Royal v. Sharkey Well Service

Inre
IN THE UNITED STATES BANKRUPTCY COURT
DCD, Inc.,
FOR THE DISTRICT OF WYOMING
Debtor.
)
)
) 	Case No. 03-21439
) 	CHAPTER 7
)
)
RANDY L. ROYAL, Chapter 7 Trustee
for the Estate of DCD, Inc.,
)
)
)
Plaintiff, 	)
v. 	) 	Adv. No. 05-2042
)
SHARKEY WELL SERVICE, 	)
)
Defendant. 	)
DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT
On February 16, 2006, the court held a hearing on the cross motions for summary
judgment filed by the plaintiff/trustee, Randy L. Royal (Trustee), and the defendant, Sharkey
Well Service, Inc. (Sharkey). The court has considered the pleadings and evidence attached,
the Stipulation of Fact filed by the parties and the applicable law and is prepared to rule.
Jurisdiction
The court has jurisdiction over this adversary proceeding pursuantto 28 U.S. C. § § 157
and 1334. This is a core proceeding within the definition of28 U.S.c. § 157(b)(2)(F). The
motions are brought under Fed. R. Civ. P. 56, made applicable in adversary proceedings by
Fed. R. Bankr. P. 7056.
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Findings and Conclusions
Summary judgment is appropriate when there is no disputed issue of material fact and
the moving party is entitled to judgment as a matter oflaw. Hardy v. SF. Phosphates Ltd.
Co., 185 F.3d 1076,1079 (10th Cir. 1999). With one exception discussed herein, the parties
agree the facts are undisputed. Those undisputed facts are incorporated into the following
discussion.
The Trustee brings his complaint under 11 U.S.C. § 547(b) to avoid an alleged
preferential transfer, i.e, the recording by Sharkey of a judgment lien against property of the
debtor DCD, Inc. (DCD). 	The parties dispute two elements of this alleged preferential
transfer: the date upon which the transfer of a perfected lien to Sharkey was effective; and
consequently, whether Sharkey received more by the transfer than it would receive in a
chapter 71iquidation if the transfer (the recording of the Judgment) had not been made. 11
U.S.C. § 547(b)(5)(B).
Prior to the filing ofDCD' s chapter 11 bankruptcy petition, Sharkey performed work
on oil and gas properties owned by DCD that were located in Campbell and Sheridan
Counties, Wyoming. From August 20, 2001 through October 31,2001, Sharkey timely filed
thirteen oil and gas lien statements against certain of DC D's oil and gas properties pursuant
to Wyo. Stat. Ann. § 29-3-106 (LexisNexis 2005). 	The liens totaled $63,359.27. 	On the
same dates, Sharkey also sent notice of the liens to 88 Oil Company (88 Oil), the purchaser
of DCD's crude oil production from the oil and gas properties subject to Sharkey's lien
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statements. Wyo. Stat. Ann. § 29-3-1 05(b) (LexisNexis 2005). 88 Oil acknowledged receipt
of the notices and suspended payment of the crude oil production proceeds. The Trustee now
has possession of those funds.
As 	required 	by Wyo. 	Stat. 	Ann. 	§ 29-3-109(a) 	(LexisNexis 	2005), 	Sharkey
commenced two lawsuits, later consolidated, to foreclose the statutory oil and gas liens
within 180 days after filing the lien statements. DCD defended the lien foreclosure lawsuit.
Ultimately, on April 7, 2003, the Sixth Judicial District Court for Campbell County,
Wyoming entered a "Stipulated Judgment Entry" (Judgment) in Sharkey's favor.
The Judgment provided that Sharkey's liens filed against the "real estate, production
therefrom, proceeds of production and other property securing that amount [$60,000.00] are
adjudged and decreed to be valid and subsisting and ofthe extent provided for by W.S. § 29-
3-105." 	In the Judgment, DCD agreed to make payments on the debt. 	The Judgment
provided that in the event the payments were not made, Sharkey could proceed to foreclose
its liens. Sharkey recorded the Judgment in the Campbell County real estate records on May
2,2003 and in the Sheridan County real estate records on May 5,2003.
DCD filed its voluntary chapter 11 petition in this court on July 17, 2003. The case
was converted to a chapter 7 case on July 19,2004, and Mr. Royal was appointed the chapter
7 trustee.
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Section 544
The Trustee's complaint did not state a claim for relief under 11 U.S.c. § 544 to avoid
Sharkey's liens in the crude production proceeds as unperfected. 	However, the Trustee
raised that argument at the hearing on the motions for summary judgment. In the interest of
judicial economy, the court will address the allegation.
The Trustee contends that Sharkey does not have a perfected lien in the crude oil
production sold to 88 Oil because there is no evidence that Sharkey provided notice as
required by Wyo. Stat. Ann. § 29-3-1 05(b) (LexisNexis 2005). The Trustee argues at best
there is a genuine issue of material fact requiring an evidentiary hearing. Sharkey contends
the Judgment is entitled to issue or claim preclusive effect on the question of whether
Sharkey's liens are valid and perfected.
For two reasons the court agrees with Sharkey. 	First, the Trustee is bound by the
Judgment which contained a finding that Sharkey's liens against production were valid.
Wyoming law is applicable to determine the extent of an interest in property. 	Buchner v.
United States, 440 U.S. 48 (1979).
Whether a Wyoming judgment is entitled to preclusive effect depends on the
applicable law of Wyoming. 	In re Griego, 64 F.3d 580, 584 (lOth Cir. 1995). 	Under
Wyoming law, the doctrine of issue preclusion precludes a party from relitigating a finding
of fact if, among other things, that party is in privity with the party to the prior litigation.
Hutchins v. Payless Auto Sales, Inc., 85 P.3d 1010, 1013 (Wyo. 2004). 	Generally, a
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bankruptcy trustee is not in privity with the debtor because the trustee represents all of the
creditors and his interest is not aligned with that of the debtor. In re Fordu, 201 F.3d 693,
705 (6th Cir. 1999). The rule makes sense, particularly in the context of an avoidance action.
However, an exception to the general rule exists when the proceeding is one in rem
or quasi in rem to determine the nature of an interest in property. In re Gibralter Resources,
Inc., 197 B.R. 246, 253 (Bankr. N.D. Tex. 1996), aff'd202 B.R. 586 (N.D. Tex. 1996). The
party's ownership must be put into issue in the prior action. Id. The lawsuit between DCD
and Sharkey was a foreclosure action that definitively determined the extent of Sharkey'S
liens in DCD's property. 	Therefore, the court concludes the Trustee is bound by the
Judgment determining that Sharkey'S liens on the production proceeds are valid.
Second, the undisputed evidence provided with the motions for summary judgment
shows that Sharkey provided requisite notice to 88 Oil of its asserted liens in the crude
production proceeds. Sharkey produced four certified mail receipts of notices delivered to
88 Oil, and a March 4, 2002 letter from 88 Oil acknowledging receipt of notice. The court
believes this evidence is sufficient to establish that Sharkey complied with the provisions of
Wyo. Stat. Ann. § 29-3-1 05(b) and perfected its statutory liens on the crude oil production
proceeds paid and held by 88 Oil.
Section 547
The issue for purposes of the Trustee's preference claim is whether Sharkey's
statutory liens merged into the Judgment and as such, were not perfected until the Judgment
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was recorded in the real estate records in May 2003. If so, the act of recording the Judgment
was the perfection of the lien and an avoidable transfer which occurred within the 90 days
prepetition. 	The court notes that the Trustee has failed to establish that this estate is
insolvent, thus failing to prove that Sharkey will receive less than the amount of its debt in
the chapter 7 distribution. However, in the interest of ending this litigation, the court will
rule on the issue at hand.
In the case of Permian Corp. v. Armco Steel Corp., 508 F.2d 68 (lOth Cir. 1974), the
Tenth Circuit Court of Appeals confronted an issue remarkably similar to that in this case.
In Permian, Armco Steel Corporation (Armco) was asserting the priority of its oil and gas
lien in production proceeds held by Permian Corporation, and ahead of two judgment
creditors that had filed garnishments. Armco's notice was served on Permian after Armco
obtained a judgment in a timely foreclosure action against the judgment debtor, but before
one of the garnishments was served. The garnishment creditors contended that Armco lost
its statutory lien priority when it reduced its claim to judgment, and that Armco was then
required to execute on the judgment under general collection law.
Relying on its interpretation of Wyoming law, the court ruled that Armco's lien
became fully "choate" when notice was served by Armco on Permian. Id. at 75. The notice
of the lien establishes the priority of the lien and that priority is not destroyed by enforcement
and judgment proceedings required under the statutory lien statutes. 	Id. at 77. 	In other
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words, a judgment obtained in compliance with the oil and gas lien statutes does not destroy
the priority date obtained by filing and serving a lien statement or notice.
Permian should resolve this case, except that the Trustee contends a change in the
language of the lien statutes enacted since Permian will produce a different result. 	When
Permian was decided the applicable statutory language was: 	"Every ... corporation .. .
holding such lien may proceed to obtain a judgment ... by civil action commenced .. .
within six months after said filing of such notice and the lien shall continue until such suit
be finally determined and satisfied. Wyo. Stat. § 29-27 (1967) (Emphasis provided). The
statute applicable to this case provides that the lien shall continue "until the case is finally
determined." Wyo. Stat. Ann. § 29-3-109(a) (LexisNexis 2005). The Trustee argues that by
deleting the words "and satisfied," the legislature intended a lien to retain its priority only
until judgment is entered. 	From that step forward, the argument goes, the lien claimant's
priority is only dated from the execution or recording date of the judgment.
The court disagrees. The Permian case was not decided on the basis of the "finally
determined" statutory language in Wyo. Stat. § 29-27 applicable in 1975. Rather, the court
ruled that the lien becomes a choate lien which relates back in time to the date the lien notice
is filed and served, as a matter of equity and the intent of mechanic's liens in general. See
generally Bryant v. JCOR Mechanical, Inc. (In re The Electron Corp.), 336 B.R. 809 (10th
Cir. BAP 2006). Further, this court does not believe it was the intention of the legislature
to deprive a statutory lien creditor of its priority date simply because that creditor was
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complying with the lien statutes requiring enforcement. 	The argument would deprive the
creditor of the very lien it had gone through all of the necessary steps to perfect. 	The
recording of the Judgment is simply irrelevant as to the date of the perfection of the liens and
transfer date for purposes of § 547.
Accordingly, the court concludes the statutory oil and gas liens of Sharkey Well
Service, Inc. are valid and perfected in the oil and gas properties as of the dates those liens
were filed, and in the proceeds of production from the date notice was delivered to 88 Oil.
Sharkey is a secured creditor to the extent of the value of those properties, the 88 Oil
proceeds are Sharkey's cash collateral, and the Trustee's claim to avoid the lien as a
preferential transfer fails. The court will issue a judgment in favor of Sharkey.
DATED this 	/c2day of June, 2006.I
Service to:
Ronald Jurovich
Randall Cox
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By the Court
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