Floyd v. Hefner
| Decision Date | 31 March 2008 |
| Docket Number | Civil Action No. 03-5693. |
| Citation | 556 F.Supp.2d 617 |
| Parties | Ben FLOYD, Trustee of the Estate of Seven Seas Petroleum, Inc., Plaintiff, v. Robert A. HEFNER, III, et al., Defendants, Seven Seas Petroleum, Inc., Plaintiff, v. McAfee & Taft, P.C. Jerry Warren and Gary Fuller, in his Capacity as a Lawyer, Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Adrian Stanley Baer, Cordray Tomlin PC, James Franklin Donnell, Miriam Michelle Carreras, Kenneth Steven Wall, Andrews Kurth LLP, Houston, TX, for Plaintiff.
J. Clifford Gunter, III, Caroline Carter Pace, Diane M. Thompson, Heath Aaron Novosad, Bracewell and Giuliani LLP, Houston, ST, Murray E. Abowitz, George W. Dahnke, Abowitz Timberlake et al, Oklahoma City, OK, for Defendants.
This highly contentious case involves the bankruptcy and ultimate demise of Seven Seas Petroleum, Inc. ("Seven Seas" or the "Company"), an oil and gas company. The relevant parties include: Plaintiffs Seven Seas and its Chapter 11 Trustee, Ben Floyd ("Trustee"); Defendants Robert A. Hefner, III ("Hefner"), Randolph Devening ("Devening"), Brian Egolf ("Egolf"), Dr. James Schlesinger ("Schlesinger"), Larry Ray ("Ray"), and Gary Fuller ("Fuller"), several former directors of Seven Seas (collectively "the Directors"); Defendants McAfee & Taft, P.C. ("M & T"), Fuller, in his capacity as a lawyer, and Jerry Warren ("Warren"), former outside counsel of Seven Seas (collectively "the Lawyers"); and Defendants Ramiiilaj Limited Partnership ("Ramiiilaj"), Fuller Family Investments Limited Partnership ("Fuller Family Investments"), and Petroleum Properties Management Company ("Petroleum Properties"), the entity defendants who helped finance the venture (hereafter collectively "Entity Defendants").
Pending before the court are a myriad of summary judgment motions including: (1) Seven Seas' motion for partial summary judgment against the Lawyers (Doc. 295); (2) the Lawyers' renewed summary judgment against Seven Seas (Doc. 297); (3) the Directors' motion for summary judgment on all remaining claims (Doc. 299); (4) Ramiiilaj's motion for summary judgment against the Trustee (Doc. 300); (5) Fuller Family Investments' motion for summary judgment against the Trustee (Doc. 301); and (6) Petroleum Properties' motion for summary judgment against the Trustee (Doc. 302). Also under consideration is the Trustee's motion for reconsideration of certain holdings in the court's September 29, 2006, Order, 2006 WL 2844245 (Doc. 267) ("Sept. 29 Order"), which granted in part Defendants' first round of summary judgment motions.
Additionally, there are numerous evidentiary matters before the court. First, the Director Defendants have objected to certain portions of the Trustee's proffered summary judgment evidence (Doc. 251). Second, the parties have moved to exclude or limit the expert testimony of numerous individuals, including (1) Dean Graves ("Graves"), Dean Swick ("Swick"), and Pete Huddleston ("Huddleston") (Doc. 333); (2) Cary Ferchill ("Ferchill") (Doc. 324); (3) Thomas Watkins ("Watkins") (Doc. 325); (4) Walter Bratic ("Bratic") (Doc. 328); (5) Don Ray George ("George") (Doc. 329); (6) Ronald Vollmar ("Vollmar") (Doc. 330); (7) Walter Steel ("Steel") (Doc. 331); and (8) Jonathan Macey ("Macey") (Doc. 332).1 Finally, Plaintiffs have filed a first amended motion to equalize peremptory challenges (Doc. 326) and a motion in limine (Doc. 327), and Defendants have filed a joint motion in limine (Doc. 334).
Having considered these motions, the innumerable responses and replies thereto, the complete record before the court, and all applicable legal standards, and for the reasons articulated below, the court (1) DENIES WITHOUT PREJUDICE Seven Seas' motion for summary judgment; (2) GRANTS-IN-PART and DENIES-IN-PART the Lawyers' motion for summary judgment; (3) DENIES the Directors' motion for summary, judgment; (4) GRANTS-IN-PART and DENIES-IN-PART the Entity Defendants' motions for summary judgment; (5) DENIES the motion to strike summary judgment evidence; (6) DENIES the motions to exclude or limit the testimony of Graves, Swick, Huddleston, George, Vollmar, and Steele; (7) GRANTS-IN-PART and DENIES-IN-PART the motions to exclude or limit the testimony of Ferchill and Watkins; (8) GRANTS the motions to exclude or limit the testimony of Bratic and Macey; and (9) DENIES WITHOUT PREJUDICE the parties' motions in limine and Plaintiffs' motion to equalize the peremptory challenges.
Seven Seas was a Houston-based oil and gas company engaged in the exploration and development of oil and gas properties located in Colombia, South America. Initially incorporated in Canada, Seven Seas migrated its place of incorporation to the Cayman Islands. The Company's primary assets were two contracts issued by Ecopetrol, Colombia's state oil company, to explore and develop wells in the Guaduas Field, which produced oil from relatively shallow depths (the "Shallow Field").
The prior board of directors of Seven Seas initially oversaw the Colombian exploration until Hefner, aided by Fuller, deposed the former board in 1997. Thereafter, Hefner installed Fuller and others as directors and assumed significant control over Seven Seas.
To pursue its business plan in the Shallow Field, Seven Seas raised $110 million by issuing unsecured promissory notes (the "Unsecured Notes") to large, sophisticated investors (the "Bondholders") in May 1998. (See Offering Memorandum, Doc. 153 Ex. 65).2 The Unsecured Notes earned 12½ percent in interest per year and, under the terms of an "Indenture," permitted Seven Seas to borrow money in the future, even on a secured basis. (Indenture at 53-54, Doc. 153 Ex. 66). The Indenture also allowed Seven Seas, if certain conditions were met, to borrow additional money from "affiliated parties," including its directors. (Id. at 58). Finally, the Indenture released the Directors from any liability arising from the issuance of the Unsecured Notes. (Id. at 88).
Despite initial optimism regarding the venture, the Shallow Field was beset by delays and lackluster production. The Directors strategy during this period was to focus on production and to obtain a "commerciality" decision from Ecopetrol, which had the option of declaring the properties "commercial" so as to give Ecopetrol a 50% working interest in the Shallow Field. Ecopetrol, however, expressed concerns about the Company's plans and its optimistic beliefs about the amount of oil in the Shallow Field. (Panero Letter, dated April 20, 1998, at 2-3, Doc. 207 Ex. 84). Ecopetrol subsequently declined to participate. (Seven Seas 2000 10-K at 3, Doc. 153 Ex. 70) (informing the public that on May 23, 2000, Ecopetrol decided not to participate in the development of the Shallow Field).
While still courting Ecopetrol, the Directors announced a new strategy to conservatively develop the Shallow Field using existing cash and cash generated from operations to develop the Field in increments (Seven Seas 1998 10-K at 4-5, Doc. 153 Ex. 67). The plan also included the use of trucks and the eventual building of a pipeline to transport the oil to market. (Id.).
In September 1999, the strategy changed from production to exploration. (September 17, 1999, Board Meeting Minutes at 2, Doc. 153 Ex. 1). In particular, the Directors chose to pursue an incredibly risky project to drill a deep exploratory test well, the "Deep Well." The exact success rate for the Deep Well is disputed, but all agree that the odds for hitting oil were extremely low.3
In its 1999 10-K report, Seven Seas informed the public that it had spent the majority of the year negotiating with Ecopetrol about commerciality. The Company then outlined different scenarios depending on the outcome of Ecopetrol's decision. Notably absent from the 1999 10-K report was the critical change in strategy that the Directors had decided to implement at the September board meeting; however, the report reminded the public that the Bond Indenture allowed the Company to obtain additional secured financing.
During the first half of 2000, the Directors fielded several inquiries from the Securities and Exchange Commission ("SEC") regarding their "proved reserves" and the delay in the pipeline construction. (Feb. 2000 Inquiry, Doc. 207 Ex. 30; May 2000 Inquiry, Doc. 207 Ex. 109). The SEC questioned whether the proved reserves of the Shallow Field should be downgraded to "unproved" given the amount of oil and the absence of a pipeline, or other facility, to bring the oil to market. The write-down of its reserves may have seriously impacted Seven Seas' ability to obtain the financing for the Deep Well and may have even exposed the Directors to liability for making material misrepresentations. After the SEC began asking questions, Egolf urged Hefner to explore for more oil. In a memorandum dated February 13, 2000, Egolf criticized the Company's management for lacking direction. (Doc. 207 Ex. 31). Egolf believed that Seven Seas should pursue "the company's greatest potential asset[,] the deep" well. (Id. at 1). According to Egolf, no other course of action held any prospect of success because as he saw it, Seven Seas had "12 months before it's over." (Id. at 2). Selling the Company was not feasible, and "[t]he only resolution to the company's problem is to FIND MORE OIL!!" (Id.). Even schedules for "cost reduction account for 10% of our overhead" were "too little, too late," like "the Captain and crew of the Titanic sitting around discussing how to design a better navigation system after they've already hit the iceberg!" (Id.). According to Egolf, building a pipeline to transport oil would be futile because Seven Seas was not producing enough oil. (Id.). In fact, Egolf believed that the...
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