Topco, Inc., Matter of

• Decision Date: 20 February 1990
• Docket Number: No. 88-2986,88-2986
• Citation: 894 F.2d 727
• Parties: , 22 Collier Bankr.Cas.2d 482, 20 Bankr.Ct.Dec. 261, Bankr. L. Rep. P 73,265 In the Matter of TOPCO, INC., Debtor. RIVER PRODUCTION, CO., INC., Appellee, v. Jack M. WEBB, Trustee, Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 727

894 F.2d 727

58 USLW 2538, 22 Collier Bankr.Cas.2d 482,

20 Bankr.Ct.Dec. 261,

Bankr. L. Rep. P 73,265

In the Matter of TOPCO, INC., Debtor RIVER PRODUCTION, CO., INC., Appellee, v. Jack M. WEBB, Trustee, Appellant.

No. 88-2986.

United States Court of Appeals Fifth Circuit.

Feb. 20, 1990.

Thad Grundy, Mark T. Womack, Hutcheson & Grundy, Houston, Tex., for appellant.

Janna L. Ivey, Thomas W. Graves, Adair & Myers, Houston, Tex., for appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before GOLDBERG, JOHNSON, and DUHE, Circuit Judges.

GOLDBERG, Circuit Judge:

Statement of Facts

While this case does not deserve a Homeric epic, it has engaged in an Odyssey in time. Nine years ago, in 1981, Topco, Inc. ("Topco") filed a Chapter 11 petition in bankruptcy. Five years later, the bankruptcy court granted the trustee in bankruptcy's ("the Trustee") motion to convert the case from Chapter 11 to 7. Shortly after Topco entered Chapter 7, the Trustee solicited bids for Topco's oil and gas properties. The Trustee accepted B/C Joint Venture's ("B/C") high bid of $201,000 subject to review and approval by the bankruptcy court.

The Trustee and B/C memorialized the proposed sale in a letter agreement dated January 27, 1987 ("Letter Agreement"). The Letter Agreement provided the following: B/C agreed to purchase Topco's "right, title, and interest" in producing and nonproducing oil and gas properties to the extent of Topco's interest provided that the bankruptcy court approved the sale. Topco conveyed to B/C Topco's interest in oil field equipment and Topco's leasehold interests in numerous oil and gas wells. ¹ The leases covering these properties allowed Topco to extract oil and gas from existing wells. In return, Topco paid royalties to the owners of the land where the wells were located. Many, if not all, of these leases contained a provision that automatically terminated the arrangement if Topco failed to produce oil or gas for more than sixty days.

B/C reserved twenty days to review title, revenue, and expense reports and to inspect the physical assets included in the sale. During that twenty day period, B/C could terminate its purchase of Topco's assets "if not satisfied." B/C had to deposit $201,000 in escrow within five days after the parties executed the Letter Agreement. B/C could terminate its purchase and recover its escrow deposit if the bankruptcy court did not approve the sale by March 30, 1987. The parties agreed to close no later than eleven days after the bankruptcy court approved the sale or at a later date if the parties agreed. The Letter Agreement did not specify the consequences of failing to close by the eleven day deadline.

On March 19, 1987, the Trustee requested court approval to sell the assets to B/C under the terms of the Letter Agreement. In his written motion, the Trustee informed the bankruptcy court that Topco could no longer operate its oil and gas wells. Shutting down those wells, the Trustee alleged, would damage the estate. The Trustee informed the court that 11 U.S.C. Section 365 of the Bankruptcy Code required the bankruptcy court to authorize the Trustee to assume the unexpired leases in order to assign those leases to B/C as part of the sale. ² In order to comply with Section 365(c)(3), the Trustee alleged that no defaults existed in the leases and that B/C could adequately perform Topco's obligations in the leases. ³

The motion further informed the court that B/C (1) agreed to purchase Topco's assets only to the extent of Topco's interest in those assets; (2) agreed to waive the requirement of formal title opinions covering the leases; and (3) agreed to waive any reliance on information provided by the Trustee, his operator, or his attorneys regarding the assets. The Trustee explained that "[t]his waiver of reliance and assumption of risk by B/C Joint Venture resulted in the reduction of considerable expense to the Trustee in negotiating this sale, and was an important factor in arriving at an agreement for the price to be paid by B/C." The Trustee attached as exhibits to the motion a copy of the Letter Agreement and several schedules detailing Topco's interests in oil and gas wells and describing the oil equipment included in the sale.

The bankruptcy court heard the Trustee's motion on April 15th and 16th and May 6th, 1987. On April 15th, the Trustee's expert witness valued the assets being sold at $250,382. The Trustee submitted an appraisal valuing Topco's interests in some, but not all, of the wells at $250,000. The current operator of the wells testified that he offered $157,000 for Topco's oil and gas properties. An expert witness for the debtor (who opposed the sale) valued the assets at $2,000,000. No one from River Production attended the hearing. However, an attorney bid $225,000 for the properties on behalf of River Production.

On April 16th, the bankruptcy court permitted all interested parties to bid orally for the property. The Trustee accepted the highest offer, from River Production, for $450,000 in cash, subject to the court's approval. River Production previously purchased all of Topco's unsecured claims and one of its principals previously viewed many of Topco's wells at the behest of the debtor. During the April 16th hearing, River Production orally agreed to "step into B/C's shoes" and to waive the twenty day period for examining Topco's title in the properties. River Production also informed the court that the sale would close eleven days after the bankruptcy court entered "this Order." In response to testimony addressing whether River Production's purchase included a certain lease, River Production reiterated that it purchased the properties "without warranty."

Three weeks later, during the last day of the hearing, the question whether River Production's purchase included a certain lease cropped up again. River Production again told the court that: "If the Trustee doesn't own it, we don't get it." River Production was "buying the pig in the poke." That same day, during testimony about whether the purchase included Topco's possible liabilities to the State of Texas and the particular lease, River Production again acknowledged its lack of information about the assets it intended to purchase:

Mr. Graves [River Production's lawyer]: ... The witness testifies that this well, if it's completed in these zones, of which there is some risk, could possibly produce this much, but the other side of that they're testifying this Nash well hadn't been produced in five years. Well, what's the title like? Is the lease still in effect? Did the lease expire two years ago? My client is taking all of that risk. They're taking the risk of the [Texas] Railroad Commission coming in and requiring us to plug wells. That's part of what went into--to my client's decision to bid what they bid, Your Honor."

Before the bankruptcy court approved the sale, the operator testified that only a small percentage of the wells were producing and that many of the royalty owners were dissatisfied with Topco's performance.

On May 6th, 1987, the bankruptcy court orally approved the sale to River Production. On May 18th, after a hearing, the bankruptcy court issued its order approving the sale. The bankruptcy court entered that order on May 27th. The order approved the sale to River Production on the same terms outlined in the Letter Agreement between B/C Joint Ventures and the Trustee with the following exceptions (contained in paragraph 14 of the order):

(1) River Production would pay $450,000 rather than $201,000.

(2) River Production waived review of title work, actual revenues and operating expenses, physical inspection of the property, and any extension of time to review, inspect, or terminate its offer.

(3) River Production agreed to deposit $225,000 in cash with the Trustee as earnest money pending closing.

After the bankruptcy court entered its order, River Production deposited the $225,000 earnest money as agreed. Before the parties could close the sale, however, the debtor and certain creditors asked the bankruptcy court to reconsider its order approving the sale. On July 17, the bankruptcy court denied that motion. On July 24, the debtor and certain creditors appealed to the district court to set aside the sale. They also requested that the bankruptcy court stay the sale pending appeal. On July 27, the bankruptcy court orally stayed the sale.

On the day the bankruptcy court stayed the sale, River Production notified the Trustee that it "terminated" its offer to purchase and asked the Trustee to return its escrow deposit. River Production cited a provision in the Letter Agreement that permitted B/C to terminate its offer if the sale did not close by March 30, 1987.

When the Trustee did not return River Production's earnest money deposit, River Production sought a declaratory judgment in bankruptcy court rescinding the sale. River Production maintained that most of the oil and gas leases the Trustee listed on the schedules attached to his motion to assume the leases expired by April 16, 1987 (when River Production offered to buy them). They expired, alleged River Production, because the debtor or the Trustee failed to comply with the terms of the leases. River Production alleged that by September 11, 1987 (the earliest possible closing date), third parties had leased most of the oil and gas wells previously leased by Topco. River Production claimed that closing the sale under these circumstances would leave River Production with only a small portion of the leases it thought it bargained for in April.

On September 1, the district court dismissed the appeal in the original bankruptcy case. On September 3, the Trustee informed River Production that he could close the sale immediately. River Production refused to close.

On September 30, 1987, the chief district judge removed this case from the bankruptcy court to the...