Shuler Drilling Company, Inc. v. Southern Management Services, Inc.

Filing 44

FINDINGS OF FACT AND CONCLUSIONS OF LAW. Signed by Honorable Susan O. Hickey on November 25, 2014. (cnn)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
EL DORADO DIVISION

SHULER DRILLING COMPANY, INC.
PLAINTIFF
V.

Case No. 11-CV-1049

SOUTHERN MANAGEMENT SERVICES, INC.

DEFENDANT

V.
SUPERIOR WELL DRILLING, LLC

THIRD PARTY DEFENDANT

FINDINGS OF FACT AND CONCLUSIONS OF LAW
Before the Court is a complaint filed by Shuler Drilling Company, Inc. (“Shuler”) against
Southern Management Services, Inc. (“Southern”) claiming that Southern owes Shuler for services
that it performed. ECF No. 3. Also before the Court is a counterclaim and third-party complaint
filed by Southern. ECF No. 22. In its third-party complaint, Southern seeks a $1,000,000 judgment
against Superior Well Drilling, LLC (“Superior”) for the alleged unauthorized purchase of certain
drilling rig components. Southern alleges in its counterclaim against Shuler that Superior is the alter
ego of Shuler, and Southern seeks a set-off in the amount of $1,000,000 against Shuler’s unpaid
invoices.
On September 29, 2014, the Court held a bench trial to address the parties’ claims. As
requested by the Court, the parties filed post-trial briefs. ECF Nos. 42 and 43. After review of the
record and evidence presented at trial, the Court makes the following findings of fact and
conclusions of law.1

1

The Court notes that the filings in this case consist mostly of facts. The complaints contain only facts and no citations
to the law. At trial, no party discussed any legal bases for its factual claims.

I. FINDINGS OF FACT
This case revolves around the complicated and poorly documented business dealings of three
separate entities: Shuler;2 Southern;3 and Superior.4 Any agreements between the parties dealing
with the disputes at issue in this case are oral agreements or contracts. There are no written contracts
at issue. The parties worked together on several projects during a certain time period, and some of
these projects have given rise to three specific disputes. The Court’s findings of fact regarding each
dispute are as follows:
A. Unpaid Invoices for Services Rendered by Shuler (Shuler v. Southern and
Southern’s Counterclaim)
1. In 2008 and 2009 Shuler and Southern agreed that Shuler would be the operator of certain
oil wells for Southern.5 As the operator of the wells, it was Shuler’s job to obtain third parties to
provide services for the wells. Southern agreed to reimburse Shuler for the operating expenses.
2. Shuler paid these third parties $906,451.17 for various services. Shuler submitted
invoices for these services to Southern, and Southern has not paid these invoices.
3. Southern admits that it owes Shuler for the services performed on the wells. Southern,
however, refuses to pay Shuler because of unresolved issues in an unrelated business matter in which
Southern claims that Superior owes it $1 million. Southern argues that Shuler and Superior are

2

Shuler Drilling Company, Inc., is an Arkansas corporation, and Paula Reynolds is the sole stockholder. Robert Reynolds
is the President of Shuler Drilling Company.

3

Southern Management Services, Inc., is a Texas corporation, and Teresa Disiere is the sole stockholder. David Disiere
is the President of Southern Management Services.

4

Superior Well Drilling, LLC, is an Arkansas corporation, and Robert Reynolds owns an interest in Superior Well
Drilling.

5

These wells are known as Archie Armstrong #1 (located in Arkansas), J.H. Montgomery #1 (located in Louisiana), and
Cedar Bluff #1 (located in Louisiana), and Dumas #1.

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acting as one business operation, and therefore Southern is entitled to a $1 million setoff against the
amount that it owes Shuler for unpaid invoices. Southern’s reason for refusing to pay the unpaid
invoices is the subject matter of its counterclaim against Shuler.
4. One issue that all parties agree on involves the Dumas #1 well. When Shuler filed its
lawsuit against Southern, a lis pendens was filed on the production of Dumas #1. This well has now
been plugged and abandoned. Lion Oil is holding $60,409.86 for Southern for oil runs on Dumas
#1. Southern owes Shuler $53,672.45 for operating and plugging expenses related to Dumas #1.
The parties agree that the money being held by Lion Oil should be disbursed as follows: $53,672.45
to Shuler and $6,737.41 to Southern.
B. 1,000 Horsepower Drilling Rig (Southern v. Superior)
5. In November 2008, at a meeting in Dallas, Texas, Loadcraft Industries (“Loadcraft”)6,
Superior, and Southern agreed to build a 1,000 horsepower drilling rig. Ownership in the rig would
be as follows: Superior 50%, Loadcraft 25%, and Southern 25%. Loadcraft agreed to supply certain
equipment. Southern agreed to pay an initial payment of $1,000,000 to be used to purchase needed
equipment. Southern also agreed to contribute more money (not to exceed $1 million) as needed to
purchase necessary equipment. Superior was to supply the labor needed to assemble the rig and
commission it.
6. On December 3, 2008, Southern sent $1,000,000 to Superior. Superior purchased the
following equipment with the money: two Weatherford pumps ($311,750), 10,000 feet of drill pipe
($550,000); twenty drill collars ($100,000); and a hex kelly ($15,000). Superior incurred a trucking

6

Loadcraft Industries is not a party to this action.

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fee expense of $5,632 associated with the purchase of the equipment. This equipment was delivered
to Superior.
7. Superior requested a second payment of $1,000,000 from Southern to buy necessary
equipment for the drilling rig. Southern did not provide the second payment, and the 1,000
horsepower drilling rig was never completed.
8. When it was apparent that the drilling rig would not be completed, Loadcraft went to
Superior and took possession of the equipment that Loadcraft had contributed to the project.
Southern has not taken possession of the equipment that Superior bought with Southern’s
contribution and instead asserts that it is entitled to a refund of its $1,000,000 contribution to the
building of the 1,000 horsepower drilling rig.
9. At some pont, Superior brought the equipment it bought with Southern’s contribution to
Hampton, Arkansas. Superior, however, can presently account for only some of the equipment, the
Weatherford pumps and the drill pipe. Superior cannot locate the twenty drill collars or the hex
kelly.
C. 2,000 Horsepower Drilling Rig (Southern v. Superior)
10. In November 2008, Southern agreed to purchase a 2,000 horsepower drilling rig from
Loadcraft Industries, Ltd. (“Loadcraft”) for $22,875,000. Southern hired Superior to oversee the
assembly of the drilling rig and operate it once it began to drill. Superior agreed to reimburse
Southern its costs to commission the 2,000 horsepower drilling rig. Once Southern recovered its
investment in the drilling rig, Superior and Southern agreed to evenly split the profits from the
drilling operations.

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11. Southern conveyed to Superior that it was imperative that the drilling rig begin to drill
no later than December 31, 2008, so that Southern could take accelerated depreciation of up to 50%
of the cost of the equipment.
12. Superior sent employees from Hampton, Arkansas to Brady, Texas to work on the
drilling rig. Disiere, the president of Southern, personally observed the Hampton employees working
in Brady. Superior completed the drilling rig on time, and it was operational before December 31,
2008. Southern, however, claims that it did not authorize Superior to send employees from Hampton
to Brady.
13. On December 17, 2008, Superior sent an invoice to Southern that contained the expenses
related to the Hampton crew being sent to Brady. On January 28, 2009, Southern made a $200,000
payment on this invoice, which left a balance of $27,375.38. On May 24, 2009, Superior made an
adjustment to the invoice and credited Southern for $26,608.07. Superior testified that it considers
this invoice paid in full. Southern now seeks a refund from Superior for all expenses related to the
Hampton crew working in Brady. Southern, however, never objected to these expenses contained
in the invoice until some time in 2012, after Shuler filed a lawsuit against Southern.
14. This same invoice billed Southern for two 2008 Ford F-150 trucks intended to be part
of the 2,000 horsepower drilling rig. There is no dispute that Southern has paid for these trucks. The
trucks, however, are presently in the possession of Superior. Superior agrees that Southern should
be awarded an amount equal to the cost of the two F-150 trucks, which is $36,438.29.
II. CONCLUSIONS OF LAW
The Court now sets forth its conclusions of law related to each dispute:

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A. Unpaid Invoices for Services Rendered by Shuler (Shuler v. Southern and
Southern’s Counterclaim)
1. Both Shuler and Southern agree that Arkansas law governs the agreement regarding the
operation of certain oil wells. Southern does not dispute that it owes Shuler $906,451.17 for services
rendered pursuant to the agreement. Southern, however, argues that Superior and Shuler are one
business entity and that Southern is entitled to a $1 million setoff against the Shuler invoices.
2. Southern argues that Rob Reynolds, as both the President of Shuler7 and a shareholder of
Superior,8 did not separate his business interests from each other. Southern asks the Court to treat
Shuler and Southern as one, allowing Southern a $1 million setoff against the Shuler invoices.
3. Corporations are separate and distinct legal entities. Yammar Co., Ltd. v. Slater, 2012
Ark. 36, at *18, 386 S.W.3d 439, 450 (Ark. 2012) (citing Mannon v. R.A. Young & Sons Coal Co.,
207 Ark. 98, 179 S.W.2d 457 (Ark. 1944)). “‘The fact that the officers of one corporation are also
officers of another does not make the corporations the same, nor the acts of one the acts of the
other.’” Id (citing Mannon v. R.A. Young & Sons Coal Co., 207 Ark. 98, 179 S.W.2d 457 (Ark.
1944)). Further, “‘[t]he fact that some of the stockholders in one company had also stock in each
of the other companies, and the fact that the general managers and officers of one company were also
general managers and officers of another company, did not make these companies the same
corporation, nor the acts of one the acts of the other.’” Id. (citing Fort Smith Light & Traction Co.
v. Kelley, 94 Ark. 461, 127 S.W. 975 (Ark. 1910)).

7

Reynolds does not own stock in Shuler. Paula Reynolds owns 100% of the Shuler stock.

8

Reynolds owned 33% of the interest in Superior when this lawsuit was filed, and he currently owns 50%.

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4. Disiere testified that he viewed Shuler and Southern as the same and that Reynolds never
disclosed the nature of his role in each business. Other than Disiere’s testimony about what he
believed to be the relationship between the businesses, there is simply no evidence in the record to
support Southern’s argument that Shuler and Superior are alter egos and that the acts of one should
be imputed to the acts of the other. Further, the only document in evidence that relates to this point
discredits Disiere’s testimony regarding what he knew about Reynolds’s role at Superior. On August
25, 2005, Reynolds sent Disiere a letter on Shuler letterhead disclosing that Reynolds owned a onethird equity interest in Superior.
5. Because the Court finds that Shuler and Superior are separate and distinct legal entities.
Southern is not entitled to a $ 1 million setoff against the Shuler invoices.
B. 1,000 Horsepower Drilling Rig (Southern v. Superior)
6. The parties agree that Southern, Superior, and Loadcraft formed a partnership to
commission a 1,000 horsepower drilling rig. The Court, however, must determine which state’s law
applies to these circumstances. In cases involving contracts, courts apply the law from the state that
has the most significant relationship to the case. Scottsdale Ins. Co. v. Morrowland Valley Co., LLC,
2012 Ark. 247, at *6, 411 S.W.3d 184, 189 (Ark. 2012). Courts look to the following five factors
to determine which state has the most significant relationship to a particular case: “(1) the place of
contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location
of the subject matter of the contract; [and] (5) the domicile, residency, nationality, place of
incorporation and place of business of the parties.” Id. Here, all negotiations were conducted in
Dallas, Texas, and Texas is the principal place of business for both Loadcraft and Southern. On the
other hand, Arkansas is Superior’s principal place of business and the drilling rig was to be
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assembled in Arkansas. From these facts, however, the Court concludes that Texas has the most
significant relationship to this case, and thus Texas law applies.
7.

Southern claims that Superior breached its fiduciary obligations to Southern by

mishandling Southern’s $1 million contribution to buy equipment. Under Texas law, partners owe
the following fiduciary duties to each other: (1) to fully disclose all matters affecting the partnership;
(2) to account for all partnership profits and property; and (3) to refrain from competition with the
partnership. Hawthorne v. Guenther, 917 S.W.2d 924 (Tex. App. 1996).
8. Southern claims that Superior breached its fiduciary obligations by using Southern’s $1
million contribution to buy unauthorized equipment. Disiere testified that he did not approve any
of the equipment purchases by Superior and that he never asked Superior what equipment it intended
to buy with the money. Disiere further testified that he did not need to know about the equipment
and that there was no need to tell him because he was not the right person to be selecting equipment.
Instead, he stated that he exclusively relied upon the expertise and judgment of Rob Reynolds to
select what equipment to purchase.
9. There is no evidence in this case that Superior purchased the wrong equipment or
purchased poor quality equipment. Disiere approved of the fact that his contribution was going to
Superior to be used to buy equipment. There was no reason for Superior to seek Disiere’s approval
for specific equipment given that Disiere testified that he did not need to know and that he trusted
Superior and Rob Reynolds to select the equipment.
10. Southern also claims that Superior breached its fiduciary duty by not being able to
account for all partnership property. The Court agrees with Southern on this point. Superior admits
that it cannot account for the twenty drill collars and a hex kelly that it purchased with Southern’s
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$1 million contribution. Superior further admits that it once had possession of the equipment but
cannot presently locate it.
11. All parties agreed to contribute resources to this partnership. Superior worked on the
construction of the rig, contributing time and labor to the partnership until the deal fell through.
After the deal fell through, Loadcraft took possession of the equipment that it had contributed to the
partnership. The Court concludes that the proper and equitable remedy under these circumstances
is for Southern to do the same with the equipment that was purchased with its contribution. For any
equipment not accounted for, Superior must pay Southern the value of the missing equipment.
C. 2,000 Horsepower Drilling Rig (Southern v. Superior)
12. Southern seeks reimbursement from Superior for monies paid to Superior for the
construction and commissioning of a 2,000 horsepower drilling rig. Specifically, Southern asserts
that it never authorized any expenses associated with Superior sending employees from Hampton,
Arkansas, to Brady, Texas, to work on the drilling rig. These expenses totaled approximately
$200,000.
13. Southern cites no law in support of its argument that it should be reimbursed for the
labor expenses associated with the Hampton crew working in Brady. Southern does not reference
these particular expenses in its complaint or post-trial brief. This issue came to the Court’s attention
at the bench trial where Disiere testified that he never authorized the expenses. There is no evidence
that the oral agreement between Southern and Superior required that Disiere authorize all expenses.
Disiere simply argues that he should not have to pay the invoices associated with the expenses
because he did not authorize them.

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14. Southern has not proven that it is entitled to a refund from Superior for any unauthorized
expenses associated with the Hampton crew working in Brady. Southern’s complaint never even
mentions the labor expenses associated with Superior employees traveling from Hampton to Brady
to work on the drilling rig. Although the topic came up at trial, Southern’s post-trial brief fails to
mention these allegedly unauthorized expenses. Nowhere in the record does Southern cite to any
law in support of its arguments relating to these expenses. Furthermore, Southern gives no legal
basis for its argument that Superior was required to seek Disiere’s authorization for all expenses
related to constructing the drilling rig.

In fact, the evidence shows that Disiere observed the

Hampton crew working in Brady, paid the invoices associated with these expenses, and did not
object to the expenses until some time after Shuler filed a lawsuit against Southern. Moreover, these
expenses were reasonable considering that the drilling rig had to be fully operational by December
31, 2008. Southern benefitted from the labor of these Hampton employees because their work
insured that the drilling rig was finished by Southern’s deadline.
15. In its complaint, however, Southern does mention that it paid for two Ford F-150 trucks
that Superior purchased in connection with commissioning the 2,000 horsepower drilling rig. These
trucks are presently in Superior’s possession, and Superior has agreed to pay Southern the purchase
price for these two trucks. The combined purchase price of the two trucks is $36,438.29, and this
amount is undisputed by the parties.
III. CONCLUSION
Based upon the above findings of fact and conclusions of law, the Court finds that:
1. Lion Oil should disburse the $60,409.86 that it is holding for Southern as follows:
$53,672.45 to Shuler and $6,737.41 to Southern.
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2. Shuler should be awarded a judgment in the amount of $906,451.17 against Southern,
which represents the total amount of unpaid invoices.9
3. Southern should be awarded a judgment in the amount of $151,439.29 against Superior,
which represents the cost of two 2008 Ford F-150 trucks, twenty drill collars, and a hex kelly.
Southern should be awarded possession of the following equipment purchased with Southern’s $1
million contribution: two Weatherford pumps and 10,000 feet of drill pipe.
A judgment of even date consistent with this opinion shall issue.
IT IS SO ORDERED, this 25th day of November, 2014.

/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge

9

In its post-trial brief, Shuler asks the Court to award it prejudgment interest in the amount of $291,753.11, costs, and
attorney’s fees. Shuler may file a separate motion setting forth the authority for its arguments that it is entitled to
prejudgment interest, costs, and attorney’s fees.

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