Motion to Compel Arbitration in VicNRG, LLC vs. VICTORY RENEWABLES, LLC, et al| Trellis.Law

On December 29, 2022 a Hearing was filed involving a dispute between Vicnrg, Llc, and Conestogaenergy Holdings, Llc, Victory Renewables, Llc, for CNTR CNSMR COM DEBT in the District Court of Dallas County.

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FILED
9/14/2023 4:36 PM
FELICIA PITRE
DISTRICT CLERK
DALLAS CO., TEXAS
Marissa Gomez DEPUTY

CAUSE NO. DC-22-17865
VicNRG, LLC, § IN THE DISTRICT COURT OF
§
Plaintiff, §
§
v § 14th JUDICIAL DISTRICT
§
VICTORY RENEWABLES, LLC, and §
CONESTOGA ENERGY HOLDINGS, §
LLC, § DALLAS COUNTY, TEXAS
Defendants. §

PLAINTIFF’S REPLY IN SUPPORT OF ITS
MOTION FOR PARTIAL SUMMARY JUDGMENT

Plaintiff VicNRG, LLC (”VicNRG”) files this Reply in support of its Motion for

Partial Summary Judgment (”MPSI”). VicNRG asks that the Court reject the arguments

that Defendants Victory Renewables, LLC (”Victory”) and Conestoga Energy Holdings,

LLC (”Conestoga”) set out in their Response and grant the MPS]. VicNRG also seeks all

other relief to which it may justly be entitled.

I. INTRODUCTION

The summary judgment evidence establishes that Defendants have withheld—

since July 28, 2020—$2,847,429 from the 2019 Additional Purchase Price owed to VicNRG.

Defendants themselves calculated this payment. Recognizing their liability, Defendants

filed a straw man summary judgment Response. Defendants’ contentions are fatally

ﬂawed because they do not counter VicNRG’s argument that the plain language of the

parties’ contract does not authorize allocation of Conestoga corporate overhead expenses

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 1
to adversely affect the Additional Purchase Price. One contract interpretation is before

the Court. That interpretation prevails as a matter of law. The parties’ contract requires

Defendants to pay $2,847,429 to VicNRG— the remainder of the 2019 Additional Purchase

Price. Defendants have never paid this money to VicNRG. Defendants’ litigation-born

excuses about purported accounting mistakes mean nothing given the contract’s plain

terms. The Court should grant VicNRG’s MPS] in full.

II. ARGUMENTS AND AUTHORITIES

Defendants' Response to VicNRG’s MPS] unpersuasively makes three contentions

to avoid summary judgment. First. the Response repeats Defendants' futile motion for

arbitration. Second the Response makes miscellaneous extra-contractual excuses for

Defendants’ decision to underpay VicNRG by almost $3 million and attempt to claw back

nearly $2.7 million from VicNRG. the Response attempts to manufacture illusory

factual issues that simply do not exist. Each point fails to change the outcome. The Court

should grant VicNRG’s MPS] in its entirety.

A. Defendants are not entitled to arbitration

Arbitration is unwarranted for the reasons set out by VicNRG in its Response to

Defendants’ Motion to Compel Arbitration. VicNRG stands on these points, so it does

not address the duplicative arguments about arbitration in Defendants’ Response to the

MP5]. Defs.’ Resp. to Pl.’s MPS] 1, 2, 4, 5, 6—7, 10. VicNRG only notes that Defendants’

discussion of Adjusted Earnings Before Interest, Depreciation, Amortization, and Taxes

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 2
(”Adjusted EBITDA”) fails to identify any mathematical dispute over calculations that

could be resolved by accountants. Id. at 6—7. This failure of Defendants heavily weighs

against arbitration of VicNRG’s legal claims.

B. Excuses do not release Defendants from their contract

Perhaps sensing the weaknesses in their arguments for arbitration, Defendants

offer extra-contractual excuses for their decision to underpay VicNRG by almost $3

million and claw back nearly $2.7 million from VicNRG. Id. at 3—4, 7—8, 10—11. These

excuses encompass a litany of accounting errors and business oversights by Defendants}

Id. But Defendants miss the mark in hiding behind their professed management failures.

The MPS] does not concern Defendants’ competence. Instead, the MP5] focuses on

whether Defendants breached the parties’ Asset Purchase Agreement (“APA”). The

Court should disregard as immaterial any discussion by Defendants that does not pertain

to the language and terms set out in the APA.

C. VicNRG is entitled to partial summary judgment

Defendants finally fabricate illusory factual issues to avoid summary judgment.

Id. at 7—8. Relying entirely on a declaration of Conestoga Chief Financial Officer (”CFO”)

Among other things, Defendants claim they just now realized it is standard practice for parent companies
1

to allocate corporate overhead expenses to subsidiaries. See Defs.’ Resp. to P1.’s MP5] 3 (citing Ex. 1-C, PWC
Viewpoint Publication: Allocation of expenses to subsidiaries (November 30, 2022), at APP 014-015; Ex. 1-
D, PwC Viewpoint: Allocation of shared costs (February 28, 2023), at APP 016-018). But the documents
cited by Defendants address inapposite scenarios where: (1) the subsidiary makes an Initial Public Offering
(”1P0”); (2) identifiable overhead expenses are attributable to the subsidiary; (3) the subsidiary is not a
distinct legal entity; and (4) the parent company sells part or all of the subsidiary. The Court should ignore
all these documents as irrelevant to the facts of this case.

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 3
Fred Rayner (”Rayner”), Defendants attempt t0 dispute that they breached the APA by

underpaying VicNRG by almost $3 million in 2019 and subsequently trying to Claw back

nearly $2.7 million already paid to VicNRG. But Defendants offer no APA interpretation

that permits Defendants’ nonpayment and claw back. VicNRG is therefore entitled to

entry of partial summary judgment because Rayner’s declaration alone cannot overcome

the plain terms of the APA. That is why the Court should reject any argumentation of

Defendants that relies on Rayner’s declaration.

For one thing, a December 20, 2018, letter Rayner sent to Torn Paquin (”Paquin”)

of VicNRG, attached as Exhibit A-3 to the MP8], conclusively defeats the contrived ”fact

issues” manufactured by Defendants. In this December 20, 2018, letter, Rayner makes

three express admissions that are fatal to Defendants’ arguments about factual issues: (1)

Rayner concedes that nonpayment by third parties does not impact Defendants’ revenue

or contractual payments to VicNRG; (2) Rayner declares that the APA forbids Defendants

from allocating any Conestoga corporate overhead expenses to Victory when calculating

payments to VicNRG; and (3) Rayner professes that Defendants’ own auditor verified

these stipulations as fully consistent with the APA and Generally Accepted Accounting

Principles (”GAAP”). Screenshots of these crucial and dispositive admissions by Rayner

are provided in turn in the below table:

Even though we have not received payment from them, we are willing to move fonivard to close out
the EBITDA and resulting Earn-out calculation for 2017. For your review, we have provided a
schedule showing the reconciliation.

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 4
It’s important to note again that the starting point for the Earn—out was Victory Renewables' income
for the year, as reflected in the Conestoga Energy Holdings audit, and therefore subjected to the
same audit process and testing. As a part of a special procedure, our auditors verified the amounts
and calculations to ensure compliance from our end. understand that there are questions about
|

whether any corporate costs were allocated from the parent company, that would effectively
reduce income at the Victory Renewables level. The answer is simply this: there were no
-
allocations made. In fact, Victory Renewables is the of the holding
corporate only subsidiau
company that is n_ot charged a management fee or other allocation of expenses for shared
— — services,
such as HR, IT, corporate, tax, compliance, etc.

One area that we felt needed to be clear on is that from our perspective, we believe that these
_
calculations are in accordance with the were our KCoe ISOM
APAi pr‘epared‘verified by auditorsi
LLP, as Bart of Conestoga Energy Holdings} annual audit and agreed upon procedures in the APA,
and as such are not subject to negotiation.

I'd like to restate again that the calculations of and EBITDA were determined or
working capital
verified by our audit firml KCoe ISOME LLPI and are correct and consistent with GAAP, which drives
the basis of determination of these amounts per the APA. Conestoga Energy Holdings and all of its
subsidiaries comply with GAAP, without exception. In other words, we are confident with the
results in all material respects.

Defendants reinforced their fatal admissions by sending Paquin a letter dated July

28, 2020—attached as Exhibit A-4 to VicNRG’s MPS]. This letter expressly stipulates that

Conestoga was withholding approximately $2.8 million owed to VicNRG because certain

third parties had thus far failed to pay Defendants. The following two-row table encloses

screenshots of this admission by Defendants:

To date, Conestoga has yet to receive approximately $5.6M in payments related to the reinstatement of
the ETC. While Conestoga continues to be hopeful and pursue receipt of those payments, the company
cannot reasonably predict whether these payments will ultimately be received, in part or in full. As
soon as any outstanding payments are received, Conestoga will remit the 50% owed to Victory Diesel.

2 The amount not collected andl'or collectible from counterparties is $5ﬁ9M. Any collected
amounts from these transactions will be remitted at 50% to the Seller since prior Earn Out
thresholds have been met.

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 5
These documents defeat any suggestion that Defendants complied with the APA

when they imposed a ”holdback of $2,847,429 while Victory researched and reviewed its

prior 2017-2019 earn out calculations to determine the potential application of newly

implemented accounting rules.” Defs.’ Resp. to Pl.’s MPS] 7—8. The one ”new accounting

rule” cited by Defendant is the ASC 606 standard for revenue recognition. 2 Defendants

regardless posit that, while ”Victory was reviewing . . . ASC 606 . . . , Victory determined

that, under . . . the APA . . . , [sic], it should pay its share for the corporate overhead

expenses of Conestoga.” Id. at 3—4. In conjunction with the above letters, this admission

by Defendants that they used Conestoga overhead to justify their nonpayment shows

that Defendants breached the APA by: (1) Withholding $3 million in Additional Purchase

Price payments for 2019 due to claimed nonpayment by third parties; (2) later using

allocation of Conestoga corporate overhead expenses to justify this nonpayment; and (3)

citing that overhead as a reason to attempt to claw back nearly $2.7 million from VicNRG.

No amount of quibbling by Defendants can create false ”factual issues” on these decisive

points, so summary judgment is required.

2
Defendants’ discussion of ASC 606 as concerning allocation of parent company overhead expenses to
subsidiaries is entirely misplaced. See Defs.’ Resp. to Pl.’s MP5] 3—4. ASC 606 only pertains to recognition
_
of revenue from contracts f_rom customers It has absolutely nothing to do with the allocation of corporate
overhead expenses between a parent company and its subsidiaries. See, e.g., Revenue recognition, PRICE
WATERHOUSE COOPERS, https://viewpoint.pwc.com/us/en/revenue-recognition.htm1 (last visited
September 14, 2023). See also Lauren Gregory, What is ASC 606? A Guide to Its Ins (‘3’ Outs, HUBSPOT (June
14, 2022), https://b10g.hubspot.com/sales/asc-606 (”ASC 606 is an accounting standard set by the Financial
Accounting Standards Board (FASB) that defines how businesses recognize revenue in their operations”).

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 6
Defendants’ breach of contract is confirmed by the plain terms of the APA. As set

out in VicNRG’s MP8], the Additional Purchase Price contains no ”pay when paid” or

”pay if paid” conditions—much less any conditions precedent at all—to Defendants’

performance. Defendants therefore cannot condition their obligation to pay VicNRG on

the occurrence of unstated events. MPS] 15 (citing APA § 3.2 (APP 002-006); Anderson v.

Lonestar Patent Servs., Ina, No. 05-18-00510—CV, 2020 WL 6018710, at *4 (Tex. App. —

Dallas Oct. 12, 2020, no pet.) (explaining that Texas law disfavors conditions precedent

and requires clear language showing the parties’ intent to create a condition precedent;

no such clear language exists in the APA)).

The MPS] further clarifies that Adjusted EBITDA, the starting point for Additional

Purchase Price payments, must be calculated using GAAP principles—which require ”a

consistent basis throughout the periods involved.” Id. at 15—16 (citing APA § 3.2 (APP

002-006) and quoting Exhibit A-1 at App’x A (APP 007)). This rule implicates the fatal

disconnect between Rayner’s December 20, 2018, letter (stating that nonpayment by third

parties does not impact payments to VicNRG) and the July 28, 2020, letter from Conestoga

that uses nonpayment by third parties as a reason to not pay VicNRG. These letters show

Defendants breached the APA. Defendants added to the APA a brand-new condition

precedent—full payment by third parties—when the APA strictly prohibits any changes

in payment requirements. Such improper revision of the APA by Defendants establishes

that Defendants breached the APA by refusing to pay VicNRG the full 2019 Additional

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 7
Purchase Price. Defendants cannot escape liability by arguing that their revision of the

APA somehow constitutes a ”calculation issue” for arbitration. Any such argument is

ﬂat wrong and must be rejected by the Court.

Moreover, the APA provides that Victory’s internal financial statements are the

basis for Adjusted EBITDA and makes clear that Adjusted EBITDA must be calculated

using the formula identified in Exhibit A to the APA. Id. at 18 (quoting APA § 3.2 (APP

002-006)). Exhibit A does not authorize Defendants to use Conestoga corporate overhead

expenses to artificially decrease Victory’s Adjusted EBITDA. Indeed, Exhibit A entirely

omits Conestoga corporate overhead from its formula. Defendants thus cannot deduct

such overhead from Victory’s Adjusted EBITDA because this methodology contradicts

the formula that is prescribed by the APA through Exhibit A. Id. (citing APP 009 and Bob

Montgomery Chevrolet, Inc. o. Dent Zone Cos., 409 S.W.3d 181, 189 (Tex. App—Dallas 2013,

no pet.) (”Documents incorporated into a contract by reference become part of that

contract. When a document is incorporated into another by reference, both instruments

must be read and construed together.”)). If the parties had intended to allocate Conestoga

corporate overhead expenses to Victory in calculating Adjusted EBITDA and Additional

Purchase Price payments, they would have said so in the APA. The absence of any such

language from Exhibit A establishes that Defendants breached the APA when they used

Conestoga overhead expenses to reduce the Additional Purchase Price payments owed

to VicNRG. Summary judgment is required.

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 8
The APA finally stipulates that Defendants can retroactively reduce previous

Additional Purchase Price payments only if the federal government alters or modifies its

biodiesel tax credit. Id. at 19 (citing APA 3.2(f) (APP 006)). Although Defendants made

Additional Purchase Price payments for 2017 and 2018, they waited until December 2020

to assert that the 2017 and 2018 payments must be reduced because they did not account

for Conestoga corporate overhead. Id. (citing Exhibit A-4 (APP 015); Exhibit A-5 (APP

017)). This attempt by Defendants to retroactively reduce the 2017 and 2018 Additional

Purchase Price payments to VicNRG using Conestoga corporate overhead expenses has

no nexus whatsoever to the federal biodiesel tax credit. The only conclusion from these

facts is that VicNRG is entitled to summary judgment because Defendants breached the

APA’s terms about retroactive adjustments.

In fact, Defendants know that the APA is clear such that they cannot dispute the

foregoing interpretations of its terms. That is why Defendants did not plead ambiguity

in their Original Answer and Counterclaim. Nor did Defendants mention ambiguity in

their threadbare Response to VicNRG’s MPS]. This lack of ambiguity requires summary

judgment on VicNRG’s breach of contract claims.

Defendants unpersuasively urge the Court to disregard VicNRG’s declaratory

judgment claim on the claw back issue because the MPS] predates the Second Amended

Petition. Defs.’ Resp. to Pl.’s MPS] 8—10. This argument is futile because Texas Rule of

Civil Procedure 63 authorizes parties to amend their pleadings up to seven days before a

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 9
hearing. See B.C. v. Steak N Shake Opera, Ina, 598 S.W.3d 256, 261 (Tex. 2020); Sosa v.

Central Power 8‘ Light, 909 S.W.2d 893, 895 (Tex. 1995). VicNRG timely filed its Second

Amended Petition, which indisputably requests a declaratory judgment regarding its

claw back claim, on September 8, 2023—ten days before the September 18, 2023, hearing

on the MPS]. See Defs.’ Resp. to Pl.’s MPS] 9.

Nor do Defendants’ alternative arguments about substantive changes to VicNRG’s

declaratory judgment claim have merit. Nowhere do Defendants explain how VicNRG’s

request for declaratory judgment evolved between the filing of the MPS] and the Second

Amended Petition. Nor could Defendants make this showing. These papers set out the

same declaratory judgment claims. And Defendants admit that the MPS] gave them

notice of VicNRG’s claw back claim over two weeks before their Response was due. Id.

at 9. Defendants therefore had adequate time to respond to VicNRG’s arguments about

Defendants’ attempted claw back. The Court should similarly disregard Defendants’

accusations about lack of diligence by VicNRG. As explained in VicNRG’s Responses to

Defendants’ Motions to Compel Arbitration and Continue the MPS] hearing, Defendants

are the only parties guilty of lack of diligence.

III. CONCLUSION

For the above reasons, VicNRG asks the Court to grant its MP5]. VicNRG also

requests that the Court award it all other relief to which it may justly be entitled consistent

with this favorable disposition of the MPS].

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 10
Dated: September 14, 2023 Respectfully submitted,

/s/ Alan Dabdoub
Alan Dabdoub
Texas Bar No. 24056836
adabdoub@1ynnllp.com
Daniel C. Polese
Texas Bar No. 24102364
dpolese@lynnllp.com
P. Campbell Sode
Texas Bar No. 24134507
csode@lynnllp.com
LYNN PINKER HURST 8: SCHWEGMANN, LLP
2100 Ross Avenue, Suite 2700
Dallas, Texas 75201
Telephone: (214) 981-3800
Facsimile: (214) 981-3839

ATTORNEYS FOR PLAINTIFF
VicNRG, LLC

CERTIFICATE 0F SERVICE

The undersigned certifies that a true and correct copy of the foregoing document
was served on all counsel of record Via Texas E-File and/or Via email on September 14,
2023.

/s/ Alan Dabdoub
Alan Dabdoub

PLAINTIFF’s REPLY ISO PARTIAL SUMMARY JUDGMENT Page 11
Automated Certificate of eService
This automated certificate of service was created by the efiling system.
The filer served this document via email generated by the efiling system
on the date and to the persons listed below. The rules governing
certificates of service have not changed. Filers must still provide a
certificate of service that complies with all applicable rules.

Jodi Taylor on behalf of Alan Dabdoub
Bar No. 24056836
jtaylor@lynnllp.com
Envelope ID: 79574264
Filing Code Description: Response
Filing Description: IN SUPPORT OF MOTION FOR PARTIAL SUMAMRY
JUDGMENT
Status as of 9/14/2023 6:19 PM CST

Associated Case Party: VicNRG, LLC

Name BarNumber Email TimestampSubmitted Status

Kay Ridenour kridenour@lynnllp.com 9/14/2023 4:36:50 PM SENT
Daniel C.Polese dpolese@lynnllp.com 9/14/2023 4:36:50 PM SENT
Jodi Taylor jtaylor@lynnllp.com 9/14/2023 4:36:50 PM SENT
Whitney Gillaspie wgillaspie@lynnllp.com 9/14/2023 4:36:50 PM SENT
Campbell Sode csode@lynnllp.com 9/14/2023 4:36:50 PM SENT
Alan Dabdoub adabdoub@lynnllp.com 9/14/2023 4:36:50 PM SENT
Gina Flores gflores@lynnllp.com 9/14/2023 4:36:50 PM SENT

Associated Case Party: VICTORY RENEWABLES, LLC

Name BarN umber Email TimestampSubmitted Status
Andrew Jackson 24055720 ajackson@velaw.com 9/ 14/2023 4:36:50 PM SENT
John C. Wander 791877 jwander@velaw.com 9/14/2023 4:36:50 PM SENT
Tara Ortiz tortiz@velaw.com 9/ 14/2023 4:36:50 PM SENT
Matthew Stammel mstammel@velaw.com 9/14/2023 4:36:50 PM SENT
Susan chiniara schiniara@velaw.com 9/14/2023 4:36:50 PM SENT
Madelyn CStanley mstanley@velaw.com 9/14/2023 4:36:50 PM SENT

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December 29, 2022

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Hearing: VicNRG, LLC vs. VICTORY RENEWABLES, LLC, et al

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