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Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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In Re: 

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCU'JIT 

) 

) 

OKLAHOMA REFINING COMPANY, ) 

) 

Debtor ) 

) 

FILED 

Unit.ed Stat.es Court of Appeals 

Tenth Circuit 

FEB 03 1988 

ROBERT L. HOECKER 

Clerk 

OKLAHOMA REFINING COMPANY, ) 85-2760 

) 

Plaintiff-Appellant, ) 

) 

vs. ) 

) 

WILLIAM BLAIK, Trustee, et al., ) 

) 

Defendants-Appellees. ) 

Appeal from the United States Bankruptcy Court 

Western District of Oklahoma 

(No. BK-84-2763-A) 

and 

United States District Court, Western District of Oklahoma 

(D. C. No. CIV-85-806-T) 

Submitted on the briefs: 

David Kline and Mark E. Monfort, Kline and Kline, Oklahoma City, 

Oklahoma, for Plaintiff-Appellant, 

D. Kent Meyers, Lyle S. Vaughn, and Ann L. Fafard, Crowe & 

Dunlevy, Oklahoma City, Oklahoma, for Defendant-Appellee, 

Continental Illinois Bank & Trust Co. 

Before BARRETT, MOORE, Circuit Judges, and A. ANDERSON, District 

Judge~'r 

A. ANDERSON, Senior District Judge. 

)~ Honorable Aldon J. Anderson, Senior Judge, U. S. District Court, 

District of Utah, sitting by designation. / 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 1 
INTRODUCTION 

· On motion of creditors, The First National Bank and Trust 

Company of Oklahoma city and Continental Illinois National Bank 

and Trust Company of Chicago, the Bankruptcy Court appointed a 

trustee to manage the. debtor, Oklahoma Refining Company. The 

order was entered pursuant to 11 u.s.c .. §1104(a), which provides 

for appointment of a trustee for cause, including fraud, 

dishonesty, incompetence or gross mismanagement, or if such 

appointment is in the interest of creditors. The District Court 

for the Western District of Oklahoma affirmed the appointment and 

debtor now appeals to this court, claiming that the appointment 

was contrary to a court-approved agreement of the parties. 

FACTS 

On September 14, 1984, debtor filed a voluntary petition for 

Chapter 11 relief. On September 19, the Bankruptcy Court denied 

debtor's request to use the lenders' cash collateral, but on 

September 28, the parties and the court approved an agreement for 

such an arrangement. The provisions of the agreement relevant to 

this appeal are the following: 

1. The Debtor is hereby authorized until further order 

of the court to use for a period contemplated by the 

parties hereto as not greater than twelve (12) months 

from the date of this order such Prepeti tion Lender 

Collateral as is necessary in order to pay the 

reasonable and agreed to items contained in the budget 

which is attached hereto 

2 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 2 
3. The Debtor is authorized and directed to 

grant to the Lenders a valid and duly perfected 

security interest •.. subject and subordinate only to 

such security interests, mortgages and liens in and 

upon such p~operty as were valid .•. and which are not 

subject to avoidance pursuant to applicable law by the 

Debtor and any successor in interest to the Debtor, 

including, but not limited to, a subsequently appointed 

trustee in this case. 

8. . . . The security interests and mortgage liens 

granted by the Debtor in the Proposed Lender Collateral 

are hereby deemed granted and perfected ... with sucp 

grant and perfection binding the Debtor, any successor 

in interest to the Debtor, including, without 

limitation, any subsequently appointed trustee in this 

case 

9. The terms and provisions of this Order shall be 

binding upon and inure to the benefit of the Debtor and 

each of the Lenders and their respective successors and 

assigns, including, but not 1 imi ted to, any trustee 

appointed in this case and in any superseding case 

under Chapter 7 of the Bankruptcy Code. 

10. The Debtor or First National and Continental may 

at any time, upon notice to the other parties hereto, 

move this Court to terminate or modify this Order. 

Further, this Order shall not prejudice or 1 imi t the 

right of First National or Continental to request or 

seek other or additional protection or relief with 

respect to [their collateral or the postpetition loans 

made by the Lenders]. 

11. If this Order is hereafter modified, vacated 

or stayed by subsequent order of this or any other 

Court, such stay, modification or vacation shall not 

affect the validity of any obligations of the Debtor to 

the Lenders incurred pursuant to this Order prior to 

the effective date of such stay, modification or 

vacation . . . . 

13. Unless otherwise agreed among the parties or 

otherwise ordered by the Court, the stay in effect in 

this proceeding shall be lifted on September 28, 1985. 

3 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 3 
In general terms, the agreement provided that the cash collateral 

arrangement was not to last more than twelve months and that 

debtor was to shut down and mothball its refineries. In January 

1985, lenders requested that the court appoint a trustee to manage the company, claiming that it had recently learned that the 

debtor had been involved in certain questionable transactions 

both bet:ore and after it had filed its petition fo'r relief. 

Specifically, they claimed that there had been a dramatic 

increase in sales to debtor's affiliated companies as a 

percentage of total sales, that far more volume discounts had 

been given to the affiliated companies than to othersy and that 

accounts receivable from the affiliated companies had risen from 

under· $100,000 just before the petition was filed to over $4.1 

million on January 16, 1985. (Appel lees' Brief to the District 

Court, pp. 5-6.) Moreover, lenders claimed that debtor was 

making no effort to collect the money owed by the affiliated 

companies. (Id., pp. 5-6.) Lenders also claimed that debtor 

deposited over $800,000 of proceeds from the sale of inventory 

into a New Mexico bank account rather than into the lenders' 

banks in order to prevent lenders' offsetting those funds. (Id., 

p. 7.) Lenders alleged that debtor was not adequately 

mothballing one of its refineries. (Id., p. 6.) They also 

claimed that debtor artificially inflated the price of its fuel 

4 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 4 
so that its inventory would not be depleted and it would have 

ample fuel to sell to the affiliated companies on credit. (Id. , 

p. 6.) Lenders . finally complained that debtor had not filed 

timely and complete monthly reports as required by law. (Id., p. 

15. ) While the Bankruptcy Court did not agree precisely with 

lenders' dollar figures in its Findings of Fact, it did find 

that :the above allegations were supported by the facts. 1 It 

further concluded that cause existed for the appointment of a 

trustee, and that such appointment would be in the interest of 

the creditors, equity security holders, and other interests of 

the estate. (Bankruptcy Court Opinion, p. 5.) 

On appeal, the District Court ruled that the · Bankruptcy 

Court's findings were not clearly erroneous, specifically citing 

its findings that debtor was making no serious effort to collect 

the debt from the affiliated compani~s and that debtor was in the 

awkward position of having to decide whether or not to sue 

itself. (District Court Opinion, p. 2.) 

Debtor now appears before this court arguing that the· 

agreement of September 28, 1984 provided that debtor was to 

remain in possession of the company for nine to twelve months and 

lThe court found that the accounts receivable from the 

affiliated companies just before the filing of the petition 

actually amounted to $2 .1 million, that the debt accumulated 

after the petition was filed was only $1.2 million, and that the 

amount transferred to the New Mexico bank account was actually 

$687,000. (Opinion of the Bankruptcy Court, pp. 1, 3.) 

5 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 5 
that the matter of concern is not the creditors' interests, but 

only whether debtor violated the terms of the agreement, 

(Appellant's Brief to the Circuit, pp. 8-9.) Debtor insists that 

it met in full all of its obligations under the agreement. 

(Appellant's Brief, pp. 10-15.) Debtor also argues that the 

company is not in operation and therefore there is nothing for a 

trustee to manage. (Appellant's Brief, pp. 15-19.) 

This court agrees with the Bankruptcy court that there is 

nothing in the cash collateral agreement to prevent the court 

from setting aside the agreement or to preclude the operation of 

§1104. Paragraphs 1, 3, 8, 9, 10, 11 and 13 contemplate 

modification of the agreement and paragraph 9 expressly 

contemplates the appointment of a trustee. Debtor claims that 

the parties agreed that it was to remain the debtor in possession 

for at least nine months. All the agreement says on this point, 

however, is that "[t]he Debtor is hereby authorized until further 

order of the court to use for a period contemplated by the 

parties hereto as not greater than twelve (12) months ... such 

Prepetition Lender Collateral as is necessary in order to pay the 

... items contained in the budget which is attached hereto ... " 

(Order Authorizing Debtor to Use Cash Collateral, para. 1.) 

As to debtor's argument that no trustee is needed because 

the company is not in operation, lenders' argue that substantial 

amounts of money are being spent each month to keep the 

6 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 6 
refineries in a holding position, accounts receivable are being 

collected, inventory is being sold, there are negotiations to 

sell the refineries, environmental problems have to be managed, 

monthly reports have to be prepared, and certain decisions have 

to be made as to whether or not to sue. Clearly a trustee would 

be helpful in protecting the lenders' positions. 

Finally, debtor argues that there is no cause for the 

appointment of a trustee. 28 u.s.c. §ll04(a) reads: 

a) At any time after the commencement of the case but 

before confirmation of a plan, on request of a party in 

interest, and after notice and a hearing, the court 

shall order the appointment of a trustee--

(1) for cause, including fraud, dishonesty, 

incompetence, or gross mismanagement of the affairs of 

the debtor by current management, either before or 

after the commencement of the case, or similar cause, 

but not including the number of holders of securities 

of the debtor or the amount of assets or liabilities of 

the debtor; or 

( 2) if such appointment is in the interests of 

creditors, any equity security holders, and other 

interests of the estate, without regard to the number 

of holders of securities of the debtor or the amount of 

assets or liabilities of the debtor. 

It is clear, both from the language of the statute and 

established case law, that the court need not find any of the 

enumerated wrongs in order to find cause for appointing a 

trustee. In re William H. Vaughn & Co., Inc., 40 Bankr. 524 

(Bankr. E.D. Pa. 1984). It is sufficient that the appointment be 

in the interest of creditors. 

7 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 7 
There are many cases holding that a history of transactions 

with companies affiliated with the debtor company is sufficient 

cause for the appointment of a trustee where the best interests 

of the creditors require. In the Matter of State Capital Corp., 

51 Bankr. 400 (Bankr. M.D. Fla. 1985); In re Humphreys Pest 

Control Franchises, Inc., 40 Bankr. 174 (Bankr. E.D. Pa. 1984); 

In re Concord Coal Corp., 11 Bankr. 552 (Bankr. S.D. W.Va. 1981); 

In re Main Line Motors, Inc., 9 Bankr. 782 (Bankr. E.D. Pa. 

1981); In re L.S. Good & Co., 8 Bankr. 315 (Bankr. N.D.W.Va. 

1980). 

It is also established that failure to keep adequate records 

and make prompt and complete reports justifies the appointment of 

a trustee. State Capital, 51 Bankr. at 4 03; Humphreys Pest 

Control, 40 Bankr. at 177, In re Ford, 36 Bankr. 501, 504 (Bankr. 

W.D. Ky. 1983) • 2 

This court's authority is limited to determining if the 

Bankruptcy Court's determination was clearly erroneous. In re 

Brown, 31 Bankr. 583 (Bankr. D.D.C. 1983). The Bankruptcy 

Court's finding that a trustee is in the best interest of the 

creditors appears to be well-grounded in fact and is not clearly 

erroneous. 

2case law also supports lenders' claims that debtor's effort 

to manage the company was impeded by the existence of at least 

four criminal cases pending against either the debtor's 

president, Ray Bell, or some of the affiliated companies. 

8 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 8 
Once the court has found that cause exists under §1104, it 

has no discretion but must appoint a trustee. Ford, 36 Bankr. at 

504; In re Bonded Mailings, 20 Bankr. 781, 786 (Bankr. E.D. N.Y. 

1982) . 

Debtor has also argued that the Bankruptcy Court should not 

have considered prepetition conduct because such activity is not 

relevant to the appointment of a trustee. The court in In re 

Ma in Line Motors, 9 Bankr. 

prepetition activity may 

determination. 

at 784, however, 

be considered as 

clearly held that 

part of a §1104 

In conclusion, the court feels that the Bankruptcy Court's 

appointment of a trustee was supported by the facts and was not 

in any way contrary to the law. 

court is, therefore, AFFIRMED. 

9 

The decision of the District 

Appellate Case: 85-2760 Document: 010110017231 Date Filed: 02/03/1988 Page: 9