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Sixth Circuit B.A.P. Rules Partnership Had Sufficient Ownership Interest in Gas Well Agreements to Assert a Claim Against Debtor's Estate

Tuesday, September 27, 2011

The Cadle Co. II, Inc. v. Gasbusters Production I LP, No. 10-5060, 2011 BL 231849 (6th Cir. B.A.P. Sept. 9, 2011) The United States Bankruptcy Appellate Panel for the Sixth Circuit (“B.A.P.”) affirmed a bankruptcy court’s decision and held that a limited partnership sufficiently established its ownership interest in fifteen gas well agreements and could assert claims against the debtor’s estate. Overruling a challenge on appeal from the primary unsecured creditor, the B.A.P. affirmed the bankruptcy court’s ruling that the creditor’s deposition testimony constituted a judicial admission, thereby limiting its ability to challenge the partnership’s claims. The court also affirmed the bankruptcy court’s rejection of the creditor’s contention that the well agreements were deficient because they contained grammatical arrors and name inconsistencies. As a result of the decision, the partnership will be entitled to assert claims totaling more than $330,000.00.

GPILP’s Claims against the Paul Bankruptcy Estate Relating to the Gas Wells

On February 6, 2004, Paul and Margaret Paul (the “Pauls”) filed for chapter 7 bankruptcy protection. Two years later, Gasbusters Production I Limited Partnership (“GPILP”) filed a proof of claim against the their bankruptcy estate in the amount of $424,825.00, based on an alleged breach of contract by Paul arising out of his failure to operate and properly manage various gas wells. At the same time, GPILP moved for payment of gas sale proceeds in the amount of $25,659.33, to which it was entitled since they were earned after GPILP settled its claims with a third party with respect to the wells, but prior to the Paul’s bankruptcy petition.

Bankruptcy Court Overrules Cadle’s Objection to GPILP’s Claims

Sometime thereafter, The Cadle Company II, Inc. (“Cadle”) purchased most of the assets and rights of the Paul bankruptcy estate and then filed an objection to GPILP’s proof of claim and motion for gas-sale proceeds. With respect to the proof of claim, Cadle contended that GPILP did not have an ownership interest in the wells, primarily because of deficiencies in the well-transfer agreements. It further argued that the amount of the claim was arbitrarily calculated and needed to be reduced to account for certain expenses and offset items owed by GLILP to Paul. The bankruptcy court ultimately overruled Cadle’s objections and awarded GPILP claims against the estate, but in the reduced amount of $312,239.50 for the proof of claim and $20,861.15 in gas sale proceeds. Cadle subsequently appealed the ruling to the district court, which affirmed the bankruptcy court’s decision, and then appealed the lower courts’ ruling to the B.A.P.

B.A.P. Rules GPILP’s Deposition Testimony Constituted a Judicial Admission

The B.A.P. began its analysis by addressing Cadle’s argument that by granting GPLIP's motion in limine, the bankruptcy court wrongfully "allowed statements made by Cadle in a prior adversary proceeding to be treated as judicial admissions, rather than evidentiary admissions." The statements at issue involved allegations that Paul concealed wrongful business activities using alter-ego entities, and as the B.A.P observed the bankruptcy court’s decision "effectively prevented Cadle from arguing that GPILP’s proof of claim against the estate was invalid on the ground that it should have been made against the alter-ego entities and not Paul." Nevertheless, the B.A.P. affirmed the bankruptcy court’s treatment of the statements as judicial admissions, noting that while it would have been error to make such a finding based solely on Cadle’s statements in the prior adversary proceeding, the bankruptcy court’s decision was also based on deposition testimony in the present case, wherein a Cadle representative confirmed that the statements made in the prior proceeding were true. Thus, the B.A.P. held that the bankruptcy court’s consideration of the prior statements was harmless error and affirmed the grant of GPILP’s motion in limine.

B.A.P. Holds GLILP Had a Sufficient Ownership Interest to Assert a Claim

Next, the B.A.P. turned to Cadle’s contention that the bankruptcy court erred in finding that GPILP had a valid ownership interest in the wells to assert in the Pauls’ bankruptcy case. Although the GPILP formation documents and well-transfer agreements contained grammatical errors and name inconsistencies, the B.A.P. noted that because the case involved a real property, the issue was governed by Kentucky law governed, which requires that a deed or assignment be construed in accordance with parties' underlying intent. See Babb v. Dowdy, 17 S.W. 2d 1014, 1016 (Ky. Ct. App. 1929). In this regard, the B.A.P. was persuaded by the facts that: (1) a name similar to GPILP was listed as grantee on four of the five well transfer documents, (2) GPILP was formed expressly for the purpose of acquiring the wells, (3) the well transfers, which totaled approximately $550,000.00 in consideration, occurred shortly after new limited partners joined GPILP and contributed $700,000, (5) no party other than Cadle had ever come forward to challenge GLILP’s ownership interest in the wells, and (6) and no evidence was submitted that GPILP transferred away its ownership interest in the wells. Based on the foregoing, the B.A.P. held that the intent of the parties was clear and the disputed documents served to transfer ownership of the subject wells to GPILP. Accordingly, the B.A.P. affirmed the bankruptcy court’s ruling that GPILP had a sufficient ownership interest in the gas wells.

B.A.P. Affirms Bankruptcy Court’s Determination of the GPILP Claim Amounts

Lastly, the B.A.P. disagreed with Cadle’s contention that, even if GPILP had an ownership interest in the wells, the bankruptcy court erred in allowing GPLIP’s claims, even in the reduced amounts. With respect to the proof of claim amount, the bankruptcy court had thoroughly analyzed the evidence in deciding how much gas from the two pipelines at issue was derived from the gas wells and correctly held that further offsets to account for amounts claimed to be owed to Paul by GPILP were not warranted in light of Cadle’s failure to provide any credible evidence concerning the existence and amount of such offsets. Likewise, the B.A.P. resolved that GPILP was entitled to the additional amount for the gas sale proceeds given that it had established a sufficient ownership interest to assert a claim in the gas wells. Consequently, the B.A.P. affirmed the bankruptcy court’s grant of a claim in favor of GPILP in the amount of $312,239.50 and an additional $20,861.15 for gas sale proceeds.

B.A.P. Affirms Bankruptcy Court’s Award of GPILP’s Claims

Ultimately, the B.A.P. affirmed the bankruptcy court’s decision and held that GPILP had a sufficient ownership interest in the gas well agreements to assert a claim against the Pauls estate. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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