Antitrust Law Daily Wrap Up, RICO—D. Kan.: RICO claims involving gas pipeline company fail absent allegations of predicate acts, (Aug 19, 2016)

By Michael Menzhuber, J.D., LL.M.

A company’s Racketeer Influenced and Corrupt Organizations Act (RICO) and RICO conspiracy claims, stemming from the alleged interference with the its exercise of a first right of refusal to purchase a gas pipeline company, was dismissed by the federal district court in Wichita, Kansas. The court dismissed the claims because the company failed to adequately allege predicate acts under RICO (Strategic Energy Income Fund III v. Stephens Energy Group, LLC, August 18, 2016, Marten, J.).

In January 2013, Strategic Energy Income Fund III, L.P. (SEIF), along with Alameda Oilfield Services Trust and MBI Oil and Gas, LLC, formed Nemaha Gas Gathering Systems, LLC for the purpose of building a pipeline needed to service gas production for Slawson Exploration, the working interest owner and operator of wells in the project area. The Nemaha Gas Operating Agreement provided each member with the right of first refusal to purchase another member’s interest on the same terms as offered by any third-party purchaser.

In August 2014, Alameda and MBI entered into a membership interest purchase agreement (MIPA) with Stevens Energy Group, LLC, who had recently entered into a purchase and sale agreement to buy Slawson’s working interest in the leases. Once SEIF was notified of the proposed sale, it exercised its right of first refusal and deposited $500,000 earnest money with Alameda.

Shortly thereafter, Slawson and Stevens took action to effectively cancel the long-term Slawson-EFP Gas Purchase Contract which Slawson had with Energy Financial & Physical, LP (EFP). The cancellation nullified the EFP-Nemaha Gas Gathering Agreement and effectively damaged the value of the pipeline owned by Nemaha Gas to such an extent that SEIF was not able close on its right of first refusal.

SEIF and its general partner U.S. Energy Development, Inc. demanded that the Slawson-EFP contract be reinstated. They also attempted to market the pipeline over the course of nearly a year, while seeking to restore the dedication of the Slawson/Stephens production to the pipeline. Failing to do so, SEIF notified Slawson and Alameda that it would not be able to close under the original MIPA terms. SEIF, however, did not receive a return of the earnest money it paid.

Stephens and Slawson later settled their lawsuit with EFP and entered into various agreements which effectively restored Nemaha Gas to the conditions that existed when SEIF first gave notice that it would exercise its right of first refusal. Stephens then purchased both Alameda’s and MBI’s membership interests in Nehama Gas and Slawson assigned operations to Stephens as purported majority membership owner.

SEIF filed a complaint against Stephens, Slawson, Alameda, and MBI which alleged that they violated RICO by forming an enterprise to engage in a pattern of racketeering activity through mail and wire fraud.

RICO. The court determined that SEIF’s complaint plausibly alleged the existence of a RICO enterprise because it alleged that the defendants associated together, for more than a year, to achieve the common purpose of defeating SEIF’s attempted purchase of Alameda’s and MBI’s interests and to bring about the sale of those interests to Stephens. Furthermore, the complaint described the alleged relationship between the members of the alleged enterprise.

The complaint, however, failed to adequately allege acts of mail or wire fraud because it contained only vague references to "numerous telephone conversations, emails, and letters" between unidentified "representatives of" the parties, on unknown dates, and with unknown content. Although SEIF alleges that Alameda and MBI knew of the cancellation of the Slawson-EFP contract, the allegation was not connected to any mailing, email, or phone call. It also was not pinpointed in time and the act of concealment was not explained.

Because the complaint failed to adequately allege predicate acts under RICO, the court was unable to ascertain whether those acts constituted a pattern of racketeering activity.

The case is No. 6:16-cv-01033-JTM-GEB.

Attorneys: Clayton D. Ketter (Phillips Murrah, PC) for Strategic Energy Income Fund III, L.P. Christina Dawn Arnone (Stinson Leonard Street LLP) for Stephens Energy Group, LLC. James M. Armstrong (Foulston Siefkin LLP) for Alameda Oilfield Services Trust and Slawson Exploration Co., Inc. Gregory T. Spalj (Fabyanske, Westra, Hart & Thomson P.A.) and Kurt A. Harper (Sherwood, Harper, Dakan, Unruh & Pratt, LC) for MBI Oil and Gas, LLC.

Companies: Strategic Energy Income Fund III, L.P.; Stephens Energy Group, LLC; Alameda Oilfield Services Trust; Slawson Exploration Co., Inc.; MBI Oil and Gas, LLC

Cases: RICO KansasNews