In re Edwin A. Epstein, Jr. Operating Co., Inc.

• Decision Date: 27 May 2004
• Docket Number: No. 04-50106-H1-7.,04-50106-H1-7.
• Citation: 314 B.R. 591
• Parties: In re EDWIN A. EPSTEIN, JR. OPERATING CO., INC., Involuntary Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

314 B.R. 591

In re EDWIN A. EPSTEIN, JR. OPERATING CO., INC., Involuntary Debtor.

No. 04-50106-H1-7.

United States Bankruptcy Court, S.D. Texas, Houston Division.

May 27, 2004.

COPYRIGHT MATERIAL OMITTED

Patrick D. Devine, Ware, Snow, Fogel & Jackson, LLP, William D. Wood, Adam T. Schramek, Fulbright & Jaworski, LLP, Houston, TX, for debtor.

Ronald J. Johnson, Attorney at Law, San Antonio, TX, for Supply Solutions of Texas, Inc., L.G.H. Inc. and Spinnsoft, Inc.

Richard L. Fuqua, Fuqua & Keim, LLP, Houston, TX, for Morningstar Gas, Inc.

Jonnie Patterson, Walker & Patterson, P.C., for Edward Abell, Jr. and Leo LeBlanc.

Diane G. Livingstone, Office of U.S. Trustee, Nancy Lynne Holley, U.S. Trustee, Houston, TX, for U.S. Trustee.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

By separate orders, this Court has (i) voided a determination made by an arbitration panel; and (ii) authorized the Involuntary Debtor to prosecute an interlocutory appeal of that same order. This memorandum opinion sets forth the basis for those decisions.

Factual background.

In 1995, the Edwin A. Epstein, Jr. Operating Co., Inc. ("EEOC") obtained interests/leases in several oil and gas wells in Starr County, Texas. At the time, EEOC was solely owned by Edwin A. Epstein, Jr. In 2001, EEOC transferred its assets to Morningstar Gas, Inc. ("Morningstar"), resigned as the working interest operator, and named Morningstar as the successor operator. Morningstar is wholly owned by Veronica Epstein (Edwin A. Epstein's wife).

On December 4, 2001, the David Clark Trust (the "Trust") executed on a judgment¹ against EEOC resulting in a sheriff's sale of EEOC's property interests in the leases of the oil and gas wells. On March 8, 2002, Baker Hughes Oilfield Operations, Inc. ("Baker Hughes") foreclosed on a security interest it held on the shares of EEOC. Baker Hughes is now the sole shareholder of EEOC.² After Baker Hughes installed new management in EEOC, Baker Hughes discovered the 2001 sheriff's sale.

Less than a month after the foreclosure by Baker Hughes, EEOC filed for relief under chapter 11 of the bankruptcy code.³ EEOC then filed adversary proceedings against Morningstar and the Trust for turnover. The Trust settled this dispute and EEOC dismissed the bankruptcy. The terms of the settlement were that the Trust and EEOC would each have a percentage of ownership in the Trust res. The Trust res consisted of the oil and gas interests executed on by the Trust.⁴

On May 10, 2002, EEOC attempted to remove Morningstar as the operator of the wells and appoint PetroReal, Inc. as operator. After Morningstar refused to relinquish the property, EEOC sued in the 169th District Court of Bell County, Texas. The litigation was then sent to compulsory arbitration by the state court on December 2, 2002. On September 9, 2003, before the arbitration panel could hear the merits of the dispute, Morningstar filed a petition for relief under chapter 11 and the arbitration was stayed by 11 U.S.C. § 362.⁵ On October 10, 2003, Bankruptcy Judge Greendyke modified the automatic stay to allow the arbitration to proceed. [Case no. 03-42936 docket no. 30].⁶ The arbitration was again stopped on March 26, 2004 when an involuntary petition for relief was filed against EEOC.⁷

The filing of the involuntary petition under 11 U.S.C. § 303 invoked the automatic stay arising under 11 U.S.C. § 362. 2 COLLIER ON BANKRUPTCY ¶ 303.12 (15th ed.2004). Without seeking relief from the stay imposed by the EEOC involuntary petition, EEOC and Morningstar argued to the arbitration panel whether the automatic stay applied to the arbitration proceedings.

After considering legal arguments, the arbitration panel ruled that the stay did not apply to the pending action and proceeded to decide the merits of the dispute. Morningstar took the position that it could not participate without violating the stay. Accordingly, although Morningstar did not participate in the proceeding on the merits, the arbitration panel proceeded to hear the evidence presented by EEOC. Not surprisingly, EEOC prevailed.

Thereafter, on April 14, 2004, EEOC filed a Motion for Declaratory Ruling That No Stay Was In Effect, or Alternatively, For Order Annulling Stay, or Alternatively For Relief From Stay in its own case [docket no. 94].⁸ The Court held an evidentiary hearing to determine EEOC's Motion for a Declaratory Ruling and made a preliminary determination that the automatic stay did apply to the arbitration proceeding. Nevertheless, the Court advised the parties that it would consider whether the Court should enforce or otherwise defer to the arbitration panel's determination.

The Court requested briefing on whether the arbitration panel had authority to determine the applicability of the automatic stay and if so, what level of deference should be given by the Court to the arbitration panel's determination that the stay did not apply.

After substantial briefing, these issues were taken up at a subsequent hearing in which the Court ruled that the automatic stay barred the panel from determining whether the automatic stay applied. EEOC later filed a motion for leave to appeal. The findings and conclusions in this memorandum opinion apply with equal force to the Court's determination to void the arbitration panel's decision and the Court's determination that EEOC should be allowed an interlocutory appeal. See Federal Trade Comm'n. v. Enforma Natural Products, Inc., 362 F.3d 1204, 1216 n. 11 (9th Cir.2004); Bodin v. Gulf Oil Corp., 877 F.2d 438, 440 (5th Cir.1989).

Was the arbitration proceeding subject to the stay?

EEOC stridently argues in it briefs and memoranda that the arbitration proceeding was not stayed because § 362 only stays actions against the debtor that could harm the estate. EEOC cites Taraska v. Carmel, 223 B.R. 200 (D.Ariz.1998) for the proposition that the automatic stay does not prevent the debtor from prosecuting a case that it instigated before the bankruptcy because such actions are not actions against the debtor. See id. at 202. EEOC then asserts:

The only issues before the arbitration panel were the appointment of a temporary operator being requested by David Clark and EEOC to preserve the properties. There was no claim even before the arbitration panel which could have negatively affected EEOC's estate, as Morningstar has already wrongfully misappropriated operations from EEOC.

[docket no. 7 at ¶ 43]. Therefore, EEOC reasons that because it had nothing to lose in the arbitration, the proceeding was not an action against the debtor.

While the logic of EEOC's argument is sound, it is inapposite to the evidence presented to the Court. Before EEOC was compelled to arbitration, Morningstar made a written demand for arbitration to EEOC.⁹ Morningstar's written demand for arbitration requested the arbitration panel to decide: (1) whether EEOC retained any title to the oil and gas; and (2) whether EEOC is liable for damages and the extent of those damages for:

(a) violating its obligations and agreements to submit all disputes to arbitration;

(b) interfering with the operation and development of the properties;

(c) interfering with the contractual rights and prospective business relations of Morningstar;

(d) making false and disparaging representations to third parties;

(e) violating its obligations respecting the confidentiality of information about the operation and development of the properties; and

(f) slander of title.

After this demand was made, the Bell County court issued its order compelling EEOC to arbitrate in accordance with the provisions of the specified letter agreement. This letter agreement expressly requires arbitration of all disputes "of any kind." Accordingly, the disputes raised in Morningstar's demand were included in the arbitration. Furthermore, title was put in issue by EEOC's pleadings in the state court suit and Morningstar's arbitration demand.¹⁰

In the EEOC/Morningstar arbitration proceeding, the arbitration panel was authorized by Judge Greendyke's order to consider all issues between the parties.¹¹ The only limitation on the arbitration was that the parties were instructed to return to the Court to confirm the arbitration panel's rulings. Therefore, at the time of the EEOC involuntary petition, there was no restriction on the arbitration panel's ability to adjudicate the disputes between Morningstar and EEOC. Furthermore, on February 5, 2004 — after the Morningstar stay was modified — the arbitration panel issued a letter ruling outlining the issues it would decide.¹² This letter ruling evidences the arbitration panel's specific intent to determine the "ownership issues." Finally, the demand for arbitration and the governing arbitration agreement show that the arbitration panel had carte blanche to determine all issues between the parties.

After the stay was lifted and the arbitration panel began hearing the disputes between the parties, EEOC requested the arbitration panel replace Morningstar as operator with a temporary operator. This temporary operatorship issue was the subject of the hearing that was interrupted by the involuntary petition. EEOC contends that even if the overall action is stayed, this specific sub-issue was not subject to the automatic stay and therefore the action did not constitute an action against the debtor. This argument basically assumes that the stay can be selectively applied to portions of a proceeding resulting in certain issues in a single action being stayed while others are not.

The Court recognizes authority stemming from First Wisconsin National Bank v. Grandlich Development Corp. (the "First Wisconsin authority") which is cited for the proposition that debtor's counterclaims are not stayed because they are not proceedings against the debtor. See e.g. Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1206 (3d Cir.1991) (citing First Wisconsin National Bank v. Grandlich Development Corp., 565...