Matter of Pester Refining Co.

Decision Date09 July 1986
Docket NumberAdv. No. 85-0203,Bankruptcy No. 85-340-C,85-0048.
Citation66 BR 801
PartiesIn the Matter of PESTER REFINING COMPANY, Debtor. PESTER REFINING COMPANY, Plaintiff, and Continental Illinois National Bank and Trust Company of Chicago, First Interstate Bank of Denver, N.A., Bankers Trust Company, Inland Crude Purchasing Corporation, and Official Unsecured Creditors Committee of Pester Refining Company, Plaintiffs-Intervenors, v. MAPCO GAS PRODUCTS, INC. and Mid-America Pipeline Company, Defendants. BURKE ENERGY CORPORATION, Plaintiff, v. PESTER REFINING COMPANY, Defendant, PESTER REFINING COMPANY, Counterclaimant and Third-Party Plaintiff, v. BURKE ENERGY CORPORATION, Counterdefendant, and Mid-America Pipeline Company, Third-Party Defendant, Continental Illinois National Bank and Trust Company of Chicago, First Interstate Bank of Denver, N.A., Bankers Trust Company, Inland Crude Purchasing Corporation, Southern Union Refining Company, and Official Unsecured Creditors Committee of Pester Refining Company, Intervenors.
CourtU.S. Bankruptcy Court — Southern District of Iowa



James A. Chatz, Chicago, Ill., and John G. Fletcher, Des Moines, Iowa, for debtor.

Harry D. Dixon, Omaha, Neb., and T. Randall Wright, Wichita, Kan., for Official Unsecured Creditors Comm.

Robert A. Gamble and Julie Johnson McClean, Des Moines, Iowa, for Bank Group.

Harold Kaplan, Theodore Livingston and Janice M. Powell, Chicago, Ill., for Continental Illinois.

William J. Baum, Denver, Colo., for First Interstate.

Frank L. Burnette, II, Des Moines, Iowa, for Inland Crude Purchasing Corp.

Thomas L. Flynn, Des Moines, Iowa, for Southern Union Refining Co.

F. Richard Lyford, Des Moines, Iowa, for Burke Energy Corp.

Herschel Langdon, Richard Steffen, Des Moines, Iowa, W. Michael Shinkle, Davenport, Iowa, and Royse M. Parr, Tulsa, Okl., for Mapco Gas Products, Inc. and Mid-America Pipeline Co.


RICHARD STAGEMAN, Bankruptcy Judge.

The matters before the court are two adversary proceedings that were consolidated for trial. The issues involved include a complaint for turnover of property of the estate, for money damages incurred by conversion of estate property, and counterclaims for reclamation. A motion to compel assumption or rejection of an executory contract has also been consolidated with the adversary proceedings.

The trial on these matters was held March 5 and 6, 1986. Pretrial and post-trial briefs have been submitted. After reviewing the evidence and arguments of counsel, the court enters the following findings of fact and conclusions of law.


Pester Refining Company ("Pester") is the debtor-in-possession. It is a Kansas corporation with its principal place of business in Des Moines, Iowa. It operated a refinery in El Dorado, Kansas. Burke Energy Corporation ("Burke") was a supplier of certain natural gas products used in Pester's refinery. MAPCO Gas Products, Inc. ("MAPCO") was also a supplier of products used in Pester's refinery. Mid-America Pipeline Company ("Mid-America") operated a pipeline serving Pester, Burke, MAPCO, and others.

Mid-America operated the pipeline system in conjunction with MAPCO Intrastate1 and MAPCO Underground Storage Company. All three are wholly owned subsidiaries of MAPCO Transportation. Both MAPCO Transportation and MAPCO Gas Products are wholly owned subsidiaries of MAPCO, Inc. The offices of MAPCO and Mid-America are located in the same building in Tulsa, Oklahoma.

Continental Illinois National Bank and Trust Co. of Chicago, First Interstate Bank of Denver, N.A., and Bankers Trust Co. (collectively the "Bank Group") loaned money to Pester in return for a lien on Pester's inventory and other assets. The Bank Group has intervened to protect its secured creditor rights. Inland Crude Purchasing Corporation, Southern Union Refining Company, and the Official Unsecured Creditors Committee of Pester Refining Company have intervened to protect rights which they acquired through Pester's confirmed plan of reorganization.

There are three kinds of natural gas liquid at issue: normal butane, isobutane, and natural gasoline. These products are extracted from natural gas and stored under pressure in liquid form. They were used by Pester in its refining process.

All three products are commonly shipped by pipeline. Because the products are fungible, it is impossible to identify the source of the product after it is put in the pipeline and commingled with other products of the same kind.

The product in question was shipped through the Mid-America pipeline system. That system has underground pipe in several states in the western and central parts of the United States. It is considered a common carrier, is regulated by government agencies, and publishes tariffs specifying the rights and duties of its customers. The system serves both producers and users of liquid natural gas product. Product is put into the pipeline directly from processing plants. It moves through the pipeline and reaches one or more stations. At a station, different kinds and amounts of product can be prepared for further delivery through the pipeline.

Producers who sell their product to users frequently designate a particular station as the location where transfer of title to the product occurs. After the product has reached the station and transfer of title has occurred, the buyer has the responsibility of having the product shipped to an end point of the pipeline system.

Title of the product in this matter was transferred at the Conway, Kansas station. The Conway station is a major station in the Mid-America pipeline system, and is designated as Group 140. Group 140 consists of interconnected pipes and caverns in a geographical area that is approximately 17 miles by 15 miles.

The tariffs and other evidence show that customers could store2 product at Group 140. There were two types of storage. One type was in-line storage. Mid-America provided this storage in its pipeline. Approximately 3% of Mid-America revenue came from in-line storage charges. Storage space in-line is limited, however, so the tariffs contain economic incentives for using the second type of storage when product is to be stored for a long period of time.

The second type of storage available was storage in underground caverns. Owners of product would have to make separate agreements with MAPCO Underground Storage to use the caverns. None of the product at issue here was stored in the caverns. These two types of storage are storage at the option of the pipeline customer. They are distinct from the incidental storage necessary for Mid-America to operate the pipeline.

Title to the product passed when the product was made available to Pester. Several steps were necessary to make the product available. First, MAPCO or Burke would ship product to Conway and pay the shipment charges. Second, Pester and the seller would execute a product transfer order ("PTO") directing Mid-America to "transfer title" of a specified amount of product from the seller to Pester. The PTO forms provided that the transfer be "F.O.B. Group 140." Third, the PTO would be sent to Mid-America. Fourth, Mid-America would check its records to see if the seller had that amount of product available at Conway. Fifth, if the seller had sufficient product available, Mid-America would transfer that product from the seller's account to Pester's account. Sixth, and finally, Mid-America would send MA-32 forms to Pester and the seller to acknowledge the transfer. No product was moved to effect a product transfer, and no transportation costs were incurred. Mid-America simply charged a flat $10 fee to process each PTO.

The tariffs indicate that once a PTO transaction was completed, future treatment of the product was at Pester's discretion. Pester could elect to ship the product to its refinery. Pester could transfer the product to another pipeline customer, or pick up the product at Conway with trucks. Finally, Pester could store the product in-line. Nothing in the tariffs indicate that Mid-America recognized any rights of the seller to product after a PTO had been processed.

Mid-America automatically placed product transferred by a PTO into Pester's 350 account. The 350 account is also known as a transfer storage account. While product was in the account, it could be transferred to another pipeline customer through a PTO. To have product in the transfer storage account shipped to the refinery, Pester would first have to have Mid-America place the product in what is known as the transportation account. This was accomplished through use of a movement order. However, no actual movement of product was involved in this step. It was simply an accounting transaction that Mid-America required for logistical purposes. After the product was in the transportation account, Pester would then have to designate the product for actual shipment. Product is designated for shipment through use of an MA-10 form. The tariffs give Mid-America the right to require submission of MA-10 forms three weeks before the desired date of delivery.

The tariffs state that product in the transportation account must be designated for shipment within thirty days. However, product that was not designated for shipment could be transferred back to Pester's transfer storage account. Mid-America did not consider product to be in the process of being shipped until it was in the transportation account and designated for shipment. Once the product was designated for shipment, Pester could not exercise any other options regarding that product.

Pester could store product in-line without taking any action. No forms had to be submitted to Mid-America to request storage. Product placed in the transfer storage account by a PTO transaction was immediately subject to storage charges. These charges initially took the form of nonmonetary credits against certain demand...

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