In re Wrt Energy Corp.

• Decision Date: 24 August 2001
• Docket Number: Adversary No. 98-5445.,Bankruptcy No. 96-50212.
• Citation: 282 B.R. 343
• Parties: In re WRT ENERGY CORPORATION, Debtor. WRT Creditors Liquidation Trust, Plaintiff, v. WRT Bankruptcy Litigation Master File Defendants, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Louisiana

282 B.R. 343

In re WRT ENERGY CORPORATION, Debtor.

WRT Creditors Liquidation Trust, Plaintiff, v. WRT Bankruptcy Litigation Master File Defendants, Defendants.

Bankruptcy No. 96-50212.

Adversary No. 98-5445.

United States Bankruptcy Court, W.D. Louisiana, Lafayette-Opelousas Division.

August 24, 2001.

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Paul N. Debaillon, Lafayette, LA, Gerald F. Slattery, Jr., New Orleans, LA, Mitchell A. Seider, Houston, TX, Jeffrey S. Sabin, New York City, Paul J. Goodwine, New Orleans, LA, Milling, Benson, Woodward, Lafayette, LA, David R. Dyer, New Orleans, LA, Michael L. Schein, Schulte, Roth & Zabel, LLP, New York City, Mark S. Farha, Dallas, TX, Lisa Dianne Hollbrook, Oklahoma City, OK, for WRT Energy Corp.

Charles H. Robertson, Dallas, TX, Douglas S. Draper, New Orleans, LA, Robein Ronquillo De Leo, Mandeville, LA, Daniel H. Golden, New York City, for DIP.

REASONS FOR DECISION

GERALD H. SCHIFF, Chief Judge.

I. INTRODUCTION

WRT Energy Corporation, Inc. ("WRT" or "Debtor"), filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code¹ on February 14, 1996 ("Petition Date"), and on that day an order for relief was duly entered. On May 5, 1997, an order was entered confirming the Modified Second Amended Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy Code ("Plan"). The Plan has now become effective.

A. Litigation

Pursuant to the Plan, the WRT Creditors Liquidation Trust ("Trust") was created to litigate and liquidate certain claims held by the Debtor. The Trust filed hundreds of complaints, which, for the purposes of this proceeding, generally fell into two categories —

• The Fraud Actions. The Trust filed some 17 complaints against over 90 parties alleging the Trust's right of recovery pursuant to various theories, including the avoidance of fraudulent conveyances under § 548, and miscellaneous state law remedies pursuant to § 544(a).

• The Preference Actions. Asserting rights to avoid pre-petition transfers under § 547(b), the Trust filed over 400 complaints seeking to recover what is referred to as "voidable preferences."

Although § 548 and the various state law causes of action contain several varied theories under which the Trust might recover, the insolvency of the Debtor at the time various transfers occurred was a common thread which linked all of the Fraud Actions. Accordingly, the court decided to consolidate the Fraud Actions for the purpose of determining the issue of the Debtor's insolvency at various points in time.

The common thread of the Debtor's insolvency, however, was also weaved into the Preference Actions as the point in time of the Debtor's insolvency was a necessary element of proof under § 547. Not wishing to try this issue piecemeal, the court entered an order in the Preference Actions requiring that each preference defendant desiring to rebut the presumption of insolvency under § 547(f) "opt in" to the consolidated case for the purpose of determining if and when the Debtor was or became insolvent. Several of the preference defendants chose to opt in and became part of the consolidated trial. Any preference defendant who did not opt in to the consolidated proceeding was precluded from raising the issue of the Debtor's insolvency upon the resumption of the individual preference trials on the remaining issues.

Although counsel for one or more of the preference defendants may have been present in the courtroom at limited times during the consolidated trial, none formally participated. During the lengthy trial, during which many witnesses testified either live or by deposition, not one word of evidence was presented to suggest the Debtor was solvent during the preference period, i.e., 90 days prior to the Petition Date. Accordingly, the court concluded that the Trust was entitled to a finding of fact (as to the preference defendants only) that WRT was insolvent during the 90 days preceding the Petition Date. This, of course, merely recognized that the presumption of insolvency which arises under § 547(f) was not rebutted by any of the preference defendants.

B. Insolvency Trial

For some 33 days during the period May 1 through August 18, 2000, the court conducted the insolvency phase ("Insolvency Trial") of the consolidated proceedings. The Insolvency Trial was the crown jewel of the Trust's efforts to recover funds for the benefit of creditors of the Debtor and others². The trial, which involved issues dealing with principles of general and forensic accounting as well as petroleum and reservoir engineering, often became contentious. Over 30 witnesses were heard and more than 4,000 exhibits were admitted into evidence. Although numerous defendants remain in these actions, the defense to the Trust's claims during the Insolvency Trial was presented by counsel for LLOG Exploration Company ("LLOG"), Benton Oil & Gas Company of Louisiana ("Benton"), Stephen Edwards, Great Southern Oil Company ("Great Southern"), and BSFI Western E & P, Inc. ("BSFI"), (collectively the "Defendants").

While several accounting principles were at issue, the court believes the main focus was the valuation of several oil and gas properties acquired by WRT from certain of the Defendants. Valuation of oil and gas properties is a two-step process. First, the amount of oil and gas in place must be determined. Then, a price must be ascertained. Applying one factor (quantity) to the other (price) should result in the value of the property. Oh, if it were only so easy.

II. FACTUAL BACKGROUND

A. History of WRT

WRT was founded by Steve McGuire.³ Around 1987 or early 1988, Mr. McGuire became CEO and Chairman of Tesla Resources, Inc. ("Tesla"), and Western Resource Technology, which later became WRT.⁴ WRT owned 100% of the stock of Tesla and Southern Petroleum, Inc. ("SPI"). Through August 1993, WRT also owned a 20% investment in TesTech, Inc. ("TesTech"), for which it had funded 100% of the operations and had management control. In September 1993, WRT acquired the remaining 80% interest in TesTech and dissolved that entity. In 1992, both Tesla and SPI were merged into WRT, which became the sole surviving corporation.⁵ Following that consolidation, WRT "went public," with its stock being traded on the NASDAQ.⁶ WRT remained continuously listed on NASDAQ from 1992 until at least Mr. McGuire's resignation in late 1995.⁷

As a publicly traded company, WRT was required by regulations of the Securities and Exchange Commission ("SEC") to file audited financial statements, both quarterly and annually. Those statements, of necessity, included valuations of WRT's oil and gas reserves.⁸ Shortly after going public, KPMG Peat Marwick ("KPMG") was retained to audit WRT's financial statements⁹ and the Scotia Group ("Scotia"), an engineering consulting firm located in Dallas, Texas, was retained to prepare WRT's reserve reports.¹⁰

B. WRT's Proprietary Technology

Beginning with its predecessor companies, TesTech and Tesla, WRT developed certain proprietary tools and technologies for use in connection with the logging of wells to locate overlooked and by-passed oil and gas reserves. Specifically, WRT used specialized radioactive spectral logging tools and a hydrocyclone water treatment system.¹¹ The radioactive spectral logging tools were a series of tools which emitted radiation through the tubing and casing of old wells and then read the signals to develop a log showing whether oil and/or gas was present.¹² These tools were unique in that their miniaturized size allowed them to be run in older wells without the necessity of spending hundreds of thousands of dollars to pull out the tubing in place.¹³

The hydrocyclone water treatment system was a series of devices that spun fluids fast enough to separate produced water from the lighter density oil and gas hydrocarbons.¹⁴ The hydrocyclone replaced much larger separator systems and processed fluid much quicker than a conventional system, thus increasing production.¹⁵ WRT believed that the use of the hydrocyclone would allow it to obtain an exemption from the Louisiana Department of Environmental Quality permitting it to discharge produced water overboard rather than having to reinject the water into the ground, thus saving additional expense.¹⁶ While the hydrocyclone was not new technology, that type of equipment was not at that time being used in South Louisiana oil and gas fields.¹⁷

C. WRT's Business Strategy

WRT thus developed into an independent oil and gas producer specializing in the acquisition, revitalization and production of mature oil and gas fields located in South Louisiana.¹⁸ WRT focused on South Louisiana because the geology in that area — numerous productive zones or sands — provided significant opportunities for overlooked and by-passed oil and gas.¹⁹

The company's strategy was to use property acquisitions to reach a critical mass as an integrated oil and gas company.²⁰ Wayne Beninger, who formerly consulted with WRT as a Scotia manager and joined WRT as a member of senior management in July, 1995, testified that WRT's strategy has been successfully employed by other companies in South Louisiana, citing Flores and Rucks as a specific example.²¹ Mr. McGuire, WRT's president, testified that WRT's vision was to become "an operator and possibly a second-tier independent that could collect large properties from the majors when they were done or had exploited most of the initial reserves."²²

According to Mr. Beninger, in the 1994 time period, WRT was looking to get to "a particular size, 100-million-plus, and to do that within a couple of years."²³ Mr. McGuire testified that WRT's target was to acquire $75,000,000 of additional oil and gas properties by the end of 1994.²⁴ Both Messrs. McGuire and Beninger agreed that the closing of a "next tier" acquisition in the...