Title: Barnhart Drilling Co., Inc. v. Petroleum Financing, Inc.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Barnhart Drilling Co., Inc. v. Petroleum Financing, Inc.1991 WY 31807 P.2d 411Case Number: 90-100Decided: 03/12/1991Supreme Court of Wyoming
BARNHART DRILLING CO., 
INC., Appellant (Defendant/Third Party Plaintiff),

v.

PETROLEUM FINANCING, 
INC., a Texas corporation; and The Clarke Partnership, a 
Texas general 
partnership, Appellees (Plaintiffs), and Devane Clarke, Appellee (Third Party 
Defendant).

Appeal from the District 
Court, NatronaCounty, Dan Spangler, 
J.

Affirmed.

Glenn E. Smith, 
Glenn E. Smith & Associates, Cheyenne, and Joel M. Vincent, Vincent and 
Vincent, Riverton, for appellant.

Jerry A. Yaap, 
Bishop, Bishop & Yaap, Casper, for appellees.

Before 
URBIGKIT, C.J., THOMAS, CARDINE and GOLDEN, JJ., and TAYLOR, District 
Judge. 

URBIGKIT, Chief 
Justice.

[¶1.]     This appeal addresses a 
simple issue of mortgage and judgment lien priorities sandwiched within a 
complex oil well drilling cost and lending controversy. The trial court ruled in 
favor of the mortgage holder over the later filing of a judgment lien creditor, 
which decision we affirm.

I. ISSUES

[¶2.]     Appellant, Barnhart 
Drilling Co., Inc., asks:

A. Did the district court 
err in finding that fair consideration existed to support the mortgage deed 
given by Andrau [promoter] to PFI [Petroleum Financing, Inc.] and the Clarke 
Partnership [jointly designated mortgagees - appellees] on the Madden Deep Unit 
property?

B. Was the trial court's 
decision that fair consideration, as the term is used in § 105 of the Uniform 
Fraudulent Conveyance Act, existed to support the mortgage delivered by Andrau 
to PFI and the Clarke Partnership contrary to the weight of the 
evidence?

C. Did the district court 
err in finding that Andrau's delivery of the mortgage to PFI and the Clarke 
Partnership was not made with actual intent to delay, hinder or defraud a 
creditor within the meaning of § 108 of the Uniform Fraudulent Conveyance Act in 
light of this court's decision in In Re: Estate of Reed?

D. Did the district court 
err in denying Barnhart [Barnhart Drilling Co., Inc. - appellant] a jury trial 
on his legal claims against PFI, the Clarke Partnership, Andrau and 
Clarke?

Appellees, 
Petroleum Financing, Inc., The Clarke Partnership and Devane Clarke, 
restate:

A.        The 
specific findings of the trial court are neither clearly erroneous nor against 
the great weight of the evidence and are supported by substantial 
evidence.

1. The trial court's 
finding that fair consideration existed to support the mortgage deed given by 
Andrau to PFI and TCP [The Clarke Partnership] is supported by substantial 
evidence. * * *

a. Appellant's cases 
distinguished - creditor v. creditor.

b. A debtor has an 
absolute right to prefer one creditor over another.

c. Appellant's 
conflicting testimony should not be considered.

2. The trial court's 
finding that Andrau's delivery of the mortgage to PFI and TCP was not made with 
actual intent to delay, hinder, or defraud a creditor is supported by 
substantial evidence. * * *

B.        The trial 
court did not err in ruling that no right to trial by jury exists in this 
case.

C.        There is no 
reasonable cause for appeal as required by W.R.A.P. 10.05.[1]

II. FACTS

[¶3.]     William E. Andrau, 
under one or more names, promoted variant oil drilling prospects. In the course 
of those activities, he failed to pay appellant what was justly due for their 
work in drilling a number of wells and ultimately escaped financial 
responsibility by filing bankruptcy.

[¶4.]     There was extensive 
litigation between appellant and several entities by which appellant, as 
third-party plaintiff, sought to bring those companies who had financial 
resources into the case for establishment of personal liability. In this 
process, Andrau, as general partner, ultimately became a judgment debtor and it 
was this judgment as entered by the district court in BigHornCounty that developed into the execution 
sale later held for properties owned by Andrau in Fremont and Natrona 
counties.

[¶5.]     In Andrau's course of 
business, he obtained funds from Petroleum Financing, Inc., and The Clarke 
Partnership which he failed, neglected or was unable to repay within agreed 
schedules. He came in time to give a mortgage as security for those note 
indebtednesses, which is the mortgage with a priority in time of filing in 
FremontCounty that anchors this 
litigation in its principal pursuit. Sometime after the Petroleum Financing 
mortgage had been duly recorded, appellant filed a copy of its judgment in 
FremontCounty, earlier rendered in BigHornCounty, and proceeded with execution sale 
of the Andrau properties.

[¶6.]     The trial court relates 
this sequence in its Judgment and Decree and judgment for the ensuing litigation 
where mortgagees, as plaintiffs, sued to foreclose and establish the primacy of 
their lien over appellant as the holder of the judgment lien.

     4. Plaintiffs' 
Mortgage of Oil and Gas Property Security Agreement and Financing Statement 
dated October 31, 1985, was recorded in the office of the County Clerk in and 
for Fremont County, Wyoming, on June 8, 1986, in Book 266 of Microfilm, , and 
was recorded in the office of the County Clerk in and for Natrona County, 
Wyoming, on April 28, 1988, as Instrument No. 442394. Plaintiffs' mortgage is 
senior and superior to the execution sale of Defendant Barnhart Drilling Co., 
which was held in Fremont County, Wyoming, on December 30, 1986, as Docket No. 
24342 entitled Barnhart Drilling Co. vs. D.A.T.A. Big Horn Basin Company and 
William E. Andrau et al, and that Plaintiffs' mortgage is senior and superior to 
the Sheriff's Certificate of Sale which was recorded in the office of the County 
Clerk in and for Fremont County, Wyoming, on December 30, 1986 in Book 279 of 
Microfilm, and the subsequent Sheriff's Deed recorded on April 2, 1987, in Book 
284 of Microfilm, .

     5. That any interest 
obtained by Defendant Barnhart Drilling Co., Inc. in leases numbered W-0321964, 
W-0310474, W-0310474-B, or W-0324315 as a result of said execution sale held on 
December 30, 1986, the Sheriff's Certificate of Sale recorded on December 30, 
1986, in Book 279 of Microfilm, , and subsequent Sheriff's Deed recorded on 
April 2, 1987, in Book 284 of Microfilm, , all in Fremont County, Wyoming, is 
junior and inferior to the Plaintiffs' mortgage and any interest obtained by 
Barnhart Drilling Co., Inc. in and to the oil and gas leases set out herein is 
null and void as to Plaintiffs, and said Levy of Execution, Sheriff's 
Certificate of Sale and Sheriff's Deed are hereby adjudicated to be null and 
void as to Plaintiffs.

[¶7.]     In October 1986, or 
about ten months after the entry of its Big Horn County judgment, appellant 
first filed its judgment in Fremont County and commenced execution sale 
resulting in a sheriff's sale on December 30, 1986 and issuance of a Sheriff's 
Deed on April 2, 1987. About a year later, appellees, as mortgagees, commenced 
this action to foreclose their mortgage and to invalidate, for priority 
purposes, the validity of the execution sale and Sheriff's Deed based on 
appellant's BigHornCounty judgment of December 12, 1985.2

[¶8.]     Appellees were clearly 
first in time and the trial court so held in ruling in their favor. Appellant 
does not dispute the basic facts of time priority, but contests the validity of 
the mortgage to provide a priority even when filed first in time.

[¶9.]     This appeal presents a 
legal issue of the sufficiency of the priority in time rule and an evidentiary 
issue of the ineffectiveness of the first filed mortgage to sustain that legal 
priority. By statute and case decisions, Wyoming is a filing date priority 
jurisdiction. Marple v. Wyoming Production 
Credit Ass'n, 750 P.2d 1315 (Wyo. 1988); 
Crozier v. Malone, 366 P.2d 125 (Wyo. 1961); W.S. 34-1-121. Filing requirements 
are the product of statute. State ex rel. State Highway Com'n v. Meeker, 75 
Wyo. 210, 294 P.2d 603 (1956). Consequently, that subject is not in real controversy, leaving 
only the contested issues as applied to challenge mortgagees and its mortgage to 
sustain that priority.

III. STRUCTURE OF THE 
LITIGATION CONTROVERSY

[¶10.]  The attack taken enumerates three bases 
for rejection of priority: 1) lack of fair consideration; 2) fraudulent 
conveyance; and 3) execution and delivery of the mortgage was accomplished for 
the purpose of hindering and delaying creditors, e.g. appellant in collection as 
a conspiratorial and fraudulent activity.

[¶11.]  In reality, the challenge addresses 
whether the mortgage execution and filing came about within a good faith 
debtor-creditor relationship or was contaminated by contrived and conspiratorial 
activities to remove assets from their availability for creditor attachment. The 
subject was comprehensively pursued in discovery and then factually considered 
in a well presented trial, following which the trial judge determined on the 
evidence presented that appellant had failed to provide evidence sufficient to 
sustain the invalidating attack. He found a bona fide debtor-creditor 
relationship to have existed from which the mortgage was properly created as a 
normal business relationship security device.

IV. RIGHT TO A JURY 
TRIAL

[¶12.]  Mandated by consideration of an 
extensively pursued pleading record and complex allegations, the most difficult 
decision for appellate review involves appellant's challenge that it was 
improperly denied a jury trial on its "legal claims" against 
appellees.

[¶13.]  Appellees, as promissory note payees and 
holders of the real estate mortgage, filed the suit to establish their mortgage 
priority over the then existent Sheriff's Deed held by appellant which was 
obtained by execution on its judgment and Sheriff's sale purchase. A receiver 
was appointed for the involved real estate interests which were derived from 
producing oil leases. Named as defendants in the complaint were appellant as 
conflicting title interest claimant and Andrau and his operating entity as 
mortgagor and note payor.3

[¶14.]  Not unexpectedly, Andrau did not answer 
and a default was entered on the note indebtedness and right of foreclosure on 
the then extinguished title interests in the Natrona and Fremont county 
properties. Appellant answered, counterclaimed and cross-claimed by challenging 
the bona fide nature of the promissory note and its secured indebtedness 
incorporated in the mortgage instrument. With prayer for priority of the 
Sheriff's Deed, appellant alleged that without an adequate remedy of law, it 
should be granted relief by counterclaim to remove the cloud of the mortgage 
lien as invalid. Pleaded charges against the mortgagees included conspiracy, 
false representations and pretenses and fraud upon creditors by combined or 
conspiratorial action with Andrau.

[¶15.]  In effect, appellant requested by 
pleading and prayer a quiet title decree accompanied by an injunction against 
maintenance of the claim by appellees and also asked for a money judgment 
against appellees of $218,567.36 plus punitive damages. Accompanying the 
pleading was an appropriately filed demand for jury.

[¶16.]  A judgment and decree of foreclosure 
based on the Andrau pleading default was entered July 1988, leaving then pending 
the priority questions between appellant with its Sheriff's Deed and mortgagees 
with their foreclosure proceedings. This state of the pleadings first brought a 
motion for summary judgment by mortgagees in March 1989 which was resisted by 
appellant and denied by the trial court by a decision letter finding a genuine 
issue of material fact for trial. Appellant followed with a motion to file a 
third-party complaint to bring into the litigation Devane Clarke, who was a 
principal in The Clarke Partnership and a shareholder in Petroleum Financing. 
This third-party complaint was based on conspiracy to commit fraud by obtaining 
and filing the real estate mortgage. 

[¶17.]  Extensive discovery was pursued and 
additional pleadings were filed. In February 1990, the litigants and the trial 
court directly faced the question of appellant's right to a jury trial based on 
its counterclaim and third party complaint. As a conclusion of an extensive 
review and argument, appellant summarized:

     In its conclusion, 
Barnhart Drilling Co. has alleged fraud, improper interference with executing 
upon a judgment, and civil conspiracy on the part of PFI and TCP, all of which 
are recognized tort theories. Barnhart should be allowed to recover all 
proximately caused damages against PFI and TCP upon proper proof of such claims. 
The Wyoming Uniform Fraudulent Conveyance Act, while it provides that the 
conveyance may be set aside and executed upon to the extent necessary to satisfy 
a judgment or claim, does not preclude the recovery of additional damages from a 
transferee under other recognized tort theories.

[¶18.]  In response, the trial court 
determined:

     The above matter 
having come before the Court upon its own motion to strike the demand for jury 
trial, the Court having reviewed the memos filed by counsel, the Court finds 
that this is not an action for the recovery of money only or specific real or 
personal property but that the major issues are equitable in nature or otherwise 
issues where there is not a right to a jury trial. This decision is based upon 
the case of True v. Hi-Plains Elevator Machinery, Inc., 577 P.2d 991 (Wyo. 1978) and related 
cases cited in the memo of plaintiffs. Therefore, the jury demand is set aside. 
We will proceed with a court trial at the same time and date earlier scheduled, 
unless counsel for both sides agree upon a different schedule.

[¶19.]  We agree with the trial court. In 
simplified analysis, this litigation started with a mortgage foreclosure and 
claim to a priority by date of filing. The holder of a later lien by judgment 
and execution contested by challenging the validity for priority of the mortgage 
by essential assertion that the mortgage was created to defraud other creditors 
- specifically this judgment creditor. In overall approach, appellees defended 
the validity of their mortgage and appellant contested the validity of the 
mortgage.

[¶20.]  In reality, the factual issue was the 
existence of a bona fide debt to authenticate the prudence of a creditor in 
obtaining a mortgage security. We recognize that in addition to the direct 
attack, appellant mounted a collateral campaign denominated to be a claim for 
money judgment. The issues were essentially equitable and claims for money 
damages were not intrinsic elements of this litigation where contestants sought 
lien priority.

[¶21.]  The authority in present Wyoming law for 
right to a jury trial is comprehensively provided in Hyatt Bros., Inc. ex rel. 
Hyatt v. Hyatt, 769 P.2d 329 (Wyo. 1989). We find that the underlying thesis of 
Hyatt of substance of the issue raised can be properly accommodated to the 
decision of the trial court that this proceeding was generically equitable in 
both complaint and counterclaim. If appellant succeeded in its attack on the 
mortgage, the mortgage would be invalidated and appellant's judgment lien 
priority advanced. If appellant failed in its attack on priority, it would 
likewise fail in parallel claims for money damages arising from the same 
conduct. The substance of the issues raised in context of the Hyatt rule was 
clearly equitable directed to fraud of creditor concept to invalidate a mortgage 
as to a third-party junior lien holder. This was not an action primarily legal 
in nature as we found to exist in Hyatt. We find no error in the trial court's 
decision on denial of a jury trial for a case which was essentially equitable in 
litigated essence. True v. Hi-Plains Elevator Machinery, Inc., 577 P.2d 991 
(Wyo. 1978); Hein v. Lee, 549 P.2d 286 
(Wyo. 
1976).

V. SUFFICIENCY OF THE 
EVIDENCE TO SUSTAIN THE TRIAL COURT DECISION

[¶22.]  Within the factual constituents of this 
case challenging the bona fide nature of an existent debt and resulting 
mortgage, the trial court, after trial, addressed its conclusions by a final 
decision letter: 

     On September 1, 1983, 
defendant Andrau, as a joint venturer with CMI Venture Number 1, borrowed 
$562,500.00 from plaintiff Petroleum Financing, Inc., as evidenced by a 
promissory note of that date. As a partner with CMI, Andrau was personally 
liable on the note. Also, he signed a partnership interest pledge agreement on 
that same date providing that if the proceeds of the pledge were not sufficient 
to pay the obligation in full, he would be liable for any deficiency. On June 
15, 1984, Andrau signed a promissory note payable to plaintiff Clarke 
Partnership in the amount of $138,000.00. There was valuable consideration given 
for both notes. As of October 31, 1985, the notes were overdue and had not been 
paid in full. By documents bearing that date, Andrau, PFI, and the Clarke 
Partnership agreed to extend the notes in exchange for a mortgage from Andrau to 
PFI and the Clarke Partnership of his ownership of oil and gas interests in 
NatronaCounty and Fremont County, Wyoming. The extension agreements were not 
signed by all parties until May 28, 1986. The mortgage was not filed of record 
in FremontCounty until June 8, 1986. 
Although Andrau was insolvent at the time, the extension agreements were fair 
consideration for the mortgage. The conveyance was made and received in good 
faith to secure an antecedent debt in an amount greater than the value of the 
property mortgaged.

     On December 12, 1985, 
defendant Barnhart obtained a judgment against Andrau in Big Horn County, Wyoming. For approximately one month prior, 
Andrau had known that the judgment would be forthcoming. Plaintiffs did not know 
of the obligation to Barnhart until June 13, 1986. As early as May, 1985, 
Barnhart, through its attorney at that time, knew that Andrau owned interests in 
the FremontCounty property. From the 
time Barnhart obtained its judgment against Andrau until Andrau filed for 
bankruptcy on October 12, 1986, Barnhart and its attorney at that time knew that 
Andrau had various properties worth well over $1,000,000.00 which apparently 
were available for satisfaction of the Barnhart judgment. Despite ample 
opportunity, Barnhart and its attorney at that time took no effective action 
against any of the Andrau properties until after the declaration of bankruptcy 
when Barnhart filed its judgment in FremontCounty and obtained a sheriff's deed on 
April 2, 1987. The evidence is not sufficient to support the claims made by 
Barnhart against plaintiffs and Andrau that they were engaged in a conspiracy, 
interference with contractual activities, fraud, or other behavior designed to 
hinder or delay Barnhart in collection of its judgment. There is no evidence 
that Andrau attempted to conceal his assets. The mortgage in question here 
apparently was the only conveyance of his assets between the time of the 
Barnhart judgment and Andrau's bankruptcy. If Andrau and plaintiffs had intended 
to deprive Barnhart of the property in question, it would not have been 
reasonable for them to leave the property available for execution by Barnhart 
for nearly six months before recording the mortgage.

[¶23.]  For appellate review, this case becomes a 
sufficiency of the evidence examination by application of our normal rule where 
a factual dispute exists. Stanbury v. Larsen, 803 P.2d 349 (Wyo. 1990); Coulthard v. Cossairt, 803 P.2d 86 (Wyo. 1990); and ANR Production Co. v. Wyoming Oil and Gas Conservation Com'n, 800 P.2d 492 
(Wyo. 1990). 
Appellant neither won the race to the county clerk's real estate filing window 
to establish priority nor now to the trial court after trial was held to prove 
fraud and disprove debt. Not only sufficient, but clear and definite evidence is 
provided by this record sustaining the findings and decision of the trial court. 
Within this relatively complex oil funding and investment activity, significant 
and persuasive evidence was introduced which supports the trial court's 
decision. There was a debt - there was a note - there was a mortgage upon 
delinquency of payment and subsequent renewal to provide additional security and 
that mortgage was first filed which provided a superior lien over property 
interests otherwise available for satisfaction of judgments by executing 
creditors.

[¶24.]  Affirmed.

FOOTNOTES

1 Although we affirm the 
decision, we decline to determine that there was no reasonable cause for appeal 
and, consequently, attorney's fees will not be awarded.

2 The Big Horn County 
judgment when entered in that county in 1985 did not become a lien on real 
estate owned by Andrau in either Fremont or Natrona counties until action was 
taken pursuant to W.S. 1-17-304 to file the "transcript of the judgment record" 
in those counties. Comment, How to Enforce a Money Judgment in Wyoming, XX Land & 
Water L.Rev. 645 (1985).

3 Andrau was then in 
bankruptcy, but the proceeding against him sought only foreclosure on a vacation 
of stay status and did not request a personal judgment.