Great Plains Royalty Corp. v. Earl Schwartz Co. (In re Great Plains Royalty Corp.), Bankruptcy No. 68-00039
| Decision Date | 18 March 2015 |
| Docket Number | Adversary No. 13-07018,Bankruptcy No. 68-00039 |
| Parties | In Re: Great Plains Royalty Corporation, Debtor. Great Plains Royalty Corporation, Plaintiff, v. Earl Schwartz Company and Basin Minerals, LLC, Defendants. Earl Schwartz Company and Basin Minerals, LLC, Counter-Claimants, v. Great Plains Royalty Corporation, Counter-Defendant. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
This adversary proceeding stems from events which began on April 12, 1968, when creditors of Plaintiff Great Plains Royalty Corporation initiated this bankruptcy case by filing an involuntary petition under Chapter 11 of the Bankruptcy Code. Great Plains assumed the role of debtor in possession until September 27, 1968, when the Court appointed Myron Atkinson as Trustee in Bankruptcy. On October 5, 1968, the Trustee filed a "Petition For an Order to Show Cause Why Debtor's Petition For Arrangement Under Chapter XI of the Act Should Not Be Withdrawn and Abandoned and the Debtor Be Adjudicated A Bankrupt." Case No. 68-39, Doc.35-2. In the petition, the Trustee asserted that Great Plains' assets were insufficient to meet its liabilities and that promptly liquidating the estate was in the best interest of the creditors. Id. The Court held a hearing on the petition on October 25, 1968. Following the hearing, the Referee in Bankruptcy executed an Adjudication, ruling that Great Plains was "a Bankrupt." Case No. 68-39, Doc. 35-4. On the same day, the case was converted to a liquidation proceeding under Chapter 7 of the Bankruptcy Code. Case No. 68-39, Doc. 35-5.
On December 5, 1968, the Trustee filed a petition seeking authorization to sell Debtor's assets "insofar as they are known." Case No. 68-39, Doc. 32. Two attorneys, Frank Jestrab and Daniel Chapman, assisted the Trustee by preparing an Inventory of Great Plains' assets. See Exs. EB-201 and D-101. The Inventory included mineral interests, oil and gas leases and royalty interests. According to the Trustee who testified at the trial of this adversary proceeding in October 2014, the entire scope of the assets held by Debtor in late 1968 and early 1969 was not clear. The Trustee explained he and Jestrab found Great Plains' records to be "a mess" and Great Plains did not provide any assistance to the Trustee or the attorneys assisting him.1 Jestrab's office prepared the Inventory based on the records the Trustee had at the time. The Trustee was not sure which records Jestrab used in preparing the Inventory. Neither the Trustee nor the attorneys assisting him conducted a comprehensive title search to ensure the Inventory included all the assets Great Plains owned because such a search was too costly.
On January 3, 1969, the Referee in Bankruptcy entered an Order authorizing the Trustee to sell assets held by Great Plains' bankruptcy estate. Case No. 68-39, Doc. 12. In its Order, the Referee appointed appraisers to determine the value of each of the properties. See id. The Appraisers' Report was submitted to the Court on March 12, 1969. Ex. EB-202.
The Trustee arranged for the sale of Great Plains' assets to take place at the Plainsman Hotel in Williston, North Dakota, on June 5, 1969. Jestrab and Chapman prepared the Notice of Bankruptcy Sale (Exhibits EB-203 and D-102) and the Trustee published the Notice in newspapers in Williston and Bismarck, North Dakota, and in Billings and Great Falls, Montana.2 Case No. 68-39, Doc. 15. The Trustee testified that he intended to sell all of Great Plains' interest in the assets identified in the Notice of Bankruptcy Sale and that he intended to list for sale all of the assets he had identified and included in the Inventory. As far as the Trustee was aware, the Inventory was never provided to potential bidders. At the time of trial, the Trustee could not recall his understanding of the nature of Great Plains' interest in the assets when his attorneys prepared the Notice of Bankruptcy Sale or when the auction occurred.
At the auction, the Trustee first attempted to sell the properties individually. When he received no bids, he offered all of the properties for sale. The Trustee declared Earl Schwartz the "high bidder." Ex. EB-204. Schwartz purchased the properties for $225,000. 3 According to the Trustee, Schwartz never asked for clarification regarding the assets offered for sale.
The Referee in Bankruptcy signed an Order confirming the sale on June 19, 1969. Exs. D-103 and EB-205, at 2. This Order confirmed "the sale of all of the assets of the bankrupt corporation to Earl Schwartz[.]" Id. On February 9, 1970, the Referee in Bankruptcy entered an Amended Order confirming the sale that changed the language of the original Order to confirm the sale of "all of the assets of the bankrupt corporation included in the Notice of Sale to Earl Schwartz[.]" Exs. D-104 and EB-206, at 1.
Great Plains dissolved shortly after its assets were sold. It was later reinstated as a corporation.4
Years after the bankruptcy auction sale, ESCO discovered title issues with some of the assets Schwartz purchased from the Trustee. Robert Mau, the managing partner of ESCO and Basin who joined ESCO in the late 1970s, first learned of title issues with these assets 20 or 25 years ago. At trial, Mau could not recall the specific problems or property interest affected. Upon learning of the title issues, Mau traveled to the Bankruptcy Court in Fargo to review the Great Plains bankruptcy file. At or about this time, Mau also became aware of the Amended Order confirming the sale of the assets. See Exs. D-104 and EB-206. Mau testified that he interpreted the Amended Order confirming the sale to mean that ESCO obtained all the assets of the bankrupt corporation. Mau did not perform any title work at this time.
In 1997, Mau signed a unitization5 agreement on behalf of ESCO. The unitization agreement listed mineral and working interest owners, including ESCO and Great Plains. GreatPlains was listed as a royalty owner in property covered by the Fossum Lease.6 Ex. D-130. Great Plains is not mentioned elsewhere in the document as an owner of any other property.
For a unitization agreement to be successful, a certain percentage of the mineral, working interest and royalty owners must agree to form a new unit. According to Gary Preszler, who Great Plains called to offer expert testimony on oil and gas issues, an operator submits an application to form a new unit and the North Dakota Industrial Commission must approve it. After it is approved, the unit operator must obtain ratification of the unit, which requires the approval of 65% to 70% of owners.
Mau maintained that he reviewed the agreement to ensure ESCO's interests were protected and did not pay attention to whether Great Plains was listed as an owner because he "didn't represent them." Mau stated: Mau claims that the unitization agreement did not alert him to title discrepancies with the Fossum Lease.
ESCO and Basin admit that they became aware of specific title issues with the Fossum Lease on or about March 29, 2004. See Ex. D-129; Doc. 47, at 15 ().
On or about January 11, 2010, ESCO and Basin received a title opinion advising them of a title discrepancy with property referred to as the 7/160 Interest.7 See Exs. D-118 and EB-234.8 At trial, Chris Greenberg, a landman who works for ESCO and Basin, testified that prior toreceiving this title opinion, he had no knowledge of any discrepancy with the title to the 7/160 Interest.
ESCO and Basin received notice of title issues relating to the 31% Interest on or about March 20, 2013. Ex. D-123. Mau testified that he had not been alerted to any other issues with the 31% Interest before March 2013.
On April 30, 2013, ESCO and Basin filed a motion to reopen this bankruptcy case and to appoint a Trustee for the purpose of allowing the Trustee to clarify alleged "ambiguities in assignments and conveyances executed by the initial Trustee." Case No. 68-39, Doc. 34. The Court entered an Order granting the motion to reopen the bankruptcy case on May 3, 2013. Case No. 68-39, Doc. 36. On May 3, 2013, the United States Trustee appointed Gene Doeling as Trustee. Case No. 68-39, Doc. 37.
In October 2013, Great Plains filed a Complaint seeking a declaration resolving the parties' dispute regarding the Trustee's conveyances to ESCO. The parties identified five assets (the "Disputed Assets") over which they disagree about whether the Trustee conveyed all of Great Plains' interest in those assets or whether the Trustee conveyed only a specific portion of Great Plains' interest in those assets. Specifically, the parties identified the following Disputed Assets:
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