Kayes v. Klippel (In Re Klippel)Kayes v. Klippel (In Re Klippel)
MEMORANDUM OF OPINION DENYING COMPLAINT TO DETERMINE DISCHARGEABILITY
This adversary proceeding is before the Court on Plaintiff Dr. Jack Kayes’ (“plaintiff’ or “Kayes”) Complaint to Determine Dis-chargeability of Indebtedness. Kayes appears by Terry C. Cupps of Foulston & Siefkin, Wichita, Kansas. The debtor appears by William H. Zimmerman of Minter, Case & Zimmerman, Wichita, Kansas.
JURISDICTION
The Court has jurisdiction over this proceeding.
NATURE OF THE CASE
The parties submitted this adversary proceeding for determination to the Court on stipulations and briefs. The plaintiff obtained a judgment against the debtor in Wilson County, Kansas, District Court, based on an investment he made in an oil production vеnture operated by the debtor. The Wilson County court found that the debtor had breached a general fiduciary duty to the plaintiff. However, the Court specifically found that the debtor had not committed fraud. The debtor subsequently filed bankruptcy. Plaintiff now brings this adversary proceeding to have the judgment debt declared non-dischargeable under
STIPULATIONS OF FACT
The parties have stipulated to the following facts:
1. The debtor, Bernhardt William Klip-pel, Jr. (the “debtor”) filed his voluntary petition for relief pursuant to Chapter 11 of the United States Bankruptcy Code on May 31, 1994.
2. The above-captioned adversary action arises on a complaint filed by Dr. Jack Kayes (the “plaintiff”) to determine the discharge-ability of a debt pursuant to
3. Plaintiff is a judgment creditor of the debtor in the amount of $59,621.60 with interest thereon at the legal rate of 7.5% per annum from and after the fifth day of May, 1993, based upon a journal entry filed in the District Court of Wilson County, Kansas in Case No. 90-C-37 on August 20, 1993.
The parties incorporated into their stipulated facts the facts contained in Wilson County Court’s Findings of Fact and Conclusions of Law. These findings of fact аre:
5. In 1972, B.W. Klippel, Jr., and his wife purchased the working interests in a series of oil leases in Woodson County and Wilson County, Kansas.
6. The Klippels’ purpose in purchasing the said oil leases was to salvage the equipment located on them.
7. Thereafter, Klippel changed his mind and decided to produce the leases.
8. In 1975, Klippel unitized the leases into the Buffalo Field Unit (“BFU”), a field comprised of twelve oil leases.
9. In the early 1980s, Klippel began searching for buyers of his working interest in the BFU. He prepared a number of promotional documents to provide to prospective purchasers of the working interests, including the General Discussion, the Supplementary Discussion, and the Supplementary Discussion II.
10. In 1984, Klippel gave Pelto Oil Company an option to purchase the leases, and allowed Pelto on the lease property to conduct drilling and production testing. Pelto drilled two wells, P-1 and P-2, on the “Apt A Lease.” A dispute arose between Klippel and Pelto, and Pelto thereafter did not exercise its option to purchase. Pelto did nоt provide Klippel with the core analysis reports obtained from the drilling of wells P-1 and P-2. As a result, Klippel ultimately sued Pelto to obtain those results, but Klip-pel did not finally obtain them until 1990.
11. In 1985, Klippel sought to borrow money from Allied Bank in Houston, Texas, pledging the oil leases as collateral for the loan. Allied Bank denied his loan application.
12. In 1985 and early 1986, Klippel sent solicitation letters to people he believed might have an interest in investing in his BFU. These included letters to Barry McFarland of Allied Bank, Don Stuckey, Stanley Kielmar, and Robert Novak.
13. By the Spring of 1986, Klippel had sold little if any of his working interest in the BFU. At that time he approached Kayes about purchasing a working interest in the BFU.
14. Kayes is a doctor of ophthalmology in St. Louis, who had long-standing professional relationships with Klippel’s mother and wife. That is the reason that Klippel solicited Kayes’ investment in this venture. Klippel knew at that time that Kayes had no experience in the oil industry, and was relying exclusively upon Klippel for advice with respect to investment in and operation of this venture.
15. Klippel met with Kayes and introduced him to the BFU. Klippel indicated to Kayes that Klippel intended to redevelop and produce the BFU and that Klippel would be the operator of that redevelopment.
16. [Klippel gave Kayes various documents including those mentioned in ¶ 9 and ¶ 12 above.]
17. Klippel represented to Kayes that it was his plan to construct a pilot waterflood project fоr the purpose of producing the Lower Squirrel pay zone. This plan involved drilling four water injection wells around an existing production well (Pelto well P-2), injecting water into the Lower Squirrel pay zone through those injection wells and producing oil therefrom through the Pelto P-2 well.
18. Klippel represented to Kayes that the cost of this development was $145,000.00. In May 1986, Kayes agreed to invest in the venture.
20. Prior to executing the Operating Agreement, Klippel represented to Kayes, both orally and in the promotional documents, that this was an industry standаrd operating agreement. Klippel also told Kayes that he would keep Kayes advised of developments on the project and provide personal recommendations on whether the project should continue.
21. Thereafter, Klippel undertook the construction of his pilot waterflood project on the BFU. At all times, Klippel continued to own a substantial portion of the working interest in the BFU.
22. Prior to Kayes purchasing the working interests in the BFU on November 1, 1986, Klippel made the following misrepresentations about the project and the investment to Kayes, either orally or in the written promotional documents:
(a) The Operating Agreement Klippel used would be an industry standard;
(b) A bank would be willing to loan the of approximately $200,000.00 secured by a first mortgage against the leases to a responsible purchaser;
(c) Klippel had received several offers to purchase the BFU for several hundred thousand dollars;
(d) The oil in the Lower Squirrel pay zonе was mobile and could be waterflooded;
(e) Findings from the prior operations of Pelto Oil Company on the property indicated probable oil production from the Lower Squirrel pay zone would likely exceed the projections contained in the general discussions;
(f) Dr. Kayes could terminate further participation in the project at any time simply by telling Klippel that he wanted to;
(g) Development costs beyond the initial four well pilot waterflood project would be paid for from revenues derived from ongoing production;
(h) Future net revenues to the working interests for production on the leases should be computed on the basis of $20.00 per barrel of crude oil;
(i) Stanley Kielmar wanted to invest in Klippel’s venture but lacked adequate cash flow to do it;
(j) The monthly operating costs on the project would run approximately $6,250.00.
28. Klippel also omitted to disclose the following material facts to Kayes prior to obtaining Kayes’ investment in the project:
(a) Klippel had sought a loan from Allied Bank in Houston secured by the BFU, and the loan application had been denied.
(b) Klippel lacked core analysis reports on the two wells that Pelto Oil Company had drilled.
(c) Klippel was involved in a lawsuit with Pelto Oil Company to obtain the core analysis reports and other results of their exploratory operations.
(d) Kayes would have to reconvey his working interest to Klippel or someone else if Kayes wished tо terminate his participation in this project.
(e) Klippel lacked sufficient funds to carry his share of working interest expense on the project.
(f) Klippel did not intend to invest further in the project, even after November of 1986.
(g) The $145,000.00 cost of the pilot water-flood project did not include costs for plugging and other operations which would more than double the cost of the project.
(h) Klippel would charge the project a management fee of $6,000.00 per month.
24. Betwеen November 1, 1986 and March 1989, Klippel charged Kayes on the BFU for costs other than those directly associated with the construction and implementation of his pilot waterflood project. Klippel
25. Klippel misrepresented to Kayes the work that he was performing on the project, including particularly representations relating to the drilling of new wells on the project. For example, in Progress Report #2, Klip-pel represented to Kayes that Klippel had drilled two new wells by December 20, 1986, when in fact Klippel did not drill his first well until approximately March, 1987.
26. Klippel altered his development plan by production testing the Pelto wells P-1 and P-2 without first seeking or obtaining the consent of Kayes.
27. Between November 1, 1986, and March 1, 1989, Klippel reworked wells and performed other work on the BFU not directly related to the proposed pilot water-floоd project without first obtaining the consent of Kayes.
28. The results of the production tests performed on the Pelto wells in December, 1986 were unfavorable. However, Klippel did not inform Kayes of these tests results until May, 1987, and even then did not indicate that the results were unfavorable.
29. The production and core analysis test results with respect to the first well drilled by Klippel (Well I — 11) were unfavorable and indicated that the proposed waterflood project would not result in sufficient production to pay the costs incurred in constructing the project. However, Klippel did not inform Kayes of this fact.
30. In his Progress Report # 6, dated June 2, 1987, Klippel misrepresented the following to Kayes:
(a) That available evidence indicated Klip-pel would recover as much or more oil from the BFU waterflood project as originally projected in the General Discussion.
(b) That production costs would be in line with those originally projected.
(c) That the project would break even with two or three good wells and that Dr. Kayes should anticipate those wells being produced soon.
31. Throughout the summer and fall of 1987, Klippel misrepresented to Kayes that he would begin drilling the additional injection wells promptly, when in fact Klippel did not intend to begin drilling them until Kayes and the other working interests invested substantial additional sums.
32. During that time, Klippel misrepresented to Kayes that Klippel would drill only one additional injection well and test it before drilling any additional wells, and that he would not drill such аdditional wells except upon obtaining favorable results from the wells he drilled.
33. In November, 1986, Klippel drilled two injection wells simultaneously: wells I-21 and 1-22.
34. The costs to drill the second of these two injection wells was at least $20,000.00.
35. The tests from well 1-22 were unfavorable; well 1-21 was never tested.
36. Nothing about the results of these two wells indicated that the proposed water-flood development plan would be successful.
37. By October 27, 1987, the project had cost more than $250,000.00 and Kayes had contributed more than $26,000.00.
38. Prior to and at this time, Klippel failed to evaluate whether the costs of the project had rendered it unlikely that the project would be profitable.
39. Klippel failed to advise Kayes as to the financial viability of the project at that time.
40. Klippel did not drill the fourth well of his proposed pilot waterflood project until August, 1988.
41. The delays in drilling wells were caused by Klippel’s unwillingness to contribute to the costs. Therefore, wells 1-21 and 1-22 were not drilled until Kayes and the other working interеst holders made an additional investment in the project, and the fourth injection well was not drilled until the working interest holders made an even further substantial investment in the project.
42. The fourth injection well, well 1-12, was drilled in August of 1988. The test results were not favorable and provided no indication that the pilot waterflood project would be profitable. Klippel never told
43. Thereafter, Klippel initiated his wat-erflood project. However, it was unsuccessful, producing no oil and only saltwater.
44. Prior to August 1989, Klippel charged the project substantial sums for the services rendered by “little b drilling” without informing Kayes that Klippel and “little b drilling” were one and the same.
45. In the spring of 1989, Klippel and Kayes met in St. Louis to discuss the project. At that time Klippel sought Kayes’ consent to participate in a new development plan at a total cost of approximately $100,000.00.
46. At that meeting, Kayes refusеd to participate any further in Klippel’s development unless and until Klippel provided Kayes with satisfactory evidence that Klippel could actually produce oil from the project.
47. Klippel promised Kayes at that meeting he would return to St. Louis to provide him with evidence that he could produce oil from the project.
48. Klippel never met with Kayes to provide him with such information, although Klippel did cancel meetings scheduled for that purpose.
49. At the time of the spring 1989 meeting, and thereafter until August, 1989, Kayes was “paid in full” to Klippel.
50. Klippel sued the other working interest holders for failing to pay their respective pro rata shares of expenses; however, Klip-pel never informed Kayes of these lawsuits.
51. In 1990, Akandas, Inc. sued Klippel and the other working interest holders to cancel leases covered by the Unitization Agreement on the theory that the leases had lapsed. Klippel charged the working interests for the attorney’s fees he incurred to defend this lawsuit.
DISCUSSIONS AND CONCLUSIONS
This adversary proceeding is before the Court on the briefs and stipulations of the parties. Plaintiff seeks to have his claim against the debtor declared nondischargeable under
Collateral estoppel, or issue preclusion, is procedural concept which precludes relitigation of issues actually and necessarily decided in a prior action.
Parklane Hosiery Co. v. Shore,
Of the four elements of collateral estoppel, the only one contested here is whether the state court’s finding of a breach of a
One of the primary purposes of the Bankruptcy Code is to give a debtor a fresh start. To further that goal, exceptions to discharge in the Bankruptcy Code are strictly construed against an objecting creditor and in favor of the debtor.
See, e.g., In re Black,
In this circuit,
In Romero, the court determined that a New Mexico statute which required construction contractors to forfeit their contracting license if they diverted funds they received prior to completion of a specific project imposed a fiduciary duty on all contractors. Id. at 621-22. The court further found that this fiduciary duty existed prior to the creation of the debt. The court, therefore, held that the debt was nondischargeable due to the breach of fiduciary duty.
In the stipulated facts in this case, the state cоurt found some sort of a fiduciary duty existed between the debtor and plaintiff, based on the disparity in knowledge and experience in oil and gas operations, such that Klippel had a “position of ascendancy” over Kayes.
Cf.
fn. 3 (the analysis in
In re
Marchiando). Unfortunately, the state law rationale for the state court’s conclusion is not in the record. Under Kansas law, in general, a “fiduciary duty” exists among joint venturers.
See First National Bank & Trust v. Sidwell Corp.,
The courts applying Kansas and bankruptcy law have generally held that a general fiduciary duty does not except a debt from discharge under the Bankruptcy Code, absent additional factors.
In re Weiner,
In
In re Weiner,
the court, while noting that the general fiduciary duty which exists by virtue of statute among partners is not sufficient to bar a debt from discharge, concluded that if there were additional factors “which evidence the existence of an express or technical trust,” then a court may appropriately find that a debtor was acting in a fiduciary capacity under
Even were the Court inclined to accept the extension of the general rule in
Weiner,
the facts here do not justify excepting plaintiffs claim from the discharge. Here, the only factor which leans towards finding that a broader standard of “fiduciary duty” applies is that Klippel was the owner and operator of the project. That factor does not alone require a finding that the higher fiduciary standard exists. Unlike
Romero,
there is no statutory fiduciary duty. The only duty is the general fiduciary duty of loyalty, good faith, and fair dealing, which accompanies practically every contract and which is not sufficient to bar the discharge of a debt under
The plaintiff has chosen to submit this matter essentially on the record of the state court judgment for a final determination under
The foregoing constitutes findings of fact and conclusions of law as required by
Notes
. Although the parties have stipulated to the “Findings of Fact” set out below, the state trial court "adopted” plaintiff’s proposed findings generally, but not in the detail that this recitation would suggest. As the parties have so stipulated, the Court must determine this as submitted: as though these were the facts found by the state court. Apparently, the stipulated facts in paragraphs 5-51 were in plaintiff's proposed findings of fact submitted to the state trial court.
. See fii. 1 above.
.
But cf. LSP Investment Partnership v. Bennett (In re Bennett), 989 F.2d
779, 784 (5th Cir.1993). The
Bennett
court noted, "[m]ost courts today ... recognize that the 'technical' or ‘express’ trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law."
Id.
at 784-85;
see also Matter of Marchiando,