In re Brent Explorations, Inc.

• Decision Date: 16 June 1983
• Docket Number: Adv. No. 82 C 0050.,Bankruptcy No. 82 B 05215 J
• Citation: 31 BR 745
• Parties: In re BRENT EXPLORATIONS, INC., Debtor. BRENT EXPLORATIONS, INC., a Colorado corporation, Debtor-in-Possession, Plaintiff, v. KARST ENTERPRISES, INC., a Wyoming corporation, Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

31 B.R. 745 (1983)

In re BRENT EXPLORATIONS, INC., Debtor BRENT EXPLORATIONS, INC., a Colorado corporation, Debtor-in-Possession, Plaintiff, v. KARST ENTERPRISES, INC., a Wyoming corporation, Defendant.

Bankruptcy No. 82 B 05215 J, Adv. No. 82 C 0050.

United States Bankruptcy Court, D. Colorado.

June 16, 1983.

Jon B. Clarke, Englewood, Colo., for plaintiff.

Bruce H. DeBoskey, Denver, Colo., for defendant.

ORDER

PATRICIA A. CLARK, Bankruptcy Judge.

Brent Explorations, Inc., (Brent) the debtor-in-possession, brought suit to avoid a lien in favor of Karst Enterprises, Inc., (Karst) under the "strong arm clause" of 11 U.S.C. § 544(a) and to recover certain payments to Karst as preferential under 11 U.S.C. § 547.

Brent is in the business of exploring for and drilling oil and gas wells. Karst was one of its suppliers of pipe. By December, 1981, Brent had accumulated a debt to Karst in the approximate amount of $471,500. Because of its inability to obtain payment of its obligation, Karst in December of 1981 filed liens against several of Brent's wells, one of which is known as Brent Federal 32-1 well in Washakie County, Wyoming. As a result of this lien, Phillips Petroleum Company, the purchaser of the production from such well, withheld the payments due Brent pending resolution of the matter between the parties. Subsequently, it was agreed between Brent and Karst that in exchange for a release of its liens Karst would receive the funds withheld by Phillips and an assignment of the proceeds from the Brent Federal 32-1.

On April 23, 1982 Brent executed an assignment in favor of Karst of the proceeds from the Brent Federal 32-1 as security for $414,552.34 owed by Brent to Karst for pipe purchased. The assignment provided that it would be of no further force and effect at such time as the debt due Karst was satisfied. The assignment further provided that Karst would not record the assignment nor would it notify the buyer of the production from the well before June 15, 1982 of the assignment. If Karst breached this agreement, the assignment would be null and void. On June 11, 1982 Karst released its lien on the Brent Federal 32-1 well and the production payments withheld by Phillips in the approximate amount of $192,000 were paid to Karst.

Brent persuaded Karst not to record the assignment after June 15, 1982 on the belief that such action would create a cloud on the title which would cause Phillips to withhold the proceeds from the well to the detriment of both parties. Karst acquiesced and did not record the assignment. Accordingly, the checks from Phillips were sent to Brent since Phillips was unaware of the assignment. Upon receipt of the payment from Phillips, Brent would issue its check in a like amount payable to Karst. Brent continued to send Karst its check for the proceeds from the well until October 4, 1982. On November 5, 1982 Brent filed its petition for reorganization under Chapter 11 of the Bankruptcy Code. The assignment has never been recorded by Karst.

The first issue before the Court is whether Brent can avoid the assignment in favor of Karst under 11 U.S.C. § 544. Section 544 of the Bankruptcy Code provides:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—

(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained a judicial lien, whether or not such a creditor exists;

(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; and

(3) a bona fide purchaser of real property from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists.

Pursuant to this section the trustee is given powers to set aside transfers voidable under state or federal law where the debtor could not do so. In short, the trustee has all the rights and powers conferred by state law on its most favored creditor who has acquired a lien on the debtor's property whether or not such a creditor exists. Accordingly, if a creditor under Wyoming law could take priority over Karst, so can the trustee. Under 11 U.S.C. § 1107 Brent as the debtor-in-possession has all the powers of a trustee. 4 Collier on Bankruptcy, ¶ 544.02 (15th ed. 1983).

From the evidence presented in this case the Court is unable to determine whether the assignment of proceeds from the well was an interest in real property or personal property. If it were an interest in real property, it had to be recorded in the real property records in Washakie County, Wyoming, to be perfected. It was never so recorded. The assignment of proceeds arose from rights pursuant to a contract. Thus, it is more likely that it was an interest in personal property. As such, a financing statement must have been filed to perfect the security interest. No financing statement was ever filed. Since Karst never perfected its security interest Brent, as debtor-in-possession, has priority over the rights of Karst pursuant to Wyo.Stat. § 34-21-930 (1977).

Karst argues that it is exempt from filing pursuant to Wyo.Stat. § 34-21-931 (1977). That section exempts from filing "An assignment of accounts or contract rights which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts or contract rights of the assignor." (emphasis added) Karst has the burden of proving that the assignment was not a significant part of the outstanding accounts or contract rights. Craig v. Gudin, 488 P.2d 316 (Wyo.1971).

It appears that from the time of the assignment to the date of bankruptcy the payments from Phillips on the Brent Federal 32-1 well were averaging approximately $16,000 to $17,000 a month. During this same period of time Brent's income from all sources, including Phillips, was approximately $70,000 to $80,000 per month. Brent's operating expenses during those months were substantially in excess of its revenues. Accordingly, the loss of the income from the Brent Federal 32-1 well had an adverse effect on the ability of Brent to pay its bills.

Courts have attempted to define what is or is not a significant part of the outstanding accounts or contract rights of the assignor. In General Lithographing Co. v. Sight & Sound Projectors, Inc., 128 Ga.App. 304, 196 S.E.2d 479 (1973) it was held that an assignment of a security interest in all of sales accounts, all reserves, funds, moneys, sums or properties in or coming into debtor's hands, all accounts receivable, customer obligations and other choses in action was a significant part of the accounts of the assignor. In Standard Lumber Co. v. Chamber Frames, Inc., 317 F.Supp. 837 (D.C.Ark.1970) it was held that 16 percent of outstanding accounts receivable was not a significant part of the outstanding accounts of the defendant. In the instant case, the funds received under the assignment to Karst constituted approximately 20 percent of Brent's total income. Furthermore, Brent's operating expenses were almost twice its income.

Another factor some courts consider in deciding whether an assignment should be recorded is whether the assignment was a casual and isolated transaction since the legislative history, as revealed by the official comments indicates an intent to protect an insignificant and ignorant assignee. Sherburne Corp. v. Carter, 133 Vt. 411, 340 A.2d 82 (1975); E. Turgeon Constr. Co. v. Elhatton Plumbing & Heating Co., 110 R.I. 303, 292 A.2d 230 (1972). From the testimony presented, it is clear that Karst is a large supplier of pipe and has sufficient business acumen to file liens and take other steps for collection of overdue debts. Karst knew it should have recorded the assignment. After discussing the matter with Brent, Karst decided against recording it because of their concern that the proceeds from the well might be withheld by Phillips as they had been when Karst recorded the lien against the well. Karst is not the insignificant and ignorant assignee that Section 34-21-931 was designed to protect. Considering all the circumstances of this case, the Court finds that Karst has failed to establish that the assignment was an insignificant part of the outstanding accounts or contract rights of Brent and recording was necessary to perfect its assignment.

Wyo.Stat. § 34-21-904 (1977) provides another exemption from filing. Under this provision an assignment of accounts, contract rights or chattel paper which is for the purpose of collection only does not have to be recorded to be perfected. The purpose of the provision is to remove assignments of a non-commercial nature such as those to a collection agency for the sole purpose of collecting a debt. It does not exclude from filing those transactions that are "financing in nature." Bramble Transportation, Inc. v. Sam Senter Sales, Inc., 294 A.2d 97 (Del.Super.1971), aff'd. 294 A.2d 104 (Del.1972). In this case the assignment itself specifies that it is security for a pre-existing debt owed by Brent for pipe purchased from Karst. Thus the Court finds that by its very terms, the assignment from Brent to Karst was not for the purpose of collection only.

Karst next raises the affirmative defense of estoppel and contends that the assignment was not recorded at the urging of the debtor so the debtor is precluded from avoiding the transfer. The defendant...