Standing and Damages in Oil Purchaser Payment Dispute: District Court Rejects Dismissal Despite Third-Party Judgment Satisfaction
Stroud Production, operator of the Kelly Bayou Jeter Field Wide Unit in Miller County, Arkansas, sued oil purchaser DK Trading & Supply for breach of contract and violation of Arkansas Code § 15-74-601(a) after DKTS redirected working interest revenue to a third-party judgment holder without garnishment proceedings. Judge Andrew S. Hanen of the Southern District of Texas denied DKTS's motion to dismiss, though the full reasoning is not yet available in the published portion of the opinion.
Background and Business Context
Stroud Production, LLC served as operator of the Kelly Bayou Jeter Field Wide Unit in Miller County, Arkansas from 2015 through 2025, coordinating the sale and distribution of oil produced from the unit. In 2022, Stroud entered into a month-to-month oil purchase agreement with Lion Oil Trading and Transportation, LLC ("LOTT"), under which Stroud would collect payment from LOTT and redistribute amounts due to the oil and gas lease owners of the Kelly Unit. The agreement specifically provided that "Stroud [ ] agrees to pay promptly to any person, or persons, entitled to any interest in the oil purchased by [LOTT]." After LOTT merged with DK Trading & Supply, LLC ("DKTS"), DKTS continued purchasing oil under the same contractual terms as the surviving entity.
The Payment Diversion Dispute
The dispute arose in June 2024 when J-Lu Ltd. Co., which had obtained a valid Arkansas state court judgment against Stroud in 2019 (affirmed on appeal in 2024), contacted DKTS's agent ExTex Land & Administration, LLC and requested that any "ownership of funds ... for the benefit of Stroud" be redirected to J-Lu to satisfy the outstanding judgment. Without any garnishment proceedings, DKTS began partially withholding payments from Stroud and redirecting them to J-Lu from June 2024 through January 2025.
In March 2025, Stroud provided written notice to DKTS asserting that "no garnishment issued, and there was no legal basis for paying these proceeds to J-Lu." Stroud emphasized that "money held at the agent for another cannot be reached by garnishment proceedings" because Stroud as operator "has no interest in the field: it pays all proceeds from the sale of production to the interest owners."
Procedural Posture
Stroud filed suit in federal court asserting claims for breach of contract and violation of Arkansas Code § 15-74-601(a) governing failure to pay proceeds from sale of oil or gas. DKTS moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Judge Andrew S. Hanen of the United States District Court for the Southern District of Texas denied DKTS's motion to dismiss, though the available excerpt of the opinion does not include the court's full analysis or reasoning.