Striker Group LLC The et al v. Drawdy
Filing
55
ORDER denying 40 Plaintiffs' 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
THE STRIKER GROUP, LLC, et al.,
Plaintiffs,
-vsJEFFREY A. DRAWDY, an
individual,
Defendant.
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Case No. CIV-18-509-F
ORDER
Before the court is Plaintiffs’ Motion for Summary Judgment, filed May 1,
2019 (doc. no. 40), as supplemented.1 Defendant has responded to the motion and
plaintiffs have replied. Upon due consideration of the parties’ submissions, the court
makes its determination.
I.
Plaintiffs, The Striker Group, LLC, Striker Development LLC, and Striker
Entities, LLC, (collectively “Striker”), bring this breach of contract action against
defendant, Jeffrey A. Drawdy (“Drawdy”), seeking to collect on five promissory
notes executed either by Drawdy, his former wife, Susan Drawdy, or both of them
in 1999,2 2000, 2001, 2002 and 2003. According to Striker, the notes were used to
1
After filing their motion, plaintiffs filed a supplement (doc. no. 45), which corrected the amount
plaintiffs seek to recover against defendant.
2
The 1999 note was executed only by Susan Drawdy. Striker claims that the Drawdys requested
that the note be split equally between them for all purposes as though both had signed it. According
to Drawdy, he was divorced from Susan Drawdy in 2008 and in some way that fact was
purchase ownership units in oil and gas drilling partnerships called North American
1999 Program, Continental American Program 2000, and Program 2001.3 The
programs were managed by Striker and organized to conduct oil and gas operations
in Oklahoma and elsewhere. The notes provided that the interest in production from
the programs’ wells would be used by Striker to first pay or reduce interest and then
to pay or reduce the principal amount of note. Exhibits 1, 4, 6, 8 and 9 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 the programs and sell off their assets in the 2012-2014
timeframe. Because “no further production from the Program’s wells [would be
available] to reduce either the non-recourse interest or the recourse principal amount
of the [note],” Striker, by letters dated January 12, 2015, January 19, 2015, and April
20, 2015, declared the notes in default and demanded payment of the outstanding
principal balance of the notes.4 Exhibits 10, 11 and 12 to Striker’s motion. Striker
claims Drawdy refused to make payment as demanded and after having credited all
oil and gas production revenues from the programs’ wells to the notes, Drawdy still
owes it $235,599.00 for the notes and $51,221.55 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 Drawdy in the total amount of $289,820.55. Striker contends that
Drawdy cannot establish any defense to its right to payment of the notes.5
communicated to Striker’s manager, Richard Romine, who sent K-1 forms in subsequent years
showing one-half of the original investments being attributed to Drawdy.
3
Cash was also utilized to purchase the ownership units.
4
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.” Exhibits 1, 4, 6, 8 and 9 to Striker’s motion,
¶3.
5
In its motion, Striker argues that Oklahoma law applies to this case. Drawdy, who is a resident
of California, does not challenge the applicability of Oklahoma law in his response. The court
therefore applies Oklahoma law.
2
Drawdy 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, Drawdy 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 any supporting records for the programs, Drawdy contends that his claimed
tax deductions based upon the notes were, at best, unsupported and potentially
invalid. Drawdy thus asserts any benefit allegedly conferred pursuant to the notes
is illusory. Consequently, Drawdy argues that all of the notes fail for lack of
consideration.
As to the defense of fraudulent inducement, Drawdy asserts that Richard
Romine, Striker’s manager, made material, false representations which induced
Drawdy to execute the notes. Specifically, Drawdy asserts that Romine told him the
notes would be fully repaid from revenues from the drilling programs, and that in
any event, Striker would not pursue Drawdy for repayment of any note balance.6
Drawdy contends that these representations were false because the revenues
generated by the programs’ 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,
Drawdy asserts that Romine promoted the drilling programs, including the use of
the notes, for the purpose of securing ongoing tax-deductible investments. However,
Drawdy contends that although requested, Striker has not produced any supporting
6
Drawdy’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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accounting for the tax deductions and the IRS has found that a substantially similar
investment program could not support the claimed tax deductions.
Even if the notes were enforceable, Drawdy argues that summary judgment is
not appropriate because there are genuine issues of material fact as to amount due
on the notes. Drawdy maintains that Striker has not produced any contemporaneous
accounting that would support its damages claim. According to Drawdy, the
summary Schedule K-1’s prepared annually by Striker and provided to Drawdy 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 Drawdy’s notes.
Striker points out that the subject programs have never been audited and the IRS
made no findings in the referenced audit about the programs, the notes at issue or
the validity of the tax deductions for the notes. According to Striker, Drawdy has
presented no evidence that the specific features of Program 2007-A that the IRS
found objectionable are also features of the other programs. In addition, Striker
contends that the notes are supported by consideration because Drawdy 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 nothing in the notes require
it to produce any documentation before the notes can be enforced against Drawdy.
Further, Striker asserts that Drawdy’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 Drawdy had reasonable opportunity to learn of the
essential terms of the notes by reading them before their execution. Lastly, Striker
argues that Drawdy’s complaints about a lack of documents to prove the notes’
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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.
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 Drawdy has failed to raise a genuine issue
of material fact with respect to a lack of consideration for the notes.
Although Drawdy has presented evidence of an IRS audit of another Striker
drilling program, Program 2007-A, which disallowed the tax deductions of certain
investors, Drawdy has not presented evidence to raise a genuine issue of material
fact that his tax deductions for investing in the subject programs are illusory. The
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IRS audit did not involve the subject programs, the notes or the tax deductions at
issue. There is no evidence in the record that the IRS has audited or intends to audit
the subject programs. The court is not satisfied that Drawdy’s “concern[] that the
IRS might audit the programs in which [he] had invested and that the IRS might
reach similar conclusions about [his] investments in those programs,” ex. 1 to
Drawdy’s response, ¶ 9, 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 Drawdy has
proffered sufficient evidence to raise genuine issues of material fact to overcome
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 programs and
that Striker would not pursue Drawdy for repayment of the balances of the notes;7
(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 Drawdy; and (4) Drawdy
actually relied upon the representation to his injury. Johnson v. Eagle, 355 P.2d 868,
870 (Okla. 1960).
7
The court concludes that Drawdy has not proffered sufficient evidence to raise a genuine issue
of material fact that Romine made a material, false representation in promoting the subject
programs 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 Drawdy, does not show that Drawdy’s tax deductions are not
valid.
6
Initially, the court rejects Striker’s argument that Drawdy 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.”8 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);
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). Drawdy 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 Drawdy’s notes. Drawdy’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.”)
8
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).
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(emphasis in original). Consequently, the court concludes that Striker may be
subject to Drawdy’s fraudulent inducement defense.
In addition, the court rejects Striker’s contention that the fraudulent
inducement defense is eliminated because Drawdy accepted the benefit 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 Drawdy’s assertions as to Romine’s material, false representation to
Drawdy, a matter which for purpose of summary judgment must be viewed in
Drawdy’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 Drawdy in
accepting the tax benefit.
Lastly, in its papers, Striker argues that Drawdy 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 wellestablished 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, Drawdy can rely upon the
alleged oral false representation of Romine, regarding repayment of the notes, as
evidence to establish his fraudulent inducement defense to Striker’s breach of
contract claim.
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V.
Drawdy, 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 for each of the notes because of an absence of documentation other than
the Schedule K-1 documents.
VI.
Based upon the foregoing, Plaintiffs’ Motion for Summary Judgment, filed
May 1, 2019 (doc. no. 40), as supplemented, is DENIED.
IT IS SO ORDERED this 11th day of July, 2019.
18-0509p010.docx
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