today i want you to know that we will have read your briefs and record excerpts we have not necessarily gotten into the record so we appreciate your giving us record citations when those are appropriate and also we appreciate your adhering to our time limits which are gauged as you know with the yellow light for two minutes and a red light that says please stop talking unless you're answering a question from the court first case of the morning is number seventeen five o two one seven u s energy development corporation versus c e o three funding holding company holding company will hear from mr taylor think your honors there are two issues that are presented in this appeal first as wear them out of the courts below and this is an appeal from the bankruptcy court to the district court to this court whether the courts of blue purchased by the at by the apple e c l three and were not assumed liens or otherwise senior secured claims for which you link that attach to assets purchased by castle a seal three in the underlying bankruptcy proceeding fees that those would be capped at five hundred thousand dollars is the amount that we could seek to recover against the assets that were quired by apple e in this case and there was a statement of the district court record that we were seeking eleven million interpreted a provision of the joint operating agreement that re that essentially says if you are a prevailing party says any of it this is section seventy five the joint operating agreement and that's at record fifteen fifty one in the event that any party is required to bring the legal proceedings to enforcing the financial obligation of a party here under the prevailing party and such action should be in total uncover all court cost cost of collection and a reasonable attorney's fee which the lane provided for here and shall also secure the courts below interpretive financial obligation to me in which there had to be a monetary payment and judge mot in the bankruptcy court held so because he interpreted the use black's law definition of financial interest in the merriam webster dictionary definition of financial to mean there had to be a payment there is no requirement of that provision nor otherwise in the to an operating agreement that there be a payment that the financial obligation means payment well that's certainly true but you could have said that any party is required in the event any party is required to bring legal proceedings to enforce any obligation you get to shift attorney's fees i think that's correct your honor and i would agree with you the parties could have put that in there they didn't and so what we're left here is trying to interpret what their intent was based on the four corners at all but all of your lawsuits were directed at changing the operating the operator well and the and that goes to the issue they were are considered a prevailing party if you alter the legal rights of the parties and that can include equitable world equitable relief it can include a consent judgment tell me what would not be a suit for a financial obligation well in the this contract or in this contract i think a suit maybe i can answer this way a suit to enforce a financial obligation could include any number of things you could include to require payment that could include which the courts below held and i agree that would be a financial obligation it could be to enforce the operator's obligations to seek financial payments from other parties and take the actions of the record to take as an operator and make sure that the working interest owners are funding their joint interest billings which is did not occur in this case it could be to keep up with your accounting obligations and reporting obligations under an agreement all of those are financial obligations just as all that this is not a credit agreement a covenant a financial covenant and a credit agreement will be a financial obligation there are lots of things that are financial obligations of parties they have to keep up with their covenants they have to enforce payments to be received by the parties they have to properly keep books and records they have to maintain their own financial status that don't involve payments but there are a lot of our obligations of an operator of a an oil and gas property that go way beyond financial i think that's correct and i would agree with you on that that there are obligations so when you sued to change operators here you're covering a lot more territory than just financial obligations well and you have yes sort of your honor and the we point to what was actually occurring in this case in this case as a record shows and is not in dispute the operator in this case was an affiliate of the working interest of one of the working interest others my client was a working interest out of they were affiliate of the other working interest to that working interest owner was not funding its joint interest billings the operator was using the funds we were receiving to pay them willy nilly to ever they wanted to pay out until you could assume that limited partner directly could you not we could have sued them in apartment directly to work for them to pay but fundamentally unless we change to the operator was out of the operating agreement who controls the accounting who controls the bookkeeping who controls the default provisions  controls the right to make the other parties pay their share of the bills nothing was going to change these folks were tied at the hip and unless the operating was removed then there was nothing was going to happen in the case because they were simply not going to pay their due an interest bill and what did happen is once the bankruptcy was filed and once we took our actions we did if a payment obligations required we did require that they are enforce our obligations to require that a payment be made after the bankruptcy was filed after we took over the operator ship the other working interest or the debtor lp is referred to by the courts below did in fact fund their share of the operating expenses out of the joint operating agreement and did fund the completion cost for six wells while we were the operator we enforce that payment obligation three is going to say well that's because we funded that under the debtor in possession alone during the course of the bankruptcy proceeding but that's the way it was being funded before the bankruptcy was filed  opportunities and locate places that might be appropriate for drilling within the lease and that would not be i think probably a financial obligation that would be a cabinet operator to go out of and locate the places that look like a somewhat imprecise document i used the example of a credit agreement earlier this is not a credit agreeing that it is that the courts have read of the power of these over the years i'm sure whether they're somewhat convoluted in the way they're put together but there are fundamentally many financial obligations under the to an operating room as i discussed the do not involve the actual enforcement of may can somebody pay some money under the joint operating agreement and they could have used the language a operator what they are there are actually two point two step so that the first was he was going to be the operator during the pendency of the bankruptcy case and the reason we got there again is because the financial obligations were not being enforced it did fundamentally change the players and certainly what we're talking about that i agree with you ought to put that together with key parts one was how we got to how us energy development corporation got to be the operator why it needed to and that's because the existing operator was not the financial obligation to ensure that everything that needs to be paid is getting paid to me that is financial obligation and not requiring their affiliate to make the payments that were necessary to the joint operating agreement they were not fulfilling their financial obligations we had to remove them as operator to make sure those financial obligations that they were collecting from the party that owed it they were paying the bills for the parties or the bills and just so the court's aware it was eleven point four million dollars that hadn't been paid to the service providers that was the basis of our proof of claim and that's the amount that was outstanding that's what we had to do we had to enforce the financial obligation of the operator to collect the money and the financial obligation of the operator to pay money going out to the parties or owed money clue to the one point nine million dollars that we enter pled into the court and ensure it was distributed to the right parties i don't believe your brief cited the i mean it referred to your state court complaint to near zero you know you're proceeding in the bankruptcy court and i don't think anything can lead your and leave you're in a pleader aside but did any of your complaints fortified this a rgument that you're making that this was mostly a financial obligation that you were sowing about as opposed to total replacement of the operator that the state court proceeding your honor specifically sought recovery of damages we did not do so in the equal proceeding was to improve screening that's correct that what happened as a hero got issued and a few days after the tier i was issued the debtors file bankruptcy and once they file bankruptcy with and changed it to bring in the adversary proceeding in in this case the issue is whether or not us c d is entitled to a secured claim in the bankruptcy case not whether or not they are entitled to any claim for their recovery fees against the debt or so as a result of that they must fit their claim within the specific provision under the joint operating agreement which would create  secured client there are several requirements under the jail way in order for them to get there and when you break it down that way the logical place i believe to start is with the fact that u s c d must bring in other words file or initiate a legal proceeding to enforce a financial obligation the reality of what happened in this case was in december two thousand and fourteen when us cd initiated their first lawsuit which was the state court lawsuit both debtor l l c the operator had a financial default at that time under the j away the operator had failed to pay vendors all full service companies and drilling companies for amounts that would be better lp the working interest owner also was in payment default under the j o way for joint interest billing amounts that were due to the operator this will illustrate why among other reasons us e d s claim fails so us see the father lawsuit they did not seek to enforce the financial obligation which would have been forcing the default to have been cured by either entity us he didn't even seek an order requiring the operator to pay the vendors they didn't even seek an order requiring the working interest owner to pay the operator instead what they saw and what they in fact obtained in a temporary restraining order was a declaratory judgment a declaratory judgment that would that would serve as a recognition that under the joint operating of the removal in the temporary restraining order so what they saw and judge about them identified it was the whole fight was about who was going to service the operator it's really the opposite of enforcing our financial obligation they wanted better alosi out they didn't want to order this a debtor l o c had to comply with its financial obligations as the operator they also did not seek an order enforcing any financial obligation on the part of the debtor lp the reason why that distinction becomes so important and the bankruptcy court does a good job of really analyzing is there is no cross collateral is ation so the claim and the lane and the assets have to all match up quite frankly the bankruptcy courts finding a fact which was not challenge that no assets owned by a debtor l l c the operator had any value that's really dispositive of whether there can be a secured claim for attorney that's in our own way fifteen seventeen but no twenty two on page thirty lp of course the working interest on or it did have assets so there is collateral there but there's no valid claim there there's no valid claim there's no valid now i went through two of the criteria under the jail way that u s c he must bring the legal proceeding and that the legal proceeding must be one to enforce a financial obligation then there's also the requirement that u s c d must be the prevailing party in enforcing our financial obligations good question though did didn't i have the impression us c d s supported your client coming in and taking over the the operating interests several right it was the it was the opposite my come in and done that you know and in fact us cd is a is an even pete company and my client is a is a financial services company and we own a non operating interest but we're not an operating e m p company so you have four separate proceedings at issue four separate legal proceedings at issue only two of which are well two of which were brought by  seeking relief against that or l l c state court action in the adversary proceeding what happen those creditors have general unsecured claims in the w b h bankruptcy case and there was a creditors trust formed for their for their benefit and that's how the bankruptcy case ended servicer so here's what happened so castle lake sued all of the vendors who asserted oil and gas lanes under chapter fifty six of the texas property code in an adversary proceeding and then there was a a mediated settlement and that i'd be sorry proceeding there was a finite sum of money that was contributed by a cancellation and that money was then paid out to the lien holders there was a sale of the property free and clear of their lanes and then there was a subsequent attempt eleven planned that was confirmed so in the vendor's aside from the payment that they received in the settlement they have now an unsecured claim removal of the operator and we know that all that was the most that was ever obtained was was preliminary injunctive relief but as i said i think that those the dispositive issue on those two is that even if you assumed everything else in u finding by the bankruptcy court that there's no value in any asset owned by that or l l c so now we move to the third proceeding the third proceeding was the u s c d enter pleader action and again this is an example of something that is the opposite of what they would have to be bringing under the jail way to have a secure claim for their attorneys fees and here's what i mean that inner peter auction was not a suit to enforce a financial chapter fifty six therefore we're going to enter plea dis money so that we don't face double liability in the form of one a liability to the operator for unpaid joint interest billings and to direct liability to the vin doors on account of their statutory minerals of contract or liens the issue dealt with their own financial obligation not either of the debate into these financial obligation and then you also have the the bankruptcy case itself and the starting point there is that that was not a proceeding that u s c d brought this was not this  a voluntary bankruptcy case not an involuntary that was initiated by us c d as a petition creditor so they fill the first requirement of bringing the legal proceeding but even if you want to the bankruptcy and look at certain contested matters u s c g doesn't fit within the parameters there either or stated another way those contested matters don't fit within the requirements of the joint operation in the first secured claim your cd talks about the payment that was made post bankruptcy for completion costs on the lewis stewart wells that is an apples and oranges difference from the pre partition amounts that were in default for unpaid joint interest buildings participate and just go non consent and that doesn't make a doesn't create a default so it's a completely different scenario than what i described at the beginning where you had a an amount that was in default that was owed for unpaid joint interest billings and had us cd chosen to do so they could have brought a legal proceeding to enforce that financial obligation were for other purposes right absolutely mean it is also the case that money is the root of all evil and therefore they would not have been doing this had there not been underlying difficulties with financial obligations right presumably that's a correct statement had we had had dead or l c d operator not been had had they been paying their vendors and had they not been in default on the their abhi and it wasn't it wasn't a deal that they were incompetent in their seismic surveys or their choice of properties on which to drill or their choice of drilling contractor or subs or whatever it was that they were paying people the money was going somewhere  or the prices were too low or something right that was that was the driving force behind the initiation that's basically what their argument is it's all about money and therefore financial obligations well the standard under the jail way that is not what what a party's underlying motivation may be to bring the lawsuit the standard is whether they bring legal proceedings to enforce a financial obligation and that they are the prevailing party in doing that so in this case there were there were only two separate proceeding and they sought the same relief and in that case their motivation may have been that l l c had failed to pay vendors and that's why they were bringing the suit but the relief they sought was not to enforce a financial obligation it was for the removal of general sees the operator and the insertion of u s c d as the recognized operator in their place so it is it is quite literally the opposite of an order that would have said the court here by fines determines and orders that dead or l l c comply with its financial obligations and pay vendors amounts that are owed under the joint operating agreement if if the order had said that would they be entitled to their attorney's fees is that the question the order for their claim to be a secured claim under the jail way they would also have to own assets subject to that lien and in this case you have the bankruptcy court made a and it is clear finding debtor l l c did not own any assets of value so there would be no collateral there to secure a claim to make it a secure claim so just because there would be a claim doesn't mean it's a secured claim under the j under the facts here that are l l c was functionally the contract operator did not own the working interests just under the hypothetical if if u that's the problem and why if you go down that path their claim still doesn't work you still don't get to a point where they're entitled to a valid secured claim again they may have an unsecured claim that's not castle lake's that's not hassling spight they're free to assert whatever unsecured claim they want under any contract three or statutory three were only concerned about this narrow issue what are their rights with respect to a secured claim under section five zero six of the bankruptcy code which necessarily take shoot to having to fit within the parameters of the joint operating agreement and having to show that the debtor entity that they have a claim against bones the collateral that they seek to assert a lien against they really never saw any relief against debt or lp the working interest on did not obtain an order such that they would be considered a prevailing party instead of opie on that plane your honors i'd like to circle back to a couple of issues that were raised in the primary argument first of all to judge taken botham he would ask about what other duties there are under the way that would not be financial obligations and i think that if you look court to look at the g a o way and specifically page fourteen fifteen forty two of the record that's a part of the chair way that talks about the rights and duties of the operator there is a specific provision  provision that's article five d the less well those are and they include financial and non financial for example financial i would say the two discharge of joint account obligations except as otherwise provided operators will promptly pay and discharge expenses incurred in the development and operation of the contract period goes on three protection from liens that would be financial custody of funds financial access to contractor area and records probably not financial filing in furnishing governmental reports probably not financial drilling and testing operations not financial the way they're there they're worded because that has to do with biasing people and certain things happen under the drilling like spreading the cost estimates insure insurance may be financial so there are financial and non financial obligations that are listed specifically under against the operator of the yacht the yacht the operator you have a possible claim for financial obligations but you have no assets he has no assets he filed bankruptcy that's actually incorrect and against a limited partner yes they have assets but you don't have a lien you don't have a right to a lien on their claim to response to that your hon first is if you actually look at the sale order and that record twenty three sixty six page twenty three through twenty five it says that the assets that are being conveyed to the apple secretary's office that doesn't mean that they're they have a equity in any of the ownership of the properties which is the real asset well that your honor there certainly would be those kind of assets but what i'm talking about if you if judgment made no finding on the value of those assets there was no there was no to evidence it was presented that those assets like the value in our lane and percent turk removed castle lake was a senior secured lane that attached everything they bought the everything they got so long as it findings that the lp had not funded his expenses and that the l l c had not made demand for them among other findings and so there were specific findings on the failure to comply with the financial obligations and i see my time is out so