By Dana Olsen Friday, December 16th, 2011

The owners of 200 acres of farmland along the Oxnard plain claim a Bakersfield oil company polluted their water through drilling leases on their land and then failed to tell the investing public about it, scuttling a deal to sell the ranch for $15 million.

In a complaint filed  Nov. 29 in Ventura County Superior Court, Pleasant Valley Ranch alleges that Tri-Valley Corp. contaminated acres of workable farmland with its oil and gas operations. Both sides concede the pollution was discovered about a year before the lawsuit was filed.

Tri-Valley, traded on the New York Stock Exchange’s Amex quote system, disclosed its role in the contamination and subsequent cleanup efforts in its Nov. 18 quarterly report. But Pleasant Valley, owned by Paul and Yvonne Murai, alleges in its lawsuit that the oil company hurt the ranch by waiting a year to disclose the information. A potential buyer backed out of $15 million deal to buy the ranch due to uncertainty about its environmental status, the family alleges.

Tri-Valley’s “failure to disclose the existence, nature or magnitude of Pleasant Valley’s claims in its public filings is and was the result of intentional and purposeful decisions made by current and former members of Tri-Valley’s upper management as part of their goal of sweeping this entire situation ‘under the carpet,’” attorneys for the ranch owners allege in the complaint.

Maston Cunningham, Tri-Valley’s president and CEO, said there’s no proof that his company’s operations caused the contamination or that Tri-Valley refused to accept responsibility for it.

“Pleasant Valley Ranch’s lawsuit is not only meritless, but full of mischaracterizations and outright falsehoods,” Cunningham told the Business Times. “Tri-Valley consistently tried to work productively with Pleasant Valley Ranch, even volunteering to meet with the prospective property buyers to address their concerns, but Pleasant Valley Ranch refused the offer.”

Oil under farmland

The ranch is located at 4407 Sturgis Road, just south of the Camarillo Airport. Pacific Ridge Farms leased most of the property from its owners in June 2010 to farm broccoli, strawberries, celery and other fruits and vegetables.

Tri-Valley leased drill sites at Pleasant Valley starting in 2006. The disputed site is two acres of land on the southwest corner of the property.

Because the oil beneath the Oxnard Plain is thick and heavy, the oil operators needed to use an unusual method of extraction. According to the complaint, Tri-Valley told the landowners that they would be using “secondary recovery,” in which water or steam are injected to thin out the oil so it can be pumped to the surface.

The owners allege that Tri-Valley did not tell them they planned to use a diluent, a term used in the oil industry to describe a variety of hydrocarbon liquid substances sometimes injected into wells to thin out oil, as part of its oil recovery method.

On Nov. 19, 2010, farm workers noticed a thick layer of an oily substance floating on top of a cistern used for farm water. That day, Pleasant Valley and Tri-Valley both collected samples to determine whether diluent had leaked from Tri-Valley’s drill site to the soil and groundwater on the farmland.

A month later, Tri-Valley received a letter from the Ventura County Environmental Health Division, directing the oil company to enter its Voluntary Cleanup Program, which allows companies to start cleanup efforts.

The letter, attached to the ranch owners’ lawsuit as an exhibit, called Tri-Valley the “responsible party” for the contamination. David Ossentjuk, an attorney at the Westlake Village office of Musick, Peeler & Garrett who filed Pleasant Valley’s complaint, says that designation isn’t necessarily legally binding.

On Dec. 30, 2010, Sespe Consulting, a Ventura-based firm that Tri-Valley hired to manage its cleanup efforts, sent the oil company’s Voluntary Cleanup Program application to Ventura County.

No acceptance of fault

While Tri-Valley has spent about $700,000 to clean up the contamination, the company hasn’t accepted legal fault. “Tri-Valley does not at this time believe that its operations are responsible for the cistern contamination,” Sespe Consulting wrote in the Dec. 30, 2010 letter to Ventura County. In its complaint, Pleasant Valley called Tri-Valley’s position “ridiculous and absolutely indefensible,” alleging that preliminary evidence indicated that Tri-Valley’s facility was the source of contamination.

The ranch’s complaint alleges that Tri-Valley management concealed the contamination so as not to scare its own shareholders. “In so doing, Tri-Valley and its management knowingly compounded and greatly increased the damages that Pleasant Valley has sustained as a result of ongoing contamination of the property,” the complaint alleges.

At the time of the contamination, Pleasant Valley was in negotiations to sell the ranch to Teays River Management for about $15 million. Teays backed out of the purchase and sale agreement in December 2010, a development Ossentjuk said was a result of the contamination.

“They backed out specifically because Tri-Valley would not accept responsibility for remediating the contamination,” Ossentjuk said. “That created enormous uncertainty with respect to the future of the property.”

Tri-Valley, whose shares trade at 17 cents per share, has lost $9.2 million in the first nine months of 2011 on revenue of $1.9 million. The company’s chairman, who is also its biggest creditor, resigned on Nov. 22 citing potential conflicts of interest, according to SEC filings.

Tri-Valley’s 10 Q for the third quarter of 2011, filed with the SEC on Nov. 18, is the first time the company’s public filings mention the dispute with Pleasant Valley.

“The company is continuing to investigate the facts and circumstances surrounding such potential contamination,” the report says. “In an effort to further resolve the dispute amicably, the company has made, and is continuing to make, progress toward the successful remediation of the property owner’s land.”

Tri-Valley continues to operate its eight drilling sites on the ranch. The oil company is expected to file an answer to the complaint through its lawyers at Luna & Glushon by the middle of January.