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Signal Peak Energy, LLC v. Eastern Montana Minerals, Inc.

United States District Court, D. Montana, Billings Division

February 7, 2013

EASTERN MONTANA MINERALS, INC., and Musselshell Resources, LLC, Defendants and Counterclaim Plaintiffs,
Signal Peak Energy, LLC; FirstEnergy Corp.; FirstEnergy Ventures Corp.; FirstEnergy Generation Corp.; Group, Ltd.; Pinesdale LLC; Boich Companies, LLC; WMB Marketing Ventures, LLC; Global Coal Sales Group, LLC; and Global Mining Holding Company, LLC, Counterclaim Defendants.

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A. Clifford Edwards, A. Christopher Edwards, John William Edwards, Triel Culver, Edwards Frickle & Culver, Billings, MT, Bruce A. Americus, Matthew F. Burger, Buchanan Ingersoll & Rooney PC, Pittsburgh, PA, for Plaintiff.

Ross W. McLinden, Moulton Bellingham, Billings, MT, Christopher R. Belmonte, Dai Wai Chin Feman, Satterlee Stephens Burke & Burke LLP, New York, NY, for Defendants and Counterclaim Plaintiffs.

A. Clifford Edwards, Edwards Frickle & Culver, Billings, MT, Banks Brown, Michael J. Dillon, McDermott Will and Emery LLP, New York, NY, James H. Goetz, Goetz Gallik & Baldwin, Bozeman, MT, for Counterclaim Defendants.


RICHARD F. CEBULL, District Judge.


This lawsuit arises out of a dispute over coal royalties paid by Plaintiff Signal Peak Energy, LLC (" SPE" ), to Defendants Eastern Montana Minerals and Musselshell Resources (collectively, " EMM" ), under a July 16, 2008 Coal Lease. SPE filed this action seeking a declaratory judgment that it is properly paying royalties to EMM based on the price paid by SPE's customer, Counterclaim Defendant First Energy Generation Corp. (" FGCO" ). EMM believes the royalties it receives

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from SPE should be based on the resale price of the coal rather than the initial price paid by FGCO and has responded with counterclaims against SPE and associated companies (the " Counterclaim Defendants" ).

Pending before the Court are motions to dismiss filed by each of the Counterclaim Defendants. Although EMM pleads plausible claims against SPE, EMM's claims against the other Counterclaim Defendants do not cross the threshold from speculative to plausible and must therefore be dismissed for failure to state a claim upon which relief may be granted.


In July of 2008, Defendant and Counterclaimant EMM (then Bull Mountain Coal Properties) and Plaintiff and Counterclaim-Defendant SPE (then, Bull Mountain Coal Mining, Inc.) entered into the Coal and Coalbed Methane Lease and Water Rights Conveyance (the " Lease" ). ¶¶ 16, 18-19. In November of that year, the Coal Lease was amended to include Defendant and Counterclaim-Plaintiff MR. The Coal Lease provides that SPE, as Lessee, will pay royalties to Lessor EMM based on all coal mined, shipped, and sold by SPE from the Signal Peak Mine (the " Mine" ) regardless of the buyer. ¶ 21. To allow EMM to benefit from future increases in the price of coal sold from the Mine, the Lease requires that royalties be calculated based on the " Gross Sales Price," that is the price received by SPE for coal sold in " arms' length transactions." ¶ 22. If the coal sales are made " in any manner other than at arms' length," the Lease requires that royalties be calculated at the price received in " comparable arms' length sales." Id.

When the Lease was executed, SPE was owned by Counterclaim-Defendant Global Mining Holding Company, Inc. (" Global Mining" ), which was jointly owned by Counterclaim Defendants FirstEnergy Corp. (" FE" ) and Boich Companies, LLC (" Boich" ). ¶ 20.

Around the same time SPE and EMM entered into the Lease, SPE and Counterclaim-Defendant FGCO, an affiliate of FE, entered into the Coal Sales Agreement (" CSA" ). ¶ 26. The CSA is not a part of the Lease and does not involve EMM. ¶¶ 27-28. When it executed the Lease, EMM expected that SPE would sell coal to FGCO, but it did not expect that companies affiliated with SPE would repurchase coal sold to FGCO and then resell the coal downstream at higher prices in order to avoid paying EMM royalties on the higher prices. ¶¶ 29-30. SPE has paid royalties, documented in monthly statements, to EMM since 2008 and has represented that all royalties were based entirely on coal sold to FGCO under the CSA. ¶ 31. Although FE publicly acknowledges that Counterclaim-Defendant Global Coal Sales Group (" GCSG" ), an affiliate of SPE, is the exclusive marketer of coal sold from the Mine, SPE has not told EMM that coal sold to FGCO under the CSA is resold to GCSG and for further sale at higher prices. ¶ 32.

Around October, 2011, FE and Boich sold 1/3 of their interest in the Mine to Counterclaim-Defendant Gunvor Group, Ltd. (" Gunvor" ), through its subsidiary Counterclaim-Defendant Pinesdale LLC (" Pinesdale" ). ¶ 33. Through this transaction, FE and Boich transferred their interests in Global Mining, the company that owns SPE and an affiliate of GCSG, to Counterclaim-Defendant Global Holding, a

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holding company newly formed by FE and Boich. Id. SPE was now owned by Global Holding, which was owned in equal parts by Gunvor, through its subsidiary, Pinesdale, by FE, through its subsidiary Counterclaim-Defendant FirstEnergy Ventures Corp. (" FEV" ), and by Boich, through its subsidiary Counterclaim-Defendant WMB Marketing Ventures, LLC (" WMB" ). ¶ 34. Accordingly, the ownership structure following the Gunvor transaction is as follows:

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Editor's Note: the preceding image contains the reference for footnote [2].

Gunvor paid $400 million for its one-third interest in Global Holding, indicating SPE is worth more than $1 billion. ¶ 37. Since SPE is not worth over $1 billion if coal sales from the Mine are made only at the CSA prices, EMM believes Gunvor valued its interest in Global Holding based on SPE selling coal at higher prices. Id. After the Gunvor transaction the CSA was amended to significantly reduce the amount of coal sold thereunder. ¶ 38. Also after the Gunvor transaction, FE issued a press release on its website stating that production at the Mine " is expected to rise to approximately 15 million clean tons per year from the current nine million tons, which can be sold to Gunvor as well as other domestic and international customers." ¶ 39. Similarly, around the same time, Gunvor issued a press release announcing its $400 million investment in the Mine and stating that " [a]s part of the transaction, coal purchase agreements between Signal Peak and subsidiaries of each of First Energy and Gunvor were negotiated." ¶ 40.

Consistent with the amendment to the CSA after the Gunvor transaction, FE certified to the SEC in November 1, 2011 that " FGCO has revised its coal purchase agreement with Signal Peak to reduce delivery from up to 7.5 million tons annually to an obligation to accept up to 2 million tons each year." ¶ 41. On November 3,

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2011, Gunvor issued a press release noticing its " substantial coal purchase agreement with Signal Peal." ¶ 42.

Prior to the press releases and the Gunvor transaction, EMM had relied on SPE's assertions that all coal sold from the mine was sold to FGCO under the CSA for FGCO's own use or for resale to bona fide third parties. ¶ 44. But upon learning of the above press releases and the Gunvor transaction, EMM requested an audit of all coal sales from the Mine as it is authorized to do under the Lease. ¶¶ 43, 60. SPE has refused to provide EMM with information regarding ...

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