Date: 07-18-2014

Case Style: EOR Domestic, LLC v. David Shroff, Avondale Operating Co. and Excalibur XYZ, Inc.

Case Number: CJ-2011-1842

Judge: Mary Fitzgerald

Court: District Court, Tulsa County, Oklahoma

Plaintiff's Attorney: Bruce Freeman, Scott Hathaway and Chris Warzecha for EOR

Defendant's Attorney: Joe Hull for the Defendants

Description: EOR Domestic, LLC v. David Shroff, Avondale Operating Co. and Excalibur XYZ, Inc.

Issue # 1.
Issue: INJUNCTION / RESTRAINING ORDER (INJUNCT)
Filed by: EOR DOMESTIC LLC
Filed Date: 03/31/2011
Party Name: Disposition Information:

Defendant: AVONDALE OPERATING CO
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: EXCALIBUR XYZ INC
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: SHROFF, DAVID
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Issue # 2.
Issue: OTHER (INJUNCTION TO REMOVE OPERATOR) (OTHER)
Filed by: EOR DOMESTIC LLC
Filed Date: 03/31/2011
Party Name: Disposition Information:

Defendant: AVONDALE OPERATING CO
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: EXCALIBUR XYZ INC
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: SHROFF, DAVID
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Issue # 3.
Issue: OTHER ( ACCOUNTING) (OTHER)
Filed by: EOR DOMESTIC LLC
Filed Date: 03/31/2011
Party Name: Disposition Information:

Defendant: AVONDALE OPERATING CO
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: EXCALIBUR XYZ INC
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: SHROFF, DAVID
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Issue # 4.
Issue: BREACH OF FIDUCIARY DUTY (DUTY)
Filed by: EOR DOMESTIC LLC
Filed Date: 03/31/2011
Party Name: Disposition Information:

Defendant: AVONDALE OPERATING CO
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: EXCALIBUR XYZ INC
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Defendant: SHROFF, DAVID
Disposed: DISMISSED - WITH PREJUDICE, 07/18/2014. Dismissed- Settled.

Issue # 5.
Issue: COUNTERCLAIM - MISREPRESENTATION & FRAUD (FRAUD)
Filed by: EXCALIBUR XYZ INC
Filed Date: 02/24/2014
Party Name: Disposition Information:

Plaintiff: EOR DOMESTIC LLC
Disposed: DISMISSED - WITH PREJUDICE, 07/17/2014. Dismissed- Settled.

According to the Defendants:

This action arises from a Purchase and Sale Agreement (“PSA2” as defined in Section II of this Response) between Excalibur, Inc. (hereinafter, “Excalibur” or “Seller”) and EOR Domestic, LLC (hereinafter “EOR” or “Buyer”) through which EOR agreed to purchase an
undivided seventy-five percent (75%) interest in certain oil and gas properties known as the “Cottonwood Red Fork Sand Unit” (“CRSU” or “Cottonwood) located in Creek County, Oklahoma. Excalibur and EOR agreed that the CRSU interest would be transferred in increments to EOR in exchange for EOR’ s installment payments made in accordance with a Payment Schedule incorporated into PSA2. EOR received a 13.75% interest in the CRSU upon closing of the PSA2. Due to EOR’s business decision to immediately use most of its investment funds for drilling an ill-advised (and “dry”) well on the CRSU (despite the existence of over 90 wells already existing on the CRSU), EOR was thereafter out of investment capital and unable to make its subsequent installment payments under PSA2. Rather than endure the consequences of its non-performance under PSA2, EOR filed this lawsuit based upon an immaterial (and completely curable) issue with respect to the proper identity of the seller in the PSA2. Relying upon the de minimus (and immaterial) error that the seller was noted in the PSA2 as “Excalibur, Inc.” (and not “Excalibur XYZ, Inc.”), EOR would have this Court exercise one of its “most extraordinary powers”2 to completely undo a $4,000,000.00 contract, the material terms of which were: (a) agreed upon; (b) reduced to writing by attorneys hired by both seller and buyer; and (c) signed by the parties’ respective representatives.
Sensing an opportunity to avoid its inevitable breach of the PSA2, EOR filed suit against Excalibur and others in Tulsa County seeking to: (i) declare the PSA2 void; (ii) rescind it; or (iii) in the alternative, recover money damages under the PSA2 against Excalibur.
EOR’s rescission claim fails upon the actual evidence. EOR cannot establish the evidence necessary to carry the burden of a successful rescission claim: (a) there was no material breach of the PSA2; (b) EOR was not induced to enter into the PSA2 through any fraud, duress, menace or undue influence; (c) EOR has repeatedly affirmed and ratified the PSA2; (d) EOR is seeking equitable relief while having acted inequitably and with unclean hands; and (e)
PSA2, at best, should be reformed to fulfill the obvious intent of the parties, which is preferred under Oklahoma law over rescission.
EOR’s Motion for Partial Summary Judgment holds no weight and should be denied.
II. STATEMENT OF MATERIAL FACTS ESTABLISHING CONTROVERSY
WITH PLAINTIFF’S STATEMENT OF FACTS
1. On May 28, 2010, Excalibur and EOR entered into a Purchase and Sale
Agreement (“PSA1”) wherein Seller agreed to sell to Buyer a 75% Working Interest (the “WI”) in and to the CRSU. (See Purchase & Sale Agreement dated May 28, 2010, attached hereto as Tab 1).
2. At all times pertinent hereto, the principal party acting on behalf of Seller in the transaction of the CRSU was Dave Shroff. (See Affidavit of Dave Shroff, attached hereto as Tab 2).
3. At all times pertinent hereto, James Somers (“Somers”) was a managing member
of EOR, sharing that responsibility with CEO, Curtis Overstreet (“Overstreet”), and Somers and
Overstreet were the individuals representing Buyer until sometime in early January, 2011, when
Overstreet resigned. (See Deposition of James Somers attached hereto as Tab 3, at PP. 75, 11. 22-
25; P. 76, 11. 1-4).
4. At the time of PSA1 and at all other times pertinent hereto, up to the 21st day of January, 2013, the defendant Avondale Operating Company, Inc. (“AOC”) was the duly certified operator of the CRSU by the Oklahoma Corporation Commission (“0CC”) under the authority of Tit. 52 O.S. §3 18.1 A.
5. In advance of the its execution of the PSA 1, EOR engaged the services of at least one law firm/lawyer to perform due diligence inspections and title review, to ensure all conditions required by Buyer as to the title to the WI were met and the transaction was acceptable to Buyer. (See Somers Deposition, Tab 3 at PP. 105).
6. Soon after PSA1 was executed, EOR defaulted on an installment payment and sought an extension of the due date from Excalibur. (See Somers Deposition, Tab 3 at PP. 115, 117, 11. 22-25; andPP. 118-119, 11. 1-8).
7. As a result of EOR’s default, the parties entered into a Memoandum of Understanding on the 1S day of July, 2010, (“MOU”) wherein the due date of the missed payment was extended by Seller, in consideration for EOR paying a monthly penalty. (See Memorandum of Understanding, attached hereto as Tab 4).
8. By October 7, 2010, none of the several installment payments due under the PSA1 had been made to Seller, nor had the penalty payments required in the MOU been met. (See Shroff Affidavit, Tab 2; and See Somers Deposition, Tab 3 at PP. 135, 11. 2-14).
9. On October 7, 2010, the seller and buyer entered into an amendment to the PSA1, with, yet again, new installment payment dates and new installment amounts. (See Amendment to PSA1, attached hereto as Tab 5).
10. By mid-November, 2010, none of the payments required in the October 7, 2010 amendment to the PSA1 had been paid, and once again EOR was in default. (See Somers Deposition, Tab 3 at PP. 137, 11. 24-25 (referring to deposition Exhibit 9); and PP. 138 — 139, Il.
1-5).
11. On December 21, 2010, Excalibur and EOR entered into a Purchase and Sale Agreement (“PSA2”) whereby EOR agreed to purchase from Seller for the same price as was to be paid pursuant to PSA1, but with a new Payment Schedule. (See Purchase and Sale agreement, dated December 21, 2010, attached hereto as Tab 6).
12. In advance of the execution of the PSA2, EOR engaged the services of at least one lawyer/law firm to conduct its due diligence, and title examination. Reflecting EOR’ s lawyer’s finding that a third party “EIG Petroleum, LLC” (hereinafter, “EIG”) was shown as the record owner of the WI, a provision was inserted in the PSA2 for the delivery at closing of an assignment of all of EIG’ s interest in and to the WI from EIG to Seller. (See PSA2, Tab 6 at ¶8) and (See also EIG Assignment to Seller, attached hereto as Tab 6a).
13. As an inducement to Seller to enter into the PSA2, and to once again extend the payments on the purchase price, EOR agreed to fund the operations of the CRSU with specific payments to be made on dates certain, to the operator of the CRSU, AOC. (See, PSA2, Tab 6, at ¶J4, 5 & 6(a)).
14. As an inducement to Excalibur to enter into the PSA2, EOR also agreed, as additional security for the payments due under the contract, to grant to the Seller, an option (“Option”) to sell all of the subject 75% working interest, including any interests assigned to EOR under the PSA2, in the event of another default. (See PSA 2, Tab 6, at ¶ 2(f)).
15. At the closing of PSA2, EOR obtained a 13.75% interest in the Mineral Interests of the CRSU. (See PSA2, Tab 6, at Pg. 3, ¶ 3(a)). Transfer of the remainder of the Mineral Interests in the CRSU (i.e., 61.25%) was conditioned on EOR’s payment of installments as agreed in the PSA, with the next installment due May 15, 2011. (See PSA2, Tab 6, at ¶ 3(b)-(f)).
16. The initial payment ($300,000.00) required to be made by EOR at closing, together with the first installment payment (which was due in February, 2011) were paid to Excalibur XYZ, Inc. which was the agreed entity for the acceptance of the payments under the PSA2. (See PSA2, Tab 6, at ¶ 18).
17. As president of Excalibur XYZ, Inc. and Excalibur, Inc. Dave Shroff signed the respective receipts for the payment made at closing and in February 2011. (See Receipts, attached hereto as Tab 6b).
18. On or about the same date of the execution of the PSA2, the parties entered into a Farmout Agreement for the drilling of a well on the CRSU. (See Farmout Agreement, attached hereto as Tab 6c).
19. The fact that over 90 wells existed on the CRSU and that the rework and workovers of those wells had been well-known by the parties and, in fact, a focal point of the PSA2 (See PSA2, Tab 6, at ¶J 4-5) evidences that the Seller and AOC had concerns about the wisdom of EOR drilling another well as distinguished from reworking those already drilled at a much lower expense. (See Shroff Affidavit, Tab 2).
20. Somers, on the behalf of EOR, insisted that he knew a person who had a “little black box” which he said would find oil, and that the box had found the oil at the Farmout well location. His expectations of production were in the vicinity of some 2000 barrels of oil per day. (See Somers Deposition, Tab 3 at PP. 39, 40, 11. 1-4; and P. 59, 11. 22-25; and P. 60-61; and P. 84, 11. 1-8).
21. As Operator of the CRSU, AOC was in charge of oversight and assurances that all bills related to the drilling of the Farmout Well were paid so as to prevent the imposition of liens. (See Affidavit of R.J. Abercrombie, attached hereto as Tab 7).
22. In conflict with the recommendations and advice of the Seller and AOC, which included the fact that most of the producing wells in the CRSU did not make more than 10 barrels per day, EOR (armed with its “black box” findings) commenced the Farmout well in January, 2011. (See Shroff Affidavit, Tab 2).
23. Although the first installment purportedly made by EOR for rework expenses was tendered as per the PSA2, on or about the day of Closing, EOR refused and failed to make payments in addition to that amount for the drilling of the Farmout well. EOR’s breach with respect to drilling expenses required AOC to disburse the money paid by EOR for rework expenses required under PSA2, to the drilling operations on the Farmout well, thereby rendering rework efforts agreed to be funded by EOR in the PSA2, to be abandoned, and further, broadening the effect of EOR’s default under the PSA2. (See Abercrombie Affidavit, Tab 7).
24. EOR’s second installment for rework expenses, which was due and owing under PSA2 on the 15th of February, 2011, was not timely paid by EOR. (See Abercrombie Affidavit, Tab 7).
25. In mid-February 2011, it became apparent to Dave Shroff that neither payment for the completion costs for the drilling operations undertaken under the Farmout Agreement for the benefit of EOR, nor the re-work installments under the PSA2, nor the installment payment due May 15, 2011 of $500,000.00 were going to be made by EOR. (See Shroff Affidavit, Tab
2).
26. Consequently, on February 18, 2011, principals on behalf of EOR met with Shroff and Abercrombie; and as an inducement to gain their authority to go forward with the completion of the Fannout well, EOR assured Shroff and AOC that the drilling costs would be paid, and all amounts due under the PSA2 would be timely paid, including the $500,000 payment due and owing on May 15, 2011. In reliance upon these assurances, AOC and Shroff authorized the completion of the final stages of the drilling of the Farmout well; yet the costs of the final drilling and completion were not voluntarily paid by EOR. (See Shroff Affidavit, Tab 2).
27. Notwithstanding the admonitions of the Seller and AOC and the assurances of the accuracies of the “little black box” in finding oil, the Farmout Well produced more water than oil and did not produce in commercial quantities. (See Abererombie Affidavit, Tab 7).
28. On March 4, 2011, Patrick Waddell, then attorney for EOR received a letter from
the attorney for Excalibur and AOC (Joseph Hull) informing him of the default in the various
payments due under the PSA2, and warning him on behalf of his client, EOR, that if the
payments were not made, the Option granted to the Seller in the PSA2, (referenced in Paragraph
13, above) would be executed. (See Default Letter dated March 4, 2011, attached hereto as Tab
8).
29. Following the Default Letter, a meeting was held between counsel on the 8th of March, 2011. All payments past due under the PSA2 were discussed as were those unpaid drilling expenses for the Farmout well. The parties also discussed the fact that the disappointing results of the drilling effort on the Farmout Well had affected the relations between his client EOR and its investors in the WI under the PSA2. (See Follow-Up Letter from Mr. Hull to Mr.
Waddell, attached hereto as Tab 9).
30. Following the Follow-Up Letter being sent, EOR representatives began efforts to disparage, and defame the professional name of AOC and Abererombie as operator of oil and gas interests, including the CRSU, by false representations to the drilling contractor for the Farmout well and to the 0CC. Mr. Somers was (erroneously) convinced that the Farmout well could produce more oil and it was the operator and Abercrombie who had caused the low production. (See Somers deposition, Tab 3 at P. 98, 11. 6-22).
31. On March l4, 2011, counsel for AOC and the Seller, sent a letter to the attorney for EOR seeking his assistance in curtailing the EOR efforts through Mr. Somers to disparage AOC and interfere in the business relationships it had with the 0CC and the drilling contractor. (See Hull Letter to Waddell dated March 14, 2011, attached hereto as Tab 10).
32. Shortly after the execution of the PSA2, EOR representatives including Somers, who had virtually no field experience in oil and gas operations, (See Letter to Judge Nightingale, attached hereto as Tab 11) entered the CRSU and began workover operations on certain of the wells, in direct disregard for the position of AOC as Operator of that unit and in violation of Tit. 52 0.5. § 138.1A. (See Abercrombie Affidav_jt, Tab 7).
33. AOC reacted aggressively by admonishing Somers to cease any further trespasses upon the CRSU for the purpose of conducting any type of rework or workover operations. (See Petition filed in CJ-201 1-33 1, attached hereto as Tab 12).
34. On March 31, 2011, EOR filed a Petition in CJ-2011-1842 seeking the removal of AOC as the Operator of the CRSU. (See March 2011 Petition, attached hereto as Tab 13). EOR further sought the immediate issuance of a temporary restraining order against AOC receiving the $30,000.00 in monthly operating fees provided under the PSA2, which were to have come from EOR, but which it had not paid and were included in the default warning to EOR counsel (see paragraph 28 above) and from payment for operations of the CRSU without EOR approval. (See March 2011 Petition, Tab 13).
35. As the May 15th 2011 date for the required payment of the $500,000.00 installment under the PSA2 drew nearer, all funding raised for the purchase of the WI had been spent on the payments made to that date for the WI purchase, and on “drilling” and “workovers.” (See Somers Deposition, Tab 3 at P. 76, 11. 6-25; and P. 77, 11. 1-2).
36. Facing the threat of the exercise of the Option, (see paragraph 13 and 28 above), on the 13th day of May, 2011 —just 2 days before its inevitable default of the May 15th, 2011 installment payment — EOR filed its Amended Petition herein, seeking for the first time, the equitable remedy of rescission against Excalibur, Inc. on the premise that at the time of the execution of the PSA2, “Excalibur, Inc.” was suspended under Tit. 68 O.S. §1212 (failure to pay franchise taxes) and for that reason, all representations in the PSA2 related to the authority of Shroff to enter into the agreement were false and “fraudulent.” (See Amended Petition, attached hereto as Tab 17).
37. Two days following the filing of the Amended Petition, in which the assignment of the 13.75% of 75% WI was “tendered back” (See Amended Petition, Tab 17, at ¶ 55), the former attorney for EOR contacted the house counsel for Pacer Energy Marketing, LLC (“Pacer”), an oil and gas purchaser which was purchasing oil through AOC from the CRSU. With his letter, counsel for EOR attached a copy of the filed Amended Petition, and characterized the allegations therein in a way that intimidated Pacer by instilling in it the belief that further disbursements of oil purchase proceeds from the CRSU would be actionable.
According to counsel for Pacer, the letter was a threat to Pacer with being joined into this lawsuit if it continued to disburse the oil proceeds to AOC as operator of the CRSU. (See Waddell Letter to Pacer and Pacer Email, attached hereto as Tab 18 and Tab 18a).
38. Without the oil revenues to apply to operating costs of the CRSU, the viability of the CRSU was substantially at risk. (See Abercrombie Affidavit, Tab 7).
39. Consequently, it was imperative that suit be filed by AOC, to clear Pacer of the EOR threat of litigation so that the revenue held in suspense, would be released. On May 25, 2011, AOC filed suit. (See Pacer Petition, attached hereto as Tab 19).
40. In a hearing on the issue of the elimination of the hold on the CRSU proceeds by Pacer, Mr. Balman, the former attorney for EOR (partners with Mr. Waddell), proclaimed the position of EOR was that it claimed no interest in the funds held in suspense, and acted as though he did not understand why suit had to be filed or why his client had to be involved. At the hearing, on the behalf of EOR, Mr. Balman (referring to PSA2) further explained to the Court EOR’s position in this matter:
“. . .we want to rescind that agreement, it would be inconsistent for EOR to ask for a share of the proceeds from daily production. So, we aren’t the problem with respect to the sales that are being made and with respect to Pacer. We don’t claim an interest in the daily proceeds.”
(See Transcript of Hearing, dated June 3, 2011, attached hereto as Tab 20)(emphasis added).
41. Shortly after the revelation was made in a hearing on the injunctive relief sought in the Petition, that “Excalibur, Inc.” was suspended, an investigation of the entity took place on the part of the attorneys for Shroff. It was at that time that it was learned that the “Excalibur, Inc.” existing of record with the Oklahoma Secretary of State, was not the “Excalibur, Inc.” that Shroff was told by his former attorney he had formed. It was an entity owned by an unknown third party (See Shroff Affidavit, attached hereto as Tab 21).
42. As a result of Excalibur, Inc.’s suspension, in a sense, Shroff became obligated as the “Seller” under the PSA2, to perform in place of Excalibur. See EOR v. Shroff 300 P3d 759, at ¶11 (citing McNitt vs. Economopoulos, 23 P.3d 983).
43. Further, PSA2 provides at ¶17 the following provision:
“17. Further Assurances, Intent: It is Seller’s intent to convey to Buyer an undivided Seventy-Five Percent (75%) .. . equitable interest in an to the Properties, . . . Seller agrees to execute and deliver to Buyer all instruments, conveyances, and other documents and to do such other acts not inconsistent with this Agreement as may be necessary to carry out Seller’s intent.”
(See PSA2, Tab 6, Pg. 12 at ¶17).
44. Consistent with the ¶17 obligation, effective the 11th day of April, 2011, Dave Shroff dlb/a assigned the PSA2 to Excalibur XYZ, Inc. (See XYZ Assignment, attached hereto as Tab 22).
45. In addition, consistent with the ¶17 obligation, on the 10th of May, 2011 — and three (3) days before the Amended Petition was filed by EOR — EIG, the former owner of the WI, filed its Correctional Assignment, Bill of Sale and Conveyance to Excalibur, XYZ, Inc. (See EIG Assignment, attached hereto as Tab 23).
46. Consistent with the ¶17 obligation, on the same date, Excalibur XYZ, Inc. filed its Correctional Assignment, Bill of Sale and Conveyance to EOR. (See Correctional Assignment to EOR, attached hereto as Tab 24).
47. Consistent with the ¶17 obligation, on the 10th of June, 2011, Dave Shroff d/bla Excalibur, Inc. executed a Quit Claim Deed to Excalibur XYZ, Inc. conveying all rights, title and interest in the WI. (See XYZ Ouit Claim D_ççj attached hereto as Tab 25).6
48. In 2011, CVR Energy, LLC (“CVR”) was engaged in purchasing oil from AOC as operator for the CRSU. Notwithstanding the statement made by Mr. Balman on June 3, 2011, in open court (set forth above at paragraph 40), after that statement was made, EOR, through Mr. Somers, sent an email to representatives of CVR — (relying on the XYZ Assignment, the EIG Assignment and the Correctional Assignment as proof of EOR’s ownership in the 13.75%) — seeking the suspension of all proceeds attributable to the 13.75% WI of the CRSU. EOR asserted its rights in and to the proceeds despite its attorney’s (Mr. Balman) previous statements on the record that to seek proceeds from the sale of oil from the CRSU “would be inconsistent” with EOR’s request for the remedy of rescission. (See CVR Email, attached hereto as Tab 26).
49. CVR granted EOR’s request, as made in the CVR email, and suspended 100% of the proceeds from the sale of oil from the CRSU. (See Pacer Interference Email, 2Qjj, attached hereto as Tab 27).
50. Remarkably, notwithstanding the statement made by Mr. Balman on June 3, 2011, in open court (set forth above at paragraph 40), EOR, through Mr. Somers — on December 8, 2011, sent an email to representatives of Pacer Energy Marking, EEC (the same “Pacer” involved in the lawsuit which had to be filed because of the previous attempted interference by EOR with its contract in May 2011) (See paragraph 3 7-40, above) — once again, contacted Pacer;
this time by and through an email to representatives of Pacer. (See Pacer Interference Email, attached hereto as Tab 28).
51. And, once again, relying on the PSA2, and the Correctional Conveyance Instruments as definitive proof of EOR’s ownership in 13.75% of the CRSU, EOR sought to convince Pacer to suspend all sale proceeds attributable to the 13.75% WI of the CRSU. EOR, once again, asserted its rights in and to the sale proceeds despite its attorney’s (Mr. Balman) previous statements on the record on June 3, 2011 confirming that to seek proceeds from the sale of oil from the CRSU “would be inconsistent” with EOR’s request for the remedy of rescission. (See Pacer Interference Email, Tab 27).
52. On February 1, 2012, Somers made report to the Creek County Sheriff’s Office that an independent tanker trucker was stealing oil from CRSU. (See Incident Report dated February 1, 2012, attached hereto as Tab 28).

Outcome: Settled and dismissed with prejudice.

Plaintiff's Experts:

Defendant's Experts:

Comments: