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Dickey v. Bull Mountain Development Co.

October 11, 2006

JOSEPH W. DICKEY, ET AL., PLAINTIFFS,
v.
BULL MOUNTAIN DEVELOPMENT CO., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Thomas W. Phillips United States District Judge

(Phillips)

MEMORANDUM AND ORDER

This is an action to recover on three promissory notes. Plaintiffs have moved for partial summary judgment. Because there are disputed issues of fact as to the claims in this case, plaintiffs' motion will be denied.

Background

The events giving rise to this litigation began in 2001. At that time, John Baugues, a principal of Bull Mountain Land Company, LLC, an affiliate of defendants, met plaintiff Joseph Dickey through a mutual acquaintance. At the time, Dickey was a principal in the consulting firm FGS & Associates, LLC, whose other principals were plaintiff Peter Chang and Ronald Hall, who is the husband of plaintiff Tonya Hall.

FGS contracted with Bull Mountain Land Company to perform services related to the feasibility of constructing a coal-fired electric plant in Montana near Bull Mountain's property. FGS originally agreed to do this work in exchange for a royalty of 10 cents (10ó) per ton of coal mined on Bull Mountain's property. Bull Mountain Development Corporation (BMDC) was formed in 2002, with Dickey becoming its twenty percent (20%) owner and president. The plan was for BMDC, with Dickey's help, to obtain the permits, contracts and other approvals that would be needed to commence the power plant project. Once the approvals were obtained by BMDC, Dickey hoped to find a third-party that would purchase, for a substantial sum, the permits for and right to pursue the power plant project.

Throughout 2002, FGS performed work and incurred expenses related to obtaining the necessary approvals and permits for the power plant project, for which it rendered monthly invoices to defendants. The amount due on the FGS invoices grew to approximately $1,300,000 by February 2002. Defendants could not pay FGS and this resulted in FGS having to pay subcontractors using its own funds. In January 2003, Dickey and John Baugues began to discuss the possibility of soliciting loans from individuals to raise the funds needed to pay FGS's subcontractors. Because they knew that the money had to be raised quickly, they agreed to offer potential lenders an extra incentive to induce them to lend money to BMDC.

Dickey and Baugues decided to offer potential lenders the right to choose between two different incentives. In addition to a fifteen percent (15%) interest rate, lenders could choose to receive either (1) a bonus payment on the due date of their loan equal to the full principal amount of their loan, or (2) an eighty (80) year royalty on coal sales from the mining of 4,216 acres of land held by BMP Investments. In February 2003, Dickey, on behalf of FGS, executed two promissory notes evidencing loans he had solicited and obtained in support of the efforts of BMDC and FGS. These two notes, respectively, obligated FGS to pay plaintiffs Peter and Cecilia Chang the principal sum of $180,000 and to pay plaintiff Tonya Hall the principal sum of $50,000.

At the same time, Dickey also arranged for FGS to execute a note in his own favor for the principal sum of $425,000. The circumstances surrounding FGS's note to Dickey were somewhat different from those relating to FGS's notes to the Changs and Hall. While the note that FGS delivered to Dickey purported to evidence a new loan made in February 2003 for $425,000 (for which Dickey also received the extra inducement of a corresponding eighty year royalty agreement from BMP Investments), Dickey concedes that $100,000 of the $425,000 loan was actually advanced by Dickey to FGS in December of the prior year, more than two months before FGS delivered the $425,000 note to Dickey. Dickey did not remember informing anyone at the time that $100,000 of his purported $425,000 loan included an advance made to FGS months earlier.

The express purpose of the loans that FGS hoped to obtain through the special inducement of offering the eighty year royalty agreements was to raise money needed to pay FGS's subcontractors. However, $200,000 of the $425,000 note that Dickey received from FGS was neither funded by Dickey nor used by FGS for this express purpose. Instead, Dickey admits that rather than advancing this $200,000 to FGS to pay outstanding subcontractor bills, Dickey credited FGS in respect of amounts that Dickey claimed that FGS owed him for other purposes.

Each of the three February 2003 promissory notes provided for interest at the rate of fifteen percent (15%) per annum. The proceeds of the notes were at all times controlled by Dickey. At the same time, Dickey arranged for defendant BMP Investments to execute Overriding Royalty Agreements in favor of each of the note holders as the "extra inducement" for the loans evidenced by the three promissory notes. BMP investments asserts it received no consideration in exchange for the royalty agreements beyond the loans to FGS.

When the original notes came due in October 2003, Dickey approached Hall and the Changs about renewing their notes and rolling the unpaid 15% interest into the principal balance of the loans. Hall and the Changs agreed, but this time, it was BMDC that executed the renewal notes, which included in their face amounts, capitalized interest on the original FGS note balances at the rate of 15% per annum. As a result, BMDC became the obligor on the loans that were originally made by Hall and the Changs to FGS. Additionally, because of the capitalization of the unpaid 15% interest, the principal amount of Hall's note was ultimately increased from $50,000 to $63,250, and the face amount of the Changs' note was ultimately increased from $180,000 to $227,000. Dickey received a new note from BMDC for $467,500.

BMDC ultimately obtained the necessary permits to build the Montana power plant, however, no third-party has purchased the right to pursue the plant. Defendant BMP Investments made payments in accordance with the formulas provided for under the Overriding Royalty Agreements until August 2004. Plaintiffs filed the instant action on December 20, 2005.

Plaintiffs have sued to recover amounts due in respect of the loans evidenced by the three promissory notes. BMDC is the maker of each of the Notes. Each Note provides that BMDC shall pay interest on the principal amount of the Notes at a rate per annum equal to fifteen percent (15%). The Notes also provide that "in no event and under no circumstances shall the Borrower be liable for the payment of ...


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