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BPI Energy Holdings, Inc. v. IEC

September 17, 2010

BPI ENERGY HOLDINGS, INC. F/K/A BPI INDUSTRIES, INC. AND BPI ENERGY, INC., F/K/A BPI INDUSTRIES (USA), INC., PLAINTIFFS,
v.
IEC (MONTGOMERY), LLC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Herndon, Chief Judge

MEMORANDUM & ORDER

I. Introduction

Now before the Court is Defendants' Motion for Summary Judgment (Doc. 238), to which Plaintiffs (collectively, "BPI") have timely responded in opposition (Doc. 246) and Defendants replied (Doc. 248). Defendants move for summary judgment in their favor as to all four counts in BPI's Fourth Amended Complaint (Doc. 183), as well their Counterclaim (Doc. 196) for declaratory relief stating that they were legally justified in attempting to terminate the CBM Leases*fn1 due to BPI's material defaults and inability to perform, and to require BPI to deliver a release reflecting termination of the CBM Leases and release the lis pendens it filed on the properties subject to the CBM Leases.

BPI's Fourth Amended Complaint (Doc. 183) pleads four separate counts for fraud in the inducement, promissory fraud, breach of contract, and tortuous interference with a contract. BPI seeks recision of certain contracts which transferred coal mining rights (or coal purchase options) for their various Illinois properties to Defendants. Additionally, BPI seeks monetary damages for Defendants' alleged breach of the CBM Leases as well as punitive damages for Defendants' alleged fraudulent and tortuous actions. Although Defendants argue for summary judgment as to all four counts, BPI has consented to the dismissal of Counts III (breach of contract) and IV (tortuous interference with a contract) (see Doc. 246, p. 1, n.1), which the Court will allow. Therefore, the focus turns to the issues regarding Defendants' alleged fraudulent behavior as well as the declaratory relief they seek. Based upon the reasoning herein, the Court finds Defendants entitled to summary judgment as to BPI's claims but not as to Defendants' counterclaim.

II. Background

BPI is in the business of drilling for and producing coal bed methane ("CBM") gas. Defendant Drummond Company, Inc. ("Drummond"), is in the business of mining coal. BPI envisioned a mutually beneficial relationship for itself with a coal mining company, such as Drummond, in that it could offer its services to extract the CBM so that the coal could be safely mined afterward. Although BPI is a Canadian corporation, its principal place of business is in the state of Ohio. Having presence in the Midwest, it turned its attention to the potential mining of land comprising the Illinois Basin. BPI concentrated its initial efforts on obtaining rights to extract CBM in the Illinois Basin, as well as obtaining options to purchase coal rights, separate from CBM rights. After acquiring several coal purchase options from various counties in Illinois, BPI next looked for a potential buyer for these coal rights. In short, BPI wanted to find a "strategic partner." Of the companies responding to BPI's inquiry, Drummond appeared to fit the bill.

In 2004, BPI and Drummond entered into what BPI calls a "strategic alliance," in which the ultimate goal anticipated by BPI was for Drummond to purchase the coal options from BPI, exercise those options, and subsequently lease the CBM extraction rights for that coal to BPI. Another key item essential to the strategic alliance was the mutual financial benefit that both BPI and Drummond would receive: Drummond would be able to purchase the coal option rights at a low cost and, in turn, it would lease the CBM extraction rights back to BPI. BPI would then pay Drummond royalties on the CBM it extracted. The royalties were to be at rates deemed favorable to BPI.

To establish and further this alliance, on August 4, 2004, BPI and defendant Vandalia Energy Company, LLC ("Vandalia"), a Drummond affiliate, entered into a Memorandum of Understanding ("MOU"). That same day, BPI also entered into a Letter of Intent ("LOI") with another Drummond affiliate, defendant IEC (Montgomery), LLC ("IEC"). The MOU addressed BPI's desire to exchange its coal option rights in Christian, Clinton, and Shelby Counties for rights to CBM from a reserve located in Montgomery, Shelby, and Fayette Counties by way of a lease with IEC, a Vandalia affiliated company (see Doc. 238, Ex. 3, p. 1). The MOU also set forth the purchase price for the coal options and further stated that "BPI and Vandalia agree to work in good faith to acquire coal and coalbed methane rights to other large blocks of Herrin #6 seam coal in Illinois where mutually beneficial" (Id. at 2).

The LOI "set forth the outline of how the proposed strategic alliance between BPI and IEC can be developed following completion of due diligence by both BPI and IEC" (Doc. 238, Ex. 4, p. 2). The LOI was also to "serve as the basis for negotiations of final agreements that will specifically outline the relationship between the parties" (Id.). The strategic alliance was described therein as a situation where "BPI [could] assist IEC in expanding their coal interests and IEC [could] assist BPI in expanding their CBM... interests in the Illinois Basin" (Id.). In addition, the LOI stated that: (1) BPI would exercise its options to acquire the coal and rights as set forth in the LOI for Christian, Clinton, and Shelby Counties at a favorable cost to IEC or its designee; (2) BPI would give Defendants a right of first refusal on any additional coal rights it would acquire at cost; (3) Defendants would work to secure CBM rights for BPI as they acquired coal rights, including the acreage of coal rights they already owned and provide them at cost; (4) Defendants would give BPI a right of first refusal on any additional CBM rights they would acquire on the same terms and conditions as they secured those rights; and (5) Defendants would exclusively use BPI for its CBM degassing operations in connection with their coal mining operations in the Illinois Basin (Id. at 2-4). Both the MOU and the LOI expressly stated that they were non-binding. Nevertheless, BPI feels that these documents clearly evidenced the Parties' intent to maintain a relationship so that BPI would be able to lease CBM rights from Defendants at favorable rates and that, in turn, Defendants would obtain BPI's coal rights (or coal options) at cost (see Doc. 183, ¶ 25).

In order to transfer the various coal options it had acquired to Defendants, BPI first created the Shelby, Christian, Clinton, and Marion Coal Holdings LLC's (also Defendants in this action) (referred to collectively as the "Coal Holdings LLC's"). BPI then transferred its coal options to each of these newly-created LLC's via the County Coal Transfer Agreements (see Doc. 238, p. 2 and Exs. 7-10 (Shelby), 12-15 (Christian), 18-21 (Clinton), and 23-26 (Marion)).*fn2 Next, BPI transferred ownership of these LLC's to IEC. In consideration, IEC reimbursed BPI for its cost of the coal options. IEC then exercised the coal options, paying the respective counties over $5 million in total to acquire the coal rights. During this time, BPI claims that it made repeated requests for Defendants to execute the CBM leases that were integral to the MOU and LOI, but that Defendants refused to so. Instead, according to BPI, it was only when it informed Defendants that it would exercise the Marion county coal option itself, rather than sell the option to IEC, that Defendants finally forwarded a draft lease for IEC's CBM rights in Montgomery, Christian, Fayette, and Shelby Counties, Illinois (see Doc. 238, Ex. 1). This CBM Lease is referred to as the "Hillsboro CBM Lease" (Doc. 238, p. 2). However, BPI also claims the draft lease did not comply with the spirit of the MOU and LOI, as it contained a short lease term, high royalty rates and multiple development commitments (Doc. 183, ¶¶ 32-33).

BPI was also able to secure another coal purchase option on property referred to as the "Osage Reserves." BPI claims that only when it threatened to exercise its option to the Osage coal rights did Defendants finally provide the CBM leases with the "agreed upon" terms (Doc. 246, p. 2, ¶ 4). Therefore, pursuant to what is known as the Osage Letter Agreement, dated March 1, 2006, entered into by BPI, IEC and Christian Coal Holdings, LLC ("Christian"), BPI agreed to sell its Osage Reserves coal option to Christian; Christian and IEC agreed to lease back the CBM rights to BPI (see Doc. 238, Ex. 28).

On April 26, 2006, BPI entered into two separate CBM Leases. In one lease, referred to as the Hillsboro CBM Lease by the Parties, IEC agreed to lease to BPI the CBM rights for its Hillsboro tract of mineral lands, located in Christian, Fayette, Montgomery, and Shelby Counties, Illinois (see Doc. 238, Ex. 1). BPI and defendant Christian also entered into what is referred to as the Osage CBM Lease, in which IEC agreed to lease to BPI its CBM rights for its Osage property, located in Christian and Montgomery Counties, Illinois (see Doc. 238, p. 2, Ex. 2). The Parties proceeded to conduct themselves in accordance to the terms and conditions of the two CBM Leases, however, BPI believes Defendants never had any intention of ever honoring these leases (Id. at ¶ 45).*fn3

The Hillsboro CBM Lease includes a primary term of 20 years and a royalty rate (for BPI to pay Defendants on the extracted CBM) ranging from 6.25% up to 12.5%, depending on the price of natural gas (Doc. 238, Ex. 1, §§ 2 & 3). The Osage CBM Lease is also for a primary term of 20 years and has a set royalty rate of 12.5% (Id., Ex. 2, §§ 2 & 3).*fn4 BPI states that it could not begin its drilling until Defendants provided the necessary data as to where they intended to mine coal (referred to as "Mine Plan Blocks" or "MPBs"). In accordance with Section 3.8 of both CBM Leases, Defendants as "Lessor," were obligated to BPI as "Lessee" to do the following:

LESSOR shall within ninety (90) days of the execution of this Agreement designate to LESSEE the area or areas of the Lease Premises that LESSOR plans to mine ("Mine Plan Block") and the order of priority in which they will be mined. Each Mine Plan Block will be placed in an order of mining priority as follows: (1) within eight (8) years and (2) greater than eight (8) years. Each Mine Plan Block can range in size up to twenty thousand (20,000) acres. (See Doc. 238, Ex. 1 - Hillsboro CBM Lease, § 3.8; Ex. 2 - Osage CBM Lease, § 3.8.)

In addition, BPI and Defendants were to meet at least once a year to review mining plans to discuss and mutually agree upon, if necessary, any adjustment to the order of mining priority of the MPBs (Id.). Section 3.8 of the CBM Leases also called for BPI to provide Defendants with an updated map every six months, showing the location of all of the existing and proposed gas wells and facilities located on the leased premises. In exchange, Defendants were to provide BPI with an updated map every six months indicating the locations of any active or projected coal mining and other surface activities that might adversely affect BPI's operations (Id. at § 3.9).

BPI claims that the CBM Leases were doomed to failure from the start, as Defendants failed to provide the MPBs within the 90-day contractual window. When Defendants actually did produce the MPBs, BPI complains they were not provided in good faith. Rather, BPI believes the untimely MPBs were indicative of Defendants' effort to frustrate BPI's ability to preform under the CBM Leases, as Defendants designated the entire premises as land it intended to mine at once. Next, Defendants forwarded substantially different revised drafts of the CBM leases, reducing the primary term from twenty to three years and increasing the royalty rates, thereby removing the consideration BPI had bargained for when it arranged for the transfer of its coal purchase options to the Coal Holdings LLC's. Refusing to renegotiate the CBM Leases, BPI gave Defendants notice that it was instituting the arbitration process. When the Parties later met, Defendants gave BPI a Notice of Default as to the CBM Leases. That same day, Defendants filed a declaratory judgment action in federal court in Alabama.*fn5 Conversely, ...


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