In this edition of Litigation Roundup, the Fifth Circuit determines 2-1 that the city of Mineral Wells can’t be sued for breaching an “illegal” contract, the Texas Supreme Court is asked to answer two certified questions in a royalty dispute involving Hilcorp Energy, and an Austin company agrees to forfeit $4.5 million for misbranding dietary supplements.
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Harris County District Court
JOMA Management Moves to Confirm $54M Arbitration Award
A judge in Houston has been asked to confirm a $54 million arbitration award entered in favor of JOMA Management in its earnout dispute with Goldfinch Energy Holdings.
According to court documents, the fight is rooted in JOMA’s 2020 sale of its 75.25 percent stake in Prime Power Solution — which does business as Life Cycle Power — to Goldfinch for about $15 million. That deal included a provision under which JOMA was to receive earnout payments in 2021, 2022 and 2023.
Goldfinch, a portfolio company controlled by Arroyo Energy Investment Partners, told JOMA its earnout payment for 2022 was $14 million, prompting JOMA to initiate an arbitration alleging it was actually entitled to a nearly $60 million earnout payment for that year.
BDO USA, which arbitrated the dispute, sided with JOMA in December, finding the company was entitled to an earnout payment of about $54 million.
JOMA filed an application to affirm the award Jan. 5 The case has been assigned to Harris County Judge Lauren Reeder.
JOMA Management is represented by Noelle M. Reed, Eben Colby and Wallis Hampton of Skadden, Arps, Slate, Meagher & Flom.
Counsel information for Goldfinch, which had not responded to the filing as of Tuesday, was not immediately available.
The case number is 2024-00983.
Western District of Texas
Ex-Head of U.S. Small Business Administration Sent to Prison
Hector Barreto, who served as the head of the Small Business Administration under President George W. Bush, has been sentenced to prison for his role in a wire fraud conspiracy.
U.S. District Judge Jason K. Pulliam sentenced Barreto to 20 months in prison on Jan. 10 and ordered he pay a $100,000 fine and about $1.2 million in restitution. His coconspirator, Miguel Gutierrez, received a 10-month sentence.
Prosecutors alleged Barreto and Gutierrez operated a charity called the Latino Coalition Foundation that purported to use donations to establish apprenticeship programs for low-income young people. Barreto was in charge of the organization’s bank account and maintained operational control, and prosecutors allege he used hundreds of thousands of dollars in donations to pay personal expenses and made payments to friends and family members as well.
In an effort to hide the fraud, prosecutors said Barreto filed false reports with the IRS to make it appear the charity had received no donations.
He was charged with conspiracy to commit wire fraud and conspiracy to defraud the United States.
Barreto had pled not guilty to the crimes and his trial began with jury selection on April 17, according to the docket, but before closing arguments were made or a verdict was returned he entered a plea agreement with the government April 20. Prosecutors had anticipated trial would last three weeks.
“Our nation’s charity system is based upon trust,” said U.S. Attorney Jaime Esparza for the Western District of Texas. “Donors trust that those who run the charities are using their money for charity and not to line their own pockets. The defendants today were sentenced for betraying that trust. Our office will vigorously prosecute anyone who steals charitable donations to feed their own greed.”
Barreto is represented by Jonathan N. Rosen and Manuel A. Medrano of the law firm Rimon.
The government is represented by Department of Justice attorneys Antonio Franco Jr., Joseph E. Blackwell, Kristy Callahan and William R. Harris.
The case number is 5:21-cr-00404.
Austin Co. Pays $4.5M, Cops to Distributing Misbranded Dietary Supplements
Defyned Brands, an Austin-based company that is also known as 5 Star Nutrition, has agreed to forfeit $4.5 million and admit to misbranding dietary supplements.
Prosecutors allege that from September 2018 until July 2020 the company misbranded dietary supplements — workout supplements called Epivar, Alpha Shreded and Laxobolic — by not including all ingredients in the product and by mislabeling some ingredients as dietary ingredients.
Defyned was charged with three counts of introducing misbranded foods into interstate commerce via an information filed with the court Dec. 15, according to court records.
The parties agreed to proceed before U.S. Magistrate Judge Susan Hightower, who on Jan. 12 entered the judgment against Defyned.
“For almost two years, the defendant in this case misinformed consumers with inaccurate labeling on dietary supplements,” said U.S. Attorney Jaime Esparza for the Western District of Texas. “By requiring this company to forfeit its profits from this practice, we hope to reaffirm the public’s confidence in the safety of the products they purchase.”
Defyned Brands is represented by Johnny K. Sutton of Ashcroft Sutton Reyes, Jack Wenik of Epstein Becker & Green and Arthur W. Leach and Jessica H. Leach of the Law Office of Arthur W. Leach.
The case was prosecuted by David Sullivan, Manu Sebastian, Mark Tindall and Matt Harding of the Department of Justice.
The case number is 1:23-cr-00213.
U.S. Court of Appeals for the Fifth Circuit
Panel Splits on Suit Against City Alleging Breach of ‘Illegal’ Contract
The city of Mineral Wells, Texas, cannot be sued by American Precision Ammunition for breaching a contract that, among other things, guaranteed the company a $150,000 gift, because the contract is illegal.
“This case serves as a strong reminder of the consequences of entering into a contract that obligates a party to perform an action forbidden by law,” the panel wrote in a Jan. 12 decision affirming dismissal of the suit.
APA, a munitions company, entered an agreement with the city in July 2016 under which the city gave it financial incentives to relocate to Mineral Wells. APA agreed to spend at least $250,000 on a new site in the city, and the city agreed to “gift” APA $150,000 in funds toward that total. The deal also included tax abatements for APA in exchange for the company agreeing to employ a certain number of people.
Then, in July 2018 the Mineral Wells city council voted to revoke the agreement on grounds that the “gift” was illegal under the state constitution.
APA sued alleging breach of contract, violations of the Texas Open Meetings Act and violations of the state constitution and federal due process protections.
U.S. District Judge Reed O’Connor had granted the city’s request for early dismissal in the case. APA filed notice of appeal in June 2021.
It was not immediately clear based on docket entries in the case why there was a delay between when the parties filed their briefs, in October and November of 2021, and when the case was calendared for oral arguments, in July 2023.
The Fifth Circuit determined 2-1 that because the $150,000 gift “constitutes a gratuitous payment of public money” to a corporation without any “return benefit,” the contract is illegal on its face. The court explained that the return benefit for APA under the deal was the tax abatements, not the $150,000.
“That the agreement as a whole is ‘consistent with encouraging development of the zone and generating economic development and increased employment opportunities in the city’ does not undermine the gratuitous nature of a ‘gift’ nor does it undermine the text of the agreement, which specifies that the tax abatements are what APA was to receive in exchange for relocating,” the court held.
Judge Cory T. Wilson dissented, writing that under his reading of the agreement, the $150,000 “was integral to the city’s inducing APA to develop the site at issue, relocate there, and employ city residents.”
“In other words, a classic economic development deal,” he wrote.
Judges James L. Dennis and Carl E. Stewart were also on the panel.
Mineral Wells is represented by Thomas Brandt of Fanning Harper Martinson Brandt & Kutchin.
APA is represented by Lance Beshara and Milo Bobbitt of Patel Gaines.
The case number is 21-10558.
Texas Supreme Court’s Input Sought in Royalty Dispute
A panel of Fifth Circuit judges told the Texas Supreme Court in a Jan. 12 opinion that it couldn’t confidently venture an Erie guess in a royalty dispute and asked the court to answer two questions so it can resolve the case between Hilcorp Energy Company and lease holders.
Anne Carl and Anderson White, who are successors in interest to a mineral lease covering two wells in Brazoria County, appealed in May 2022, trying to overturn a ruling from U.S. District Judge Keith P. Ellison granting Hilcorp’s motion to dismiss the case.
Carl and White sued Hilcorp alleging it was required to pay them royalties on gas it used off-lease for post-production services like transport and processing.
The questions are:
1) After Randle, can a market-value-at-the well lease containing an off-lease-use-of-gas clause and free-on-lease-use clause be interpreted to allow for the deduction of gas used off lease in the post-production process?
2) If such gas can be deducted, does the deduction influence the value per unit of gas, the units of gas on which royalties must be paid, or both?
Randle refers to the Texas Supreme Court’s 2021 ruling in BlueStone Natural Resources II v. Randle, where the justices determined BlueStone had improperly deducted postproduction costs from royalties paid to lessors.
Carl and White argue that the Randle decision entitles them to the royalties they seek, while Hilcorp argues Randle doesn’t apply here because that case dealt with “a gross-value-received lease, rather than a value-at-the well lease.”
Judges James L. Dennis, Jennifer Walker Elrod and James C. Ho sat on the panel.
Hilcorp is represented by Stephen Crain and Jeffrey L. Oldham of Bracewell and Andrew Zeve of White & Case.
The landowners are represented by Rex A. Sharp, Heather Hacker, Hammons P. Hepner, Ruan Hudson and Greg Wright of Sharp Law.
The case number is 22-20226.