Hart Oil & Gas lawsuit

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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

Case 14-01138-t Doc 18 Filed 03/20/15 Entered 03/20/15 17:02:47 Page 1 of 37

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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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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.


19

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


20

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


21

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.


22

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.


23

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


24

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.


25

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


26

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


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


27

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


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


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


28

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.


29

COUNT VI

CONVERSION OF PROPERTY


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


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


30

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


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.


31

COUNT X

BREACH OF LOAN AGREEMENTS


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


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


32

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


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.


33

COUNT XIV

PRIMA FACIE TORT


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


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.


34

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


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


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;


37

(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 4:14-cr-00634 Document 1 Filed in TXSD on 12/16/14 Page 1 of 17

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.

Date post:	16-Nov-2015
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