Delta Energy Resources, Inc. v. Damson Oil Corp., Civ. A. No. 85-1149.

• Decision Date: 04 December 1985
• Docket Number: Civ. A. No. 85-1149.
• Parties: DELTA ENERGY RESOURCES, INC. v. DAMSON OIL CORPORATION.
• Court: U.S. District Court — Western District of Louisiana

72 B.R. 7 (1985)

DELTA ENERGY RESOURCES, INC. v. DAMSON OIL CORPORATION.

Civ. A. No. 85-1149.

United States District Court, W.D. Louisiana, Lake Charles Division.

December 4, 1985.

Philip K. Jones, Jr., Liskow & Lewis, New Orleans, La., for Damson Oil Corp.

Harry R. Holladay, Chaffe, McCall, Phillips, Toler and Sarpy, New Orleans, La., for The Unsecured Creditors Committee of Delta Energy Resources, Inc.

William C. Sandoz, Opelousas, La., for Charles N. Wooten, Sr., Trustee for the Bankruptcy Estate of Delta Energy Resources, Inc.

STATEMENT OF JURISDICTION

EDWIN F. HUNTER, Jr., Senior District Judge.

This case arises under Title 11 of the United States Code (i.e., the United States Bankruptcy Code) and jurisdiction is vested in this Court pursuant to 28 U.S.C. § 1334. Furthermore, this matter constitutes a "core proceeding" pursuant to 28 U.S.C. § 157(b). As such the judgment of the Bankruptcy Court in this proceeding is subject to review by this Court pursuant to 28 U.S.C. § 158(a).

This litigation began with the rejection by William C. Sandoz, the prior trustee, of the "purchase and sale agreement" dated September 29, 1983, entered into between Damson Oil Corporation (Damson) and Delta Energy Resources, Inc. (Delta). According to the terms of that agreement Delta was to convey to Damson its leasehold interest, less and except a 1/32 overriding royalty retained by Delta, in and to certain mineral properties located in the "East Moss Lake Field". A hearing was held on March 5, 1984, regarding the trustee's proposed rejection. The Bankruptcy Judge determined that although Damson had paid $1,000,000.00 toward a purchase price of approximately $5,000,000.00 and had taken, or had attempted to take, certain other steps toward fulfillment of its end of the bargain, the contract nevertheless remained executory as of the date the bankruptcy case was filed. Despite Damson's contentions to the contrary, the court agreed with the trustee and found that the rejection of the contract would be in the best interest of the estate. The rejection order contained provisions intended to insure that Damson would eventually recover the $1,000,000.00 it had paid toward the purchase price, specifically Damson was to be granted a lien in the amount of $1,000,000.00 against Delta's interest to the property which formed the subject of the rejected contract. 11 U.S.C. § 365(j). Then, too, as an additional measure of security or assurance to Damson the order granted it an administrative priority pursuant to 11 U.S.C. § 364(d) for any deficiency which might result should the 365(j) lien prove ultimately inadequate.

The submission of the proposed judgment was delayed by negotiations between the parties concerning a possible settlement, and a judgment was not entered by the Bankruptcy Court until August 24, 1984. The Trustee thereafter moved for reconsideration of the judgment based upon the priority given Damson's claim vis-a-vis administrative expenses of the Estate. At that time the Trustee did not object to the lien given to Damson pursuant to section 365(j). However, the Unsecured Creditors' Committee filed a motion to reconsider alleging that the judgment was incorrect and that Damson was not entitled to a lien to secure recovery of its claim resulting from the rejection. Both motions were heard on September 27, 1984. Following the hearing and additional BRIEFING, THE Bankruptcy Court withdrew its original judgment and issued Findings and Conclusions on January 3, 1985.¹ A judgment in accordance with the Findings and Conclusions was entered on February 17, 1985, which modified the order of August 24, 1984, by granting

to Damson an entitlement to damages resulting from the rejection/breach, including but not limited to its $1,000,000.00 claim as an unsecured creditor of the estate.

This appeal followed.

Secured Status and Section 365(j)

The Bankruptcy Court, in reliance upon the reservation of a 1/32nd overriding royalty in favor of Delta and Louisiana jurisprudence determined that the transaction was a "sublease" under the law of Louisiana, and should be similarly classified for purposes of Section 365; and that as a result, Damson is not entitled to a lien under Section 365(j) of the Bankruptcy Act. This holding Damson insists, is incorrect as a matter of law. The second issue urged by Damson concerns being in "possession" as contemplated by Section 365(b). This issue becomes relevant only if Damson is determined to be a lessee or sub-lessee. Nevertheless, for the record, we note our complete concurrence in the Bankruptcy Judge's conclusion that Damson was not entitled to remain in possession as it did not have possession as is envisioned by the provisions of 11 U.S.C. § 365(b)(1) at the time of the reject. We accept his findings in this regard to be correct.

No useful purpose is to be served by a recitation of the contract provisions, which are made a part hereof by reference. Counsel for the respective parties (by briefs) argue extensively as to whether Louisiana or Texas Law should govern. Whether Texas law applied because of the language in the Damson agreement matters not. The core issue has to be what law applies to the transfer of an interest in immovable property located in Louisiana. Whether a Texas court applies Louisiana law or a Louisiana court applies Louisiana law, the outcome must be the same. So strong is the interest of Louisiana in the classification of immovables found within its borders that any Texas Court faced with the issue would apply Louisiana law to resolve the dispute. Texas law, when dealing with immovable property in another state, requires that the courts apply the substantive rules of the state where the property is located. Holt v. Guerguin, 106 Tex. 185, 163 S.W. 10 (1914); Colden v. Alexander, 141 Tex. 134, 171 S.W.2d 328 (1943); Estabrook v. Wise, 506 S.W.2d 248 (Tex.C.C.A. Tyler 1974); Echols v. Wells, 508 S.W.2d 118 (Tex.C.C.A.1973).

Louisiana Law

The distinction between a sublease and assignment under Louisiana law was substantially altered in 1974 with the adoption of the Louisiana Mineral Code.² While the Louisiana Mineral Code kept the nominal distinction between "sublease" and "assignment", the functional differences were substantially eliminated,³ and the minor remaining technical differences⁴ should not control the classification of the transaction for purposes of Bankruptcy Code.

The arbitrary and inequitable effect of such a classification was explained in the following statement made prior to the adoption of the Mineral Code:

The astounding thing about this judicial definition is the doctrine that a transfer for any consideration except cash is a sublease . . . But there are many sales contracts which stipulate royalty as part of the consideration. There are sales of books, patents, moving pictures which stipulate royalty as part of the purchase price. These do not become subleases simply because they were not made for cash. Royalties stipulated as consideration for a true sublease (leased by a lessee) may be rent, but royalty as consideration for the sale of a lease is not rent. The method of payment of the consideration is not a determining factor in the distinction of a sublease from an assignment. A paid-up primary term will not convert a mineral lease into an assignment. The lease remains a lease because it retains the attributes and characteristics of a mineral lease. In the same manner, an assignment should be considered an assignment whether the consideration is to be paid in cash, lump sum or by installments, or by cash with other considerations or services. The distinguishing feature is the transfer of title to the basic lease. The contract has none of the characteristics of a lease. The transferee assumes all the obligations of the basic lease. The transferee\'s obligations are identical under each contract, regardless of the method of payment. He has a vendor-vendee, not a lessor-lessee relationship with his assignor.

Scott, "More on Assignment and Sublease Problems in Louisiana Mineral Law," L.S.U. 12th Ann.Inst. on Mineral L., 39, 52-53 (1965). This need for the essential functional equivalence of the two relationships as intended by Louisiana Mineral Code was recognized in Cameron Meadows Land Company v. Bullard, 348 So.2d 193 (La.App. 3d Cir.1977), where the court considered "the vexing problems which might arise as a result of the instrument of transfer being characterized as a sublease as opposed to an assignment." Id. at 198. One such vexing problem was the ability of a "sublessor" to grant an effective release against his sublessee although the sublessor in reality had not retained any interest in the property.

The jurisprudence prior to the Mineral Code unquestionably distinguished between the two legal relationships and found different obligations to exist depending upon whether the transaction was classified as a sublease or assignment. Articles 128-132 of the Louisiana Mineral Code substantively altered the jurisprudence and equated the two relationships. As noted by one commentator, "the effect of these changes by the Mineral Code is to provide for certain common results flowing from the execution of either an assignment or a sublease."⁵ The motivating factor for eliminating the functional differences was to avoid the inequitable results caused by the classification which were not intended by any of the parties. One such unintended and inequitable result would occur if the clear intentions of Delta and Damson in this regard were disregarded, and Damson was classified as a "sublessee" solely by virtue of the reservation of one thirty-second (1/32) overriding royalty by Delta. We are, of course, fully aware that the Bankruptcy Code does not attempt to define or distinguish the terms "sale", "lease" and "assignment". But, we are not bound by the use of the term "lease" in a state law context in our determination of the exact nature of the...