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Hart Oil & Gas lawsuit

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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.
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW MEXICO § MARILYN M. SMELCER, AS § LIQUIDATION TRUSTEE OF § HART OIL & GAS, INC., § § Adv. No. 14-01138 Plaintiff, § § v. § Case No. 12-13558 § CITIZENS BANK OF KILGORE AND § JOHN N. EHRMAN, § § Defendants. § TRUSTEE’S SECOND AMENDED COMPLAINT TO THE HONORABLE JUDGE OF THIS COURT: Plaintiff Marilyn M. Smelcer, the Liquidation Trustee of Hart Oil & Gas, Inc. (“Trustee or Plaintiff ””), files this Second Amended Complaint against Citizens Bank of Kilgore (Bank or “Defendant ) and John N. Ehrman (hereinafter Ehrman ”)(together the Bank and Ehrman are referred to as the “Defendants ”) and states the following: I. INTRODUCTION 1. The Trustee brings claims against Citizens Bank of Kilgore and John N. Ehrman in connection with a fraudulent scheme to take control of Hart Oil & Gas, Inc. (“Hart ”). The objective of the scheme was to force the sale of Hart’s mineral leases at a distressed price to Palo Petroleum, Inc. (“Palo ”) while paying the Bank’s $1 million note in full. In the event Hart refused to sell, Ehrman and the Bank developed a foreclosure strategy whereby the Bank would Case 14-01138-t Doc 18 Filed 03/20/15 Entered 03/20/15 17:02:47 Page 1 of 37
Transcript
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    IN THE UNITED STATES BANKRUPTCY COURT

    FOR THE DISTRICT OF NEW MEXICO

    MARILYN M. SMELCER, AS

    LIQUIDATION TRUSTEE OF

    HART OIL & GAS, INC.,

    Adv. No. 14-01138

    Plaintiff,

    v. Case No. 12-13558

    CITIZENS BANK OF KILGORE AND

    JOHN N. EHRMAN,

    Defendants.

    TRUSTEES SECOND AMENDED COMPLAINT

    TO THE HONORABLE JUDGE OF THIS COURT:

    Plaintiff Marilyn M. Smelcer, the Liquidation Trustee of Hart Oil & Gas, Inc. (Trustee

    or Plaintiff), files this Second Amended Complaint against Citizens Bank of Kilgore (Bank

    or Defendant) and John N. Ehrman (hereinafter Ehrman)(together the Bank and Ehrman are

    referred to as the Defendants) and states the following:

    I. INTRODUCTION

    1. The Trustee brings claims against Citizens Bank of Kilgore and John N. Ehrman in

    connection with a fraudulent scheme to take control of Hart Oil & Gas, Inc. (Hart). The

    objective of the scheme was to force the sale of Harts mineral leases at a distressed price to Palo

    Petroleum, Inc. (Palo) while paying the Banks $1 million note in full. In the event Hart

    refused to sell, Ehrman and the Bank developed a foreclosure strategy whereby the Bank would

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    sell its note to Palo who would then proceed to foreclose on Harts leases. This fraudulent

    scheme damaged Hart Oil and forced the company into bankruptcy.

    2. Ehrmans plan for Hart Oil began in the Fall of 2011, less than a year after his release

    from a federal prison in Texas for securities fraud related to oil and gas investments. See United

    States of America v. John N. Ehrman, 4: 07-cr-00290 (S.D. Tex).

    3. In October 2011, Ehrman learned that Andy Saied, the president of Hart, was interested

    in selling the company. Ehrman, who had previously owned two companies in the San Juan

    Basin of New Mexico, began gathering information about Hart Oil and Mr. Saied. The scheme

    was complicated. It involved Ehrmans use of the internet, the alias Darrell Evans, and two

    shell companies specifically formed by Ehrman: Redevelopment Energy LLC and AAA Oil &

    Gas Advisors (AAA). AAA would pose as a broker for energy acquisitions and

    Redevelopment Energy would pose as the buyer for Harts leases.

    4. In June 2012 Ehrman, using the alias Darrell Evans of AAA Oil & Gas Advisors, was

    able to entice Hart Oils president, Andy Saied, into signing a binding yet fraudulent contract to

    sell Hart Oil to Ehrmans other company, Redevelopment Energy for $4,000,000. Closing was

    set for July 30, 2012. Unfortunately, Mr. Saied did not know that Darrell Evans was really John

    N. Ehrman nor did Mr. Saied know that AAA (broker) and Redevelopment Energy (buyer) were

    affiliated companies controlled by Ehrman. The contract allowed Ehrman/Redevelopment to

    physically enter Harts leases prior to closing ostensibly to put wells on line, drill, or work over

    wells at the Redevelopment Energys sole expense. Unbeknownst to Hart Oil and Mr. Saied,

    Palo Petroleum was the real buyer behind Ehrmans scheme. Palo and one its Dallas investors, a

    man named Ed Hawes, were working with Ehrman as early as May 2012 to acquire Harts

    leases. Ehrman would refer to Palo and Hawes as his Dallas partners. Palo agreed to advance

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    funds to implement Ehrmans plan and did in fact do so. A key to the success of the Hart

    takeover strategy was Palos president, James P. Graham. Graham, who would play a major role

    and work closely with Ehrman, was longtime friends with Larry T. Long, the owner and

    chairman of Citizens Bank. Had these facts been disclosed to Andy Saied, he would not have

    signed the sale contract with Redevelopment Energy. In executing the contract with

    Redevelopment Energy, Mr. Saied ceased negotiations with a third-party who in March 2012 had

    given Hart a term sheet to purchase Harts leases for $3.5 million.

    5. By mid-June 2012, Citizens Bank was ready, willing, and able to assist John N. Ehrman

    with his scheme to force the sale of Harts leases to Palo at a reduced price. In May 2012, the

    Banks $1,000,000 loan to Hart was downgraded to substandard. In June 2012 the loan to

    Hart was on the Banks internal Watch List and, in September 2012, the Bank was facing an

    audit from federal banking regulators at the Federal Deposit Insurance Corporation (FDIC).

    The Bank had also tightened its financial control over Hart Oil. Throughout 2012 and at all

    times during the Ehrman scheme, Bank employees were managing Harts oil revenues, cash

    flow, and deciding which vendors Hart Oil could pay. All payments to Harts vendors and

    suppliers were made by wire transfers direct from the Bank and only after such payments were

    approved by Margaret Logston, the Banks Oil & Gas Secretary. Citizens Bank was in control of

    Harts business.

    6. The Bank saw Ehrman and Palo as its exit strategy. So the Bank, and its senior officers,

    took steps to aid Ehrman. Over a 4-week period in July 2012, the Bank and certain officers,

    employees, and agents engaged in the following acts and omissions in furtherance of Ehrmans

    fraudulent scheme: (a) disclosed confidential information about their clients distressed financial

    condition to John N. Ehrman (a convicted felon), Palo Petroleum, and others; (b) entered into a

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    contract with Ehrmans shell company Redevelopment Energy LLC to serve as escrow agent for

    the fraudulent sale transaction arranged by Ehrman; (c) engaged in strategy and informational

    calls with Ehrman and others regarding Harts field operations without the knowledge of Harts

    management; (d) on July 27, 2012 instructed their agent in Farmington to seize and take control

    of Harts oilfield equipment without any notice to Hart Oil and refused to allow Hart Oil to use

    that equipment and supplies in its operations; (e) was fully aware of and complicit in Ehrmans

    written plan dated July 26, 2012, to remove Harts main generator and shut-in the field and,

    further, failed to notify and protect their client Hart Oil or its president Andy Saied about this

    plan; (f) refused to release needed funds to pay the generator lease and thus allowed the Hart

    field to be without power and shut-in; (g) continued to make all financial decisions regarding the

    expenditure of funds for Hart Oils operations; (h) refused to advance funds under the Banks

    existing loan agreement with Hart Oil; (i) on July 30, 2012, Citizens Bank flew representatives

    of Palo Petroleum on the Banks private jet from Texas to New Mexico to pressure Mr. Saied to

    sell Harts leases to Palo; and (j) negotiated a secret agreement with Palo and the Navajo Nation

    to foreclose the Hart leases and re-issue the leases to Palo in exchange for payment of the Banks

    $1 million note.

    7. While the Bank was taking the actions described above, Ehrman was also undermining

    Hart Oil. Ehrman engaged in the following conduct in furtherance of the fraudulent scheme: (a)

    simultaneously acted as broker (AAA), buyer (Redevelopment), and agent (for Palo) in the sale

    transaction without disclosing the same to Hart Oil or Mr. Saied; (b) Ehrman disclosed Hart Oils

    private financial information that he received from the Bank to Palo Petroleum; (c) retained a

    local Farmington, New Mexico foreman to monitor Harts field operations and report direct to

    Ehrman and the Bank about Hart; (d) repeatedly called regulators at the BLM and Navajo Nation

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    to bring attention to Harts Oil non-compliance with certain regulatory requirements and to

    request that the field be shut-in; (e) refused to pay local vendors for parts and supplies ordered by

    Ehrman/AAA thus damaging Harts relationships with its vendors; (f) sent Andy Saied

    threatening and intimidating emails and stated to Palo that he planned to beat Andy down and

    pound Andy; (g) on eve of the closing date under the PSA that Hart signed and, before Palo

    was to arrive in Farmington on the Banks private jet, Ehrman ordered the Hart field shut-in, the

    generator removed, coordinated with the Bank on seizure of Harts equipment and supplies, and

    sabotaged Harts wells.

    8. On July 17, 2012 Ehrman had Redevelopment Energy assign the sale contract to NM4

    LLC, a Texas company formed by Ed Hawes who, along with Palo, was Ehrmans Dallas partner

    on the deal. The closing was scheduled for July 30, 2012 but Ehrman and NM4 LLC did not

    close or fund the $4,000,000 to Hart. By July 30, Ehrmans work was done: Hart Oils

    operations had been crippled, its production destroyed, vendors and employees were owed

    money, government regulators were agitated, and the Hart leases were in jeopardy. In the words

    of John H. Ehrman:

    Now, let Palo and the bank beat him up.

    It is a lost cause. Too much drama for me. Palo will make Andy take the deal

    and the Bank will shove it down his throat.

    9. On August 16, 2012, with the Hart field crushed and operations destabilized, Jace

    Graham, vice-president of operations at Palo Petroleum, emailed a $1.5 million offer to Andy

    Saied and Hart Oil. Bank officers Margaret Logston and Jim Griffin were ccd on Palos email.

    Palos $1.5 million offer was enough to pay the Banks loan and taxes but that is all. Hart Oil &

    Gas and its unsecured creditors would be left with nothing. Mr. Saied declined Palos offer.

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    10. With Hart Oil now critically wounded and, with the Bank and Palo still working together,

    the company could not recover in time to market itself for an orderly saleeven with oil prices

    near $100 per barrel. Instead, the Bank and Palo continued their joint efforts to take control of

    Harts mineral leases. Their objective remained the same: deliver the Hart Leases to Palo at a

    low price while ensuring full payment of the Banks $1 million loan.

    11. After Hart Oil and Mr. Saied declined Palos $1.5 million offer, the Bank and Palo

    continued to confer and plan among themselves. In late August 2012 they developed and agreed

    to a plan whereby Harts leases would be administratively terminated and/or foreclosed on by the

    Bank and then re-issued by the Navajo Nation to Palo. In the words of Jace Graham, Palo

    Petroleum, Inc. will serve as Citizens Banks turn-key operator for the properties until the

    Navajo Nation approves Palo as the new owner of the leases. Graham recognized that for the

    plan to work, the Bank and Palo would need to move quickly while Hart Oil was still crippled.

    On September 24, 2012 at 6:19 a.m. Jace Graham, vice-president of Palos operations wrote:

    We are currently waiting on the bank to sign the documents before proceeding any

    further. These were to be completed and signed by them some two weeks ago. Our

    team informed them [Citizens Bank] that if we do not receive by today, the deal is off.

    All this delay has given Andy way too much time to try and put something together. We are quite frustrated with the bank to say the least. As soon as I know we are firm

    with the bank I will call.

    12. The Bank agreed to Palos deadline for moving forward. Bank officers executed

    documents that would result in Harts leases being terminated but did not inform their client or

    Andy Saied. On September 24, 2012, Margaret Logston sent the executed documents to Pat

    Snyder at Palo Petroleum by FedEx with the highest priority delivery. Palo received documents

    from Logston the next day. It appeared that the Ehrman/Bank/Palo scheme to take Harts leases

    would finally succeed. When Palo received the signed documents from the Bank, Jace Graham

    was elated but he wanted to keep the clandestine operation secret:

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    As I mentioned over the phone, we are merely operating these properties as the status

    quo until the Navajo have approved us [Palo] to take over the leases and our deal

    with the bank is final.

    Keep everything we are doing on the Hart properties as close to the chest as

    possible until the sale is final and the Navajo have approved us as operator.

    13. On September 25, 2012, within hours before the Bank/Palo transaction was to become

    effective and the Hart Leases terminated, Hart Oil & Gas filed for chapter 11 bankruptcy thus

    barely averting the loss its leases.

    14. After the bankruptcy filing, the Bank and Palo continued to take actions in furtherance of

    John N. Ehrmans original scheme to force the sale of the Hart Leases to Palo at a discount. An

    internal Bank memo dated October 31, 2012 confirmed that if the Debtor did not agree to sell its

    leases to Palo, that the Bank would file a motion to convert the Hart bankruptcy case to chapter 7

    and then have the trustee to sell the property. Throughout the bankruptcy case (2012-2013)

    and through the post-confirmation period (2013-2015), the Bank took aggressive actions that

    impeded the Debtors reorganization even though its $1 million loan was not in jeopardy.

    15. The Trustee now brings claims against Citizens Bank of Kilgore and John N. Ehrman to

    equitably subordinate the Banks claims and compensate the creditors of Hart Oil & Gas, Inc. for

    the harm caused by the Defendants conduct.

    16. The Trustee also brings additional claims pursuant to her avoiding powers under Section

    544 of the Bankruptcy Code, the Federal Declaratory Judgment Act, 11 U.S.C. 506(c), and the

    doctrine of equitable marshaling of liens.

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    II. PARTIES

    17. Plaintiff is the Liquidation Trustee of Hart Oil & Gas, Inc. Hart Oil is a Colorado

    corporation that owned and operated oil and gas leases in San Juan County, New Mexico. The

    Liquidation Trustee is operating Hart Oil pursuant to a chapter 11 plan confirmed on September

    27, 2013 (the Plan).

    18. Defendant Citizens Bank of Kilgore is a domestic corporation. The Bank appeared and

    filed a proof of claim in the Hart Oil bankruptcy case. Defendant Citizens Bank has been served

    and has appeared in this adversary action.

    19. Defendant John N. Ehrman is a resident of the State of Texas whose home address is 242

    Angel Leaf, Spring, Texas 77380. Defendant Ehrman is free on bail and awaiting trial on

    charges of wire fraud and other crimes in United States of America v. John N. Ehrman, 14-cr-634

    (S.D. Tex.). The clerk of this court is requested to issue a summons for John N. Ehrman.

    III. JURISDICTION AND VENUE

    20. The Court maintains subject matter jurisdiction over this adversary proceeding and the

    parties thereto pursuant to 28 U.S.C. 1334.

    21. Venue is proper in the United States Bankruptcy Court for the District of New Mexico

    pursuant to 28 U.S.C. 1408 and 1409(a).

    IV. PREPETITION BACKGROUND

    A. Hart Oil & Gas, Inc.

    22. Hart Oil & Gas has owned and operated mineral leases in San Juan County, New Mexico

    for more than 15 years. Andrew Andy B. Saied acquired the stock in Hart in 2001. Mr. Saied

    is a native Texan and has a B.S. in mechanical engineering from the University of Texas. He

    was the president and owner of Hart Oil for most of the companys corporate existence before

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    the leases were sold in 2015. Mr. Saied has knowledge of the Hart field and San Juan Basin and

    has spent a substantial period of time living and working in northwestern New Mexico and the

    Four Corners region. He and his wife Amy Saied have extensive knowledge of the facts and

    events that are the subject of this adversary proceeding.

    23. Harts mineral rights consist of 1 lease in which Hart is a lessee and contract operating

    rights in 5 other leases (the Hart Leases or Leases)). The Hart Leases are on Navajo Tribal

    Lands and are regulated by the United States Department of Interior and regulations promulgated

    by the Secretary of Interior in 25 C.R.F. Part 211.1 et seq. The Hart Leases cover approximately

    9,400 acres, shallow production, ~1200 ft average, and produced 35 to 50 bopd from 39 wells in

    the San Juan Basin, Shiprock, New Mexico. The four pools in the Leases, separated

    geographically, are the Horseshoe Gallup, Many Rocks Gallup, Many Rocks Gallup North, and

    the Mesa Gallup. In addition to the producing wells, there is upside potential in currently 27

    inactive producers, infill locations, re-drills, and other enhancement strategies. In February 2015

    the Hart Leases and related assets were assigned by the Trustee to Lan Mas Oil company for

    $2.1 million.

    B. Citizens Bank of Kilgore

    24. Defendant Citizens Bank of Kilgore is an independent community bank that was

    chartered in 1949. The Banks corporate headquarters are located in Kilgore, Texas. Larry T.

    Long is the chairman of the Board of Citizens Bank. Larry T. Long is a long-time friend of

    James P. Graham, the president of Palo Petroleum, Inc. With respect to the transactions that are

    the subject of this federal lawsuit, James Graham told John Ehrman that he was sure that Larry

    is calling the shots.

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    25. Sammy York is the Banks president and CEO. Mr. York has testified in the Hart Oil

    bankruptcy case and has detailed knowledge of the transactions that are the subject of this

    lawsuit. Kenneth R. Plunk is an executive vice president of the Bank. Mr. Plunk is a signatory

    to many of Hart Oils loan documents including the June 2008 Deed of Trust that the Bank

    claims secures its 2011 loan to Hart Oil. Mr. Plunk was also copied on the internal Bank

    memorandum of October 31, 2012 in which the Bank outlines its strategy to force Hart Oil into

    chapter 7 liquidation so that the Debtors mineral leases could be sold by a chapter 7 trustee to

    Palo.

    26. Jim Griffin is Vice-President of Oil & Gas at the Bank. Mr. Griffin has detailed

    knowledge of the transactions, events and facts that are the subject of this lawsuit. Mr. Griffin

    participated in numerous phone calls with John N. Ehrman in July 2012 about Hart Oil. Mr.

    Griffin knew in advance that Ehrman intended to remove Harts generator and shut-in the Hart

    leases on July 27, 2012. Griffin was responsible for ordering the seizure of Hart equipment.

    Jim Griffin personally escorted Jace Graham of Palo Petroleum to New Mexico on the Banks

    private jet to negotiate with Andy Saied. Mr. Griffin monitored the Hart Oil bankruptcy case

    closely and traveled to New Mexico to attend court hearings. He engaged in numerous

    discussions and email exchanges with Pat Snyder of Palo Petroleum regarding Hart Oil and he is

    familiar with the joint efforts and agreements between the Bank and Palo in September 2012 to

    terminate Harts Leases and re-issue the leases to Palo.

    27. Margaret Logston is Assistant Vice-President of Oil & Gas at the Bank. Ms. Logston

    testified in court that she is the custodian of records at the Bank. Margaret Logston has detailed

    knowledge of the transactions, events, and documents that are the subject of this lawsuit. She

    was the Banks direct contact with Harts management throughout 2012 including all times

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    during Ehrmans fraud. Andy Saied and his wife Amy Saied, who assisted with administrative

    tasks at Hart, put their faith and trust in Margaret Logston that she would act in the best interests

    of the company. Ms. Logston was in complete control of Hart Oils day-to-day business

    operations. She managed Harts bank accounts, decided what bills to pay, paid the Hart bills by

    wiring payments to vendors that she approved, and made day-to-day decisions that affected Hart.

    Ms. Logston would also threaten to withhold funds or refuse to advance funds to Hart Oil if

    Andy Saied did not do what the Bank requested.

    28. Margaret Logston was also in direct and regular contact with John N. Ehrman by

    telephone and email during the month of July 2012. On July 5, 2012 it was Margaret Logston

    who provided John N. Ehrman with private information concerning Harts distressed financial

    condition including details about Harts liquidity. She was also fully aware of Ehrmans written

    demand to Andy Saied that Hart Oil agree to a substantial reduction in the sale price within a few

    days of the closing datein order to accommodate Palo. Ms. Logston was a recipient of the

    email sent by Ehrman on July 26, 2012 at 5:06 p.m. where Ehrman informed the Bank about

    final plans to crush Hart Oil before Palo came to town.

    As for the generator, send it back. Let the field get shut in and see if

    Andy cannot get some religion here and see the light.

    Thanks and keep up the good work.

    29. Instead informing Hart and its management of plans to cut power to the field the next

    day, Margaret Logston was doing her part to crush Hart Oil. Logston coordinated the seizure of

    all Harts equipment at the same time Ehrman was cutting off power and shutting the field in.

    And that is what she did. On July 26, Margaret Logston and Jim Griffin called their field

    operative in Farmington who they referred to as their Eyes and Ears on the ground, Bill

    Pinasco. Logston instructed Pinasco to seize all Harts equipment including motors, pump

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    panels, and generators and to not release any of the seized equipment to Hart Oil or Andy Saied.

    Pinasco acted on the explicit instructions of the Bank per orders given by Margaret Logston and

    Jim Griffin. Within 36 hours, John N. Ehrman, Margaret Logston, and Jim Griffin had

    completely disabled Hart Oil and its operations.

    30. The Banks attorneys deny that the Bank did anything wrong.

    C. John N. Ehrman

    31. In the words of United States District Court Judge Lee H. Rosenthal at John Ehrmans

    2009 sentencing hearing for securities fraud, Defendant, Mr. Ehrman is a repeat offender with

    criminal convictions for securities fraud. [Hearing Transcript, United States of America v. John

    N. Ehrman, H-07-cr-290, ECF No. 97, at p. 133, lines 16-18]. You dont usually see repeat

    convictions. [Id.]. John N. Ehrman has done what not many felons have done: be convicted

    of securities fraud in two different decades. Ehrman is currently awaiting trial on a 36 count

    indictment for wire fraud and engaging in monetary transactions in property derived from

    unlawful activity in United States of America v. John N. Ehrman, 14-cr-634 (S.D. Tex.). He is

    free on bail but after his arrest in December 2014, Ehrman was forced to surrender his passport

    and must report to the United States Marshalls office regularly. [See USA v. Ehrman, ECF No.

    7].

    32. In the scheme to defraud Hart Oil, Citizens Bank was quick to join forces with John

    Ehrman. During month of July 2012, Ehrman and Bank officers were in regular telephone and

    email communication about Hart Oil. The Bank and Ehrman discussed Harts operations,

    liquidity, how much the Bank was willing to advance on Harts line of credit for field work, the

    sale transaction, the condition of the field, Andy Saied, Harts status with regulators, and

    ultimately the capstone event: the plan to shut-in the field and seize Harts equipment. Ehrmans

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    company Redevelopment Energy and Citizens Bank were parties to an escrow agreement that

    allowed the Bank to hold the $50,000 deposit and sale proceeds to apply against Harts $1

    million note to the Bank. The Bank prepared the agreement at Ehrmans request.

    33. Likewise from June 8, 2012 through July 29, 2012 Ehrman was in regular and frequent

    communication with Palo Petroleum, Inc. and its president James P. Graham and then later Pat

    Snyder. Ehrman met with James Graham and Ed Hawes in Palos offices on June 11, 2012 to

    develop their takeover strategy. James Graham and Ehrman became friendly and exchanged

    racially insensitive jokes about Navajo women and made sexually explicit comments to each

    other via email. James Graham and Ehrman felt comfortable working with each other on the

    scheme to deliver Harts Leases to Palo at a deep discount.

    D. Palo Petroleum, Inc.

    34. Palo Petroleum is an independent oil and gas exploration company based in Dallas,

    Texas. James P. Graham is the president of Palo. Jace Graham is his son and Palos vice-

    president of operations. Palo funds its oil and gas ventures from a small group of private

    investors. Ed Hawes is one of Palos investors who worked with John N. Ehrman to takeover

    Hart. Palo is familiar with the San Juan Basin and has holdings in the Four Corners region. In

    2014, Palo entered an AMI agreement with Diversified Resources covering all lands in San Juan

    County, New Mexico. Palo also owns a participation interest in the Horseshoe Gallup Field

    formerly owned by BIYA Operators. Palos interest in the San Juan Basin is keen and so in

    2012 Palo wanted to add the Hart Leases to its portfolioeven if it meant collaborating with a

    convicted felon.

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    E. The Banks Loan to Hart Oil

    35. On June 20, 2008 Citizens Bank extended financing to Hart Oil & Gas, Inc. in the form

    of a revolving loan evidenced by $1,000,000 promissory note, Loan No. 505294820 (together the

    loan and note are referred to as the 2008 Hart Loan). The original advance made by the Bank

    was $743,605.88 of which only $100,000 went into Hart Oil. The remaining $643,605.88 was

    used to pay credits cards, divorce attorneys, and oil and gas expenses for projects unrelated to

    Hart. The Bank filed a Deed of Trust in San Juan County to secure the 2008 Hart Loan (the

    DOT). The DOT refers to certain provisions of the Uniform Commercial Code and purports to

    perfect the Banks interest in the Hart Leases, extracted minerals, and fixtures.

    36. The 2008 Hart Loan matured July 5, 2009 but was extended by the Bank to November

    5, 2009 subject to the Bank adding additional collateral to secure the 2008 Hart Loan. The Bank

    granted a second extension of the 2008 Hart Loan extending the maturity date to January 5,

    2010. Then, in February 2010, the Bank made a new loan to Hart Oil evidenced by a promissory

    note in the amount of $1,000,000 designated as Loan No. 505294821 (the 2010 Hart Loan)

    The 2010 Loan was intended to repay the 2008 Hart Loan. The maturity date on the 2010 Hart

    loan was March 5, 2011. In connection with the 2010 Hart Loan the Bank took as additional

    collateral oil & gas assets owned by Andy Saied located in Texas and Tennessee, including Crest

    Petroleum and ABS Energy. The Bank later agreed to extend the maturity date of the 2010 Hart

    Loan to May 5, 2011.

    37. On or about May 25, 2011, the Bank made Loan No. 505294822 to Hart Oil & Gas as

    borrower in the amount of $1,000,000 (the 2011 Hart Loan). The 2011 Hart Loan was an

    open-ended resolving line of credit that accrued interest at the WSJP + 2%. The Bank made an

    opening advance to Hart Oil on June 3, 2011 in the amount of $1,000,000. Hart also executed a

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  • 15

    security agreement in connection with the 2011 Hart Loan and, on June 9, 2011, filed an

    extension and renewal of its DOT that covered the additional collateral consisting of Crest

    Petroleum LLC and ABS Energy LLC. (Together, the note, loan agreement, UCC filings made

    in connection with the 2011 Hart Loan, DOT, and extensions of the DOT, are referred to as the

    2011 Hart Loan Documents).

    38. The maturity date of the 2011 Hart Loan was June 5, 2012. The Bank then extended the

    maturity date of the 2011 Hart Loan to December 5, 2012 and placed Hart Oil on interest only

    payments until December 5, 2012 (the 2012 Hart Loan Extension). In connection with the

    extension of the 2011 Hart Loan, Bank vice-president Kenneth R. Plunk signed a letter to the

    United States Department of the Interior dated May 29, 2012 confirming the loan extension,

    interest only payments, and the Banks commitment to make future advances and additional

    capital available to Hart Oil in the total amount of $145,000.

    F. Hart Oil Seeks a Buyer for Its Leases

    39. By early 2012, Andy Saied, the president and owner of Hart Oil, wanted to sell the

    company. Oil prices were at near record highs and there was industry interest in the San Juan

    Basin.

    40. Discussions started between Andy Saied and Earl Hollingshead. Hollingshead owned a

    company, Parawon Operating, which operated a field adjacent to the Hart leases in the San Juan

    Basin and was familiar with the area. Hollingshead and Andy Saied began discussions about a

    potential sale transaction. On March 23, 2012 Hollingsheads company, Mobile Minerals,

    submitted a non-binding term sheet to Andy Saied to purchase a 100% working interest in the

    Hart Leases for $3.5 million.

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    41. At the same time Andy Saied was in discussions with Mobile Minerals, John N. Ehrman

    was in the beginning stages of his scheme to defraud Hart. John N. Ehrman had a sordid history

    in the San Juan Basin. Ehrman had owned and operated several oil and gas companies including

    Playa Minerals & Energy and Vulcan Minerals. Ehrmans companies left many local suppliers in

    the Farmington, New Mexico area unpaid and upset. Because of his bad reputation in the

    Farmington area, criminal history, and multiple investigations and lawsuits by the Securities &

    Exchange Commission, Ehrman needed to conceal his identity before he approached Andy Saied

    and Hart Oil.

    42. On March 20, 2012 Ehrman formed Redevelopment Energy LLC with the aid of his

    criminal defense lawyer, Donald J. Petrillo. Petrillo himself had been disbarred by the Internal

    Revenue Service for willfully failing to file income tax returns. On April 17, 2012 Ehrman

    formed AAA Oil & Gas Advisors LLC, again with the help of Petrillo. Both Redevelopment and

    AAA shared the same office space and phone numbers in The Woodlands, Texas.

    G. Ehrman Induces Hart Oil to Sign a PSA

    43. On May 18, 2012, Ehrman using the alias Darrell Evans of AAA approached Andy Saied

    about purchasing the Hart Oil leases. Andy Saied provided technical information about Harts

    leases to Ehrman. Ehrman told Andy: We will take the information, run the economics and

    then be able to make you an offer very quickly. Two days later, Ehrman sent Mr. Saied a

    preliminary analysis that assumed a $3.5 million purchase price. That information was

    immediately forwarded to Margaret Logston at the Bank. Andy advised Logston that he was

    ready to move on an LOI/PSA. Little did Andy know that Darrell Evans was really John N.

    Ehrman, a twice convicted felon.

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    H. Palo Petroleum and Ehrman Team Up

    44. On May 30, 2012, Ehrman provided a term sheet which Andy signed. Next, Ehrman

    began work on the PSA. Unbeknownst to Andy, Ehrman was collaborating with Palo Petroleum,

    and Ed Hawes who Ehrman had met at a hotel in Aspen on New Years Eve 2011. On or about

    June 6, 2012 Ehrman and Palos president, James Graham began working on the PSA for Hart.

    Ehrman circulated copies of the PSA to Graham, Hawes, and Grahams personal assistant by

    electronic mail. At the same time, Ehrman was adjusting the PSA to offer Hart Oil more

    favorable terms. Ehrman made the initial $50,000 deposit non-refundable and lowered the

    purchase price adjustments. On June 8, 2012, Ehrman emailed the final exhibits and PSA to

    James Graham at Palo in advance of their all-hands strategy meeting in Dallas scheduled for

    Monday, June 11. Ehrmans and Palos plan was clear: lock Hart Oil into a binding contract,

    place a local operative on the Hart lease pending close, and then move in for the kill. Ehrman

    tells Graham:

    He is awaiting the deposit. The bank note came due on Tuesday so he [Andy] is

    motivated. He needed a PSA to hold the bank in place and it was our purpose to

    get him on paper.

    45. On June 14, 2012, Ehrman, using the alias Darrell Evans of AAA emailed Andy Saied

    the signature copy of the PSA with exhibits. Andy Saied executed the PSA with Redevelopment

    Energy on behalf of Hart. Ehrmans criminal defense lawyer, Donald Petrillo, signed the PSA

    for Ehrmans company Redevelopment as buyer, thus concealing Ehrmans involvement from

    Andy Saied. Redevelopment agreed to pay Hart $4,000,000 cash with a July 30, 2012 closing

    date. The PSA did not contain any purchase price adjustment and gave Hart a carried interest in

    new wells. It was too good to be true.

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    46. Immediately on execution of PSA Andy Saied began making preparations to transition

    the leases to the buyer. He provided information to Ehrman on operational matters that needed

    attention. Ehrman also promised to advance funds to bring wells back online and pay vendors

    through the closing date. Unfortunately, Andy Saied did not realize Ehrmans representations

    were lies. John N. Ehrman and Palo had no intention of closing or funding the PSA at

    $4,000,000.

    47. An essential part of Ehrmans scheme was to have a person on the ground in Farmington

    who would carry out the orders of Ehrman, Palo, and later the Bank. Ehrman enlisted the help of

    Bill Pinasco, a 30 year resident of Farmington and experienced oilfield technician. Pinasco was

    looking for work at the time and so he agreed to work for Ehrman as field superintendant during

    the transition phase. But Ehrman could not reveal his true identity to Pinasco or his scheme

    would be discovered. So Ehrman told Pinasco his name was Darrell Evans of AAA. Pinasco

    was industrious and ready to work to help the new buyer increase production. Ehrman told

    Pinasco that Palo Petroleum was the buyer. They promised Pinasco permanent employment

    after the sale was completed. Pinascos first paycheck was issued by Palo.

    I. The Bank, Palo, and Ehrman Execute Their Plan

    48. In early June 2012, the Bank extended the maturity date of the 2011 Hart Loan and

    committed to lend additional funds to improve the leases. By this time, Ehrman was talking with

    Kenneth Plunk at Citizens Bank about the Hart sale transaction with Palo. Ehrman did not tell

    Hart Oil or Andy Saied about his private discussions with Plunk. Neither did Plunk inform his

    client that the Bank was discussing Harts loan. Ehrman and Palo wanted to enlist the Bank in

    their plan to take down Hart. They requested the Bank to be the escrow agent for the transaction.

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    Instead of giving Hart the $50,000 deposit required under the PSA, Ehrman wanted the Bank to

    have the deposit. The Bank was eager to help.

    Ehrman: Plunk is walking a fine line. Let me introduce you and then after I

    speak with him I will put you in touch. He [Plunk] is being too helpful right

    now and has to be carefulbut we have discussed him holding the $50k

    pending title clearing as well as holding off on his note until we close.

    Graham: Understood. The Chairman of Citizens Bank of Kilgore, Larry

    Long, is an old friend of mine. I will be glad to give him a call and let him

    know I am participating in this deal if you want to cut through the bullshit with

    Plunk. I am sure that Larry is calling the shots.

    Upon information and belief, James Graham called Larry Long and discussed Hart Oil with him.

    The Bank agreed to be the escrow agent and drafted the agreement. And, from this point

    forward, Citizens Bank of Kilgore actively supported and assisted John Ehrman with the scheme

    to deliver the Hart Leases to Palo.

    49. Plunk wasnt the only Bank officer to talk freely with Ehrman about Hart. On July 5,

    2012, Margaret Logston disclosed detailed financial information about Hart to Ehrman without

    Harts knowledge including whether the Bank would advance funds to Hart under the 2011 Hart

    Loan and how much. Ehrman immediately shared this information to Palo, telling James

    Graham that Andy has his back against the wall. When Andy Saied admonished Logston

    about disclosing Harts financial information, she threatened to withhold additional funds to Hart

    unless Andy sent her an email giving the Bank permission to engage in unrestricted discussions

    with AAA. After July 5, 2012, Ehrmans private conversations with Logston and Jim Griffin

    continued and became more frequent.

    J. Problems in the Hart Field

    50. Bill Pinasco was working hard in the field under the belief that Ehrman and Palo were

    legitimate businessmen who wanted to improve the field prior to closing. But the opposite was

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    true. Ehrman, Palo, and the Bank starved the Hart field in the month of July 2012 while Palo

    conducted due diligence. Ehrman and Palo were slow to pay Pinasco and other Hart vendors as

    promised. Pinasco continuously made payment requests to Ehrman which Ehrman promised to

    address but never did. By mid-July 2012, Pinasco was becoming frustrated by lack of payment

    and Ehrmans broken promises.

    51. It was becoming increasingly difficult to sustain operations and production. Parts were

    desperately needed for the field but it was difficult to obtain parts because the Bank was

    controlling all of Harts cash. In order to purchase parts, Andy or Amy Saied had to first obtain

    an invoice from the supplier and fax it to Margaret Logston for approval. After Logston

    approved the purchase, she would wire funds. Often it would take several days for the Bank to

    approve a purchase and actually pay a vendor. This process, imposed by the Bank, was

    cumbersome and time consuming for Hart Oil. The Bank was not only controlling Harts funds

    it was controlling Harts operations. One of the critical vendors was Mann Pipe who supplied

    pipe. At Ehrmans direction pipe was ordered and delivered to the Hart field. Both Ehrman and

    Margaret Logston personally promised Ed Mann that Mann Pipes invoice for $21,594.60 would

    be paid. Mann Pipe was never paid the money it was promised and later became very active in

    Hart Oils chapter 11 bankruptcy case.

    52. Another part of Ehrmans sale strategy was to call Navajo and BLM regulators and

    inform them of possible violations by Hart Oil. Ehrman called Steve Prince, the chief engineer

    for the Navajo Nation, and requested a list of potential INCs. He bragged to James Graham

    about his hand holding session with Prince writing that Palo could address them

    [deficiencies] and deal with them in advance of closing. [Prince] liked that. Ehrman also

    instructed Pinasco to take photographs of the field to identify potential violations which Ehrman

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    then promptly forwarded to Steve Prince. By July 16, 2012 Ehrman was bombarding Andy

    Saied with paperwork, information requests, and sending Andy emails warning that Ehrmans

    Dallas buyers were going to walk the deal. Ehrman instructed Pinasco to prepare a draft AFE

    that contained a list of repairs and deferred maintenance for the Hart field. The AFE was

    requested under the guise that after closing, Palo would use the AFE as a template for its well re-

    work program. Instead, Ehrman promptly sent the AFE to Steve Prince at Navajo Minerals

    Department.

    53. As the July 30 closing date approached, Bank officers Margaret Logston and Jim Griffin

    were in daily contact with Ehrman and Pinasco. The $50,000 deposit had not been funded per the

    PSA but Ehrman continued to tell Andy that he was waiting on the Bank to complete the escrow

    agreement. Hart Oils vendors and employees were becoming disgruntled due to non-payment.

    Andy Saied believed that his company Hart Oil was being undermined and was distraught.

    54. On July 23, 2012, Andy demanded that Pinasco leave the lease. But Ehrman and the

    Bank knew that their plan to force Andy to sell to Palo would not work if their Eyes and Ears on

    the Ground was not allowed to remain on the lease. The following day Margaret Logston called

    Andy and demanded that Pinasco be allowed back on the Hart leases or else the Bank would not

    release money for operations. A few hours later, Ehrman confirmed Logstons demands in an

    email to Andy Saied, ccd Margaret Logston:

    Ehrman: Per below we have been talking to Bill Pinasco. The bank is talking to Bill

    Pinasco. The Navajos are talking to Bill Pinasco. He works for us.

    Personally, I am sick of this kindergarten bullshitthe bank wants him out there and I

    want him out there. WE HAVE TO KNOW WHAT IS GOING ON.

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    55. Bill Pinasco returned to the Hart lease within hours. Three days later, Margaret Logston

    and Jim Griffin would call Pinasco and give him direct orders to take possession of all of Hart

    Oils essential parts and supplies and not release them to Andy Saied.

    K. The Bank and John N. Ehrman Shut Down Hart Oil

    56. It was now July 25, 2012, just five days before closing of the PSA. The Bank and

    Ehrman were coordinating by phone and email. The Bank was in receipt of a list of Hart bills

    that needed be paid. Logston responded to the payment request from Harts accountant, Linda

    Gordon: We will keep you posted on what we do. At the same time, Ehrman and Palo

    decided that no more Hart vendors would be paid. Ehrman then sent Andy an AFE for $680,120.

    Ehrman gave Andy 24 hours to agree to the purchase price adjustment, telling Andy that we

    have instructed our Dallas partners to stand by and wait on your answer. Ehrman told Steve

    Prince on July 26, 2012 that unless Andy agreed to the AFE, there would be no closing and Palo

    would just buy the Banks note. He then asked Prince to stand by, not snatch the lease back,

    and give us time to get to that alternative route. Late in the day at 5:06 p.m. Ehrman coordinated

    with Margaret Logston on what they would do next to force Andy to accept the AFE and sell to

    Palo:

    Ehrman: The guys in Dallas are spooked and awaiting an email telling us

    whether he will credit us at closing or not.

    Andy has not sent back his agreement yet on crediting us at closing. Thus we are

    screwed here and will have to go with the bank and buy the note. Enough is

    enough. Therefore I just do not know if there will be a deal done as currently set

    up, but we will do somethingthats for sure, be it through a PSA currently

    in place or through a foreclosure action.

    As for the generator, send it back. Let the field get shut in and see if Andy

    can get some religion here and see the light.

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    57. The next day, July 27, 2012, Margaret Logston and Jim Griffin instructed Bill Pinasco to

    seize all Harts equipment and not release it to Andy. As for the generator, Bill Pinasco spoke to

    Margaret Logston and Jim Griffin and asked them whether the Bank would pay to keep the

    generator in the field or whether they wanted it removed. Logston and Griffin said the Bank

    would not make any payments for the generator and that it should be removed. Without a power

    source, the Hart field was paralyzed. Ehrman and the Bank had shut-in the field. Oil production

    stopped.

    58. With the field now shut in, Ehrman wrote Andy at 9:46 a.m.:

    I have seen no answer from you. NO MONEY WILL MOVE UNTIL A

    POSITIVE RESPONSE IS RECEIVED IN WRITING.

    I was at the bank parking lot when the call came in that the field was shut in

    and that the equipment was shut down and red tagged.

    Without being in compliance, and being shut in, the entire lease, and your entire

    livelihood is in jeopardy.

    The next move or lack thereof, is yours.

    59. Ehrman then forwarded his email to Margaret Logston at the Bank.

    60. Having shut-in the field, Ehrman and the Bank had Andy where they wanted him. The

    Bank was flying Palo to the field in two days. Jace Graham toured the field that was now shut-in

    and broken. On August 16, 2012, Palo offered Andy Saied $1.5 million for the Hart Leases.

    Andy refused Palos offer.

    L. Epilogue

    61. Hart Oil & Gas, Inc. filed for chapter 11 bankruptcy protection on September 25, 2012

    just a few hours before the Bank, Palo, and the Navajo Nation were able to finalize an

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    agreement, negotiated in secret, that would have transferred Harts Leases to Palo and paid

    Citizens Bank $1 million.

    62. John N. Ehrman currently is awaiting trial in federal court in Houston, Texas on 29

    counts of wire fraud.

    V. POST PETITION BACKGROUND

    63. During the Hart Oil bankruptcy case, the Bank and Palo continued their joint efforts to

    crush Hart Oil and its owner Andy Saied.

    64. On October 1, 2012, at the first hearing on the Debtors emergency use of cash collateral,

    attorneys for the Bank and Palo complained that the Debtors $50,000 budget to re-start

    operations was too much. Before the hearing, the Banks attorneys and Palo coordinated legal

    strategy in emails and telephonic communications. The Bank argued for tight restrictions on the

    Debtors use of funds to pay its vendors and employees. The Banks attorneys questioned

    whether money should be used for repairs to down-hole pumps, injections pumps, and purchase

    of tubing to re-start wells. The Bank argued that Harts employees should only be paid for seven

    (7) days and its attorneys even questioned a modest $500 monthly health insurance premium for

    Andy and Amy Saied. The Bank and Palos legal strategy was clear: block the Debtors use of

    cash for operations but allow Navajo royalty payments to keep the Hart Leases alive.

    65. After the hearing, Jace Graham, Palos vice president, gave the following report:

    I am about to send an email out to everyone with an update. Basically not good.

    He [Andy] was awarded $50k to get operations back up and running. The

    official hearing was set for Tuesday, October 9 in Albuquerque. The judge could

    rule to allow Andy to maintain operations through the end of the year. Citizens

    Bank is trying to get the bankruptcy thrown out altogether. If they are

    successful, were back in the game.

    Jace Graham, RPL

    Vice President of Operations

    Palo Petroleum, Inc.

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    66. The Bank would file objections to the Debtors next two requests for use of cash

    collateral. [ECF Nos. 30 and 49].

    67. On October 31, less than 40 days into the bankruptcy, Jim Griffin, the Banks vice-

    president of oil and gas and co-architect of July 27 blitzkrieg operation that shut-in the field,

    outlined the Banks legal strategy to get the Hart Leases to Palo. In an internal Bank

    memorandum Griffin wrote:

    Counsel and loan officer visited with Trustee; Trustee wants [Palo] to make

    another offer to Debtors counsel. If [Debtor] rejects offer, Bank will make

    motion to convert to chapter 7 & have trustee sell the property.

    68. The Bank would execute its Palo Strategy by filing motions to dismiss the bankruptcy

    [ECF Nos. 76 and 159] and two motions to convert the Hart case to chapter 7 [ECF Nos. 159,

    484]. The Bank also tried to get appointed Palo as operator of the Hart Leases [ECF 90]. When

    unsecured creditors pointed out that allowing Palo as the interim operator would be akin to

    letting the fox in the hen-house, the Bank reluctantly abandoned its request.

    69. In April 2014 unsecured creditors filed their own chapter 11 plan that would appoint a

    trustee with oil & gas experience to make improvements to the Hart Leases and then sell them in

    a competitive auction (the Creditor Plan). [ECF No. 139]. The Bank opposed the Creditor

    Plan and instead, backed a competing chapter 11 plan that called for the sale of Harts leases to

    Palo in a private sale (the Palo Plan).

    70. In September 2012, the court held a week-long trial on the Creditor Plan and Palo Plan.

    On September 27, 2012, the court confirmed the Creditor Plan.

    71. Since confirmation of the Plan, Hart Oils assets have been managed by its Liquidation

    Trustee, Marilyn M. Smelcer. The Hart Leases were sold in February 2015 for $2.1 million with

    oil prices at $50 per barrel. Under the Plan, the Trustee is vested with the power to bring legal

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    claims and avoidance actions including this action against Citizens Bank of Kilgore and John N.

    Ehrman.

    VI. TRUSTEES CLAIMS FOR RELIEF

    COUNT I

    EQUITABLE SUBORDINATION OF BANK CLAIM UNDER SECTION 510(C)

    72. The Trustee hereby incorporates the allegations of the preceding paragraphs as provided

    herein.

    73. The conduct of the Bank as set forth above warrants equitable subordination of the

    Banks secured claim against Hart Oil & Gas, Inc. pursuant to 11 U.S.C. 510(c). The

    prepetition and postpetition conduct of the Bank caused injury to the bankruptcy estate and

    injury to the creditors and equity-holders of Hart Oil or conferred an unfair advantage to the

    Bank. Equitable subordination of the Banks claim is not inconsistent with the Bankruptcy

    Code.

    74. The Trustee requests that the Court subordinate the Banks claim to a position below the

    claims of general unsecured creditors.

    COUNT II

    AIDING AND ABETTING FRAUD

    75. The Trustee hereby incorporates the allegations of the preceding paragraphs as provided

    herein.

    76. The Bank is liable for aiding and abetting the fraudulent scheme of John N. Ehrman as

    described herein. The Bank had knowledge of and joined Defendant Ehrmans scheme to defraud

    the Banks client and borrower Hart Oil. The Bank provided substantial assistance in

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    furtherance of Ehrmans fraudulent scheme. The Banks actions caused substantial damages to

    Hart Oil and its creditors for which the Bank is liable.

    77. The Trustee seeks punitive damages against the Bank for aiding and abetting Ehrmans

    fraud as set forth herein below.

    COUNT III

    BANKS BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING

    78. The Trustee hereby incorporates the allegations of the preceding paragraphs as provided

    herein.

    79. Based on the facts described above, the Bank breached the implied covenant of good

    faith and fair dealing that exists in the 2011 Hart Loan Documents, 2011 Hart Loan, and 2012

    Hart Loan Extension. The Bank did not act in good faith toward its borrower and customer Hart

    Oil. The actions of the Bank demonstrate that it did not deal fairly with Hart Oil its borrower.

    The Banks actions caused Hart Oil substantial damages. Alternatively, the Banks conduct is a

    complete defense to the Banks enforcement of its 2011 Loan Agreement.

    COUNT IV

    BANKS BREACH OF DUTY OF CONFIDENTIALITY AND BANK PRIVACY LAWS

    80. The Trustee hereby incorporates the allegations of the preceding paragraphs as provided

    herein.

    81. The Bank owed a duty to its borrower and customer to maintain the privacy and

    confidentiality of Hart Oils financial and banking information including but not limited to

    information related to the 2011 Hart Loan Agreement and 2012 Loan Extension. The Bank made

    multiple illegal and improper disclosures of information about Hart Oil, including disclosures to

    a twice convicted felon, John N. Ehrman, and disclosures to Palo Petroleum, among others. The

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    Banks data and privacy breaches were knowing and intentional. The Banks breaches violated

    federal and Texas state banking regulations. The Banks breaches caused substantial damages to

    Hart Oil & Gas, its creditors, and equity-holders for which the Bank is liable.

    82. The Trustee seeks punitive damages against the Bank for its breaches of financial

    privacy and confidentiality related to its borrower Hart Oil as set forth herein below.

    COUNT V

    BREACH OF FIDUCIARY DUTY

    83. The Trustee hereby incorporates the allegations in the preceding paragraphs as more as

    provided herein.

    84. The Bank owed Hart Oil & Gas, Inc. a fiduciary duty based on the special relationship of

    trust and confidence that Harts management, Andy Saied and Amy Saied, placed in the Bank

    and, in particular, Margaret Logston. The Bank, through its officers, exerted a high degree of

    control over Hart Oil, managed the financial affairs of Hart Oil, and regularly made decisions

    affecting the company and its operations thus giving rise to a fiduciary duty. The Bank breached

    its fiduciary duty on multiple occasions. The facts alleged herein show that the Bank breached

    its duty of care and its duty of loyalty with respect to Hart Oil which comprise the fiduciary duty.

    The Banks breaches caused substantial damages to Hart Oil & Gas, its creditors, and equity-

    holders for which the Bank is liable.

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    COUNT VI

    CONVERSION OF PROPERTY

    85. The Trustee hereby incorporates the allegations in the preceding paragraphs as more as

    provided herein.

    86. The Bank committed the unlawful exercise of dominion and control over personal

    property belonging to Hart Oil in exclusion or defiance of Harts rights, and committed acts

    constituting an unauthorized and injurious use of Harts property. These acts by the Bank

    described herein and, in particular, the conduct of Bank officers Margaret Logston and Jim

    Griffin, were intentional and without excuse or justification. Hart Oil was harmed by the Banks

    conversion and thus the Bank is liable for damages.

    87. The Trustee seeks punitive damages against the Bank for its conversion of Harts

    property.

    COUNT VII

    CIVIL CONSPIRACY

    88. The Trustee hereby incorporates the allegations in the preceding paragraphs as more as

    provided herein.

    89. Defendants Citizens Bank and John N. Ehrman had an agreement to shut-in the Hart field

    and immobilize Hart Oils operations. The object of this conspiracy was fraudulent scheme to

    force Hart and its president Andy Saied to sell Harts valuable mineral leases to Palo and ensure

    payments of the Banks $1,000,000 note. Defendant Citizens Bank and defendant John N.

    Ehrman are liable for the damages caused to Hart Oil by their conspiracy.

    90. Defendant Bank had both a written and oral agreements with Palo to cause termination of

    the Hart Leases and thereby interfere with the prospective economic advantage of Hart Oil. This

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    agreement between the Defendant Bank and Palo was illegal and caused Hart Oil damages for

    which the Bank is liable.

    COUNT VIII

    INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE

    91. The Trustee hereby incorporates the allegations in the preceding paragraphs as more as

    provided herein.

    92. The right to conduct one's business without the wrongful and injurious interference of

    others is a valuable property right. Based on the conduct, acts, and omissions described herein,

    Defendants Citizen Bank and John N. Ehrman interfered with the prospective economic rights of

    Hart Oil & Gas. The interference caused damages to Hart Oil & Gas for which the Bank and

    Ehrman are liable.

    COUNT IX

    FRAUD

    93. The Trustee hereby incorporates the allegations in the preceding paragraphs as provided

    herein.

    94. Defendant John N. Ehrman engaged in conduct described herein that was fraudulent as to

    Hart Oil & Gas. Defendant Ehrman made multiple misrepresentation of fact with knowledge of

    the falsity of the representations, with the intent to deceive Hart Oil & Gas, and in order to

    induce Harts reliance on the misrepresentations. Hart Oil detrimentally relied on Defendant

    Ehrmans misrepresentations. Defendants fraud caused Hart to incur and suffer damages for

    which Ehrman is liable.

    95. The Trustee seeks punitive damages against the Defendant Ehrman for his fraud against

    Hart Oil.

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    COUNT X

    BREACH OF LOAN AGREEMENTS

    96. The Trustee hereby incorporates the allegations in the preceding paragraphs as provided

    herein.

    97. Defendant Citizens Bank breached the 2011 Hart Loan Agreement, the 2012 Extension

    Agreement, and oral promises made to Hart Oil. Defendant Bank refused to the honor the terms

    of the 2012 Extension Agreement by, among other things, refusing to advance funds, failing to

    abide by the terms of the agreements, and exerting excessive control over Hart Oils internal

    finances, cash, accounts, and operations, among other breaches. Defendants breaches caused

    Hart Oil to incur and suffer damages for which the Bank is liable.

    98. The Trustee further asserts and pleads under FED. R. BANK. P. 7008(c), that the Bank is

    barred from asserting any rights to payment from the estate under the 2011 Hart Loan

    Documents or 2012 Hart Extension based on the affirmative defenses of estoppel, duress, fraud,

    and failure of consideration.

    COUNT XI

    LIABILITY UNDER THE INSTRUMENTALITY DOCTRINE

    99. The Trustee hereby incorporates the allegations in the preceding paragraphs as provided

    herein.

    100. Defendant Bank exercised excessive control over Harts finances, cash, accounts,

    and operations. Bank officers made the sole decisions which vendors to pay. The Banks

    conduct, in assuming and exercising complete control of its borrowers finances, makes it liable

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    for damages under the instrumentality doctrine for the debts of Hart Oil. Alternatively, the

    Banks conduct is a complete defense to enforcement of its 2011 Hart Loan.

    COUNT XII

    TORTUOUS INTERFERENCE

    101. The Trustee hereby incorporates the allegations in the preceding paragraphs as

    provided herein.

    102. At all times relevant, the Defendant Bank knew of Harts Leases yet it engaged in

    a pattern of conduct intended to cause the Navajo Nation to transfer the leases to Palo thus

    interfering with a valuable property right of Hart. The acts of Defendant Bank constitute

    tortuous interference with contracts thereby causing Hart Oil damages.

    COUNT XIII

    NEGLIGENCE

    103. The Trustee hereby incorporates the allegations in the preceding paragraphs as

    provided herein.

    104. By assuming control of Hart Oils finances and operations, including its cash and

    other assets, the Bank owed Hart Oil a duty of ordinary care to manage the company prudently,

    to make disbursements timely, and to make business decisions affecting operations in accordance

    with corporate best practices among other duties. The Bank breached this duty thus causing

    damages to Hart Oil.

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    COUNT XIV

    PRIMA FACIE TORT

    105. The Trustee hereby incorporates the allegations in the preceding paragraphs as

    provided herein.

    106. Defendants John N. Ehrman and Citizens Bank are liable to the Trustee for prima

    facie tort. The facts described herein show that both Defendants had intent to injure Hart Oil and

    that Hart Oil did in fact suffer injuries. Defendants were not justified in taking the acts they did

    toward Hart Oil. Defendants are liable for damages.

    COUNT XV

    PUNITIVE DAMAGES

    107. The Trustee hereby incorporates the allegations in the preceding paragraphs as

    provided herein.

    108. The Trustee seeks punitive damages against Citizens Bank of Kilgore. The

    Banks conduct as described herein toward its client and borrower Hart Oil & Gas, Inc. rises to a

    willful, wanton, malicious, reckless, oppressive, or fraudulent level. Defendant Citizens Bank

    and its officers, Margaret Logston, Jim Griffin, and Kenneth R. Plunk acted intentionally or with

    reckless disregard for the truth and consequences of their actions. A judgment of punitive

    damages is appropriate and warranted to deter such future conduct by an FDIC regulated Bank.

    109. The Trustee seeks punitive damages against John N. Ehrman because the

    Defendant Ehrmans conduct as described herein rises to a willful, wanton, malicious, reckless,

    oppressive, or fraudulent level. Defendant Ehrman acted intentionally or with reckless disregard

    for the truth and consequences of his actions.

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    COUNT XVI

    CLAIM UNDER TRUSTEES STRONG ARM POWERS

    110. The Trustee brings claims against the Bank in her position as a hypothetical lien

    creditor under the strong-arm provisions of Section 544(a) of the Bankruptcy Code. As the

    holder of strong-arm powers, the Trustees lien against Hart Oils assets is senior to all creditors

    who hold unperfected liens. Because of the Banks sloppy and imprecise collateral descriptions

    in the 2011 Hart Loan Documents, the Banks liens do not extend to all of Hart Oils property

    and, as such, the Banks asserted liens are unperfected and will be avoided. The Trustee will

    show that the Banks security agreement made in connection with the 2011 Hart Loan did not

    attach to Harts assets. Moreover, the Bank failed to file accurate financing statements to perfect

    its security agreement.

    111. Because of these acts and omissions in documenting the 2011 Hart Loan, the

    Banks claimed liens are of no effect thus leaving it unsecured as to the most valuable assets of

    Hart Oil and, as an unsecured creditor is not entitled to interest or attorneys fees.

    COUNT XVII

    DECLARATORY JUDGMENT AND OBJECTION TO CLAIM

    112. The Trustee seeks declaratory judgment under the Federal Declaratory Judgments

    Act, 28 U.S.C. 2201 regarding the extent and allowance of the Banks claim, including its post-

    petition claim for default interest and attorneys fees under Section 506(b) of the Bankruptcy

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  • 35

    Code. The Bank is not entitled to post-petition interest or fees on its claim. The Banks claim

    should be disallowed pursuant to 11 U.S.C. 502(d) because property is recoverable from the

    Bank under chapter 5 of the Bankruptcy Code.

    COUNT XVIII

    SURCHARGE ACTION UNDER SECTION 506(C) OF THE CODE

    113. Only to the extent the Bank has an allowed secured claim, the Trustee seeks to

    surcharge the Banks collateral. Section 506(c) of the Bankruptcy Code allows the Trustee to

    recover from a secured creditor's collateral the costs and expenses incurred by the Trustee which

    benefit the collateral of the secured creditor. In this bankruptcy case, most if not all of Harts

    well work-over expenses, environmental remediation expenses, reconnection of electrical

    service, field improvements to the Hart assets, and sale expenses were incurred for the benefit of

    the Bank's collateral. To the extent that the Court finds the Banks claim is not subordinated and

    its liens are valid and secured by Harts collateral, the Trustee seeks to surcharge the Bank

    collateral to recover, fees, costs and expenses incurred since the petition date.

    COUNT XIX

    EQUITABLE MARSHALLING OF LIENS

    114. The Trustee seeks an order of equitable marshalling of the Banks liens to the

    extent the Bank has valid liens. Both prepetition and postpetition the Bank has sought

    satisfaction of its $1 million note from non-estate collateral including Crest Petroleum. In light

    of the equities of the case and the Banks inequitable conduct toward its borrower Hart Oil &

    Gas, the Trustee seeks a judgment from the Court compelling the Bank to look to non-Hart

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  • 36

    collateral for satisfaction of its secured debt, if any, against Hart before receiving distributions

    from Harts assets.

    PRAYER FOR RELIEF

    WHEREFORE, PREMISES CONSIDERED, Plaintiff Trustee respectfully requests that

    the Court award the following relief against Defendant Citizens Bank of Kilgore and Defendant

    John N. Ehrman as follows:

    (a) Entry of judgment equitably subordinating the Banks pre-petition and postpetition claims against the Hart Oil bankruptcy estate to a priority level junior

    to the claims of unsecured creditors;

    (b) Entry of judgment of monetary damages against the Defendant Bank on the Trustees legal claims against the Bank in Counts II, III, IV, V, VI, VII, VII, X,

    XI, XII, XIII and XIV in an amount to be determined at trial;

    (c) Entry of judgment of monetary damages against Defendant John N. Ehrman on the Trustees legal claims in Counts VII, VIII and IX in an amount to be

    determined at trial;

    (d) Entry of a judgment of punitive damages against Defendants Citizens Bank and John N. Ehrman;

    (e) Entry of a judgment avoiding the Defendant Banks liens pursuant to 11 U.S.C. 544(a) and preserving the lien for the benefit of unsecured creditors;

    (f) Entry of declaratory judgment disallowing the Banks prepetition and postpetition claims;

    (g) Entry of a money judgment in favor of the Trustee pursuant to the surcharge provisions in 11 U.S.C. 506(c) in an amount to be determined at trial;

    (h) Entry of judgment of equitable marshaling against defendant Bank requiring it to seek satisfaction from the non-bankruptcy collateral securing its loan;

    Case 14-01138-t Doc 18 Filed 03/20/15 Entered 03/20/15 17:02:47 Page 36 of 37

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    (i) Entry of judgment against the Defendant Bank to pay pre-judgment interest through the date of judgment at the rate of 6% per annum and post-judgment

    interest at the prevailing federal judgment rate until paid; and

    (j) Entry of an award of attorneys fees and costs in favor of the Liquidating Trustee.

    Dated: March 20, 2015

    Respectfully submitted,

    THE KENNEDY FIRM

    By: Kirk A. Kennedy

    Kirk A. Kennedy

    4221 Avondale Avenue

    Dallas, Texas 75219

    Tel: (832) 646.9228

    Fax: (713) 583.7069

    AND

    Modrall, Sperling, Roehl, Harris & Sisk,

    P.A.

    Douglas R. Vadnais

    Spencer L. Edelman

    Bank of America Center

    Suite 1000

    500 Fourth St., NW

    Albuquerque, New Mexico 87103

    Telephone (505) 848-1800

    Counsel to Liquidation Trustee

    Marilyn M. Smelcer

    Case 14-01138-t Doc 18 Filed 03/20/15 Entered 03/20/15 17:02:47 Page 37 of 37

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  • Marilyn M. Smelcer, Liquidation Trustee of Hart Oil & Gas, Inc. FOR IMMEDIATE RELEASE MATT KRUMTUM PUBLIC AFFAIRS OFFICER March 23, 2015 (276) 873-0007 Former Local Oil-Man and East Texas Bank Named in Federal Lawsuit in San Juan

    County Oil and Gas Fraud

    FARMINGTON On Friday evening, John N. Ehrman and Citizens Bank of Kilgore, Texas were named in a federal lawsuit filed in Albuquerque for their role in a scheme to defraud a local oil company, Hart Oil & Gas. The suit was filed by Marilyn M. Smelcer, the court appointed Trustee of Hart Oil & Gas, and alleges that the Bank and certain bank officers joined forces with co-defendant John N. Ehrman, 59, of The Woodlands, a twice convicted felon. Mr. Ehrman, who previously owned and operated oil companies in San Juan County, is currently awaiting trial in Houston federal court for 29 counts of wire fraud and 7 related felony charges in a separate criminal fraud action unrelated to the Hart Oil scheme. The New Mexico case filed in the Unites States Bankruptcy Court in Albuquerque follows directly on the heels of Ehrman's recent indictment in December 2014. The federal criminal charges in Texas are not directly related to the new charges in New Mexico. In Texas, Ehrman faces criminal charges of engaging in monetary transactions in property derived from specified unlawful activity, announced just last December by U.S. Attorney Kenneth Madison.

    The New Mexico civil case against Ehrman and the Bank mirrors the character of the Federal criminal charges in that in both cases, Ehrman is accused of using shell companies with no assets to defraud investors and, in the case of Hart Oil, its owner.

    The criminal indictment in Texas alleges Ehrman was the president of Woodlands Oil & Gas, Inc. According to prosecutors, Ehrman defrauded investors by falsely representing he owned oil and gas leases on the McFadden Ranch in Victoria County. He allegedly claimed he would sell participation interests in the ranch when, in fact, he had no such ownership interest. Similarly, Ehrman now stands accused of using improper and illegal methods and manipulations to profit off the distressed sale of Harts leases in the oil rich San Juan Basin of New Mexico. The New Mexico suit names Citizens Bank of Kilgore, Texas as Ehrmans co-conspirator. It is alleged that the Bank, in a desperate attempt to protect the value of its collateral and $1 million debt, knew or should have known that it was communicating and emailing with a notorious two-time felon. The Trustee alleges that the scheme by Ehrman and the Bank forced Hart Oil into bankruptcy and left local Farmington businesses unpaid. The bankruptcy trustee seeks punitive damages against Ehrman and the Bank.

    No criminal action has yet been taken in New Mexico.

    In the Texas criminal case, each count of wire fraud carries a maximum of 20 years in federal prison. If convicted of engaging in monetary transactions in property derived from specified unlawful activity, Ehrman would face a maximum of 10 years imprisonment. All counts also carry as possible punishment a $250,000 fine. The Houston case was investigated by the FBI and Internal Revenue Service Criminal Investigation. Assistant U.S. Attorney John Braddock is prosecuting.


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