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OTA LIMITED PARTNERSHIP v. FORCENERGY

November 14, 2002

OTA LIMITED PARTNERSHIP
V.
FORCENERGY, INC.



The opinion of the court was delivered by: Thomas J. Rueter, United States Magistrate Judge

MEMORANDUM OF DECISION

Presently before the court are defendant's motion for partial summary judgment (Document No. 30), and plaintiff's motion for summary judgment (Document No. 31). Each party filed numerous briefs, reply briefs, exhibits and affidavits in support of its own motion and in opposition to the other party's motion. The motions with respect to the reformation issue only were referred to the undersigned for disposition by the Honorable J. Curtis Joyner by order dated July 31, 2002. For the reasons stated below, defendant's motion for partial summary judgment is GRANTED, and plaintiff's motion for summary judgment is DENIED.

I. BACKGROUND

The basic facts are undisputed and the court will summarize them briefly here. Defendant, Forcenergy, Inc., was an independent oil and gas company engaged in exploring for and producing oil and natural gas.*fn1 Plaintiff, OTA, is a Delaware limited partnership and is an arbitrageur in the business of investing and trading securities for its own account. (Pl.'s Mem. of Law Supp. Summ. J. at 4.) In June and July, 2000, plaintiff bought approximately 10,000 warrants convertible into common shares of defendant (the "Warrants"). OTA did not purchase the Warrants directly from defendant, but bought them on the secondary market from another seller. Id. at 14. Defendant had issued the Warrants approximately three months earlier as part of its Chapter 11 bankruptcy reorganization. Under defendant's Chapter 11 plan of reorganization, defendant sold its unsecured creditors 40,000 "Units," each Unit consisting of one share of defendant's preferred stock and forty-five warrants, each warrant convertible into one share of defendant's common stock at the price of $10.00 per share. (Def.'s Appendix Supp. Summ. J. Exs. 1 and 3.)

Defendant and American Stock Transfer & Trust Company (the "Warrant Agent") entered into a Warrant Agreement dated March 20, 2000. The parties agree that the Warrant Agreement provides that each Warrant may be converted into one share of defendant's common stock, a one to one ratio. The parties agree that the Warrant Agreement contains no errors at the time it was drafted, and accurately reflects the intent of the parties to that agreement. (Pl.'s Mem. of Law Supp. Summ. J. at 16.)

Plaintiff claims that it purchased the Warrants because it believed that each Warrant was convertible into forty-five shares of defendant's common stock, a one to forty-five ratio. Id. at 13-14. Plaintiff contends that it believed that only 40,000 Warrants had been issued.*fn2 Plaintiff asserts that it formed these beliefs after reviewing certain documents including defendant's filings with the United States Securities and Exchange Commission ("SEC"), and defendant's Chapter 11 bankruptcy plan and disclosure statement. Id. at 10-14. Plaintiff also claims that it confirmed this conversion ratio in two telephone calls to defendant's employees before purchasing the first batch of Warrants. Id. at 13-14. Two of plaintiff's employees, Neil Weiner and David Tattersall, conducted the due diligence on behalf of the plaintiff. Id. at 10-14.

The issue before this court is very narrow and discrete: is plaintiff entitled to reformation of the Warrant Agreement to reflect that the Warrants are exercisable at the ratio of one to forty-five, i.e., one Warrant for forty-five shares of common stock. In Count I of the Complaint, plaintiff asked the court to reform the Warrant Agreement to give plaintiff forty-five shares of defendant's common stock for each Warrant it owns, rather than the one share per Warrant as provided in the Warrant Agreement.*fn3 Defendant seeks the entry of summary judgment on Count I of the Complaint arguing that plaintiff is not entitled to the equitable relief of reformation because: (1) the Warrant Agreement contains no mistakes; (2) innocent third parties, defendant's other shareholders, will be harmed by the dilution of their stock; and (3) plaintiff has an adequate remedy at law by means of the other claims it raised in its complaint. (Def.'s Br. Supp. Mot. Summ. J. at 2-3.)

Plaintiff also seeks summary judgment and asserts that defendant's motion for summary judgment should be denied because: (1) it is not seeking to amend the Warrant Agreement, but rather the specific individual agreement between plaintiff and defendant created when plaintiff first purchased Warrants; (2) the value of defendant's stock will not be diluted because defendant no longer has any common stock after its merger with Forest Oil, alternatively, the court may award plaintiff money damages rather than stock; and (3) plaintiff's other claims offer only a partial remedy, reliance damages rather than expectancy damages. (Pl.'s Br. Opp. Mot. Summ. J. at 2-4.)

Plaintiff acknowledges that Delaware law governs the reformation issue. (Pl.'s Br. Opp. Mot. Summ. J. at 16-18.) Defendant also acknowledged that Delaware law applies, citing to Section 11 of the Warrant Agreement which provides that it is governed by Delaware law. (Def.'s Br. Supp. Mot. Summ. J. at 23 n. 12.)*fn4 This court concludes that the issue of reformation is governed by Delaware law.

II. STANDARD OF REVIEW

Summary Judgment Standard. Pursuant to Fed.R.Civ.P. 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admission on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). See also Michaels v. New Jersey, 222 F.3d 118, 121 (3d Cir. 2000), cert. denied, 531 U.S. 1118 (2001). In considering a motion for summary judgment, the evidence must be considered in the light most favorable to the non-moving party, and all inferences must be drawn in that party's favor. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The court, however, must consider the evidence supporting reformation in light of the standard of proof plaintiff must meet to establish its right to that equitable remedy. Cerberus Int'l, Ltd. v. Apollo Management, L.P., 794 A.2d 1141, 1149 (Del. 2002) (adopting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986) ("[I]n ruling on a motion for summary judgment, the judge must view the evidence presented through the prism of the substantive evidentiary burden.")). In the instant matter, the party seeking reformation bears a high burden of proof. "The agreement as executed must stand unless the party seeking reformation can, by clear and convincing proof, provide the court with a clear understanding of how the intended agreement conflicts with the formal writing." Croxton v. Chen, 1998 WL 515346, at *2 (Del. 1998) (citing Hob Tea Room v. Miller, 89 A.2d 851, 857 (Del. 1952)). See also Cereberus, 794 A.2d at 1149 (considering a defendant's motion for summary judgment in an action for reformation of a merger agreement, the Delaware Supreme Court concluded that "the trial court must determine whether the plaintiffs on the summary judgment record proffered evidence from which any rational trier of fact could infer that plaintiffs have proven the elements of a prima facie case [for reformation] by clear and convincing evidence").

Reformation. Reformation is an equitable remedy that is "sparingly" granted. H. Prang Trucking Co., Inc. v. Local Union No. 469, 613 F.2d 1235, 1239 (3d Cir. 1980). "Reformation presupposes that a valid contract between the parties was created but, for some reason, was not properly reflected in the instrument that memorializes the agreement." Id. Under Delaware law, two doctrines allow reformation.

The first is the doctrine of mutual mistake. In such a case, the plaintiff must show that both parties were mistaken as to a material portion of the written agreement. The second is the doctrine of unilateral mistake. The party asserting this doctrine must show that it was mistaken and that the other party knew of the mistake but remained silent. Regardless of which doctrine is used, the plaintiff must show by clear and convincing evidence that the parties came to a specific prior understanding that differed materially from the written agreement.

Cerberus, 794 A.2d at 1151-52 (footnotes omitted). See also Emmert v. Prade, 711 A.2d 1217, 1219 (Del.Ch. 1997) (a document may be reformed to reflect the original intent of the parties but reformation is appropriate "only when the contract does not represent the parties' intent because of fraud, mutual mistake or, in exceptional cases, a unilateral mistake coupled with the other parties' knowing silence.") (citation omitted). "Reformation is not a mandate to produce a reasonable result." Collins v. Burke, 418 A.2d 999, 1002 (Del. 1980). Rather, the principle of reformation is "based on intention." Id.

Reformation has also been allowed to those in privy with the original parties. "Reformation will be allowed not only as against the original parties, but also against those claiming under them in privity, such as representatives, heirs or designees, legatees, assignees, voluntary grantees, or judgment creditors, or purchasers from them with notice of the facts." Phoenix Chair Co. v. Daniel, 155 So. 363, 366 (Ala. 1934). In Emmert, the executor of the estate of the decedent had standing to pursue, albeit unsuccessfully, a reformation claim to reform beneficiary designations of decedent's life insurance policy and pension plan to match the disposition of assets under decedent's will. Emmert, 711 A.2d at 1217-18. See also L.E. Myers Co. v. Harbor Ins. Co., 384 N.E.2d 1340, 1345-46 (Ill.App. 1st Dist. 1978) (reformation of written instruments may be had by the immediate parties thereto and by those standing in privity with them, such as their successors; a person not a party or a privy to the transaction, even a person with a substantial interest therein, may not maintain the action), aff'd, 394 N.E.2d 1200 (Ill. 1979).

The "mistake" requiring reformation, however, must have occurred between the original parties to the contract and existed at the time the contract is executed. Collins v. Burke, 418 A.2d 999 (Del. 1980) (reformation granted based on "mistake" in original deed); Fitzgerald v. Cantor, 1998 WL 781188 (Del.Ch. Oct. 28, 1998) ("mistake" at issue in reformation claim was between parties to the original contract). Reformation is not intended to bring documents into conformity with an intention that arose after the original contracts were executed. Emmert, 711 A.2d at 1219 (will may not be ...


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