Trustee in oil company's bankruptcy claims land grab conspiracy in federal lawsuit
FARMINGTON — The trustee of an insolvent oil and gas company that operated near San Juan County filed a federal lawsuit in December claiming that a Texas bank and a twice-convicted felon conspired to defraud the company in 2012.
Marilyn Smelcer, liquidation trustee of Hart Oil & Gas, claims in a complaint filed in the District of New Mexico's bankruptcy court that the Citizens Bank of Kilgore and oilman John Ehrman used underhanded tactics, including property seizures, phony environmental complaints and corporate spies, to bankrupt the company so its assets could be purchased at bargain-basement prices. Originally filed in December, the complaint was amended March 20.
Ehrman, 59, was indicted in Texas federal court in December on 29 counts of wire fraud and seven other felonies in an unrelated criminal case stemming from a fraudulent investment scheme in Woodlands, Texas, according to court records.
Ehrman was previously sentenced to six months in federal prison in 2009 after pleading guilty to making a false filing with the Securities and Exchange Commission. In the early 1990s, he was also convicted of securities fraud while employed at the Houston company TransWestern Oil and Gas, according to court records.
Smelcer's spokesman, Matt Krumtum, said Ehrman and other co-conspirators potentially committed criminal acts in their attempt to acquire Hart Oil & Gas' assets.
"There are always machinations in any business matter, but what happened in this goes way beyond accepted business practices," Krumtum said. "What went on here goes into the realm of illegality."
Ehrman's attorney in the lawsuit, Edward Friedman of the BakerHostetler law firm in Houston, Texas, could not be reached for comment.
Citizens Bank of Kilgore denied the allegations in a response to the complaint filed in January.
The bank's attorney, Scott Ritcheson of Tyler, Texas, could not be reached for comment.
Hart Oil & Gas Inc. is a Colorado corporation founded in 1991 that operated in Tennessee, Texas and New Mexico, according to a disclosure statement.
The company's primary assets consisted of six leases that allowed it to extract oil and gas from 9,400 acres on the Navajo Nation near Shiprock, according to the disclosure statement.
Despite record-high oil prices and gross annual revenue of more than $1 million, the company initiated Chapter 11 bankruptcy proceedings on Sept. 21, 2012. That resulted in many local vendors, including Dawn Trucking of Farmington, Mann Pipe Co. of Bloomfield and Mo-Te Drilling Inc. of Farmington, not being paid for services provided, according to court documents.
In its petition for bankruptcy, the company claimed more than $1 million in liabilities, including an unpaid $1 million loan from Citizens Bank of Kilgore, and less than $500,000 in assets.
Smelcer claims in her lawsuit that the loan and the bank's desperate attempts to see it repaid caused the company's bankruptcy.
According to the civil complaint, the company's president, Andy Saied, expressed an interest in selling Hart Oil & Gas in October 2011.
Ehrman learned of Saied's intention to sell and contacted the company president through email using the alias "Darrell Evans" to hide his criminal history, according to the complaint.
Ehrman convinced Saied to sign a binding contract to sell Hart Oil & Gas to a straw company owned by Ehrman for $4 million, the complaint states.
However, the true purchaser of the company, the complaint claims, was Palo Petroleum, a Dallas-based oil and gas company owned by the Graham family.
Jim Graham, Palo's president, was a longtime friend of Larry Long, the owner and chairman of Citizen's Bank of Kilgore, according to the complaint, and conspired with Ehrman and Long to force the company into bankruptcy so its leases with the Navajo Nation could be acquired cheaply by Palo and the bank could be repaid its $1 million loan.
Graham said in an interview that the claims made by Smelcer were "totally fictitious."
According to the complaint, officials with Citizens Bank of Kilgore downgraded the $1 million loan issued to Hart Oil & Gas in 2008 to "substandard" in May 2012 and began tightening financial control over the company, which resulted in nonpayment or delayed payment to vendors.
In July 2012, the bank allegedly had an employee at the oil field shut down operations and seize a generator, resulting in a work stoppage and a significant loss of revenue, according to the complaint.
Graham and Ehrman also allegedly called federal and tribal regulators and made anonymous, specious claims that the oil fields were not compliant with environmental standards, according to the complaint.
Throughout the period, the accused individuals allegedly sent emails to each other discussing the conspiracy.
"By July 30, (2012), Ehrman's work was done: Hart Oil's operations had been crippled, its production destroyed, vendors and employees were owed money, government regulators were agitated, and the Hart leases were in jeopardy," the complaint states.
In August 2012, a Palo Petroleum vice president emailed Saied a new offer of $1.5 million for Hart Oil & Gas, the complaint states.
Saied rejected the offer, and, in response, Citizens Bank of Kilgore began foreclosing on the company's oil fields, the complaint states.
Saied then filed bankruptcy in September 2012, which halted the foreclosure process.
Graham, Palo's president, said Ehrman approached an unnamed partner of his claiming to have the right to purchase Hart Oil's leases. His company was asked to perform "due diligence" to ensure the deal was above board, which it was not, he said.
"We learned a lot about Mr. Ehrman during our due diligence, none of which we were particularly impressed with, and we advised our partner not to become involved with him," Graham said.
He further said that Hart Oil's properties were, in fact, in violation of federal environmental standards, and he was happy his company did not become involved in acquiring the leases.
"It was a mess," he said.
Regarding the lawsuit, he said Smelcer is an unsecured creditor, as well as a trustee, and is attempting to get as much money as possible from the bankruptcy of Hart Oil & Gas.
According to court records, Smelcer, a commercial manager for Houston-based oil exploration company Cobalt International Energy, is an unsecured claimant owed $200,000 by Hart Oil & Gas.
Smelcer said she is bringing claims for the benefit of all individuals harmed by the co-conspirators, which includes the businesses in San Juan County that are still owned money by Hart Oil & Gas.
"Palo's 'blame the victim' attack on the trustee and refusal to accept responsibility for the harm that Palo and its co-conspirators caused is what is expected from a company that was working closely with a convicted felon," she said in a statement.
Smelcer claims in the complaint that the accused individuals committed civil conspiracy, conversion of property, breach of fiduciary duty and breach of bank privacy laws, among other violations.
She requests that a federal judge subordinate the bank's fiscal claims in the bankruptcy below those made by the unsecured creditors and seeks unspecified monetary damages from Ehrman.