In Re Cornerstone E & P Company
| Decision Date | 25 August 2010 |
| Docket Number | Adversary Nos. 09-3447-bjh, 09-3448, 09-3450, 09-3452, 09-3457.,Bankruptcy No. 09-35228-BJH-11. |
| Citation | 436 B.R. 865 |
| Parties | In re CORNERSTONE E & P COMPANY, L.P., et. al., Debtors. Baker Hughes Oilfield Operations, Inc., et. al., Plaintiffs v. Union Bank of California, N.A. n/k/a Union Bank, N.A., et. al., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
OPINION TEXT STARTS HERE
John C. Middleton, Scott W. Everett, Stephen M. Pezanosky, Haynes and Boone, LLP, Dallas, TX, for Debtors.
SUPPLEMENTAL OPINION
The Court tried the adversary complaints (collectively, the “Complaints”) filed by: (i) Baker Hughes Oilfield Operations, Inc. (“Baker Hughes”), Schlumberger Technology Corporation, Simons Petroleum, Inc., Texas CES, Inc., T.K. Stanley, Inc., Pumpco Energy Services, Inc., I.E. Miller Services, Inc., Bridgeport Tank Trucks, LLC, and Select Energy Services, LLC d/b/a Tejas Oilfield Services (collectively, the “Baker Hughes Plaintiffs”), (ii) Awesome Transport, LLC, (iii) Weatherford U.S., L.P., and Precision Energy Services, Inc. (collectively, the “Weatherford Plaintiffs”), (iv) B.J. Services Company, USA and Newpark Drilling Fluids, LLC (collectively, “BJ Services”), and (v) Phantom Drilling Fluids Company (collectively with the Baker Hughes Plaintiffs, Awesome Transport, LLC, the Weatherford Plaintiffs and BJ Services, the “Plaintiffs”) against Union Bank of California, N.A. n/k/a Union Bank, N.A. (“Union Bank”), Cornerstone E & P Company, L.P. (the “Debtor”), and the Debtor's general partner and another debtor, Cornerstone Southwest GP, LLC (together with the Debtor, “Cornerstone”) on August 9-11, 2010. Thereafter, the Court issued its Memorandum Opinion and Order, which (i) was entered on the docket in these adversary proceedings on August 23, 2010 and (ii) disposed of substantially all of the issues that were tried by the parties (the “Trial Opinion”).
However, as noted in the Trial Opinion, three issues remained open for resolution by the Court following the issuance of the Trial Opinion. First, whether Union Bank's prior mortgage lien is subordinate to subsequent mineral liens against Union Bank's working interest collateral under the decision in Ladder Energy Co. v. Intrust Bank, N.A., 931 P.2d 83 (Okla.Civ.App.1996). Second, are the Baker Hughes Plaintiffs entitled to recover reasonable attorneys' fees from Cornerstone under 42 Okla. Stat. § 176 on account of the M/M Lien 1 claims arising under 42 Okla. Stat. § 144. Third, if the Court's primary ruling in the Trial Opinion granting Union Bank's Rule 52(c) Motion regarding the discretionary advance issue was in error, did the extrinsic evidence offered at trial establish that Union Bank made any discretionary advances to Cornerstone. Each of these issues will be discussed separately below.
I. LEGAL ANALYSISA. Is Union Bank's Prior Mortgage Lien Subordinate to Certain M/M Liens Against Union Bank's Working Interest Collateral under Ladder?
As noted in the Trial Opinion, in the Summary Judgment Opinion and Order, the Court denied the Motion for Partial Summary Judgment (the “Oklahoma and Texas Properties Motions”) filed by the Weatherford Plaintiffs, Awesome Transport, LLC, Phantom Drilling Fluids Company, and BJ Services (collectively, the “Ladder Plaintiffs”). In the Oklahoma and Texas Properties Motions, the Ladder Plaintiffs sought a determination that Union Bank's prior mortgage lien 2 on Cornerstone's working interest in oil and gas properties is subordinate to their subsequent M/M Liens because a mortgage interest in a working interest cannot be conveyed free of costs, relying upon an intermediate Oklahoma appellate court decision in Ladder Energy Co. v. Intrust Bank, N.A., 931 P.2d 83 (Okla.Civ.App.1996) as authority for such a determination. In denying the Oklahoma and Texas Properties Motions, the Court concluded that Ladder is not of significance here, since even assuming that the holding in Ladder is correct, the case is largely confined to its own facts and does not establish the proposition that the Ladder Plaintiffs have asserted in reliance upon it. See Summary Judgment Opinion and Order, pp. 44-47.
During closing arguments at trial, counsel for the Weatherford Plaintiffs offered additional arguments regarding why Union Bank's prior mortgage lien is subordinate to the Ladder Plaintiffs' M/M Liens against Union Bank's working interest collateral under Ladder. In addressing these arguments, a short discussion of working interests and the Ladder decision will be helpful.
Under Texas law, a “working interest is an operating interest under an oil and gas lease that provides its owner with the exclusive right to drill, produce, and exploit the minerals.” H.G. Sledge, Inc. v. Prospective Inv. & Trading Co., Ltd., 36 S.W.3d 597, 599 n. 3 (Tex.App.2000) (citing 8 Howard R. Williams & Charles J. Meyers, Oil & Gas Law 1191 (1999)). As an oil and gas interest, a working interest is an interest in real property. Long Trusts v. Griffin, 222 S.W.3d 412, 416 (Tex.2006). As opposed to royalty interests, which are free of expenses, a working interest bears all of the operating and drilling costs. Id. at 599 n. 2-3; see also Newhouse v. Colony Ins. Co., No. 08-50370, 2010 WL 2546113, at *3 n. 5, 383 Fed.Appx. 461, 465 n. 5 (5th Cir. June 23, 2010) ().
Oklahoma law construes a working interest in the context of oil and gas leases in the same way-as an interest in an oil and gas lease that is subject to the costs of exploration and development. See XAE Corp. v. SMR Prop. Mgmt. Co., 968 P.2d 1201, 1207 (Okla.1998) and TXO v. Comm'rs of the Land Office, 903 P.2d 259, 262-63 (Okla.1994).
Ladder Energy Company (“Ladder”) became the operator of various oil and gas leases in Grant County, Oklahoma in 1993. Ladder, 931 P.2d at 84. In 1987, well before Ladder became the operator, the owner of the working interest in the oil and gas leases executed a mortgage and security agreement on the oil and gas leases to Intrust Bank, N.A. (the “Bank”). Id. After Ladder assumed its duties as operator, disputes arose between Ladder and the owner of the oil and gas leases over certain operating expenses, which led Ladder to file a mineral lien against the leases. Id. After the lien was filed, the purchaser of gas produced by the leases suspended payment pending a determination of priorities. Id. Ladder sued to foreclose its mineral lien. Id.
The trial court entered judgment that both Ladder and the Bank had statutory liens, but that Ladder was entitled to reimbursement of its lease operating expenses from the suspended revenues. Id. at 84-85. According to the court of appeals, in entering judgment in favor of Ladder, the trial court made the following pertinent findings of fact and conclusions of law: (i) the Bank's mortgage lien extended only to its mortgagor's working interest; (ii) as applicable in the case, the term “proceeds” could only mean net proceeds; and (iii) the Bank was entitled to what remained of the suspended revenues after Ladder had recouped its lease operating expenses. Id. at 85. The Bank appealed on the issue of whether Ladder's lien, as operator, or the Bank's lien, which was prior in time, was superior. Id. at 84. On appeal, the Bank argued that because its lien was prior in time, it was entitled to all of the suspended revenues, citing 42 Okla. Stat. § 144, which provides that mineral liens are superior only to those liens that attach after the commencement of labor or the furnishing of materials by the mineral contractor. Id.
The court of appeals affirmed the judgment of the trial court and found no error in the trial court's division of the suspended revenues. Id. In doing so, the appeals court noted first that a mortgagee can acquire no greater interest than that owned by its mortgagor. Id. Thus, the Bank could only acquire a lien in the oil and gas leases to the extent of the interest held by the owner, which was found to be only a working interest. Id. Specifically, the court of appeals stated:
While it is clear that Bank's mortgage and security interest are prior in time to the interest of Ladder, Bank's interest is subject to the obligations and liabilities of the interest held by WMA [the working interest mortgagor]. Those obligations and liabilities include paying for the costs of development and exploration.
As noted previously, in the Summary Judgment Opinion and Order, the Court concluded that Ladder is not of significance here, since even assuming that the holding in Ladder is correct, the case is largely confined to its own facts and does not establish the proposition that the Ladder Plaintiffs have asserted in reliance upon it. In this regard, the Court notes certain aspects of the facts and the actual holding in Ladder that distinguish its applicability here. Most significantly, the collateral at issue in Ladder was not the working interest in the oil and gas leases per se, but instead was suspended revenues from gas production. Further, while the issue on appeal was framed by the Bank as a question of lien priority, the Ladder court did not address the relative priority of the Bank's and Ladder's liens in any single piece of collateral, but instead the decision focused exclusively on the extent of the Bank's lien and only identified property that the Bank's lien did, and did not, encumber. Specifically, the Ladder court concluded “ ‘[p]roceeds' in this context can only mean net proceeds.” Id. at 85. In short, the Ladder court concluded that the Bank's lien on proceeds only extended to those proceeds remaining after the amounts owing to Ladder, as operator, were deducted.
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