In re Klippel

• Citation: 183 BR 252
• Decision Date: 23 June 1995
• Docket Number: Bankruptcy No. 94-11352. Adv. No. 94-5257.
• Parties: In re Bernhardt William KLIPPEL, Jr., Debtor. Dr. Jack KAYES, Plaintiff, v. Bernhardt William KLIPPEL, Jr., Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas

183 B.R. 252 (1995)

In re Bernhardt William KLIPPEL, Jr., Debtor.

Dr. Jack KAYES, Plaintiff, v. Bernhardt William KLIPPEL, Jr., Defendant.

Bankruptcy No. 94-11352. Adv. No. 94-5257.

United States Bankruptcy Court, D. Kansas.

June 23, 1995.

COPYRIGHT MATERIAL OMITTED

Terry C. Cupps, Foulston & Siefkin, Wichita, KS, for plaintiff.

William H. Zimmerman, Jr., Minter, Case & Zimmerman, Wichita, KS, for defendant/debtor.

John E. Foulston, U.S. Trustee, Wichita, KS.

MEMORANDUM OF OPINION DENYING COMPLAINT TO DETERMINE DISCHARGEABILITY

JOHN K. PEARSON, Bankruptcy Judge.

This adversary proceeding is before the Court on Plaintiff Dr. Jack Kayes' ("plaintiff" or "Kayes") Complaint to Determine Dischargeability of Indebtedness. Kayes appears by Terry C. Cupps of Foulston & Siefkin, Wichita, Kansas. The debtor appears by William H. Zimmerman of Minter, Case & Zimmerman, Wichita, Kansas.

JURISDICTION

The Court has jurisdiction over this proceeding. 28 U.S.C. § 1334. This is a core proceeding. 28 U.S.C. § 157(b)(2)(I).

NATURE OF THE CASE

The parties submitted this adversary proceeding for determination to the Court on stipulations and briefs. The plaintiff obtained a judgment against the debtor in Wilson County, Kansas, District Court, based on an investment he made in an oil production venture operated by the debtor. The Wilson County court found that the debtor had breached a general fiduciary duty to the plaintiff. However, the Court specifically found that the debtor had not committed fraud. The debtor subsequently filed bankruptcy. Plaintiff now brings this adversary proceeding to have the judgment debt declared non-dischargeable under 11 U.S.C. § 523(a)(4). As presented, this case involves a mixed question of law and fact as the Court must attempt to apply federal bankruptcy law to the state court findings of fact. The Court, for the reasons stated below, denies plaintiff's complaint and finds that the debt is dischargeable.

STIPULATIONS OF FACT

The parties have stipulated to the following facts:

1. The debtor, Bernhardt William Klippel, Jr. (the "debtor") filed his voluntary petition for relief pursuant to Chapter 11 of the United States Bankruptcy Code on May 31, 1994.

2. The above-captioned adversary action arises on a complaint filed by Dr. Jack Kayes (the "plaintiff") to determine the dischargeability of a debt pursuant to 11 U.S.C. § 523(a)(4).

3. Plaintiff is a judgment creditor of the debtor in the amount of $59,621.60 with interest thereon at the legal rate of 7.5% per annum from and after the fifth day of May, 1993, based upon a journal entry filed in the District Court of Wilson County, Kansas in Case No. 90-C-37 on August 20, 1993.

4. The facts as found by the Wilson County Court which gave rise to the Wilson County judgment are set forth in detail in the Findings of Fact and Conclusions of Law filed in connection with and incorporated in the Wilson County judgment.¹

The parties incorporated into their stipulated facts the facts contained in Wilson County Court's Findings of Fact and Conclusions of Law. These findings of fact are:

5. In 1972, B.W. Klippel, Jr., and his wife purchased the working interests in a series of oil leases in Woodson County and Wilson County, Kansas.

6. The Klippels' purpose in purchasing the said oil leases was to salvage the equipment located on them.

7. Thereafter, Klippel changed his mind and decided to produce the leases.

8. In 1975, Klippel unitized the leases into the Buffalo Field Unit ("BFU"), a field comprised of twelve oil leases.

9. In the early 1980s, Klippel began searching for buyers of his working interest in the BFU. He prepared a number of promotional documents to provide to prospective purchasers of the working interests, including the General Discussion, the Supplementary Discussion, and the Supplementary Discussion II.

10. In 1984, Klippel gave Pelto Oil Company an option to purchase the leases, and allowed Pelto on the lease property to conduct drilling and production testing. Pelto drilled two wells, P-1 and P-2, on the "Apt A Lease." A dispute arose between Klippel and Pelto, and Pelto thereafter did not exercise its option to purchase. Pelto did not provide Klippel with the core analysis reports obtained from the drilling of wells P-1 and P-2. As a result, Klippel ultimately sued Pelto to obtain those results, but Klippel did not finally obtain them until 1990.

11. In 1985, Klippel sought to borrow money from Allied Bank in Houston, Texas, pledging the oil leases as collateral for the loan. Allied Bank denied his loan application.

12. In 1985 and early 1986, Klippel sent solicitation letters to people he believed might have an interest in investing in his BFU. These included letters to Barry McFarland of Allied Bank, Don Stuckey, Stanley Kielmar, and Robert Novak.

13. By the Spring of 1986, Klippel had sold little if any of his working interest in the BFU. At that time he approached Kayes about purchasing a working interest in the BFU.

14. Kayes is a doctor of ophthalmology in St. Louis, who had long-standing professional relationships with Klippel's mother and wife. That is the reason that Klippel solicited Kayes' investment in this venture. Klippel knew at that time that Kayes had no experience in the oil industry, and was relying exclusively upon Klippel for advice with respect to investment in and operation of this venture.

15. Klippel met with Kayes and introduced him to the BFU. Klippel indicated to Kayes that Klippel intended to redevelop and produce the BFU and that Klippel would be the operator of that redevelopment.

16. Klippel gave Kayes various documents including those mentioned in ¶ 9 and ¶ 12 above.

17. Klippel represented to Kayes that it was his plan to construct a pilot waterflood project for the purpose of producing the Lower Squirrel pay zone. This plan involved drilling four water injection wells around an existing production well (Pelto well P-2), injecting water into the Lower Squirrel pay zone through those injection wells and producing oil therefrom through the Pelto P-2 well.

18. Klippel represented to Kayes that the cost of this development was $145,000.00. In May 1986, Kayes agreed to invest in the venture.

19. On November 1, 1986, Klippel and his wife executed an Assignment of their working interest in the Foster lease, one of the leases in the BFU, to Kayes and his wife. The Foster lease comprised 10.006452% of the Buffalo Field. Thus, Kayes paid Klippel 10.006452% of the $145,000.00 estimated project cost ($14,509.36) in return for the assignment. On that same day, Klippel and Kayes executed an Operating Agreement which appointed Klippel the operator of the leases on the BFU.

20. Prior to executing the Operating Agreement, Klippel represented to Kayes, both orally and in the promotional documents, that this was an industry standard operating agreement. Klippel also told Kayes that he would keep Kayes advised of developments on the project and provide personal recommendations on whether the project should continue.

21. Thereafter, Klippel undertook the construction of his pilot waterflood project on the BFU. At all times, Klippel continued to own a substantial portion of the working interest in the BFU.

22. Prior to Kayes purchasing the working interests in the BFU on November 1, 1986, Klippel made the following misrepresentations about the project and the investment to Kayes, either orally or in the written promotional documents:

(a) The Operating Agreement Klippel used would be an industry standard;

(b) A bank would be willing to loan the of approximately $200,000.00 secured by a first mortgage against the leases to a responsible purchaser;

(c) Klippel had received several offers to purchase the BFU for several hundred thousand dollars;

(d) The oil in the Lower Squirrel pay zone was mobile and could be waterflooded;

(e) Findings from the prior operations of Pelto Oil Company on the property indicated probable oil production from the Lower Squirrel pay zone would likely exceed the projections contained in the general discussions;

(f) Dr. Kayes could terminate further participation in the project at any time simply by telling Klippel that he wanted to;

(g) Development costs beyond the initial four well pilot waterflood project would be paid for from revenues derived from ongoing production;

(h) Future net revenues to the working interests for production on the leases should be computed on the basis of $20.00 per barrel of crude oil;

(i) Stanley Kielmar wanted to invest in Klippel\'s venture but lacked adequate cash flow to do it;

(j) The monthly operating costs on the project would run approximately $6,250.00.

23. Klippel also omitted to disclose the following material facts to Kayes prior to obtaining Kayes' investment in the project:

(a) Klippel had sought a loan from Allied Bank in Houston secured by the BFU, and the loan application had been denied.

(b) Klippel lacked core analysis reports on the two wells that Pelto Oil Company had drilled.

(c) Klippel was involved in a lawsuit with Pelto Oil Company to obtain the core analysis reports and other results of their exploratory operations.

(d) Kayes would have to reconvey his working interest to Klippel or someone else if Kayes wished to terminate his participation in this project.

(e) Klippel lacked sufficient funds to carry his share of working interest expense on the project.

(f) Klippel did not intend to invest further in the project, even after November of 1986.

(g) The $145,000.00 cost of the pilot waterflood project did not include costs for plugging and other operations which would more than double the cost of the project.

(h) Klippel would charge the project a management fee of $6,000.00 per month.

24. Between November 1, 1986 and March 1989, Klippel charged Kayes on the BFU for costs other than those directly associated with the construction and implementation of his pilot waterflood project. Klippel never informed Kayes...