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. 44), 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 Development LLC, and Striker
Entities, LLC, (collectively “Striker”), bring
this breach of contract action against defendant, Susan A.
Drawdy (“Drawdy”), seeking to collect on five
promissory notes executed by either Drawdy, her former
husband, Jeffrey Drawdy, or both of them in 1999, 2000,
[2]
2001, 2002 and 2003. According to Striker, the notes were
used to purchase ownership units in oil and gas drilling
partnerships called North American 1999 Program, Continental
American Program 2000, and Program 2001.[3]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, 8 and 9 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 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 January 12, 2015, January 19, 2015, and April 20, 2015,
declared the notes in default and demanded payment of the
outstanding principal balance of the notes.[4] Exhibits 10, 11
and 12 to Striker's motion. Striker claims Drawdy refused
to make payment as demanded and after having credited all oil
and gas production revenues from the programs' wells to
the notes, Drawdy still owes it $238, 599.00 for the notes
and $51, 221.55 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 Drawdy
in the total amount of $289, 820.55. Striker contends that
Drawdy cannot establish any defense to its right to payment
of the notes.[5]
Drawdy
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, Drawdy asserts that her
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, Drawdy contends that
her claimed tax deductions based upon the notes were, at
best, unsupported and potentially invalid. Drawdy thus
asserts any benefit allegedly conferred pursuant to the notes
is illusory. Consequently, Drawdy argues that all of the
notes fail for lack of consideration.
As to
the defense of fraudulent inducement, Drawdy asserts that
Richard Romine, Striker's manager, made material, false
representations which induced Drawdy to execute the notes.
Specifically, Drawdy asserts that Romine told her the notes
would be fully repaid from revenues from the drilling
programs, and that in any event, Striker would not pursue
Drawdy for repayment of any note balance.[6]Drawdy 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, Drawdy
asserts that Romine promoted the drilling programs, including
the use of the notes, for the purpose of securing ongoing
tax-deductible investments. However, Drawdy 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, Drawdy argues that summary
judgment is not appropriate because there are genuine issues
of material fact as to amount due on the notes. Drawdy
maintains that Striker has not produced any contemporaneous
accounting that would support its damages claim. According to
Drawdy, the summary Schedule K-1's prepared annually by
Striker and provided to Drawdy 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 Drawdy'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, Drawdy 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 Drawdy 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 Drawdy. Further, Striker
asserts that Drawdy's fraud arguments fail because she
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
Drawdy had reasonable opportunity to learn of the essential
terms of the notes by reading them before their execution.
Lastly, Striker argues that Drawdy's complaints about a
lack of documents to prove the notes' balances are
meritless because she never challenged the accuracy of the
Schedule K-1s, she 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 Drawdy has failed to raise a
genuine issue of material fact with respect to a lack of
consideration for the notes.
Although
Drawdy has presented evidence of an IRS audit of another
Striker drilling program, Program 2007-A, which disallowed
the tax deductions of certain investors, Drawdy has not
presented evidence to raise a genuine issue of material fact
that her 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 Drawdy's “concern[] that the IRS might audit
the programs in which [she] had invested and that the IRS
might reach similar conclusions about ...