Striker Entities LLC v. Callander
Filing
55
ORDER denying 41 Plaintiff's Motion for Summary Judgment. Signed by Honorable Stephen P. Friot on 7/11/2019. (llg)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
STRIKER ENTITIES, LLC,
Plaintiff,
-vsBRUCE CALLANDER,
Defendant.
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Case No. CIV-18-508-F
ORDER
Before the court is Plaintiff’s Motion for Summary Judgment, filed May 1,
2019 (doc. no. 41). Defendant has responded to the motion and plaintiff has replied.
Upon due consideration of the parties’ submissions, the court makes its
determination.
I.
Plaintiff, Striker Entities, LLC (“Striker”), brings this breach of contract
action seeking to collect on two promissory notes executed by defendant, Bruce
Callander (“Callander”), in 2002 and 2003. According to Striker, the notes were
used to purchase ownership units in two phases of an oil and gas drilling partnership
called Program 2001.1 Program 2001 was managed by Striker and organized to
conduct oil and gas operations in Oklahoma and elsewhere. The subject notes
provided that “[t]he interest of [Callander] in the production from the Program Wells
shall be used by [Striker] to prepay [Callander’s] obligations under [the note] with
such payments to first be used to pay interest and then to pay the principal amount
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Callander also contributed cash to purchase the ownership units.
of [the note].” Ex. 1 and ex. 4 to Striker’s motion, ¶ 4. Striker claims that due to a
severe downtown in the price of oil and gas, it was forced to shut down Program
2001 and sell off its assets in the 2012-2014 timeframe. Because “no further
production from the Program’s wells [would be available] to reduce either the nonrecourse interest or the recourse principal amount of the [note],” Striker, by letter
dated April 20, 2015, declared the notes in default and demanded payment of the
outstanding principal balance of the notes.2 Ex. 5 to Striker’s motion. Striker claims
Callander refused to make payment as demanded and after having credited all oil
and gas production revenues from the Program Wells to the notes, Callander still
owes it $116,856.00 on the notes and $17,528.40 in attorney’s fees for collection of
the notes. Striker now seeks summary judgment under Rule 56(a), Fed. R. Civ. P.,
on its breach of contract claim and requests the court to enter judgment in its favor
and against Callander in the total amount of $134.384.40. Striker contends that
Callander cannot establish any defense to its right to payment of the notes.3
Callander opposes summary judgment, arguing that genuine issues of material
fact exist as to whether the notes are enforceable due to lack of consideration and
fraudulent inducement. With respect to lack of consideration, Callander asserts that
his core interest and expectation in investing in the oil and gas drilling partnership
was to obtain valid, ongoing tax deductions. Because of an Internal Revenue Service
audit conducted on a similar Striker drilling program (which found that the program
could not support the claimed tax deductions), together with Striker’s inability to
produce supporting records for Program 2001, Callander contends that his claimed
2
Only the principal balance was sought by Striker as each of the notes provided that “[a]ccrued
but unpaid interest shall be a non-recourse liability” and “the Maker shall be personally liable for
the payment of the principal amount of this [note].” Ex. 1 and ex. 4 to Striker’s motion, ¶¶3-4.
3
In its motion, Striker argues that Oklahoma law governs in this case. Callander, who is a resident
of California, does not challenge the applicability of Oklahoma law in his response. The court
therefore applies Oklahoma law.
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tax deductions based upon the notes were, at best, unsupported and potentially
invalid. Callander thus asserts that any benefit allegedly conferred pursuant to the
notes is illusory. Consequently, Callander argues that both notes fail for lack of
consideration.
As to the defense of fraudulent inducement, Callander asserts that Richard
Romine, Striker’s sole member and manager, made material, false representations
which induced Callander to execute the notes. Specifically, Callander asserts that
Romine told him the notes would be fully repaid from revenues from the drilling
program, and that in any event, Striker would not pursue Callander for repayment of
any note balance.4 Callander contends that these representations were false because
the revenues generated by Program 2001’s wells did not fully repay the alleged
balances on the notes and Striker is now pursuing collection of the notes with this
action. In addition, Callander asserts that Romine promoted the drilling program,
including the use of the notes, for the purpose of securing ongoing tax-deductible
investments. However, Callander contends that although requested, Striker has not
produced any supporting accounting to support the tax deductions and the IRS has
found that a substantially similar investment program could not support the claimed
deductions.
Even if the notes were enforceable, Callander argues that summary judgment
is not appropriate because there are genuine issues of material fact as to amount due
on the notes.
Callander maintains that Striker has not produced any
contemporaneous accounting that would support its damages claim. According to
4
Callander’s arguments in opposition to summary judgment rest in part on his contention that
there was a side agreement that he was not to be held liable on the notes. No issue is now before
the court as to any other potentially serious ramifications of this off-the-books agreement (if it did,
in fact, exist).
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Callander, the summary Schedule K-1’s prepared annually by Striker and provided
to Callander are not sufficient evidence to establish its damages.
In reply, Striker argues that the IRS audit of the other Striker drilling program,
Program 2007-A, is completely irrelevant to the enforceability of Callander’s notes.
Striker points out that Program 2001 has never been audited and that the IRS made
no findings in the referenced audit about Program 2001, the notes at issue or the
validity of the tax deductions for the notes. According to Striker, Callander has
presented no evidence that the specific features of Program 2007-A that the IRS
found objectionable are also features of Program 2001. In addition, Striker contends
that the notes are supported by consideration because Callander accepted and kept
all the tax benefits. Moreover, it asserts that the notes recite numerous mutual
promises of future performance. These promises, Striker argues, are sufficient
consideration for the notes. Striker further points out that the notes do not require it
to produce any documentation before the notes can be enforced against Callander.
Further, Striker asserts that Callander’s fraud arguments fail because he accepted all
the benefits of the notes, and under 12A O.S. 3-305(a)(1), fraud can be a defense to
a promissory note only where it induced the obligor to sign the instrument with
neither knowledge nor reasonable opportunity to learn of its character or its essential
terms. Striker contends that Callander had reasonable opportunity to learn of the
essential terms of the notes by reading them before their execution. Lastly, Striker
argues that Callander’s complaints about a lack of documents to prove the notes’
balances are meritless because he never challenged the accuracy of the Schedule K1s, he knowingly refused to give time to Striker to produce the supporting
documents, and Striker’s summary judgment motion is timely under the court’s
scheduling order.
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II.
Federal Rule of Civil Procedure 56(a) provides that “[a] party may move for
summary judgment, identifying each claim or defense—or part of each claim or
defense—on which summary judgment is sought.” Rule 56(a), Fed. R. Civ. P.
Summary judgment is appropriate if “the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Id. In deciding whether summary judgment is appropriate, the court does not
weigh the evidence and determine the truth of the matter asserted, but only
determines whether there is a genuine issue of material fact for trial. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). A dispute is “genuine” “if the
evidence is such that a reasonable jury could return a verdict for the nonmoving
party.” Id. at 248. A fact is “material” if under the substantive law it is essential to
the proper disposition of the claim. Id. In adjudicating a motion for summary
judgment, the court views the evidence and draws all reasonable inferences
therefrom in the light most favorable to the nonmoving party. McGehee v. Forest
Oil Corporation, 908 F.3d 619, 624 (10th Cir. 2018).
III.
Upon review, the court finds that Callander has failed to raise a genuine issue
of material fact with respect to a lack of consideration for the notes.
Although Callander has presented evidence of an IRS audit of another Striker
drilling program, Program 2007-A, which disallowed the tax deductions of certain
investors, Callander has not presented evidence to raise a genuine issue of material
fact that his tax deductions for investing in Program 2001 are illusory. The IRS audit
did not involve Program 2001, the notes or the tax deductions at issue. There is no
evidence in the record that the IRS has audited or intends to audit Program 2001.
The court is not satisfied that Callander’s “concern[] that the IRS might audit the
[Program 2001] in which [he] invested and that the IRS might reach similar
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conclusions about [his] investment,” ex. 1 to Callander’s response, ¶ 8, is adequate
to raise a genuine issue of material fact that the notes at issue lack consideration.
IV.
As to the defense of fraudulent inducement, the court finds that Callander has
proffered evidence to raise genuine issues of material fact sufficient to avoid
summary judgment. Specifically, the evidentiary record is sufficient to raise genuine
issues of material fact as to whether (1) Romine made a material, false representation
– that the notes would be fully repaid from revenues from the drilling program and
that Striker would not pursue Callander for repayment of the balances of the notes;5
(2) Romine made the representation with knowledge of falsity, or recklessly without
any knowledge of its truth, and as a positive assertion; (3) Romine made the
representation with intention that it be acted upon by Callander; and (4) Callander
actually relied upon the representation to his injury. Johnson v. Eagle, 355 P.2d 868,
870 (Okla. 1960).
Initially, the court rejects Striker’s argument that Callander cannot rely upon
his fraudulent inducement defense because 12A O.S. § 3-305(a)(1) only allows a
defense of “fraud that induced the obligor to sign the instrument with neither
knowledge nor reasonable opportunity to learn of its character or its essential
terms.”6 The fraud defense in § 3-305(a)(1) is “fraud in the factum.” See, Federal
Deposit Ins. Corp. v. Aetna Cas. & Sur. Co., 947 F.2d 196, 203 (6th Cir. 1991);
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The court concludes that Callander has not proffered evidence sufficient to raise a genuine issue
of material fact that Romine made a material, false representation in promoting Program 2001 as
a source of valid tax deduction. (That tax-related benefit of the program is a benefit wholly
separate from the benefit of the opportunity to receive income from production, or the benefit of
never having to pay the notes from personal resources.) The evidentiary record, even viewed in a
light most favorable to Callander, does not show that Callander’s tax deductions are not valid.
6
Because the notes at issue are negotiable instructions, they are subject to the requirements of the
Uniform Commercial Code. See, Wells Fargo Bank, N.A. v. Heath, 280 P.3d 328, 333 (Okla.
2012).
6
Exchange Intern. Leasing Corp. v. Consolidated Business Forms Co., Inc., 462 F.
Supp. 626, 628 (W.D. Pa. 1978); Exportkreditnӓmnden v. Fleming Building
Company, Inc., 2014 WL 11532283, * 7-8 (N.D. Okla. Sept. 16, 2014). Callander
is not asserting fraud in the factum. Rather, he is asserting fraudulent inducement.
Section 3-305(a)(2) of Title 12A of the Oklahoma Statutes permits “a defense of the
obligor that would be available if the person entitled to enforce the instrument were
enforcing a right to payment under a simple contract.” 12A O.S. 2011 § 3-305(a)(2).
In Oklahoma, fraudulent inducement is a defense to a simple contract. Johnson v.
Eagle, 355 P.2d 868, 870 (Okla. 1960). The court recognizes that under 12A O.S.
2011§ 3-305(b), the “holder in due course” is not subject to the § 3-305(a)(2) defense
of the obligor “against a person other than the holder.” However, the record does
not indicate that Striker is a holder in due course. Even if it were a holder in due
course, Striker is the “holder” of Callander’s notes.
Callander’s defense of
fraudulent inducement is against Striker and based upon its conduct. 2 White,
Summers, & Hillman, Uniform Commercial Code § 18.29 (6th ed.) (“[T]he holder in
due course is sure to take free only of personal defenses that do not arise from his
own behavior. As we have seen, the payee of a note can be a holder in due course
and yet, if the maker has a defense against him, be subject to all of the maker’s
defenses.”) (emphasis in original). Consequently, the court concludes that Striker
may be subject to Callander’s fraudulent inducement defense.
In addition, the court rejects Striker’s contention that the fraudulent
inducement defense is eliminated because Callander accepted the benefits of the
notes, i.e., the tax deductions. Striker cites 15 O.S. 2011 § 75 in support of this
contention. That statute provides that “[a] voluntary acceptance of the benefit of a
transaction is equivalent to a consent to all the obligations arising from it so far as
the facts are known, or ought to be known to the person accepting.” § 75 (emphasis
added).
In light of Callander’s assertions as to Romine’s material, false
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representation to Callander, a matter which for purpose of summary judgment must
be viewed in Callander’s favor, the court concludes that a genuine issue of material
fact exists as to whether the “facts [were] known, or ought to [have been] known” to
Callander in accepting the tax benefit.
Lastly, in its papers, Striker argues that Callander cannot rely upon any prior
oral representations purportedly made by Romine to him because the prior oral
representations are directly contradictory of the plain language of the written
contracts.
The court recognizes that under the parol evidence rule, written
agreements entered into by the parties supersede all pre-contract negotiations and
prior oral communications.
See, First Nat. Bank in Durant v. Honey Creek
Entertainment Corp., 54 P.3d 100, 103 (Okla. 2002).
However, “[i]t is
well-established in Oklahoma that the parol evidence rule does not preclude
evidence of false and fraudulent representations of fact offered to establish fraud in
the inducement of the execution of a contract, even when those representations
directly contradict the contract provisions.” Id. at 104. Thus, Callander can rely
upon the alleged oral false representation of Romine, regarding repayment of the
notes, as evidence in support of his fraudulent inducement defense to Striker’s
breach of contract claim.
V.
Callander, in his briefing, also argues that summary judgment is not
appropriate because there is a dispute between the parties as to the balance due and
owing on the notes. In reply, Striker does not address this argument other than to
say that production of documents is not a condition of the notes’ enforceability. As
the court is denying summary judgment based upon the fraudulent inducement
defense, the court does not need to decide whether a genuine issue of material fact
exists as to the balance of the notes because of an absence of documentation other
than the Schedule K-1 documents.
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VI.
Based upon the foregoing, Plaintiff’s Motion for Summary Judgment, filed
May 1, 2019 (doc. no. 41), is DENIED.
IT IS SO ORDERED this 11th day of July, 2019.
18-0508p011_rev.docx
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