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Leland Oil & Gas, LLC v. Azar

United States District Court, D. North Dakota

February 27, 2017

Leland Oil & Gas, LLC, and K and R Roustabout, Inc., Plaintiffs,
v.
Marsha Azar and Saul Azar dba Illinois Energy, and Bensun Energy, LLC, Defendants.

          FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT

          Charles S. Miller, Jr., Magistrate Judge United States District Court

         FINDINGS OF FACT

         The parties and the wells

         1. Plaintiffs Leland Oil & Gas, LLC (“Leland Oil”) and K and R Roustabout, Inc. (“K&R Roustabout”) are North Dakota limited liability companies having their principal business office in Killdeer, North Dakota. Both are owned and operated by Gregory Krueger (“Krueger”). (Exs. P1, P4).

         Leland Oil is Krueger's production company. It owns a small number of oil wells in addition to those at issue in this case. K&R Roustabout provides labor for operating oil wells and storage facilities, including those owned by Leland Oil. In addition to these companies, Krueger also owns a well service company that does completion and maintenance work on oil wells, including downhole work. He also owns a company that takes care of natural gas engines that provide power to pumping units that do not have electrical service.

         All told, Krueger has some 25 years of oilfield experience as a laborer, an owner and operator of his various businesses, and as a consultant with respect to well servicing and workovers. (Tr. Tr. 24-28; Ex. P2). He is not, however, a petroleum engineer or geologist.

         2. Defendant Bensun Energy, LLC (“Bensun Energy”) is a Montana limited liability company having its principal business office in Sidney, Montana. (Exs. P1, P4).

         3. Defendants Saul and Marsha Azars (collectively the “Azars”) are husband and wife residing in Chicago, Illinois. Saul Azar is an investor and a manager of real estate. (Tr. Tr. 102). He conducted his business in the State of North Dakota under the name “Illinois Energy.” (Exs. P1, P4, P8, P9, P10, P11).

         4. In June 2012, Leland Oil and Bensun Energy acquired the Azars' ownership interest in two oil and gas wells located in North Dakota, specifically the Davis State 34-26 (“Davis State”) and the Sullivan 23-1 (“Sullivan”) along with certain lease rights allowing them to produce the wells, with each acquiring a 50% undivided interest in the wells and lease rights. (Ex. P11; Tr. Tr. 28-29).

         5. The acquisition of the two wells and lease rights was paid for by Leland Oil. Bensun Energy's nonpayment of its share of the acquisition and certain post-acquisition costs led to the claim in this case by Leland Oil against Bensun Energy that was resolved by the entry of a default judgment. Shortly before trial and in satisfaction of that judgment, Leland Oil acquired an assignment from Bensun Energy of its 50% undivided share in the two wells and associated lease rights along with its share of any claim that it may have against the Azars arising out of the purchase of the two wells, including the claim held in common with Leland Oil against the Azars in this action. (Ex. 28). At trial, and without objection by the Azars, Leland Oil asserted not only the rights it held initially but also those it acquired from Bensun Energy and that Leland Oil had financed. Consequently, when reference is made below to Leland Oil's claim for breach of contract for lost production from the Davis State and Sullivan wells, it includes that which was held by Bensun Energy in common with Leland Oil.

         6. During the times relevant to this action, the Azars owned the McMahen State 1 (“McMahen State”) well. (Ex. P1, P4, P13).[1]

         K&R's claim for money due on services rendered

         7. Two claims were presented for trial in this case. One was K&R Roustabout's claim for money owed by the Azars for work on the McMahen well. At the beginning of trial, the parties stipulated that judgment could be entered in favor of K&R Roustabout and against the Azars in the amount of $19, 552.80. The remainder of what follows addresses the second claim, which is Leland Oil's claim for breach of contract. (Tr. Tr. 4-6; Ex. D2).

         Leland Oil's breach of contract claim and the grant of partial summary judgment

         8. Leland Oil alleged in its complaint that the Azars breached the agreement pursuant to which Leland Oil and Bensun Energy acquired the Davis State and Sullivan by failing to complete and file a Notice of Transfer of Oil and Gas Wells - Form 15 (“notice of transfer”) with the North Dakota Industrial Commission (“NDIC”) following the completion of the sale of the two wells. Leland Oil claimed that, until a notice of transfer was filed and approved by the NDIC, it was prohibited from being able to commercially produce the two wells and that it suffered significant damages as a consequence.

         9. Prior to trial, Leland Oil moved for partial summary judgment on the issue of whether the Azars were legally obligated to complete and file a notice of transfer with the NDIC. After approximately three months with no response by the Azars, the court on January 22, 2016, entered an order granting the motion for partial summary judgment on the issue of liability as follows:

Defendants Marsha and Saul Azar d/b/a as Illinois Energy are legally obligated to complete and file all necessary documents with the North Dakota Industrial Commission to effectuate a change of operator of the Sullivan 23-1 and Davis State 34-36 wells to Leland, including but not limited to, Notice of Transfer of Oil and Gas Wells-Form 15[.]

         (Doc. No. 44, Ex. P5). The foregoing language parroted what Leland Oil had requested in its motion. Notably, no determination was made, however, as to when the Azars became liable in terms of having failed to provide a notice of transfer. This was because Leland Oil did not address that in its motion. Consequently, while the primary focus of the trial with respect to Leland Oil's lack-of-production claim was damages, one of the issues that remained to be determined was when the Azars' liability for failing to have timely provided a notice of transfer first arose because it is material to what damages can be awarded. Unfortunately, the determination of when the Azars were obligated to provide the notice of transfer requires consideration of what the parties agreed to, which is not entirely clear, along with possibility that the initial understandings and obligations of the parties were altered by the subsequent course of performance or lack of it.

         When the Azars' liability arose and its impact on any damage calculation

         10. In large part, the agreement for the sale of the two wells as finally consummated appears to have been made orally. While there was a May 11, 2012 written offer by Bensun Energy to purchase the wells that was countersigned by the Azars, that writing cannot be relied upon for what the final agreement was for several reasons, including: (1) the fact that the written offer expressly contemplated a further more formal agreement; (2) no mention was made of Leland Oil in the written offer and the fact it became a party to the ultimate agreement; (3) no date was specified in the written offer for a closing; and (4) a number of the terms in the written offer subsequently changed, including the purchase price, which was $100, 000 in the written offer but changed to $75, 000 and payment by a promissory note and not cash. (Exs. P8, P9, P11).

         That being said, it is clear an agreement was reached at some point as evidenced by the subsequent performance of the parties, including the Azars' assignment of their interests in the two wells to Leland Oil and Bensun Energy in exchange for: (1) a promissory note given by the purchasers in the amount of $75, 000; and (2) the promise of Leland Oil and Bensun Energy to have K&R Roustabout perform certain rehabilitative work on the McMahen State well that would be paid for by the Azars. (Exs. P1, P4, P8, P9, P11; Tr. Tr. 28-34, 69-70).

         11. In furtherance of this agreement, the Azars did assign their interest in the Davis State and Sullivan wells to Leland Oil and Bensun Energy by way of a written assignment effective as of June 15, 2012, with Leland Oil and Bensun Energy each receiving a 50% undivided interest in the acquired property. In exchange for the assignment, Bensun Energy and Leland Oil gave the Azars a promissory note in the amount of $75, 000 on the same date. (Exs. P4; P9; P11). As noted above, this represented a substantial deviation from the terms set forth in the earlier written offer made by Bensun Energy in that Leland Oil was now formally involved, the purchase price had dropped, and, instead of full cash payment being made, only a note was given.

         12. Under the terms of the promissory note, Leland Oil and Bensun Energy were to have made payments in equal monthly installments beginning 45 days from the date of the note. However, no monthly installments were ever made. It was not until November 1, 2013, almost seventeen months after the assignment, that Leland Oil forwarded a check to the Azars in the amount of $75, 000, which was cashed by the Azars on November 6, 2013. (Exs. P4, P9, P12).

         13. Leland Oil claims that the Azars were required to provide a notice of transfer of the wells for filing with the NDIC at the time of closing, relying upon the provision in Bensun Energy's initial written offer. However, for reasons already expressed, the written offer cannot be relied upon for what the terms of the ultimate agreement was. Further, the closing of sorts that took place when the written assignment of interests was exchanged for the promissory note went forward notwithstanding the lack of completion of a notice of transfer.

         14. The Azars did complete a form notice of transfer later in July 2012 that was filed with the NDIC. (Ex. P10). This lends some support to an argument that they were obligated at that time to provide the notice of transfer. However, this notice of transfer was later rejected by the NDIC as being defective in form. (Tr. Tr. 15-16). And, while the record is murky, it appears that substantial disputes had arisen between the parties by the time of its rejection that, along with other evidence described below, creates some doubt as to whether the Azars were in breach of any obligation to provide the notice of transfer prior to Leland Oil later making the one and only payment on the note months later in November 2013.

         Soon after the assignment, a dispute arose over whether Bensun Energy and Leland Oil had fully complied with their obligation to complete certain work required to get the McMahen State operating using K&R Roustabout. Leland Oil and Bensun Energy claimed that they had fully performed their obligation in August 2012. (Ex. P4). This was disputed by the Azars. Where the truth lies is difficult to determine, but there is evidence that the well broke down in September 2012 and that K&R Roustabout continued to do work on the well to fix the problems. (Exs. P7, P11, P20). There is also evidence that the well broke down again in December and that K&R Roustabout refused to perform any more work on the well because it had not yet been paid by the Azars for the work it had performed to date. (Ex. P4). It is unclear based on the record what obligations Leland Oil and Bensun Energy may have with respect to these breakdowns, if any, given the uncertainties with respect to the contractual obligations as well as the cause of the breakdowns in terms of whether it related to work they performed through K&R Roustabout earlier or were otherwise obligated to perform.

         While this was going on, Leland Oil and Bensun Energy never made any of the payments that had become due on the promissory note and were in default. Again, while the record is murky, there is some suggestion that the payments were not made because the Azars had not yet paid K&R Roustabout. Leland Oil also now claims that it did not pay on the note because the Azars had not yet provided the notice of transfer. The Azars appear to have taken the position that they were under no obligation to provide the notice of transfer so long as the promissory note was in default and Leland Oil and Bensun Energy had not fully complied with what they perceived to be the work required to be performed on the McMahen State. These disputes, which developed in the second half of 2012, spilled over into most of 2013. (Exs. P1, P4, P6, P12, P19, P20, P22, P23, P24) (Tr. Tr. 60-61). Given the uncertainty over what exactly the parties had initially agreed to as well as whether those obligations had been modified by the parties' subsequent performance or lack of it, it is difficult to determine whether the Azars were in actually in breach of any obligation to provide a notice of transfer up until Leland Oil made the one and only payment on the promissory note in November 2013.

         15. Leland Oil appears to contend that the Azars were in breach earlier because of two additional determinations that the court made pursuant to Leland Oil's earlier motion for summary judgement, those being:

2. Neither Leland, K&R, nor Bensun, have any legal obligation under the Contract, as modified by the Parties, to secure or provide further services to fix, maintain or otherwise service the McMahen State 1 well; and
3. Leland and Bensun have fully performed all of their obligations owed Azar under the Modified Contract.

         (Doc. No. 44, Ex. P5). The problem with this, however, is that no determination was made as to when the referenced obligations were fulfilled.

         16. Particularly telling with respect to the uncertainty as to whether the Azars were obligated to provide the notice of transfer prior to the one and only payment being made on the promissory note is the following testimony given by Krueger at trial:

Q. (THE COURT CONTINUING) To be able to both produce and sell oil from the two wells would have required the filing of the instrument that you say Mr. Azar refused to provide, correct?
A. Correct.
Q. And so I can keep my time frame straight, that once you acquired the interest, then that form would have had to have been filed?
A. Yes, as soon as he should've -- as soon as he got the money, it should have been -- the transfer should have been started and sent in to the State.
Q. And how long was the payment of the money after the -- after the contract became effective?
A. I think there was a -- I don't remember for sure. Like I say, it's been, you know, four years ago, but there was a -- he was -- wanted us to take care of the McMahen, so there was some strings attached to it. And we did follow through on our end of the deal taking care of the McMahen well, got it producing. And at that point I believe the check was cut, and then the transfer was supposed to be taken care of at that point.

(Tr. Tr. p. 61) (italics added). Of the same import is Krueger's cover letter to the Azars dated November 1, 2013, in which he forwarded the check in full payment of the purchase price for the wells. (Ex. P12).

         17. Given the foregoing, the court finds and concludes the Azars were obligated to provide a notice of transfer within a reasonable time after Leland Oil made the one and only payment on the promissory note in November 2013. If the Azars were obligated to provide the notice of transfer before that time, Leland Oil has failed to prove it.[2]

         18. The $75, 000 check in satisfaction of the promissory note was forwarded by Leland Oil to the Azars by mail under cover of a letter dated November 1, 2013, and was cashed on November 6, 2013. (Exs. P4, P12). A reasonable time for the Azars to have completed and filed the notice of transfer thereafter would have been two weeks.

         In terms of any claim for lost production, however, some allowance of time must be given for the NDIC to have reviewed and approved the transfer. The record supports a conclusion that this could have taken up to three months. (Tr. Tr. 12-15, 22) Consequently, the court finds and concludes that any calculation of damages based on lost production for the failure to timely provide a notice of transfer that includes the time period prior to March 1, 2014 is unsupportable for these reasons.

         The completion and filing of a notice of transfer acceptable to Leland Oil

         19. Following the court's entry of partial summary judgment concluding that the Azars were legally obligated to complete and file a notice of transfer and that Leland Oil and Bensun Energy had fulfilled their obligations to the Azars, the Azars completed a notice of transfer dated February 16, 2016, which was provided to counsel for Leland Oil and filed with the NDIC sometime in March 2016. As of the date of trial, the NDIC had not approved the transfer, but that approval was expected to be forthcoming shortly. Leland Oil agrees that the most recent notice of transfer was this time in proper form. (Ex. 15; Tr. Tr. 12-15, 22-23).

         The Azars have not disputed that Leland Oil was prohibited from commercially producing the Davis State and the Sullivan because the NDIC had not approved the transfer of the wells. In their posttrial briefing, the Azars contend that Leland Oil could have produced the oil and then marketed it through them. However, the Azars have not offered any evidence that they were willing to do so at the time. In fact, the evidence that the Azars were holding the completion of the administrative transfer ...


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