Leland Oil & Gas, LLC v. Marsha Azar & Saul Azar Dba Ill. Energy, & Bensun Energy, LLC

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.

Case No. 1:14-cv-161

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NORTH DAKOTA SOUTHWESTERN DIVISION

February 27, 2017

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

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 BensunEnergy 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, enteredan 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 butchanged 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 thewells 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...