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Lack of Recognition of Constructive Trust in Louisiana Precludes Judgment in Favor of Defendant

Rodney Tow Ch 7 Tr. v. Exxon Mobil Corp. (In re ATP Oil & Gas Corp.) Nos. 12-36187, 15-3174, 2016 Bankr. LEXIS 2249 (U.S. Bankr. S.D. Tex. June 6, 2016)

Debtor ATP Oil & Gas Corp. is a Texas corporation in the business of acquisition, development, and production of oil and gas. Being a developer in oil and natural gas properties, the Debtor’s creditors consisted of oil and gas related vendors, including the Defendant Exxon Mobil Corporation. ATP and Exxon carried out business pursuant to an operating agreement executed between them. ATP was the operator while Exxon held a non-operating working interest. In compliance with the agreement, ATP sought advances from Exxon to cover Exxon’s proportionate share of the estimated costs of decommissioning certain offshore wells and platforms. Exxon advanced those funds to ATP to cover its share of the costs under the agreement. Later on, the advanced funds significantly exceeded the actual costs of the decommissioning operations. Accordingly, ATP returned the overpayment to ExxonMobil. Subsequently, ATP filed a voluntary chapter 11 for relief. The case was converted to Chapter 7 and Rodney Tow was appointed as a Chapter 7 Trustee.

The Trustee commenced the adversary proceeding against Exxon to recover the overpayment amount worth $765,000.00 as a preferential transfer pursuant to 11 U.S.C. §§ 547. Exxon filed a motion for summary judgment, alleging that the overpayment was held by ATP in a constructive trust for the benefit of Exxon, ATP had no equitable interest in the overpayment, and thus the alleged transfer was not a transfer of an interest of the Debtor in property and hence, was not avoidable as preferential. The Trustee for ATP argued that Louisiana law does not recognize constructive trusts. So, the alleged transfer was avoidable under 11 U.S.C.S. § 547 as the payment constituted property of the estate. The Trustee further alleged that Exxon failed to adequately trace the funds, as the overpayment was commingled. The Trustee argued that ATP exercised sufficient dominion and control over the overpayment such that the overpayment was ATP’s property. Further, the operating agreement between the parties permitted commingling of funds. So, the Trustee contended that an agreement that permits commingling of funds and does not prohibit or condition a debtor’s use of such funds creates a debtor-creditor relationship such that the funds are property of the debtor’s bankruptcy estate.

Following receipt of the briefs, the Court applied the lowest intermediate balance test and found that Exxon had sufficiently satisfied its tracing burden. However, as regards to the recognition of constructive trusts, the Court said that it is the state law, which controls whether a constructive trust has been established or not. The Louisiana Supreme Court has not explicitly ruled on whether Louisiana recognizes the concept of a constructive trust. In the absence of guidance from the Louisiana Supreme Court, the Court stated that it must make an Erie guess and determine, to the best of its ability, how the Louisiana Supreme Court would rule if confronted by the issue. The Court further elucidated that when making an Erie guess, the Court looks to: (1) lower state court decisions and Supreme Court dicta, (2) the general rule on the issue, (3) the rule in other states looked to by Louisiana courts when they formulate the substantive law of Louisiana, and (4) other available legal sources, such as treatises and law review commentaries.

After review and analysis, the Court found that the lower appellate courts in Louisiana have been generally hostile to the concept of a constructive trust. The Fifth Circuit has also consistently held that the equitable concept of a constructive trust does not have a place in Louisiana civil law and the Louisiana Trust Code is silent as to constructive trusts. Thus, the Court concluded that given the lack of support for constructive trusts in both the Louisiana Civil Code and relevant case law, the Louisiana Supreme Court does not recognize constructive trusts. Hence, the Court denied the Defendant’s Motion for summary judgment and held the alleged transfer constituted property of the estate and was liable to be returned to the bankruptcy estate pursuant to Sec. 547.