In the Estate of Larry Wayne Ewers is a reminder of a few guidelines for oil and gas investing:
- Think twice before giving money to your scripture-spouting friend from church.
- Liking a promoter who is courteous and could become a good friend should be way far down the list of investment criteria.
- Do you really want to liquidate your retirement account to invest in an industry you know nothing about?
The facts
A too-brief recitation of nine years of interactions between the parties looks like this:
In 2011 Larry Ewers approached Fauth and Cooper about an oil and gas deal and they invested a total of $720,000 in EPD, a company owned by Larry.
The EPD investment was rolled into a loan to Citadel, another Ewers company, for a $52 million acquisition of production from Dewbre Production Company.
In 2014 the payments stopped and Larry explained that was because of low gas prices. Fault and Cooper continued to pay their share of notes they had signed.
Repeatedly over the next six years Larry approached Fauth and Cooper with other ventures that would be “huge”, assuring them their investment was good. He “confessed” his prayer that they recognize the Biblical importance of secrecy, relying once on the Letter of James, and insisted that confidentiality was of paramount importance to protect their opportunities.
Larry transferred his interest in GEM, a company he had told them they owned part of, to his wife Janice for no consideration. Larry died from brain cancer and Janice became administrator of his estate.
In 2020 Fauth and Cooper learned the Dewbre deal had never closed.
Fauth and Cooper submitted claims against Larry’s estate for $1.4 million.
The litigation
The trial court rendered judgment against the estate for $1.4 million. On appeal Fauth and Cooper overcame all of Janice’s defenses and prevailed.
At 49 pages, the opinion and dissent are too detailed for this post. Let’s consider the decision as a good discussion of the issues typically raised in fraud cases.
Limitations
The lawsuit was timely based on fraudulent concealment, the discovery rule, and the continuing tort doctrine.
Fraudulent concealment tolls limitations until after a cause of action has accrued. The discovery rule determines when a cause of action accrues. The two doctrines are independent of one another.
Actual Knowledge.
Fauth and Cooper had actual knowledge of the wrongful act in 2014 when the payments from the Dewbre deal stopped, but there was no conclusive evidence establishing their actual knowledge of the injury-causing conduct – Larry’s fraud, or of the injury itself – misappropriation of their investments.
Red Flags
Discontinued payments did not raise a red flag because Larry had a believable explanation for it. And he continued to insist that their investment was solid. They even had a dinner with the wives to celebrate that the Dewbre deal had closed.
They knew they were not being paid but were willing not to take action because the deal was too good to pass up.
Reasonable diligence/justifiable reliance
The Court excused Plaintiffs’ failure to contact Dewbre and others to find out what had happened and to never hire a lawyer, CPA, or oil and gas consultant to look into their investment. They were entitled to believe Larry.
They had a duty to use reasonable diligence to protect their interests but their confidence in Larry excused their lack of diligence. And there was no publicly available information by which they would have gained knowledge of Larry’s fraud. It was a private transaction among friends.
A party’s reliance on representations is not justifiable when there are red flags indicating further investigation is needed. Reliance is not justifiable where a party fails to exercise reasonable diligence because of mere confidence in the honesty and integrity of the other party. But their trust in Larry did not alone establish justifiable reliance. Other facts made their reliance justified.
Other issues
There’s lots more. The trial court’s ruling against Larry on unjust enrichment and fraudulent transfer of Larry’s GEM interest to Janice were also affirmed. A ruling that GEM was Larry’s alter ego was reversed.
Warning
The dissent disagreed with the majority. A case with similar facts could easily have gone the other way.
Your musical interlude.
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