United States District Court, W.D. Kentucky, Bowling Green Division
SIERRA ENTERPRISES INC., et al. PLAINTIFFS
SWO & ISM, LLC, et al. DEFENDANTS
MEMORANDUM OPINION AND ORDER
N. Stivers, United States District Court Judge
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
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).
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).
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).
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).
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).
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).
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.
entered into various contracts with the
Defendants. (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).
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).
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).
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.
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).
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.
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
Defendant's Motion to Exclude Plaintiffs' Expert
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
(d) the expert has reliably applied the principles and
methods to the facts of the case.
Fed. R. Evid. 702.
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
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
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)).
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)).
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.
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).
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 ...