Opinion
Civil Action No. 00-3502, Section "C"
June 11, 2001
OPINION
This matter comes before the Court from two decisions rendered by Judge Jerry A. Brown at the United States Bankruptcy Court for the Eastern District of Louisiana. First, in Matter No. 00-3502, appellants assert that this Court lacks subject matter jurisdiction over the appeal because the appeal was not timely. Appellants also assert that the bankruptcy court wrongfully determined that insurance proceeds, under a policy of indemnification/reimbursement, are not the property of the Debtor's estate. Second, in Matter No. 00-3320, the bankruptcy court denied priority to liens, filed pursuant to the Louisiana Oil Well Lien Act (LOWLA), La. Rev.Stat. §§ 9:4681 et. seq., favoring a pre-existing mortgage. For the reasons set forth below, this Court affirms in part and reverses in part.
STANDARD OF REVIEW
The district court reviews issues of law on appeal from a bankruptcy court de novo, and factual issues under a clearly erroneous standard. Kennard v. MBank Waco, 970 F.2d 1455, 1457-58 (5th Cir. 1992); see also Fed.R.Bank.P. 8013 (stating that "[f]indings of fact . . . shall not be set aside unless clearly erroneous"). Only if this court has a "definite and firm" conviction that the bankruptcy court erred would this court reverse the bankruptcy court's fact findings. Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
BACKGROUND
Alma Energy Corp. (Alma), and Equinox Oil Company, Inc. (Equinox), are owned by two individuals. Michael Galesi owns 50% of Equinox, and 85% of Alma. Steven Layton owns the remaining 50% of Equinox and 15% of Alma. Equinox operates on oil and gas leases owned by Alma.
Den norske Bank, ASA, individually, and as agent for BNP Paribas and Comerica Bank — Texas (collectively the "Bank Group"), loaned money to Alma and Equinox (collectively the "Debtor"), in excess of $106 million, secured by mortgages and other security rights in all the assets of Alma. During the course of operation, Equinox incurred unpaid debts to numerous vendors and service providers (collectively the "MM" creditors). All MM creditors perfected liens pursuant to the Louisiana Oil Well Lien Act (LOWLA), against the same property previously secured by the Bank Group. The bankruptcy court turned this matter into an adversary proceeding, and allowed five weeks of discovery before trial.
In September 1998, a "blow-out" that occurred at a well near Port Sulfur, Louisiana in the Lake Washington Field, which caused property damage and an oil spill. Pursuant to its policy with National Union Fire Insurance Company (National Union), Equinox placed its insurer on notice. Numerous companies provided services and equipment (collectively the "Remediation Creditors") to Equinox to help respond to the spill, with the expectation that they would be paid by either Equinox or National Union.
Equinox presented to National Union a sworn proof of loss form and directed National Union to pay the Remediation Creditors. National Union did provide Debtor with $709,138.21 in partial settlement of the insurance claim relating to the clean up. Equinox then paid some of the assisting companies a portion of what they were owed.
In May 1999, several of Equinox's creditors filed a petition for involuntary Chapter 7 bankruptcy. Equinox converted the proceeding from Chapter 7 to Chapter 11. In June 1999, Alma also filed a voluntary Chapter 11 petition, and the bankruptcy court joined both proceedings.
At trial, the bankruptcy court determined that the National Union insurance proceeds were not property of the estate and that the security interests of the Bank Group held priority over the LOWLA liens of the MM creditors.
TIMELINESS OF APPEAL
Phillip Services/Louisiana, Inc., (Phillip Services) moves to dismiss Equinox's appeal in adversary No. 99-1209, and Equinox moves to dismiss that issue from being raised in this appeal. It argues that this court lacks subject matter jurisdiction because Equinox filed its appeal more than ten days after final judgment. Phillip Services argues that a September 20, 2000, order of the bankruptcy court was appealable, while Equinox argues that a September 26, 2000, judgment of the bankruptcy court began the running of time for filing an appeal.
Under Fed.R.Bank.P. 8002(a) (2000), a notice of appeal must be filed "within 10 days of the date of the entry of the judgment, order or decree appealed from." Subject matter jurisdiction can be raised at any time, or even sua sponte by the court. Bank One Tex., N.A. v. United States, 157 F.3d 397, 403 (5th Cir. 1998), cert denied, 526 U.S. 1115, 119 S.Ct. 1761, 143 L. Ed 2d 792 (1999); Sealed Appellant v. Sealed Appellee, 130 F.3d 695, 697 (5th Cir. 1997), cert. denied, 523 U.S. 1077, 118 S.Ct. 1523, 140 L.Ed.2d 675 (1997); Fed.R.Civ.P. 12(h)(3) (providing that district court "shall dismiss the action" whenever "it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter"). When multiple claims and parties are involved in a single action, the Federal Rules of Civil Procedure provides that:
[T]he court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is not just reason for delay and upon express direction for the entry of judgment. In the absence of such determination and direction, any order . . . which adjudicates fewer than all the claims or rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order . . . is subject to revision at any time before entry of judgment adjudicating all the claims and the rights and liabilities of all the parties.
Fed.R.Civ.P. 54(b) (2000); Fed.R.Bank.P. 7054 (2000).
The effect of a partial summary judgment is to remove decided issues and streamline the subsequent trial. See Fed.R.Civ.P. 56(d) (2000); Fed.R.Bank.P. 7056 (2000). "An order of a district court granting partial summary judgment which leaves claims to be adjudicated may constitute a final order 'only upon an express determination that there is no just reason for delay and upon an express determination for the entry of judgment'" Eudy v. Motor Guide, Herschede Hall Clock Co., 604 F.2d 17, 18 (5th Cir. 1979).
In Bankruptcy Adversary No. 99-1209, Phillips services sued Equinox, National Union and the Bank Group for satisfaction of its remediation claims. On March 2, 2000, the bankruptcy court consolidated this action with three others for trial purposes only. On August 22, 2000, the bankruptcy court granted Phillip Services' Motion for Partial Summary Judgment, declaring that insurance proceeds from National Union were payable directly to Phillip Services and not payable to the estate. On this date, Phillips was entitled to the insurance proceeds over Equinox, but no decision was made with regard to National Union, or Phillip Services' position vis a vis numerous other remediation creditors. On September 20, 2000, the bankruptcy court entered a order approving a compromise and settlement between Phillip services and National Union whereby National Union deposited $1,965,000.00 into the court registry to satisfy $1,990,933.56 in outstanding remediation claims.
After September 20, 2000, Phillip Services only had to determine its share of the insurance proceeds in relation to the other remediation creditors. In this regard, Phillip Services stipulated that they would reduce their claim from $1,086,423.96 to share pro rata with the other remediation creditors, and it argues that this stipulation does not affect the finality of the judgment. On September 26, 2000, the bankruptcy court determined the recovery of Phillip Services along a pro rata approach. Equinox sought to appeal adversary No. 99-1209 under the judgment of September 26, 2000.
Adding to the confusion is the fact that adversary No. 99-1209 is included in the caption of the September 20, 2000, order, but is not included in the caption of the September 26, judgment. Also consolidated adversary Nos. 99-1225 and 99-1226 were not finally adjudicated until after the September 26, 2000, decree.
A review of the facts surrounding the September 20, 2000, order and September 26, 2000, judgments reveals that the September 20, 2000, order was not final for purposes of appeal. First, the September 20, 2000, order sets the total amount of Phillip Services remediation claim, but, does not list the actual amount disbursed. The actual amount of Phillip Services' recovery was not determined until September 26, 2000. Second, the September 20, 2000, judgment specifically states that "the Settlement Amount shall be disbursed by the clerk on the entry of a Final Judgment in accordance with the terms of such Final Judgment or upon further order of this Court." This statement neither describes the immediate judgment as the Final Judgment, nor reflects an unmistakable intent by the bankruptcy court to enter a partial final judgment under Rule 54(b). Third, the bankruptcy court ruled that the September 20, 2000, order was not intended as appealable when he denied Phillip Services motion to dismiss Equinox's appeal in the bankruptcy court.
Accordingly, all the rights and liabilities of Phillip Services were not finally adjudicated until the amount of Phillip Services was determined on September 26, 2000, and the bankruptcy court did not intend the September 20, 2000, order to be a final judgment or a partial judgment subject to interlocutory appeal. The Court finds that the time for filing an appeal in adversary No. 99-1209 did not begin to run until the September 26, 2000, judgment, making Equinox's appeal, filed on October 6, 2000, timely.
INSURANCE PROCEEDS
The issue presented is whether the proceeds of the National Union indemnification policy constitutes "property of the estate" of Equinox. The facts are not in dispute. The question is a legal one, subject to de novo review. The bankruptcy court concluded the proceeds were not property of the estate, but instead should go to the Remediation Creditors involved in the aftermath of the blow-out of the Equinox well. The Court respectfully disagrees and finds that the indemnification proceeds are in fact property of the estate.
The statutory definition of the property of a bankrupt estate appears to clearly encompass the proceeds of this indemnification policy. 11 U.S.C. § 541 (a)(1) defines such property to include "all legal or equitable interests of the debtor in property" and (6) includes "[p]roceeds, product, offspring, rents, or profits of or from property of the estate." The debtor here certainly has a "legal interest" in the indemnification insurance policy, fulfilling subcategory (1). Likewise the "proceeds" of the insurance policy flow from the policy, fulfilling subcategory (6).
Furthermore, the United States Supreme Court has held that the statutory definition of property of the estate is to be interpreted broadly, not narrowly, citing Congressional intent to draw as much property within the bankrupt estate in order to facilitate rehabilitation of the business. United States v. Whiting Pools, 103 S.Ct. 2309 (1983).
"The scope of this paragraph [§ 541(a)(1)] is broad. It includes all kinds of property, including tangible or intangible property, causes of action (see Bankruptcy Act S 70a(6)), and all other forms of property currently specified in section 70a of the Bankruptcy Act." H.R. Rep. No. 95-595, p. 367 (1977); S.Rep. No. 95-989, p. 82 (1978), U.S. Code Cong. Admin.News 1978, pp. 5868, 6323.Id., 103 S.Ct.at 2313, fn 9.
This broad interpretation is likewise consistent with most of the Fifth Circuit jurisprudence on the general issue of insurance policy proceeds. See, for example, In re Davis, 730 F.2d 176 (5th Cir. 1984); Holland America Insurance Co. v. Succession of Roy, 777 F.2d 992, 996 (5th Cir. 1985)("Whether subject to defeasance, defenses, or liens, the fire insurance policy and any right to payment from it were property of the debtor's bankruptcy estate."); In re Zale Corporation, 62 F.3rd 746, 757-758 (5th Cir. 1995).
The Fifth Circuit, however, has not dealt directly with the issue presented in this case, namely whether the proceeds of an indemnification policy which is to reimburse for losses owed to third parties is property of the estate. A review of the case law on related issues offers guidance but not a definitive answer.
In Louisiana World Exposition, Inc. v. Federal Insurance Co., 832 F.2d 1391 (5th Cir. 1987), the Louisiana World Exposition (LWE) filed for Chapter 11 reorganization. LWE had purchased several insurance policies that covered both the personal liability of its directors and officers in connection with their duties and also provided for indemnification to LWE to the extent LWE might to required to reimburse the directors/officers for such expenses or liability. After filing for bankruptcy, LWE sought to prevent any payment from the policies going to the legal expenses of the directors and officers under the liability provisions. LWE claimed the proceeds were property of the bankruptcy estate. The Fifth Circuit disagreed. While the Court acknowledged that LWE owned the policies themselves, the real issue was "who owns the liability proceeds." 832 F.2d at 1399. The Court noted that the proceeds of the liability coverage was dedicated to the directors and officers personally, and not to LWE. LWE's rights were limited to indemnification, which wasn't at issue in the case. Since the proceeds at issue "belonged" to the officers and directors, not LWE, then they were not the property of the estate.
This case is, however, distinguishable in that in this case the beneficiary of the policy, Equinox, is in fact the bankrupt entity, not a nonbankrupt co-insured or a third party, such as the remediation claimants. Consequently, under the reasoning of Louisiana World Exposition, the proceeds of this indemnification policy would be property of the bankrupt estate.
In In re Edgeworth, 993 F.2d 51 (5th Cir. 1993), a physician filed for bankruptcy and after the case was discharged, he was sued for malpractice in connection with care given a patient prior to his filing. The plaintiff recognized that recovery was not possible against the physician personally, but was seeking to collect against his malpractice insurance carrier. The Fifth Circuit concluded, among other things, that the proceeds of the policy were not property of Edgeworth's bankruptcy estate.
The overriding question when determining whether insurance proceeds are property of the estate is whether the debtor would have a right to receive and keep those proceeds when the insurer paid on a claim. When a payment by the insurer cannot inure to the debtor's pecuniary benefit, then that payment should neither enhance nor decrease the bankruptcy estate. In other words, when the debtor has no legally cognizable claim to the insurance proceeds, those proceeds are not property of the estate.Id., 993 F.2d at 55-56.
Since Dr. Edgeworth's insurance was a liability policy for the benefit of the third parties, the proceeds were for the victims of his malpractice and payable to them, not him. The Court noted in passing that insurance policies whose proceeds are property of the estate were such things as casualty, collision, life and fire insurance, under which the debtor is the beneficiary. In re Edgeworth is heavily relied upon by the creditors in this case as well as the bankruptcy court.
Nevertheless, it is also distinguishable. In this case, the named beneficiary of the policy is the debtor itself, not any third party. It is an indemnification policy which only inures to the benefit of the debtor. Furthermore, the Fifth Circuit in a subsequent case, discussed immediately below, cast in doubt the continuing validity of the Edgeworth distinction.
But see also In re Sfuzzi, 191 B.R. 664 (N.D. Texas, 1996); In re Scott Wetzel Services, Inc., 243 B.R. 802 (M.D. Fla. 1999); Landry v. Exxon Pipeline Co., 2001 WL 332635 (M.D.La.2001).
In In re Vitek, 51 F.3d 530 (5th Cir. 1995), a similar situation to Louisiana World Exposition existed. Vitek, Inc. manufactured a prostheses which was allegedly defective. Hundreds of law suits were filed and Vitek filed for Chapter 7 bankruptcy. Vitek had liability insurance that named also the directors and officers as co-insureds. A significant factual distinction with Louisiana World Exposition is that in the latter case, only the officers and directors had liability coverage, LWE had only indemnification coverage. In Vitek, both the corporation and the officers/directors had direct liability coverage, so the issue was "when one of two or more coinsureds declares bankruptcy and seeks protection under Chapter 7, what part of the proceeds of a liability policy that covers the non-bankrupt coinsureds should enrich the estate of the coinsured debtor?" Vitek, 51 F.3d at 532. The Fifth Circuit then discussed the distinction between ownership of a policy and ownership of the proceeds, referring to Louisiana World Exposition and In re Edgeworth specifically:
In the time since Louisiana World Exposition was decided, the distinction drawn in that case between ownership of liability policies and ownership of the proceeds of those policies has not been broadly applied: It arguably remains confined to cases involving D O liability policies, given their unique nature among liability insurance products. [FN17] Faced with the typical situation in which a debtor corporation's liability policies provide the debtor and thus the estate with direct coverage against third party claims, virtually every court to have considered the issue has concluded that the policies — and clearly the proceeds of those policies — are part of debtor's bankruptcy estate, irrespective of whether those policies also provide liability coverage for the debtor's directors and officers . . . Most courts do not even recognize a technical distinction between ownership of insurance policies and ownership of the proceeds of those policies: They simply conclude that such policies — and, by implication, the proceeds of such policies — are valuable properties of debtors' bankruptcy estates . . .
FN17. But see In re Edgeworth, 993 F.2d 51 (5th Cir. 1993) (holding that the proceeds of a physician's liability policy were not part of the physician's bankruptcy estate). In the Edgeworth opinion, the panel did include some general language that appears to endorse broadly the policy/proceeds dichotomy introduced in Louisiana World Exposition. For example, the panel suggested that "under the typical liability policy, the debtor will not have a cognizable interest in the proceeds of the policy," because the proceeds truly inure to the benefit of third parties. Id. at 56. This language was, however, dicta. More importantly, this language confutes the broad understanding — recognized even in Louisiana World Exposition — that when a liability policy "provides coverage for judgments against or losses of the bankrupt corporation itself," the debtor owns both the policy and the proceeds of that policy. World Exposition, 832 F.2d at 1399-1400. As indicated infra the vast majority of courts do not bother to distinguish ownership of insurance policies from ownership of the proceeds of those policies, but treat that the two go hand-in-hand. Thus, the scope of the policy/proceeds distinction enshrined in Louisiana World Exposition is still in ferment: Whether that distinction will be extended more broadly has yet to be determined.Vitek, 51 F.3d at 534.
In Vitek, the Court avoided deciding whether all or part of the proceeds belonged to the bankruptcy estate, finding that the bankruptcy court had acted properly in approving a settlement between the insurance company and the estate, but modified it to allow the directors/officers to bring suit against the insurance company for breach of good faith, if otherwise legally permissible.
Noteworthy, however, is that the Court acknowledged that the issues in Vitek arose in a Chapter 7 proceeding. With regard to Chapter II proceedings, the Court specifically stated that "the precedential — or even merely instructional — value of this opinion to future Chapter II cases should probably be 'little or none.'" Id., 51 F.3d at 533. The bankruptcy court here concluded that because of this language, the Vitek case had no precedential value to this Chapter 11 case. The Judge also concluded that the Edgeworth distinction between policy and proceeds was still valid. While this Court questions the continuing viability of Edgeworth in light of footnote 17 in Vitek, quoted above, even if the Edgeworth test is applied, the proceeds here still belong to the bankrupt estate.
The National Union provides that it will indemnify and/or reimburse Equinox for losses covered by the policy. These losses include expenses in regaining control of a blown out well, which include costs of materials, supplies and the services of individuals or firms specializing in that field. Under the "Loss Payable" provision in the "Declarations", it states that the "Loss, if any, hereunder shall be payable to Assured and/or Order." Under an endorsement entitled "Clean-up Expenses and Seepage, Pollution and Contamination Insurance,", National Union agrees to indemnify Equinox for "the cost of removing, nullifying or cleaning up seeping, polluting or contaminating substances. . . ."
Policy, p. 1 pf 17, ¶ 2, "Control of Well Insurance".
Policy, Declarations page.
Policy, Endorsement of April 1, 1998.
The plain language of the policy states that payment is to be made to the Assured, which in this case is Equinox. This alone appears to fulfill the requirement of even the Edgeworth test, which hinges on not who owns the policy but who is entitled to receive the proceeds. This is not a liability policy, like Edgeworth, for the benefit of injured third parties . . . but is an indemnification policy, for the benefit of Equinox, for expenses incurred in connection with its wells.
The bankruptcy court concluded that "Although the policy is written as a contract of first party indemnity insurance, it provides what is, in essence, a form of third-party coverage". The bankruptcy court appears to have been motivated by very compelling policy considerations, that Equinox not be allowed to "recover and keep a windfall from its insurer for the cost of unpaid invoices.," that the purpose of cleanup insurance, like liability insurance, is to protect third parties from the acts of the insured," and "[p]ollution cleanup insurance facilitates the rapid remediation of environmental disasters by insuring that vendors can proceed with cleanup operations without concern over the financial ability of customers to pay the considerable expenses of the cleanup." The Court does not disagree with any of these concerns. Nevertheless, the Court believes that the statutory language and the thrust of the current jurisprudence leads to the conclusion that the proceeds of this insurance policy belong to the estate, regardless of the compelling policy reasons to interpret the contract otherwise.
Bank. Ct. Rec. 99-1237, Doc. 233, p. 12.
Bank. Ct. Rec. 99-1237, Doc. 233, pp. 14-15.
One recourse would to bring the proceeds into the estate but subject to the requirement that they only be distributed to those to whom there would be a right of recovery under the policy, in this case, the remediation claimants. See Landy v. Exxon Pipeline Co., 2001 WL 332635, fn. 62 (M.D.La.). This would alleviate all of the policy concerns and at the same time be truer to the thrust of the jurisprudence. This alternative was not raised before the bankruptcy court, and is not before this Court on appeal.
II MOOTNESS
As a preliminary issue, in appeal No. 00-3502, Debtor argues that this Court should dismiss MM's appeal to the district court as equitably moot, because Debtor's Chapter 11 plan was the plan was substantially consummated, and granting appellants relief, after consummation of the plan, would be detrimental to the rights of other parties.Equitable mootness "is not an Article III inquiry as to whether a live controversy is presented; rather, it is a recognition by the appellate courts that there is a point beyond which they cannot order fundamental changes in reorganization actions." In Re GWI PCS 1, Inc., 230 F.3d 788, 800 (5th Cir. 2000), reh'g denied, ___ F.3d ___ (5th Cir. Dec. 22, 2000) (Table, No. 99-11294) (quoting In re Manges, 29 F.3d 1034, 1038-39 (5th Cir. 1994), cert. denied, 513 U.S. 1152, 115 S.Ct. 1105, 130 L. Ed 2d 1071 (1995). "Consequently, a reviewing court may decline to consider the merits of a confirmation order when there has been substantial consummation of the plan such that effective judicial relief is no longer available — even though there may still be a viable dispute between the parties on appeal." Id. (quoting In re Manges 29 F.3d at 1039). In evaluating whether MM's appeal to this Court is moot, the Court must examine three factors: 1) has a stay been obtained, 2) has the plan been substantially consummated, and 3) would the relief requested affect either the rights of parties not before the court, or the success of the plan. Id. Accordingly, this three pronged test for equitable mootness is designed to reflect the Court's concern for determining "the proper balance between the equitable considerations of finality and good faith reliance on a judgment and the competing interests that underlie the right of a party to seek review of a bankruptcy order adversely affecting him." In re Manges, 29 F.3d at 1039 (quoting In re Club Assoc., 956 F.2d 1065, 1069 (1992)). The Court considers each in turn.
(1) Failure to Obtain a Stay
The first question in a mootness inquiry is whether the MM creditors obtained a stay to Confirmation Order on October 23, 2000. Following the passage of ten days, the Confirmation Order became final. See 11 U.S.C. § 8002 (a) (2000). Under the terms of Debtor's confirmed plan, the Bank Group received $86.5 million in satisfaction of its existing $106 million right to payment. The plan was funded by the sale of Debtor's major assets to Elysium Energy, L.L.C. (Elysium).
Notably, the Chapter 11 plan provides the Court with an indication of when substantial consummation occurs. Under paragraph 16.7 of the Third Amended Joint Plan of Reorganization, substantial consummation is defined as occurring "when the Liquidating Trustee makes the Initial Distribution." Paragraph 8.3 of the plan provides:
The Initial Distribution Date shall be within thirty (30) days following the Effective Date of the Plan, or as soon as practical thereafter, but in no event later than ninety (90) days after the Effective Date. . . . On the Initial Distribution Date, the Liquidating Trustee shall use the Distribution Reserve to pay holders of (I) Allowed Administrative Expense Claims; (ii) Allowed Priority Tax Claims . . . and (iii) Allowed [Convenience Claims], the Allowed Amount of such Claims due as of the Initial Distribution Date.
Since the date of Confirmation, Elysium bought debtor's assets, the plan was funded and monies disbursed. Accordingly, under the terms of the plan, substantial consummation has occurred and the second prong of the equitable mootness test weighs in favor of dismissal.
3. Effect on Parties Not Before the Court
The final question in the mootness inquiry involves whether the requested relief would affect the rights of parties not before the court or the success of the reorganization plan. In Re GWI PCS 1, Inc., 230 F.3d at 802 (citing In re Berryman Prods., Inc., 159 F.3d 941, 945-46 (5th Cir. 1998)). Even if a Chapter 11 plan is substantially consummated, that fact does not make it impossible for a district court to grant effective relief. See In re Manges, 29 F.3d at 1042-43. As the Fifth Circuit has stated: "Substantial consummation of a reorganization plan is a momentous event, but it does not necessarily make it impossible or inequitable for an appellate court to grant effective relief." In re U.S. Brass Corp., 169 F.3d 957, 961 (5th Cir. 1999).
Here, we must evaluate the transactions that have occurred under the reorganization plan against the backdrop of MM's argument that its liens deserve priority over the pre-existing security rights of the Bank Group. Debtor argues that Elysium obtained its financing to purchase Debtor's assets based on the freedom of liens and encumbrancers, and based on the full satisfaction of all existing liens in the bankruptcy proceeding. Thus, a decision by this Court would impact Elysium, a third party buyer, and possibly subject Elysium to an additional liability for sub rosa bankruptcy claims. Furthermore, Debtor points out that third parties have undertaken numerous transactions in reliance on (i) the closing of the transactions provided under the plan; and (ii) the $2.959 million set aside for distribution to the holders of allowed unsecured claims.
The MM appellants assert that their appeal does not interfere with the confirmed plan. Elysium elected under the confirmed plan to assume obligations for Allowed Secured Claims, which are not otherwise paid on the Effective Date, or satisfied with the cash provided by the Debtors to the Liquidating Trustee, up to $7 million. See Section 9.3, Debtor's Third Amended Joint Plan of Reorganization. Consequently, if this Court finds that the liens of the MM claimants are superior to the Bank Group's security interests, their claims would become Allowed Secured Claims and entitled to payment from either the Liquidating Trustee, or Elysium.
The instant case is distinguishable from prior jurisprudence utilizing the doctrine of equitable mootness. In the case of In re GWI PCS 1, Inc., 230 F.3d at 799 n. 20 802, the Debtor listed eighteen different transactions, and showed that the requested relief would totally destroy the plan of reorganization. In Berryman Prod., 159 F.3d at 945-46, the court was faced with overturning a plan that was nearly completed, and the relief requested would adversely affect third party trade creditors. In the case of In re Manges, 29 F.3d at 1038, the court refused to rescind the sale of immovable property sold to third party purchasers in good faith. None of those equitable factors are present in the instant case.
The facts of this case do not warrant the use of the equitable mootness doctrine. Although the fact that no MM creditor sought a stay, and the fact that the plan is substantially consummated, favor dismissal, the Debtor has failed to show that granting the MM holders priority would unravel the plan and divest rights acquired by third parties who relied on the finality of the plan. The parties most affected by MM's requested relief are the Bank Group, a party to the bankruptcy proceeding, who was closely associated with the debtor throughout the litigation, and Elysium, who has agreed to assume outstanding secured debt up to $7 million. No showing was made that the relief, if granted, would exceed this limit, unduly prejudice investors in Elysium, or unravel the confirmed plan. Also, this Court notes the dangers associated with allowing the bankruptcy court to be the de facto final decision maker of a controversy, merely by confirming a plan of reorganization and denying a motion for a stay. Accordingly, the doctrine of equitable mootness is not applicable in this case.
PRIORITY
The loans made by the Bank Group to Debtor were secured by perfected interests in the oil and gas leases owned and operated by the Debtors. The Bank Group also filed a financing statement in Orleans Parish, perfecting a security interest in the production proceeds from the oil and gas wells. All the Bank Group's security interests in the property of the Debtor were perfected prior to the LOWLA liens. The MM creditors argue that the bankruptcy court erred by not granting priority to their perfected LOWLA liens because the express terms of the mortgage to the Bank Group allow such liens as "Permitted Encumbrances," and the MM creditors ask this Court to recognize principles of equity, that would favor priority treatment to the LOWLA liens.
(1) LOWLA
The express provisions of LOWLA provide that any lien filed and perfected in accordance with the Act is subordinated to: "Security interests that are perfected before the privilege is established or with respect to which a financing statement has been filed before such establishment." La. Rev.Stat. § 9:4870(B)(3) (2000). Accordingly, the MM creditors are not entitled to priority over the pre-existing perfected security interests of the Bank Group under the express provisions of LOWLA.
(2) Act of Mortgage of Mineral Interests
Failing to receive priority by express statute, the MM creditors argue that the Act of Mortgage between Debtors and the Bank Group grants priority to their perfected LOWLA liens. Under Louisiana law, the interpretation of either an ambiguous, or an unambiguous, contract is an issue of law for the court. Amoco Prod. Co. v. Texas Meridian Resources Exploration Inc., 180 F.3d 664, 668 (5th Cir. 1999) (citing Texas Eastern Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737, 741 (5th Cir. 1998); Hampton v. Hampton, Inc., 713 So.2d 1185, 1189 (La.App. 1st Cir. 1998). "When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent." La. Civ. Code art. 2046 (2000). "A contract provision is not ambiguous where only one of two competing interpretations is reasonable or merely because one party can create a dispute in hindsight." Amoco Prod. Co., 180 F.3d at 668-69 (quoting Texas Eastern, 145 F.3d at 741). "Each provision of a contract must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole." La. Civ. Code art. 2050 (2000). The court should not construe the express provisions of a contract in a manner that leads to unreasonable consequences, inequitable, or absurd results. Makofsky v. Cunningham, 576 F.2d 1223, 1229 (5th Cir. 1978). "A doubtful provision must be interpreted in light of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties." La. Civ. Code art. 2053 (2000).
The relevant portions of the Act of Mortgage of Mineral Interests from Alma to the Bank Group set out below. Specifically the Act of Mortgage defines "Permitted Encumbrances" in Section 1.20 as:
(a) the contracts, agreements, burdens, encumbrances and other matters, if any, set forth in the description of the Subject Leases on Exhibit "A" attached hereto or otherwise described in Exhibit "A" attached hereto;
(b) the Lien evidenced by this Mortgage and any other Liens in favor of Mortgagee;
(c) statutory Liens for taxes not yet delinquent; and
(d) Liens under operating agreements, pooling orders and unitization agreements, and mechanics and materialmen's Liens, and similar statutory Liens, for services or materials for which payment is not yet due.
Article IV, entitled "Covenants of Mortgagor," provides:
So long as any part of the Obligations remains outstanding or unpaid, Mortgagor hereby specially covenants, promises, stipulates and agrees with Mortgagee that Mortgagor shall. . . . Section 4.19 Liens. Without the express prior written consent of Mortgagee, not create or place or permit to be created or placed, or through any act or failure to act, acquiesce in the placing of, or allow to remain, on the Mortgaged Property or any part thereof, any Lien (except Permitted Encumbrances) regardless of whether the same are expressly subordinated to the Lien created in this Mortgage, and should any of the foregoing become attached hereafter in any manner to the Mortgaged Property or any part thereof without the express prior written consent of Mortgagee, Mortgagor will cause the same to be promptly discharged and released. Any mortgage, Lien, security interest, charge, encumbrance or assessment in violation of this Section shall be of no force and effect against Mortgagee.
The MM creditors argue that this language expressly subordinates the Bank Group's mortgage to their mechanic and materialmen's liens because such liens are listed under "Permitted Encumbrances." Such an interpretation is not justified under the four corners of the document, applicable statutory law, or custom and practice in the industry.
The phrase "not yet due," indicates to this Court that when the parties executed the mortgage, work may have been commenced before the effective date of the mortgage, and the vendor, or service provider is not yet due payment for that work. Had the MM claimants begun any work prior to the effective date of the Act of Mortgage, the vendor's privilege, even if filed after perfection of the Bank Group's security interest, would relate back to the date the claimant began rendering services. See La. Rev. Stat. § 9:4864(A)(1-4) (2000).
Also a similar interpretation, regarding liens pursuant to LOWLA, is used in other Mortgages of Mineral Interests. During the bankruptcy proceeding, Patricia H. Chicoine, accepted by the bankruptcy court as an expert, testified that the term "Permitted Encumbrances" in a mortgage of mineral interests, customarily refers to liens that are extant, at the time the mortgage is executed.
Ms. Chicoine is a Houston oil and gas attorney. To the extent that her qualification or non-recusal is before the Court, the ruling of the bankruptcy court is affirmed.
On direct examination, Ms. Chicoine answered the following question:
Q. Okay. In your experience, is it usual or customary for a lender taking a mortgage on a mineral lease to agree that all liens of whatever type or character, whenever established, would be superior to the lender's mortgage rights?
A. No you wouldn't see that. In fact, typically, you'll have warranties, representations, covenants that would specifically state that that (sic) would not occur, unless . . . there was consents (sic) or something. But, typically, it would state that that (sic) would not occur.
Trial Transcript, p. 96 Aug. 8, 2000.
Similarly, the bankruptcy court ruled in his oral reasons for judgment that "it's a strange interpretation to hold, that permitted encumbrances would cover liens that arose long after the mortgage was placed of record for work that was done subsequent to [perfection of the mortgage]." Trial Transcript p. 73 Aug. 10, 2000. Accordingly, by the express terms of the Act of Mortgage, the Bank Group agreed that the mortgage would be subordinated to statutory liens for which payment was not yet due at the date of execution of the mortgage. This provision would not encompass statutory liens for work that was committed or commenced after the perfection of the mortgage interest. To construe this express language in any other manner could lead to unreasonable consequences, inequitable, or absurd results. Interpreting the phrase "not yet due" to mean any "Permitted Encumbrance," filed after perfection of the security interest, for work begun prior to the effective date of that interest, comports with the four corners of the document, applicable statutory law, and custom and practice in the industry.
(3) Equitable Arguments
Failing to achieve priority over the Bank Group under LOWLA, or the express terms of the
(3) Equitable Arguments
Failing to achieve priority over the Bank Group under LOWLA, or the express terms of the Act of Mortgage, the MM creditors argue that this Court should apply general rules of equity found in the Louisiana Civil Code, to help effectuate the purpose of LOWLA, and grant priority to the liens of vendors and service providers who increased the value of the debtor's property. The MM creditors assert that it is inequitable that the Bank Group, who performed no work, should realize the increased value of the property when the MM claimants, who performed the work, will not be able to recover money due to them.
(A) Unjust Enrichment
As a matter of law, the MM creditors cannot assert priority based upon a theory of unjust enrichment, because LOWLA provides them with another remedy at law. See Schiro-Del Bianco Entr., v. NSL, Inc., 765 So.2d 1087, 1092 n. 3 (La.App. 4 Cir. 2000), writ denied, 774 So.2d 146 (La. 2000); see also La. Civ Code art. 4 (2000) (stating that "[w]hen no rule for a particular situation can be derived from legislation or custom, the court is bound to proceed according to equity").
In the case of Minyard v. Curtis Products, Inc., 251 La. 624, 652, 205 So.2d 422, 432 (La. 1967) the court stated the elements of unjust enrichment. There are now five prerequisites to the successful suit [for unjust enrichment:] (1) there must be an enrichment, (2) there must be an impoverishment, (3) there must be a connection between the enrichment and resulting impoverishment, (4) there must be an absence of 'justification' or 'cause' for the enrichment and impoverishment, and finally (5) the action will only be allowed when there is no other remedy at law, i.e., the action is subsidiary or corrective in nature. Id.
(B) Law of Accession
Likewise, the MM creditors argue that they are entitled to payment under the law of accession. "When fruits that belong to the owner of a thing by accession are produced by the work Code. art. 485 (2000).
This Civil Code article has previously been applied to oil and gas leases. The court in Scott v. Hunt Oil Co., 152 So.2d 599, 603 (La.App. 2nd Cir. 1963), stated that "claiming the fruits produced by a thing, or the mineral or royalty produced from the land, the owner is obligated to reimburse a third person whose work and labor produced such fruits, mineral, or royalty, the expenses incurred by the third person."
The Fifth Circuit applied a similar theory in Grace-Cajun Oil Co. No. 3 v. Federal Deposit Insurance Corp., 882 F.2d 1008 (5th Cir. 1989). Grace-Cajun was decided prior to the 1995 revision of LOWLA, and established that a mineral lessee was not entitled to share in the proceeds of production from an oil well until he paid his share of the construction costs. See id. at 1010. In Grace-Cajun, Delta Energy contracted with Grace-Cajun to develop a mineral lease, granting to Grace-Cajun an undivided portion of the lease. Id. at 1009. Thereafter, Delta Energy obtained financing, and the bank perfected a security interest with a Collateral Mortgage and Assignment of Production. Id. When Delta Energy defaulted and entered bankruptcy, Grace-Cajun paid the financing bank to avoid foreclosure. Id. at 1009-10. When production was obtained, Grace-Cajun sued the bank for recovery of well drilling costs it had expended on Delta Energy's behalf. Id. at 1010.
Grace-Cajun, involved co-lessees, and under Louisiana law, "a co-lessee is not entitled to share in the proceeds of production from an oil and gas well until he pays his cost of drilling and completing the well. This rule rests on the principal of unjust enrichment." Id. (citations omitted). The banks rights to the proceeds, were derived solely from Delta Energy's Collateral Mortgage, and Delta could not pledge any right greater than it owned. Id. at 1010-11. "By paying Delta's share of the well costs, Grace-Cajun acquired a 'right of prior claim.'" Id. at 1012.
Neither Grace-Cajun nor the civilian law of accession are applicable in this case. First, "laws on the same subject must be interpreted in reference to each other." La. Civ. Code art. 13 (2000). When two statutes conflict, the statute that is more specific prevails as an exception to the more general statute. Kennedy v. Kennedy, 699 So.2d 351, 359 (La. 1996). Here, the provisions of LOWLA are more specific, and the provisions of LOWLA must take priority over the general law of accession found in the Civil Code. Also, under the express provisions of Louisiana's statutory law, the court cannot proceed to determine a case on the basis of equity when there is an express statute governing the matter. See La. Civ. Code art. 4 (2000) (stating that only when there is no legislation or custom may the court proceed in equity); La. Rev. Stat. § 9:4870(B)(3) (2000) (stating that a pre-existing mortgage is given priority treatment over a mechanic and materialmen's lien).
Second, Grace-Cajun, is distinguishable from the instant case and concerned different equitable principles. Whereas Grace-Cajun was a co-lessee, the MM creditors do not enjoy any ownership over the subject leases. As the Grace-Cajun court was careful to point out, the right to receive proceeds is not automatically burdened with the obligation to pay for the costs of the well, such an obligation depends on the source of the right. Grace-Cajun, 882 F.2d at 1011 n. 2. Thus, the Grace-Cajun analysis is concerned more with the relationship between the parties than with the ranking of privileges. Additionally, in Grace-Cajun, the bank did not pay for the costs of production of the wells. Id. at 1009-10. In the instant case, much of the money loaned to the Debtor during the time the MM creditor's performed their work was used to pay for the costs of production.
Therefore, the bankruptcy court was correct in granting priority treatment to the pre-existing security interests of the Bank Group over the liens of the MM creditors because express statutory provisions govern the relationship between the Bank Group and the MM creditors making a retreat into equity unwarranted, and Grace-Cajun, decided before the 1995 revisions to LOWLA, is factually distinguishable from the instant case.
11 U.S.C. § 502. FIXING OF CLAIMS
Finding that the Bank Group's security interest are superior to the LOWLA liens of the MM creditors, there is no need to reach the issue of fixing the amount of the MM liens. To the extent the claims should have been quantified, the Court finds that no prejudice has been shown.
DENIAL OF MOTION FOR CONTINUANCE
The MM creditors argue that the bankruptcy court allotted an inadequate time for discovery and pretrial proceedings, and allege that the bankruptcy court denied them due process by refusing to grant a continuance. "The grant or denial of a continuance is within the sound discretion of the Trial Judge." Crompton-Richmond Co., Inc., Factors v. Briggs, 560 F.2d 1195, 1202 (5th Cir. 1977); see also 9 CHARLES A. WRIGHT ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2352 (1971). In reviewing the decision of the bankruptcy court to deny MM's motion for continuance, this Court functions as an appellate court and applies the same standards of review generally applied in federal court appeals. Matter of Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992); Matter of Coston, 991 F.2d 257, 261 n. 3 (5th Cir. 1993) (citing Matter of Hipp, Inc., 895 F.2d 1503, 1517 (5th Cir. 1990)). When examining a denial of a continuance, the reviewing court "usually considers whether the trial judge acted within his discretion knowing what he knew at the time of the denial." United States v. Medina-Arellano, 569 F.2d 349 354 (5th Cir. 1978). In handling calender matters, the trial judge has wide latitude because it must consider time demands on the court and counsel, as well as the particular facts of the case. Fontenot v. Upjohn Co., 780 F.2d 1190, 1193 (5th Cir. 1986). No error or defect in the bankruptcy proceeding shall be reversed if the error or defect does not affect the substantial rights of the parties. Bankr. Rule 9005 (2000) (providing that Fed.R.Civ.P. 61 applies in cases under the Bankruptcy Code).
MM argues that the depositions noticed by Debtor were physically impossible for an individual attorney to attend, the depositions continued nearly until the day of trial and that the allowance of five weeks, between, the start of discovery and trial, was unreasonable. Specifically, MM asserts that the shortened discovery period was prejudicial because they could not develop alter ego allegations against Debtor's affiliates to satisfy their liens, or develop an understanding of Debtor's defenses to their liens, or understand the validity of other MM lien claims.
MM's argues further that, given more time to prepare, they could have presented a better case. On June 28, 2000 the bankruptcy court converted the case in to an adversary proceeding and responses to discover requests were shortened from the customary thirty days to a mere fifteen. The Pretrial Order was due on August 2, and trial was set for August 7, 2000. On July 21, 2000, the MM creditors received notices of twenty depositions of corporate representatives. Furthermore, on the day that Debtor scheduled the deposition of their valuation expert, seven other depositions were scheduled at the same time. Nevertheless, under the relevant law, as applied to the facts of this case, compel the conclusion that the bankruptcy court did not abuse its discretion in denying MM's motion for a continuance.
First, the MM creditors requested that the response period for written discovery be shortened to fifteen days. Second, the complained of depositions noticed by the Debtor were all concerning corporate representatives of other LOWLA lien holders. One MM claimant undoubtedly had an interest in the status of its LOWLA lien vis a vis another MM lien holder, but, as a general matter, these depositions were of little interest to individual MM claimants. Furthermore, the MM claimants did participate in the depositions of Debtor's corporate representatives and their experts.
Third, the argument that ample time was not afforded to the MM creditor to develop alter ego allegations against Debtor's affiliates holds less weight since the LOWLA liens were in place before the Debtor was in bankruptcy, and the MM claimants arguably could have researched alter ego alternatives at that time to obtain satisfaction of their liens. Fourth, the MM claimants could have discovered at any time the Debtors defenses to their LOWLA liens. The Bank Group had perfected its security interest in 1995, which the MM creditors could have discovered and worked to develop alter ego theories to protect the value of their liens. The very purpose of perfecting a security interest is to give other parties notice that another has a priority lien against the subject property.
Clearly, trial by ambush is not contemplated by the Federal Rules of Civil Procedure. The bankruptcy judge, however, has great discretion in granting continuances, which should not be lightly disturbed. Crompton-Richmond Co., Inc. v. Briggs, 560 F.2d 1195, 1202 (5th Cir. 1977). This Court finds no error in the decision of the bankruptcy court not to grant the MM creditors a continuance.
ADMISSION OF UCC-1 FILILNG
The MM claimants argue that the bankruptcy court committed reversible error by admitting UCC File No. 36-94141 into evidence. A trial court's discretion to admit or exclude evidence is generally broad, but competent evidence cannot be excluded without a sound and acceptable reason. Davidson Oil Country Supply v. Klockner, Inc., 908 F.2d 1238, 1245 (5th Cir. 1990), on reh'g, 917 F.2d 185 (5th Cir. 1990). "Error may not be predicated upon a ruling which admits or excludes evidence unless a substantial right of the party is affected." Fed.R.Evid. 103(a) (2000); see Fed.R.Bank.P. 9017 (2000) (providing that the Federal Rules of Evidence apply in bankruptcy proceedings). The Court finds that the bankruptcy court did not err with regard to this evidentiary ruling.
AMENDMENT OF PLEADINGS
After the close of evidence, but prior to the hearing of oral arguments, Baker Hughes and Baker Petrolite (Baker), sought leave to amend the pleadings to conform to the evidence. Baker wanted to add allegations against a Debtor's affiliate, Lower Lafourche, L.L.C., an entity not subject to a perfected lien by the Bank Group. "When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings." Fed R. Civ. P. 15(b) (2000); Fed.R.Bank.P. 7015 (2000) (providing that Fed R. Civ. Proc. 15 applies in bankruptcy adversary proceedings). The decision to grant or deny a motion to amend pleadings is subject to the court's discretion. Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir 1994).
For Baker to properly invoke Rule 15(b), however, the parties had to consent, expressly or impliedly to try the issue of whether Debtor had a corporate alter ego, as the text of Rule 15(b) requires. See Douglas v. Owens, 50 F.3d 1226, 1236 (3rd Cir. 1995) (holding amendment permitted under Rule 15(b) only if tried by express or implied consent of parties) (quoting 6A CHARLES ALAN WRIGHT ARTHUR R. MILLER, FEDERAL PRACTICE PROCEDURE § 1494 (3d ed. 1990)).
Baker argues that in this case, the assets of Lower Lafourche have been contributed into the bankruptcy estate for sale pursuant to the bankruptcy court's approved Plan of Reorganization. Baker asserts that the following facts elicited at trial are sufficient grounds to amend the pleadings to assert alter ego theories for the satisfaction of their LOWLA liens.
Q. And who owns Lower Lafourche?
A. Lower Lafourche is owned, 98 percent, by a partnership called LG Petroleum.
Q. That's you and Mr. Galesi, right?
A. Yes. . . . Michael Galesi and I each own one percent, individually. . . .
Q. Okay. What assets does Lower Lafourche have?
A. Lower Lafourche has a gas plant in Illinois and a gathering system tied to that gas plant. The other two assets of any significance would be an oil gathering line that it was (sic) acquired from Exxon in 1993, I think, in the Lake Washington field.
Q. Okay. And I believe Mr. Ashworth testified yesterday, that's the oil gathering line running along the Cockrell-Moran lease, up through the 212 lease, into the Phillips facility, is that right?
A. Yes. . . .
Q. Okay. Now, Equinox has the same arrangement with Lower Lafourche as it does with Alma, it operates its business; is that correct?
A. It's a similar arrangement, yes.
Q. Okay. And Lower Lafourche doesn't have any employees of its own either?
A. That is correct.
Q. Okay. And in fact, the assets of Lower Lafourche are being contributed, in the plan of reorganization currently pending before this court, to be sold to the purchaser, correct?
A. The three assets I've just described, yes.
Q. Okay. What is the debt relationship between Lower Lafourche and Equinox?
A. Lower Lafourche has an intercompany debt to Equinox. I believe it's in the range of $600,000 to $700,000.
Trial Transcript pp. 142-44. Aug. 8, 2000.
Under Louisiana law, there are eighteen factors that should be considered in determining whether a corporation is the alter ego of another corporation. See Green v. Champion Ins. Co., 577 So.2d 249 (La. 1991). The above testimony does not establish that the parties tried, by express or implied consent, the issue of whether Lower Lafourche was the alter ego of Debtor.
MM LIENS ATTACHING TO NON DEBTOR PROPERTY
The MM claimants assert that the bankruptcy court erred in not finding that their liens attached to non debtor property, specifically, Lower Lafourche. Lower Lafourche was not a party to the bankruptcy court's adversary proceeding, was not served, and did not formally appear at trial. The bankruptcy court correctly refrained from adjudicating the rights of Lower Lafourche when that entity was not a party to the litigation. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 110, 89 S.Ct. 1562, 23 L.Ed. 129 (1969) (holding that "a court has no power to adjudicate a personal claim or obligation unless it has jurisdiction over the person of the defendant").
Accordingly,
IT IS ORDERED that the judgment of the bankruptcy court is AFFIRMED IN PART and REVERSED IN PART.
IT IS FURTHER ORDERED that the motion to dismiss Philip Services/Louisiana, Inc.'s additional issues on appeal filed by Equinox Oil Company, Inc., is hereby MOOT.