In re Coral Petroleum, Inc., Bankruptcy No. 83-02460-H2-5
| Decision Date | 17 June 1985 |
| Docket Number | Adv. No. 83-1953-H1.,Bankruptcy No. 83-02460-H2-5 |
| Citation | 50 BR 830 |
| Parties | In re CORAL PETROLEUM, INC., Debtor. CORAL PETROLEUM, INC., Plaintiff, v. Banque PARIBAS, Defendant, MBank Houston, N.A., Defendant Intervenor. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Michael L. Cook, Dennis J. Drebsky, Timothy A. Nelson, Sally M. Henry of Skadden, Arps, Slate, Meagher & Flom, New York City, Lenard M. Parkins, Patrick L. Hughes of Sheinfeld, Maley & Kay, Houston, Tex., for plaintiff, Coral Petroleum, Inc.
Peter Langerman, Bruce Zirinsky of Weil, Gotshal & Manges, New York City, Alfredo R. Perez of Bracewell & Patterson, Houston, Tex., for defendant, Banque Paribas.
Frank LaBudde of Dotson, Babcock & Scofield, Houston, Tex., for defendant-intervenor, MBank Houston N.A.
Daniel H. Johnston, Jr., Mark Shaiken of Ross, Banks, May, Cron & Cavin, Houston, Tex., for Official Creditors Committee of Coral Petroleum, Inc.
This matter, before the Court on plaintiff Coral Petroleum's complaint for a declaratory judgment raises several complex issues. The major issues are whether a 30 million dollar promissory note is to be classified as an instrument or a general intangible under the Uniform Commercial Code and whether the defendants Banque Paribas and MBank, N.A. properly perfected their security interests in the promissory note so as to prevent the debtor from avoiding their respective interests under 11 U.S.C. § 544. Because the Court concludes that the promissory note is an instrument, and because defendants Banque Paribas and MBank, N.A. did not take possession of the note or satisfy the requirements of establishing constructive notice pursuant to U.C.C. § 9-305, the Court holds that their respective interests are unperfected and the debtor can recover the proceeds pursuant to 11 U.S.C. § 544. Accordingly, the declaratory relief sought by the debtor is GRANTED and the motion to dismiss is DENIED. Intervenor MBank's motion is also DENIED.
Debtor Coral Petroleum, Inc. commenced this adversary on July 8, 1983, by filing a complaint seeking a declaratory judgment that a lien on a promissory note held by Banque Paribas, defendant herein, (hereinafter "Paribas") is voidable under § 544(a) of the Bankruptcy Code of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984. By answer dated October 4, 1983, Paribas moved for dismissal of the complaint in all respects, claiming that its interest in the promissory note was superior to all other claimants. MBank Houston, N.A. (hereinafter "MBank") intervened in the adversary by court order entered on January 30, 1985, requesting that its interests be recognized as superior to, or equal to, Paribas' interests. The trial was held on February 27, 1985; as a preliminary matter, Coral was allowed to amend its complaint by oral motion to include a preference cause of action which was then severed from this trial by court order. The parties filed extensive pre- and post-trial memoranda of law. The Official Creditor's Committee appeared and participated at the trial and submitted a post-trial memorandum of law pursuant to 11 U.S.C. § 1109(b). The court heard evidence and arguments of counsel and makes the following findings of fact and conclusions of law:
Coral Petroleum, Inc., a Texas corporation with its principal place of business in Houston, filed a petition under Chapter 11 of Title 11 of the United States Code (Bankruptcy Code) on June 2, 1983, and is operating its business as a debtor-in-possession under 11 U.S.C. §§ 1107 and 1108. Prior to the filing of the petition, Coral's principal business was marketing and trading crude oil and petroleum products in the domestic and international market. Coral was engaged in virtually all aspects of the crude oil and petroleum business by virtue of its subsidiaries and other affiliated corporations. (Adm.3)1 Paribas, the defendant in this action, is a banking corporation organized under the laws of France. (Adm.5) Paribas transacts business in the United States at its branch office located in New York, New York. (Adm.5) MBank, the intervenor in this action, is a banking corporation organized under the laws of the State of Texas with its principal place of business in Houston. MBank is the successor in interest to Capital Bank N.A., and Capital National Bank. (Stipulation of fact concerning MBank)
On or about September 17, 1982, Coral Petroleum Development, Inc., a Texas corporation and a wholly owned subsidiary of Coral, sold substantially all of its United States oil and gas producing properties to Tricentrol Resources, Inc., a Delaware corporation. (Adm.7, Tr. 45) In return, Tricentrol Resources, Inc., made and delivered to Coral Development, Inc., an interest-bearing installment promissory note in the principal amount of 30 million dollars (hereinafter "Tricentrol Note"). The obligation of Tricentrol Resources, Inc., under the note was guaranteed by its parent corporation, Tricentrol, PLC., pursuant to a written guarantee. (Adm. 10, 11, Coral Exh. 2) On the same day, Coral Development, Inc., assigned the Tricentrol Note to Coral Petroleum, Inc., in consideration for intercompany advances. (Coral Exh. 3)
On September 17, 1982, Coral entered into a credit agreement with the First National Bank of Chicago (hereinafter "First Chicago") pursuant to which First Chicago agreed to lend Coral up to 30 million dollars. (Coral Exh. 4) Simultaneously, Coral made and delivered to First Chicago its interest-bearing installment promissory note (hereinafter "Coral Note") in the principal amount of 30 million dollars. (Adm. 16) As security for this loan, Coral pledged among other things, the Tricentrol Note to First Chicago, delivered possession of the Tricentrol Note to First Chicago and executed a security agreement for the $30 million amount. Id. Coral's borrowing under the credit agreement totalled 27 million dollars and on February 18, 1983, both the Coral Note and the credit agreement were amended to reflect Coral's having borrowed 27 million dollars. (Coral Exh. 7 Amended Agreement) From October 27, 1982, to August 1, 1983, the note was in the exclusive physical possession of First Chicago in Chicago, Illinois. (Adm. 20)
The Tricentrol Note, although transferred three times, contained the following limitation on transferability:
This Note is not negotiable and may not be sold, assigned, endorsed or pledged in whole or in part by the Payee, except that (i) it may be pledged to First National Bank of Chicago or any other banking institution approved by the Company, which approval shall not be unreasonably withheld, as security for a loan made by such institution (the "Pledge") to the Payee, provided the Pledgee agrees in writing with the Company that it will not further sell, assign, endorse or pledge, or issue or grant any participations in, this Note, except to the extent specifically required by applicable law or as it may be transferred as a result of a foreclosure after an event of default by the Payee with respect to its obligations to the Pledgee, and (ii) it may be assigned to Coral Petroleum, Inc., ("Coral") or any directly or indirectly wholly-owned subsidiary thereof, provided such transferee or assignee agrees in writing to be bound by all of the provisions hereof and makes in writing the representation and warranty contained in paragraph 4 hereof.
The Note is unique in that it incorporates the law of the United Kingdom only in so far as a definition which is taken from the United Kingdom Companies Act, 1948, for excluded subsidiaries. (Coral Exh. 1, Para 7c)
Banque Paribas and Coral entered into several loan agreements. On July 31, 1981, Coral borrowed 24.5 million dollars from Banque de Paris de Pays-bas (predecessor to Banque Paribas) coupled with a 10.5 million dollar loan from the Royal Bank of Canada. Paribas was granted an interest in certain collateral, including the following: "(iii) all other personal property now owned or hereafter acquired by the company, of every kind and description, tangible or intangible, including but not limited to, all money, goods, instruments, securities, documents, contract rights, patent and trademark rights, general intangibles, credits, claims demands and any other property, rights and interests of the company; (iv) any and all proceeds of the foregoing." (Paribas Exh. 3)
Paribas and Coral entered into a second loan agreement on August 30, 1982, in which Paribas lent Coral the principal amount of 40 million dollars, secured by a security agreement in certain collateral.
On January 27, 1983, a third loan was entered into between Coral and Paribas whereby Paribas loaned Coral 15 million dollars. In return, Coral granted Paribas a security interest in certain artwork that it owned and made two stock pledges, one of stock in Coral Petroleum Canada, Inc. and the other of stock in Coral Petro Development, Ltd., a Canadian Company. At the closing on January 27, 1983, of the 15 million dollar loan, Mr. Sudhaus, vice-president of Coral, signed a letter agreement2 which assigned all the payments received by Coral from the Tricentrol Note to Paribas. (Coral Exh. 12) Mr. Sudhaus testified that Coral was willing to grant Paribas a security interest in the Tricentrol Note but never executed a document which specifically said that the excess funds of the Tricentrol Note would be "specific security" for the 15 million dollar loan. (Tr. 55-56) Following the closing of the 15 million dollar loan, Paribas filed a financing statement with the Texas Secretary of State relating specifically to Coral's artwork. (Coral Exh. 24) Paribas also sent a letter to the gallery which held the artwork requesting that it sign an agency agreement designating Paribas as the secured party. (Coral Exh. 53) However, no such filing or agency...
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