In re Jones
| Decision Date | 11 September 1987 |
| Docket Number | 583-00060,584-5175,584-5173,584-5184,Bankruptcy No. 583-00059,Adv. No. 584-5151,584-5152,584-5188,584-5202 and 584-5221. |
| Citation | 77 BR 541 |
| Parties | In re J. Lynn JONES and Rebecca Jean Jones, d/b/a Union Exploration et al., Debtors. In re UNITAS, INC., Debtor. Robert B. WILSON, Trustee, Plaintiff, v. Gabe and Joann PARSON, J & A Lease and First National Bank, Evan Matlock, Bobbie Matlock, Ralph Payton, Ron Downing, J & A Lease and Gabe Parson, William E. Shields, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Robert B. Wilson, Sims, Kidd, Hubbert & Wilson, Lubbock, Tex., trustee.
Gary Terrell, McWhorter, Cobb & Johnson, Lubbock, Tex., for investors.
These Adversary Proceedings concern the Trustee-in-Bankruptcy's challenge to unrecorded assignments of interests in oil and gas leases.
J. Lynn Jones (Debtor) started brokering oil and gas leases in 1976. A pattern soon developed where he would acquire a lease in the name of Unitas, Inc., a wholly-owned corporation. It would then be assigned to J. Lynn Jones d/b/a Union Exploration with Unitas, Inc. retaining an overriding royalty. Then the Debtor would sell participations in the wells to be drilled upon the lease to various parties. During 1980, 1981 and 1982 the participations were sold to the Defendants in these Adversary Proceedings by the Debtor's salesmen.
The "Exploration and Drilling Agreement" dated February 14, 1980 "among UNION EXPLORATION, a sole proprietorship, solely owned by J. Lynn Jones, herein referred to as the Operator, and Gabe Parson, herein referred to as the Non-Operator," is typical of these assignments. For the sum of $23,000.00, Parson acquired a 10% interest in the initial well to be drilled on a designated oil and gas lease in Callahan County, Texas. The Agreement provided:
For such sum of money, Operator shall, prior to the commencement of the initial well, assign to Non-Operator, by an Assignment in recordable form, an undivided 10% interest in the working interest evidenced by the lease insofar as the same applies to the 40 acre proration unit allocated to the initial well.
Parson received a first right of refusal to participate in additional wells on the property. The Debtor as Operator had exclusive charge, control and supervision of all operations on the lease and was authorized to enter into drilling agreements and other contracts for the benefit of the joint owners. Expenses were shared in relation to the ownership and the liability was several, "not joint or collective." Parson also received the right to take in kind and separately dispose of his proportionate share of the oil and/or gas produced from the wells, but in the event he did not do so the Operator was authorized to sell the oil and gas and account to Parson for the proceeds. The Agreement included a paragraph entitled "Risk Venture" in which the Non-Operators acknowledged that "the operations contemplated by this agreement constitute a high risk venture and they are relying solely upon their own judgment and not upon any statements or representations if any, which may have been made to them by the Operator or any of the partners of Operator." Thus, Parson, along with the other Defendants, acquired what is known in the oil and gas industry as a non-operating working interest in the well.
Some of the Non-Operators recorded their Assignments, but others, including the Defendants in these Adversary Proceedings, did not. When Assignments were mailed to Non-Operators, they included no admonition that they should be recorded. The Debtor's secretary testified that when it became apparent that Assignments were not being recorded, the Debtor would record a group of Assignments before mailing them to the Non-Operators.
Initially, the Debtor did not maintain separate accounts on his books for each well. Funds received from Non-Operators were placed in the Debtor's general account and used as needed for overhead and drilling expenses with no attempt to match receipts to a particular well. If a well was successfully completed, and production commenced, then the Debtor would set up a special account for the well showing the interests of the various owners. Thereafter, receipts and disbursements were allocated to the particular well.
Apparently none of the Non-Operators exercised their right to take their share of production and sell it separately, so the Debtor, as the Operator, sold the production and distributed the proceeds.
The records of the Texas Railroad Commission (the agency which regulates oil and gas production in Texas) listed the Debtor as the Operator of each well. In addition to filing all the necessary reports with the Railroad Commission, the Debtor maintained a sign at the gate of each lease, on each well, and on each tank battery showing the Debtor as Operator. Frequently, the Debtor and his employees were on each lease performing the various functions necessary to operate and maintain the wells and equipment.
On February 18, 1983 an involuntary petition under § 303 of the Bankruptcy Code1 was filed against the Debtor. The Debtor converted the case to a reorganization under Chapter 11 of the Bankruptcy Code on May 23, 1983. On March 28, 1984, the case was converted to a liquidation under Chapter 7 and Robert B. Wilson was appointed Trustee.2
The issue before the Court is whether unrecorded oil and gas interests granted by a Debtor prior to bankruptcy are property of the bankruptcy estate, or property of the assignees.
The Trustee asserts that he has title to the leases free and clear of any claims by the Investors under the provisions of § 544(a) which reads:
The Investors claim that they own an equitable interest in the leases while the Trustee holds bare legal title and thus the Investors' interests are not property of the bankruptcy estate pursuant to § 541(d). Section 541 defines the bankruptcy estate as follows:
The United States Supreme Court determined the relationship between state property laws and the equity powers of the bankruptcy court in Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The Butner Court found that bankruptcy courts should follow state property laws in most instances, regardless of countervailing claims of "equity." The Court stated:
. . . Congress has generally left the determination of property rights in the assets of a bankrupt\'s estate to state law. . . . (Footnote omitted). Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving "a windfall merely by reason of the happenstance of bankruptcy." (Citation omitted).
Id. at 54-55, 99 S.Ct. at 918. In Butner, the Supreme Court stressed the importance of state law to the decisions of bankruptcy courts. The Butner decision also clarified the Court's position on the proper place for the equity powers of bankruptcy courts stating:
The equity powers of the bankruptcy court play an important part in the administration of bankrupt estates in countless situations in which the judge is required to deal with particular, individualized problems. But undefined considerations of equity provide no basis for adoption of a uniform federal rule affording . . . a party . . . an automatic . . . interest . . . as soon as the . . . debtor . . . is declared bankrupt.
Id. at 55-56, 99 S.Ct. at 918.
Although Butner was decided while the Bankruptcy Act of 1898 was in effect, it...
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