Krystal Energy Company Incorporated v. Navajo Nation

Filing 17

ORDER adopting the bankruptcy judge's proposed findings of fact and conclusions of law and recommendation for a final judgment (doc. 1). Adopting the bankruptcy judge's award of attorneys' fees and costs and DENYING defendants' o bjections to the award (doc. 12). DENYING defendant's motion for de novo review and independent determination as moot 9 . The Clerk shall enter judgment for plaintiff and against defendant in the amount of $4,000,000, and shall award plaintiff $101,008.50 in attorneys' fees and $7,384.83 in costs. Signed by Judge Frederick J Martone on 5/24/12.(DMT)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Krystal Energy Co. Inc.,
Plaintiff,

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vs.

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The Navajo Nation,
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Defendant.
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CV 12-00079-PHX-FJM
CV 12-00282-PHX-FJM
BK 01-00166-GBN
AP 01-00171-GBN
ORDER

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The court has before it the bankruptcy judge's proposed findings of fact and

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conclusions of law and recommendation for issuance of a final judgment and order (doc. 1),

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defendant's objections (doc. 11), plaintiff's response (doc. 13), and defendant's reply (doc.

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9).1 Plaintiff filed an appendix containing the transcript of the bankruptcy court's damages

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hearing, selected exhibits, and related bankruptcy court rulings (doc. 15). We also have

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before us defendant's objections to the bankruptcy court's award of attorneys' fees and costs

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to plaintiff (doc. 12), plaintiff's response (doc. 14), and defendant's reply (doc. 16).
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This adversary proceeding concerns two oil well sites located on Navajo tribal land

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Rule 9033(b), Fed. R. Bankr. P. does not contemplate the filing of a reply in support
of a party's objections. Defendant also moves for de novo review. For the reasons discussed
below, this motion is unnecessary. We are already required to conduct a de novo review of
the bankruptcy judge's proposed findings. Fed. R. Bankr. P. 9033(d).

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near Farmington, New Mexico ("the New Mexico site") and Aneth, Utah ("the Utah site").

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Amoco leased the land and granted Cross Creek operating rights.2 In 1997, plaintiff met with

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Amoco, the Bureau of Indian Affairs ("BIA"), and defendant regarding Amoco's proposed

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transfer of operating rights from Cross Creek to plaintiff. Plaintiff paid Cross Creek

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approximately $400,000 for operating rights to both sites, took possession, and began

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operations in May 1997. The formal application for approval of the assignment was

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submitted.

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Plaintiff's operation of both sites continued without incident until 1999. That spring,

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the FBI seized plaintiff's business records as part of an investigation into alleged non-

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payment of taxes by other business entities owned by plaintiff's owners.3 Plaintiff was

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informed by the BIA on December 8, 1999 that assignment of the leases had been rejected

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by defendant. Amoco was instructed to immediately take over operation of the leases. Later

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that month, Navajo officials arrived at the Utah site. They evicted plaintiff's employee,

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emptied storage tanks containing oil, locked the gate, and told plaintiff's employee he could

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not return. The New Mexico site was also locked.

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Plaintiff filed for bankruptcy in the United States Bankruptcy Court for the District

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of Arizona in January 2001. Soon after, plaintiff filed an adversary proceeding against

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defendant. In 2004, the Ninth Circuit held that Congress expressly abrogated the sovereign

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immunity of Indian tribes in 11 U.S.C. § 106(a), permitting this action to proceed. See

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Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004). In January 2008,

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the bankruptcy judge granted partial summary judgment to plaintiff on the turnover of

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property claim and reserved ruling on the remaining claim for violation of the automatic stay.

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For a complete description of the facts and procedural history relating to the turnover
claim, see In re Krystal Energy Co., Inc., CV-08-178-PHX-MHM, 2008 WL 4446703 (D.
Ariz. Sept. 30, 2008).
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Plaintiff's vice-president, Bruce Nicholson, pled guilty to federal charges and spent
two years in prison. Despite plaintiff's attempts, it has been unable to recover the seized
business documents.
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Defendant filed an interlocutory appeal of the ruling, which this district affirmed. See In re

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Krystal Energy, 2008 WL 4446703, at *7.

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The bankruptcy judge held an evidentiary hearing on damages on June 27, 2011 (doc.

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15, ex. C). Plaintiff presented four witnesses. Jonny Bennett Jr., an oil and gas inspector,

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testified about the equipment he recalls seeing when performing inspections at the Utah and

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New Mexico sites. Carl Padilla, an oil equipment manufacturer, testified about his memory

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of the Utah site and his valuation of the equipment at both sites. George Cunningham, a

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certified appraiser, testified concerning his valuation of the property at both sites as of 1999,

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which he calculated to be $4,250,000. Finally, Bruce Nicholson, plaintiff's vice president,

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testified concerning the events leading up to plaintiff's ejection from the sites. Defendant

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presented Donald Ross, a certified appraiser, as its sole witness. Ross calculated the forced

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liquidation value in 2008 of the equipment at the New Mexico site as $8,300. Each witness

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was cross-examined and a number of exhibits were admitted. The parties submitted post-trial

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briefs.4

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On January 6, 2012, the bankruptcy judge issued his proposed findings of fact and

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conclusions of law pursuant to 28 U.S.C. § 157(c)(1). After an extensive discussion of the

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evidence presented at the hearing and the history of this action, the bankruptcy judge

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concluded that Cunningham's appraisal was "far more valuable in establishing the value for

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the operating assets as existing in place during December of 1999" than Ross's appraisal.

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Proposed Findings at 18. However, due to the uncertainty associated with the need to

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hypothetically appraise property at the Utah site, the bankruptcy judge reduced

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Cunningham's appraisal by $250,000 and recommended that we enter a final judgment in

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favor of plaintiff and against defendant in the amount of $4,000,000. In addition, he noted

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that plaintiff may apply to the bankruptcy court for an award of attorneys' fees.

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Plaintiff filed its motion for attorneys' fees (doc. 15, ex. H), to which defendant

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A time to present closing arguments was scheduled at the close of the evidentiary
hearing. Neither party provided this court with a transcript for this hearing, if it occurred.
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responded (doc. 15, ex. M) and plaintiff replied (doc. 15, ex. N). Defendant's sole objection

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was to the inclusion of fees for a period of time when the parties were having a discovery

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dispute. The bankruptcy judge awarded plaintiff $101,008.50 in attorneys' fees and

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$7,384.83 in costs on January 24, 2012 (doc. 15, ex. Q).

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II

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Defendant raises a number of objections to the bankruptcy judge's proposed findings

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of fact and conclusions of law concerning the damages award, which we address in turn.

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First, defendant objects to the bankruptcy judge's recitation of this court's standard of review

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in ¶ 6 of the conclusions of law. Proposed Findings at 17. The bankruptcy judge stated that

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while his conclusions of law are reviewed de novo, his findings of fact are not set aside

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unless clearly erroneous. But this is not a bankruptcy appeal under 28 U.S.C. § 158, to which

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Rule 8013, Fed. R. Bankr. P. applies. Instead, these are objections to a recommendation

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under 28 U.S.C. § 157(c)(1), to which Rule 9033(d), Fed. R. Bankr. P. applies. Thus, we

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must conduct a de novo review upon the record of proposed findings to which a party has

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"timely and specifically objected." 28 U.S.C. § 157(c)(1); see also Fed. R. Bankr. P.

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9033(d). In doing so, we must review the record. In re Castro, 919 F.2d 107, 108 (9th Cir.

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1990).
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Next, defendant objects to the use of George Cunningham's testimony to establish the

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proposed damages award. Specifically, defendant objects to consideration of Cunningham's

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valuation of well casings,5 which it argues renders the bankruptcy court's proposed findings

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"fatally inconsistent" with its liability ruling because plaintiff presented evidence of damages

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beyond the value of property actually removed from the sites. Objection at 8. We disagree.

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In affirming the bankruptcy judge's grant of summary judgment on the turnover claim,

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the district court found that the "uncontroverted facts" established that defendant evicted

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Well casing is steel pipe that is placed into an oil well. Tubing is placed inside the
casing, which attaches to a pump jack that pumps oil up through the tubing. Tr. at 52:2153:19.
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plaintiff from both well sites, took property belonging to plaintiff, and locked the well sites,

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telling plaintiff that it could not return. In re Krystal Energy, 2008 WL 4446703, at *6.

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Because both sites were located on Navajo land and secured by defendant, any property left

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on the sites was necessarily "in possession, custody, or control" of defendant. See 11 U.S.C.

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§ 542(a). Pursuant to § 542(a), defendant was required to deliver that property to the trustee.

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In re Del Mission Ltd., 98 F.3d 1147, 1151 (9th Cir. 1996). In granting summary judgment

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to plaintiff, the bankruptcy judge found that defendant's "ejectment and exclusion of

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[plaintiff] from both sites without the opportunity to remove its equipment was found to

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create liability for return of the property or its value." Proposed Findings at 3. The district

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court cited this conclusion with approval. "Indeed, as the [bankruptcy judge] remarked. . .

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'as long as it's proper you can eject someone from your property, but that doesn't mean you

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get to keep the property that that person has brought onto the property.'" In re Krystal

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Energy, 2008 WL 4446703, at *6. The bankruptcy judge found (and defendant has not

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disputed) that defendant neither let plaintiff remove its equipment from the sites nor let

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plaintiff sell the equipment in place. Proposed Findings at 18. Thus, it was proper for

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plaintiff to present evidence of the value of property remaining at the sites, because

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defendant was found liable for the value of any property that it did not return. See id. at 3.

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IV

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Defendant next objects to the bankruptcy judge's admission of the valuation reports

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and opinions of Padilla and Cunningham and his calculation of damages at ¶ 8 of the

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conclusions of law. Proposed Findings at 18. Defendant's objection to the admission of the

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opinions and reports is unclear. To the extent that this is a specific objection requiring de

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novo review, we note that defendant did not object at the hearing to either Cunningham's

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tender as an expert, Tr. at 82:1-3, or to the admission of his report. Tr. at 93:11-15. It was

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permissible to permit Cunningham to testify as an expert and to admit his report when there

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was no objection. It was also reasonable to permit Padilla to testify and admit his report.

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Padilla has been an oil equipment manufacturer since approximately 1990. He was asked by

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plaintiff to conduct a market valuation of the equipment at the Utah and New Mexico sites
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in 2009. The bankruptcy judge reasonably permitted Padilla to testify based on his

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experience, and reasonably concluded that Padilla's testimony was helpful to corroborate

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Cunningham's findings, although it was not as persuasive as an opinion of a certified

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appraiser. The admission of Padilla's opinions and report and the assignment of weight to

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Padilla's testimony were proper.

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Next, defendant objects to the bankruptcy judge's calculation of damages. It argues

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that there was no evidence presented by plaintiff to show that it had property rights in any

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of the property located at the Utah and New Mexico sites. Specifically, defendant argues that

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plaintiff had no rights in the well casings at either site, items to which Cunningham attributed

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a total value of $2,900,000. According to defendant, plaintiff's failure to introduce evidence

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of its property rights at the damages hearing means that it did not meet its burden of proof

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for the turnover claim, and warrants entering judgment on defendant's behalf.

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But the district court already affirmed the bankruptcy judge's ruling that found

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defendant liable to plaintiff on the turnover claim. Indeed, the exact questions defendant

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presented on appeal were (1) whether the bankruptcy court "erroneously determined that

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[plaintiff's] property was in the possession, custody or control of [defendant] under 11 U.S.C.

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§ 542(a);" and (2) whether the bankruptcy court "erroneously determined that [plaintiff]

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possessed a legal or equitable interest in the property to be turned over and accounted for."

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In re Krystal Energy, 2008 WL 4446703, at *3. This district affirmed. Id. at *7. Moreover,

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plaintiff's witnesses testified at the damages hearing about the equipment they personally

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observed while plaintiff operated the sites. Bennett described the equipment he remembered

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seeing at each site. Proposed Findings at 3-5. Padilla visited the Utah site during its

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operation and the New Mexico site in 2009 and described the equipment he remembers. Id.

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at 6-7. Cunningham conducted interviews to learn what items were at the Utah site, and took

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photographs of both sites during his 2007 visits. Id. at 9-10. Finally, Nicholson testified that

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he visited the Utah site at least thirty times and remembers seeing the equipment listed in

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Padilla's report. Tr. at 158:17-159:7.

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Notably, defendant introduced no evidence to establish that anyone other than plaintiff
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owned the on-site equipment, or that plaintiff had no right to remove the well casings.

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Instead, defendant now urges us to admit the Utah and New Mexico leases, which defendant

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argues expressly provide that well casings become the defendant's property when the lease

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terminates (doc. 11, exs. F & G). We may receive further evidence when reviewing a

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bankruptcy judge's proposed findings. Fed. R. Bankr. P. 9033(d). Expansion of the record

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may be appropriate in situations where evidence is newly discovered, or where a party was

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not provided with a full and fair opportunity to present its case in bankruptcy court. But

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these are defendant's own leases, and they are from the 1950s. And our review of the hearing

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transcript reveals that defendant was provided with a full and fair opportunity to present

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witnesses and evidence. For whatever reason, it chose not to admit the leases, and it chose

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not to call witnesses to testify about whether plaintiff could remove the well casings. A post-

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hearing change in strategy does not justify the re-opening of the record in this decade-long

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adversary proceeding.

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This district affirmed defendant's liability on the turnover claim in 2008. Defendant

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introduced no evidence at the 2011 damages hearing to suggest that anyone other than

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plaintiff owned the equipment located at the New Mexico and Utah sites. Accordingly,

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damages were appropriately entered in plaintiff's favor, and it was appropriate to consider

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the well casings when calculating value.

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V

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Next, defendant again objects to the admission of Padilla's valuation testimony and

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to the valuation finding at ¶ 8 of the conclusions of law. Proposed Findings at 18. Although

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defendant concedes that the bankruptcy judge did not base his conclusions solely on Padilla's

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testimony, it argues that Padilla's testimony was irrelevant because it contemplated

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replacement cost rather than 1999 value. We disagree.

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The bankruptcy judge admitted Padilla's opinions and report over objection, although

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he noted that he would later determine what weight he would give Padilla's testimony. Tr.

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at 40:9-17. He thoughtfully considered and discussed the limitations of Padilla's valuation

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opinion, including his lack of appraisal credentials and his utilization of current rather than
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1999 values. The bankruptcy judge found Padilla's opinions to be credible, but noted that

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they did not equate to those of an experienced appraiser. He concluded that Cunningham's

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appraisal was supported by Padilla's extensive experience. Proposed Findings at 18.

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Although Padilla did not offer an opinion of 1999 value, his opinion concerning the kind and

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amount of equipment that would be present at both sites is consistent with the kind and

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amount of equipment in Cunningham's report. Based on these facts, it was reasonable to

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conclude that Padilla's testimony supported Cunningham's valuation.
VI

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Defendant again objects to the admission of Cunningham's opinion. As discussed

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above, defendant did not object to the admission of Cunningham's testimony or report at the

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hearing. Defendant also objects to the bankruptcy judge's summary of Cunningham's

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testimony in ¶¶ 11-13 of the findings of fact. It is unclear what defendant feels was incorrect.

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However, we are satisfied after reviewing the transcript that the bankruptcy judge accurately

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summarized Cunningham's testimony.

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Defendant also objects to the bankruptcy judge's reliance on Cunningham's calculation

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of "fair market value in continued use." Defendant argues that Cunningham's valuation is

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improper because it assumes that the wells would continue to operate. On cross examination,

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Cunningham acknowledged that the equipment would only have a "market value" if plaintiff

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was no longer permitted to operate the wells and was ejected from the property. Tr. at 106:1-

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9. Although Cunningham acknowledged that the value of removed property would be less

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than "market value in continued use," he testified that it would not be that much less. It

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would be less to the degree of transportation and installation. Tr. at 114:10-19. By contrast,

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defendant offered no evidence to rebut Cunningham's calculation of 1999 "fair market value

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in continued use," or to establish "market value." Its only witness, Donald Ross, provided

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a 2008 forced liquidation value of the New Mexico site. The bankruptcy judge noted that

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Ross had "no opinion regarding the value as of December of 1999." Proposed Findings at

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Next, defendant repeats its argument that there was no evidence that plaintiff had any
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property rights in the well casings. For the reasons discussed above, we find this argument

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unpersuasive.

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Finally, defendant argues that plaintiff is judicially estopped from arguing that its

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property is worth $4,000,000, because it stated on its bankruptcy schedules that the value of

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its oil equipment was $400,000. Judicial estoppel prevents a party from asserting a position,

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then later obtaining an advantage by taking a "clearly inconsistent position." Hamilton v.

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State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001). We may consider whether

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the party asserting an inconsistent position "would derive an unfair advantage or impose an

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unfair detriment on the opposing party if not estopped."

Id. at 783.

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Judicial estoppel is not applicable here. First, it is not clear that plaintiff's original

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position as to the value of its property (made at a time when it had been denied access to the

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sites) is clearly inconsistent with its current assertions of value. Evidence presented at the

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hearing suggests that $400,000 - the amount that plaintiff spent in 1997 to purchase the

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operating rights - may not reflect the property's true value in 1999.6 Even if the positions are

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clearly inconsistent, plaintiff would not obtain an unfair advantage if not estopped.

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Defendant's liability in this case was caused by its own actions: it failed to return property

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to plaintiff. It is fair to permit an aggrieved plaintiff to submit a value calculation prepared

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by a neutral appraiser when the very damages it seeks to calculate were caused by the

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defendant. Moreover, defendant had an opportunity to challenge plaintiff's proposed

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valuation at the hearing.

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The bankruptcy judge ultimately discounted Cunningham's valuation of $4,250,000

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by $250,000 to account for the uncertainty generated by Cunningham's hypothetic valuation

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of the Utah site. He acknowledged that this uncertainty was caused in part by the plaintiff,

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who was unable to produce business records to confirm the exact equipment owned at each

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site. Even assuming that market value is the correct valuation, because defendant presented

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For example, Nicholson testified that plaintiff was continually making improvements
at the sites, and could have spent hundreds of thousands of dollars on replacing and
improving equipment. Tr. at 145:11-147:9.
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no evidence to establish 1999 market value, we cannot conclude that the market value

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approach would have required a greater discount than that already applied by the bankruptcy

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judge. Thus, based on our consideration of the proposed findings and our de novo review of

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defendant's objections, we adopt the bankruptcy judge's proposed judgment of $4,000,000.

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VII

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Defendant objects to the bankruptcy judge's order awarding plaintiff its fees and costs.

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It argues that because we must conduct a de novo review of the bankruptcy judge's

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proposed judgment for the turnover claim, there is not yet a prevailing party. Accordingly,

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defendant asks that we conduct a de novo review of the bankruptcy judge's award of fees and

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costs.

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Even under de novo review, however, we agree that an award of fees and costs is

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appropriate in this case. Plaintiff argued in its motion for attorneys' fees and costs that

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defendant's violation of the turnover requirements amounts to a violation of the automatic

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stay, thus entitling it to fees. Plaintiff further argued that it was entitled to fees under A.R.S.

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§ 12-341.01, as this action arose out of a contract between plaintiff and defendant (doc. 15,

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ex. H). Defendant responded, raising as its sole objection that plaintiff should not be

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awarded fees incurred between February 2009 and October 2009 because of a discovery

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dispute (doc. 15, ex. M). After subtracting these amounts, the bankruptcy judge awarded

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plaintiff its fees and costs pursuant to A.R.S. §§ 12-341.01 and 12-341 and 11 U.S.C. §§

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362(k)(1) and 105 (doc. 15, ex. Q).

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Defendant now argues that an award of fees and costs is unavailable under either 11

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U.S.C. § 362(k) or A.R.S. § 12-341.01. Defendant did not raise these objections in a timely

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matter in the bankruptcy court. Based on the record, we agree with the bankruptcy judge's

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award, which was unopposed (with the exception of plaintiff's fees incurred during the

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discovery dispute). Moreover, although damages are only available to an individual debtor

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under 11 U.S.C. § 362 for violation of an automatic stay, they are available under 11 U.S.C.

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§ 105(a) as a sanction. See In re Pace, 67 F.3d 187, 192-93 (9th Cir. 1995); In re Cascade

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Roads, Inc., 34 F.3d 756, 767 (9th Cir. 1994). A violation of 11 U.S.C. § 542(a), for which
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defendant has already been found liable by both the bankruptcy court and this district,

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constitutes a violation of the automatic stay. In re Del Mission, 98 F.3d at 1151. The award

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of fees was therefore justified under § 105(a).

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Defendant has not objected to the amount of fees and costs. Accordingly, we award
plaintiff $101,008.50 in attorneys' fees and $7,384.83 in costs.
VIII

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IT IS ORDERED adopting the bankruptcy judge's proposed findings of fact and

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conclusions of law and recommendation for a final judgment (doc. 1). IT IS FURTHER

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ORDERED adopting the bankruptcy judge's award of attorneys' fees and costs and

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DENYING defendants' objections to the award (doc. 12). IT IS ORDERED DENYING

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defendant's motion for de novo review and independent determination as moot (doc. 9).

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The Clerk shall enter judgment for plaintiff and against defendant in the amount of

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$4,000,000, and shall award plaintiff $101,008.50 in attorneys' fees and $7,384.83 in costs.

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DATED this 24th day of May, 2012.

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