In re Dakota Drilling, Inc.
| Citation | 135 BR 878 |
| Decision Date | 02 December 1991 |
| Docket Number | Bankruptcy No. 86-05642,Adv. No. 91-7032. |
| Parties | In re DAKOTA DRILLING, INC., Debtor. Phillip D. ARMSTRONG, Trustee, Plaintiff, v. Olen PEDIE and Linda Pedie, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of North Dakota |
Phillip D. Armstrong, Minot, N.D., Trustee.
Orlin W. Backes, Minot, N.D., for defendants.
This is a complex, multi-faceted proceeding commenced by complaint filed on April 5, 1991, by the trustee who, in some 17 pages, detail circumstances he believes establish the defendants to be the alter ego of the Debtor, Dakota Drilling, Inc. (Dakota Drilling), and who he believes engaged in a series of transactions with themselves and with others which were preferential, fraudulent or both. The trustee is seeking the recovery of real and personal property as well as cash. Recovery is premised upon sections 547, 548 and 549 of the Bankruptcy Code as well as chapter 13-02.1-04 of the North Dakota Century Code.
Trial was held on October 2, 1991. From the evidence adduced at trial the facts as material are as follows:
Findings of Fact
For a number of years the defendants, Olen and Linda Pedie, were sole proprietors of a North Dakota business known as Pedie Construction whose primary business was oil well site preparation and oil rig transportation. Pedie Construction had a 20% interest in an oil drilling rig it managed for a drilling company known as South Ranches and in which it had a first option to purchase for $600,000.00.
In September 1983, the Debtor, Dakota Drilling, Inc., was incorporated with Olen and Linda Pedie as its principal officers. Dakota Drilling was formed to own and operate drilling rigs and maintain a drilling business. It filed for relief under Chapter 11 on July 29, 1986, and eventually converted to Chapter 7 in 1989.
In 1983 Dakota Drilling purchased the South Ranch rig for $600,000.00 by means of a $500,000.00 loan from Centerre Bank and a $100,000.00 loan from Earl Schwartz. As security for the bank loan the bank was given a blanket security interest in all machinery and equipment of every kind now owned or hereafter acquired. The security interest covered not only the financed rig but two later-acquired rigs as well. The bank loan was personally guaranteed by Olen Pedie as well as by Earl Schwartz.
Two more drilling rigs were purchased by Dakota Drilling by means of loans from Earl Schwartz. Three hundred sixty thousand dollars was borrowed on rig No. 2 and $230,000.00 was borrowed on rig No. 3. The indebtedness to Schwartz was not memorialized by any promissory note nor is there in evidence a security agreement by which Schwartz was extended a security interest in the rigs.
Earl Schwartz at some point became an officer of Dakota Drilling and also held an interest in a well operating company known as Gofor Oil, Inc. According to Olen Pedie, Dakota Drilling was to satisfy its outstanding indebtedness to Schwartz by drilling wells for Gofor thereby creating a debt exchange.
In August 1985, Dakota Drilling purchased a 1980 Load Craft platform trailer for $39,000.00 and an I.H. Paystar Semi Tractor for $16,000.00. The trailer, although purchased by Dakota Drilling, was titled in the name of Pedie Construction Company. This trailer, worth $12,000.00 at the time of Dakota Drilling's Chapter 11 filing, never appeared in its schedule of assets. The ownership transfer to Pedie Construction took place in 1988 during the pendency of the Chapter 11. The I.H. semi-tractor, worth $35,000.00 at the time of the Chapter 11 filing, was, as was the trailer itself, a part of the collateral given to Centerre Bank as security.
Also in 1984 Dakota Drilling purchased an I.H. T-D 20 crawler tractor from Northwestern Equipment for $220,000.00 with financing through CIT Corporation. This obligation was personally guaranteed by Olen and Linda Pedie. From December 1984 through July 2, 1986, Dakota Drilling paid CIT a total of $62,000.00 on this obligation.
In January 1986, Olen and Linda Pedie d/b/a Pedie Construction purchased a commercial building in Botteneau, North Dakota for use as a shop and business office by both Pedie Construction and Dakota Drilling. As used, Dakota Drilling occupied approximately 95% of the space. The source of funds for the purchase was two checks from Dakota Drilling aggregating $180,000.00 payable to Pedie Construction. The checks, both bear the notation that they were a "loan" for building acquisition. No promissory note or mortgage was given to Dakota Drilling. Dakota Drilling's corporate minutes confirm that this was in the nature of a loan to be paid back by way of rig moves and other jobs contracted with Pedie construction. Shortly after acquisition, Pedie began to renovate the premises by means of Dakota Drilling funds. Office equipment and furniture were purchased in an amount of $10,700.45 and remodeling materials were purchased in the sum of $7,232.00.
After acquiring the building, the Pedies, d/b/a Pedie Construction, in April 1986 borrowed $40,000.00 against it from the State Bank of Botteneau, giving the bank a $40,000.00 mortgage as security. This loan was renewed in 1987 (after Dakota Drilling was in Chapter 11) along with new money of $90,000.00 for a total new note of $130,000.00.
Dakota Drilling occupied the premises from 1986 through 1988 under a rental agreement which, according to Olen Pedie, required Dakota Drilling to pay all remodeling and insurance. Pedie stated that rent would have been around $2,500.00 to $3,000.00 per month and that at the time of building acquisition in January 1986, Dakota Drilling owed Pedie Construction $200,000.00.
After its inception, Dakota Drilling used its three rigs to do contract drilling for a number of well operators including Gofor Oil and Earl Schwartz. Between September 1983, and September 1989, its jobs included 22 wells for Gofor and 2 wells for Earl Schwartz. Business was good up until April 1986, when the oil industry in western North Dakota experienced a general depression. Between January 1985 and January 1986, oil prices plummeted from $24.00 per barrel to $12.50 per barrel. This caused not only a depression for the drilling market but resulted in an extreme erosion of value for oil-related equipment including rigs. As a result, Dakota Drilling's work evaporated and it filed for relief under Chapter 11 in July 1986. Business picked up somewhat post-petition but not enough for a recovery and the case was converted to a Chapter 7 in January 1989. From its inception until it went into Chapter 7, Dakota Drilling had total drilling revenues of $7,202,368.00.
Earl Schwartz, as co-guarantor of the Dakota Drilling obligation to Centerre Bank paid off the remaining debt of $475,387.00 in 1989 and took an assignment of the bank's security interest which, among other things, were oil drilling rigs, inventory and accounts. He moved for relief from stay which was stipulated to by the trustee and recovered the collateral including the three rigs, the I.H. semi-tractor and Load Craft trailer. As of July 1986, the three rigs were worth $379,770.00. The semi-tractor was worth $35,000.00 and the trailer was worth $12,000.00.
At the time of conversion to Chapter 7, Olen and Linda Pedie incorporated a new drilling company named Centennial Drilling, Inc. This company is engaged in the same business as was Dakota Drilling and occupies the same place of business with the same telephone number and post-office box number. It is using the same three drilling rigs and semi through means of a leasing arrangement with Earl Schwartz.
Over the period of Dakota Drilling's operation it engaged Pedie Construction to perform rig hauling, and well site preparation for which it was billed by Pedie Construction. Invoices from Pedie Construction to Dakota Drilling covering the period November 1983 through December 1986 show the total invoice billing of $425,304.00. When Dakota Drilling advanced the $180,000.00 to Pedie in January 1986 for purchase of the building there was $214,414.00 in outstanding unpaid invoices. Olen Pedie testified that the $180,000.00 was written off as a payment against invoiced but unpaid rig moves.
From 1984 through 1988 cash was taken out of Dakota Drilling deposits and during this same period a number of Dakota Drilling checks were made payable to cash and negotiated by Olen and/or Linda Pedie. Although a review of Dakota Drilling's ledgers establish this fact, neither the ledgers nor the accountant testifying on behalf of the trustee could identify what the cash was used for. From 1985 through 1988 Dakota Drilling received checks from Max-bass Natural Gas Co., an oil producer, and all of these checks totaling $4,261.87 were negotiated for cash by either Olen or Linda Pedie. Olen stated, in explanation of these cash transactions, that it was common to deal in cash and the cash taken out was used to pay for supplies, rig parts and other items incidental to Dakota Drilling's business. The trustee's accountant agreed that Dakota Drilling had been put on a cash basis by a lot of people and that he could find no evidence of doubled-up payments. It is worthwhile noting that the trustee's accountant did not perform an audit and could not point to any irregular use of Dakota Drilling funds by Pedies themselves or Pedie Construction.
From its inception in 1983 until January 1988, Dakota Drilling paid Olen and Linda Pedie a monthly salary which gradually diminished from an average of $4,247.00 for each of the last three months of 1983 to $2,065.00 per month in 1986 and finally, to $2,300.00 for January 1988 when payments stopped completely. The trustee's accountant testified that on their face the Dakota Drilling payroll ledgers did not reveal anything unusual.
In addition to taking fairly extreme salary cuts as Dakota Drilling slid into difficulty, Pedies in a further effort to keep it going,...
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