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Bates Energy Oil & Gas, LLC v. Complete Oil Field Services

United States District Court, W.D. Texas, San Antonio Division

September 5, 2019

BATES ENERGY OIL & GAS, LLC, Plaintiff,
v.
COMPLETE OIL FIELD SERVICES, ET AL., Defendants.

          ORDER ON MOTION FOR SUMMARY JUDGMENT

          XAVIER RODRIGUEZ, UNITED STATES DISTRICT JUDGE.

         On this date, the Court considered Counter-Defendant Mark B. Sylla's Motion for Summary Judgment (docket no. 119) and Counter-Plaintiff Complete Oil Field Services' Motion to Strike Evidence (docket no. 123) and Motion for Leave to File Sur-reply (docket no. 126).

         BACKGROUND

         This lawsuit stems from a contract for the purchase of frac sand between Bates Energy Oil & Gas ("Bates Energy") and Complete Oilfield Services ("COFS"). Except as otherwise cited, the facts below are undisputed.

         COFS was created in 2017 for the purpose of supplying frac sand to ProPetro, a pressure pumping and fracking company. Pursuant to an agreement between ProPetro and COFS, ProPetro agreed to deposit $4 million into an escrow account to pay COFS's eventual sand supplier for the purchase and delivery of specific types of frac sand. COFS began looking for sand suppliers and was introduced to Stanley Bates, principal and CEO of Bates Energy. Relying on Bates's representations about Bates Energy's ability to deliver 80, 000 tons of frac sand, COFS entered into a Memorandum of Understanding ("MOU") with Bates Energy in April 2017. Under the MOU, Bates Energy was to deliver specific amounts and types of frac sand to one of seven rail terminals in Texas on specific due dates, the first being a delivery of 10, 000 tons by May 10, 2017. Docket no. 124-5 (Ex. D) at 48; docket no. 124-10 (Ex. I) at 14.

         COFS, Bates Energy, and Equity Liaison Company ("ELC") entered into an Escrow and Distribution Agreement ("the Escrow Agreement") in April 2017. One million of ProPetro's money was placed into an escrow account at Chase Bank with ELC acting as the escrow agent. COFS alleges that the agreements required that disbursements from the ELC escrow account needed the joint instruction of both COFS and Bates Energy. COFS later learned that DeWayne Naumann, the principal of ELC, was a close associate of Bates. Unbeknownst to COFS, the account managed by ELC was a pre-existing Bates Energy escrow account that ELC was already handling for Bates Energy, and thus the $1 million was immediately commingled with funds already in the account.

         After Bates promised that sand was on its way but no sand was delivered, COFS became concerned about Bates Energy's ability to deliver the quantity and quality of frac sand they had contracted for. Sam Taylor, COFS's principal, went to Wisconsin on or about May 9, 2017 to investigate Bates Energy's purported mines and other frac sand sources and to ensure that sand was being loaded. The parties agree that Taylor met with Mark Sylla, whom COFS characterizes as an independent contractor for Bates Energy. Sylla does not state in what capacity he was acting when he met with Taylor in Wisconsin to look at the mines. Sylla and Taylor drove around, and Sylla pointed out various mining operations in Wisconsin.

         According to Taylor, Sylla told him "that there was no way they [Bates Energy] could hit 80, 000 ton right now, less - or 40, 000 ton." Docket no. 124-4 (Ex. C) at 90. Taylor testified Sylla "puts me in his truck and we drive down the road" and "he's supposed to give me a tour of some mines." Id. Taylor testified that he was not interested in seeing the mine owner or talking to the mine operator, he "just wanted to see the mine and how they operated at different levels." Id. at 90-91. Taylor stated that as they drove down the road, Sylla would point at a mine, and Taylor would ask him if they bought from that mine, and Taylor would say, "No." Id. at 91. Taylor stated that they stopped on the road because one of them had to use the restroom and "I'm being told after the fact that we were parked over LaPrairie, CSI's mine." Id. Taylor stated that they were "sitting there talking" and Taylor was trying to come up with ways to help and he asked "Mark, do you know an Eric String [sic]" Id. Taylor states he then called Eric Strang, a representative from the CSI mine, on "both of his cell phones," which he had from talking to him in January or February. Id. at 92. Taylor states that Strang called him the next day as he was headed to the airport, and they discussed COFS's need for sand, and Strang told Taylor that CSI could deliver sand "very soon." Id.

         According to Sylla, they visited the Wisconsin White Sands Site in Tomah, the High Crush site in Independence, the CSI Sand Wisconsin site in Arcadia, and the Industrial Sands site in New Auburn. Docket no. 119-1 at 2. Sylla states that they "stopped at three of the sites." Id. Sylla told Taylor that none of those sites had the capacity to deliver the quantities of sand that Bates had promised to deliver. Sylla Aff ¶ 7 ("I informed Sam Taylor that none of those sites had the capacity to deliver quantities in the amount he was seeking.").

         The parties agree that, during the Wisconsin visit, Taylor contacted Eric Strang by phone and Taylor and Strang made an arrangement for sand delivery. COFS contends that this was "a separate arrangement directly with" CSI. Docket no. 124 at 4. Sylla contends that he is entitled to a commission for the sand delivery from CSI of $1 per ton.

         COFS alleges that, on May 11 or 12, 2017, Sylla and Bates's girlfriend Audra Vega created a new company, Unlimited Frac Sand d/b/a Frac Sand Unlimited ("FSU"), a Texas LLC. David Bravo testified that FSU was a company that he owned with Mark Sylla as partner to sell and procure frac sand. Docket no. 124-6 (ex. E) at 179. COFS also provides screenshots from FSU's website when it was operational, which show David Bravo as President/Managing Partner and Mark Sylla as Chief Operations Officer/Partner. Docket no. 124-8 (Ex. G(1)).

         Sylla denies any involvement with FSU, docket no. 119-1 at 2 ("I did not manage or have any involvement in Frac Sand Unlimited."), but he acknowledges that he is listed as a manager on the LLC formation documents, docket no. 124-8 at 9 (Ex. G(2)). Sylla asserts that he "was working with David Bravo on other completely unrelated prospective transactions, which transactions were not consummated." Docket no. 119-1 at 3. COFS alleges that FSU was used as a key part of the conspiracy among all the Defendants to fraudulently funnel COFS's escrow funds to persons outside the MOU contract. Docket no. 124 at 5. COFS alleges that FSU was the payee of most of the fraudulent payments totaling over $600, 000 for frac sand that COFS alleges was never delivered. Id; docket no. 124-9 (Ex. H) at 19.

         Pursuant to the arrangement with CSI for a delivery of sand, on June 15, 2017, there was an authorized disbursement of $1 million from the escrow account, shown as a "flat fee" "one time transfer" of $1 million "For: CSI Sand Wisconsin, LTD." Docket no. 124-7 (Ex. F). Bates signed the disbursement authorization and sent it to Taylor and Janis Kline of COFS, stating, "Here is the Disbursement letter for our team to used [sic] $1, 000, 000 of the escrowed fund towards Eric's mine at LaPrairie 'CSI Sand Wisconsin, LTD.'" Id. COFS contends that none of its authorizations permitted disbursements, fees, or commissions to Bates, Sylla, or anyone else besides CSI based on the quantity of sand delivered or the amount paid to CSI. Docket no. 124 at 4.

         The parties do not dispute that, in June and July 2017, Sylla received three wire transfers of $10, 000, $5, 000, and $7, 500, totaling $22, 500, from COFS's escrow account with ELC. Docket no. 119-1 at 3. Sylla contends these payments were a typical 1% fee "for locating, disclosing and introducing the site from which the compliant firac sand was delivered," as was reasonable and customary in the frac sand industry. Id. Sylla asserts that 22, 500 tons of frac sand was delivered from CSI, and thus $22, 500 represents his fee. Docket no. 119-1 at 2-3.[1]

         On June 15, ELC paid out a total of $60, 50 in escrow funds to Sylla, David Bravo, ELC, and Howard Resources. The June 15, 2017 "distribution of funds" authorization letter is signed by Stan Bates, and lists a "flat fee" payment to Sylla of $10, 000, "flat fee" payments to David Bravo, ELC, and Bates Energy, and $1 per ton ($5, 050) to Howard Resources.[2] Docket no. 124-11 (Ex. J(1)) at 2. The specific disbursement authorization to Sylla is signed by Stan Bates via "electronic signature added under authorization by Frac Sand Unlimited, LLC." Docket no. 124-11 at 3.

         The June 30, 2017 distribution authorization letter is signed by Bates and also shows a "flat fee" of $5, 000 to Sylla, as well as "flat fee" payments to Bravo, ELC, and Bates Energy. Docket no. 124-11 at 8. The specific disbursement authorization is signed by Bates with "electronic signature added under authorization by Frac Sand Unlimited, LLC" and states the amount to disburse as "$5000.00 exactly Additional Liquidated Damages COS." Id. at 12.[3]And the July 19, 2017 distribution shows a "flat fee" of $7, 500 to Sylla and a $6, 500 "flat fee" to Howard Resources and "flat fee" payments to Bravo, Bates Energy, and ELC. Docket no. 124-11 at 15. Other than the $1 per ton payment to Howard Resources, ELC's notations on the wire transfers characterize them as "flat fees" and state they are "liquidated damages and administration fees" rather than commission payments. Sylla asserts that he had no control over or involvement in how ELC characterized the payments.

         COFS contends it never authorized the payments to Sylla and had no knowledge of them at the time they were made. COFS argues that Sylla was not entitled to compensation because COFS's relationship with CSI pre-existed Taylor's visit to Wisconsin and there is no evidence that COFS ever agreed to pay Sylla or anyone associated with Bates Energy a commission in relation to the CSI sand delivery. See docket no. 124-11. In addition, COFS asserts that it never authorized any distributions to Sylla, as required by the Escrow Agreement. Sylla claims he was unaware of the requirement that COFS authorize the disbursement of escrow funds and that COFS never demanded return of the money or claimed it was improperly paid until the filing of this lawsuit. Docket no. 119-1 at 3.

         COFS brings the following claims against Sylla: conspiracy to commit fraud, theft, conspiracy to commit theft, restitution or money had and received, and ...


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