TWA Resources, formerly known as Appalachian Well Services, Inc. v. Complete Production Services, Inc., et al.
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IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
TWA RESOURCES., formerly known as
APPALACHIAN WELL SERVICES,
INC., a Pennsylvania corporation,
COMPLETE PRODUCTION SERVICES, )
INC., a Delaware corporation and AWS, )
INC., a Delaware corporation,
C.A. No. N11C-08-100 MMJ
Submitted: June 17, 2013
Decided: July 30, 2013
OPINION FOLLOWING TRIAL
Joseph C. Schoell, Esquire, Lindsay O. Clizbe, Esquire, Drinker, Biddle & Reath,
Wilmington, Delaware, Attorneys for Plaintiff
Seth A. Niederman, Esquire, Fox Rothschild LLP, Wilmington, Delaware, Daniel
F. Shank, Esquire, James A. Collura, Jr., Esquire, Coats Rose, P.C., Houston,
Texas, Attorneys for Defendants
Plaintiff Appalachian Well Services, Inc. (âAppalachianâ) was founded by
Jackie Albert (âAlbertâ) and Douglas Henson (âHensonâ) in 1987. In 2006,
Appalachian acquired Titan Wireline Service, Inc. (âTitanâ). Appalachian was an
oil field services company in the business of performing fracturing and cementing
services related to oil and natural gas extraction. Through its subsidiary, Titan,
Appalachian also supplied coiled tubing, perforation, and logging services in the
Allegheny Plateau region of the northern Appalachian Basin.
The Marcellus Shale is a geographic formation that stretches from Ohio and
West Virginia into Pennsylvania and Southern New York, and contains large
quantities of natural gas. Due to the depth and tightness of the shale, however, it
was cost-prohibitive to exploit these deposits until recently. Developments and
advancements in drilling technology, specifically horizontal drilling and high
pressure, multi-stage hydraulic fracturing (âfracingâ),1 have made access to these
large deposits of natural gas more cost-efficient.
Fracing involves pumping fluids into formations of rock, thereby creating a conduit through
which natural gas can flow, enabling larger quantities to be extracted more easily.
Prior to 2008, Appalachian engaged in âshallow marketâ fracturing in the
Marcellus Shale. Appalachian was unable to exploit the deposits located in the
deeper shale without more powerful equipment. Appalachian began discussions
with Complete Production Services, Inc. (âCPXâ), as a potential partner for high
pressure fracking. Appalachian and CPX exchanged relevant information.
Letter of Intent
The parties executed a letter of intent (âLOIâ) in early August 2008. CPX
created a wholly-owned subsidiary, AWS, Inc. (âAWSâ). Under the terms of the
LOI, AWS (the buyer) acquired the assets of Appalachian (including Appalachian
subsidiary Titan). Appalachian (the seller) became known as TWA Resources,
AWS agreed to pay $48 million in cash, $12 million in CPX common stock
with value determined based upon an average fifteen daysâ trading prices at
closing, and up to $5 million in contingent consideration. The combined maximum
consideration was $65 million. Additionally, AWS agreed to pay $8.2 million of
the $12 million purchase price for the Marcellus high pressure frac fleet.2
A âfrac fleetâ is a number of pump trucks, sand haulers, manifolds, and other equipment
necessary to conduct fracking.
The $5 million contingent consideration was subject to certain performance
targets for CPXâs Marcellus Shale business, as calculated from the time of the
transaction through December 31, 2010. First, TWA would receive a Milestone
Payment of a maximum of $1 million if the earnings before interest, taxes,
depreciation, and amortization (âEBITDAâ) from e-line operations exceeded $4
million per year during 2009 or 2010. Second, TWA would receive a Milestone
Payment of a maximum of $3 million if âPressure Pumping and Coiled Tubing
Operationsâ generated EBITDA of $14 million or more over any consecutive
twelve-month period during 2009 and 2010. Third, TWA would receive an
additional $1 million Milestone Payment if certain targets were achieved in âNew
Asset Purchase Agreement
On October 4, 2008, the parties executed the Asset Purchase Agreement
(âAPAâ) and the transaction closed. Albert and Henson became Vice Presidents
of AWS, which began operating as a division of CPX.
Section 6.02(a) of the APA contains a covenant whereby TWA, Titan and
their shareholders agree not to perform fracing services in the Marcellus Shale.
âNew Services Linesâ include: services, capital requirements, and targets to be agreed upon
during the development of an integration and growth plan.
The employment agreements entered into by Albert and Henson, in their roles as
Vice Presidents of AWS, contain similar covenants not to compete. These
covenants only prohibit TWA and its shareholders - Albert and Henson - from
competing with AWS. The agreements do not contain reciprocal language
explicitly prohibiting CPX, or any division of CPX, from competing with AWS in
the Marcellus Shale high pressure fracing business. The employment agreements
also permit AWS to terminate Albertâs and/or Hensonâs employment at will.
Section 2.05 of the APA contains the same terms relating to earn-outs (or
Milestone Payments) and Growth Oriented Capital Expenditures as were included
in the LOI. For Pressure Pumping and Coiled Tubing Operations, TWA is entitled
to an earn-out of up to $3 million - governed by a stated formula - if EBITDA for
the operations is in excess of $14 million over a consecutive twelve-month period.
TWA is entitled to the maximum earn-out of $3 million if EBITDA from Pressure
Pumping and Coiled Tubing Operations reaches $20 million for a consecutive
twelve-month period. The minimum EBITDA threshold for an earn-out and the
maximum EBITDA cap subject to an earn-out were to be adjusted based on
investment by CPX in âGrowth Oriented Capital Expendituresâ related to AWSâs
operations. If EBITDA were not in excess of the minimum EBITDA threshold,
however, no Milestone Payment would be owed.
The APA also provides an additional earn-out of up to $1 million through
the offering of new services in the Marcellus Shale. By the terms of the APA,
both parties were required to negotiate in good faith concerning a âNew Services
Milestone.â If the parties could not reach an agreement, however, the APA
included a âfall backâ whereby the New Services Milestone would be calculated
as a proportion of the other two earn-outs paid or payable.
Transfer of Frac Fleets
During 2009, AWS performed three fracing jobs in the Marcellus Shale. On
two of the three jobs, serious complications occurred. During the first job (for
XTO Energy), a joint of pipe ruptured causing an âiron failure.â4 AWS secured
two fracking jobs with East Resources. On one of the jobs, AWS suffered its
second iron failure, which led to serious injuries to multiple employees and an
Pumpco is a wholly-owned subsidiary of CPX5 and operates as a division of
CPX. In September 2009, CPX transferred a Pumpco high pressure pumping frac
An iron failure occurs when a piece of metal tubing ruptures or explodes under high pressure.
Iron failures are considered catastrophic events in the oil and gas industry, as flying iron shrapnel
can cause extensive equipment damage and personal injury.
Pumpco is wholly-owned by Integrated Production Services, Inc., which in turn is whollyowned by CPX.
fleet from Texas to the Marcellus Shale. This fleet performed five fracing jobs
throughout the remainder of 2009. Gross revenues were $4,426,000.00.
In November 2009, CPX transferred AWSâs high pressure frac fleet to
Texas. Albert and Henson both agreed to this transfer. After being transferred to
Texas, the AWS fleet was broken up and used to supplement Pumpcoâs other
On January 15, 2010, Albert and Henson were terminated from AWS.
Section 2.05(d) of the APA requires Buyer to deliver a Milestone Statement
detailing the calculation of the Milestone Payments to Seller prior to March 1,
2010 and 2011. Following delivery of the Milestone Statement, Seller had ten
business days to deliver a Disagreement Statement. If the parties are unable to
negotiate a final determination of appropriate Milestone Payments, they must
jointly select an independent auditor of recognized national standing to resolve
any disagreement concerning the calculations of the Milestone Payments.
2009 Milestone Payment
CPX delivered a Milestone Statement for 2009 on February 26, 2010. The
2009 Milestone Statement included all Pumpco revenue and EBITDA from the
Marcellus Shale in calculating the earn-out. CPX calculated a Pressure Pumping
and Coiled Tubing Threshold of $15,466,895, and a Pressure Pumping and Coiled
Tubing Cap of $21,466,895. Because CPX did not have a positive EBITDA from
Pressure Pumping and Coiled Tubing Operations for 2009, CPX determined that it
did not owe an earn-out.
Additionally, because no New Services Milestone had been agreed upon by
the parties, CPX contended that the New Services Milestone should be calculated
based upon the default formula contained in Section 2.05(c) of the APA, which
would result in no Milestone Payments for new services.
On March 12, 2010, TWA sent a Disagreement Statement to CPX, pursuant
to Section 2.05(d) of the APA, challenging certain aspects of the 2009 Milestone
On May 4, 2010, the parties met in an attempt to resolve the disagreement
regarding the Milestone Payment for 2009, but ultimately were unsuccessful.
CPX then proposed that an independent auditor be selected to review the matter
pursuant to Section 2.05(e) of the APA. TWA rejected this proposal.
2010 Milestone Payment
Throughout 2010, CPX added three additional frac fleets to the Marcellus
Shale. For 2010, CPXâs fracing operations in Pennsylvania earned in excess of
$100 million in revenue, and EBITDA of $34 million.
In initially preparing the 2010 Milestone Statement, CPX included the
results of Pumpcoâs entire operation in the Marcellus Shale, as CPX had done
when it prepared the 2009 Milestone Statement. With EBITDA calculated for
combined operations for 2010 year as $34 million, TWA would have been
entitled to the maximum Pressure Pumping and Coiled Tubing earn-out payment
of $3 million.
CPX subsequently took the position that Pumpco assets should not be
included for the 2010 Milestone Statement. Under this calculation, EBITDA
earned solely by AWS would be $0.3 million. Because EBITDA would not have
met the minimum threshold, TWA would not be entitled to any earn-out payment.
As an alternative method of calculation, CPX proposed the âreplacement
fleetâ calculation. Under this approach, CPX would include revenue from the first
Pumpco fleet deployed to the Marcellus Shale in 2009, but would not include any
additional Pumpco operations. TWA disagreed with this approach.
The parties attempted to mediate this dispute in July 2011, but were
unsuccessful. TWA brought this action claiming breach of the APA, and breach
of the implied covenant of good faith and fair dealing, by CPX and AWS. TWA
asserts that CPX and AWS refused to pay earn-outs mandated under the APA.
Following discovery, Defendants CPX and AWS moved for summary
judgment. Defendants argued that they are entitled to judgment as a matter of law,
pursuant to Delaware Superior Court Civil Rule 56(c), because no facts support
the application of the implied covenant of good faith and fair dealing.
By Memorandum Opinion dated March 28, 2013, the Court ruled:
TWA has failed to present a prima facie case for the existence
of an independent, enforceable agreement about milestone
computation. The Court finds, as a matter of law, that the APA has
not been modified in this respect.
Because TWA has not requested any specific relief based on
Defendantsâ alleged breach of Section 2.05(c), the Court need not
decide any Section 2.05(c) issues at this juncture.
The Court finds that the APA is silent on he question of what
happens when there are no âSellerâ âPressure Pumping and Coiled
Tubing Operationsâ in the Marcellus Shale. Silence, however, does
not render the APA ambiguous. There is a gap in the APA as to earnout consideration under the circumstances alleged by TWA. TWA
has raised genuine issues of material fact as to whether Defendants
have acted arbitrarily or unreasonably, thereby frustrating the partiesâ
reasonable expectations at the time of executing the APA. The Court
finds that TWA has established a prima facie case for application of
the implied covenant of good faith and fair dealing.
PLAINTIFFâS BURDEN OF PROOF
The Court found in the Memorandum Opinion that the finder of fact6 first
must determine the reasonable expectations of the parties to the APA. In order to
augment the APA through the implied covenant of good faith and fair dealing,
TWA has the burden of proving that Defendantsâ conduct frustrated the
reasonable expectations of the parties to the APA.7 The Court must decide
whether the events affecting calculation of the earn-out were developments that
could not have been anticipated, or whether these were developments that the
parties simply failed to consider.8
If TWA succeeds in demonstrating that its reasonable expectations under
the APA have been thwarted, in order to benefit from the implied covenant of
good faith and fair dealing, TWA next must prove that Defendants have acted
arbitrarily or unreasonably.9
This case originally was set for trial by jury. Shortly prior to trial, the parties stipulated that the
Court conduct a bench trial.
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005).
Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
Questions of fact to be resolved include: whether in response to economic
realities CPX acted reasonably in transferring AWS equipment out of the
Marcellus Shale; whether CPX acted reasonably in allegedly preventing AWS
management from maximizing its profitability; whether CPX was reasonable in
allegedly competing against AWS through CPXâs other subsidiaries; whether CPX
acted in contravention of its alleged assurances that CPX would use its resources
to assist AWS in entering and expanding AWSâs presence in the Marcellus Shale
frac market; and whether Defendantsâ position in excluding Pumpco revenues
from the 2010 earn-out calculations was arbitrary or unreasonable.
Finally, if TWA proves that CPXâs Milestone Payment calculations are not
consistent with the reasonable expectations of the parties to the APA, and also
demonstrates that Defendants have acted arbitrarily and unreasonably, the next
issue for the Court is what should be included in the earn-out calculations for
purposes of the Milestone Payments.
The questions of fact on this issue are whether the following should be
included in the Milestone Payment calculations: all CPX operations in the
Marcellus Shale; all Pumpco operations in the Marcellus Shale; only the
production of one fleet, to substitute for the single fleet transferred out of the
region; or no operations because Sellerâs fleet was moved out of the Marcellus
Upon determination of what should be included or excluded from the
calculations, the actual calculations must be performed according to the APA
provisions. If the parties cannot agree on these calculations, the matter must be
referred to the independent accountant auditor pursuant to Section 2.05(e) of the
FINDINGS FOLLOWING TRIAL
The 6-day bench trial began on April 22, 2013. Having heard and
considered all of the testimony, documentary evidence, and arguments of counsel,
the Court makes the following findings.
What were the Reasonable Expectations of the Parties
at the Time the APA was Executed?
At the time the APA was executed, CPX agreed to support the fracing
business conducted by AWS in the Marcellus Shale. Such support was
contemplated by the parties to include exchange of customer contacts and
introductions to potential AWS customers. The transaction was intended to create
a platform for CPXâs future growth in the Marcellus Shale.
The APA neither contemplates nor provides for the contingency of removal
of the AWS frac fleet out of the Marcellus Shale. It appears that the parties to the
APA did not consider removal as a possibility at the time of contracting.
As businesses experienced in the industry, it is not disputed that the parties
to the APA contemplated ordinary market fluctuations. However, there is no
evidence that any party anticipated the extraordinary economic downturn that
occurred in the fall of 2008. The poor performance in the industry beginning in
late 2008 was unusual and unexpected. Prior to consummating the APA, the
parties relied upon projections of significant income increases beginning in
In September 2009, CPX transferred a Pumpco high pressure pumping frac
fleet from Texas to the Marcellus Shale. In November 2009, the sole AWS high
pressure frac fleet was transferred to Texas. This fleet subsequently was broken
up and used to supplement Pumpcoâs other operations.
As of at least October 2009, the approach of CPX was to â[e]stablish both
AWS and Pumpco as preferred pressure pumping brands in the Marcellus Shale.â11
The evidence at trial demonstrates that it reasonably could be anticipated that
Defendantsâ Exhibit (âDXâ) 2.
Joint Exhibit (âJXâ) 19, at p. 2.
Pumpco and AWS would conduct operations on parallel business tracks. The pretransaction statement of CPX - âPost transaction CPX would like Doug and Jack
to manage CPXâs Appalachian businessâ12 - did not become part of the APA. The
Court finds this statement to be aspirational, and it is concededly non-binding.
Section 6.02(a) of the APA contains a covenant prohibiting TWA and its
shareholders - Albert and Henson - from competing with AWS. There is no
reciprocal non-compete agreement preventing CPX, or any division of CPX, from
competing with AWS in the Marcellus Shale high pressure fracing business. If the
parties had contemplated that AWS would control all CPX operations in the
Marcellus Shale, no matter what the circumstances, the non-compete language
would not have been unilateral.
By agreement, Albert and Henson could be terminated at any time after four
months. The Milestone Payments were earned, or not, pursuant to the terms of the
APA, regardless of whether Albert and Henson remained employed by AWS.
Viewing the evidence produced at trial in its entirety, the Court is not
persuaded that there could be a reasonable expectation, under these circumstances,
that AWS would supervise and control all CPX operations in the Marcellus Shale.
Plaintiffâs Exhibit (âPXâ) 1, at p. 14.
At the time the APA was executed, the parties reasonably contemplated that
at least one (and hopefully more than one) AWS high pressure frac fleet would
operate in the Marcellus Shale, whether or not Albert and Henson continued with
AWS. That was the very purpose of the business arrangement. The Court finds
that removal of the sole AWS high pressure fleet thwarted the reasonable
expectations of all parties to the APA.
Was Defendantsâ Conduct Arbitrary or Unreasonable?
The events leading to transferring the AWS fleet to Texas are hotly
disputed. However, it is undisputed that Albert and Hanson ultimately concurred
with the decision to move the fleet. The Court finds that the actual exchange of
the AWS fleet for a Pumpco fleet was neither arbitrary nor unreasonable.
Therefore, the reasons for transfer of the fleet need not be resolved. The
following factual issues are deemed moot: whether CPX acted reasonably in
allegedly preventing ASW management from maximizing its profitability; whether
CPX was reasonable in allegedly competing against AWS through CPXâs other
subsidiaries; and whether CPX acted in contravention of its alleged assurances
that CPX would use its resources to assist AWS in entering and expanding AWS
presence in the Marcellus Shale frac market.
The conduct in question is whether CPX acted arbitrarily or unreasonably in
calculating the Milestone Payments.
The 2009 Milestone Statement was sent by CPX along with a letter dated
February 26, 2010.13 The letter states:
Pursuant to Section 2.05(d) of the Asset Purchase Agreement
(âAPAâ) by and between Complete Production Services, Inc.
(âCPXâ), AWS, Inc., Appalachian Well Services, Inc., Titan Wireline
Service, Inc., and each stockholder of Appalachian Well Services,
Inc., with an effective date of October 4, 2008, CPX hereby provides
the enclosed year-ending December 31, 2009, Milestone Statement
setting forth in reasonable detail the calculation of milestone
payments, if any, contemplated by Sections 2.05(a)-(c) of the APA.
The Milestone Statement provides in part:
In December of 2009 CPX moved the Marcellus Frac Spread from the
Appalachian region to Texas. Since this group of assets was removed
from AWS, CPX will allow the performance of its other subsidiaryâs
pressure pumping operations (Pumpco) in the Appalachian region to
count toward potential milestone payments.
CPX concluded: âFor the twelve months ended December 31, 2009 total
EBITDA generated from CPXâs pressure pumping operations in the Appalachian
region was $(567,342); therefore, no milestone payment was earned.â
In 2009, only one Pumpco fleet was operating in the Marcellus Shale.
JX 24 (Letter and 2009 Milestone Statement).
In 2010, the high pressure fraking business in the Marcellus Shale improved
Accompanied by a virtually identical letter, dated March 1, 2011, CPX sent
its calculations in the 2010 Milestone Statement.14 The Statement provides in part:
Replacement Fleet Calculation. Last year in the milestone
statement prepared for the year ending December 31, 2009, CPX
noted that the original AWS Marcellus Frac Spread was removed
from the Appalachian region to Texas. CPX offered the performance
of another subsidiaryâs first Marcellus pressure pumping spread to
contribute to the milestone calculations. The offered pressure
pumping spread had additional capabilities compared to the
equipment of Sellers. The Sellers did not accept CPXâs proposal.
Thus CPX assumes Henson and Albert would prefer that the
calculations be completed based on the original purchase agreement
which contains a mechanism to account for additions of capital
CPX again concluded that no Milestone Payment was earned for 2010.
Even under an alternative calculation, CPX declared that there was no Milestone
Despite there being no contractual requirement to do so, CPX has
calculated the milestone payment with additional methodology to
show that no milestone payment was earned under any scenario.
During 2009 and 2010 approximately $12.9MM of assets were
transferred out of AWS, partially offset by approximately $3.7MM of
growth capital expenditures. Although not provided for in the
Agreement even if CPX were to reduce the thresholds as a result of
JX 29 (Letter and 2010 Milestone Statement).
the transfers, there is no milestone payment. Accounting for the
transfers if the revised Pressure Pumping EBITDA Threshold for the
twelve months ended December 31, 2010 is reduced to $10.4MM and
the revised Cap is reduced to $16.4MM there is no milestone
The Court finds that it was arbitrary and unreasonable for CPX to perform
the 2010 Milestone Payment calculations for the specific purpose of concluding
that no Milestone Payment was earned. It was arbitrary and unreasonable for CPX
to include the Pumpco equipment for the 2009 Milestone Statement, in exchange
for the transferred AWS fleet, and not to include at least one Pumpco fleet in the
The fact that a Disagreement Statement was sent does not alter the fact that
CPX, when it did not matter because profits were negligible, included the Pumpco
fleet. The Disagreement Statement did not dispute that the Pumpco fleet should be
included in the earn-out calculations.15
The Court is not persuaded by the testimony of Defendantsâ witnesses that
the 2009 calculations were a mistake.16 The initial calculations for the 2010
Milestone Statement, performed by John Stude, CPA, of CPX in February 2011,
JX 25, at p. 1-2.
This argument also is not consistent with other documentary evidence presented at trial.
were done in the same manner as the 2009 calculations.17 Specifically, Stude
included Pumpco operations in the Marcellus Shale. Studeâs bottom line was a
Milestone Payment of $3,000,000.
A few days after Stude gave his calculations to Jose Bayardo, then VicePresident and Chief Financial Officer of CPX, Bayardo informed Stude by email:
Our position is that they did not achieve any earn-out milestones for
2010. Last year, because we pulled out the original AWS Marcellus
frac fleet (due to their inability to do work [sic] the assets) we
generously proposed giving them credit for the first Pumpco fleet that
was deployed in [the Marcellus Shale] for the 2009 Milestone
Statement, even though the Pumpco fleet had nothing to do with
AWS and Jack and Doug did not contribute in any way to the Pumpco
deployment. They rejected our proposal, and since they didnât have
anything to do with Pumpco they should not receive any credit for
any of the Pumpco operations in PA. At best they could argue that
they should get credit for the original Pumpco fleet.
It appears to the Court that the final 2010 Milestone Statement calculations
obviously were result-oriented. There is no other plausible explanation for the
change in methodology. The evidence at trial demonstrated that as of the time of
the 2010 Milestone Statement, the relationship among Bayardo, Albert and
Henson was contentious.
The earn-out calculations were established by the APA. The letter
accompanying the 2009 Milestone Statement explicitly states that the 2009
calculations were pursuant to the APA. Whether or not Albert and Henson
remained involved in operations is not relevant. The Court finds that the only
reason for the CPX change in the 2010 position was to achieve the result of no
The Court has determined that it was arbitrary and unreasonable for CPX: to
calculate the 2010 Milestone Statement for the specific purpose of concluding that
no Milestone Payment was earned; and to include the Pumpco equipment for the
2009 Milestone Statement, but not to include at least one Pumpco fleet in the 2010
How Should the Milestone Payments be Calculated?
The first question is whether the 2010 Milestone Payment calculations
should include one Pumpco replacement fleet, or all CPX operations in the
The APA defines âPressure Pumping and Coiled Tubing Operationsâ as âthe
pressure pumping and coiled tubing operations of Sellers.â âSellersâ are Titan
Wireline Service, Inc. and Appalachian Well Services, Inc. CPX and AWS are
defined as âBuyer.â The APA recites that Sellers âown certain assets used in the
conduct of the Business,â and that Buyer âdesires to purchase...such assets.â
âBusinessâ is defined as âthe pressure pumping services (including but not limited
to, cementing and fracturing services), coiled tubing services and e-line operation
services, each as conducted, and contemplated to be conducted, by Sellers on the
date hereof [October 4, 2008].â At that time, Sellers operated a single fleet.
The Court already has determined that the parties to the APA could not
reasonably expect all CPX operations to be managed and supervised by AWS.
Therefore, the Milestone Payment does not have to include all CPX operations.
Section 2.05 of the APA provides that for Pressure Pumping and Coiled
Tubing Operations, TWA is entitled to an earn-out of up to $3 million, if EBITDA
for the operations is in excess of $14 million over a consecutive twelve-month
period. The minimum EBITDA threshold for an earn-out and the maximum
EBITDA cap subject to an earn-out were to be adjusted based on investment by
CPX in âGrowth Oriented Capital Expendituresâ related to AWSâs operations.
In the 2009 Milestone Statement, CPX made its calculations using the net
book value (âNBVâ) of the transferred AWS fleet.18
CPX expert Dennis Arnie, CPA, did not use NBV. Rather, Arnie used
acquisition cost, and found total 2010 EBITDA to be $15,770,828. Arnieâs net
JX 24, at p. 6441.
result was that the 2010 EBITDA was $217,418, or 1.36%, short of the minimum
threshold, which he calculated as $15,988,246. Thus, Arnie testified that no
Milestone Payment was earned.
TWA expert Jeff Litvak used NBV for the fleet. He calculated the threshold
to be $15,598,704, and total 2010 EBITDA to be $16,446,172. The difference is
$847,468, or 5.4%, over the threshold. Litvak concluded that if all Pumpco
EBITDA were included for 2010, the result would be a Milestone Payment of
$3.75 Million. EBITDA from only one Pumpco fleet deployed in the Marcellus
Shale would result in an earned Milestone Payment of $529,668.
The Court finds CPXâs use of acquisition value, instead of NBV, to be
arbitrary and unreasonable. The only apparent reason for changing the parameters
of the 2009 NBV calculation to the 2010 acquisition value calculation was to
ensure that no Milestone payment would be earned, regardless of whether or not
any Pumpco fleet eventually would be included, as it had for 2009.
Course of Performance/Dealing or Settlement Discussions?
Throughout the trial, the Court considered whether certain evidence should
be admitted for purposes of findings of fact and conclusions of law at the close of
the case. The parties disputed certain testimony, and numerous documents, on the
grounds that such evidence constituted either inadmissible settlement discussions,
or admissible course of performance or course of dealing.
Because this case was not tried before a jury, the Court had the discretion to
hear the evidence, and to resolve the evidentiary issues at the close of the
evidence. The Court has determined that the disputed evidence is inconclusive.
The Court has made its findings based on the terms of the contract, and on the
evidence that was admitted without objection.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
FOLLOWING BENCH TRIAL
The Court finds that removal by CPX of the sole AWS high pressure
fleet thwarted the reasonable expectations of all parties to the APA.
The subsequent exchange of the AWS fleet for a Pumpco fleet was
neither arbitrary or unreasonable.
It was arbitrary and unreasonable for CPX to perform the 2010
Milestone Payment calculations for the specific purpose of
concluding that no Milestone Payment was earned.
It was arbitrary and unreasonable for CPX to include the Pumpco
equipment in calculating the 2009 Milestone Statement, in exchange
for the transferred AWS fleet, and not to include at least one Pumpco
fleet in the 2010 calculations.
CPXâs use of acquisition value, instead of net book value, in the 2010
Milestone Statement was arbitrary and unreasonable, and net book
value must be used in the Milestone Payment calculations.19
The production of one Pumpco fleet, to substitute for the single AWS
fleet transferred out of the Marcellus Shale, must be included in the
Milestone Payment calculations.
The actual Milestone Payment calculations must be performed
according to the APA provisions. If the parties cannot agree on these
mathematical calculations, the matter must be referred to an
independent accountant pursuant to Section 2.05(e) of the APA.
Defendantsâ Motion for a Directed Verdict is hereby DENIED.
The parties shall confer on a proposed implementing order, to be submitted
to the Court by August 15, 2013. If there is not agreement on the form of
proposed order, the parties shall submit competing draft orders to the Court.
IT IS SO ORDERED.
The Court also finds that it is reasonable to calculate the 2010 Milestone Payment after
normalizing revenues for February 2010.
/s/ M M Johnston
The Honorable Mary M. Johnston