Cullum v. Arkla, Inc., Civ. No. B-C-90-44.

• Decision Date: 07 August 1992
• Docket Number: Civ. No. B-C-90-44.
• Citation: 797 F. Supp. 725
• Parties: Bill CULLUM, Darnell Cullum, Scott Kallsnick, and Cynthia Kallsnick, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. ARKLA, INC., Arkla Exploration Company, Arkoma Production Company, Jerrell Jones, Michael V. McCoy, Billy Harrell, Sheffield Nelson, Mac McLarty, Arkansas Public Service Commission, Sam I. Bratton, Jr., Patricia S. Qualls, Julius D. Kearney, and Jerrell Clark, Defendants.
• Court: U.S. District Court — Eastern District of Arkansas

797 F. Supp. 725

Bill CULLUM, Darnell Cullum, Scott Kallsnick, and Cynthia Kallsnick, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. ARKLA, INC., Arkla Exploration Company, Arkoma Production Company, Jerrell Jones, Michael V. McCoy, Billy Harrell, Sheffield Nelson, Mac McLarty, Arkansas Public Service Commission, Sam I. Bratton, Jr., Patricia S. Qualls, Julius D. Kearney, and Jerrell Clark, Defendants.

Civ. No. B-C-90-44.

United States District Court, E.D. Arkansas, N.D.

August 7, 1992.

Jerry C. Post, Murphy, Post, Thompson, Arnold & Skinner, Batesville, Ark., Harvey L. Bell, Stephen P. Bilheimer, Bell, Bilheimer & Associates, P.A., Little Rock, Ark., J. Michael Rediker, Thomas L. Krebs, Ritchie & Rediker, Birmingham, Ala., Kenneth F. McCallion, James W. Johnson, Goodkind, Labaton & Rudoff, New York City, John M. Belew, Batesville, Ark., for plaintiffs.

N.M. Norton, Jr., Wright, Lindsey & Jennings, Little Rock, Ark., Joseph L. McEntee, Jones, Day, Reavis & Pogue, Chicago, Ill., Stephen C. Engstrom, Wilson, Engstrom, Corum & Dudley, Samuel A. Perroni, Perroni, Rauls & Looney, P.A., Marcia Barnes, Deborah Ruth Stallings, Jack, Lyon & Jones, P.A., Little Rock, Ark., Richard W. Cass, Gary D. Wilson, Arthur F. Matthews, Roger W. Yoerges, Andrew B. Weissman, James Lee Buck, II, Wilmer, Cutler & Pickering, Washington, D.C., Theodore C. Skokos, Skokos, Coleman & Rainwater, P.A., Little Rock, Ark., for defendants.

MEMORANDUM OPINION AND ORDER

GEORGE HOWARD, Jr., District Judge.

This action presents, in essence, the question whether a private lawsuit under the federal Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. § 1964(c) (1984), and other federal statutory provisions identified hereinafter, may be instituted against Arkla, Inc., Arkla Exploration Company, Arkoma Production Company, Jerrell Jones, Michael V. McCoy, Billy Harrell, Sheffield Nelson, Mac McLarty, Arkansas Public Service Commission (PSC), Commissioner Sam I. Bratton, Jr., Commissioner Patricia S. Qualls, Commissioner Julius D. Kearney, and PSC Executive Director Jerrell Clark (hereinafter with the PSC and Commissioners as the "Public Servant Group") to recover alleged excessive charges for natural gas imposed on the consuming public as a result of fraudulent conduct and material misrepresentations during rate setting proceedings.

Plaintiffs originally filed suit on June 5, 1990, and filed their first amended complaint on June 15, 1990, prior to the filing of any responsive pleadings. The defendants filed motions to dismiss to which plaintiffs filed a consolidated response on August 31, 1990. By order filed on September 28, 1990, the Court granted plaintiffs' September 6, 1990 motion to amend and supplement their complaint.

The second amended complaint was filed on October 9, 1990. Motions to dismiss, responses, replies and supplements were filed with the last filing on May 23, 1991. By order filed on July 3, 1991, all pending motions were referred to Magistrate Judge H. David Young for recommended disposition. On October 8, 1991, Magistrate Judge Young recommended that the case be dismissed. Plaintiffs filed objections on October 21st supported by the affidavit of Bernard Persky. By order filed on October 29th, the Court set oral argument on the recommended disposition and objections for November 15th. Thereafter, defendants filed their responses to the objections. By order filed on November 12th, the Court cancelled oral argument and found that plaintiffs' alternative request to file an amended complaint should be granted to permit plaintiffs to address the alleged deficiencies and to incorporate the matters raised by the affidavit.

The third amended complaint was filed on December 2nd. Defendants filed motions to dismiss on January 27th and plaintiffs responded on March 16th. Replies were filed by all defendants on April 6th. On May 28th and July 6th, Nelson moved for submission of additional authority. Nelson's motions are granted.

Although the third amended complaint does provide more details than the second amended complaint, for purposes of this order, the Court adopts the following factual summary from the October 8th findings:

The plaintiffs seeks to represent a class of about 400,000 residential and commercial customers of Arkla, alleging that a fraud was perpetrated by the defendants, damaging the plaintiffs in an amount of at least $100,000,000.00. This continuing scheme began to be implemented around 1982. Some of the defendants directly participated in the scheme, while others covered up the scheme and its effects. The scheme was not discovered by the plaintiffs until later 1989 or early 1990.

As described by the plaintiffs, certain defendants manipulated the price of natural gas reserves located in two fields. Arkla, pursuant to long-term contracts, could have drilled for, and obtained, gas from these fields at favorable prices. Instead, defendants Jerrell Jones and Mike McCoy, owners of Arkoma Production Company, obtained acreage in the two fields and arranged a deal with Arkla. This deal, approved by Arkla on December 31, 1982, resulted in raising the price of gas from these fields fivefold. Defendants Nelson and Harrell knew that the deal would result in the higher prices, according to the plaintiffs.

Pursuant to the terms of the agreement, Jones and McCoy paid $15,000,000.00 to Arkla over a three-year period, and promised to spend at least $30,000,000.00 to explore gas reserves in the two fields and to acquire other acreage. Arkla conveyed one-half of its interest in the fields to Jones and McCoy. Arkla was obligated to purchase gas from Jones and McCoy pursuant to a "take or pay" Footnote 2 — This clause obligated Arkla to purchase 75% of all gas produced by Arkoma Production Company at the maximum lawful price. provision in the contract. Unlike some other gas purchase contracts entered into by Arkla, there was a "unilateral renegotiation" clause in the agreement. As a result, when gas prices fell due to deregulation, Arkla did not have the right to renegotiate the prices it was obligated to pay to Jones and McCoy. In 1985, Arkla paid more than $18,000,000.00 to Jones and McCoy pursuant to the "take or pay" provisions of the agreement. During 1985 and 1986, the prices paid to Jones and McCoy were higher than the prices paid by Arkla to other gas producers whose contracts contained "bilateral renegotiations" clauses. Footnote 3 — In a gas purchase contract containing a "bilateral renegotiation" clause, Arkla retained the right to renegotiate the price it paid. In a gas purchase contract containing a "unilateral renegotiation" clause, Arkla retained no right of renegotiation.

Arkla, desiring to resolve the "take or pay" claims, entered into an agreement with Jones and McCoy in late 1986 whereby Arkla became the sole owner of the stock of Arkoma Production Company. In exchange for the Arkoma stock, Arkla agreed, among other things, to pay Jones and McCoy $14,000,000.00 in cash and $35,000,000.00 pursuant to the terms of a promissory note. In addition, Arkla Exploration Company agreed to purchase quantities of gas from Arkoma Production Company and delivered a promissory note for over $24,000,000.00 to Jones and McCoy. The price paid by Arkla Exploration Company for the gas purchase from Arkoma between March of 1987 and September of 1989 was above the best market rate of gas for those years.

The plaintiffs contend that Jones was given preferential treatment by Arkla and that other producers were pressured to use Jones and Arkoma Production Company as an intermediary with Arkla. For example, the plaintiffs allege that in 1983, Stephens Production Company of Fort Smith, Arkansas ("Stephens'), was pressured into contractual arrangements whereby Jones and Arkoma Production Company obtained from Stephens certain interests in the two gas producing fields.

The 1982 agreement between Arkla and Arkoma Production Company was the subject of a 1983 investigation by the Arkansas Public Service Commission ("PSC"). The plaintiffs allege that the PSC's final report, issued in 1984, failed to answer some basic questions about the transaction. The PSC report, as well as the 1986 stock purchase of Arkoma Production Company by Arkla and related agreements, were part of a cover up of the fraudulent acts of the defendants, according to the complaint. Various other facts are alleged in support of the claim of a cover-up, including the allegation that secret meetings were conducted by the PSC and Arkla officials and the allegation that Arkla sought to pay attorney Thomas Mars $2,000,000.00 to further cover up the deceitful acts of the defendants.

Like the second amended complaint, the first four claims of the third amended complaint are based upon alleged violations of 18 U.S.C. § 1962, which is part of RICO, and the fifth claim is based upon an alleged violation of 42 U.S.C. § 1983. The sixth claim, which was contained in the original and first amended complaint, but omitted in the second amended complaint, alleges a violation of 42 U.S.C. § 1985.¹ The seventh claim is for declaratory judgment while the remaining five claims are brought pursuant to state law.

Magistrate Judge Young, in a thorough analysis, found that the second amended complaint did not set forth facts which would establish the required pattern of racketeering activity and recommended that the RICO claims be dismissed for failure to state a claim upon which relief may be granted. He further found that plaintiffs had failed to describe a protectable property right or a violation of federal statutes which would have permitted a claim under § 1983. He next found that even if there were a proper claim based upon procedural due process, the Burford abstention doctrine would be applicable.² Finally, without a basis for federal jurisdiction, it was recommended that the pendent state claims be dismissed.

Subsequent to the filing of the...