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Sierra Enterprises Inc. v. SWO & ISM, LLC

United States District Court, W.D. Kentucky, Bowling Green Division

August 28, 2017



          Greg N. Stivers, United States District Court Judge

         This matter comes before the Court on Defendant's Motion to Exclude Plaintiffs' Expert Witness (DN 208); Defendant's Motion for Summary Judgment (DN 207), and Plaintiffs' Motion for Leave to File Sur-Reply (DN 219). The motions are ripe for adjudication. For the following reasons, Defendant's Motion to Exclude Plaintiffs' Expert Witness is DENIED; Defendant's Motion for Summary Judgment is DENIED IN PART and GRANTED IN PART, and Plaintiffs' Motion for Leave to File Sur-Reply is GRANTED.

         I. BACKGROUND

         In 2009, David Lewis (“Lewis”) and Monica Ticer (“Ticer”) formed Insight Management, LLC (“Insight”), which was engaged in the business of soliciting investors over the phone to purchase real estate in Georgia. (Ticer Dep. 47:15-24, 43:19-24, Feb. 25, 2015, DN 212-1). Also around 2009, Ticer and Lewis began working in the oil and gas business with FHE Energy. Lewis worked as a promotor and driller, while Ticer performed administrative work. (Ticer Dep. 60:25-61:4).

         In 2010, Ticer and Lewis' relationship with FHE Energy ended, and the pair, through Insight formed Graybar & Associates, LLC (“Graybar”) for the purpose of forming joint ventures to drill oil wells. (Ticer Dep. 57:15-58:1, 64:18-23). The original members of Graybar were Greylon White and Insight. (Ticer Dep. 61:25-63:16; 65:25-66:9). Subsequently, Insight and Steve Wallace (“Wallace”) formed SWO & ISM, LLC for the purpose of conducting the oil drilling operations and managing the joint ventures. (Ticer Dep. 119:20-25).

         In 2010, Graybar began soliciting investors for their oil drilling business. (Ticer Dep. 78:23-25). Investors were offered “participation units” which would purportedly entitle the investor to a percentage of working interest in the oil wells. (Callicotte Report 16, DN 213-1; Pls.' Resp. Def.'s Mot. Exclude Expert Witness Ex. D, at 26, DN 213-4 [hereinafter Gentry PPM]). The joint ventures were organized in such a manner that the purchasers had to rely on the efforts of the operator/managing joint venturer-either Graybar or SWO & ISM-to actually operate the oil and gas property. (Callicotte Report 16).

         In the course of soliciting investors, Graybar sent to potential investors various Private Placement Memoranda (“PPM”). (Gentry PPM; Pls.' Resp. Def.'s Mot. Summ. J. Ex. K, DN 211-12 [hereinafter Littrell PPM]). The PPMs touted the experience of the principals involved but omitted any discussion of risk beyond the investor's capital contribution. (Littrell PPM; Gentry PPM 3). Plaintiffs' expert, Harry D. Callicotte (“Callicotte”), opines that this is a blatant misrepresentation of the risks associated with the purchasing of working interests in oil and gas ventures. (Callicotte Report 7-8). For example, according to Callicotte if the wells were to require more work than anticipated, or be destroyed, the costs for continuing operations would be borne entirely by the working interest owners; however, the PPMs did not mention such risk. (Callicotte Report 7-8). Callicotte opines that these are standard risks in the oil and gas industry which should have been disclosed in the PPMs. (Callicotte Report 7-8).

         The PPMs also offered to sell 100% of the working interest in the wells. (Gentry PPM 4). Callicotte opines that it is highly unusual that one would sell 100% of such working interest. (Callicotte Report 8-9). According to Callicotte, by selling 100% of the working interest in the wells that were already producing, Graybar divested itself of any liability as a working interest owner and thus Graybar and SWO & ISM had no incentive to pursue continued production of these wells. (Callicotte Report 8-9).

         Furthermore, the PPMs provided production estimates to potential investors of 30 barrels of crude oil per day based on past production records and a “48-hour daily test” that was conducted. (Gentry PPM 7-8). Wallace signed the “affidavit of production” that was attached to the PPM attesting to the probability that this amount of oil would be produced. (Wallace Dep. 134:2-137:23, Feb. 25, 2015, DN 213-5; Gentry PPM 7-8). Callicotte opined that despite his extensive experience in the oil and gas industry, he had never heard of the type of 48-hour daily test described in the PPM. (Callicotte Report 12). Moreover, he expressed the opinion that the advertisement of an agreed amount of production in the PPMs is highly unusual and inappropriate under industry standards. (Callicotte Report 12).

         Greylan Gentry contacted Plaintiff William Peterson (“Peterson”) to solicit investments for a joint venture created by Graybar. (Am. Compl. ¶ 39, DN 60). Peterson decided to invest in the joint venture and issued an initial check to Graybar on February 10, 2011, in the amount of $28, 350.00. (Am. Compl. ¶ 40). Peterson continued his business relationship and invested in additional joint ventures with Graybar. (Am. Compl. ¶ 40). Peterson and his company, Sierra Enterprise, LLC, (collectively “Plaintiffs”), eventually invested a total of $955, 225 in the joint ventures.

         Plaintiffs entered into various contracts with the Defendants.[1] (Am. Compl. ¶¶ 40, 52, 59, 62, 68, 74). In their Verified Amended Complaint, Plaintiffs allege that they were not paid proper distributions under these contracts and that numerous misrepresentations and omissions were made in the disclosure memoranda that induced them into signing the agreements. (Am. Compl. ¶¶ 40, 52, 59, 62, 68, 74).

         KRS 353.205 requires that the Department of Revenue (“DOR”) submit statistics on crude oil as reported to the DOR under the crude oil tax requirements of KRS Chapter 137. According to Callicotte, the DOR received no reports of oil produced from any of the identified wells by any of the operators identified in the PPMs-Wallace Well Service, Hein Oil Company, Inc., or SWO Drilling-for the years 2010, 2011, and 2012. (Callicotte Report 11; T. Lewis Dep. 170-71, Oct. 14, 2015, DN 211-2). No run tickets demonstrating that oil was being produced have been provided from the transportation companies-Coomer Transport, and Hein Oil Gathering and Transport Company, LLC (now Lewis Oil Transportation, LLC (“Lewis Oil”))-although Ticer testified that these records were kept. (Ticer Dep. 280:6-25; Notice Intent Serve Subpoena, DN 132).

         As Defendants were having issues with oil getting picked up in a timely fashion, Lewis suggested that they form a transportation company. (Wallace Dep. 150:9-14). Solicitations were then made to the joint venture participants to invest money to purchase a transportation company. (Wallace Dep. 162:17-22; Ticer Dep. 182:1-9; Pls.' Resp. Ex. O, at 4, DN 211-16). Lewis Oil's predecessor was formed when Coomer Transportation was purchased. (Ticer 176:11-178:8). Callicotte opines that the Lewis Oil operation allowed Defendants to fully control exploration, production, and transportation of any oil, as well as controlling the flow of money and recordkeeping among those entities. (Callicotte Report 13). Callicotte further stated that this insulated record-keeping is highly unusual in the oil and gas industry and allowed for manipulation of information. (Callicotte Report 13).

         Bank records show a series of transfers in 2012-13 from SWO & ISM into Lewis Oil's bank account totaling $1, 826, 930.41. (Pls.' Resp. Def.'s Mot. Summ. J. Ex. I, at 26-30, DN 211-10 [hereinafter Bank Records]). The funds were transferred in twelve transactions, the largest amounting to $950, 000. (Bank Records 26-30). Although Ticer contends that accounting records explaining some of these transfers are in the possession of Lewis Oil, there are no detailed records in evidence explaining the purpose of the transfers. (Ticer Dep. 180:1-17).

         Plaintiffs filed their Complaint against Defendants Graybar and SWO & ISM on March 5, 2015. (Compl., DN 1). Graybar failed to respond to the Complaint and Default Judgment was entered against it on April 15, 2014. (Default J., DN 19). In the Amended Complaint, Plaintiffs added as Defendants, Hein Oil Company, Inc.; Hein Oil Well Services, LLC; Insight; SWO, LLC; Wallace; Ticer; and Lewis Oil. (Am. Compl., DN 60). Subsequently, Plaintiffs settled with all Defendants except for Lewis Oil. (Pls.' Resp. Def.'s Mot. Summ. J. Ex. M, DN 211-14 [hereinafter Settlement Agreement]). Five causes of action remain against Lewis Oil: (i) Count 33 - piercing the corporate veil; (ii) Count 34 - aiding and abetting; (iii) Count 35 - interference with business relations; (iv) Count 35 - fraudulent conveyances; and (v) Count 36 - enforcement of order. (Am. Compl. ¶¶ 262-287).

         In the pending motions, Lewis Oil has moved for summary judgment on Plaintiffs' claims against it. (Def.'s Mot. Summ. J., DN 207). Lewis Oil has also moved to exclude the expert testimony of Callicotte, and Plaintiffs has sought leave to file a sur-reply to Lewis Oil's summary judgment motion. (Def.'s Mot. Exclude Expert Witness, DN 208 [hereinafter Def.'s Mot. Exclude]; Pls.' Mot. File Sur-Reply, DN 46). Thus, this matter is ripe for adjudication.


         The Court has subject matter jurisdiction over this action under 28 U.S.C. § 1332 as there is complete diversity between the parties and the amount in controversy exceeds the sum of $75, 000.00.


         A. Defendant's Motion to Exclude Plaintiffs' Expert Witness

         Rules 702 and 104(a) of the Federal Rules of Evidence govern the admissibility of expert testimony. See Nelson v. Tenn. Gas Pipeline Co., 243 F.3d 244, 250 (6th Cir. 2001) (citing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993)). Rule 702 provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.

Fed. R. Evid. 702.

         Under Daubert, Rules 702 and 104(a) require that the trial court act as a gatekeeper and ensure that expert testimony is both relevant and reliable. Daubert, 509 U.S. at 589; Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768, 792 (6th Cir. 2002). The test for relevancy is one of “fit, ” meaning the testimony must be sufficiently related to the facts of the case such that it will aid the trier of fact in understanding the evidence or determining a fact in issue. Daubert, 509 U.S. at 591.

         When determining reliability, a key consideration for the trial court in carrying out its gatekeeping function is “whether the reasoning or methodology underlying the testimony is sufficiently valid . . . .” Daubert, 509 U.S. at 592-93. The Supreme Court, however, has advised that the inquiry is flexible and that “[t]he focus . . . must be solely on principles and methodology, not on the conclusions they generate.” Id. at 594-95. There is no definitive checklist for determining whether an expert's testimony is reliable, but Daubert outlines factors for courts to consider, such as: (1) whether the theory or method in question “can be (and has been tested)”; (2) whether it “has been subjected to peer review and publication”; (3) whether it has a “known or potential rate of error”; and (4) whether the theory or technique enjoys “general acceptance” in the “relevant scientific community.” Id. at 593-94.

         Daubert applies to all expert testimony. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999). The listed factors, however, are not exhaustive. See Id. Moreover, where a party challenges the testimony of a proffered expert for insufficient “factual basis, data, principles, methods, or their application . . . the trial judge must determine whether the testimony has a reliable basis in the knowledge and experience of [his or her] discipline.” Id. at 149 (quoting Daubert, 509 U.S. at 592). Daubert involves balancing the desire to liberally admit relevant evidence against the necessity of excluding misrepresentative “junk science.” Best v. Lowe's Home Ctrs., Inc., 563 F.3d 171, 176-77 (6th Cir. 2009) (citing Amorgianos v. Nat'l R.R. Passenger Corp., 303 F.3d 256, 267 (2d Cir. 2002)).

         While the trial court is not required to hold a Daubert hearing to determine the admissibility of expert testimony, it must ensure that the testimony is both relevant and reliable. See Clay v. Ford Motor Co., 215 F.3d 663, 667 (6th Cir. 2000); Nelson, 243 F.3d at 248-49 (citing Greenwell v. Boatwright, 184 F.3d 492, 498 (6th Cir. 1999)). Ultimately, “a trial judge . . . ha[s] considerable leeway in deciding whether particular expert testimony is reliable, ” and the decision is reviewed for abuse of discretion. Kumho Tire, 526 U.S. at 142, 152; Conwood, 290 F.3d at 792; see also Tamraz v. Lincoln Elec. Co., 620 F.3d 665, 672 (6th Cir. 2010) (“Rule 702, we recognize, does not require anything approaching absolutely certainty. And where one person sees speculation, we acknowledge, another may see knowledge, which is why the district court enjoys broad discretion over where to draw the line.” (internal citation omitted) (citation omitted)).

         As an initial matter, Lewis Oil's motion to exclude Plaintiffs' expert witness does not contest that Callicotte is qualified to opine on the standards, customs, and practices in the oil and gas industry. Callicotte has a B.S. in Petroleum Engineering from the University of Kansas; an MBA in Management from the University of Texas-Permian Basin, and a J.D. from the University of Missouri, Kansas City. (Callicotte Report 2). He has participated in significant continuing education courses related to petroleum and natural gas certification, reservoir engineering, product engineering, and petroleum management. (Callicotte Report 2). Callicotte is a thirty-five-year member of the Society of Petroleum Engineers, of which he previously served as the Chair of the East Kentucky Section, is a member of the Kansas Independent Oil and Gas Association, and a member of the Kentucky Oil and Gas Association. (Callicotte Report 2). He has been a licensed Professional Engineer since 1988. (Callicotte Report 2). Callicotte's qualifications would certainly qualify him as an expert generally in matters related to the oil and gas drilling business.

         Lewis Oil contends that Callicotte's testimony is irrelevant because many of his opinions do not relate specifically to Lewis Oil. (Def.'s Mot. Exclude 2-3). For example, Lewis Oil posits that Callicotte's opinion regarding misstatements made during the course of the joint ventures were not made by Lewis Oil. Additionally, Lewis Oil argues that Callicotte's opinion concerning fraudulent operation of the wells is irrelevant because Lewis Oil was not the operator (Def.'s Mot. Exclude 2-3).

         Lewis Oil's argument misses the mark, as Plaintiffs allege that Lewis Oil aided and abetted breaches of fiduciary duty and fraud by other parties. To prevail on ...

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