In Re Cornerstone E & P Company

• Citation: 436 B.R. 830
• Decision Date: 23 August 2010
• Docket Number: Adversary Nos. 09-3447-bjh, 09-3448, 09-3450, 09-3452, 09-3457.,Bankruptcy No. 09-35228-BJH-11.
• 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: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

436 B.R. 830

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.

Bankruptcy No. 09-35228-BJH-11.
Adversary Nos. 09-3447-bjh, 09-3448, 09-3450, 09-3452, 09-3457.

United States Bankruptcy Court,N.D. Texas,Dallas Division.

Aug. 23, 2010.

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Kenneth P. Green, Phil F. Snow, Jr., Snow Fogel Spence LLP, Annie E. Catmull, Melissa A. Haselden, Hoover Slovacek LLP, Carl Dore, Jr., Kristin S. Wallis, Dore & Associates, P.C., Houston, TX, Andrew D. Schwartz, Michael D. Gray, Ramsey and Gray, P.C., Eric Huddleston, Elias, Books, Brown & Nelson, P.C., Oklahoma City, OK, for Plaintiffs.

Brian Christopher Mitchell, Michael L. Dinnin, Samuel Martin Stricklin, William Jarrell Moore, Bracewell & Giuliani, LLP, John C. Middleton, Scott W. Everett, Haynes and Boone, LLP, Dallas, TX, for Defendants.

MEMORANDUM OPINION AND ORDER BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court are 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”). The Court tried the Complaints on August 9-11, 2010.

The Court has jurisdiction over the parties and the issues raised in the Complaints in accordance with 28 U.S.C. §§ 1334 and 157, either because the issues

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are core issues or because the parties have consented to the Court's entry of a final judgment. This Memorandum Opinion and Order contains the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

I. FACTUAL AND PROCEDURAL BACKGROUND

On August 6, 2009, Cornerstone filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. On August 7, 2009, the Court consolidated the two cases for procedural purposes only, with joint administration under case number 09-35228-bjh. Cornerstone is a private, independent oil and gas exploration and production company with interests in Texas and Oklahoma. All of Cornerstone's oil and gas assets are owned and operated through the Debtor. ¹

In December 2006, the Debtor entered into a credit agreement (the “Credit Agreement”) with Union Bank to finance the Debtor's operations. Cornerstone Southwest GP, LLC guaranteed the Debtor's obligations under the Credit Agreement. In connection with the Credit Agreement, the Debtor executed in favor of Union Bank a Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Production (the “Texas Deed of Trust”), which Union Bank filed in the property records of Hill County, Texas on January 4, 2007. The Debtor and Union Bank also entered into the First Supplement to the Texas Deed of Trust (the “Texas Supplement”) (collectively, the Texas Deed of Trust and the Texas Supplement will be referred to as the “Texas Mortgage Documents”), which Union Bank filed in the property records of Hill County, Texas on October 10, 2008.

On October 10, 2008, the Debtor also executed in favor of Union Bank a Mortgage, Line of Credit Mortgage, Security Agreement, Financing Statement, Fixture Filing and Assignment of Production (“the Oklahoma Mortgage”), which Union Bank filed in the property records of Hughes County, Oklahoma on October 14, 2008. ²

Each of the Mortgage Documents purports to grant Union Bank a security interest and lien on the Debtor's real and personal property, fixtures, and production from or attributable to the Debtor's oil and gas interests. The Mortgage Documents all contain exhibits (“Exhibit A” to the Texas Deed of Trust, the Texas Supplement, and the Oklahoma Mortgage, respectively) that list certain oil and gas leases as subject to the mortgage liens created by each of those documents. In addition, the Mortgage Documents contain language that purports to broaden the scope of the liens granted to Union Bank to property interests in leases owned by Cornerstone beyond those listed on the individual exhibits, as well as language that purports to grant Union Bank a lien on after-acquired assets and property interests. By virtue of advances made under the Credit Agreement, Union Bank asserts a secured claim against Cornerstone of $30,116,591.00, plus interest, fees, and other costs.

The Plaintiffs are mineral contractors who have filed statutory mechanics'/ materialmens' liens (“M/M Liens”) under Texas and Oklahoma law for unpaid pre-petition labor or materials provided to the Debtor in connection with the Debtor's oil and gas

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operations in Texas and Oklahoma (the “Subject Units” ³ ). The issues raised by the Complaints concern the Debtor's leasehold interests and rights associated with wells in Hill County, Texas, Maverick County, Texas, and Hughes County, Oklahoma and the relative lien rights of Union Bank and the Plaintiffs.

The Court heard certain motions for summary judgment filed by Union Bank, the Baker Hughes Plaintiffs, the Weatherford Plaintiffs, and the Oklahoma Plaintiffs on July 23, 2010 (collectively, the “Motions”). The Court granted a portion of the Baker Hughes Motion by oral ruling at the July 23 hearing, which ruling was embodied in an Order entered on August 13, 2010 (the “Baker Hughes Order”). See Order on Baker Hughes Plaintiffs' Motion for Partial Summary Judgment, Docket No. 165. By Memorandum Opinion and Order entered on August 9, 2010, ⁴ the Court disposed of the balance of the Motions by granting them in part and denying them in part. ⁵ See Memorandum Opinion and Order, Docket No. 152 (the “Summary Judgment Opinion and Order”). The issues not resolved by the Baker Hughes Order and the Summary Judgment Opinion and Order proceeded to trial.

In connection with the Motions, the parties filed a Joint Statement Regarding (i) Contested Issues of Law; (ii) Stipulated Facts; and (iii) Contested Facts (the “Joint Statement”). In connection with the trial, the parties filed a Joint Pre-Trial Order and certain agreed amendments to that order (the “Joint Pre-Trial Order”), which also contained a significant number of factual stipulations. ⁶ The Court hereby adopts the parties' statements of stipulated facts from both the Joint Statement and the Joint Pre-Trial Order. ⁷

II. CONTENTIONS OF THE PARTIES

In summary, the Plaintiffs contend that (i) they have valid and enforceable M/M Liens against the Texas Properties and the Oklahoma Properties, (ii) the Mortgage Documents fail to satisfy the Texas and Oklahoma Statutes of Frauds with respect to properties not listed on Exhibit A to the Mortgage Documents, (iii) the granting language of the Mortgage Documents is ambiguous under Texas and Oklahoma law, (iv) they do not have either actual notice or constructive notice of Union Bank's mortgage lien with respect to properties Cornerstone owned at the time the Mortgage Documents were recorded, but were not specifically listed on Exhibit

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A to the Mortgage Documents, ⁸ such that their M/M Liens have priority over Union Bank's mortgage lien, (v) they do not have either actual notice or constructive notice of Union Bank's mortgage lien with respect to properties Cornerstone acquired after the date the Mortgage Documents were recorded, ⁹ such that their M/M Liens have priority over Union Bank's mortgage lien, (vi) to the extent Union Bank's mortgage lien has priority over their M/M Liens, that certain of Union Bank's advances were not obligatory such that certain of their M/M Liens have priority over Union Bank's mortgage lien with respect to those discretionary advances, (vii) to the extent Union Bank's mortgage lien has priority over their M/M Liens, equity should adjust the relative priority of the liens to the extent that the Plaintiffs' work on the wells enhanced the value of Union Bank's collateral, and (viii) under the holding of the Oklahoma Court of Civil Appeals in Ladder Energy Co. v. Intrust Bank, N.A., 931 P.2d 83 (Okla.Ct.App.1996), Union Bank's mortgage lien is subordinate to the M/M Liens on Cornerstone's working interest in oil and gas properties because working interest is, by definition, subject to costs of production. ¹⁰

While Union Bank and Cornerstone agree that many of the Plaintiffs hold valid and enforceable M/M Liens, ¹¹ Union Bank contends that certain of the Plaintiffs failed to timely file their M/M Liens with respect to certain wells in Hughes County, Oklahoma. Union Bank further contends that: (i) the Mortgage Documents satisfy the Texas and Oklahoma Statutes of Frauds; (ii) the granting language of the Mortgage Documents is not ambiguous under Texas and Oklahoma law; (iii) its mortgage lien was properly recorded in Hill County, Texas and Hughes County, Oklahoma such that it holds a valid and enforceable first lien on the Texas Properties and the Oklahoma Properties; (iv) the Plaintiffs have either actual notice or constructive notice of Union Bank's...