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APEG Energy II. LP v. Veltri

United States District Court, D. Colorado

May 16, 2019

APEG ENERGY II, LP, Plaintiff,
v.
DAVID VELTRI, Defendant, and U.S. ENERGY CORPORATION, Nominal Defendant.

          ORDER GRANTING INTERIM PRELIMINARY INJUNCTIVE RELIEF AND APPOINTING RYAN SMITH AS INTERIM CUSTODIAN

          William J. Martinez United States District Judge

         Plaintiff APEG Energy II, LP (“APEG”), sues David Veltri (“Veltri”), arguing that Veltri, without authorization, holds himself out to be and acts as president and CEO of U.S. Energy Corporation (“U.S. Energy”), a Wyoming corporation headquartered in Colorado. APEG moved for a temporary restraining order to enjoin Veltri (ECF No. 5), but the Court denied that specific relief. It instead construed the motion as one for a preliminary injunction and ordered Veltri to respond. (See ECF No. 22.)

         On April 23, 2019, the Court issued an order describing why the Court believes APEG is likely to succeed on the merits, but questioning whether enjoining Veltri from acting as president and CEO would prevent or cause irreparable harm. (ECF No. 35.) The Court therefore called for further briefing. The Court received that briefing (ECF Nos. 36, 37), and then set APEG's motion for an evidentiary hearing on May 24, 2019 (ECF No. 38).

         On May 14, 2019, APEG filed an Emergency Renewed Motion for Temporary Restraining Order (“Emergency Motion”). (ECF No. 39.) APEG argues that Veltri, along with an ally on U.S. Energy's board of directors, engineered a rearrangement of the board's audit committee, prompting a warning from the NASDAQ stock exchange (where U.S. Energy's stock trades) that the new audit committee does not meet NASDAQ guidelines, and that U.S. Energy had a May 23, 2019 deadline to rectify the situation or face de-listing of U.S. Energy's shares from the exchange. However, the board is deadlocked 2-2 on the task of re-rearranging the audit committee, with Veltri and his ally in one corner and the two directors that Veltri managed to dismiss from the audit committee in the other corner (these directors are allied with APEG). APEG requests that the Court enjoin Veltri from acting as CEO and that the Court further invoke a Wyoming corporation statute permitting the Court to appoint a “custodian” who can act as interim CEO-and who, by operation of U.S. Energy's bylaws regarding the role of CEO, would also become chairman of the board, meaning the board would have five members and so could avoid deadlock.

         The Court ordered Veltri to respond to the Emergency Motion by 10:00 AM yesterday (ECF No. 40), which he did (ECF No. 41). Because Veltri has responded, APEG's Emergency Motion can no longer be deemed to be seeking a TRO. See Fed. R. Civ. P. 65(b). As with the original motion for a TRO, the Court will now construe the Emergency Motion as one for preliminary injunctive relief. The parties' briefs show that the material facts are not in dispute. For the reasons explained below, the Court grants the Emergency Motion under specified conditions.

         I. BACKGROUND

         A. The Governance Dispute

         The Court incorporates Part I of its prior order (ECF No. 35) as if set forth herein, and presumes familiarity with that narrative.

         B. The NASDAQ Dispute

         On March 28, 2019, Veltri and his ally on the board of directors, John Hoffman, convened a no-notice telephonic board meeting consisting of themselves and Weldon Chitwood, who is allied with APEG. They did not include Javier Pico, the fourth director, who is also allied with APEG. Veltri or Hoffman moved to dismiss Chitwood and Pico from the audit committee, which, at that time, comprised Hoffman, Chitwood, and Pico. Chitwood did not object to the lack of notice (thus waiving that objection) and voted against the resolution, but Hoffman and Veltri voted in favor, so the motion carried.

         On April 16, 2019, Veltri caused U.S. Energy to file a Form 8-K with the U.S. Securities & Exchange Commission announcing that Hoffman was now the audit committee's sole member. On May 9, 2019, NASDAQ sent a letter to Veltri stating that the reorganization of the audit committee puts U.S. Energy out of compliance with NASDAQ's requirement that audit committees be composed of three independent directors. NASDAQ imposed a May 23, 2019 deadline for U.S. Energy to propose a plan to regain compliance, or suffer possible de-listing of U.S. Energy's shares.

         The audit committee now has only one member, but Veltri, Hoffman, Chitwood, and Pico are all still members of the board of directors, and they are deadlocked regarding how to move forward. Chitwood and Pico, in particular, have refused Veltri's proposal to appoint all four directors as audit committee members. Veltri, of course, does not want to reconstitute the audit committee as Hoffman, Chitwood, and Pico, because then Chitwood and Pico would again control the committee. That committee intervened in a lawsuit that U.S. Energy brought against APEG in Texas, and the committee's position as intervenor is opposed to Veltri's interests. See U.S. Energy Corp., et al., v. APEG Energy II, LP, et al., Civil Action No. H-19-754 (S.D. Tex.). If Chitwood and Pico again comprise the majority of the audit committee, they can continue to steer the committee's litigation strategy in Texas in a manner that Veltri perceives as detrimental.

         II. LEGAL STANDARD

         The Court incorporates Part II of its prior order (ECF No. 35) as if set forth herein, and presumes familiarity with the legal principles and conclusions set forth there.

         III. ANALYSIS

         A. ...


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