Bates Energy Oil & Gas v. Complete Oilfield Servs.

• Decision Date: 14 January 2019
• Docket Number: Civil Action No. SA-17-CV-808-XR
• Parties: BATES ENERGY OIL & GAS, Plaintiff, v. COMPLETE OILFIELD SERVICES, et al., Defendants.
• Court: U.S. District Court — Western District of Texas

361 F.Supp.3d 633

BATES ENERGY OIL & GAS, Plaintiff,

v.COMPLETE OILFIELD SERVICES, et al., Defendants.

Civil Action No. SA-17-CV-808-XR

United States District Court, W.D. Texas, San Antonio Division.

Signed January 14, 2019

Lisa Schumacher Barkley, Lamont Alan Jefferson, Jefferson Cano, San Antonio, TX, for Defendants.

ORDER

XAVIER RODRIGUEZ, UNITED STATES DISTRICT JUDGE

On this date, the Court considered Defendant Mark Sylla's Motion to Dismiss pursuant to Rule 12(b)(2) for lack of personal jurisdiction (docket no. 86), Defendant Dewayne D. Naumann's Motion to Dismiss (docket no. 82), and Defendant Equity Liaison Company's Motion to Dismiss (docket no. 83), and the responses thereto.

Factual and Procedural Background

This lawsuit, which now involves multiple parties and claims, stems from a contract for the purchase of frac sand between Bates Energy Oil & Gas ("Bates Energy") and Complete Oilfield Services ("COFS"). The following facts alleged in the Third Amended Counterclaim ("TAC") (docket no. 68), which is COFS's live pleading, are taken as true for purposes of the pending motions.

COFS is a Utah company that was created in 2017 for the specific purpose of supplying frac sand to ProPetro, a pressure pumping and fracking company based in Midland, Texas. COFS and ProPetro have a Supply Agreement for COFS to acquire specific types of frac sand for ProPetro's use, and ProPetro agreed to deposit $ 4 million into an escrow account to pay COFS's eventual sand supplier for the purchase and delivery of sand.

COFS began researching to find an appropriate source for frac sand, and relied upon information provided by others such as Defendant Austin Howard of Howard Resources. In March 2017, Defendant Howard introduced COFS to Stanley Bates, the principal and CEO of Bates Energy, which was created in February 2017. Despite Bates's reputation as an unscrupulous businessman, Austin Howard firmly vouched for Bates as a trustworthy associate and assured COFS that Bates was well regarded in the frac sand industry. Bates represented to COFS that Bates Energy had the capacity to supply the required frac sand, specifically through its rights with mines in Wisconsin. Relying on Bates's representations about Bates Energy's delivery capabilities, as well as other representations, COFS entered into a Memorandum of Understanding ("MOU") with Bates Energy on April 18, 2017. Under the MOU, Bates Energy was to deliver specific amounts and types of frac sand to one of seven rail terminals in Texas on specific due dates, the first being May 10, 2017. COFS alleges that, "[o]nce Bates Energy became aware that COFS was a potential client, it promptly notified other Counter-Defendants, copying them on emails and giving rise to the conspiracy and other unlawful acts that led to the Counter-Defendants' theft of over $ 650,000 of COFS's funds." TAC ¶ 25.

COFS alleges that "[p]ublic allegations of improper conduct by Bates created COFS's need for caution if the parties were to proceed." TAC ¶ 30. COFS alleges that it moved forward based on Howard's endorsement, but "insisted on a legal structure to protect the funds entrusted by ProPetro," including the creation of two independent escrow accounts for ProPetro's monies, one with Counter-Defendant Equity Liaison Company ("ELC") and one with Amegy Bank. Id. Bates Energy originally insisted that all $ 4 million be held in escrow by ELC, which COFS later learned was a close associate of Bates's overseen by its principal Dewayne D. Naumann, ostensibly because Amegy Bank was not embedded in the oil and gas industry and in Bates's opinion, ELC was a "proven performance company." Id. ¶ 33. But because ELC was not a financial institution and was unknown to COFS, COFS insisted upon the creation of a second escrow account with Amegy Bank.¹ ProPetro's money was placed into two escrow accounts, one with Amegy Bank with a deposit of $ 3 million, with Amegy serving as the escrow agent, and one with ELC with a deposit of $ 1 million in account no. 2917 at Chase Bank, with ELC acting as the escrow agent.

COFS, Bates Energy, and ELC entered into an April 14, 2017 Escrow and Distribution Agreement ("the Escrow Agreement"). Under the terms of the MOU between Bates Energy and COFS, Bates Energy could be paid from the escrow account the first 50% of each purchase upon delivery of a Bill of Lading ("BOL") for the sand, and could receive the outstanding balance within three business days after the sand was "loaded into the COFS or designated trucking company, and the BOL of the load-out are issued with the final invoice." TAC Ex. 3 ¶ 3. The Escrow Agreement required ELC to deposit and maintain COFS's funds in a separate escrow account under COFS's name, but, unbeknownst to COFS, account no. 2917 was a pre-existing Bates Energy escrow account that ELC/Naumann was already handling for Bates Energy, and thus the $ 1 million was immediately commingled with funds already in the account. TAC ¶¶ 35-36. COFS alleges that disbursements from the ELC escrow account required the joint instruction of both COFS and Bates Energy, and COFS alleges that the unusual arrangement was acceptable to it "because both escrow agreements required COFS's notice, signature and authorization to effectuate any disbursements of funds." Id. ¶ 37, 42. COFS alleges that "Naumann assured COFS that he and ELC recognized their legal obligations as a fiduciary" and all parties "knew that disbursement of escrowed funds was improper until COFS signed off on an invoice or disbursement authorization." Id. ¶ 42.

COFS alleges that Stanley Bates immediately began lying about frac sand being on its way, and in fact represented that Bates Energy had already begun acquiring sand and arranging for delivery by April 17, before the formal MOU was executed on April 18. Id. ¶ 44. Bates again promised that railcars were in Iowa on April 27 and would be leaving for Texas on April 29 with anticipated delivery on May 5. Id. ¶¶ 47-48. No sand was delivered either time, and Bates Energy provided no BOLs or other documents showing it ever loaded any railcar with sand. Id. ¶ 48.

After COFS became concerned about the truth of the statements and Bates Energy's ability to deliver, COFS's principal Sam Taylor went to Wisconsin on May 9 to investigate Bates Energy's purported mines and other frac sand sources. Id. ¶ 49. COFS alleges that Bates sent Mark Sylla, who was also in the frac sand business, as a "company representative," and Sylla "took Sam Taylor on a winding tour around Wisconsin, stopping at two mines along the way," neither of which "had the capacity to deliver any appreciable amount of frac sand and neither permitted Sylla/Bates Energy to access its premises." Id. ¶ 50.

Bates Energy failed to meet the May 10 initial delivery deadline. COFS alleges that Stanley Bates and David Bravo, who had been described alternatively as an owner, COO, and logistics coordinator of Bates Energy and worked closely with Bates/Bates Energy and was aware of the escrow agreements, knew that Stanley Bates faced imminent indictment for his role in the Four Winds Logistics frac sand scandal. Id. ¶ 102. Consequently, on May 11 or 12, Bravo, Sylla, and Bates's girlfriend Audra Vega, created a new company, Unlimited Frac Sand d/b/a Frac Sand Unlimited ("FSU"), a Texas LLC, "to maintain the parties' fraudulent and illegal acts against COFS, and drain COFS's escrowed funds." Id. Sylla is listed as a manager of FSU on the LLC formation documents. COFS alleges that FSU "was essentially one and the same as Bates Energy, and was operated by Bates and Bravo." Id. ¶ 103. COFS alleges that by July 2017, Bates was directing ELC/Naumann to use the name FSU on new escrow agreements and it was listed as the "assignee" on Bates/Bates Energy correspondence and false invoices referring to sand that was never procured or delivered. Id. ELC/Naumann directed numerous unauthorized payments to FSU from COFS's escrowed funds. Id. ¶ 104. On May 12, $ 50,000 was withdrawn from the ELC escrow account, and disbursed $ 16,666 each to ELC/Naumann, Bates/Bates Energy, and FSU/Bravo. Id. ¶ 67. That same day, Bates/Bates Energy approved an unauthorized wire transfer of $ 10,761.52 to purchase railcar insurance. Id. ¶ 68. On May 16, 2017, Stanley Bates was indicted based on his involvement in Four Winds Logistics.

COFS alleges that Bates Energy changed its strategy in early June to string COFS along, suggesting that it could deliver noncomplying sand. Id. ¶ 52. COFS alleges that Bates admitted that he had never scheduled any sand for delivery until June 9, when he made his first attempt to deliver compliant sand. But this attempt was also deficient. Id. ¶ 57. The railcar documentation indicated that the consignee of the product was "High Crush" rather than Bates Energy, and Bates insisted that Sam Taylor "fix that problem by falsely representing to railroad officials that Sam was with Frac Sand Unlimited, the company managed by David Bravo, Mark Sylla, and Bates' girlfriend Audra Vega." Id. After hours of searching the Odessa facility, Taylor never located the sand. Id. COFS alleges on information and belief that Bates Energy did not have a mine or other supplier that could provide the tonnage and type of sand COFS required under the MOU. Id. ¶ 54.

On June 15, COFS and Bates Energy agreed that COFS could use some of the escrowed money to buy sand from CSI, and funds were distributed from the ELC escrow account and then replenished from the Amegy account. Id. ¶ 59. COFS alleges that throughout this time, Defendants were "secretly and systematically raiding COFS's escrow funds" despite knowing that "funds should not have been distributed absent notice to and consent by COFS." Id. ¶ 61. COFS alleges that Defendants absconded with at least $ 652,000 of its funds and "used various techniques to conceal the unlawful disbursements." Id. ¶¶ 63-64. ELC/Naumann frequently transferred large sums of money among the Chase bank account that was supposed...