Seneca Oil Co., In re

• Decision Date: 28 June 1990
• Docket Number: 87-2078 and 87-2080,Nos. 87-1890,87-2018,s. 87-1890
• Citation: 906 F.2d 1445
• Parties: , 59 USLW 2043, 23 Collier Bankr.Cas.2d 361, Energy Mgt. P 26,635, Bankr. L. Rep. P 73,506 In re SENECA OIL COMPANY and Seneca Drilling Company, Debtors. UNITED STATES DEPARTMENT OF ENERGY, Plaintiff-Appellee/Cross-Appellant, v. SENECA OIL COMPANY and Seneca Drilling Company, Defendants, and The Bank of New York, Individually and as agent for Interfirst Dallas; Credit Suisse; United Bank of Denver, National Association; Bank of Oklahoma, National Association, Creditors-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1445

906 F.2d 1445

106 A.L.R.Fed. 795, 59 USLW 2043, 23

Collier Bankr.Cas.2d 361,

Energy Mgt. P 26,635, Bankr. L. Rep. P 73,506

In re SENECA OIL COMPANY and Seneca Drilling Company, Debtors UNITED STATES DEPARTMENT OF ENERGY, Plaintiff-Appellee/Cross-Appellant, v. SENECA OIL COMPANY and Seneca Drilling Company, Defendants and The Bank of New York, Individually and as agent for Interfirst Dallas; Credit Suisse; United Bank of Denver National Association; Bank of Oklahoma, National Association, Creditors-Appellants/Cross-Appellees.

Nos. 87-1890, 87-2018, 87-2078 and 87-2080.

United States Court of Appeals Tenth Circuit.

June 28, 1990.

Eric M. Reuben of Emmet, Marvin & Martin, New York City (David A. Cheek of McKinney, Stringer & Webster, Oklahoma City, Okl., and Marcia S. Ruskin and Eileen Chin-Bow of Emmet, Marvin & Martin, New York City, with him on the briefs), for creditors-appellants/cross-appellees.

Floyd I. Robinson (Marc Kasischke and Phyllis Jo Gervasio, with him on the briefs), Office of Judicial Litigation, Economic Regulatory Admin., U.S. Dept. of Energy, Washington, D.C., for plaintiff-appellee/cross-appellant.

Before LOGAN, BRORBY, and EBEL, Circuit Judges.

EBEL, Circuit Judge.

This bankruptcy case involves appeals and a cross-appeal from three orders of the United States District Court for the Western District of Oklahoma. Appellants are a group of banks that made loans to the debtor, Seneca Oil Company. Appellee is the Department of Energy ("the DOE"), which is seeking recovery of overcharges made by Seneca on its sales of crude oil in violation of federal pricing regulations.

Appellants raise the following issues on appeal: (1) Has the DOE established sufficient wrongdoing by Seneca to justify imposition of a constructive trust under Oklahoma law? (2) Has the DOE sufficiently traced the funds in dispute? (3) Does this court have jurisdiction to decide whether the DOE's claim is a "fine, penalty, or forfeiture" under the Bankruptcy Code, or does exclusive jurisdiction rest with the Temporary Emergency Court of Appeals? (4) Is the DOE's claim a "fine, penalty, or forfeiture" under Section 726(a)(4) of the Bankruptcy Code?

In a cross-appeal, the DOE raises the issue of whether the constructive trust fund should be increased by $54,690.09 because of improper expenditures from that fund.

FACTS

To cope with increasing inflation, Congress in 1970 enacted the Economic Stabilization Act ("ESA"), 12 U.S.C. Sec. 1904 note, which authorized the President "to issue such orders and regulations as he deems appropriate ... to ... stabilize prices." Economic Stabilization Act of 1970, Pub.L. No. 91-379, Sec. 202, 84 Stat. 799, 799 (1970), as amended by Economic Stabilization Act Amendments of 1971, Pub.L. No. 92-210, Sec. 203(a), 85 Stat. 743, 744 (1971). In November 1973, after the OPEC ("Organization of Petroleum Exporting Countries") oil embargo was declared, Congress passed the Emergency Petroleum Allocation Act ("EPAA"), 15 U.S.C. Sec. 751 et seq., which authorized the President to establish regulations for the pricing and allocation of crude oil and petroleum products. The regulations promulgated pursuant to the EPAA that are relevant here are the Mandatory Price and Allocation Regulations, which included price ceilings for the sale of crude oil. Those regulations are enforced by the DOE. ¹ The oil price controls relevant here were discontinued by the President in 1981, although enforcement actions for past violations continue under a savings clause, 15 U.S.C. Sec. 767.

During the time in which the Mandatory Price and Allocation Regulations were in effect, Seneca Oil Company was an independent producer of crude oil and natural gas operating primarily in Oklahoma. In 1977 and 1978, Seneca conducted test drilling on five oil and gas properties in Oklahoma. Seneca sold the "test oil" that it recovered from those wells.

In May 1979, the DOE issued regulations ("the May regulations") exempting "newly discovered crude oil" from price ceiling regulations. 10 C.F.R. Sec. 212.79, 44 Fed.Reg. 25,828, 25,832 (1979) (revoked effective March 30, 1981, 46 Fed.Reg. 20,508, 20,516 (1981)). The May regulations defined newly discovered crude oil as crude oil "produced ... from a property from which no crude oil was produced in calendar year 1978." 10 C.F.R. Sec. 212.79(b), 44 Fed.Reg. 25,828, 25,832 (1979) (revoked effective March 30, 1981, 46 Fed.Reg. 20,508, 20,516 (1981)). Seneca, allegedly believing that the word "produced" in the May regulations meant "produced in commercial quantities," disregarded its 1978 "test" production on the five properties and certified that the oil produced from those properties after 1978 was "newly discovered crude." Accordingly, Seneca charged the market price for that oil from November 1979 to December 1980. During that period, Seneca set aside, in an interest-bearing suspense account, a portion of its revenues equal to the difference between the market price it charged and the regulated ceiling price. ²

In July 1980, the Office of General Counsel of the DOE issued Interpretive Ruling On March 8, 1985, before judgment was entered in favor of the DOE, Seneca filed for bankruptcy under Chapter 11 of the Bankruptcy Code. The district court entered a final judgment against Seneca on July 3, 1985 for $1,741,597.77--the amount of the overcharges plus interest up to the date of bankruptcy. The DOE then filed a proof of claim for that amount. It also asserted that it had a constructive trust or equitable lien over the amount of Seneca's contingency fund as of the date of bankruptcy (approximately $1.3 million). ⁵ The bankruptcy court held that the DOE had not established sufficient wrongdoing by Seneca to warrant imposition of a constructive trust. ⁶ The district court reversed and remanded for a determination of whether the DOE had sufficiently traced the funds. In re Seneca Oil Co., 76 B.R. 810 (W.D.Okla.1985). ⁷ On remand, the bankruptcy court found that the DOE had sufficiently traced the funds, and the district court affirmed that finding.

                1980-3, stating that the word "produced" in the May regulations meant produced in any quantity during 1978. 3   In February 1981, Seneca sought injunctive and declaratory relief against the enforcement of Ruling 1980-3 in the United States District Court for the Western District of Oklahoma.  It prevailed in the district court.  That court held that the DOE's interpretation in Ruling 1980-3 of the term "produced" was invalid, largely relying upon the preamble to the May regulations. 4   But on appeal the Temporary Emergency Court of Appeals ("the TECA") reversed the district court, holding that the DOE's interpretation of the pricing regulations was valid and that Seneca had violated the pricing regulations by miscertifying its crude oil and by overcharging for oil.  Seneca Oil Co. v. Department of Energy, 712 F.2d 1384 (Temp.Emer.Ct.App.1983).  The TECA remanded to the district court "to grant motions for appropriate orders to secure recovery from [Seneca] of the overcharges in violation of Ruling 1980-3 and the May 2, 1979 legislative regulation, interest thereon and costs."    Id. at 1402.
                

The bankruptcy court approved a plan of reorganization on November 21, 1985, over the DOE's objections. The DOE appealed to the district court, arguing that (1) the plan improperly subordinated the portion of the DOE's claim not covered by a constructive trust below the claims of unsecured creditors, labeling that portion of the DOE's claim as a fine, penalty, or forfeiture, and (2) the contingency account that the DOE asserted a constructive trust over was deficient by almost $55,000 because the bankruptcy court had improperly approved the payment of postpetition administrative fee expenses out of the contingency account. The district court reversed the confirmation of the plan to the extent that it subordinated the unsecured portion of the DOE's claim as a penalty. But the district court approved the payment of the administrative fees because the constructive trust claim had not yet been granted when the administrative fees were authorized. ⁸

8]

The appellants here are a group of banks that made secured loans to Seneca (The Bank of New York, Interfirst Bank Dallas, Credit Suisse, United Bank of Denver, and Bank of Oklahoma). Seneca has no interest in this litigation because it has been reorganized and the money in dispute has been set aside in a disputed claim fund for the benefit of Seneca's creditors.

ANALYSIS

I. CONSTRUCTIVE TRUST

A constructive trust is an equitable remedy that is imposed for the recovery of wrongfully-held property. See In re Heston Oil Co., 63 B.R. 711, 714 (Bankr.N.D.Okla.1986); Cacy v. Cacy, 619 P.2d 200, 202 (Okla.1980). In order to obtain a constructive trust over property of a bankrupt, a party must (1) show either sufficient wrongdoing by the bankrupt in acquiring the property or a fiduciary relationship between the party and the bankrupt, and (2) be able to trace the wrongfully-held property. See 4A Collier on Bankruptcy Sec. 70.25 (14th ed. 1978); see also In re Heston Oil Co., 63 B.R. at 714.

A. Wrongdoing

The district court found a constructive trust here because it concluded that Seneca's illegal overcharging "clearly and unequivocally shows wrongdoing." In re Seneca Oil Co., 76 B.R. at 813. Appellants argue that Seneca's overcharging was not sufficient wrongdoing to warrant a constructive trust. Because this is an issue of law, we apply a de novo standard of review. In re Ruti-Sweetwater, Inc., 836 F.2d 1263, 1266 (10th Cir.1988).

The parties agree that Oklahoma law governs the issue of whether a constructive trust exists in this case. The Supreme Court of Oklahoma has explained the conditions for imposing a constructive trust as follows:

The primary reason for imposing a constructive trust is to avoid unjust enrichment. It is imposed against one who "by fraud, actual or constructive, by [dure...