Hard Rock Exploration, Inc. ("Hard Rock"); Caraline Energy Company ("Caraline"); Brothers Realty, LLC ("Brothers"); Blue Jacket Gathering, LLC ("BJG"); and Blue Jacket Partnership ("BJP") (collectively the "Debtors") are all entities organized under West Virginia laws. The Debtors are independent oil and gas development companies who share a principal place of business in Charleston, West Virginia. The Debtors have developed over 350 miles of pipeline systems to gather and transport production from certain oil and gas wells. The Debtors have two distinct operation arrangements: 2003–2008 wells ("Hard Rock Wells") and 2009–2014 wells ("Program Wells"). The Hard Rock Wells were almost exclusively vertical wells placed on property leased by Hard Rock. The Debtors operate the Hard Rock Wells and transport and sell the gas from those wells. However, entities other than the Debtors also have an interest in these wells. The Debtors' share of the proceeds ranges from approximately 0.5–44.5%.
After 2009, the Program Wells entered production. They are owned by six West Virginia limited partnerships. These six limited partnerships were formed from 2009–2014. To raise money for exploration and drilling, investors were solicited by Hard Rock to buy units of the limited partnerships. Those funds were placed with HNB, who served as the Escrow Agent. HNB held the funds in escrow until the minimum funding requirements were met. Then HNB distributed the funds for well placement and development. After forming the limited partnerships, the Debtors would enter into a general partnership with the limited partnership with the Debtors retaining a 10% share, known as a working interest. Hard Rock leased mineral rights from property owners to acquire the right to drill on the land. After the leases were acquired, Hard Rock assigned the wells to the limited partnerships. In consideration of that assignment, Hard Rock operates the wells and sells the gas for an operating fee and a transportation fee.
Currently, the Debtors are operating over 380 wells. Sales of the oil and gas under both arrangements yield approximately $500,000 of revenue each month. A significant portion of the Debtors' monthly revenue, around $140,000 each month, is derived from the monthly operating fees and transportation fees paid by the limited partnerships.
In 2005, HNB began providing a series of loans to the Debtors. HNB has filed documentation to support its claim that all of the Debtors' assets, including its cash, are encumbered by liens securing the $26 million in loans. The Debtors disagree.
HNB's interest in the Debtors' property is set forth in the Deeds of Trust, which have been recorded in various counties, and the UCC–1 Financing Statements filed with the West Virginia Secretary of State. The granting language in the Deeds of Trust states:
[T]he Mortgagor, for and in consideration of the premises and the sum of TEN DOLLARS ($10.00) and other good and valuable consideration paid to the Mortgagor, the receipt and sufficiency of which is hereby acknowledged, and for and in consideration of the debts and trusts hereinafter mentioned, have granted, bargained, sold, warranted, mortgaged, assigned, transferred and conveyed, and by these presents do grant, bargain, sell, warrant, mortgage, assign, transfer and convey unto the Trustee and to their successor or successors or substitute in this trust, with power of sale for the use and benefit of the Bank, all of the Mortgagor's right, title and interest, whether now owned or hereafter acquired, in all of the hereinafter described properties, rights and interests; and, insofar as such properties, rights and interests consist of equipment, general intangibles, accounts, contract rights, inventory, fixtures, as extracted collaterals, instruments, proceeds of collateral or any other personal property of a kind or character defined in or subject to the applicable provisions of the Uniform Commercial Code of the State of West Virginia, the Mortgagor hereby grants to said Trustee for the use and benefit of the Bank a security interest therein; namely:
(a) the Lands described in Exhibit A, as said Exhibit A may from time to time be amended or supplemented,
(b) the Gas System and all Gas Contracts and accounts resulting from the operation thereof,
(c) the Operating Equipment,
(d) the proceeds and products of the foregoing, together with any and all corrections or amendments to, or renewals, extensions or ratifications of, any of the same or of any instrument relating thereto, all rights-of-way, franchises, licenses, permits, certificates of public conveniences and necessity, easements, contractual rights, tenements, hereditaments and appurtenances now existing or in the future obtained in connection with any of the aforesaid, and all other things of value and incident thereto that any Mortgagor might at any time have or be entitled to, and all the interests specified in Exhibit A and all the aforesaid properties, rights and interests described in this Granting Paragraph, together with any additions thereto, that may be subjected to the lien of this instrument by means of supplements hereto, being hereinafter called the "Mortgaged Property"....
The UCC–1 Financing Statements provide the following collateral description:
COLLATERAL:
(a) the Lands described in Exhibit A, as said Exhibit A may from time to time be amended or supplemented,
(b) the Gas System and Gas Contracts and all accounts resulting from the operation thereof,
(c) the Operating Equipment,
(d) the proceeds and products of the foregoing, together with any and all corrections or amendments to, or renewals, extensions or ratifications of, any of the same or of any instrument relating thereto, all rights-of-way, franchises, licenses, permits, certificates of public conveniences and necessity, easements, contractual rights, tenements, hereditaments and appurtenances now existing or in the future obtained in connection with any of the aforesaid, and all other things of value and incident thereto that Mortgagor might at any time have or be entitled to.
DEFINITIONS:
A. "Gas Contracts" shall mean (i) all contracts (whether preliminary or final in nature) now or hereafter entered into by the Mortgagor and another party (and any and all amendments or modifications thereto) providing for the sale, purchase, exchange, processing and/or storage by the Mortgagor of natural (whether processed or not processed), manufactured or mixed gas or of natural gas liquids or other liquid hydrocarbons and (ii) all contracts (whether preliminary or final in nature) now or hereafter in effect (and any and all amendments or modifications thereto) providing for the sale, purchase, exchange, processing, transportation and/or storage of natural (whether processed or not processed), manufactured or mixed gas or of natural gas liquids or other liquid hydrocarbons under which contracts the Mortgagor has, whether as a result of assignment or by operation of law, any rights of any nature whatsoever.
B. "Gas System" shall mean all lands, leases, surface leases, rights-of-way, road crossings, railroad crossings, ditch, canal and river crossings, easements, licenses, franchises, permits, pipelines (including gathering lines, laterals and trunklines), compressors, regulating stations, metering stations, valves, wells, tanks, separators, fencing and other facilities comprising a gas gathering and gas delivery system (in which the Mortgagor has or may have any interest) or necessary for or used or useful primarily in connection with the gathering, transporting, transmitting, distributing or supplying of natural, manufactured or mixed gas or of natural gas liquids or other liquid hydrocarbons, together with all storage tanks and facilities for storage of gas on, under or over ground, located on or forming a part of such gas gathering and gas delivery system ...
E. "Lands described in Exhibit A" shall include all of the Company's right, title and interest in and to the real estate, leases, leasehold estates and all other interests in real estate, the description of which is contained in Exhibit A or incorporated in Exhibit A by reference to another instrument or document. References in Exhibit A to individual leases or percentage interests are included only to identify particular leases. All of the Company's interests (whether such interests are properly identified or not) are subject to the lien of the Mortgage ...
I. "Operating Equipment" shall mean all surface or subsurface machinery, equipment, facilities or other property of whatsoever kind or nature (excluding drilling rigs, trucks, automotive equipment or other property taken to the premises to drill a well or for other
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