Pester Refining Co., Matter of

• Decision Date: 06 July 1988
• Docket Number: 87-1908 and 87-1942,Nos. 87-1907,s. 87-1907
• Parties: , Bankr. L. Rep. P 72,295, 6 UCC Rep.Serv.2d 417 In the Matter of PESTER REFINING COMPANY, a Kansas Corporation, Debtor (Three Cases). PESTER REFINING COMPANY, Appellee, and The Continental Illinois National Bank and Trust Company of Chicago; First Interstate Bank of Denver, N.A.; and Bankers Trust Company, Intervenors Below, v. MAPCO GAS PRODUCTS, INC. and Mid-America Pipeline Company, Burke Energy Corporation, Appellant, Unsecured Creditors Committee, Southern Union Refining Co., Inland Crude Purchasing Corp., Appellees. PESTER REFINING COMPANY, Appellee, and The Continental Illinois National Bank and Trust Company of Chicago; First Interstate Bank of Denver, N.A.; and Bankers Trust Company, Intervenors Below, v. MAPCO GAS PRODUCTS, INC., Appellant, and Mid-America Pipeline Company, and Burke Energy Corporation, Unsecured Creditors Committee, Southern Union Refining Co., Inland Crude Purchasing Corp., Appellees. PESTER REFINING COMPANY, Appellee, and The Continental Illinois National Bank and Trust Company of Chicago; First Interstate Bank of Denver, N.A.; and Bankers Trust Company, Intervenors Below, v. MAPCO GAS PRODUCTS, INC. and Mid-America Pipeline Company, Appellant, and Burke Energy Corporation, Unsecured Creditors Committee, Southern Union Refining Co., Inland Crude Purchasing Corp., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1476

845 F.2d 1476

93 P.U.R.4th 558, Bankr. L. Rep. P 72,295,

6 UCC Rep.Serv.2d 417

In the Matter of PESTER REFINING COMPANY, a Kansas

Corporation, Debtor (Three Cases).

PESTER REFINING COMPANY, Appellee,

and

The Continental Illinois National Bank and Trust Company of

Chicago; First Interstate Bank of Denver, N.A.; and Bankers Trust Company, Intervenors Below, v. MAPCO GAS PRODUCTS, INC. and Mid-America Pipeline Company, Burke Energy Corporation, Appellant,

Unsecured Creditors Committee, Southern Union Refining Co.,

Inland Crude Purchasing Corp., Appellees.

PESTER REFINING COMPANY, Appellee,

and

The Continental Illinois National Bank and Trust Company of

Chicago; First Interstate Bank of Denver, N.A.; and Bankers Trust Company, Intervenors Below, v. MAPCO GAS PRODUCTS, INC., Appellant, and Mid-America Pipeline Company, and Burke Energy Corporation,

Unsecured Creditors Committee, Southern Union Refining Co.,

Inland Crude Purchasing Corp., Appellees.

PESTER REFINING COMPANY, Appellee,

and

The Continental Illinois National Bank and Trust Company of

Chicago; First Interstate Bank of Denver, N.A.; and Bankers Trust Company, Intervenors Below, v. MAPCO GAS PRODUCTS, INC. and Mid-America Pipeline Company, Appellant,

and

Burke Energy Corporation,

Unsecured Creditors Committee, Southern Union Refining Co.,

Inland Crude Purchasing Corp., Appellees.

Nos. 87-1907, 87-1908 and 87-1942.

United States Court of Appeals,

Eighth Circuit.

Submitted Dec. 14, 1987.

Decided April 28, 1988.

Rehearing and Rehearing En Banc Denied July 6, 1988.

Mark Schantz, Des Moines, Iowa, and W. Michael Shinkle, Davenport, Iowa, for appellants.

Mick J. DiGiovanni, Chicago, Ill., for appellees.

Before JOHN R. GIBSON, BOWMAN, and WOLLMAN, Circuit Judges.

WOLLMAN, Circuit Judge.

Pester Refining Company (Pester) filed a Chapter 11 bankruptcy petition on February 25, 1985. In an adversary proceeding, the bankruptcy court held that Mapco Gas Products, Inc. (Mapco) and Mid-America Pipeline Company (Mid-America) had wrongfully converted various natural gas liquids (NGLs) that were property of Pester's bankruptcy estate and subject to the turnover provisions of 11 U.S.C. Sec. 542(a). Mapco, Mid-America, and Burke Energy Corporation (Burke) appeal from the district court's ¹ affirmance of the bankruptcy court's ² judgment. 85 B.R. 520. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

I

Pester, ³ the debtor in possession, ⁴ operated a refinery in El Dorado, Kansas. Mapco and Burke were suppliers of NGLs used in Pester's refinery. The NGLs in question were shipped through Mid-America's pipeline system, a common carrier.

Title to the NGLs passed from Mapco or Burke to Pester when the relevant NGLs were made available to Pester at Mid-America's Conway, Kansas, station (Group 140). The bankruptcy court described the steps necessary to make the product available at Group 140:

First, MAPCO or Burke would ship product to Conway and pay the shipment charges. Second, Pester and the seller would execute a product transfer order ("PTO") directing Mid-America to "transfer title" of a specified amount of product from the seller to Pester. The PTO forms provided that the transfer be "F.O.B. Group 140." Third, the PTO would be sent to Mid-America. Fourth, Mid-America would check its records to see if the seller had that amount of product available at Conway. Fifth, if the seller had sufficient product available, Mid-America would transfer that product from the seller's account to Pester's account. Sixth, and finally, Mid-America would send MA-32 forms to Pester and the seller to acknowledge the transfer. No product was moved to effect a product transfer, and no transportation costs were incurred. Mid-America simply charged a flat $10 fee to process each PTO.

In re Pester Ref. Co., 66 B.R. 801, 806 (Bankr.S.D.Iowa 1986).

Following a PTO transfer from Mapco or Burke, Mid-America placed the NGLs in Pester's transfer storage account. Two additional steps were theoretically required to ship NGLs to Pester's refinery. ⁵ First, Pester, by a "Transfer Storage Movement" form, was to instruct Mid-America to transfer the product to its transportation account. Second, by use of an MA-10 form, Pester was to designate the NGLs for actual shipment.

In practice, the bankruptcy court found the working relationship between Pester and Mid-America to be one of accommodation. For years prior to filing its bankruptcy petition, Pester had requested that all NGLs in its accounts at Mid-America be scheduled for delivery. Mid-America thereupon automatically transferred the NGLs from Pester's transfer storage account to its transportation account. ⁶ In addition, the use of MA-10 forms was disregarded and oral designation orders were accepted so that Pester could obtain NGLs within forty-eight hours after designation.

Most of Pester's inventory was delivered to the refinery within a week of its arrival at Mid-America. In January and February of 1985, however, inventory began to accumulate in Pester's transportation account. For example, the bankruptcy court found that Pester's normal butane inventory in its transportation account increased from 30,654 barrels on January 1, 1985, to 54,217 barrels on February 1, 1985, which greatly exceeded the 18,015 barrels actually delivered to Pester during February. Pester, 66 B.R. at 807. Similarly, the bankruptcy court found that Pester's isobutane inventory in its transportation account increased from 35,340 barrels on January 1, 1985, to 47,136 barrels on February 1, 1985, which also exceeded the 26,711 barrels actually delivered to Pester's refinery in February. Id. Nonetheless, Mid-America continued to automatically transfer NGLs from Pester's transfer storage account to its transportation account.

On February 25, 1985, the day Pester filed its Chapter 11 bankruptcy petition, Mapco orally requested Mid-America to transfer the following NGLs for which Mapco had not been paid from Pester's account to Mapco's account: 10,000 barrels of normal butane, 5,000 barrels of isobutane, and 38,000 barrels of natural gasoline. ⁷ Two days later, Mapco sent a letter formally notifying Mid-America of its demand to stop delivery of the NGLs in transit pursuant to section 2-705 of the Uniform Commercial Code (U.C.C.). On February 27, 1985, after receiving Mapco's letter and an agreement for indemnification, Mid-America decreased Pester's transportation account and increased Mapco's transportation account by the requested amounts.

On March 1, 1985, Mid-America sent a letter to Pester stating that it had decided to exercise its common carrier lien rights, pursuant to its published tariffs and the U.C.C., by withholding 3,260 barrels of Pester's normal butane to satisfy previously accrued and unpaid transportation charges.

On March 4, Burke sent a letter to Mid-America directing it to stop shipment of 15,000 barrels of isobutane and 10,000 barrels of natural gasoline in transit to Pester. Burke's demand was also pursuant to U.C.C. Sec. 2-705. Mid-America refused to transfer the NGLs to Burke unless provided with an indemnification agreement backed by a letter of credit. Although Burke never provided the indemnification requested, Mid-America withheld 15,000 barrels of isobutane and 2,600 barrels of natural gasoline from Pester. These NGLs were not transferred to Burke's account, however.

On March 15, 1985, Pester's counsel sent a letter to Mapco and Mid-America stating that their actions had violated the automatic stay imposed by 11 U.S.C. Sec. 362 and demanding that they turn the NGLs in question over to Pester. Mapco and Mid-America refused.

The bankruptcy court determined that U.C.C. Sec. 2-705(2)(c) terminated the rights of Mapco and Burke to stop the NGLs in transit. Pester, 66 B.R. at 813-14. The bankruptcy court also determined that Mid-America had failed to establish a carrier's lien under U.C.C. Sec. 7-307, and that even if such lien existed, the NGLs were nonetheless subject to the turnover provisions of 11 U.S.C. Sec. 542(a). Id. at 814.

II

One in possession of property of the bankruptcy estate is required to deliver such property to the trustee unless it is of inconsequential value or benefit to the estate. 11 U.S.C. Sec. 542(a) (1982). ⁸ Property of the estate is broadly defined as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1) (1982). Pester had title to the NGLs in question. Accordingly, absent special circumstances, the NGLs in question were property of the estate and subject to the turnover provisions of section 542(a).

Mapco and Burke argue that the NGLs in question are not property of the estate because the NGLs were stopped in transit pursuant to U.C.C. Sec. 2-705(1), ⁹ which states in relevant part: "The seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent[.]" When the goods are stopped in transit, the contract is executory, In re Coast Trading Co., 744 F.2d 686, 693 (9th Cir.1984), and the debtor's contract right, not the goods themselves, is property of the estate. The estate has a right to the goods themselves only if the contract is assumed under 11 U.S.C. Sec. 365(b). In re Nat'l Sugar Ref. Co., 27 B.R. 565, 574 (S.D.N.Y.1983).

It is undisputed that Pester had not paid Mapco or Burke for the NGLs in question and that the product was in possession of Mid-America when Mapco and Burke learned of Pester's insolvency. Pester contends, however, that Mapco's and Burke's right to stop delivery of the NGLs under U.C.C. Sec. 2-705(1) was terminated by U.C.C. Sec. 2-705(2)(c), which states in relevant part: "As against such buyer the seller may stop delivery until * * * (c) such acknowledgement to the buyer by a carrier * * * as warehouseman[.]" In this case, there was acknowledgement to the buyer, Pester, by the carrier, Mid-America....