United States District Court, W.D. Pennsylvania
DONALD D. SBARRA REVOCABLE TRUST UAD 11/23/1998, DONALD D. SBARRA TTEE; WILLARD LEE FRICKEY TTE U/A DTD 9/8/99; ROBERT E. SCHMIDT; DAVID R. NORCOM; TIM. L. WERTH; ANTHONY A. SCHMIDT; LORETTA SCHMIDT; DANIEL CARNEY; GAYLA W. CARNEY; BKF INVESTMENTS; KEN BRAUN FAMILY, LLC; JEFF COOPER, INC.; ROBERT DWERLKOTTE; SATELLITE RADIO MANAGEMENT, INC.; ALAN MOSKOWITZ; ATK INVESTMENTS, LLC; ICT EXPLORATION, LLC; BRUCE PRINGLE TTEE JOINT REV TRUST UTA 7-25-11; SHELLEY PRINGLE; SIEBER RESOURCES, LLC; PAGE FAMILY TRUST, ROBERT W. PAGE AND KAY PAGE, CO-TTEES; EDWARD C. RITCHIE, Plaintiffs,
HORIZONTAL EXPLORATION, LLC; MARK A. THOMPSON; MARCELLX LLC; DAVID M. PRUSHNOK; G. DANIEL PRUSHNOK; JOHN P. PRUSHNOK, Defendants.
OPINION RE: ECF Nos. 14, 15
MAUREEN P. KELLY, Chief Magistrate Judge.
Pending before the Court are two Motion to Dismiss; the first filed on behalf of Defendants Horizontal Explorations, LLC ("Horizontal") and Mark A. Thompson ("Thompson")(ECF No. 14), and the second filed on behalf of Defendants MarcellX ("MarcellX"), David M. Prushnok, G. Daniel Prushnok and John P. Prushnok ("the Prushnok Defendants")(ECF No. 15). The Motions to Dismiss are filed pursuant to Rule 12(b)(6) and Rule 9 of the Federal Rules of Civil Procedure, and contend that the facts alleged in Plaintiffs' Complaint are insufficient to state claims upon which relief may be granted.
In their Complaint, Plaintiffs allege claims for fraudulent misrepresentation against Horizontal and Thompson (Count I); civil conspiracy against all Defendants (Count II); violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act against Horizontal and Thompson (Count III); aiding and abetting a violation of Section 10(b) and Rule 10b-5 against MarcellX and the Prushnok Defendants (Count IV); violations of the Pennsylvania Securities Act against Horizontal and Thompson (Count V); and a state law claim arising under Pennsylvania's Unfair Trade Practice and Consumer Protection Law against Horizontal and Thompson (Count VI).
Plaintiffs' claims arise out of Defendants' alleged misrepresentations and actions taken to defraud them in the course of soliciting substantial investments in an oil and gas well drilling venture in Western Pennsylvania. MarcellX and the Prushnok Defendants seek dismissal of Counts II and IV against them, contending that the facts alleged in the Complaint are insufficient as a matter of law to state claims for conspiracy or aiding and abetting a securities violations. Horizontal and Thompson seek dismissal of all claims asserted against them because of Plaintiffs' failure to adequately plead fraud.
For the following reasons, the Motion to Dismiss filed by MarcellX and the Prushnok Defendants is granted as to Plaintiffs' claim for conspiracy (Count II), and as to Plaintiffs' claims for "aiding and abetting" securities law violations (Count IV). The Motion to Dismiss filed by Horizontal and Thompson (ECF No. 14) is denied, as noted supra at fn. 1.
I. FACTUAL AND PROCEDURAL BACKGROUND
For the purposes of the instant Motions, the factual allegations in the Complaint are accepted as true and all reasonable inferences are drawn in Plaintiff's favor. Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011).
Plaintiffs are a group of 22 individuals, family trusts, and businesses located in Kansas, Texas, Ohio and Florida, who were invited to invest in the development of oil and gas wells on a 2, 900 acre parcel of land in McKean County, Pennsylvania, identified as the "Swamp Angel Property." Plaintiffs allege that in February 2012, prior to the solicitations to invest, Defendant Thompson entered into discussions with the Prushnok Defendants to acquire certain rights to explore and produce oil and gas on the Swamp Angel Property from its owner, Swamp Angel Energy, LLC. (ECF No. 1. ¶ 35). Prior to entering into discussions for further exploration, approximately 75 wells had been drilled on the property.
In June 2012, the Prushnoks, principal owners of MarcellX, a limited liability company, provided the financing for MarcellX to make the land purchase. After acquiring the land, MarcellX obtained a bank line of credit to provide the working capital necessary to drill additional wells. The line of credit was used to rework and repair existing wells, pipelines and access roads. However, the line of credit, coupled with profits from existing productive wells, was insufficient to fund additional drilling. Due to this short-fall, Plaintiffs allege the Prushnoks and Thompson, President of Horizontal, developed a "Ponzi-like" investment scheme to fund the capital needed to obtain a return on their investment in the Swamp Angel Property. (ECF 1, ¶ 41).
Plaintiffs allege that Defendant Horizontal prepared a "Confidential Information Memorandum" (the "Memorandum") in August 2012 for distribution to potential investors. The Memorandum described a three-phase drilling schedule of lateral and vertical wells, and represented that permit applications were prepared for all planned initial lateral and vertical wells. Investors in "Fund I" would receive a working interest in each well drilled in the initial phase, with the founders of Horizontal providing up to twenty-five percent of the working capital necessary for the initial phase. Horizontal represented that it had obtained a turnkey price of $178, 590 for the completion of each vertical well in the first phase, and that the vertical wells would provide a low cost efficient way to generate cash flow with a high degree of predictability. Horizontal also stated that lateral wells would be on a "cost plus" basis, and estimated that each lateral well would be approximately 2, 500 feet long and cost $897, 720 to complete. Plaintiff does not allege that the Prushnoks or MarcellX were involved in the preparation or distribution of the Memorandum.
From September 2012 through December 2012, Defendant Thompson conducted numerous meetings and telephone calls with Plaintiffs to convince them to participate in Fund I. Thompson represented that he would personally invest up to 25% of the cash necessary to drill the first phase wells, to assure potential investors that he would operate Fund I in their best interests. Plaintiffs allege that based upon Thompson's representations, and the Memorandum authored by Horizontal, they elected to participate in the first phase of the development of the Swamp Angel Property by purchasing membership interests in Fund I. In the aggregate, Plaintiffs contributed approximately $3.35 million dollars to Fund I, and believed that Horizontal had raised at least $6 million dollars, including at least $2 million from Thompson. Again, Plaintiffs do not allege any solicitations to them by or through the Prushnok Defendants or MarcellX.
Plaintiffs contend that after their investments were received, they learned that Thompson never intended to contribute any money to the venture and that he failed to honor his promise to "have skin in the game." Plaintiffs further allege that Thompson failed to disclose that he had selected Larry Dean Winkler ("Winkler") as the Fund I manager, and that Winkler was facing criminal charges for embezzlement from an unrelated oil and gas venture. Plaintiffs allege that the criminal charges filed against Winkler led to a guilty plea for conspiracy, mail fraud and income tax fraud, stemming from the $9 million embezzled from the unrelated venture. Plaintiffs do not allege that the Prushnok Defendants and/or MarcellX participated in the selection of Winkler as the Fund I manager.
Plaintiffs allege that the Memorandum prepared by Horizontal and Thompson misrepresented the phasing of the drilling, such that the first vertical well was drilled in December 2012, followed by drilling two of the more expensive lateral wells in January 2013.
Plaintiffs allege that costs associated with the two lateral wells far exceeded representations contained in the Memorandum, and yet, to date, neither well has been completed. Plaintiffs allege "upon information and belief, " that drilling the lateral wells out of order was undertaken to "afford Horizontal the opportunity to pay more money to companies that Thompson and/or the Prushnoks owned, " including MarcellX. In particular, by performing services on lateral wells, MarcellX was paid at a higher rate than it would have received for drilling vertical wells under the fixed-price arrangement. (ECF No. 1, ¶¶ 62, 67). Three vertical wells were subsequently drilled in March 2013; however, one was never completed. In all, three vertical wells were completed and are producing oil, two lateral wells and a vertical well have not been completed, and all cash initially invested by Plaintiffs was exhausted by April 2013. Plaintiffs do not allege that MarcellX or the Prushnoks were involved in the order of drilling decisionmaking process.
In May 2013, select Plaintiffs met with Thompson to discuss continued development of the initial phase. Thompson confirmed that Horizontal would drill eight additional vertical wells in the Northeast corner of the Swamp Angel Property, and later advised that Horizontal had begun clearing trees to drill and complete the eight wells. Plaintiffs allege these representations were false, given the depletion of all cash in Fund I, and the lack of funds to drill and complete the eight additional wells.
Plaintiffs allege that in September 2013, Thompson sent each Plaintiff a letter proposing a new scheme, whereby shares in Fund I and the wells represented therein would be rolled into a new investment, identified as Fund II. New investors would be solicited for Fund II to provide cash for an additional forty wells. As proposed, and Fund I investors would obtain interests in each of the Fund II wells. In discussions with Plaintiff Donald D. Sbarra ("Sbarra"), later reduced to a signed letter, Thompson represented that $1.5 million dollars remained in Fund I to "roll" into Fund II. Based upon ...