Magnum Hunter Resources Corporation v. Hall, Kistler & Company, LLP
Filing
64
OPINION & ORDER: The Court ORDERS that 54 Motion for Summary Judgment is DENIED. Signed by Judge Karl S. Forester on 8/1/2013. (SCD)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
CIVIL ACTION NO. 12-70-KSF
MAGNUM HUNTER RESOURCES CORPORATION
v.
PLAINTIFF
OPINION & ORDER
HALL, KISTLER & COMPANY, LLP
DEFENDANT
**********
Currently before the Court is the motion of the defendant, Hall, Kistler & Company, LLP
(“Hall Kistler”), for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.
This matter is fully briefed and is ripe for review. For the reasons set forth below, Hall Kistler’s
motion will be denied.
I.
FACTUAL AND PROCEDURAL BACKGROUND
The plaintiff, Magnum Hunter Resources Corporation (“Magnum Hunter”), is a publicly
traded oil and gas exploration company based in Texas. In late 2010 and early 2011, Magnum
Hunter was in the process of determining whether to acquire NGAS, a publicly traded oil and gas
exploration and production company based in Lexington, Kentucky. On December 23, 2010,
Magnum Hunter and NGAS entered into an Arrangement Agreement giving Magnum Hunter the
right to acquire NGAS, and contemplated a closing on or before April 15, 2011. The Arrangement
Agreement also provided a period of time in which to conduct due diligence and provided for the
delivery to Magnum Hunter of NGAS’ audited financial statements for the years 2009 and 2010.
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On February 28, 2011, during the due diligence period, Magnum Hunter was provided an
audit report issued by Hall Kistler covering the 2009 and 2010 financial statements of NGAS. Hall
Kistler is an accounting firm located in Canton, Ohio. The audit report certified that the NGAS
financial statements were true and accurate, stating:
In our opinion, the financial statements referred to above present fairly, and in all
material respects, the consolidated financial position of NGAS Resources, Inc., and
subsidiaries as of December 31, 2010 and 2009, and the consolidated results of its
operation and its cash flows for each of the three years ended December 31, 2010 in
conformity with the accounting principles generally accepted in the United States of
America.
[DE #60-1]. The audit report also included a “Going Concern” statement, which described the facts
that raised substantial doubt about NGAS’s ability to continue as a going concern if the Magnum
Hunter transaction was not completed. At the time of the audit, NGAS was in default on certain
loans and had obtained conditional forbearance from its lenders until March 31, 2011 due to the
pending sale to Magnum Hunter.
During the due diligence period, Magnum Hunter focused its due diligence efforts on NGAS’
contracts, oil and gas production, and oil and gas reserves. With respect to the NGAS financial
statements and accounting aspects of the transaction, Magnum Hunter contends that it relied
exclusively on the audit work of Hall Kistler, based on the assumption that Hall Kistler performed
its audit of NGAS’ financials with the appropriate standard of care and in accordance with Generally
Accepted Accounting Principles (“GAAP”) applicable to an accounting firm auditing a publicly
traded company.
On April 13, 2011, Magnum Hunter completed its purchase of NGAS based in part, it
alleges, on its reliance on the audited financial statements prepared by Hall Kistler. The purchase
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involved an exchange of Magnum Hunter stock, plus Magnum Hunter paying off NGAS bank and
convertible note debt, plus payments to certain parties who contracted with NGAS. The fair value
of the consideration paid by Magnum Hunter for the stock of NGAS exceeded $124,000,000.00.
After the purchase, Magnum Hunter alleges that it subsequently discovered that the audited
financial statements of NGAS were inaccurate for the following reasons: (1) an understatement of
NGAS’ asset retirement obligations (“ARO”) in the amount of $8,677,688; (2) and overstatement
in NGAS’ pipeline assets in the amount of $1,741.486; and (3) an unrecorded NGAS liability to the
Commonwealth of Kentucky for withholding taxes in the amount of $3,650,177.
The first alleged inaccuracy relates to NGAS’ liability for any obligation and cost associated
with the retirement of the oil and gas wells (i.e., the costs to plug and abandon a well). Hall Kistler
has acknowledged not only that NGAS did not properly calculate its ARO in accordance with
GAAP, but also that it did not record any ARO on its balance sheet as required by Financial
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 410-20. Based on
its own well analysis, Magnum Hunter now contends that a liability of $6,677,688 for ARO should
have been recorded on NGAS’ books as of December 31, 2010. Additionally, Magnum Hunter
alleges that NGAS failed to record any ARO with respect to a gold mine in Alaska which was owned
by NGAS at the time of the acquisition. Based on its evaluation, Magnum Hunter contends that it
would cost $2,000,000 to remediate the property and has made such an adjustment to its books to
reflect this ARO liability. Thus, in total, Magnum Hunter alleges that it was forced to make
adjustments to its books totaling $8,677,688.
The second alleged inaccuracy relates to 485 miles of pipeline sold by NGAS to Seminole
Energy Services, LLC (“Seminole”) during the third quarter of 2009. Magnum Hunter contends that
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$1,741,486 of pipeline assets, which had been sold to Seminole, remained on NGAS’ books. As a
result, Magnum Hunter contends that NGAS’ books were over-inflated by $1,741,486.
The final alleged inaccuracy was revealed when Magnum Hunter received a notice from the
Revenue Cabinet of the Commonwealth of Kentucky indicating that NGAS had failed to withhold
taxes in 2007 with respect to distributions made to minority investors in a particular NGAS
sponsored drilling partnership. The tax liability, plus penalties, fees and interest, amounted to
$25,773. Magnum Hunter also alleges that after reviewing all other NGAS sponsored drilling
partnerships, it determined that NGAS had also failed to withhold any taxes for the years 2008 and
2009 with respect to over 30 partnerships. According to Magnum Hunter, the total liability using
the same methods employed by the Commonwealth of Kentucky, if the Revenue Cabinet issued
notices on all NGAS sponsored drilling partnerships for these years, would be $3,650,177. After
voluntarily approaching the Revenue Cabinet and participating in settlement discussions, the
Commonwealth of Kentucky and Magnum Hunters agreed to resolve all outstanding tax liability for
$250,000. The legal fees incurred in negotiating this settlement amount to $82,806.55. Magnum
Hunter claims damages in the amount of the $250,000 settlement paid to the Revenue Cabinet, the
$25,773 paid for the initial tax penalty, and the $82,806.55 in legal fees.
Based on these alleged errors, Magnum Hunter now brings this civil action. In its complaint,
Magnum Hunter asserts a claim against Hall Kistler for negligent misrepresentation, claiming that
Hall Kistler, as professional accountants, provided certifications of financial statements which were
incorrectly and negligently made, knowing that Magnum Hunter was relying on these certifications.
Magnum Hunter further alleges that if the incorrect financial statements had not been certified, then
the purchase price for NGAS, including all of the amounts paid by Magnum Hunter in connection
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with the acquisition, would have been substantially less, or alternatively, Magnum Hunter would not
have entered into the purchase transaction. Magnum Hunter seeks to recover its actual damages,
exemplary damages, pre- and post-judgment interest, and attorneys’ fees. Discovery has closed, and
Hall Kistler has filed this motion for summary judgment.
II.
SUMMARY JUDGMENT STANDARD
Rule 56(a) entitles a moving party to summary judgment if that party “shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Rule 56(c)(1) further instructs that “[a] party asserting that a fact cannot be or is genuinely disputed
must support the assertion” by citing to the record or “showing that the materials cited do not
establish the absence or presence of a genuine dispute, or that an adverse party cannot produce
admissible evidence to support the fact.” In deciding a motion for summary judgment, the court
must view the evidence and draw all reasonable inferences in favor of the nonmoving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The “moving party bears the burden of showing the absence of any genuine issues of material
fact.” Sigler v. Am. Honda Motor Co., 532 F.3d 469, 483 (6th Cir. 2008). The moving party may
meet this burden by demonstrating the absence of evidence concerning an essential element of the
nonmovant’s claim on which it will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477
U.S. 317, 323 (1986). Once the movant has satisfied its burden, the nonmoving party must “do more
than simply show that there is some metaphysical doubt as to the material facts,” Matsushita Elec.
Indus. Co., 475 U.S. at 586, it must produce specific facts showing that a genuine issue remains.
Plant v. Morton Int’l, Inc., 212 F.3d 929, 934 (6th Cir. 2000). If, after reviewing the record in its
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entirety, a rational fact finder could not find for the nonmoving party, summary judgment should be
granted. Ercegovich v. Goodyear Tire & Rubber Co., 154 F.3d 344, 349 (6th Cir. 1998).
Moreover, the trial court is not required to “search the entire record to establish that it is
bereft of a genuine issue of material fact.” Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479-80
(6th Cir. 1989). Rather, “the nonmoving party has an affirmative duty to direct the court’s attention
to those specific portions of the record upon which it seeks to rely to create a genuine issue of
material fact.” In re Morris, 260 F.3d 654, 665 (6th Cir. 2001).
III.
ANALYSIS
Hall Kistler moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil
Procedure on Magnum Hunter’s sole claim for negligent misrepresentation. In Kentucky, negligent
misrepresentation claims are governed by the Restatement (Second) of Torts § 552. Presnell Constr.
Managers, Inc. v. EH Constr., LLC, 134 S.W.3d 575, 580 (Ky. 2004). This section provides:
One who, in the course of his business, profession or employment, or in any other
transaction in which he has a pecuniary interest, supplies false information for the
guidance of others in their business transactions, is subject to liability for pecuniary
loss caused to them by their justifiable reliance upon the information, if he fails to
exercise reasonable care or competence in obtaining or communicating the
information.
Restatement (Second) of Torts, § 552(1) (1977). While Hall Kistler acknowledges that there are
genuine issues of material fact with respect to the breach of duty element of the tort as to the claims
based on the oil and gas well ARO, gold mine ARO, and the pipeline, it argues that evidence shows
that Magnum Hunter did not rely on the alleged misstatements in the audited financial statements
in making its decision to purchase NGAS or in negotiating the contract price. Additionally, Hall
Kistler argues that even if Magnum Hunter relied on the audited financial statements, such reliance
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would not have been justified as a matter of law because Magnum Hunter should have performed
its own due diligence on all aspects of NGAS that were pertinent to the transaction.
With respect to the Kentucky withholding tax issue, Hall Kistler denies that there was any
arguable misrepresentation and that Magnum Hunter did not actually and justifiably rely on the
alleged misrepresentation relating to the Kentucky withholding taxes. Because the reliance issue is
common to all of the alleged misrepresentations, the Court will consider this issue first.
A.
A GENUINE ISSUE OF MATERIAL FACT EXISTS AS TO MAGNUM
HUNTER’S ACTUAL AND JUSTIFIABLE RELIANCE ON THE ALLEGED
MISREPRESENTATIONS
Although this is a complex case, the actual reliance issue is simple. Hall Kistler argues
generally that Magnum Hunter cannot satisfy the actual reliance element of negligent
misrepresentation because although Magnum Hunter undertook due diligence on those portions of
the audited financial statements that were material in valuing the company, it did not rely on them
for any matter that was important to it in assessing the value of NGAS. Magnum Hunter, however,
has come forward with specific evidence that it actually relied on the audited financial statements
prepared by Hall Kistler. Both Gary C. Evans, Magnum Hunter’s CEO, and Ron Ormond, Magnum
Hunter’s CFO, testified that they relied on the audited financial statements prepared by Hall Kistler.
See Evan’s Deposition, pp. 20-21, 47, 81 [DE #60-20], and Ormond’s Deposition, pp. 45 and 78 [DE
#60-25].
Thus, a genuine issue of material fact remains as to this element of negligent
misrepresentation.
Whether this reliance was justified is a closer call. Hall Kistler argues that Magnum Hunter
was not justified in relying on the audited financial statements for two reasons. For its first reason,
Hall Kistler contends that because Magnum Hunter did not conduct its own accounting due diligence
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on the portions of the financial statements containing the alleged misrepresentations, it must not have
considered NGAS’ errors related to the ARO, pipeline assets, and withholding taxes material to the
transaction. However, as Magnum Hunter notes, these alleged errors amount to over $13,000,000.
Magnum Hunter has cited the testimony of Evans, David Krueger, Magnum Hunter’s CAO, and Jim
Denny, Magnum Hunter’s Executive Vice-President of Operations, who all stated that the
information in the audited financial statements relating to the ARO, pipeline assets and withholding
taxes issues were material to the transaction [Evans’ Deposition, DE #60-20 p. 163, 165; Krueger
Deposition, DE # 60-23, pp. 87, 110-11, 174; Denny Deposition, DE #60-18, 109-110].
Second, Hall Kistler also argues that even if the alleged misstatements were material,
Magnum Hunter’s reliance thereon was not justified because, as a matter of law, it should have
conducted its own due diligence and not relied solely on the audited financial statements prepared
by Hall Kistler. Both parties cite cases from various jurisdictions to support their arguments, but are
unable to point to any binding caselaw addressing the issue before this Court. While Hall Kistler
cites several cases for its claim that Magnum Hunter was not justified in relying on the audited
financial statements, these cases are distinguishable, in large part, because they do not involve
audited financial statements of a publicly traded company. See e.g., TSG Water Resources, Inc. v.
D’Alba & Donovan Certified Public Accountants, P.C., 260 Fed.Appx 191 (11th Cir. 2007); Harner
v. Prudential-Bache Securities, Inc., 35 F.3d 565 (6th Cir. 1994). Additionally, some of the cases
relied upon by Hall Kistler address scenarios where either the plaintiff had prior knowledge of the
truth - making reliance on a misrepresentation unjustified - or contractual language disclaiming any
responsibility for misstatements - also making reliance unjustified. In this case, however, it is
undisputed that Magnum Hunter knew nothing about the alleged errors until after closing, and Hall
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Kistler did not present any disclaimers to Magnum Hunter. In fact, the audit report itself was
unqualified.
While White v. BDO Seidman, LLP, 549 S.E.2d 490, 491 (Ga.Ct.App. 2001), a case cited by
Hall Kistler, did concern an audit report, it too is distinguishable. The plaintiffs in White admitted
that they never saw the defendant’s audit report. As a result, they did not rely on any of the
representations contained therein. In this case, however, there is evidence that Magnum Hunter
actually relied on the audit report.
Additionally, the audit of NGAS, a publicly traded company, was subject to the heightened
scrutiny of the Securities Exchange Commission (“SEC”) and the Public Company Accounting
Oversight Board (“PCAOB”). The PCAOB is a non-profit corporation established by Congress to
oversee those firms which engage in public company audits. See Sarbanes-Oxley Act of 2002, 15
U.S.C. § 7201, et seq. Its purpose is to protect the general public by promoting accurate audit
procedures and information. Id. Other courts have concluded that a party is justified in relying on
audited financial statements of a publicly traded company. See Murphey v. Lattimore, Black,
Morgan & Cain, P.C., 2011 WL 2420265, *3 (M.D. Tenn. June 13, 2011); E*TRADE Financial
Corp. v. Deutsche Bank AG, 631 F.Supp.2d 313, 383-85 (S.D.N.Y. 2009); Travelers Casualty and
Surety Co. of Am. v. Ernst & Young, LLP, 542 F.3d 475, 484 (5th Cir. 2008); In re Health Risk
Mgmt., Inc. v. Loop Corp., 319 B.R. 181, 191 (D. Minn. 2005); Spherex, Inc. v. Alexander Grant &
Co., 451 A.2d 1308, 1313 (N.H. 1982)
Based on the evidence presented and this Court’s review of these cases, the Court cannot
find, as a matter of law, that Magnum Hunter did not actually and justifiably rely on Hall Kistler’s
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audited financial statements of NGAS. Magnum Hunter’s reliance is a question of fact for the jury
and cannot establish a basis for summary judgment on the issue of reliance.
B.
A GENUINE ISSUE OF MATERIAL FACT EXISTS AS TO WHETHER
HALL KISTLER NEGLIGENTLY MISREPRESENTED NGAS’
WITHHOLDING TAX LIABILITY
The Court turns next to the issue of whether the audited financial statements prepared by Hall
Kistler for NGAS were inaccurate because they did not reflect a potential tax liability based on the
failure to pay withholding taxes. While there is no dispute that the audit incorrectly cited no
withholding tax liability, Hall Kistler argues that it cannot be found liable for its failure to do any
audit work related to NGAS’ withholding tax liability because it relied on a letter from another
accountant. The letter, dated March 4, 2010, from Daryl Greattinger, CPA, states as follows:
I have evaluated the tax position Daughtery Petroleum, Inc. has taken relative to their
gold properties, oil and gas properties, intangible drilling costs, depletion, and
depreciation. I feel that it more likely than not (MLTN) that their positions in these
areas would be sustained upon examination by the applicable taxing authorities.
In addition, I have considered the filing requirements in the various states that
Daughtery Petroleum, Inc. generated income. There would be no additional tax
considerations in any of those states. However, there could be some immaterial filing
fees for zero returns.
[DE # 60-15].
Daughtery Petroleum, Inc. (“DPI”) was a wholly owned subsidiary of NGAS. All of NGAS’
oil and gas operations were conducted through DPI. NGAS conducted a substantial portion of its
operations through drilling programs owned in part by third-party investors. Under this Drilling
Program structure, a general partnership was formed, which owned the wells to be developed. DPI
typically owned 20% of that general partnership. A limited partnership would own the other 80%.
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DPI served as the managing general partner of the limited partnership and owned 1% of the limited
partnership. The other 99% of the limited partnership was owned by private investors.
Importantly, the Greattinger letter says nothing about partnership taxes or withholding taxes.
Moreover, Magnum Hunter’s expert, Jim Tencza, a CPA, opines that Hall Kistler improperly failed
to address withholding taxes in its audit and was not entitled to exclusively rely on the Greattinger
letter [Tencza Deposition, DE #60-2, pp. 186-87]. Rather, Tencza opined that Hall Kistler was
obligated to make some investigation into Greattinger’s competence and independence, and to have
a discussion with NGAS management about withholding taxes. By using Greattinger’s letter and
undertaking no further investigation, Tencza opines that Hall Kistler breached the standard of care.
Additionally, Hall Kistler’s own expert, Allen Waddle, acknowledged that the withholding
tax liability should have been recorded on NGAS’ books. Waddle opined that Hall Kistler should
have raised this issue with NGAS management [Waddle Deposition, DE #60-28, pp. 189-80]. Based
on this evidence, Magnum Hunter has come forward with evidence of a genuine issue of material
fact with respect to whether Hall Kistler breached the standard of care by failing to ensure that
NGAS was properly withholding all taxes with respect to the NGAS drilling partnerships.
Accordingly, Hall Kistler is not entitled to summary judgment on this issue.
C.
HALL KISTLER IS NOT ENTITLED TO SUMMARY JUDGMENT ON
MAGNUM HUNTER’S CLAIM FOR DAMAGES
In addition to seeking summary judgment on Magnum Hunter’s negligent misrepresentation
claim, Hall Kistler also challenges Magnum Hunter’s entitlement to and/or calculation of certain
damages. First, Hall Kistler argues that Magnum Hunter should not be allowed to recover any
attorneys’ fees expended in obtaining a settlement with the Revenue Cabinet related to the
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withholding tax liability. Next, Hall Kistler challenges Magnum Hunter’s calculation of NGAS’
ARO related to the oil and gas wells. Third, Hall Kistler challenges Magnum Hunter’s calculation
of NGAS’ ARO costs related to closing the gold mine. Finally, Hall Kistler argues that Magnum
Hunter should not be allowed to pursue any claim related to the pipeline incorrectly recorded on
NGAS’ books. Each of these arguments is discussed fully below.
1.
ATTORNEYS’ FEES
Hall Kistler argues that Magnum Hunter should not be allowed to recover any attorneys’ fees
expended in negotiating a settlement with the Kentucky Revenue Cabinet. Hall Kistler points to the
American rule, where each party is to pay its own attorneys’ fees unless an exception is created by
statute or a contract expressly provides for payment of such fees. See Strohschein v. Crager, 258
S.W.3d 25, 30 (Ky.App. 2007). However, Magnum Hunter contends that it is entitled to recover
its attorneys’ fees based on the trial court’s powers in equity, citing Commonwealth of Kentucky v.
Bell, 2012 WL 3538472, *4 (Ky. App. Aug. 17, 2012) and Batson v. Clark, 980 S.W.2d 566 (Ky.
App. 1998). Magnum Hunter argues that based on these cases, an award of attorneys’ fees is
justified by the court’s exercise of inherent power to “do that which is reasonably necessary for the
administration of justice with the scope of [its] jurisdiction.” Bell, 2012 WL 3538472 at *4.
While it is clear that Magnum Hunter is not relying on any statute or contract to recover its
attorneys’ fees, Magnum Hunter is asking this court to exercise its equitable powers. Until the Court
has heard the evidence in this case, any judgment on this issue is premature. Accordingly, Hall
Kistler’s motion for summary judgment on Magnum Hunter’s claim for attorneys’ fees related to the
withholding tax liability will be denied without prejudice.
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2.
DAMAGE CALCULATION OF NGAS’ OIL AND GAS WELL ARO
Magnum Hunter alleges that after the acquisition, it discovered that NGAS had not recorded
any ARO related to the oil and gas wells on its balance sheet. As a result, it conducted its own
analysis to determine the amount of ARO which should have been listed as a liability. This
calculation was performed by Brint Camp and David Krueger, Chief Accounting Officer. Camp
provided the relevant plugging and abandonment costs to Krueger, who then applied the remaining
calculations required by GAAP, such as the inflation and discount rate, to arrive at the ARO to be
booked. Based on these calculations, Magnum Hunter is seeking to recover $6,677,688 - the
amount it added to its books as a liability. Hall Kistler, however, claims that Magnum Hunter does
not have adequate evidence to submit its $6,677,688 ARO damage claim to the jury on the grounds
that Camp was not qualified to estimate the plugging and abandonment costs.
In response, Magnum Hunter argues that Camp, a geologist with over thirty-five years
experience in the oil and gas industry, is imminently qualified to estimate plugging and abandonment
costs. Camp was the Vice President of Geology of NGAS prior to the acquisition, and now
maintains the same position with Magnum Hunter. During his career, he has overseen the drilling
of well sites and the plugging and abandonment of all wells. [Camp Deposition, DE #60-17, pp.717]. Moreover, Magnum Hunter’s expert, Jim Tencza, has opined that Camp’s analysis, estimate
and calculation is reasonable and appropriate [DE #60-2]. On the other hand, Hall Kistler’s own
expert, Allen Waddle, has conceded that there is no documentation in Hall Kistler’s files or work
papers demonstrating that it did any testing to determine if the ARO costs were reasonable. [Waddle
Deposition, DE #60-28, pp. 151-52]. Additionally, Waddle stated that NGAS’ ARO calculations
were not in accordance with GAAP, and that Hall Kistler did nothing to correct that fact. Certainly,
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Magnum Hunter has come forward with sufficient evidence to present the issue of oil and gas well
ARO damages to the jury.
3.
DAMAGE CALCULATIONS RELATED TO CLOSING THE GOLD
MINE
In addition to failing to record any ARO for the oil and gas wells, Magnum Hunter alleges
that NGAS failed to properly record any ARO for the gold mine located in Alaska. Upon
investigation, Magnum Hunter determined that it would cost approximately $2,000,000 to clean up
and remediate the gold mine. Hall Kistler contends that Magnum Hunter cannot establish that it has
or will incur this liability. Specifically, Hall Kistler argues that there is no evidence to support
Magnum Hunter’s calculation of $2,000,000 to retire the mine. Additionally, Hall Kistler contends
that Magnum Hunter is in negotiations with a third party to purchase the mine, which will result in
income which would offset any costs associated with closing the mine.
Whether or not Magnum Hunter will sell the gold mine is speculation at this time. The
present issue is whether Hall Kistler is negligent for any misrepresentation on the audited financial
statements related to the gold mine and what damages, if any, resulted to Magnum Hunter. In
response to Hall Kistler’s argument, Magnum Hunter points to the opinion of its expert, Jim Tencza,
who has opined that: (1) Hall Kistler was negligent in not requiring NGAS to book an ARO related
to the gold mine; and (2) that $2,000,000 is a reasonable estimate of such liability [DE #60-2, p. 15].
To the extent that Hall Kistler complains that Tencza relies on alleged hearsay in reaching this
conclusion, the Court finds that as an expert, Tencza can rely on inadmissible hearsay under Rule
703 of the Federal Rules of Evidence. In reaching his opinion, Tencza obtained information about
the costs of retiring a gold mine from an individual with first hand knowledge about the existing
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conditions at the site. This is the type of information reasonably relied upon by accountants in
estimating an ARO. While Hall Kistler disagrees with Tencza’s opinion, this is ultimately an issue
for the jury.
4.
DAMAGES RELATED TO THE PIPELINE INCORRECTLY
MAINTAINED ON NGAS’ BOOKS
Hall Kistler’s final challenge to Magnum Hunter’s damages relates to the pipeline assets that
improperly remained on NGAS’ books despite the fact that they had been sold to Seminole in 2009.
Hall Kistler contends that the $1,741,486 figure is only a book value, and doesn’t take into account
depreciation or the fact that the assets were not income-producing. It also argues that Magnum
Hunter was aware that these assets had been sold to Seminole.
While Magnum Hunter concedes that it was aware that some pipeline assets were sold, it
believed that the $1,741,486 on the books were assets related to the pipeline [Evans Deposition, DE
#60-20, pp. 158-59]. Moreover, Tencza has opined that Hall Kistler was negligent in not assuring
that the pipeline assets were removed from NGAS’ books [Tencza Deposition, DE # 60-27 pp. 17273]. In any event, Magnum Hunter has come forward with sufficient evidence to create a genuine
issue of material fact that leaving the assets on the audited financial statements may have inflated
the value of NGAS by some amount. The exact amount is a matter for the jury.
IV.
CONCLUSION
The Court, being fully and sufficiently advised, hereby ORDERS that Hall Kistler’s motion
for summary judgment [DE # 54] is DENIED.
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This August 1, 2013.
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