United States District Court, W.D. Oklahoma
ORDER
STEPHEN P. FRIOT UNITED STATES DISTRICT JUDGE
Before
the court is Plaintiffs' Motion for Summary Judgment,
filed May 1, 2019 (doc. no. 30), as
supplemented.[1] Defendant has responded to the motion and
plaintiffs have replied. Upon due consideration of the
parties' submissions, the court makes its determination.
I.
Plaintiffs,
The Striker Group, LLC, Striker Entities, LLC and Striker
Development LLC (collectively “Striker”), bring
this breach of contract action against defendant, Stephen M.
Chess (“Chess”), seeking to collect on four
promissory notes executed by Chess in 1998, 2000, 2001 and
2003. According to Striker, the notes were used to purchase
ownership units in oil and gas drilling partnerships called
North American 1998 Program, Continental American Program
2000 and Program 2001.[2] The programs were managed by Striker and
organized to conduct oil and gas operations in Oklahoma and
elsewhere. The notes provided that the interest in production
from the programs' wells would be used by Striker to
first pay or reduce interest and then to pay or reduce the
principal amount of note. Exhibits 1, 4, 6 and 8 to
Striker's motion, ¶ 4. Striker claims that due to a
severe downtown in the price of oil and gas, it was forced to
shut down the programs and sell off their assets in the
2012-2014 timeframe. Because “no more revenues [would
be] realized” or “no further production from the
Program's wells [would be available] to reduce either the
non-recourse interest or the recourse principal amount of the
[note], ” Striker, by letters dated February 5, 2014,
January 19, 2015, and April 20, 2015, declared the notes in
default and demanded payment of the outstanding principal
balance of the notes.[3] Exhibits 9, 10, and 11 to Striker's
motion. Striker claims Chess refused to make payment as
demanded and after having credited all oil and gas production
revenues from the programs' wells to the notes, Chess
still owes it $286, 176.00 for the notes and $66, 786.30 in
attorney's fees for collection of the notes. Striker now
seeks summary judgment under Rule 56(a), Fed. R. Civ. P., on
its breach of contract claim and requests the court to enter
judgment in its favor and against Chess in the total amount
of $352, 962.30. Striker contends that Chess cannot establish
any defense to its right to payment of the
notes.[4]
Chess
opposes summary judgment, arguing that genuine issues of
material fact exist as to whether the notes are enforceable
due to lack of consideration and fraudulent inducement. With
respect to lack of consideration, Chess asserts that his core
interest and expectation in investing in the oil and gas
drilling partnership was to obtain valid, ongoing tax
deductions. Because of an Internal Revenue Service audit
conducted on a similar Striker drilling program (which found
that the program could not support the claimed tax
deductions), together with Striker's inability to produce
any supporting records for the programs, Chess contends that
his claimed tax deductions based upon the notes were, at
best, unsupported and potentially invalid. Chess thus asserts
any benefit allegedly conferred pursuant to the notes is
illusory. Consequently, Chess argues that all of the notes
fail for lack of consideration.
As to
the defense of fraudulent inducement, Chess asserts that
Richard Romine, Striker's manager, made material, false
representations which induced Chess to execute the notes.
Specifically, Chess asserts that Romine told him the notes
would be fully repaid from revenues from the drilling
programs, and that in any event, Striker would not pursue
Chess for repayment of any note balance.[5]Chess contends
that these representations were false because the revenues
generated by the programs' wells did not fully repay the
alleged balances on the notes and Striker is now pursuing
collection of the notes with this action. In addition, Chess
asserts that Romine promoted the drilling programs, including
the use of the notes, for the purpose of securing ongoing
tax-deductible investments. However, Chess contends that
although requested, Striker has not produced any supporting
accounting for the tax deductions and the IRS has found that
a substantially similar investment program could not support
the claimed tax deductions.
Even if
the notes were enforceable, Chess argues that summary
judgment is not appropriate because there are genuine issues
of material fact as to amount due on the notes. Chess
maintains that Striker has not produced any contemporaneous
accounting that would support its damages claim. According to
Chess, the summary Schedule K-1's prepared annually by
Striker and provided to Chess are not sufficient evidence to
establish its damages.
In
reply, Striker argues that the IRS audit of the other Striker
drilling program, Program 2007-A, is completely irrelevant to
the enforceability of Chess's notes. Striker points out
that the subject programs have never been audited and the IRS
made no findings in the referenced audit about the programs,
the notes at issue or the validity of the tax deductions for
the notes. According to Striker, Chess has presented no
evidence that the specific features of Program 2007-A that
the IRS found objectionable are also features of the other
programs. In addition, Striker contends that the notes are
supported by consideration because Chess accepted and kept
all the tax benefits. Moreover, it asserts that the notes
recite numerous mutual promises of future performance. These
promises, Striker argues, are sufficient consideration for
the notes. Striker further points out that nothing in the
notes require it to produce any documentation before the
notes can be enforced against Chess. Further, Striker asserts
that Chess's fraud arguments fail because he accepted all
the benefits of the notes, and under 12A O.S. 3-305(a)(1),
fraud can be a defense to a promissory note only where it
induced the obligor to sign the instrument with neither
knowledge nor reasonable opportunity to learn of its
character or its essential terms. Striker contends that Chess
had reasonable opportunity to learn of the essential terms of
the notes by reading them before their execution. Lastly,
Striker argues that Chess's complaints about a lack of
documents to prove the notes' balances are meritless
because he never challenged the accuracy of the Schedule
K-1s, he knowingly refused to give time to Striker to produce
the supporting documents and Striker's summary judgment
motion is timely under the court's scheduling order.
II.
Federal
Rule of Civil Procedure 56(a) provides that “[a] party
may move for summary judgment, identifying each claim or
defense-or part of each claim or defense-on which summary
judgment is sought.” Rule 56(a), Fed.R.Civ.P. Summary
judgment is appropriate if “the movant shows that there
is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.”
Id. In deciding whether summary judgment is
appropriate, the court does not weigh the evidence and
determine the truth of the matter asserted, but only
determines whether there is a genuine issue of material fact
for trial. Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 249 (1986). A dispute is “genuine” “if
the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.” Id. at 248.
A fact is “material” if under the substantive law
it is essential to the proper disposition of the claim.
Id. In adjudicating a motion for summary judgment, the
court views the evidence and draws all reasonable inferences
therefrom in the light most favorable to the nonmoving party.
McGehee v. Forest Oil Corporation, 908 F.3d 619, 624
(10th Cir. 2018).
III.
Upon
review, the court finds that Chess has failed to raise a
genuine issue of material fact with respect to a lack of
consideration for the notes.
Although
Chess has presented evidence of an IRS audit of another
Striker drilling program, Program 2007-A, which disallowed
the tax deductions for him and his company, he has not
presented evidence to raise a genuine issue of material fact
that his tax deductions for investing in the subject programs
are illusory. The IRS audit did not involve the subject
programs, the notes or the tax deductions at issue. There is
no evidence in the record that the IRS has audited or intends
to audit the subject programs. The court is not satisfied
that Chess's “concern[] that the IRS might audit
the programs in which [he] had invested and that the IRS
might reach similar conclusions about ...