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Arkoma Basin Project v. West Fork Energy, 09-40011 (2010)

Court: Court of Appeals for the Fifth Circuit Number: 09-40011 Visitors: 126
Filed: Jun. 29, 2010
Latest Update: Feb. 21, 2020
Summary: Case: 09-40011 Document: 00511158605 Page: 1 Date Filed: 06/29/2010 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED June 29, 2010 No. 09-40011 Lyle W. Cayce Clerk ARKOMA BASIN PROJECT LIMITED PARTNERSHIP, Plaintiff-Appellant, v. WEST FORK ENERGY COMPANY LLC; ARKANA OPERATING COMPANY INC; JOE POE; JEFF SMYTH, Defendants-Appellees. Appeal from the United States District Court for the Eastern District of Texas, Sherman Division USDC No.
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     Case: 09-40011     Document: 00511158605         Page: 1     Date Filed: 06/29/2010




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                 FILED
                                                                           June 29, 2010

                                       No. 09-40011                        Lyle W. Cayce
                                                                                Clerk

ARKOMA BASIN PROJECT LIMITED PARTNERSHIP,

                                                  Plaintiff-Appellant,
v.

WEST FORK ENERGY COMPANY LLC; ARKANA OPERATING
COMPANY INC; JOE POE; JEFF SMYTH,

                                                  Defendants-Appellees.




                  Appeal from the United States District Court
               for the Eastern District of Texas, Sherman Division
                             USDC No. 4:07-CV-530


Before JONES, Chief Judge, and SMITH and ELROD, Circuit Judges.
PER CURIAM:*
        Appellant Arkoma Basin Limited Partnership appeals from the trial
court’s grant of judgment as a matter of law to Appellees West Fork Energy
Company LLC, Arkana Operating Company, Joe Poe, and Jeff Smyth on its
breach-of-contract claim as well as its claims for violations of federal and state
securities laws. Arkoma also appeals several of the trial court’s evidentiary




       *
         Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
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                                No. 09-40011

rulings, its conduct during trial, and the award of attorney’s fees. For the
following reasons, we AFFIRM.
                                      I.
      Arkana owned several thousand acres of natural gas leases in Arkansas’s
Arkoma Basin. In 2002, Surge Petroleum, Arkana’s owner, decided to sell the
company. In order to promote the sale, Surge prepared a two-hundred-page
report (the “Surge Report”).    The Surge Report detailed Arkana’s current
holdings and included geological information, recommended development
strategies, and projected production levels for several wells located on the
prospect. In 2003, Fagadau Energy considered purchasing Arkana. As part of
its due diligence, Fagadau hired Dwight Coleman to prepare an additional report
on the prospect (the “Coleman Report”).
      Appellees Poe and Smyth formed West Fork, an entity which purchased
Arkana from Surge. In order to raise the necessary capital to develop the
prospect, Appellees entered into discussions with WG Energy regarding its
possible purchase of a fifty percent working interest in Arkana’s holdings.
Pursuant to these negotiations, Poe and Smyth collaborated with Bill Lynton to
craft a Business Plan for the development of the Arkoma Basin field. The
Business Plan outlined a first-year development program in which Arkana
would reconnect existing shut-in wells and drill additional wells. The Business
Plan also projected the production volume from these wells and the revenue that
the project would generate. These projections were based on the Surge and
Coleman Reports as well as information taken from the Arkansas Oil & Gas
Commission’s website.
      After negotiations with WG Energy failed, Lynton decided to invest
personally in the project with Arthur Clark, a Mississippi attorney with
experience in the oil and gas industry. Lynton and Clark formed Arkoma.
Without Appellees’ knowledge or consent, Clark created his own prospectus

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                                 No. 09-40011

using the original Business Plan and altered the data contained in the Business
Plan. Clark and Lynton recruited twelve investors to become limited partners
in Arkoma using this prospectus.
      In October 2004, Arkoma, Arkana, and West Fork executed a purchase
and sale agreement (hereinafter “PSA”). Pursuant to this agreement, Arkoma
acquired an undivided fifty-percent working interest in all of the assets owned
by Arkana for $1.5 million. As part of the PSA, Arkoma and Arkana executed
five joint operating agreements based upon Form 610 of the 1982 version of the
American Association of Petroleum Landmen’s Model Form Operating
Agreement (hereinafter “Model Form Operating Agreement”). Neither the PSA
nor the joint operating agreements incorporated the Business Plan. As part of
the PSA, Arkana received approximately $1 million in sale proceeds. West Fork
and Arkana used approximately $640,000 of the sale proceeds to repay loans
made by Poe, Smyth and another investor. This left Arkana with a working
balance of approximately $483,000. The PSA did not contain any restrictions on
Arkana’s or West Fork’s use of the sale proceeds.
      In November 2004, other parties discovered a way to develop the natural
gas reserves in the Fayetteville Shale. This discovery led to a natural gas boom
in Arkansas, resulting in shortages of personnel and equipment.            These
shortages led to higher operating costs. In addition, it became more difficult to
negotiate leases with landowners. As a result, Arkoma and Appellees decided
to modify their plans for developing the prospect.       The parties agreed to
purchase hundreds of additional acres in the Fayetteville Shale and to renew
leases around their existing lease acreage in order to prevent forced pooling. At
the same time that the parties were purchasing additional leases, Arkana spent
between $250,000 and $300,000 implementing the first-year development
program outlined in the Business Plan. Arkana successfully completed Phase



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                                      No. 09-40011

I of the Plan, but was unable to complete Phase II due to ongoing equipment
shortages and the loss of cash flow from two unproductive wells.
       By March 2005, Lynton, Clark, Poe, and Smyth were looking for additional
capital to develop the prospect, anticipating that they would need approximately
$30 million. In September 2007, the parties began serious discussions with
Touradji Capital, a hedge fund, about investing in the prospect. In a letter of
intent, Touradji offered $7.5 million for 50% of the Class A units in the prospect.
Negotiations broke down, however, when Arkoma refused to sign the letter of
intent. Instead, Arkoma brought suit against West Fork, Arkana, Poe and
Smyth for misappropriation of funds, breach of contract, statutory fraud,
negligent misrepresentation, fraudulent inducement, and violations of federal
and state securities laws.1
       Pursuant to 28 U.S.C. § 636(c), the case was tried before a Magistrate
Judge (“the trial court”). At the conclusion of Arkoma’s case in chief, Appellees
filed motions for judgment as a matter of law pursuant to Federal Rule of Civil
Procedure 50(a). The trial court granted the motions as to Arkoma’s federal and
state securities-fraud claims on the ground that Arkoma had failed to show
reliance on any material misrepresentation made by Appellees. The trial court
also granted the motion on the breach-of-contract claim on the ground that
Arkoma did not present evidence that the joint operating contracts covered
property where it lost leases. A jury returned a verdict in favor of Appellees on
the remaining claims.        The trial court entered judgment for Appellees on
December 11, 2008. Post judgment, Appellees filed motions for attorney’s fees;
the trial court entered an order awarding attorney’s fees against Arkoma under
15 U.S.C. § 77k(e) and Ark. Code Ann. § 16-22-308.


       1
        Arkoma appeals only the trial court’s grant of judgment as a matter of law on its
breach-of-contract claim and its securities-fraud claims. The remaining claims are not before
us on appeal.

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                                             II.
                                             A.
       We review the trial court’s Rule 50 judgment de novo, viewing the evidence
in the light most favorable to the non-moving party. James v. Harris County,
577 F.3d 612
, 617 (5th Cir. 2009), cert. denied, 
130 S. Ct. 1078
(2010). Judgment
as a matter of law is appropriate “[i]f a party has been fully heard on an issue
during a jury trial and the court finds that a reasonable jury would not have a
legally sufficient evidentiary basis to find for the party on that issue.” Fed. R.
Civ. P. 50(a). “In order to survive a Rule 50 motion and present a question for
the jury, the party opposing the motion must at least establish a conflict in
substantial evidence on each essential element of [its] claim.”                Anthony v.
Chevron USA, Inc., 
284 F.3d 578
, 583 (5th Cir. 2002) (citation omitted). “In
other words, the evidence must be sufficient so that a jury will not ultimately
rest its verdict on mere speculation and conjecture.” 
Id. (citation omitted).
                                             1.
       To succeed on its breach-of-contract claim, Arkoma must prove “the
existence of an agreement, breach of the agreement, and resulting damages.”
Ultracuts, Ltd. v. Wal-Mart Stores, Inc., 
33 S.W.3d 128
, 133 (Ark. 2000).2
Arkoma maintains that the Appellees breached Article V(A) of the five joint-
operating agreements, which provides,
       Arkana Operating Co. shall be the Operator of the Contract Area,
       and shall conduct and direct and have full control of all operations
       on the Contract Area as permitted and required by, and within the
       limits of this agreement. It shall conduct all such operations in a
       good and workmanlike manner, but shall have no liability as
       Operator to the other parties for losses sustained or liabilities




       2
        The joint operating contracts specify that the governing law is “the law of the state
in which the Contract Area is located.” Both parties agree that Arkansas law applies to the
breach-of-contract claim.

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                                       No. 09-40011

       incurred, except such as may result from gross negligence or willful
       misconduct.
Specifically, Arkoma alleges that Appellees failed to drill wells, allowed leases
to expire, and failed to produce existing wells, all of which resulted in the loss
of several leases in the prospect.3 Arkoma maintains that the Appellees’ actions
constitute a breach of the duty to conduct operations in a “good and workmanlike
manner.”
       Appellees argue that Arkoma failed to introduce evidence at trial that they
breached any of the specific duties of the operator under the joint operating
agreements. We agree. At trial, Arkoma presented the testimony of Billy
Moore, who claimed that several leases were lost due to Appellees’ failure to
maintain necessary production levels.             Even if we accept the truth of this
testimony, it is insufficient to establish a breach of the operator’s duty under the
joint operating agreements. Applying Texas law, this court has previously held
that there is no special duty on the part of an operator to maintain leases under
a joint operating agreement that contained language identical to that of Article
V(A). Stine v. Marathon Oil Co., 
976 F.2d 254
, 259, 265–66 (5th Cir. 1992).
Arkoma has not cited, and we have not found, any authority indicating that the
result would be different under Arkansas law. Therefore, we apply our holding
in Stine to this case. The joint operating agreements at issue impose no special
duty on Appellees to maintain the leases. As we noted in Stine, “[p]reservation
of title to the leases contained within the Contract Area is not the sole
responsibility of the operator.” 
Id. (quoting Ernest
E. Smith, D UTIES AND


       3
         As noted above, the trial court granted the Appellees’ motion for judgment as a matter
of law on the ground that Arkoma did not present evidence that the joint operating contracts
covered property where it lost leases. This argument was not presented in the Appellees’ Rule
50(a) motion. Arkoma argues on appeal that the trial court cannot grant judgment as a matter
of law on a ground raised sua sponte. We need not address this argument, however, as we may
affirm the grant of judgment as a matter of law on any ground even if the trial court did not
rely on that ground. See Foreman v. Babcock & Wilcox Co., 
117 F.3d 800
, 804 (5th Cir. 1997).

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                                  No. 09-40011

O BLIGATIONS O WED B Y A N O PERATOR TO N ONOPERATORS, I NVESTORS, AND O THER
I NTEREST O WNERS, 32 Rocky Mtn. Min. L. Inst. § 12.03(8)(a) (1986)). As Arkoma
has failed to “establish a conflict in substantial evidence” as to whether
Appellees breached a duty imposed by the joint operating agreements, its
breach-of-contract claim must fail. Anthony v. Chevron USA, Inc., 
284 F.3d 578
,
583 (5th Cir. 2002).
                                        2.
      Arkoma also appeals the grant of judgment as a matter of law to Appellees
on its federal and state securities-fraud claims.     In its complaint, Arkoma
asserted violations of 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5 (hereinafter
“Rule 10b-5 claim”) and Article 581-33A(2) of the Texas Securities Act, Tex. Rev.
Civ. Stat. Ann. Art. 581-33A(2), (hereinafter “Article 581-33A(2) claim”).
Specifically, Arkoma alleged that Appellees used the projections contained in the
Business Plan to entice investors, but never intended to take steps to complete
those projections. The trial court granted judgment as a matter of law on the
securities -fraud claims on the ground that Arkoma had failed to provide legally
sufficient evidence that it had relied on any material misrepresentations or
omissions contained in the Business Plan.
      In order to prevail on its Rule 10b-5 claim, Arkoma must show “(1) a
material misstatement or omission, (2) which occurred in connection with the
purchase or sale of securities, (3) that was made with scienter, (4) harm, (5) and
causation.” Mercury Air Group, Inc., v. Mansour, 
237 F.3d 542
, 546 (5th Cir.
2001) (citations omitted). A Rule 10b-5 claim requires evidence that the
Appellees knew that a particular statement or omission was “materially false or
misleading when made.” Tuchman v. DSC Commc’ns Corp., 
14 F.3d 1061
, 1069
(5th Cir. 1994). To prevail on its Article 581-33A(2) claim, Arkoma must prove
that (1) Appellees offered or sold a security, (2) Appellees made an untrue
statement (or omission), and (3) the omission or untrue statement is the means

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                                       No. 09-40011

by which the sale of the security was made. Tex. Rev. Civ. Stat. Ann. Art. 581-
33A(2). A claim under Article 581-33A(2) requires the plaintiff to show that the
material statement or omission was false before a plaintiff purchased the
security. See Nicholas v. Crocker, 
687 S.W.2d 365
, 368 (Tex. App. —Tyler 1984,
writ ref’d n.r.e.).
             As an initial matter, we note that “‘projections of future performance not
worded as guarantees are generally not actionable under the federal securities
laws as a matter of law.” ABC Arbitrage Plaintiffs Group v. Tchuruk, 
291 F.3d 336
, 359 (5th Cir. 2002) (quoting Krim v. BancTexas Group, Inc., 
989 F.2d 1435
,
1446 (5th Cir. 1993)). The Business Plan contains only projections; it provides
no guarantees of minimum production volumes or revenue streams from the
wells.
         Moreover, there is no evidence that Appellees knew that the projections
contained in the Business Plan were false when made. The evidence presented
at trial showed that Appellees completed Phase I and made serious efforts to
complete Phase II of the Business Plan on schedule. Although it is true that
subsequent events prevented Appellees from completing Phase II, neither Rule
10b-5 nor Article 581-33A(2) imposes liability for securities fraud solely based
on the fact that future projections were not met.4 See Isquith ex rel. Isquith v.
Middle S. Util. Inc., 
847 F.2d 186
, 203–04 (5th Cir. 1988) (“Most often, whether
liability is imposed depends on whether the predictive statement was ‘false’
when it was made. The answer to this inquiry, however, does not turn on
whether the prediction in fact proved to be wrong . . . .”); see also Herrman
Holdings Ltd. v. Lucent Techs. Inc., 
302 F.3d 552
, 564 (5th Cir. 2002) (holding



         4
         Arkoma’s failure to present evidence that Appellees knew that the projections
contained in the Business Plan were false at the time they were made is also fatal to its claim
that Appellees intentionally aided Lynton and Clark in committing securities fraud in
violation of Tex. Rev. Civ. Stat. Ann. Art. 581-33(F)(2).

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                                  No. 09-40011

that a claim under Article 581-33A(2) for an untrue promise of future
performance requires proof that the defendant had no intention of performing
the promise at the time it was made).
      Arkoma also presents, for the first time on appeal, a list of fourteen alleged
oral misrepresentations made by Appellees. As Arkoma did not bring these
specific misrepresentations to the attention of the trial court in response to the
motion for judgment as a matter of law, we will not consider them here. See
Greenberg v. Crossroads Sys. Inc., 
364 F.3d 657
, 669–70 (5th Cir. 2004).
                                        B.
      Arkoma also appeals three of the trial court’s evidentiary rulings.
Specifically, Arkoma argues that the trial court erred by (1) limiting Marty
Spadinger’s testimony, (2) refusing to allow testimony as to how Appellees spent
the PSA proceeds, and (3) limiting Lynton’s testimony regarding an e-mail that
Poe had sent to potential investors. We review evidentiary rulings under an
abuse-of-discretion standard. Triple Tee Gold Inc., v. Nike, Inc., 
485 F.3d 253
,
265 (5th Cir. 2007). An abuse of discretion occurs when an evidentiary ruling
is manifestly erroneous. Leefe v. Air Logistics, Inc., 
876 F.2d 409
, 410–11 (5th
Cir. 1989). Even if we find an abuse of discretion, however, we will not reverse
an evidentiary ruling unless “a substantial right of the complaining party was
affected.” Triple 
Tee, 485 F.3d at 265
(footnote omitted).
      We first address the trial court’s limitation of Spadinger’s testimony.
Spadinger was president of Momentum Energy Corporation, which shared a
working interest with Arkana and Arkoma in certain wells. Arkoma sought to
introduce his testimony as to Arkana’s general performance as an operator. The
trial court limited the scope of Spadinger’s testimony to billing disputes that
Momentum had with Arkana.           Arkoma asserts that this order prevented
Spadinger from testifying about (1) Arkana’s lack of operations on the common
wells, (2) Arkana’s failure to provide an audit of the common wells, (3) instances

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                                  No. 09-40011

of Arkana billing Momentum for projects without performing its obligations, and
(4) Arkana’s general ineptitude as an operator.
      Arkoma’s first three arguments lack merit. Spadinger’s testimony that
Arkana failed to operate on the common wells would have been cumulative of the
testimony already presented regarding Arkana’s failure to drill certain wells in
the prospect. Excluding such cumulative evidence does not constitute an abuse
of discretion. See 
Leefe, 876 F.2d at 410-11
. Arkoma’s argument that it was
unable to elicit testimony regarding Arkana’s failure to provide an audit is belied
by the record; the trial court allowed a limited inquiry into Arkana’s refusal to
cooperate with the audit request. The record likewise shows that the Spadinger
did testify about Arkana’s failure to fulfill its obligations to pay vendors after
receiving money from Momentum to make such payments. The fourth argument
presents a somewhat closer issue as it is not entirely clear why the trial court
did not allow Spadinger to testify regarding Arkana’s ineptitude as an operator.
In light of our holding that the joint operating contracts impose no duty to
maintain leases, however, the trial court’s ruling could not have affected
Arkoma’s substantial rights. Triple 
Tee, 485 F.3d at 265
.
      We next address Arkoma’s argument that the trial court improperly
excluded evidence as to how Appellees spent the PSA proceeds. This argument
is directly contradicted by the record before us.         The trial court allowed
testimony on this issue.
      Finally, we find no abuse of discretion with respect to the trial court’s
limitation of Lynton’s testimony. The trial court initially permitted a limited
inquiry about the contents of the e-mail, but then ruled that the e-mail was not
relevant to any of Arkoma’s fraud claims. The record provides ample support for
this ruling. Lynton admitted that Poe was not attempting to solicit him to invest
in the prospect at the time he was copied on the e-mail, approximately a year-
and-a-half before the PSA was signed. Moreover, Lynton admitted that none of

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                                  No. 09-40011

Arkoma’s limited partners had ever received the e-mail. In light of these
admissions, we can hardly say that the decision to limit any further testimony
regarding this e-mail constitutes an abuse of discretion.
                                       C.
      Arkoma argues that the trial court’s actions and comments influenced the
jury and thereby denied it a fair trial. Our standard of review is set forth in
Rodriguez v. Riddell Sports, Inc., 
242 F.3d 567
, 579 (5th Cir. 2001):
      In reviewing a claim that the trial court appeared partial, this court
      must determine whether the judge’s behavior was so prejudicial
      that it denied the [defendant] a fair, as opposed to a perfect, trial.
      To rise to the level of constitutional error, the district judge’s
      actions, viewed as a whole, must amount to an intervention that
      could have led the jury to a predisposition of guilt by improperly
      confusing the functions of judge and prosecutor.
      Our review of the trial court’s actions must be based on the entire
      trial record. A trial judge’s comments or questions are placed in the
      proper context by viewing the totality of the circumstances,
      considering factors such as the context of the remark, the person to
      whom it is directed, and the presence of curative instructions. The
      totality of the circumstances must show that the trial judge’s
      intervention was quantitatively and qualitatively substantial.
(internal quotation marks and citations omitted).
      Arkoma first argues that the jury was prejudiced by the trial court’s
frequent statements that it was the Appellees’ prerogative to use the PSA
proceeds as they saw fit and that the Clark Prospectus was not identical to the
Business Plan. After reviewing the record as a whole, we are satisfied that the
trial court’s comments did not confuse “the functions of judge and prosecutor.”
Id. In addition,
Arkoma argues that the jury was irreparably prejudiced when
the trial court erroneously ruled as a matter of law that the Appellees could do
whatever they wished with the PSA Proceeds and that the Clark Prospectus had
been materially altered.     According to Arkoma, the trial court’s formal
withdrawal of the rulings and instructions to the jury to disregard them failed

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                                    No. 09-40011

to correct the resulting prejudice. We disagree. “[C]urative instruction[s] . . .
can operate against a finding of constitutional error.” United States v. Bermea,
30 F.3d 1539
, 1571 (5th Cir. 1994) (citations omitted). Here, the trial court
instructed the jury to disregard the prior rulings at the time they were
withdrawn and again at the close of the case. We are satisfied that these actions
corrected any possible prejudice.
      In addition, Arkoma argues that the trial court improperly cross examined
its witnesses and was heavily biased in favor of Appellees. “A trial judge has
wide discretion over the tone and tempo of a trial and may elicit further
information from a witness if he believes it would benefit the jury. However, the
trial court’s efforts to move the trial along may not come at the cost of strict
impartiality.” 
Rodriguez, 242 F.3d at 579
(internal quotation marks and citation
omitted). Arkoma points to three instances of allegedly improper questioning.
As Arkoma did not object to the trial court’s questioning, our review is for plain
error only. 
Id. To prevail
under the plain error standard, Arkoma must show
that an error occurred, the error was plain or obvious, the error affected its
substantial rights, and “not correcting the error would seriously impact the
fairness, integrity, or public reputation of judicial proceedings.” Septimus v.
Univ. of Houston, 
399 F.3d 601
, 607 (5th Cir. 2005) . After reviewing the record,
we are satisfied that the trial court’s comments were well within the trial court’s
broad power to “elicit facts not yet adduced or clarify those previously
presented.” 
Rodriguez, 242 F.3d at 579
.
      Finally, Arkoma argues, without any evidentiary support whatsoever,
that the trial court allowed the U.S. Marshal to threaten force against its
attorneys during trial. There is no evidence in the record before us that this
incident occurred.




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                                  No. 09-40011

                                        D.
      Arkoma appeals the award of attorneys’ fees to Appellees under 15 U.S.C.
§ 77k(e) and Ark. Code. Ann. § 16-22-308.         Appellees argue that we lack
jurisdiction over this claim because Arkoma filed its notice of appeal prior to the
date of the order awarding attorneys’ fees and failed to amend its notice or file
a separate notice appealing the order. We agree. When a party files a notice of
appeal from a final judgment and that judgment is filed before the court awards
attorney’s fees to the opposing party, that notice is not sufficient to appeal the
subsequent order awarding attorney’s fees. NCNB Tex. Nat’l Bank v. Johnson,
11 F.3d 1260
, 1269–70 (5th Cir. 1994); Quave v. Progress Marine, 
912 F.2d 798
,
801 (5th Cir. 1990). Therefore, we lack jurisdiction to review the award of
attorney’s fees.
      For the foregoing reasons, the judgment of the trial court is hereby
AFFIRMED.




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