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Enutroff, LLC v. Epic Emergent Energy, Inc.

United States District Court, D. Kansas

February 2, 2015

ENUTROFF, LLC, Plaintiff,
v.
EPIC EMERGENT ENERGY, INC., DALE S. MORGAN, DOUGLAS McKINNON, and CLYDE H. PITTMAN, JR., Defendants.

MEMORANDUM AND ORDER

ERIC F. MELGREN, District Judge.

This matter comes before the Court on Defendants Epic Emergent Energy, Inc. ("Epic"), Dale Morgan, Douglas McKinnon, and Clyde Pittman's Motion to Dismiss (Doc. 9). Defendants ask the Court to dismiss Plaintiff Enutroff, LLC's ("Enutroff's") First Amended Complaint for lack of personal jurisdiction under Fed.R.Civ.P. 12(b)(2). In addition, Defendants Epic and McKinnon ask the Court to dismiss the amended complaint for insufficient process and insufficient service of process under Fed.R.Civ.P. 12(b)(4) and (5). Because the Court finds that it does not have personal jurisdiction over Defendants, the Court grants Defendants' motion.

I. Factual and Procedural Background[1]

A. The Parties

Plaintiff Enutroff is a single-member limited liability company organized under Nevada law with its principal place of business in Kansas. Enutroff's sole member, James Loeffelbein, resides in Kansas. Enutroff is an investment company that provides equity capital to other companies somehow engaged in the energy business, whether by way of exploration, production, refining, or distribution.

Defendant Epic is a Texas corporation with its principal place of business in Texas. Epic is a start-up company seeking to gain a foothold in the field of gas-to-liquids technology (known as "GTL technology"). GTL technology involves the conversion of native natural gas into diesel fuel and other high-value liquid fuels. Defendant Pittman is Epic's Chief Executive Officer and a resident of Texas. Defendant Morgan is one of Epic's senior shareholders and a member of its board of directors. He also resides in Texas. Defendant McKinnon is Epic's President, a member of Epic's board of directors, and a Colorado resident.

B. The Parties' Relationship and Agreements

In early 2014, Enutroff received a telephone call in Kansas from Alan Chaillet. Chaillet identified himself as Epic's agent and indicated that he was aware that Enutroff invested in energy companies like Epic. During this and subsequent conversations with Enutroff, Chaillet told Enutroff about Epic's business prospects and proprietary technology. When Chaillet asked Enutroff if it wanted to learn more about Epic, Enutroff answered affirmatively.

In the context of conference calls, during which Enutroff was located in Kansas, Chaillet and Defendants Pittman, Morgan, and McKinnon made representations regarding Epic's technology, business prospects, and company stock. Specifically, Enutroff claims that Defendants told Enutroff that Epic had negotiated a binding agreement with HollyFrontier Corp., one of the largest independent petroleum refiners in the United States, and that this agreement required HollyFrontier to purchase GTL-produced fuels from Epic on a fixed, invariable, and "take-or-pay" basis.[2] Defendants also allegedly told Enutroff that Epic's stock was owned by a number of individual shareholders exclusively for investment purposes and that no single investor or group of affiliated investors owned any controlling substantial percentage of Epic stock. Accordingly, Defendants allegedly represented that Epic could issue and sell up to thirty percent of Epic stock to Enutroff without an existing shareholder preventing such issuance and sale.

On March 11, 2014, Chaillet sent a business plan to Enutroff in Kansas that included a memorandum from Defendant Pittman. Three days later, on March 14, 2014, Chaillet emailed Enutroff, stating that Defendant McKinnon would "present the financial model - via Go-To meeting" or through "conference call"; that HollyFrontier would provide a document in the next week; and that Chaillet was a "key person for sourcing equity and financing for Epic and [would] likely have a principal role in the Company."[3] Chaillet sent another email to Enutroff in Kansas on March 19, 2014, confirming the conference call in his previous email and stating that he had been on the phone with HollyFrontier that morning and learned the date by which HollyFrontier hoped to have a fuels purchase document for Epic's review.

Enutroff agreed to invest in Epic, and the parties entered into two agreements to memorialize their relationship. The first agreement is a Consulting and Fee Agreement (the "Consulting Agreement") dated February 1, 2014. Loeffelbein signed this document on behalf of Enutroff on February 1, 2014, in Kansas. Defendant Pittman signed the document in his capacity as Epic's CEO on March 26, 2014, in Texas. Under this agreement, Enutroff agreed to perform "general consulting services" related to Epic's affairs and "liason with the investment community."[4] Specifically, Enutroff agreed to: analyze and provide advice on "strategy, position, and business direction in order to optimize its business success in general regarding Epic's upstream gas and oil exploration, drilling completion, and production opportunities"; provide information, advice, and negotiations with potential joint venture partners, customers, or investors" on Epic's behalf; and "manage communications and relationship with the investment community."[5] In return, Epic agreed to convey to Enutroff three percent of Epic's common outstanding shares as of February 1, 2014.

The second agreement is the Convertible Loan Agreement (the "Loan Agreement") dated February 1, 2014. Leoffelbien executed this agreement on Enutroff's behalf on February 1, 2014, in Kansas, and Defendant Pittman executed this agreement on Epic's behalf, in Texas, on March 24, 2014. The Loan Agreement provides that Enutroff will advance $200, 000 to Epic in as many increments and in such amounts per increment as Enutroff might determine, provided that $100, 000 will be paid on or before March 31, 2014, and the remainder paid not later than May 30, 2014. The Loan Agreement also provides that Enutroff would have the right to convert the principal and accrued interest under the loan into shares of Epic's common stock. If the loan amount is not converted to Epic stock, Epic is required to repay the loan one year after February 1, 2014, including interest, at a rate of eight percent per annum. Pursuant to this agreement, Enutroff transferred $100, 000 in cash from a Kansas bank to Epic on or about March 24, 2014.

Enutroff and Epic's relationship began to unravel in April 2014, after Pittman sent Enutroff an email informing it that HollyFrontier decided not to enter into an agreement with Epic to purchase Epic's fuel. Enutroff then demanded additional information regarding the state and nature of Epic's business, prospects, assets, management, and directorate. After these and additional demands for information, Epic informed Enutroff that there was an existing shareholder who held thirty percent of its issued outstanding shares; that Epic was having trouble with this shareholder; and that such shareholder could prevent Epic from giving Enutroff a thirty percent ownership interest in Epic.

Enutroff then demanded that Epic return its $100, 000 payment pursuant to the Loan Agreement. The parties exchanged several emails on April 30, 2014, through Loeffelbein, who was located in Kansas, and Epic's lawyer, who was located in Texas. During this email exchange, Epic's attorney stated that Epic would agree to return Enutroff's funds, terminate the Consulting and Loan Agreements, accept a return of the Epic stock by Enutroff, and exchange a mutual release. Epic's attorney also asked whether Enutroff would like him to draft the settlement agreement. Loeffelbein replied "that's fine."[6] However, the parties have not executed a settlement agreement, and Epic has not returned the $100, 000 payment under the Loan Agreement to Enutroff.

C. The Current Action between the Parties

Enutroff filed suit against Defendants on July 1, 2014, in the District Court of Johnson County, Kansas. Defendants removed the action to this Court on August 6, 2014. On August 8, 2014, Enutroff filed its First Amended Complaint alleging that Defendants made misrepresentations regarding Epic's relationship with HollyFrontier, Epic's proprietary technology, and Epic's ability to issue and sell stock that induced Enutroff to enter into the Consulting and Loan Agreements. Enutroff also alleges that the parties entered into a valid and enforceable settlement agreement that Defendants have breached. Enutroff's First Amended Complaint asserts the following claims: (1) enforcement of the settlement agreement, (2) violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, (3) violation of the Kansas Securities Act, (4) fraud, and (5) negligent misrepresentation. In response, Defendants filed a motion to dismiss, seeking dismissal on the basis of lack of personal jurisdiction. Defendants Epic and McKinnon also seek dismissal for insufficient process and insufficient service of process. Defendants' motion is now before the Court.

II. Legal Standard

A. Personal ...


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