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In re 15375 Memorial Corp.

December 22, 2009

IN RE: 15375 MEMORIAL CORPORATION, ET AL.,
SANTA FE MINERALS, INC. DEBTORS/APPELLANTS IN 09-1391 CROSS-APPELLEES IN 09-1432 CROSS-APPELLEES IN 09-1608
v.
BEPCO, L.P., F/K/A BASS ENTERPRISES PRODUCTION COMPANY, APPELLEE IN 09-1391 INTERVENOR/CROSS-APPELLEE IN 09-1432 INTERVENOR/APPELLANT IN 09-1608
GLOBAL SANTA FE CORPORATION; GLOBAL SANTA FE CORPORATION SERVICES, INC.; ENTITIES HOLDINGS, INC., INTERVENORS/APPELLEES IN 09-1391 INTERVENORS/APPELLANTS IN 09-1432 INTERVENORS/APPELLEES IN 09-1608
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE DISTRICT COURT NOS. 1-08-CV-00313, 1-08-CV-00314, 1-08-CV-00318, 1-08-CV-00319, 1-08-CV-00321; 1-08-CV-00322; 1-08-CV-00325; 1-08-CV-00326, DISTRICT JUDGE: THE HONORABLE SUE L. ROBINSON.



The opinion of the court was delivered by: Smith, Circuit Judge

PRECEDENTIAL

Argued September 14, 2009

Before: SLOVITER, FUENTES, and SMITH, Circuit Judges.

OPINION

This appeal asks us to determine whether Chapter 11 bankruptcy petitions filed by Santa Fe Minerals, Inc. and 15375 Memorial Corporation (together, the "Debtors") were filed in good faith. There is ample evidence to support the finding of the District Court that the Debtors' bankruptcy petitions served no valid bankruptcy purpose and were used primarily as a litigation tactic to protect the Debtors and their parent companies from liability in pending litigations. Thus, we will affirm the District Court's order dismissing the bankruptcy petitions for lack of good faith.*fn1

The Debtors raise two issues in this appeal. First, they argue that the District Court incorrectly exercised plenary review, instead of review for an abuse of discretion, of the good faith inquiry. Second, they argue that the District Court erred in concluding that they did not file their bankruptcy petitions in good faith.*fn2

I.

The historical and narrative facts in this case are not disputed. The District Court, finding no clear error in the Bankruptcy Court's findings of fact, adopted those facts for the purposes of its decision, BEPCO, L.P. v. 15375 Mem'l Corp. (In re 15375 Mem'l Corp. III), 400 B.R. 420, 423 n.4 (D. Del. 2009), and we do so as well. These facts were ascertained during a three-day trial held by the Bankruptcy Court to decide several motions, including a motion by Bass Enterprises Production Co. ("BEPCO") to dismiss the Debtors' Chapter 11 petitions for lack of good faith. Santa Fe Minerals, Inc. v. BEPCO, L.P. (In re 15375 Mem'l Corp. I), 382 B.R. 652, 658 (Bankr. D. Del. 2008).

The Parties

The parties in this case are all companies involved in oil and gas exploration. The Debtors, 15375 Memorial Corporation ("Memorial") and Santa Fe Minerals, Inc. ("Santa Fe"), are both subsidiaries of GlobalSantaFe Corporation ("GSF"). Id. at 660. Both subsidiaries list the address of the U.S. headquarters for GSF, 15375 Memorial Drive, Houston, Texas, as their address. Id. Neither company, however, actually has offices at that address or at any other location. Id.

Memorial is a holding company incorporated in Delaware and is the immediate parent of Santa Fe. Id. It has no employees and engages in no business other than acting as the sole shareholder of Santa Fe. Id. In June 2001, Memorial voluntarily dissolved, but that dissolution was revoked in June 2004 "under the advice of counsel[.]" Id.

Santa Fe was an oil and gas exploration company incorporated in Wyoming. Id. On December 8, 2000, id. at 663, it filed for dissolution under Wyoming law, id. at 660. At that time, "Santa Fe's assets were upstreamed to [GSF and related entities] or other of the Debtors' affiliates[.]" Id. at 662. "Santa Fe's dissolution [permits] it . . . to act only through its sole shareholder, Memorial, in furtherance of winding up its remaining business." Id. at 660. It "currently has no officers, directors or employees and engages in no business." Id. Despite its December 8, 2000, dissolution, Santa Fe did not publish notice of that dissolution until August 4, 2006. Id. at 663. As a result, Santa Fe may not have been able to avail itself of the Wyoming state law statute of limitations defense for dissolved corporations until August 4, 2009. Wyo. Stat. Ann. § 17-16-1407 (providing three year statute of limitations starting from date of publication of notice of dissolution for claims against dissolved corporations).*fn3

GSF is a Cayman Islands corporation that indirectly owns Memorial and Santa Fe. In re 15375 Mem'l Corp. I, 382 B.R. at 660-61. It also owns numerous other companies (collectively, including GSF, the "GSF Entities"), including Entities Holdings, Inc. ("EHI") and GlobalSantaFe Corporate Services, Inc. ("GSFCSI"). Id. The GSF Entities, together with Memorial and Santa Fe, are "one of the world's largest offshore oil and gas drilling contractors and a leading provider of drilling services." Id. at 660.

EHI is a wholly owned, direct subsidiary of GSF. Id. It is the parent and sole shareholder of Memorial, id. at 660-61, and it also owns several other subsidiaries, id. at 661. EHI is a holding company and has no employees. Id.

GSFCSI is a wholly owned, indirect subsidiary of GSF. Id. It provides corporate services to Memorial, Santa Fe, and the GSF Entities. Id. GSFCSI, among other things, maintains the Debtors' books and records. Id.

David E. Faure, the vice president and assistant secretary of Memorial, was charged with marshaling the Debtors' assets prior to the filings of their bankruptcy petitions, dealing with the Debtors' liabilities, and working on the Debtors' bankruptcy cases. Id. Aside from handling these tasks, Faure held other important decision-making responsibilities at GSFCSI, EHI, and Memorial. Id. He was "employed by GSFCSI as vice president, assistant general counsel and assistant secretary." Id. As an employee of GSFCSI, Faure provided "legal services to EHI, primarily assisting it with the defense of litigation." Id. "[He] also serve[d] as vice president and assistant secretary of both Memorial and EHI." Id.*fn4 In carrying out his various duties, Faure reported to and took direction from James L. McCullough, the senior vice president and general counsel of GSF. Id. Although McCullough had no formal title at Santa Fe or Memorial, Faure had to receive McCullough's approval before he could file the Debtors' bankruptcy petitions.*fn5 Faure consulted McCullough while preparing the Debtors' bankruptcy petitions. Id. Faure also sought legal advice from McCullough regarding Memorial on matters unrelated to bankruptcy prior to filing its bankruptcy petition. Id.

As part of Faure's effort to marshal the Debtors' assets, he oversaw the recovery of funds from the GSF Entities for the benefit of the Debtors' estates. Id. This included seeking recovery of funds that were "upstreamed to EHI and Memorial after Santa Fe's dissolution." Id. After an initial investigation, though, Faure determined that the Debtors' potential claims against the GSF Entities were not viable. Id. Faure's determination is unsurprising considering that he also testified that "he [did] not think [the claims against the GSF Entities] '[we]re very good claims.'" Id. "Faure further testified that filing a lawsuit against [GSF] on behalf of the Debtors to facilitate the return of upstreamed funds would jeopardize his job." Id.

BEPCO is a limited partnership that is, among other things, challenging the Debtors' bankruptcy petitions for lack of good faith. Its involvement in the Debtors' bankruptcies stems from a property of which BEPCO and Santa Fe are both in the chain of title, a 1938 mineral lease of land in Avoyelles Parish, Louisiana (the "Tebow Property"). Both companies have been accused of contaminating the Tebow Property. Id. at 663-66. On April 27, 2007, BEPCO filed proofs of claim in the Bankruptcy Court asserting a right to recover against the Debtors and the GSF Entities all obligations and damages arising out of or related to litigation concerning the Tebow Property. Id. at 666.

The Tebow Litigation

On April 18, 2005, individuals affected by the contamination of the Tebow Property (the "Tebow Plaintiffs") filed suit in Louisiana state court naming Santa Fe, BEPCO, and others as defendants, seeking $320 million for the contamination (the "Tebow Action"). Id. at 663-64. The Tebow Plaintiffs alleged that "water produced from oil wells [on the Tebow Property] was disposed of in unlined earthen pits on their property[;] this water contained salt and dangerous minerals, metals, and radioactive materials, and the contamination migrated both horizontally and vertically into the surrounding soil and ground water." Id. Some of the pollutants entered and contaminated a drinking water aquifer. Id. at 663-64.

As a result of trial preparation, the Debtors learned that the Tebow Plaintiffs' "[e]xpert [r]eports indicated that[] the worst contamination on the Tebow Property occurred in the East Pit area-an area located on the 1938 [m]ineral [l]ease for which both BEPCO and Santa Fe were in the chain of title." Id. at 664. They also learned from the work of their own expert and that of the Tebow Plaintiffs' expert, that the East Pit was probably constructed after 1965 and that BEPCO assigned the 1938 mineral lease to a different company in 1964. Id. Thus, Santa Fe ascertained that BEPCO's liability for contamination caused by the East Pit was likely to be less than companies like it, i.e.,companies that used the Tebow Property after 1964. Id. In short, Santa Fe "knew that the [e]xpert [r]eports showed that it, not BEPCO, was to blame for pollution around the East Pit." Id. Santa Fe also learned that the contamination caused to the drinking water aquifer by the East Pit would cost approximately $189 million to clean. Id.

The Debtors were also aware that filing for bankruptcy would permit them to avoid liability in the Tebow Action. Id. at 665.The Tebow Plaintiffs' complaint stated that "if a party . . . has or intends to file for bankruptcy concerning any of the claims alleged . . . , it is the express intention of Plaintiffs not to pursue those claims or party or parties in this action, even if such party or parties has been inadvertently named as a defendant." Id.

The Tebow Action was scheduled for trial on October 11, 2006. Id. Leading up to the trial, BEPCO and Santa Fe participated in depositions, hired experts, and engaged in fact and expert discovery. Id. Santa Fe hoped that its dissolution under Wyoming law would be a defense to the Tebow Action, but it was concerned that its failure to publish notice until 2006 would undermine the defense. Id. at 667 ("[The] Debtors determined in the Summer of 2006 that the failure to give proper notice in connection with Santa Fe's dissolution created a risk to Santa Fe's shareholders for its liabilities in litigations, including the Tebow Action."). In June 2006, the Tebow Plaintiffs and BEPCO informed Santa Fe that they would pursue the GSF Entities under an alter ego theory. Id. Although the record is unclear as to when, at some point during the Tebow Action BEPCO asserted claims against Santa Fe and its insurers for the damage done to the Tebow Property. Id. at 686-92. It also asserted alter ego claims against the GSF Entities. Id.

The Demand Note

On August 8, 2006, eight days before the Debtors filed for bankruptcy, Memorial, through Faure, executed a demand note issued by EHI. Id. at 667. The demand note provided a revolving credit line of $500,000 in exchange for, among other things, Memorial (i) "accept[ing] all liabilities existing or arising from the activities of [Santa Fe]" and agreeing that "(ii) it is not a single business enterprise with [GSF] or any affiliate of [GSF]" and that "(iii) it will defend and indemnify [GSF] from any claims, whether based on an alter-ego, single business enterprise or other principle, relating to [Santa Fe's] operations." Id. at 668. A few days later, Memorial obtained $100,000 from EHI under the note to pay bankruptcy costs. Id.

Faure testified at trial that clause (i) of the demand note was intended to protect EHI and other GSF Entities from liability arising from Santa Fe's activities, including the Tebow Action.*fn6 Id. Clause (ii), according to Faure, stipulated that "Memorial had no claim . . . against EHI, GSF Corp. or GSF Corp.'s affiliates based on a single business enterprise theory." Id. This clause was not objectionable to Faure because, based on his due diligence, he had concluded that "Memorial was not a single business enterprise with any of the [GSF Entities]." Id. at 669. Clause (iii) "provided for Memorial to defend and indemnify EHI from any claim related to Santa Fe's operations, whether based on alter ego, single business enterprise or other theories." Id. at 668. Together, the three clauses were included in the demand note "so that EHI and other [GSF Entities] would not be prejudiced in the face of assertions being made by the Tebow Plaintiffs that GSFCSI's [designation of Faure as the Debtors' representative in bankruptcy] and [his ...


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