In re Tex. Wyo. Drilling, Inc.

• Decision Date: 04 February 2013
• Docket Number: No. 07–41650–DML7.,07–41650–DML7.
• Parties: In re TEXAS WYOMING DRILLING, INC., Debtor.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

486 B.R. 746

In re TEXAS WYOMING DRILLING, INC., Debtor.

No. 07–41650–DML7.

United States Bankruptcy Court,

N.D. Texas,

Fort Worth Division.

Feb. 4, 2013.

Jeffery D. Carruth, Weycer, Kaplan, Pulaski & Zuber, P.C., Arlington, TX, Mark A. Castillo, Stephanie Diane Curtis, Curtis Castillo PC, Dallas, TX, Melanie Pearce Goolsby, The Curtis Law Firm, PC, Dallas, TX, Jason T. Rodriguez, Higier Allen & Lautin, P.C., Addison, TX, for Debtor.

Barbara Elaine Hargis, Harris, Finley & Bogle, Ft. Worth, TX, Lyndel Anne Mason, Cavazos, Hendricks, Poirot & Smitham, PC, Dallas, TX, Davor Rukavina, Munsch, Hardt, Kopf & Harr, Dallas, TX, for John Dee Spicer, Trustee.

John Dee Spicer, Cavazos Hendricks Poirot & Smitham, P.C., Dallas, TX, Trustee.

Erin Marie Schmidt, Dallas, TX, United States Trustee.

MEMORANDUM OPINION

D. MICHAEL LYNN, Bankruptcy Judge.

Before the court is the Trustee's Objection to Claim No. 82 ( Charlie Lawrence )(the “Objection,” docket no. 961 ¹) ²filed in the Case on September 24, 2012 by John Dee Spicer, chapter 7 trustee (the “Trustee”) for Texas Wyoming Drilling, Inc. (“Debtor”) pursuant to Bankruptcy Code ³ section 704(a)(5)⁴ and Federal Rule of Bankruptcy Procedure 3007. By the Objection, the Trustee objects to Claim No. 82 (the “Claim”) filed by Charles C. Lawrence (“Lawrence”), the former consulting director, president, and chief operating officer for Debtor. Lawrence claims that the court's conversion of the Case from a case under chapter 11 of the Code to one under chapter 7 constitutes an involuntary termination of his employment agreement with Debtor. As a result, Lawrence seeks a total of $232,750.00 in compensation, benefits, and other expenses to be paid immediately as an administrative expense in the Case. The court held a hearing on the Objection on December 11, 2012 (the “Hearing”),⁵ at which the court admitted into evidence documentary exhibits ⁶ and heard testimony from (1) Lawrence, (2) Nathan Villanueva, a revenue officer advisor for the IRS Advisory Unit (“Villanueva”), and (3) Julie Lawrence, wife of Lawrence and financial controller and a stockholder of Debtor (“Julie”). ⁷ At the conclusion of the Hearing, the court took the matter under advisement.

The court exercises core jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(B). This memorandum opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 9014, 7052.

I. BACKGROUND

A. Debtor's Chapter 11 Petition

Prior to its bankruptcy, Debtor's business operations consisted of three primary areas: (1) oil drilling operations, (2) a working ownership in several dozen oil wells, and (3) “snubbing” operations, defined as relieving pressure on oil wellheads to prevent pipes from coming out of the ground. TR (Lawrence) at 5–8.

Debtor filed a voluntary bankruptcy petition under chapter 11 of the Code on April 16, 2007. See docket no. 1. Debtor's goal in bankruptcy was to continue its business operations and restructure its debt, particularly debt owed to the IRS. TR (Lawrence) at 6–7; id. (Julie) at 73–74. Debtor believed that it could maximize return to creditors by operating the business as a going concern through chapter 11 rather than liquidating its assets through chapter 7. Id. (Lawrence) at 8.

On November 12, 2008, Debtor filed Debtor's First Amended Plan of Reorganization (the “Plan,” at docket no. 577). The court confirmed the Plan on November 13, 2008. See Order Confirming Debtor's First Amended Plan of Reorganization (the “Confirmation Order,” at docket no. 578). The Plan became effective on December 15, 2008. Id. The Plan was to be funded by Debtor's business operations. TR (Lawrence) at 5–6. Neither the Plan nor the First Amended Disclosure Statement Under [Code] § 1125 In Support Of Debtor's Plan of Reorganization (the “DisclosureStatement,” at docket no. 476) contemplated the possibility that the Plan would fail and Debtor would be required to liquidate. TR (Lawrence) at 13.

B. The Executive Employment Agreement With Lawrence

Lawrence and Debtor entered into an Executive Employment Agreement (the “Agreement,” at Ex. D), pursuant to which Lawrence agreed to serve as Debtor's president and chief operating officer from December 15, 2008 until December 15, 2014 (the “Term”) ⁸ in exchange for (1) a base salary of $130,000.00 annually; (2) a bonus “[a]s determined from time to time by the Board of Directors;” and (3) “Twenty-five percent (25.00%) of all of the outstanding shares of the reorganized [Debtor] [issued] pursuant to the” Plan. Agreement, Ex. A.⁹ The Agreement also permitted Lawrence to “participate, on the same basis generally as other employees of [Debtor], in all general employee benefit plans and programs,” including but not limited to health insurance. Agreement § 2.2. Lawrence and Debtor “enter[ed] into th[e] Agreement pursuant to and in conjunction with the [Plan].” Id. at p. 1; see also Confirmation Order ¶ 33. The Agreement was not, and did not have to be, presented to the court prior to its execution and implementation by Debtor following the effectiveness of the Plan. See Confirmation Order ¶ 33.

Under the terms of the Agreement, Lawrence can either be terminated voluntarily, involuntarily, or for cause. See Agreement §§ 3.1–3.5. Each type of termination has different preconditions and consequences.¹⁰Id.

C. Conversion to Chapter 7

In early 2009, Debtor encountered economic difficulties and failed to make a required payment to the IRS under the Plan. TR (Lawrence) at 10–13; id. (Villanueva) at 61–65; id. (Julie) at 80–81, 83, 91–93. In light of its business difficulties, Debtor entered into an auction agreement with Kruse Energy & Equipment, LLC (“Kruse”) on June 5, 2009, pursuant to which seven drilling rigs that Debtor customarily leased to customers would be auctioned off (the “Auction”). Id. (Lawrence) at 14–16; see also Ex. G–3. Lawrence, as a member of Debtor's board of directors, was one of several representatives of Debtor who approved Debtor's decision to auction the rigs. TR (Lawrence) at 14–15; id. (Julie) at 81. Debtor's debtor-in-possession lender held a security interest in the seven rigs. Id. (Lawrence) at 26–27. As Lawrence admitted at the Hearing, the consummation of the Auction, which was set to occur on or around July 16, 2009,¹¹ would cause “one category of [Debtor's] business operation income,” namely “the leasing of drilling rigs,” to “go away.” Id. at 14. Lawrence further admitted that as a result of Debtor losing this stream of income, “[Debtor's] ability to perform under [the Plan]” would be “shot by the auction.” Id. at 26–29.

According to Lawrence, Debtor was advised by the Curtis Law Firm (“Curtis”), Debtor's chapter 11 counsel, that the IRS had notice of and approved the Auction, and Debtor was therefore permitted by its board to proceed with the Auction. TR (Lawrence) at 32–34. Lawrence later learned that the IRS had not in fact approvedthe Auction. Id. at 33. In actuality, the IRS had no notice of the Auction until a few days before the Auction was set to occur. Id. (Villanueva) at 65. Lawrence never personally discussed the Auction with any representative for the IRS. Id. (Lawrence) at 40. Lawrence testified that he would not “have signed th[e] agreement with Kruse if [Curtis] hadn't told [him] to sign it,” and that, as a non-lawyer, he “depended entirely on [Curtis] to advise [him] in what [he] was supposed to be doing in the Chapter 11” stage of the Case. Id. at 33–34.

On July 14, 2009, upon learning of Debtor's default under the Plan, the court, pursuant to Code section 1112, converted the Case sua sponte from one under chapter 11 of the Code to one under chapter 7 (the “Conversion”) because Debtor had “taken steps to auction a substantial portion of its assets” without timely informing either the unsecured creditors' committee or the IRS, and therefore had “materially default[ed]” under the terms of the Plan. Order Converting Case, at docket no. 701, 1–2 (the “Conversion Order”); see also TR (Lawrence) at 6–7. “[T]he court conclude[d] that the best interests of creditors would be served by conversion of th[e] [C]ase to chapter 7.” Conversion Order at 2. Immediately thereafter, the United States trustee appointed the Trustee.

The Auction of Debtor's property was initially canceled because of the Conversion. TR (Lawrence) at 23–24. However, the IRS and the Trustee agreed that, because Debtor would henceforth be liquidated, auctioning off Debtor's assets would be in the best interest of creditors. See docket no. 707. Therefore, the Auction was consummated on the originally scheduled date. TR (Lawrence) at 25–26. Lawrence attended the Auction to answer prospective bidders' questions and thereby encourage bidding and maximize the final sale price for the rigs. Id. at 42–46, 48; id. (Julie) at 77–78. The Auction brought in more revenue than expected. Id. (Lawrence) at 26.

As a result of the Conversion, Lawrence no longer works for Debtor. He now makes a living as a drilling consultant who has “worked for ... five or six different” companies. TR (Julie) at 75–76. However, no member of Debtor's board of directors ever officially informed Lawrence he was terminated under the Agreement; nor did any officer of Debtor, nor the Trustee. Id. (Lawrence) at 34–35.

On October 13, 2009, Lawrence filed the Claim. Lawrence claims that he was involuntarily terminated on the date of the Conversion as a result of the Conversion Order. Claim at 2. Therefore, argues Lawrence, he is entitled to an “administrative claim in the amount of $232,750.00” payable “immediately.” Id. at 1. Lawrence breaks the Claim down as follows:

+-----------------------------------------------------------------------------+
                ¦2009 remaining salary                                            ¦65,000     ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Lump sum distribution

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