Court: United States Bankruptcy Court, D. Delaware; October 5, 2009; Us Bankruptcy; United States Bankruptcy Court
Cross-motions for summary judgment are currently before the court, involving Vess Oil Corporation (the Plaintiff) and the defendants SemGroup, L.P. and Eaglwing, L.P. (collectively, the Debtors). The court also considers motions to strike affidavits from J. Michael Vess and objections to deposition testimony related to the Plaintiff's motion. The central issue is whether the Defendants are holding certain funds in trust for the Plaintiff, which would allow the Plaintiff immediate recovery of those funds, or if the Plaintiff is merely a general unsecured creditor.
The court finds that the Defendants do hold the disputed funds in trust for the Plaintiff, leading to the decision to grant the Plaintiff's motion and deny the Defendants' motion.
In 2003, Vess Oil became the operator of oil and gas wells in the Kurten Field, Texas, including interests held by VOC Brazos Energy Partners, L.P. Vess Oil markets the production from these wells and arranges payments to various royalty and working interest owners. Lacking the necessary back-office capabilities to manage fund distributions, Vess Oil sought assistance from SemGroup, which directed them to Eaglwing. An agreement, referred to as the Oral Agreement, was established between Vess Oil and Eaglwing, whereby Eaglwing would receive funds from all monthly oil and gas sales from the Kurten Field, although SemGroup was not a party to this agreement.
Vess Oil regularly transferred monthly gas revenue directly to Eaglwing and instructed the purchasers of Kurten Field oil, initially BP and later Teppco, to remit oil revenues to Eaglwing as well. Eaglwing deposited these funds into its Bank of Oklahoma operating account in Tulsa and disbursed them to Kurten Field royalty and working interest owners, withholding only small amounts as "suspense money" pending clear title. If Eaglwing was unable to pay an interest owner due to their interest being in suspense, it retained those funds until payment was possible. Eaglwing and SemGroup did not purchase oil or gas from the Kurten Field. Iberia Management Systems was engaged by Eaglwing to manage the distribution of payments to interest owners and to maintain accurate records of their respective interests. Iberia charged an average monthly fee of $1,791 for these services, initially paid by Vess Oil but switched to Eaglwing in May 2005 at Mr. Vess's request to allow Eaglwing to retain interest earned from the funds before distribution. Both parties considered the fee and interest earned to be a “wash.” Throughout their relationship, Vess Oil did not request that funds be placed in an escrow account or segregated, nor did Eaglwing promise to do so. Despite the commingling of funds, both Mr. Vess and Mr. Foxx confirmed that the proceeds did not belong to Eaglwing, and Eaglwing would have returned the funds to Vess Oil upon request before July 2008, viewing the arrangement as a customer accommodation.
Vess Oil utilized a payment structure for distributing funds related to the Kurten Field wells without a formal written agreement. After SemGroup and its subsidiaries filed for Chapter 11 bankruptcy on July 22, 2008, the Defendants withheld funds totaling $2,732,607.58 from Vess Oil and Kurten Field interest owners, citing a debtor-creditor relationship as justification for treating these funds as part of the bankruptcy estate. The Defendants proposed an unsecured claim of the same amount to Vess Oil, which Vess Oil rejected, arguing that the funds were held in a constructive or resulting trust for their benefit and should not be included in the bankruptcy estate.
The Court has jurisdiction under 28 U.S.C. 1334 and 157 and proper venue under 28 U.S.C. 1408 and 1409. The proceeding is classified as a core proceeding. Both parties have filed cross-motions for summary judgment concerning Vess Oil’s complaint, with the Court affirming that the standards for summary judgment remain unchanged regardless of cross-motions. Summary judgment is warranted only when there are no genuine issues of material fact, and the movant is entitled to judgment as a matter of law. The Court must assess facts favorably toward the nonmoving party and require specific facts from the nonmoving party to avoid summary judgment. If the nonmoving party fails to establish a genuine issue for trial, the moving party may be granted summary judgment.
Applicable state law governs whether the Defendants held the funds in question in trust for Vess Oil as of the Petition Date, with potential governing laws from Kansas, Oklahoma, or Texas. The Court determines that Vess Oil is entitled to a resulting trust under each state's law. Under Texas law, resulting trusts imply an intention to create a trust and are considered equitable in nature, requiring examination of the circumstances at the time of the transaction. Texas courts impose a heavy burden of proof on the party claiming the existence of a resulting trust. In Oklahoma, resulting trusts arise when the legal estate is transferred, but the intent indicates that the beneficial interest should not go to the legal title holder. Vess Oil must provide clear and decisive proof to establish an implied trust under Oklahoma law, as the burden lies with them to demonstrate its existence.
Recent Kansas cases involving resulting trusts have focused on instances where one individual pays for property but another holds legal title, particularly in land transactions, which are governed by specific statutes (Kan. Stat. Ann. 58-2406) not applicable in this case. To determine the governing common law rule, the court references a 1944 Kansas Supreme Court citation emphasizing that resulting trusts arise from the presumed intentions of the parties involved, based on the facts and circumstances at the time of the transaction. A resulting trust implies an intention to create a trust, even if not explicitly agreed upon by the parties. It must align with the parties' intentions at the time of property acquisition and cannot be assumed unless it is a fair interpretation of their actions.
The party claiming a resulting trust must meet the preponderance of the evidence standard (University State Bank v. Blevins, 1980). In applying these principles to the undisputed facts, the court finds Vess Oil entitled to summary judgment on its resulting trust claim. Evidence suggests that the parties did not intend for the proceeds from the Kurten Field wells to belong to the Defendants during the period the funds were forwarded to them. Instead, the funds were transferred to Eaglwing solely to facilitate payments to the Kurten Field interest owners, while Vess Oil retained beneficial ownership. Further supporting this conclusion is the treatment of interest earned on these funds during a 30-day payment cycle, with both Mr. Vess and Mr. Foxx acknowledging in 2005 that the interest belonged to Vess Oil, not Eaglwing.
Mr. Vess, representing Vess Oil, and Mr. Foxx, representing Eaglwing, recognized the interest earnings as belonging to Vess Oil, which influenced their agreement allowing Eaglwing to pay Iberia monthly for retaining those earnings. Consequently, if the interest belonged to Vess Oil, the principal amount that generated the interest also belonged to them. Testimonies from both Vess and Foxx reveal that they did not view their negotiations as establishing a creditor-debtor relationship, but rather as Eaglwing serving merely as a pass-through entity for distributing the Kurten Field proceeds to third parties. Foxx emphasized that the funds were always Vess Oil's and that Eaglwing's role was limited to handling the money for distribution. Vess anticipated that Eaglwing would manage the funds for Vess Oil's account and expected transparency regarding the funds, though he did not require their segregation. The court determined that this evidence sufficiently demonstrated the intent to create a trust relationship through the Oral Agreement, leading to the conclusion that a resulting trust should be imposed in favor of Vess Oil.
The Court finds that the Plaintiff, Vess Oil Corporation, is entitled to a resulting trust over certain funds held by the Defendants, SemGroup, L.P. and Eaglwing, L.P. Under Section 541(a)(1) of the Code, the bankruptcy estate encompasses all legal or equitable interests of the debtor in property at the case's commencement, but excludes any powers held solely for the benefit of another entity (11 U.S.C. 541(b)(1)). Property owned by the debtor only in legal title, without an equitable interest, is included in the estate only to the extent of the legal title (11 U.S.C. 541(d)). Since the funds in question are held in trust for Vess Oil, they do not constitute part of the Defendants' bankruptcy estate and must be returned to Vess Oil. The Court grants the Plaintiff's Motion for summary judgment and denies the Defendants' Motion, ordering the Defendants to remit the funds within 30 days. Additionally, the Court grants the Motions to Strike certain portions of the affidavits submitted by the Defendants.
This Opinion outlines the Court's findings of fact and conclusions of law under Federal Rule of Bankruptcy Procedure 7052. The Defendants have agreed that Eaglwing's Bank of Oklahoma operating account maintained a minimum balance from June 20, 2008, to August 6, 2008, and can track all Kurten Field proceeds up to the Petition Date, thereby waiving any tracing defense. The parties dispute whether Texas or Oklahoma law governs the matter, with the Court also considering Kansas law due to references made in the parties' briefs. The Defendants objected to a question regarding Mr. Foxx's intent in creating an Oral Agreement, but the Court overruled this objection, emphasizing the importance of understanding Mr. Foxx’s intent as it relates to trust creation. The Court highlighted the heavy burden of proof on parties asserting a trust relationship, referencing past cases that rejected trust claims in favor of debtor-creditor presumptions. However, the Court concluded that a resulting trust is justified based on the specific facts of this case, granting summary judgment to Vess Oil on its resulting trust claim and not addressing the constructive trust claim. Additionally, the Court noted it would address deposition testimony objections in a separate Opinion.
