights and remedies of the Series Holders upon the occurrence of any Event of Default and/or default specified in this Note or applicable laws.” Id. at 130 of PDF; see Id. at 179 (wherein the Security Agreement appoints the Agent “for purposes of exercising any and all rights and remedies of the Secured Parties hereunder”). The Security Agreement identifies Hornbeck as Agent to the Secured Parties (i.e. Series A Note Holders). [Dkt. 40 ¶ 6; Dkt. 44-1 ¶ 6; Dkt. 10-2 at 170 of PDF].

         The Security Agreement, by which the Agent must abide, [2] also includes provisions about the methods for terminating the Agent. Under the Appointment of Agent clause, the “appointment shall continue until revoked in writing by a Majority in Interest, at which time a Majority in Interest shall appoint a new Agent.” Id. “Majority in Interest” is defined as “at any time of determination, the majority in interest (based on then-outstanding principal amounts of Notes at the time of determination) of Secured Parties.” Id. at 158 of PDF. The Agent may also resign, pursuant to Annex B to the Security Agreement, “at any time by giving 30 days' prior written notice (as provided in the Agreement) to the Company and the Secured Parties.” Id. at 180 of PDF. “Such resignation shall take effect upon the appointment of a successor Agent” so long as either (1) the Secured Parties appoint a successor agent after notice of resignation, or (2) if a successor appointment is not made within 30 days “the Agent shall then appoint a successor Agent who shall serve as Agent until such time. . . .” Id.

         On February 20, 2014, a UCC financing statement was filed listing Hornbeck as a Secured Party. [Dkt. 10-2 at 182 of PDF]. The document does not bear his signature, although there does not appear to be a signature requirement. Plotnikov contends that this filing perfected Hornbeck's security interest. [Dkt. 10-3 at 2 of PDF].

         Stratex filed a Form 8-K on April 10, 2014, indicating that as of this date Stratex raised $9, 987, 650 in gross proceeds “in connection with the private offering of the Notes and Warrants.” Id. at 127 of PDF; see Dkt. 10-2 at 2 of PDF (“In that Offering, Stratex raised $9, 987, 650”); Dkt. 10-3 at 3 of PDF (wherein Plotnikov declared, “Based on my review of public documents available at the Securities and Exchange Commission, I understand that Stratex raised $9, 987, 650 from the Note Holders.”)]. The Form 8-K states that “all outstanding principal under the Notes is due payable on February 11, 2016.” [Dkt. 10-3 at 127 of PDF].

         On November 16, 2015, Hornbeck sent Series A Note Holders a letter regarding Stratex's default on Series A and Series B Notes. See Id. at 80 of PDF. The letter indicates Stratex defaulted on payment of interest and explains the company was in “extremely poor financial position” with “no cash and very few assets of value to repay this note.” Id. The letter also states that Hornbeck and the Agent for Series B Notes “sent notice of default and demand for payment” in addition to “a notice of the sale of assets if we the agents decide this is the best approach to get payments to the Noteholders.” Id. Hornbeck notified the Note Holders that “[i]n order to save these assets, pay existing expenses, legal and accounting fees and determine if it is feasible to try and recover a net $4 to $5 million in the tax loss carryforward and whatever we can from the producing wells the agents are levering a $500 per $100, 000 call on all Noteholders.” Id. “These funds should immediately be sent by wire transfer to the Washburn Law Firm attorney's trust account. . . .” Id. at 80-81 of PDF.

         On April 17, 2016, Hornbeck received an email from Richard Gora, PA Realty's attorney, notifying him of the following: “YOUR APPOINTMENT AS AGENT OF THE NOTES HAS BEEN REVOKED IN WRITING BY A MAJORITY IN INTEREST OF THE HOLDERS OF THE NOTES. TO BE CLEAR, YOU HAVE BEEN REMOVED AS AGENT, AND YOU NO LONGER HAVE ANY AUTHORITY AS AGENT UNDER THE NOTES.” [Dkt. 10-4 (Mot. TRO Ex.4, Gora Decl. and Exs.) at 7 of PDF]. The email does not include a note register or disclose the Note Holders who voted for his termination. The email also demands an accounting of all Stratex assets in his possession, including a Chevy Tahoe under his counsel's name, any funds called from the Note Holders, and documents and communications relating to the Notes and Stratex. Id. Plotnikov admits that he was involved with the voting process. [Dkt. 40 ¶ 15; Dkt. 44-1 ¶ 15; Dkt. 40-2 (Def.'s L. R. 56(a)(1) Stmt. Ex. 1, Plotnikov Dep.) at 47-49].

         Submitted into evidence are various signed Note Holders' Forms of Vote for Agent Removal, voting for Hornbeck's removal. See [Dkt. 10-3 at 85-120 of PDF. These Note Holders have also submitted declarations stating under penalty of perjury that they are Note Holders; that they are holders of a specified principal balance amount of Notes; that their Form of Vote for Agent Removal is true and accurate and bears their signature; that they intended to remove Hornbeck as Agent; and that they intended to replace him with PA Realty as Successor Agent. See generally, [Dkt. 33-4 (Mot. Summ. J. Ex. E, Note Holder Decls.)]. Plaintiff also submitted a chart of Note Holders, their loan amounts, and monthly accrued interest, dated September 30, 2015. See [Dkt. 33-3 (Mot. Summ. J. Ex. ...

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