Bankruptcy Sales: “It Ain’t Over ’Til It’s Over”

Great Plains Royalty Corp. v. Earl Schwartz Co. (In re Great Plains Royalty Corp.), 520 B.R. 292 (Bankr. D. N.D. 2014) –

Two companies that acquired assets in a bankruptcy auction moved to reopen the case to clarify ambiguities in the conveyance documents.  After the case was reopened, the debtor commenced an adversary proceeding to resolve disputes regarding the legal status of certain of the assets.  An interesting twist:  the sale that gave rise to this decision took place 45 years ago in 1969.

The debtor was incorporated in the late 1950s to buy, own and sell oil, gas and other mineral interests.  Its creditors filed an involuntary chapter 11 petition in 1968, which was converted into a chapter 7 liquidation.

In 1969 the Chapter 7 trustee sought bankruptcy court approval to sell the debtor’s assets “insofar as they are known.”  The assets included oil and gas interests.  The trustee declined to conduct a title search due to the cost.

An auction was held and the winning bidder directed that purchased assets be conveyed directly to several other entities, including the two companies that moved to reopen the case.  (They attempted to resolve the issues in state court, but were directed to go back to seek relief from the bankruptcy court.)

One issue raised in the reopened case was whether the trustee offered to sell all of the bankruptcy estate’s assets.  The purchasers also identified five acquired interests that they claimed involved ambiguities in the conveyance documents, resulting in disputed titles.

The debtor sought declaratory relief that the purchasers did not have any interest in certain disputed assets, which it claimed it continued to own.  In response, the purchasers requested that court find that 100% of the disputed assets were sold to the purchasers, the trustee did in fact intend to and sell all of the debtor’s assets, and the debtor had no interest in any property owned prior to the bankruptcy.  The purchasers also requested that the court order the trustee to issue corrected conveyance documents.

The debtor (1) moved for summary judgment, asking the court to find that the buyer did not purchase all of the debtor’s assets in the bankruptcy sale, and (2) alleged that the conveyance documents were unambiguous (which the court treated as a motion for summary judgment), thus precluding use of parol evidence.

As for whether all of the assets were sold, the trustee testified “absolutely not” since he “had concerns all along… that there would be property he had not identified.”  Similarly, a manager of the purchasers testified that he knew “ten to twenty years ago” that there were debtor properties that were not conveyed during the bankruptcy.  After reviewing the testimony, the court found that there was no genuine issue of fact, and the purchasers did not purchase all of the debtor’s assets.

On the second issue, while acknowledging that the parol evidence rule precludes use of prior oral negotiations and agreements to vary a written contract, the court noted that there is an exception if the written agreement is ambiguous or if it does not reflect the intent of the parties because of fraud, mistake, or accident.

As summarized by the court, the purchasers raised several areas of ambiguity:  It was unclear whether the trustee intended to transfer a royalty, an overriding royalty, an interest in an individual well or a parcel, or some combination.  Similarly, the conveyance of a lease interest included two different legal descriptions, and the denominator used to identify one of the fractional interests was calculated in a manner inconsistent with the way it was calculated for other properties.

The debtor did not address the ambiguities identified by the purchasers, so the court concluded that the purchasers satisfied their burden of showing how reasonable arguments could be made for different interpretations.  Since the conveyance documents were arguably ambiguous, the court denied the motion for summary judgment on that issue and determined to proceed with a trial.

This was not the first time that this bankruptcy case was reopened.  Another assignee of the bidder reopened the case in 2010 to correct a scrivener’s error in the legal description of the trustee’s deed.  After a trustee was appointed and apparently executed a corrected deed, the bankruptcy case was closed for a second time in November 2010.

The motion to reopen the case once again in 2013 paints a picture of a rather large mess.  The purchasers described the process of transferring the assets sold in 1969 as “prolonged and difficult.”  The debtor’s “books and records were in disarray, and many of its assets, which were comprised of various oil and gas interests, were difficult to precisely describe, particularly for people unfamiliar with the oil and gas business.” As a result various errors occurred.

For those who wonder why the purchasers waited so long to take action, the motion to reopen the case explained that the lengthy delay in discovering the errors was because the assets were undeveloped severed oil and gas leases.  Unlike personal property or surface property, apparently these types of interests are not considered to be in the possession of anyone until they are developed, so the title defects would not be apparent until then.

Forty-five years is a long time.  Even locating relevant people and documents involved in a transaction that old could be quite a challenge. However, this case suggests that the effort might be worth it if the original conveyance documents were not adequate to get the job done.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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