In re Future Energy Corp.

• Decision Date: 19 February 1988
• Docket Number: Bankruptcy No. 2-87-00552.
• Citation: 83 BR 470
• Parties: In re FUTURE ENERGY CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

83 B.R. 470 (1988)

In re FUTURE ENERGY CORPORATION, Debtor.

Bankruptcy No. 2-87-00552.

United States Bankruptcy Court, S.D. Ohio, E.D.

February 19, 1988.

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E. James Hopple, Todd R. Marti, Schottenstein, Zox & Dunn, Columbus, Ohio, for debtor.

Henry P. Montgomery, IV., Baker & Hostetler, Columbus, Ohio, for Canyon.

Joseph A. Giampapa, Porter, Wright, Morris & Arthur, Columbus, Ohio, for TCO.

Thomas H. Grace, Gamble, Hartshorn & Grace, Columbus, Ohio, for Pattison.

MEMORANDUM OPINION AND ORDER DENYING CONFIRMATION OF THIRD AMENDED PLAN OF REORGANIZATION

R. GUY COLE, Jr., Bankruptcy Judge.

I. PRELIMINARY STATEMENT

This matter is before the Court following a hearing held to consider confirmation of the Third Amended Plan of Reorganization ("Plan") filed in this Chapter 11 case. The Plan has been jointly proposed by Future Energy Corporation (hereinafter "Future" or "debtor" or "debtor-in-possession"), Krutex Energy Corporation ("Krutex") and Canyon Development Corporation ("Canyon") — (hereinafter referred to as the "Proponents"). Objections to confirmation have been lodged by Columbia Gas Transmission Corp. ("TCO"), the holder of an unsecured claim, and Pattison Petroleum Corporation ("Pattison"), the holder of both a secured and an unsecured claim against Future. Upon consideration of the record made at the confirmation hearing, which was conducted in accordance with 11 U.S.C. § 1128, and its review of the post-hearing briefs, the Court issues the following decision.

II. JURISDICTION

The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding which the Court may hear and determine. 28 U.S.C. § 157(b)(2)(L). The following constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule ("B.R.") 7052.

III. FACTUAL BACKGROUND

Future is an Ohio corporation that, since 1977, has been engaged in the business of oil and gas exploration and development. At the present time, Future is operating 48 oil and gas wells which are located in Eastern Ohio and New York.¹ Future operates the wells under arrangements with limited partnerships or other entities involved in drilling and completion programs. Future's ownership interest in the production of such oil and gas wells varies from 0 to 100%, with 20% representing Future's average working interest.²

Due to various market and other economic conditions, Future, by early 1986, had incurred large losses and owed substantial sums to its trade creditors. In late 1986 and in January, 1987, Krutex, a publicly-held Utah corporation whose primary business activity involves the production and development of oil and gas reserves in Caldwell County, Texas, commenced negotiations with the principals of Future regarding the acquisition of 100% of the outstanding common shares of Future. Bruce Decker ("Decker"), the Vice-President of Krutex, testified that Krutex intended to acquire Future's stock in an effort to diversify its holdings and expand the geographical scope of its operations. On January 14, 1987, following extensive negotiations, Krutex acquired 100% of the outstanding common shares of Future. Hence, Future became a wholly-owned subsidiary of Krutex prior to filing for relief in this Court. In exchange for the acquisition of Future's stock, Krutex agreed to indemnify George M. Sherry ("Sherry"), the principal shareholder of Future,³ from any liability resulting from the enforcement of claims held by Ohio Steel Fabricators ("Ohio Steel"), Republic Steel/LTV ("Republic") and BancOhio National Bank ("BancOhio"),⁴ creditors whose claims were the subject of Sherry's personal guaranty.

In January, 1987, Canyon, an Ohio corporation which had been formed for the purpose of acquiring control of Future, purchased several claims of Future's creditors in an attempt to obtain Future's assets. At this time, Canyon was acting independently of, and apparently unnoticed by, Krutex in attempting to gain control of the debtor's assets. According to James P. Burgin ("Burgin"), the President and a director of Canyon, Canyon sought to obtain control of Future because Future's oil and gas operation would "fit well" within the operations of Canyon and its affiliates in Eastern Ohio.⁵ Transcript of Hearing ("Transcript") at 137.

Krutex's management determined, prior to or at the time it acquired the outstanding stock of Future, that it would be necessary to restructure the debt obligations of Future by filing a case under Chapter 11 of the Bankruptcy Code. Prior to the filing of Future's Chapter 11 petition, Krutex engaged in several transactions which were intended to facilitate the formulation of a plan of reorganization and the ultimate rehabilitation of Future. First, Krutex received an assignment of the claim held against Future by Perkins Drilling Company ("Perkins"), in the face amount of $21,300, in return for a cash payment of $21,130. Second, Krutex loaned $66,400 to Future, which was combined with approximately $40,000 of Future's cash on hand, to satisfy one of the several claims held by BancOhio. This particular BancOhio claim had been acquired from BancOhio by Canyon in January of 1987. Immediate satisfaction of the BancOhio claim was deemed to be necessary given Canyon's threat of a foreclosure action against most of the assets of Future, including Future's oil and gas wells, pipelines and all of Future's accounts receivable. The $66,400 transfer of funds from Krutex to Future was intended to be a loan, as opposed to a contribution of capital to Future. Transcript at 26. In fact, Krutex attempted to collateralize its loan to Future by filing with the appropriate governmental authorities the necessary documents to perfect a "blanket security interest" in all of Future's real and personal property.⁶ Transcript at 22. After Krutex and Future had completed the transactions described above, Future filed its Chapter 11 petition on February 10, 1987.

Future has continued to operate its business as a debtor-in-possession (as authorized by 11 U.S.C. § 1108) since the filing of its Chapter 11 petition. Future has retained and withheld all production proceeds⁷ generated from the operation of its oil and gas wells from the petition date to the present. Burgin and Fred Steele ("Steele"), the Secretary and Treasurer of Canyon, testified that Future has withheld all post-petition production proceeds due to uncertainty surrounding: (1) the extent to which Future's working interests are encumbered by secured claims; (2) the precise extent of Future's holdings due to unrecorded assignments of various interests in Future's wells; and (3) the nature and cost of well reworking on Future-operated wells. Steele's uncontraverted testimony established that the production proceeds (approximately $57,000) have been segregated in a separate account by Future and have not been utilized to fund the debtor's post-petition operations. Transcript at 108.

Subsequent to the filing of Future's Chapter 11 petition, Krutex, through Decker and its counsel, continued to negotiate with various creditors of Future in an attempt to obtain assignments of their claims. Prior to engaging in such negotiations, Krutex undertook a thorough review of the claims held by those creditors of Future who claimed secured status. Krutex's claims' analysis included a complete examination of the value of the collateral securing the claims held by each of Future's creditors. Through this claims' analysis process, Krutex attempted to determine whether the claims held by those creditors of Future who claimed secured status were indeed fully secured, partially secured or unsecured.⁸ After conducting an analysis of the secured claim held by Republic, in the face amount of $164,000, Krutex purchased this claim for $20,000. According to Decker, Krutex obtained Republic's claim for such a favorable price because Republic simply underestimated the value of the collateral securing its claim. In fact, prior to purchasing Republic's claim, Krutex had independently valued the collateral securing Republic's claim at an amount far in excess of $20,000.

Krutex first became aware that Canyon was also purchasing the claims of Future's creditors in January, 1987, when it was necessary for Krutex to extend the $66,400 loan to the debtor in order to prevent Canyon from enforcing the claim against Future which it had obtained from BancOhio. In the course of its negotiations with various claimholders of Future, Krutex learned that Canyon, in addition to acquiring the BancOhio claim, had also purchased several other claims from creditors of Future. Canyon purchased the claims of Halliburton Co. ("Halliburton") and Ohio Steel for $105,000 and $17,000, respectively. The face amounts of the Halliburton and Ohio Steel claims were $231,578.95 and $91,310.01, respectively.⁹ Burgin testified that before Canyon acquired the Halliburton and Ohio Steel claims, it likewise conducted a detailed analysis of such claims, including an estimation of the value of the property collateralizing the Halliburton and Ohio Steel claims. Burgin further noted that it was Canyon's intention to acquire the operations of Future without initiating a Chapter 11 proceeding. Instead, Canyon planned to acquire Future's assets by obtaining the secured positions of Future's creditors and then proceeding with state court foreclosure actions. Transcript at 127.

Because Canyon also was acquiring the claims of Future's creditors, it became apparent by the early summer of 1987 that a "bidding war" had developed between Krutex and Canyon over the control of Future's assets. Krutex determined that the time and expense involved in attempting to successfully reorganize Future would be increased unnecessarily if the competition between Krutex and Canyon continued. Accordingly, Krutex and Canyon commenced a series of...