Bidarka Gas Corp et al v. Merrill et al

Filing 74

ORDER granting in part and denying in part 29 Plaintiffs' Motion for Summary Judgment and case remains set for trial on Tuesday, February 18, 2020 (as more fully set out). Signed by Honorable Patrick R Wyrick on 2/15/2020. (ks)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
BIDARKA GAS CORP., an Oklahoma
corporation; DUSLEI ENERGY, LLC, an
Oklahoma limited liability company; JIM
PRICE OIL CO., LLC, an Oklahoma
limited liability company; CCJ
VENTURES, LLC, an Oklahoma limited
liability company; BECKHAM OIL CO.
LLC, an Oklahoma limited liability
company; BIG J’S OIL CO. LLC, an
Oklahoma limited liability company;
GARBET INVESTMENTS LLC, an
Oklahoma limited liability company;
DEBORAH K. BRANDT, an individual;
CHARLES R. DOZIER, an individual; and
MARGARET DOZIER, an individual,

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Plaintiffs,
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v.
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STEPHEN J. MERRILL, individually and
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as Trustee of the MFS Trust Dated September )
30, 1997; KAREN MERRILL, individually and )
as Trustee of the MFS Trust Dated September )
30, 1997; SBM ENERGY, LLC, an
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Oklahoma limited liability company;
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MFS TRUST DATED SEPTEMBER 30,
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1997; and DONALD F. SCHNELL,
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individually,
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Defendants.
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Case No. CIV-18-00041-PRW

MEMORANDUM OPINION AND ORDER
On March 25, 2019, Plaintiffs filed a Motion for Summary Judgment and
Supporting Brief (Dkt. 29) pursuant to Rule 56(a) of the Federal Rules of Civil Procedure.
Three days prior to that, the Court Clerk entered default against Defendant Donald F.
Schnell for failure to plead or otherwise defend the action after being personally served
1

one year earlier. 1 Although the deadline for the remaining Defendants—husband and wife
Stephen J. and Karen Merrill, both individually and as trustees of the Merrill Family
Spendthrift Trust Dated September 30, 1997; his oil exploration company, SBM Energy,
LLC; and their family trust, the Merrill Family Spendthrift Trust Dated September 30, 1997
(collectively “the Merrill Defendants)—to respond to Plaintiffs’ summary judgment
motion was April 15, 2019, no responses were filed until June 12, 2019, 2 and then only on
behalf of Mr. and Mrs. Merrill in their dual capacities. 3 Upon review of the parties’ filings,
the Court GRANTS IN PART and DENIES IN PART Plaintiffs’ Motion for Summary
Judgment (Dkt. 29) as set forth more fully below.
Burden of Proof
Rule 56(a) provides that “[t]he court shall grant summary judgment if the movant
shows that there is no genuine dispute as to any material fact and the movant is entitled to

1

Clerk’s Entry of Default (Dkt. 27) at 1; see also Proof of Serv. (Dkt. 22) at 2 (certifying
that James C. Reynolds “personally served the summons on the individual at
(place) 13690 S. 4070 Rd, Oologah, OK on (date) 3-29-18 ”)

2

The reasons for the delayed responses were the withdrawal of the attorneys representing
the Merrill Defendants on April 11, 2019, Order (Dkt. 30) at 1; the reassignment of this
case to the undersigned judge on April 19, 2019, Enter Order (Dkt. 33) at 1; the Court’s
extension of the response deadline to June 11, 2019, due to the circumstances, Order (Dkt.
34) at 9; and the Merrill Defendants’ inability to secure alternative counsel on or before
June 11, 2019, Order (Dkt. 47) at 7-8.
3

The reasons why responses were not filed on behalf of SBM Energy and the MFS Trust
were the Court’s warnings to Mr. and Mrs. Merrill that the law prevents them from
appearing pro se on behalf of the limited liability company or the trust and that those
entities must hire counsel to defend the lawsuit and respond to Plaintiffs’ summary
judgment motion, the Merrill Defendant’s inability to secure alternative counsel, and the
Court’s Order (Dkt. 47) eventual entry of default against SBM Energy and the MFS Trust
on July 1, 2019. Order (Dkt. 35) at 3–4; Order (Dkt. 41) at 5–7; Order (Dkt. 47) at 2, 7-10.
2

judgment as a matter of law.” In deciding whether summary judgment is proper, the court
does not weigh the evidence and determine the truth of the matter asserted, but determines
only whether there is a genuine dispute for trial before the fact-finder(s). 4 The movant bears
the initial burden of demonstrating the absence of a genuine, material dispute and an
entitlement to judgment. 5 A fact is “material” if, under the substantive law, it is essential
to the proper disposition of the claim. 6 A dispute is “genuine” if there is sufficient evidence
on each side so that a rational trier of fact could resolve the issue either way. 7
If the movant carries the initial burden, the nonmovant must then assert that a
material fact is genuinely disputed and must support the assertion by “citing to particular
parts of materials in the record, including depositions, documents, electronically stored
information, affidavits or declarations, stipulations (including those made for purposes of
the motion only), admissions, interrogatory answers, or other materials”; by “showing that
the materials cited [in the movant’s motion] do not establish the absence . . . of a genuine
dispute”; or by “showing . . . that an adverse party [i.e., the movant] cannot produce
admissible evidence to support the fact.” 8 The nonmovant does not meet its burden by

4

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also Birch v. Polaris
Indus., Inc., 812 F.3d 1238, 1251 (10th Cir. 2015).

5

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

6

Anderson, 477 U.S. at 248; Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir.
1998).

7

Id.

8

Fed. R. Civ. P. 56(c)(1); see also Celotex Corp., 477 U.S. 317; Beard v. Banks, 548 U.S.
521, 529 (2006).
3

“simply show[ing] there is some metaphysical doubt as to the material facts,” 9 or by
theorizing a “plausible scenario” in support of its claims. 10 “Rather, ‘the relevant inquiry
is whether the evidence presents a sufficient disagreement to require submission to a jury
or whether it is so one-sided that one party must prevail as a matter of law.’” 11 If there is a
genuine dispute as to some material fact, the district court must consider the evidence and
all reasonable inferences from the evidence in the light most favorable to the nonmoving
party. 12
Undisputed Material Facts
Included here are those material facts supported by the record and not genuinely
disputed in the manner required by Rule 56(c). These facts are now established in the case
pursuant to Rule 56(g).
Defendant Stephen J. Merrill holds himself out as an Oklahoma attorney “ha[ving]
more than 37 years of experience in the oil and gas industry” who “specializ[es] in oil and
gas title opinions and litigation” but who also remains “active in the exploration and
production side of the industry.” 13 Defendant Donald Schnell is a business associate of Mr.

9

Neustrom v. Union Pac. R.R. Co., 156 F.3d 1057, 1066 (10th Cir. 1998) (alteration in
original) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586
(1986); Ulissey v. Shvartsman, 61 F.3d 805, 808 (10th Cir. 1995)).
10

Scott v. Harris, 550 U.S. 372, 380 (2007).

11

Neustrom, 156 F.3d at 1066 (quoting Anderson, 477 U.S. at 251–52; Bingaman v. Kan.
City Power & Light Co., 1 F.3d 976, 980 (10th Cir. 1993)).

12

Scott, 550 U.S. at 380; Matsushita Elec. Indus. Co., 475 U.S. at 587; Sylvia v. Wisler,
875 F.3d 1307, 1328 (10th Cir. 2017).

13

SBM Energy, LLC Business Plan (Dkt. 29-1) Ex. I, at 44.
4

Merrill who describes himself as “a third[-]generation driller” who, “by all accounts, is a
foremost expert in shallow production.” 14 Defendant Karen Merrill is Mr. Merrill’s wife. 15
Defendant The Merrill Spendthrift Trust Dated September 30, 1997 (hereinafter “the MFS
Trust”) appears to be a revocable living trust established by Mr. Merrill’s father, J.C.
Merrill, purportedly to protect Mr. Merrill’s assets during a divorce and to provide for
succession of his parents’ estates. 16 Though the exact circumstances are unclear, Mr.
Merrill eventually became sole trustee of the MFS Trust sometime around his father’s death
in 2011 17; and in March of 2017, Mr. Merrill made Mrs. Merrill a co-trustee to facilitate
their purchase of a home located in Owasso, Oklahoma. 18 Lastly, Defendant SBM Energy,
LLC is an Oklahoma limited liability company that Mr. Merrill formed in 2015 to acquire
some oil and gas leasehold interests in Kiowa County, Oklahoma, 19 as described more fully
below.

14

Id.; see also Stephen Merrill Aff. (Dkt. 44-1) ¶ 1, at 1.

15

Trustee Resolution (Dkt. 29-2) Ex. P, at 34 (Mar. 28, 2017); Stephen Merrill Aff. (Dkt.
44-1) ¶ 18, at 3.
16

E-mail from Steve Merrill to James Price (Dkt. 29-2) Ex. J, at 1 (Nov. 14, 2017, 11:58
AM).

17

Compare id. (stating that Mr. Merrill’s father made Mr. Merrill’s law partner, Wilson
Busby, a co-trustee and that Mr. Merrill became a co-trustee with Mr. Busby after his father
passed), with Memorandum of Trust (Dkt. 29-2) Ex. Q, at 35 (filed May 23, 2014) (stating
that Mr. Merrill’s father made Mr. Merrill a co-trustee in 2009 and that Mr. Merrill became
the sole trustee upon the passing of his father in 2011).
18

Trustee Resolution (Dkt. 29-2) Ex. P, at 34 (Mar. 28, 2017); Trustee Resolution (Dkt.
29-2) Ex. O, at 31 (Mar. 29, 2017).

19

E-mail from Merrill to Price (Dkt. 29-2), supra note 16, Ex. J, at 1; see also Executive
Summary (Dkt. 29-1) Ex. G, at 25.
5

In late February or early March of 2015, Mr. Merrill and Mr. Schnell approached
Gary Tyson of the Tyson Oil Company, LLC about purchasing approximately twentyseven oil and gas leases that his company held in Kiowa County, along with all wells,
associated equipment, easements, and other associated rights. 20 Mr. Merrill hoped to use
the cash flow from the pre-existing producing wells on those leases to fund both the
refurbishing of some pre-existing wells and the drilling of new wells into the Hunton
Limestone and Simpson formations. 21 Mr. Merrill and Mr. Tyson eventually settled on a
price of $550,000.00, but Mr. Merrill wanted 90 days to gather funding. 22 So Mr. Tyson
agreed to hold the leasehold interests for Mr. Merrill in exchange for payment of some
earnest money. On March 25, 2015, Mr. Tyson—acting on behalf of his company, himself,
Carolyn Tyson, Pamela Sue Rhodes, and Fred Rhodes—signed an Exclusive Option
Agreement memorializing the agreement. 23 By its terms, in exchange for payment of a
$25,000.00 non-refundable deposit, Mr. Tyson agreed to give the MFS Trust 90 days to
exercise an exclusive option to acquire the leasehold interests by tendering the unpaid

20

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 5, at 5; Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 5, at 2
(“Admitted,” but clarifying that he was purchasing “leasehold interests” rather than
“Mineral Interests”); Tyson Aff. (Dkt. 29-3) Ex. X, ¶ 1, at 38.

21

See Exploration Agreement (Dkt. 29-1) at 5.

22

See Tyson Aff. (Dkt. 29-3) Ex. X, ¶¶ 2–3, at 39; Exclusive Option (Dkt. 29-1) Ex. A, at

1.
23

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 5, at 5; Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 5, at 2
(admitting these facts, with the clarification noted supra at note 20); Exclusive Option (Dkt.
29-1) Ex. A, at 1.
6

balance of $525,000. 24 Two days later, Mr. Merrill, paid the $25,000.00 non-refundable
deposit to Mr. Tyson by issuing a check from his law firm’s IOLTA trust account.25
Consequently, Mr. Merrill had until June 23, 2015, to raise the additional $525,000.00
needed to purchase Tyson’s leasehold interests.
Little is known about Mr. Merrill’s efforts to secure funding between March 27 and
June 23, 2015. An affidavit from Mr. Tyson indicates that a closing was set up for June
23rd, but that Mr. Merrill called approximately three hours beforehand to request more
time, which Mr. Tyson permitted. 26 A “few” weeks later, a second closing was scheduled,
but Mr. Merrill again informed Mr. Tyson that he wasn’t ready to close. 27
In July and August of 2015, Mr. Merrill and Mr. Schnell met with Plaintiffs and
several others to solicit investment funding for acquisition of the Kiowa County leasehold
interests. 28 Five people representing seven of the ten Plaintiffs—i.e., Deborah K. Brandt,
James Dustin Price of CCJ Ventures LLC, Joe Lindsey of Big J’s Oil Co. LLC, Michael
Beckham of Beckham Oil LLC, and James R. Price of Jim Price Oil Co. LLC, Duslei
Energy LLC, and Bidarka Gas Corp.—have produced affidavits concerning what was

24

Pls.’ Mot. Summ. J. (Dkt. 29) ¶¶ 5–7, at 5–6; Def. Stephen Merrill’s Resp. (Dkt. 44)
¶¶ 5–7, at 2 (admitting everything, with the clarification noted supra at note 20); Exclusive
Option (Dkt. 29-1) Ex. A, at 1.
25

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 8, at 6; Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 8, at 2
(“Admitted.”); Exclusive Option (Dkt. 29-1) Ex. A, at 1; Check (Dkt. 29-1) Ex. B, at 2.

26

Tyson Aff. (Dkt. 29-3) Ex. X, ¶ 4, at 39.

27

Id. ¶ 5, at 39.

28

Pl.’s List of Admitted Compl. Paragraphs (Dkt. 29-4) Ex. AA, ¶ 10, at 1
7

discussed at those meetings. 29 Plaintiffs have also obtained affidavits from five other
people who attended those same meetings but decided not to invest. 30 Nine affiants
represent that Mr. Merrill said he needed to raise $1,000,000.00 to purchase the leasehold
interests from Tyson. 31 One of the non-parties recalls Mr. Merrill stating that SBM Energy,
LLC had the exclusive option to acquire the leasehold interests and produced
documentation from the meeting held July 27, 2015, indicating that, upon “Investors . . .
paying to SBM the sum of one million dollars USD ($1,000,000)[,] . . . SBM shall exercise
its Option to acquire from Tyson Oil Company the leases scheduled in Exhibit ‘B’ attached
hereto (‘Tyson Leases’), existing production and all associated equipment for $1.0
million.” 32 Seven of the affiants state that Mr. Merrill never mentioned the MFS Trust at

29

Brandt Aff. (Dkt. 29-3) Ex. X, at 22; James D. Price (CCJ Ventures LLC) Aff. (Dkt. 293) Ex. X, at 26; Lindsey (Big J’s Oil Co. LLC) Aff. (Dkt. 29-3) Ex. X, at 28; Beckham
(Beckham Oil LLC) Aff. (Dkt. 29-3) Ex. X, at 30; James R. Price (Jim Price Oil Co., LLC)
Aff. (Dkt. 29-3) Ex. X, at 32; James R. Price (Duslei Energy LLC) Aff. (Dkt. 29-3) Ex. X,
at 34; James R. Price (Bidarka Gas Corp.) Aff. (Dkt. 29-3) Ex. X, at 36.
30

Brenner Aff. (Dkt. 29-3) Ex. X, at 2; Dennis Aff. (Dkt. 29-3) Ex. X, at 4; Redd Aff. (Dkt.
29-3) Ex. X, at 18; Bradford Aff. (Dkt. 29-3) Ex. X, at 20; Dozier Aff. (Dkt. 29-3) Ex. X,
at 24.
31

Brenner Aff. (Dkt. 29-3) Ex. X, at 3; Dennis Aff. (Dkt. 29-3) Ex. X, ¶ 1, at 4; Redd Aff.
(Dkt. 29-3) Ex. X, at 18–19; Bradford Aff. (Dkt. 29-3) Ex. X, at 21; Dozier Aff. (Dkt. 293) Ex. X, at 25; James D. Price (CCJ Ventures LLC) Aff. (Dkt. 29-3) Ex. X, at 27; Lindsey
(Big J’s Oil Co. LLC) Aff. (Dkt. 29-3) Ex. X, at 29; Beckham (Beckham Oil LLC) Aff.
(Dkt. 29-3) Ex. X, at 31; James R. Price (Jim Price Oil Co., LLC) Aff. (Dkt. 29-3) Ex. X,
at 33; James R. Price (Duslei Energy LLC) Aff. (Dkt. 29-3) Ex. X, at 35; James R. Price
(Bidarka Gas Corp.) Aff. (Dkt. 29-3) Ex. X, at 37.
32

Dennis Aff. (Dkt. 29-3) Ex. X, ¶ 1, at 4; Unexecuted Exploration Agreement (Dkt. 293) Ex. X, ¶¶ 1–2, at 6
8

the meetings. 33 Mr. Merrill admits that he “did not ever disclose to Plaintiffs that the MFS
Trust had the right to purchase the Mineral Interests for only $550,000 from Tyson &
Rhodes.” 34 By one affiant’s account, he asked Mr. Merrill if the investors could directly
“contact Tyson to see if he would take $600,000 or $700,000 for the leases,” but Mr. Merrill
assured him “that Tyson would not take less than $1,000,000” and told him that no one
should contact Mr. Tyson. 35
Mr. Merrill eventually convinced Plaintiffs to invest $250,000.00 with him for
purchasing the leasehold interests and an additional $125,000.00 for further exploration
and development. 36 Between July 8 and October 22, 2015, the Plaintiffs executed
Exploration Agreements with SBM Energy, LLC and submitted $250,000 to be used for
purchasing the leasehold interests—giving Plaintiffs a 25% interest in the Kiowa County
leasehold interests. 37 Mr. Merrill and Mr. Schnell also convinced Buford and Helen

33

Dennis Aff. (Dkt. 29-3) Ex. X, ¶ 5, at 4; Dozier Aff. (Dkt. 29-3) Ex. X, at 25; James D.
Price (CCJ Ventures LLC) Aff. (Dkt. 29-3) Ex. X, at 27; Lindsey (Big J’s Oil Co. LLC)
Aff. (Dkt. 29-3) Ex. X, at 29; Beckham (Beckham Oil LLC) Aff. (Dkt. 29-3) Ex. X, at 31;
James R. Price (Jim Price Oil Co., LLC) Aff. (Dkt. 29-3) Ex. X, at 33; James R. Price
(Duslei Energy LLC) Aff. (Dkt. 29-3) Ex. X, at 35; James R. Price (Bidarka Gas Corp.)
Aff. (Dkt. 29-3) Ex. X, at 37.
34

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 11, at 7; Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 11, at
2 (“Admitted,” but with the addition of a “relevant predicate” by which Mr. Merrill attempt
to justify his mark-up from $550,000 to $1,000,000)
35

Dozier Aff. (Dkt. 29-3) Ex. X, at 25.

36

See Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 12, at 7 (asserting that Mr. Merrill “coerced and
induced” Plaintiffs to invest); Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 12, at 2–3 (denying
the asserted fact on the sole basis that he “never coerced, or attempted to coerce, any of the
Plaintiffs, or anyone else for that matter, to invest in SBM’s Hobart Prospect”)
37

See Pls.’ Mot. Summ. J. (Dkt. 29) ¶¶ 13–14, at 7 (asserting payment of $250,000 to SBM
Energy, LLC to acquisition of the leasehold interests); Def. Stephen Merrill’s Resp. (Dkt.
9

Williams to invest the remaining $750,000 needed to purchase the leasehold interests and
an additional $375,000.00 for further exploration and development; the Williamses sent a
wire transfer of $1,125,000.00 to Mr. Merrill on September 21, 2015. 38
On the same day he received the Williamses’ money, Mr. Merrill made an $800,000
transfer and a $200,000 transfer from SBM Energy, LLC’s account at Bank of America to
the MFS Trusts’ account at Arvest Bank. 39 He also obtained a cashier’s check from the
MFS Trust’s account made payable to Tyson Oil Company, LLC in the amount of
$525,000 and purchased the leasehold interests, 40 leaving a remainder of $475,000.00.
Because Mr. Merrill and Mr. Schnell treated the remainder as a mark-up, they split it evenly

44) ¶¶ 13–14, at 3 (acknowledging receipt of $375,000 from Plaintiffs, of which $250,000
was transferred to the MFS Trust for purchase of the leasehold interests, and
acknowledging that Plaintiffs and SBM Energy, LLC executed Exploration Agreements);
Bidarka Gas Corp., Duslei Energy LLC, and Jim Price Oil Co. LLC’s Exploration
Agreement (Dkt. 29-1) Ex. C, at 3–10; Pl.’s Checks (Dkt. 29-2) Ex. W, at 51–62 (showing
receipt of $257,500 from Plaintiffs).
38

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 16, at 7 (asserting that Mr. Merrill “coerced Buford and
Helen Williams to invest $750,000); Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 16, at 3
(denying the asserted fact on the sole basis that the Williamses “were not coerced”); Compl.
(Dkt. 29-2) Ex. L, ¶ 13, at 18, Williams v. Merrill, No. 4:16-cv-00606-TLW (N.D. Okla.
filed Sept. 21, 2016) (asserting that the Williamses sent a wire transfer of $1,125,000 to
Mr. Merrill, of which $750,000 was to be used for purchasing the leasehold interests).
39

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 18, at 8; Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 18, at
3 (“Admitted.”); Arvest Statement for Account No. XXXXX0367 (Dkt. 29-2) Ex. V, at 46,
49 (showing “ELECTRONIC ACTIVITY” on 9/21/15 with a description of “SBM
ENERGY LLC” and an amount of $800,000.00 and showing a deposit slip dated 9/21/15
in the amount of $200,000.00).
40

Pls.’ Mot. Summ. J. (Dkt. 29) ¶¶ 19–20, at 8; Def. Stephen Merrill’s Resp. (Dkt. 44)
¶¶ 19–20, at 3 (“Admitted.”); Cashier’s Check (Dkt. 29-1) Ex. D, at 11; Arvest Statement
for Account No. XXXXX0367 (Dkt. 29-2) Ex. V, at 48–49 (showing a “CHECK[] PAID”
on 9-21 in the amount of $525,000.00 and a checking/money market withdrawal slip dated
9/21/15 in the amount of $525,000.00 with the memo “Tyson Oil Company, LLC”).
10

between themselves. Mr. Merrill kept his $237,500 in the MFS Trust account and wrote
Mr. Schnell a $237,500 check from the MFS Trust account. 41 What happened to the markup money from there is either unknown or disputed. 42
Upon purchase of the leasehold interests, it appears the MFS Trust assigned “an
overriding royalty interest equal to the difference between 25% and existing lease
burdens, if any, as to each and every lease” to Russell Dozier and SBM Energy, LLC’s
management team 43—which included Mr. Merrill (President), Mr. Schnell (Vice President
of Operations), Cody Merrill (Vice President of Finance), and John Helton (Geologic
Consultant). 44 SBM Energy, LLC then assigned all of the remaining 75% net revenue
41

Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 21, at 8; Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 21, at
3 (“Admitted.”); Check to Schnell (Dkt. 29-1) Ex. E, at 13; Arvest Statement for Account
No. XXXXX0367 (Dkt. 29-2) Ex. V, at 48, 50 (showing a “CHECK[] PAID” on 9-21 in
the amount of $237,500.00 as well as an image of that check).
42

The parties’ briefing on summary judgment is silent on what happened to the money.
But other filings have offered possible explanations.
In their Amended Complaint (Dkt. 3), Plaintiffs alleged “[u]pon information and belief”
that Mr. Merrill and his wife used some of the money he kept “to purchase the home in
which his wife, Karen Merrill, and he now reside.” Pls.’ Am. Compl. (Dkt. 3) ¶ 24, at 5.
But the Merrill Defendants denied such allegations in their Answer (Dkt. 6), stating that
“Defendants Merrill sold their Tulsa home of 20 years in May of 2017 (two years later)
and bought a different, and much smaller home, in Owasso” and that “[a]bsolutely no
investor money was used!” Defs. (1), (2), (3) & (4) Answer (Dkt. 6) ¶ 22, at 3.
In his Proposed Findings of Fact and Conclusions of Law (Dkt. 67), Mr. Merrill seemingly
suggests that some of the mark-up money was used to buy a pulling unit and a water truck
that SBM Energy, LLC used solely on the Kiowa County leases purchased from Tyson.
But the source of the money used to buy that equipment is not explicitly stated. See Def.
Stephen Merrill’s Proposed Findings of Fact & Conclusions of Law (Dkt. 67) ¶ 39, at 9.
43

Assignment of Overriding Royalty Interest (Dkt. 29-1) Ex. F, at 15; see also Exploration
Agreement (Dkt. 29-1) Ex. C, ¶ 2(b), at 3 (discussing delivery to the Investors of 75% net
revenue interest in all leases).
44

Business Plan (Dkt. 29-1) Ex. I, at 44–45.
11

interest to Plaintiffs and the Williamses. 45 This made Plaintiffs and the Williamses working
interest owners. 46 Under the terms of the Exploration Agreement, Plaintiffs and the
Williamses would receive their portion of revenue from any producing wells through direct
payment by the oil purchaser, Murphy Oil Co., until they recouped their initial investments
that totaled $1,500,000.00. 47 After such recoupment or “payout,” SBM Energy, LLC would
“automatically back-in for a 20% working interest with regard to all existing and future
wells and production therefrom,” presumably decreasing the Plaintiffs’ 25% working
interest and the Williamses’ 75% working interest proportionately. 48 Furthermore, the
Exploration Agreement required working interest owners to contribute to SBM Energy,
LLC “an additional $5,000 per month to cover other monthly operating expenses including
electricity and insurance, in addition to general administrative services and supervision.” 49

45

Exploration Agreement (Dkt. 29-1) Ex. C, ¶¶ 2(b), 3, at 3; see also Pls.’ Mot. Summ. J.
(Dkt. 29) ¶ 22, at 9 (asserting ownership of a working interest); Def. Stephen Merrill’s
Resp. (Dkt. 44) ¶¶ 22, 31, at 3–4 (admitting Plaintiffs’ ownership of a working interest but
explaining that Plaintiffs only owned a 75% interest in the leases, as provided in the
Exploration Agreement).
46

See supra note 45; Compl. (Dkt. 29-2) Ex. L, supra note 38, ¶ 25, at 20 (asserting that
the Williamses “are working interest owners in some of these oil and gas schemes”).
47

Exploration Agreement (Dkt. 29-1) Ex. C, ¶¶ 3, 8, at 3, 5.

48

Id. ¶ 10, at 6; Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 25, at 9; Def. Stephen Merrill’s Resp. (Dkt.
44) ¶ 25, at 4 (“Admitted.”).

49

Id. ¶ 12(c), at 6.
12

Despite Mr. Merrill’s initial plans to use a separate company as operator of the wells
on the leasehold interests, 50 SBM Energy, LLC ended up serving as the operator. 51 The
parties have presented minimal evidence about oil production from the wells on the Kiowa
County leases, the revenues received from sale of the oil, the operating expenses associated
with the production, the investor’s contributions toward those operating expenses, or the
net profits realized by the investors. From December 2015 to September 2016, SBM
Energy sold anywhere from 69.2 to 1,306.7 barrels of oil from the leases. 52 It appears the
Plaintiffs and the Williamses were making contributions toward operating costs or “joint
interest billing” during this period. 53 But the Williamses’ contributions toward joint interest
billing ceased sometime around September 2016, when they filed suit against Mr. Merrill,
Mr. Schnell, SBM Energy, LLC, and SBM Operating, LLC in the U.S. District Court for
the Northern District of Oklahoma for fraud, securities fraud, negligence, and conversion. 54
Because the Williamses were responsible for 75% of the joint interest billing, their lack of

50

See Pls.’ Mot. Summ. J. (Dkt. 29) ¶ 24, at 9; Exploration Agreement (Dkt. 29-1) Ex. C,
¶ 4, at 2 (discussing the plan to use SBM Operating LLC “for the purpose of conducting
all the actual operations, thus providing a liability shield to SBM and Investors in the
unlikely event of a catastrophic loss of any kind”); Def. Stephen Merrill’s Resp. (Dkt. 44)
¶ 24, at 3 (stating that SBM Operating LLC was formed but never used).
51

Id. ¶ 27, at 9 (acknowledging that SBM Energy LLC was the operator); Tyson Aff. (Dkt.
29-3) Ex. X, ¶ 9, at 38.
52

Total Barrels of Oil Sold by All Project Leases (Dkt. 29-2) Ex. T, at 43.

53

See Cash Flow for Kiowa Project (Dkt. 29-2) Ex. R, at 36–38 (outlining the “JIB” for
Plaintiffs); Loss on Stoppage of Production (Dkt. 29-2) Ex. S, at 41 (showing the “Joint
Interest Billing” for all investors).
54

See Pls.’ Mot. Summ. J. (Dkt. 29) ¶¶ 27-28, at 9–10; Def. Stephen Merrill’s Resp. (Dkt.
44) ¶¶ 27–28, at 4 (admitting ¶ 28 and only denying the allegations in ¶ 27 insofar as they
suggest that Mr. Merrill may have a duty to prepare an operating agreement).
13

contributions led to a stoppage of production in December 2016 that would last until
September 2017. 55 The Plaintiffs fault Mr. Merrill for the cessation, arguing that he should
have prepared a joint operating agreement that would allow SBM Energy, LLC to garnish
the payments going to the Williamses by the amount of joint interest billing they owe, but
it appears none of the Plaintiffs ever asked for a Joint Operating Agreement. 56
A year into the Williamses’ lawsuit, the Williamses found a friend, Phil Osterhout
of the Yarhola Production Co., who was interested in buying their working interests in the
Kiowa County leases. On September 21, 2017, Mr. Osterhout met with the principals for
Plaintiffs Bidarka Gas Corp., Duslei Energy, LLC, Jim Price Oil Co. LLC, and CCJ
Ventures LLC—i.e., Jim Price and his son, Jimmy—to verify whether he wanted to be
investment partners with the Plaintiffs. 57 Shortly thereafter, Mr. Osterhout agreed to buy
out the Williamses, and the Williamses settled their lawsuit. 58 Mr. Osterhout’s company
became the operator on the leases. 59

55

See Pls.’ Mot. Summ. J. (Dkt. 29) ¶¶ 27, 29, at 9–10; Def. Stephen Merrill’s Resp. (Dkt.
44) ¶¶ 27, 29, at 4 (only denying the allegations in ¶¶ 27 and 29 insofar as they suggest that
Mr. Merrill may have a duty to prepare an operating agreement).
56

See Pls.’ Mot. Summ. J. (Dkt. 29) ¶¶ 27, 29, at 9–10; Def. Stephen Merrill’s Resp. (Dkt.
44) ¶¶ 27, 29, at 4.

57

See James R. Price Aff. (Dkt. 29-4) Ex. BB, at 11–12; Def. Stephen Merrill’s Proposed
Findings of Fact & Conclusions of Law (Dkt. 67) ¶ 57, at 12.
58

See James R. Price Aff. (Dkt. 29-4) Ex. BB, at 11; Def. Stephen Merrill’s Proposed
Findings of Fact & Conclusions of Law (Dkt. 67) ¶ 61, at 12.
59

James R. Price Aff. (Dkt. 29-4) Ex. BB, at 12; Yarhola Prod. Co.’s 1/31/2018 Statement
(Dkt. 29-4) Ex. BB, at 14–19; Yarhola Prod. Co.’s 1/31/2018 Jt. Interest Invoice (Ex. 294) Ex. BB, at 20–26.
14

At the September 21, 2017 meeting with Mr. Osterhout, Plaintiffs first became
aware that Mr. Merrill had only paid Gary Tyson $525,000 for the Kiowa County leases,
rather than $1,000,000. 60 Jim Price called Mr. Tyson to verify the information, and Mr.
Tyson faxed him copies of the Exclusive Option Agreement and the two checks received
from the MFS Trust. 61
Shortly thereafter, on December 15, 2017, Plaintiffs filed this lawsuit against Mr.
and Mrs. Merrill, SBM Energy, LLC, and the MFS Trust in the District Court of Oklahoma
County, alleging that Mr. Merrill used SBM Energy, LLC and the MFS Trust to defraud
them; to commit securities fraud in violation of §§ 12(1)–(2) and 17(a) of the Securities
Act, § 10(b) of the Exchange Act and Rule 10b-5 thereunder, and certain provisions of the
Oklahoma Securities Act, Okla. Stat. tit. 71, §§ 509 et seq.; to convert their investment
money for his own use and benefit and seeking an accounting, the creation of a constructive
trust over the assets Mr. Merrill acquired with their investment money, and an injunction
preventing Mr. Merrill from dispersing such assets. 62 On January 16, 2018, Mr. Merrill
removed the lawsuit to this Court. 63 On March 27, 2018, Plaintiffs filed an Amended
Complaint (Dkt. 3) adding Mr. Schnell as a defendant.

60

James R. Price Aff. (Dkt. 29-4) Ex. BB, at 12.

61

Id.

62

Id.; Pls.’ Pet. (Dkt. 1-1) at 1, 7–14.

63

Notice of Removal (Dkt. 1) at 1.
15

Analysis
Plaintiffs have filed a Motion for Summary Judgment (Dkt. 29), seeking summary
adjudication against Defendants on several claims.
A. Fraud
First, Plaintiffs seek summary adjudication against Mr. Merrill, SBM Energy, LLC,
and the MFS Trust on the fraud claim and ask the Court to award them a money judgment
in the amount of $112,500.00.
The elements of common law fraud are: (1) a material misrepresentation; (2) known
to be false at the time made; (3) made with specific intent that a party would rely on it; and
(4) reliance and resulting damage. 64 Fraud is divided into actual fraud and constructive
fraud. 65 Actual fraud requires the intentional misrepresentation or concealment of a
material fact which substantially affects another person. 66 Constructive fraud is a breach of
either a legal or equitable duty that does not necessarily involve any moral guilt, intent to

64

Bowman v. Presley, 2009 OK 48, ¶ 13, 212 P.3d 1210, 1218. There is some question as
to whether Plaintiffs are asserting a common law fraud claim or a statutory fraud claim,
particularly insofar as Plaintiffs’ Motion for Summary Judgment cites both to case law
concerning common law fraud and a state statute that defines the term “actual fraud.” Upon
review of the relevant statutory provisions, it appears such statutes would only apply if
Plaintiffs were seeking to invalidate a contract. See Okla. Stat. tit. 15, §§ 51, 53, 57–59
(stating first that “[c]onsent of the parties to a contract must be: 1. Free. 2. Mutual; and, 3.
Communicated by each to the other”; second that “consent is not real or free when obtained
through: . . . 3. Fraud”; and third defining the terms “fraud,” “actual fraud,” and
“constructive fraud” but only “within the meaning of this chapter”). As Plaintiffs are not
seeking to invalidate the Exploration Agreement by which they obtained working interests
in the Kiowa County leases, it appears their claim lies in the common law.
65

Patel v. OMH Med. Ctr., Inc., 1999 OK 33, ¶ 34, 987 P.2d 1185, 1199 (citations omitted).

66

Faulkenberry v. Kan. City S. Ry. Co., 1979 OK 142, ¶ 4, 602 P.2d 203, 206.
16

deceive, or actual dishonesty of purpose. 67 It may be defined as any breach of a duty which,
regardless of the actor’s intent, gains an advantage for the actor by misleading another to
his prejudice. 68 Where a party has a duty to speak, but remains silent, there may be
constructive fraud. 69 In Deardorf v. Rosenbusch, 1949 OK 117, 206 P.2d 996, the
Oklahoma Supreme Court held:
A duty to speak may arise from partial disclosure, the speaker being under a
duty to say nothing or to tell the whole truth. One conveying a false
impression by the disclosure of some facts and the concealment of others is
guilty of fraud, even though his statement is true as far as it goes, since such
concealment is in effect a false representation that what is disclosed is the
whole truth.
“Fraud is never presumed and each of its elements must be proved by clear and convincing
evidence.” 70
Plaintiffs argue that Mr. Merrill committed actual fraud. They assert (1) Mr.
Merrill’s representations in July and August 2015 that he must pay Gary Tyson $1,000,000
to acquire the Kiowa County leases was a material misrepresentation; (2) that Mr. Merrill’s
failure to disclose that the MFS Trust had the right to purchase the leases for $550,000
pursuant to the Exclusive Option agreement that was executed in March 2015 constituted
concealment of a material fact; (3) that Mr. Merrill’s affirmative misrepresentation of a
material fact and concealment of a material fact were knowing and intentional, as

67

Id.

68

Patel, 1999 OK 33, ¶ 34, 987 P.2d at 1199.

69

Evers v. FSF Overlake Assocs., 2003 OK 53, ¶ 16 n.3, 77 P.3d 581, 587 n.3 (citations
omitted).
70

Bowman, 2009 OK 48, ¶ 13, 212 P.3d at 1218.
17

demonstrated by the prior execution of the Exclusive Option agreement; (4) that Mr.
Merrill intended for the Plaintiffs to act upon his fraudulent actions by giving him
$1,000,000 in investment money; and (5) that Plaintiffs did rely upon his fraudulent actions
by giving him $1,000,000 to their detriment. Plaintiffs further assert that Mr. Merrill “failed
to disclose that he was retaining overrides on the Kiowa properties”—i.e., that he was
assigning an overriding royalty interest of up to 25% to Russell Dozier and the SBM
Energy, LLC management team. Plaintiffs claim their damages are $112,500, which is their
25% share of the difference between the $1,000,000 Plaintiffs gave Mr. Merrill and the
$550,000 Mr. Merrill gave Mr. Tyson—i.e., 25% × ($1,000,000 – $550,000) = $112,500.
Mr. and Mrs. Merrill admit they only told Plaintiffs about the $1,000,000 price and
that they never told Plaintiffs’ about the $550,000 price, but argue such information is
“irrelevant” because “[a]ll Plaintiffs and the Williamses were explicitly told that the cost
to all of the investors was $1 million in order to purchase the Tyson Leasehold Interests”
and “Defendants delivered as promised.” 71 The Merrills justify the price mark-up by
arguing that the MFS Trust deserved compensation for “gambling $25,000 of its own
money to buy the Exclusive Option” when there was no guarantee that the penniless SBM
Energy, LLC would be successful in raising the remaining balance of $525,000 needed to

71

E.g., Def. Stephen Merrill’s Resp. (Dkt. 44) ¶ 17, at 3; see also id. at 6 (“Defendants told
every Plaintiff, up front, that the cost to the investors would be one million dollars to buy
the Tyson Leases. And the cost they actually paid, in fact, was exactly one million dollars,
no more, no less. . . . [E]ach Defendant [sic] did, in fact, get exactly what they had agreed
to.”).
18

purchase the leasehold interests from Tyson. 72 Lastly, the Merrills point to ¶ 2(b) of the
Exploration Agreement to demonstrate that they did advise Plaintiffs Mr. Merrill would be
retaining an overriding royalty interest insofar as he advised Plaintiffs they would only be
receiving 75% net revenue interest.
It is undisputed that Mr. Merrill knowingly concealed the facts that the MFS Trust
possessed the exclusive option to purchase the leasehold interests, that Tyson was selling
the leasehold interests for $550,000, and that the $450,000 mark-up would be split between
himself and Mr. Schnell. It is also undisputed that he knowingly misrepresented that
$1,000,000 were needed to purchase the leasehold interests from Mr. Tyson—even telling
Bill Dozier and Jim Price that Mr. Tyson would not accept $600,000 or $700,000 and that
they should refrain from contacting Mr. Tyson to negotiate the price down. The Merrills
main argument seems to be an attack upon either the materiality of these facts or the
existence of a detriment suffered. On one hand, they seem to be arguing that the only
material information was an offer of leasehold interests in exchange for $1,000,000. On
the other hand, they seem to suggest that Plaintiffs got exactly what they bargained for—
i.e., the leasehold interests—at the price they bargained for, meaning they have suffered no
harm. Under Oklahoma law, “[a] fact is material if a reasonably careful person under the
circumstances would attach importance to it in determining [his/her] course of action.” 73
72

Id. at 6; see also id. ¶ 10, at 2.

73

Okla. Unif. Jury Instr.–Civ. 3d # 18.4 (rev. 2009); accord Restatement (Second) of Torts
§ 538, at 80 (stating that, for purposes of tort law, a “matter is material” in only two
circumstances: (1) “[if] a reasonable man would attach importance to [it] in determining
his choice of action in the transaction”; or (2) if the defendant knew or had reason to know
that the recipient of the representation attaches importance to the specific matter “in
19

Here, all of the facts that were either misrepresented or concealed would be important to
Plaintiffs in determining whether they should hand over $1,000,000 or something less.
Thus, those facts were material. Moreover, all the investors suffered a detriment to the tune
of $450,000; the Plaintiff’s portion is only 25% of that detriment, or $112,500.
Upon review of the undisputed facts and the parties’ legal arguments, the Court
finds that Mr. Merrill, in his capacity as President of SBM Energy, LLC, committed actual
fraud. Although Plaintiffs seek judgment as a matter of law against Mr. Merrill in his
individual capacity, SBM Energy, LLC, and the MFS Trust, the Court can only enter a
summary adjudication on the common law fraud claim against SBM Energy, LLC.
Plaintiffs have not presented any evidence to demonstrate why the corporate veil should be
pierced to permit entry of judgment against Mr. Merrill, individually, nor have Plaintiffs
presented any evidence to demonstrate why acts he took as an officer of the limited liability
company should be attributed to the trust.
B. Constructive Trust and Injunction
Plaintiffs’ fourth claim concerns alternative equitable remedies for the fraud
perpetrated by SBM Energy, LLC. In support of their request, Plaintiffs cite a statute that
discusses constructive fraud but not constructive trusts, as well as two cases that do discuss
constructive trusts but not in the context of summary judgment. Further, Plaintiffs do not

determining his choice of action,” even though a reasonable person would not);
Restatement (Second) of Contracts § 162(2) & cmt. C, at 439, 441 (1979) (stating that, for
purposes of contract law, “a misrepresentation is material” only if it would “likely . . .
induce a reasonable person to manifest his assent,” or the defendant “knows that for some
special reason [the representation] is likely to induce the particular recipient to manifest
his assent” to the transaction).
20

attempt to identify any specific property that any of the Defendants have acquired with the
fraudulently obtained funds, making it impossible for the Court to create a constructive
trust over any specific property. Plaintiffs also have not discussed the elements for
obtaining injunctive relief. Consequently, Plaintiffs are not entitled to the creation of a
constructive trust or to the entry of an injunction at this summary judgment stage.
C. Securities Fraud
Plaintiffs’ second claim seeks summary adjudication against Mr. Merrill
individually, Mr. Merrill in his capacity as trustee of the MFS Trust, and SBM Energy,
LLC for alleged violations of § 12(2) of the Securities Act of 1933, 74 § 10(b) of the
Securities Exchange Act of 1934, 75 and Rule 10b-5, 76 and again ask for an award of
$112,500.00. 77
The Securities Act of 1933, 15 U.S.C. §§ 77a et seq., governs dealings related to the
initial issuance of securities. Section 2 of the Securities Act defines the term “security” to
mean, among other things, “any . . . fractional undivided interest in oil, gas, or other mineral
rights.” 78 Section 11 governs the requirements for registered securities sold pursuant to
registration statements filed with the SEC and allows purchasers of a registered security to

74

15 U.S.C. § 77l (2012).

75

Id. § 78j(b).

76

17 C.F.R. § 240.10b-5.

77

Incidentally, despite the heading in Plaintiffs’ Motion for Summary Judgment (Dkt. 29)
that mentions “OKLAHOMA SECURITIES FRAUD,” the motion never again mentions
any state law concerning securities fraud.
78

15 U.S.C. § 77b(a)(1) (2012).
21

sue certain parties when false or misleading information is included in a registration
statement. 79 Section 12 governs securities sold by a prospectus or oral communication and
allows purchasers to sue certain parties when the prospectus or oral communication
contains a misstatement or omission about which the party being sued did not know and
could not have known after the exercise of reasonable care. 80
In citing § 12(2), Plaintiffs imply that Tyson’s oil and gas leasehold interests were
being sold by means of a prospectus or oral communication. Otherwise, § 12(2) would not
apply. But Plaintiffs fail to assert any undisputed facts to demonstrate that Tyson and the
MFS Trust’s Exclusive Option agreement, or even SBM Energy, LLC and Plaintiffs’
Exploration Agreements were either a “prospectus” or “oral communication” such that the
terms of § 12(2) are applicable. In the case of Gustafson v. Alloyd Co., 513 U.S. 561 (1995),
the U.S. Supreme Court defined the term “prospectus” as “a document that describes a
public offering of securities by an issuer or controlling shareholder” and that, “absent an
overriding exemption [in § 3 of the Securities Act], must include ‘the information
contained in the registration statement’” as spelled out in §§ 7 and 10 of the Act. 81 The
Gustafson Court also defined the phrase “oral communication” as being restricted to oral
communications that relate to a prospectus. 82 Nothing in Plaintiffs’ Motion for Summary
Judgment (Dkt. 29) even attempts to demonstrate that the documents involved here were a

79

Id. § 77k; Herman & MacLean v. Huddleston, 459 U.S. 375, 381 (1983).

80

§ 77l(a)(2).

81

513 U.S. at 569, 571, 584 (emphasis added).

82

Id. at 567–68.
22

prospectus, that they contained the same information that would appear in a registration
statement filed with the SEC, or that some exemption under § 3 of the Act applies. Thus,
it is not clear to this Court that § 12(2) of the Securities Act even gives rise to a claim under
the undisputed facts presented by the parties. Also, Plaintiffs do not appear to be seeking
the remedy offered by § 12(2), which would be a “recover[y] [of] the consideration paid
for such security with interest thereon, less the amount of any income received thereon,
upon tender of such security, or for damages if he no longer owns the security.” 83 Plaintiffs
still own the alleged securities, but they are not seeking rescission of the purchase. Instead,
Plaintiffs seek the difference between what they paid and what they would have paid had
they known all of the material facts. Lastly, in light of the exclusive option to buy, it does
not appear this transaction involved a “public offering” of securities. Plaintiffs are
attempting to recycle their common law fraud claim under a theory of liability that does
not apply. Consequently, Plaintiffs are not entitled to summary adjudication on the alleged
violation of § 12(2) of the Securities Act of 1933.
But Plaintiffs also allege violations of § 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5. The Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq.,
governs dealings in securities following their initial issue. The Exchange Act is intended
to protect the investing public from manipulation and deception and to promote free and
fair public security markets and fair dealing in such markets. 84 Section 10(b) is a catch-all

83

§ 77l(a).

84

See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976); United Hous. Found.,
Inc. v. Forman, 421 U.S. 837, 849 (1975); see also Blackie v. Barrack, 524 F.2d 891, 907
23

antifraud provision permitting a purchaser or seller “of any security registered on a national
securities exchange or any security not so registered, or any securities-based swap
agreement” to bring an action against “any person” who has used “any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest or for the
protection of investors.” 85 Rule 10b-5 implements this provision by making it unlawful to,
among other things, “make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading” by the use, directly or
indirectly, “of any means or instrumentality of interstate commerce, or of the mails or of
any facility of any national securities exchange.” 86 Federal jurisdiction depends on the “use
of any means or instrumentality of interstate commerce or of the mails or of any facility of
any national securities exchange.” 87 The U.S. Supreme Court has previously implied a
private cause of action from the text and purpose of § 10(b). 88 The elements of a claim for
violation of § 10(b) and Rule 10b-5 are: “(1) a material misrepresentation or omission by

(9th Cir. 1975) (stating that § 10(b) and Rule 10b-5 are designed to foster an expectation
that securities markets are free from fraud, an expectation on which purchasers should be
able to rely).
85

§ 78j(b); see also Herman & Maclean, 459 U.S. at 382.

86

17 C.F.R. § 240.10b-5; Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011).

87

§ 78j; § 240.10b-5; United States v. Kunzman, 54 F.3d 1522, 1527 (10th Cir. 1995).

88

Matrixx Initiatives, Inc., 563 U.S. at 37 (citing Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 318 (2007); Herman & MacLean, 459 U.S. at 380 & n.10 (citing
Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 (1971); Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 196 (1976)).
24

the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and
the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.” 89
Plaintiffs assert federal jurisdiction insofar as Mr. Merrill utilized bank accounts
belonging to his law firm, the MFS Trust, and SBM Energy, LLC to orchestrate the alleged
fraud. Plaintiffs also assert (1) the existence of material misrepresentations insofar as Mr.
Merrill represented that SBM Energy, LLC would be purchasing the Kiowa County leases
from Mr. Tyson for $1,000,000 and the existence of a material omissions insofar as Mr.
Merrill failed to disclose that the MFS Trust was purchasing the securities for $550,000
and failed to disclose that he and others would receive an overriding royalty interest of up
to 25% to; (2) that Mr. Merrill’s affirmative misrepresentations of material facts and
concealment of material facts were knowing and intentional, particularly insofar as he was
a licensed attorney who should know better; (3) that the misrepresentations related to the
price and the identity of the entity purchasing the securities, as well as the related omissions
were clearly connected to the purchase of the securities; (4) that the Plaintiffs relied upon
Mr. Merrill’s misrepresentations and omissions when they gave him their 25% share of the
$1,000,000; (5) that they suffered economic loss in the amount of $112,5000; and (6) that
Mr. Merrill’s misrepresentations and omissions were the cause of their loss.

89

Matrixx Initiatives, Inc., 563 U.S. at 37–38 (quoting Stoneridge Inv. Partners, LLC v.
Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008)).
25

The Merrills again argue that the facts “that MFS was going to make a profit on the
acquisition of the Tyson Leases and that Defendants were going to retain a small overriding
interest in some, but not all, of the Tyson Leases . . . [are] not material fact[s].” 90
Mr. Merrill’s use of bank accounts appears to be a sufficient basis for establishing
federal jurisdiction. 91 Moreover, it is undisputed that Mr. Merrill knowingly concealed the
facts that the MFS Trust possessed the exclusive option to purchase the leasehold interests,
that Tyson was selling the leasehold interests for $550,000, and that the $450,000 mark-up
would be split between himself and Mr. Schnell. It is also undisputed that he knowingly
misrepresented that $1,000,000 were needed to purchase the leasehold interests from Mr.
Tyson—even telling Bill Dozier and Jim Price that Mr. Tyson would not accept $600,000
or $700,000 and that they should refrain from contacting Mr. Tyson to negotiate the price
down. As discussed in relation to Plaintiffs’ common law fraud claim, the facts withheld
and the misrepresented facts were material facts related to the purchase or sale of the
leasehold interests. All remaining elements are met, and the Merrills fail to dispute them.
Thus, upon review of the undisputed facts and the parties’ legal arguments, the
Court finds that judgment as a matter of law should be entered against Mr. Merrill in his
capacity as trustee of the MFS Trust and SBM Energy, LLC on Plaintiffs’ claim under

90

E.g., Def. Stephen Merrill’s Resp. (Dkt. 44) at 7–8.

91

See Kunzman, 54 F.3d at 1527 (“The evidence also included numerous checks drawn
and deposited into banks involved in interstate commerce” such that “the district court had
jurisdiction over the securities fraud counts.” (citing Reyos v. United States, 431 F,2d 1337,
1348 (10th Cir. 1970), aff’d in part, rev’d in part by Affiliated Ute Citizens of Utah v.
United States, 406 U.S. 128 (1972))).
26

§ 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Although Plaintiffs also seek
judgment as a matter of law against Mr. Merrill in his individual capacity, the Court does
not have sufficient evidence at this time to ascertain whether Mr. Merrill should be held
liable. What is clear is that both Mr. Merrill in his capacity as trustee of the MFS Trust and
in his capacity as President of SBM Energy, LLC participated in the deceptive contrivance
that violated § 10(b) of the Securities Exchange Act and SEC Rule 10b-5.
D. Conversion
Next, Plaintiffs seek summary adjudication against Mr. Merrill individually, Mr.
Merrill in his capacity as trustee of the MFS Trust, and SBM Energy, LLC for allegedly
converting $112,500 of Plaintiffs’ money.
Oklahoma law regarding the tort of conversion is well settled and the elements of
liability are clear:
Conversion is any act of dominion wrongfully exerted over another’s
personal property in denial of or inconsistent with his rights therein. It is not
necessary to constitute a conversion that the property come into the
defendant’s possession wrongfully. Nor is it necessary that the alleged
converter apply the property to his own use, or be in bad faith. 92
“In terms of essential elements, one seeking damages for conversion must plead and prove
(a) he owns or has a right to possess the property in question, (b) that defendant wrongfully

92

Steenbergen v. First Fed. Sav. & Loan of Chickasha, 1987 OK 122, ¶ 9, 753 P.2d 1330,
1332 (citing Fed. Nat’l Bank of Shawnee v. Lindsey, 1935 OK 455, 43 P.2d 1036; U.S. Zinc
Co. v. Colburn, 1927 OK 76, 255 P. 688; Stack v. Gudgel, 158 P. 1144 (Okla. 1916); White
v. Webber-Workman Co., 1979 OK CIV APP 6, 591 P.2d 348).
27

interfered with such property right, and (c) the extent of his damages.” 93 Where the
undisputed facts establish all elements of conversion, summary judgment may properly be
entered in Plaintiffs’ favor. 94
Under the undisputed facts shown by the summary judgment record in this case,
Plaintiffs are not entitled to prevail on their conversion claim as a matter of law. Plaintiffs’
claim fails because they voluntarily gave the entire $250,000 to SBM Energy, LLC; SBM
Energy, LLC did not take it without Plaintiffs’ consent. “[I]f the owner expressly or
impliedly assents to or ratifies the taking, use, or disposition of his property, he cannot
recover as for a conversion thereof.” 95 Thus, Plaintiffs’ motion for summary adjudication
on the issue of conversion is denied.
E. Negligence—Failure to Prepare Operating Agreement
Lastly, Plaintiffs seek summary judgment against the operator, SBM Energy, LLC,
for alleged negligence resulting from its failure to prepare an operating agreement that
would have permitted it to attach the funds being disbursed to the investors when they
failed to pay their joint interest billings (i.e., operating expenses). Plaintiffs allege the
absence of an operating agreement permitted Buford and Helen Williams to essentially

93

White, 1979 OK CIV APP 6, ¶ 4, 591 P.2d at 350, cited in Steenbergen, 1987 OK 122,
753 P.2d 1330; accord Okla. Unif. Jury Instr.–Civ. 3d # 27-1 (rev. 2009).

94

See, e.g., Steenbergen, 1987 OK 122, ¶ 12, 753 P.2d at 1333.

95

Rose Bros., Inc. v. City of Alva, 1960 OK 231, ¶14, 356 P.2d 1083, 1085 (citing Okla.
Farmer’s Nat’l Grain Corp. v. Kirkendall, 1938 OK 337, 79 P.2d 570); accord Am.
Biomedical Grp., Inc. v. Techtrol, Inc., 2016 OK 55, ¶ 12, 374 P.3d 820, 825 (“Conversion
of personal property does not require the property be obtained by wrongful means, but it
must be either obtained or appropriated without the owner’s consent.”).
28

shut down operations when they decided to stop paying their joint interest billings, and
neither SBM Energy, LLC nor Plaintiffs could do anything about it. Plaintiffs assert this
resulted in lost revenue equaling $17,588, although Plaintiffs failed to assert that specific
amount of damages as an undisputed fact.
Plaintiffs’ motion fails to cite any case supporting the existence of an operator’s
duty to prepare a joint operating agreement, nor has the Court found any, even after looking
for cases that might incorporate that notion into an operator’s duty of diligent and proper
operation. 96
Consequently, Plaintiffs’ motion for summary adjudication on the issue of
negligence is denied.
IT IS THEREFORE ORDERED that Plaintiffs’ Motion for Summary Judgment
(Dkt. 29) is hereby GRANTED IN PART and DENIED IN PART. This case remains set
for trial on Tuesday, February 18, 2020.
IT IS SO ORDERED this 15th day of February, 2020.

96

For a discussion of the duty of diligent and proper operation, see, e.g., 5 Eugene Kuntz,
A Treatise on the Law of Oil and Gas § 59.1, at 105 (1991).
29