D.R. Four Beat Alliance v. Sierra Prod. Co.

• Decision Date: 29 September 2009
• Docket Number: No. DA 08-0546.,DA 08-0546.
• Citation: 2009 MT 319,352 Mont. 435,218 P.3d 827
• Parties: D.R. FOUR BEAT ALLIANCE, LLC; DR Four Beat Energy Corp., a body corporate registered to do business in the Province of Alberta; and Michael Siemer, Plaintiffs and Appellees, v. SIERRA PRODUCTION COMPANY, Defendant and Appellant.
• Court: Montana Supreme Court

218 P.3d 827

2009 MT 319

352 Mont. 435

D.R. FOUR BEAT ALLIANCE, LLC; DR Four Beat Energy Corp., a body corporate registered to do business in the Province of Alberta; and Michael Siemer, Plaintiffs and Appellees, v.SIERRA PRODUCTION COMPANY, Defendant and Appellant.

No. DA 08-0546.

Supreme Court of Montana.

Submitted on Briefs July 29, 2009.

Decided September 29, 2009.

For Appellant: Jason T. Holden, Faure Holden, Great Falls, Montana, Douglas C. Allen, Attorney at Law, Shelby, Montana.

For Appellee: Mark D. Parker, Parker, Heitz & Cosgrove, PLLC, Donald L. Harris, Harman, Warren & Harris, PLLP, Billings, Montana.

Justice PATRICIA O. COTTERdelivered the Opinion of the Court.

¶ 1 Sierra Production Company (Sierra) appeals from a jury verdict which in part awarded $2.5 million dollars in damages to plaintiff D.R. Four Beat Alliance (Four Beat) for a breach of contract claim.Sierra argues that the $2.5 million dollar verdict should be reversed because it is not supported by substantial evidence.We reverse and remand for a new trial.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2Michael Siemer(Siemer) and Gary McDermott(McDermott) had previously conducted business dealings together in the 1980's.In July 2000, they crossed paths again when both were vacationing near West Glacier, Montana.During the course of subsequent conversations, Siemer and McDermott discussed business prospects involving oil and gas development of which McDermott was aware around Shelby, Montana.Siemer had recently made a profit of roughly $3 million dollars from business ventures in Florida, and was looking for a way to make investments in an effort to avoid tax liability and pursue new business opportunities.McDermott was a certified public accountant who was knowledgeable in oil and gas development.McDermott mentioned to Siemer that one of his clients, William M. Fulton(Bill Fulton) had a potential business opportunity developing oil and gas on lands owned by his company, Fulton Fuel Company(Fulton Fuel), in the Shelby area.

¶ 3 After touring oil and gas properties in the Shelby area and meeting Bill Fulton, Siemer decided to go into business with McDermott.Siemer retained a Montana attorney who was knowledgeable in oil and gas development issues to advise him concerning potential projects in Montana.Siemer and McDermott entered into an Exploration Agreement (Agreement) dated December 1, 2000.The parties to the Agreement are Four Beat, owned by Siemer, MCR Partnership(MCR), owned by McDermott, and Sierra, a Nevada corporation formed on November 1, 2000, and owned entirely by the Stephco Trust, of which McDermott is a trustee.

¶ 4 Under the Agreement, Sierra, at the direction of McDermott, was responsible for locating and developing one or more prospects for the acquisition or development of oil and gas.Each prospect was to be considered a separate joint business venture, or JIB, and Four Beat and MCR, as "participants" to the Agreement, would have the option to participate in a given JIB under the terms of the Agreement.The Agreement had a 2-year period within which business interests could be acquired (hereinafter "the acquisition period").The acquisition period ran from December 1, 2000, to December 1, 2002.Pursuant to the Agreement, each participant's ownership interest in a JIB would be proportional to the amount that participant invested until "payout" on that JIB was achieved.Under the Agreement as originally written, payout was achieved when each participant recovered 150% of their initial investment out of the proceeds of the net production of a given JIB (e.g., an oil or gas well).Once payout was achieved, each participant's proportional ownership interest would be reduced by one-half, and Sierra would acquire a 50% interest in that particular JIB.

¶ 5 Siemer, through Four Beat, put up the capital required for Sierra to locate and develop oil and gas prospects.According to Siemer, Four Beat put up $1 million dollars as an initial capital contribution.One of the prospects in which Siemer was very interested during this time concerned development rights in properties held by Fulton Fuel.At the time, the properties were burdened by a mortgage and security arrangement in favor of Triassic Energy Partners, LP, of Houston, Texas (Triassic).The Fulton properties could not be developed until the Triassic mortgage and security arrangement were released.On August 6, 2001, Siemer and McDermott discussed Siemer's interest in developing the Fulton Fuel properties.On August 7, 2001, Siemer told McDermott that he was interested in entering into an option agreement with Fulton Fuel for the right to develop wells on its land.

¶ 6 After further discussions, on August 17, 2001, Fulton Fuel sent Sierra a letter (Letter).The Letter's subject line stated that it was a "Development Option/Letter of Intent."McDermott faxed the Letter to Siemer's Montana counsel.The Letter contained a physical description of the property interests held by Fulton Fuel in Toole, Liberty, Pondera, and Teton Counties.The Letter noted that Sierra had "offered to further develop said properties under an arrangement whereby you would bear the costs of such development and participate on an equal basis with Fulton Fuel Company after recovery of the development costs."The Letter went on to note, however, that the properties were burdened by the Triassic mortgage and security arrangement, and that the properties could not be development until such time as Fulton Fuel's indebtedness to Triassic could be released.The Letter concluded as follows:

Accordingly, at such time as Triassic Energy Partners, LP releases Fulton Fuel Company from its mortgage obligation and security arrangements, you shall have an option to enter into a development agreement with Fulton Fuel Company to develop those properties.

The development agreement will provide that you will furnish all of the capital for such further development and that Fulton Fuel Company will participate with you on an equal basis at such time as you have recovered your costs of development on a well by well payout basis.The development agreement will be aimed at development of incremental production of oil and gas on the lands and leases that will not interfere with FFCo.'s present production.The agreement will terminate three years from the date that Triassic Energy Partners, LP releases its Mortgage and security arrangement with Fulton Fuel Company.FFCo. will operate any and all properties so developed and the parties will enter into a mutually agreeable operating agreement for this purpose.

This letter is of necessity very general, and you understand that we will enter into appropriate contractual arrangements for the development as and when necessary.However, this letter is written to give you assurance that you will have the first and prior option and right to develop the properties as and when they become available.

¶ 7 As a result of the Letter, Siemer believed that Sierra had acquired an option to develop the Fulton Fuel properties once the Triassic obligations had been released.Since Siemer, through Four Beat, provided Sierra with capital, Siemer believed that he essentially owned Sierra, and thus had acquired the right to develop the Fulton Fuel properties based upon the Letter.Also at that time, Siemer claims that he renegotiated the payout provision in the Agreement in consideration of this option, in order to have the right to develop interests on the Fulton Fuel properties.Instead of requiring each participant to recoup 150% of its initial investment before Sierra itself would acquire a 50% interest, the renegotiated provision required each participant to recoup only 100% of its investment before Sierra itself would acquire an interest.

¶ 8 On or about November 27, 2002, approximately 3 days before the end of the acquisition period, Siemer and an associate named Ken Alcini(Alcini) entered into a memorandum of understanding with Fulton Fuel.The memorandum allegedly listed the properties which Siemer and Alcini were attempting to sell, and stipulated that Siemer and Alcini would sell the Fulton Fuel properties for a 10% commission.The memorandum had a term of one year, which was renewed in a subsequent agreement between these same parties.Siemer and Alcini worked on selling the Fulton Fuel properties from 2002 to early 2004.One of the entities Siemer attempted to recruit for the purchase was a Canadian company named Wave.According to the record, negotiations with Wave began sometime in the fall 2003.As Siemer directly testified at trial, he believed he was entitled to sell the Fulton Fuel development rights to Wave by virtue of the option agreement embodied in the Letter.

¶ 9Summerfield C. Baldridge(Baldridge) was a "land man" who worked for Fulton Fuel from July 1998 until the fall 2003.Baldridge met Siemer in August of 2001 when Siemer was acquainting himself with the Fulton Fuel properties in his capacity as a potential investor.Baldridge subsequently worked for both Sierra and later directly for Four Beat, assisting Siemer with various development projects.At the time of trial, Baldridge was an employee of Four Beat.Baldridge had previously been involved in the attempted sale of the Fulton Fuel properties beginning in February or March 2003.Baldridge assisted Siemer in contacting companies, including Wave, to see if they would be interested in buying the Fulton Fuel development rights.Baldridge was knowledgeable of the on-going discussions concerning the potential purchase of the Fulton Fuel properties by Wave.

¶ 10 Sometime in late summer or early fall 2004, Wave decided it was not going to purchase the Fulton Fuel properties.After the sale with Wave fell through, Siemer, McDermott, Bill Fulton, and Baldridge discussed further prospects for selling the Fulton Fuel development rights.According to the testimony of Baldridge, McDermott and Bill Fulto...