UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In their cross-motions for summary judgment, the parties ask the court to determine what type of interest was granted to plaintiff, The Aleut Corporation ("TAC"), by virtue of an agreement entitled "Oil and Gas Production Payment" dated February 25, 1992. The parties also seek a determination of whether TAC's interest had to be perfected as a security interest and, if so, whether the interest was properly perfected. If TAC's interest is found to be secured, the parties request a valuation of its security interest. Finally, defendant Stewart Petroleum Company ("SPC") has moved for partial summary judgment on Count V of its counterclaim, which seeks to avoid a transfer to TAC made in August, 1996, as a preference.

The material facts are not in dispute. The court has taken judicial notice 5 ABR 377      of certain documents filed in Main Case No. A96-00795-DMD, In re Stewart Petroleum Co., in reaching its decision herein.

Case Background

In 1983, the State of Alaska granted two Competitive Oil and Gas Leases in an area described as the West McArthur River Unit to Richard E. Wagner. These leases ("the WMRU leases") granted Wagner, as lessee, the "exclusive right to drill for, extract, remove, clean, process, and dispose of oil, gas, and associated substances in or under" the leased tracts. The leases also granted the lessee the nonexclusive right to explore for oil and gas on the leased tracts. Finally, the leases, or an undivided interest in them, could be assigned by the lessee with the approval of the state. Ex. A to Aff. of Erik LeRoy In Supp. of Mot. for Summ. J., filed Jan 15, 1998. In 1989, SPC acquired 100% of the working interest and 82.5% of the royalty interest in both of the WMRU leases. Only one of the leases has producing wells on it; the other one is non-producing.

On February 25, 1992, in consideration of TAC's payment to SPC of the sum of $1,250,000.00, SPC and TAC executed a document entitled "Oil and Gas Production Payment" ("the Agreement"), which provided, in part, as follows:

For value received, Stewart Petroleum Company (hereinafter referred to as Payor) promises to pay to the order of The Aleut Corporation (hereinafter referred to as Payee) a total of One Million Five Hundred Sixty Two Thousand Five Hundred and no/100 Dollars ($1,562,500.00) payable from and out of actual revenues accruing to 1.875% working interest (hereinafter referred to as Paying Interest) in and to those certain oil and gas leases located in Cook Inlet Basin, Alaska more fully discussed on Exhibit "A" attached hereto and made a part hereof.

. . . .

Installments totalling [sic] the full amount of this Production Payment shall be 5 ABR 378      made to Payee by Payor hereunder on the basis of actual Net Production Income to the Paying Interest when and as received by Payor, but in no event later than February 25, 1996. It is the intention of Payor that Payee shall receive the entire Production Payment amount provided herein on or before said date. Payor may at any time prior to February 25, 1996 elect to prepay to Payee the remaining balance of this Production Payment without penalty of any kind and in full satisfaction of its obligations hereunder.

To secure payment under this Agreement, Payor has pledged, given a security interest in and delivered to Payee as security, an undivided 1.875% working interest (hereafter referred to as Secured Working Interest) in and to the oil and gas leases described on Exhibit "A". Payee shall have all the rights in said Secured Working Interest given by the Uniform Commercial Code as enacted and enforced in the State of Alaska. Payee shall have no duty as to the collection or protection of the Secured Working Interest held hereunder or of any income thereon, nor as to the preservation of any rights pertaining thereto.

The attachment to the Agreement, entitled "Exhibit 'A', Attached to Oil and Gas Production Payment, Security Agreement and Financing Statement dated February 25, 1992," contains the legal descriptions for both of the WMRU leases.

The same day the Agreement was executed, SPC and TAC also signed a Security Agreement, which provided:

Stewart Petroleum Company (hereinafter referred to as Payor) hereby delivers and grants to The Aleut Corporation, 4000 Old Seward Highway, Suite 300, Anchorage, Alaska 99503, (hereinafter referred to as Secured Party), a security interest in 1.875% working interest in and to those certain oil and gas leases located in Cook Inlet Basin, Alaska, (hereinafter referred to as Secured Working Interest) more fully described on Exhibit "A" attached hereto and made a part hereof to secure full payment to Secured Party of that certain Production Payment Agreement in the amount of $1,562,500.00 delivered concurrently herewith (hereinafter referred to as Agreement).

Exhibit A to the Security Agreement is identical to the exhibit attached to the Agreement.

Finally, on February 25, 1992, the parties executed a Financing Statement, which provided:

1. Name and Address of Payor:


Stewart Petroleum Company
3111 C Street, Suite 400
Anchorage, Alaska 99503


5 ABR 379      2. Name and Address of Secured Party:



The Aleut Corporation
4000 Old Seward Highway, Suite 300
Anchorage, Alaska 99503


3. Description of Secured Interest Covered Hereby:

(i)       An undivided 1.875% working interest in and to oil and gas properties described in the schedule attached as Exhibit "A" hereto, the oil, gas and casinghead gas therein or thereunder or produced and saved therefrom, and the proceeds, income and revenue therefrom;

(ii)      All accounts and general intangibles now owned or hereafter acquired or held by Payor in connection with such working interest or in any manner arising from the production or sale of such oil, gas and casinghead gas associated therewith;

(iii)      All personal property and fixtures located on or attached to said lands, leases, properties and interests, and all inventory, equipment, machinery, fixtures and accessories thereto and replacements therefor, now owned or held or hereafter acquired by Payor for use on or in connection with said lands, leases, properties and interests, and in connection with operating, developing, and maintaining the same or in producing, treating, processing, transporting, marketing or otherwise dealing in the oil, gas and casinghead gas produced therefrom.

Exhibit A to the Financing Statement is the same as the ones attached to the Agreement and Security Agreement. Unlike the Agreement and the Security Agreement, the Financing Statement was acknowledged by both parties. It was recorded in both the Anchorage Recording District and with UCC Central on February 26, 1992.⁽¹⁾

Between August, 1993, and January, 1996, SPC paid TAC a total of $195,686.22 on this obligation. SPC failed to pay the balance due on the note by the February 25, 1996, deadline specified in the Agreement. On February 12, 1996, SPC wrote a letter to TAC in which it acknowledged that the Agreement had "an unpaid balance in the amount of 5 ABR 380      $1,373,426.49 which matures 2/25/96." SPC indicated that, due to cash flow problems, its final payment on the obligation would be delayed by no more than 45 days, and it offered to pay "10% interest from 2/25/96 until actual date of payment, no later than 4/10/96." Alternatively, SPC offered to convert TAC's "1.875% Paying Interest to a permanent working interest."

On March 8, 1996, TAC wrote a letter in response which stated:

Per our discussions, this letter is to document that the Aleut Corporation wishes to be paid the remaining balance due under the terms of the Oil and Gas Production Payment Agreement dated 2/25/92 and not to convert its interest into a working interest as offered by Stewart Petroleum Company in your letter dated 02/12/96.

You have notified us of your short-term cash flow difficulties, and that the Aleut Corporation may not receive its final payment in the amount of $1,394,267.66 plus interest until as late as 04/10/96. This amount was due on 2/25/96. We have expressed to you our need to be paid as soon as possible, and that the Aleut Corporation would be adversely impacted if payment is not received by 3/31/96.

SPC did not satisfy the obligation by April 10, 1996. On April 16, 1996, TAC wrote a letter to SPC which noted that the "production payment matured on February 25, 1996, at which time a payment of $1,376,798.15 was due." TAC requested receipt of "the overdue payment immediately" and asked SPC to provide additional security if it was still unable to make payment. On May 15, 1996, SPC executed a promissory note in favor of TAC for the sum of $1,394,267.66, together with interest payable at the rate of 10% per annum, said sum to be paid in four monthly installments. Consistent with the terms of this note, the first payment, in the sum of $348,496.95, was made by cashiers check to TAC the same day. The note stated that it had been:

executed to memorialize amounts due and payable under an Oil and Gas Production Payment dated February 25, 1992, and represents an obligation that is secured by a security interest on an undivided 1.875% working interest in certain oil and gas leases located in Cook Inlet Basin. Said leases are more fully described in a Financing Statement executed by the parties and filed on February 26, 1992.

5 ABR 381      On July 17, 1996, SPC executed a second promissory note in favor of TAC, in the amount of $1,045,490.81, to be paid in six monthly installments with the first payment due on July 15, 1996, and the final payment due in December, 1996. This note contained language identical to that contained in the May 15, 1996, note indicating that it had been executed to memorialize the amounts outstanding under the Agreement. In addition, William Stewart, a principal of SPC, executed a personal guaranty for this second note. SPC did not make any of the monthly payments to TAC which were required under the second note.

Finally, on August 28, 1996, SPC executed a third promissory note in favor of TAC, for the sum of $1,045,490.81. This note provided for monthly payments commencing September 15, 1996, and concluding August 15, 1997. It also indicated that it had been executed to memorialize the outstanding amounts owed under the Agreement. In addition, the note provided:

As further security for this note, the undersigned has granted a security interest in another 1.875% working interest in said oil leases. Said leases are more fully described in a Financing Statement executed by the parties on the date this note is executed.

The same day the third promissory note was executed, SPC also executed a Security Agreement which granted TAC "a security interest in 1.875% working interest" in the WMRU leases "to secure full payment" to TAC of the amounts due under the third promissory note. The Security Agreement indicated that "[t]he 1.875% working interest pledged herein is in addition to another 1.875% working interest that was pledged by [SPC] in a Security Agreement dated February 25, 1992."

A Financing Statement was also executed by SPC which described TAC's collateral as an undivided 1.875% working interest in the WMRU leases, plus all accounts and general intangibles associated with "such 1.875% working interest or in any manner arising from 5 ABR 382      the production or sale of such oil, gas and casinghead gas associated therewith." This Financing Statement was recorded with UCC Central on August 30, 1996.

Assignments of an "additional" 1.875% working interest in each of the WMRU leases were prepared as well, and executed and acknowledged by both parties. Each assignment stated that it was "for security purposes only, subject to that security agreement dated August 28, 1996. This assignment is void until there is a default pursuant to that security agreement." ⁽²⁾ These assignments were submitted to the Alaska Department of Natural Resources ("DNR") for approval and processing, but the DNR did not approve them. The DNR advised the parties that it was "unable to process assignments with special conditions." The assignments were never recorded in the Anchorage Recording District.

An involuntary chapter 11 petition was filed against SPC on September 13, 1996. SPC consented to the entry of an order for relief under chapter 11 on January 17, 1997, and an order for relief was entered on January 27, 1997. On June 5, 1997, after obtaining bankruptcy court approval, SPC sold 97.75% of the working interest in the WMRU leases and the estate's interest in other, non-producing oil and gas leases to Forcenergy, Inc., for an adjusted cash purchase price of $18,743,447.23. The sale proceeds have been used to fund SPC's plan.

SPC's sixth amended chapter 11 plan was confirmed on August 4, 1997. TAC's claim was treated as a disputed secured claim under the confirmed plan, which provided:

5 ABR 383      4.4.3 Class 4(c) - The Aleut Corporation. Class 4(c) Claims are impaired. The Debtor contends that Aleut's production payment was not perfected and its secured claim in all property of the estate is avoidable. Aleut disputes this contention and argues that it is entitled to full payment of its production payment on a priority basis, based upon 11 U.S.C. § 541 and/or its perfected security interests. If this dispute is not resolved before Confirmation, Aleut's claim shall be recognized, allowed and treated as an Allowed Claim, Class, and, as such, Aleut shall be entitled to payment on the Effective Date in accordance with the treatment afforded other Allowed Claims, Class 6 [Unsecured Claims], hereunder as set forth in Appendix 2. Notwithstanding the above, Aleut shall retain its priority rights and lien claims to the extent such rights and claims are finally determined and any such lien rights shall attach to Sale Proceeds. The Debtor will escrow the difference between the Aleut's entire Class 4(c) Claim and the Class 6 dividend paid to Aleut under the Plan, pending final determination of Aleut's interest. In no event shall Aleut be required to disgorge any Class 6 distribution made to it hereunder, but if any portion of Aleut's Class 6 claim is determined to be in Class 4(c), any excess distribution received will be credited to the Class 4(c) Claim.

In accordance with this provision, TAC has received Class 6 distributions under the plan totaling $377,544.00. SPC has $828,789.00 in escrow to cover TAC's claim should it be found to be fully secured. Analysis
I. TAC's Interest is not a Production Payment

11 U.S.C. § 541(b)(4)(B) excludes from property of a bankruptcy estate:

(4) any interest of the debtor in liquid or gaseous hydrocarbons to the extent that --

. . . .
(B)(i) the debtor has transferred such interest pursuant to a written conveyance of a production payment to an entity that does not participate in the operation of the property from which such production payment is transferred; and

(ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 542 of this title;
TAC argues that it holds an enforceable production payment, because § 5 ABR 384      541(b)(4)(B) "merely require[s] a conveyance of a production payment in writing. No further condition [such as perfection] is imposed . . . " TAC's Mem. in Supp. of Mot. for Summ. J., p. 13, filed Nov. 3, 1997. I disagree. Section 541(b)(4)(B) will not automatically exclude an interest from a bankruptcy estate simply because it has been created "pursuant to a written conveyance of a production payment."

Under section 541(b)(4)(B), a production payment will not become property of the estate if transferred by the debtor pursuant to a written conveyance to an entity that does not participate in the operation of the property against which the payment is granted; and if the estate's only claim to the transferred interest could be asserted under section 542 of the Code. The latter limitation means that the production payment will remain property of the estate if the claim to such production payment arises on some other basis -- e.g., under section 544(a)(3).

5 Collier on Bankruptcy ¶ 541.22, at 541-76 (Lawrence P. King ed., 15th ed. revised 1997)(emphasis added). Accordingly, perfection of the production payment interest under applicable state law is still an issue in bankruptcy. Here, however, it is unnecessary for me to determine whether TAC has properly perfected its interest as a production payment, because I find that it does not hold a valid production payment.

The document evidencing SPC's obligation to TAC is entitled "Oil and Gas Production Payment," and provides that TAC will be paid "out of actual revenues accruing to 1.875% working interest" in the WMRU leases. Under TAC's analysis, one need go no further to find that it holds a valid production payment. However, the Oil and Gas Production Payment also provides that SPC's obligation to TAC was to be paid in full within 4 years, regardless of production from the WMRU. TAC's interest simply does not fit the description of a "production payment."

5 ABR 385      The Bankruptcy Code defines a production payment as follows:

(42A) "production payment" means a term overriding royalty satisfiable in cash or in kind --

(A) contingent on the production of a liquid or gaseous hydrocarbon from particular real property; and

(B) from a specified volume, or a specified value, from the liquid or gaseous hydrocarbon produced from such property, and determined without regard to production costs;

11 U.S.C. § 101(42A). This definition is consistent with the term as it is used outside of bankruptcy. A "production payment" is "another name for oil payment." 8 Williams & Meyers, Oil And Gas Law (Manual of Oil & Gas Terms), p. 847 (1997). An "oil payment" is:

[a] share of the oil produced from a described tract of land, free of the costs of production at the surface, terminating when a specified sum from the sale of such oil has been realized. . . . The duty to deliver oil under an oil payment subsists if, as and when the oil is produced; there is no personal liability to pay the sum specified in the instrument creating the oil payment. An oil payment is an interest in land.

Id. at p. 712. "If, . . . , the payment is required to be made whether or not production is obtained or is sufficient for the purpose, there is no true oil payment; instead there is a debtor-creditor relationship and a lien or other security interest in production." 2 Williams & Meyers, Oil And Gas Law § 422.2, p. 374 (1997). Although the Oil and Gas Production Payment provided that SPC would pay TAC out of "actual revenues accruing to 1.875% working interest" in the WMRU leases, it was essentially a promise to pay TAC a sum certain by no later than February 26, 1996. SPC's obligation to pay TAC was not contingent on production from the WMRU leases. Accordingly, TAC's interest is not a production payment.

5 ABR 386      TAC argues that a valid production payment can exist even in instances where the agreement also creates an absolute liability to pay the obligation, citing Danciger Oil & Refining Co. v. Powell, 154 S.W.2d 632 (Tx. 1941), in support. The issue before the court in Danciger was whether a contract contained an implied covenant to develop property for oil and gas production. There, the contract provided for Danciger to repay a $50,000 obligation to the Powells by making specified monthly payments out of oil and gas production from a specified tract of land, but also indicated that if the monthly production was insufficient to make the required monthly payments, it would be paid by Danciger "in cash, it being the intention of all parties that said payments shall be made on said dates in any event." Id. at 633. In addition to the foregoing, however, under the contract the Powells reserved "an overriding one-eighth interest in and to all of the oil, gas, and casinghead gas in and under and that may be produced" from land which they had conveyed to Danciger. Id. at 634. The court found that the document was a "conveyance of the minerals" rather than a lease, and further found that it did not contain an implied covenant to develop the property for oil and gas mining purposes. Id. at 636. It did discuss whether the document created a "production payment." In fact, the court never used this phrase, nor did it use the term "oil payment." Danciger lends little support to TAC's argument.

TAC also contends it holds a production payment because that is what both parties intended it should receive. TAC has submitted the affidavits of its vice president, Ronald Lee, and SPC's former president, William R. Stewart, in support of this contention. Mr. Stewart states that he prepared the Agreement, Security Agreement, and Financing Statement which were provided to TAC in 1992 without assistance of legal counsel and based on his experience in the oil and gas industry. His interpretation of the Agreement is that TAC was to be repaid on its 5 ABR 387      loan from revenues accruing to a 1.875% working interest, but in the event that production was insufficient to repay TAC, SPC also provided TAC with a corporate guaranty for full payment of the debt. Stewart says it was his "absolute intent" to provide TAC with a production payment, and that the February 25, 1996, deadline in the Agreement was the date when SPC's guarantee of repayment became absolute. Stewart also stated that the three promissory notes executed by SPC after the 1996 deadline had passed without making full payment to TAC were simply to "memorialize the now non-contingent guarantee" given by SPC. Mr. Lee's affidavit is consistent with Stewart's regarding the intent to provide TAC a production payment.

These affidavits regarding intent are wholly inconsistent with the terms of the notes and security agreements executed by the parties, and are further controverted by the exchange of correspondence between SPC and TAC after the February 25, 1996, deadline passed without full payment of the obligation. The parties intended that TAC receive full payment by the date specified in the Oil and Gas Production Payment. The obligation was to be paid regardless of the quantity of production from the WMRU leases. The correspondence between SPC and TAC both before and after the February 25, 1996, deadline reflects that both parties believed the obligation was to be paid in full by then. The three promissory notes SPC executed after the deadline in order to "memorialize amounts due and payable under an Oil and Gas Production Payment" all established installment payment schedules and payment deadlines which had no relation to production revenues from a 1.875% working interest. Regardless of what the parties now say was intended, a review of the documents and correspondence reflects that TAC does not hold a production payment.

Under the terms of the Oil and Gas Production Payment SPC "pledged, [gave] a security interest in and delivered to" TAC an undivided 1.875% working interest. The Security Agreement stated that SPC "delivers and grants" to TAC a security interest in a 5 ABR 388      1.875% working interest in the WMRU leases." Both of these documents express an intent to immediately convey and deliver to TAC a 1.875% working interest as collateral for SPC's obligation. The Financing Statement, executed contemporaneously with these two documents, describes TAC's "secured interest" to include "an undivided 1.875% working interest" in the WMRU leases. Rather than a production payment, TAC received a note which was to be secured by a 1.875% working interest.

II. TAC's 1.875% Working Interest Cannot be Avoided under 11 U.S.C. § 544(a)(3)

11 U.S.C. § 544(a)(3) provides:


(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by --

. . . .

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

This section of the Code "gives a bankruptcy trustee 'strong arm powers' to avoid transfers of real property of the debtor that would be voidable under state law by a bona fide purchaser (BFP) of the property from the debtor." Weisman v. Robertson (In re Weisman), 5 F.3d 417, 419-420 (9th Cir. 1993). State law determines whether the trustee holds the status of a BFP. Id. at 420; 5 Collier on Bankruptcy ¶ 544.08, at 544-14 (Lawrence P. King ed., 15th ed. revised 1997). In a chapter 11 case, the debtor in possession holds the rights and powers of a bankruptcy trustee, including the trustee's strong arm powers. 11 U.S.C. § 1107(a).

As § 544(a)(3) is only applicable to interests in real property, the first issue to be 5 ABR 389      determined is whether, under state law, TAC's 1.875% working interest is an interest in real property.

It is generally held that transfers of mineral, royalty and leasehold interests are within the recordation statutes applicable to conveyances of real estate and that the interest of the grantee may be cut off by operation of the recordation statute if such conveyance is not recorded. In the case of security interests such as mortgages of mineral, royalty or leasehold interests the question arises as to whether such interests are to be recorded in chattel mortgage records or in real estate mortgage records. It has been held that the appropriate place of recordation of such security interests is the real estate mortgage records. Such cases are not to be taken as holdings that the particular interests involved are realty rather than personalty. These results turn on the fact that the realty recording statutes in question are typically phrased in terms of conveyances affecting real estate or conveyances of interests in real estate. Even though mineral, royalty or leasehold interests may be classified as personalty in a particular jurisdiction, conveyances thereof clearly "affect" real estate or are conveyances of "interests in" real estate.

1 Williams & Meyers, Oil and Gas Law § 231.2, p. 136.3 - 136.5 (1997)(emphasis in text).

Although there are no reported cases indicating how a lessee's interests in a state oil and gas lease would be classified in Alaska, the Alaska Statutes reflect that the two WMRU leases which SPC acquired in 1989 are interests in land. See, e.g., AS 38.05.035(10)(e) [director of DNR may approve contracts for the sale, lease or other disposal of available state public lands] AS 38.05.135 [state land containing valuable mineral deposits may be made available via permit or lease for the purpose of exploration, development and extraction of minerals] AS 38.05.180 [regarding oil and gas leases of state land]. Further, the terms of the WMRU leases, which were given by the state, specify that "the rights granted to the lessee by this lease constitute an interest in real property in the leased area." Ex. A, p.6, ¶ 28, to Aff. of Erik LeRoy in Supp. of Mot. for Summ. J., filed Jan. 15, 1998. SPC's interest in the WMRU leases constitutes an interest in land.

5 ABR 390      As lessee, SPC acquired 100% of the working interest in the WMRU leases. The term "working interest" has been defined as "[t]he operating interest under an oil and gas lease." 8 Williams & Meyers, Oil And Gas Law (Manual of Oil & Gas Terms), p. 1191 (1997). This interest is also an interest in land. 11 AAC 88.185(32) defines "working interest" as "the interest held in lands by virtue of a lease, operating agreement, fee title or otherwise, under which the owner of the interest is vested with the right to explore for, develop and produce minerals."⁽³⁾ I conclude that TAC's security interest in a 1.875% working interest in the WMRU leases is an interest in land.

SPC seeks to avoid TAC's interest on the grounds that the conveyance of the working interest was not acknowledged and that a conveyance of a real property interest cannot be perfected by the recording of a financing statement.

In Alaska, the conveyance of an interest in land must be acknowledged. AS 34.15.150(a) provides, in part, "A conveyance executed in the state of land or an interest in land in the state shall be acknowledged before a person authorized to take acknowledgments in AS 09.63.010 or proved in accordance with AS 34.15.210 or 34.15.220." Here, while both the Agreement and Security Agreement expressed an intent to immediately convey and deliver to TAC a 1.875% working interest as collateral for SPC's obligation, neither of them was acknowledged. On the other hand, the Financing Statement, executed contemporaneously with these two documents, was acknowledged by both TAC and SPC. The Financing Statement clearly states that TAC's secured interest includes a 1.875% working interest in the WMRU leases, which leases are fully described in Exhibit "A." Further, Exhibit "A" refers to both the 5 ABR 391      Agreement and the Security Agreement.

[A] court must look squarely at the real nature of the transaction, thus avoiding, so far as lies within its power, the betrayal of justice by the cloak of words, the contrivances of form, or the paper tigers of the crafty. We are interested not in form or color but in nature and substance.

>Metcalf v. Bartrand, 491 P.2d 747, 750 (Alaska 1971)(court found that deed absolute on its face was a security instrument), citing Wilcox v. Moore, 93 N.W.2d 288, 291 n.1 (Mich. 1958); see also Dimond v. Kelly, 629 P.2d 533 (Alaska 1981) (deed conveying title to certain named buildings was found to have conveyed title to subjacent and adjacent realty; court could resort to extrinsic evidence to interpret deed). Under the circumstances present here, I find that the Financing Statement was sufficient to convey TAC, as security, a 1.875% working interest in the WMRU leases.

SPC next argues that the Financing Statement cannot be used to perfect a security interest in real property. SPC contends TAC should have obtained, and recorded, an unconditional assignment or a deed of trust conveying the 1.875% working interest. It is true that these types of instruments are traditionally used to transfer an interest in realty. Further, the UCC does not apply to "the creation or transfer of an interest in or lien on real estate," AS 45.09.104(10), and financing statements typically are not used to convey interests in land. However, certain types of interests in realty are excluded from this general rule. AS 45.09.401 provides:

(a) The proper place to file, in order to perfect a security interest, is as follows:

. . . .

(2) if the collateral is timber to be cut or is minerals or the like (including oil and gas) or accounts subject to AS 45.09.103(e), or when the financing statement is filed as a fixture filing (AS 45.09.313) and the collateral is goods which are or are 5 ABR 392      to become fixtures, then in the office where a mortgage on the real estate concerned would be filed or recorded,


. . . .

Further, AS 45.09.402(f), which discusses formal requisites for financing statements, provides:

(f) A financing statement covering timber to be cut or covering minerals or the like (including oil and gas) or accounts subject to AS 45.09.103(e), or a financing statement filed as a fixture filing (AS 45.09.313) if the debtor is not a transmitting utility, must show that it covers this type of collateral, must recite that it is to be recorded in the real estate records, and the financing statement must contain a description of the real estate sufficient if it were contained in a mortgage of the real estate to give constructive notice of the mortgage under the law of this state.

Here, the Financing Statement satisfies the formal requisites contained in AS 45.09.402(f). It describes the collateral as a 1.875% working interest in the WMRU leases, and gives a sufficient description of the WMRU realty. It also states, on page 2, that it is to be recorded in the records of the Anchorage Recording District, which is the district in which the WMRU leases are located.

The Financing Statement also satisfies the criteria for recording contained in AS 40.17.030. Further, it is one of the classes of documents eligible for recording pursuant to AS 40.17.110(b). Even if the document were not accepted for recording as a conveyance of real property, under AS 40.17.110(b)(1), or as an assignment of a security interest in real property, under AS 40.17.110(b)(8), it would qualify as "a financing statement covering goods that are or are to become fixtures to real property described in the financing statement," under AS 40.17.110(b)(51). The Financing Statement was recorded in the records of the Anchorage Recording District, Book 2243, Pages 392 - 395, on February 26, 1992. Once recorded, the Financing Statement gave constructive notice of its contents to subsequent purchasers pursuant to AS 40.17.080(a), which provides:

5 ABR 393      (a) Subject to (c) and (d) of this section, from the time a document is recorded in the records of the recording district in which land affected by it is located, the recorded document is constructive notice of the contents of the document to subsequent purchasers and holders of a security interest in the same property or a part of the property.

In Alaska, a "BFP without notice" is "one who lacks actual, constructive (i.e., from the land records) or inquiry notice." Rosenberg v. Smidt, 727 P.2d 778, 784 (Alaska 1986). Here, the contents of the Financing Statement would provide a subsequent purchaser with constructive notice of TAC's security interest in a 1.875% working interest in the WMRU. The subsequent purchaser would also find a reference to the Oil and Gas Production Payment and the Security Agreement, mentioned on Exhibit "A."

Alternatively, assuming the contents of the Financing Statement, by themselves, were insufficient to provide constructive notice of TAC's interest, they were sufficient to place a prospective purchaser on inquiry notice.

However, apart from the related concept of constructive notice, it is well established that '[e]very man is chargeable with notice of that which the law requires him to know, and of that which, after being put upon inquiry, he might have ascertained by the exercise of reasonable diligence.'

First Nat'l Bank of Anchorage v. Dent, 683 P.2d 722, 724 (Alaska 1984)(citations omitted). In Dent, the court found that a recorded mechanic's lien constituted inquiry notice to a subsequent purchaser, even though the lien would, by statute, lapse if a lawsuit was not timely filed. A subsequent purchaser could not simply assume, because no lis pendens had been recorded, that the lien had lapsed.

The same analysis would apply here. Even if the Financing Statement were treated solely as a fixture filing, its existence in the land records is sufficient to lead a reasonable person to inquire further regarding TAC's interest, and a reasonable inquiry would have 5 ABR 394      permitted the discovery of TAC's interest. Id. All the information necessary to make that inquiry could be obtained from the Financing Statement.

The trustee relies on Nat'l Bank of Alaska v. Erickson (In re Seaway Exp. Corp., 912 F.2d 1125 (9th Cir. 1990), in support of his contention that a financing statement cannot perfect an interest in real property. In Seaway, the bank held a perfected security interest in Seaway's inventory and accounts receivable, and any proceeds from the sale of either. Seaway sold one of its accounts back to a creditor in exchange for a parcel of real property. After the parcel was sold, the bank claimed its security interest covered the proceeds from the sale of the realty. The Ninth Circuit disagreed, and permitted the trustee to avoid the bank's interest in the proceeds.

The facts in Seaway are distinguishable. First, unlike a fixture filing relating to particular realty, the type of security interest acquired by the bank, in accounts receivable and inventory, is not typically filed in real property records. Further, the financing statement made no mention of an interest in realty. Seaway does not control the outcome of this case.

The facts here are more like those in Lovelady v. Bryson Escrow, Inc., 27 Cal.App.4th 25, 24 UCC Rep.Serv.2d 270 (Cal. Ct. App. 1994). There, the court held that a UCC-1 financing statement which specified that it covered a leasehold interest was sufficient to create a leasehold mortgage, even though such an interest is usually evidenced by a deed of trust and security interests in real estate leases are not governed by the UCC. The financing statement was recorded in the proper recording district, and the court found that the recording of this document was "sufficient to give notice of the mortgage to anyone interested in the property." Id. at 27 Cal.App.4th 31. "That the real estate mortgage appeared in the form of a UCC-1 financing statement is irrelevant. The form used here shows on its face that it was 5 ABR 395      intended to secure an obligation on a leasehold interest; that is, it was intended to create a real estate mortgage." Id.

I conclude that, even though TAC did not perfect its security interest in the 1.875% working interest via the more conventional methods of obtaining an assignment or a deed of trust, TAC took sufficient steps to give notice of its interest that SPC cannot be found to be a BFP under state law. The recorded Financing Statement gives constructive and inquiry notice of TAC's interest. SPC cannot avoid TAC's 1.875% working interest under 11 U.S.C. § 544(b)(3).

Although TAC's security interest is not avoidable, a determination of its value cannot be made at this time. The Financing Statement encompasses not only a 1.875% working interest, but also includes accounts and general intangibles, and all personal property and fixtures. There are several unresolved issues regarding these additional items of collateral. First, since neither the Agreement nor the Security Agreement refers to this additional collateral (both refer solely to a 1.875% working interest), did the parties intend to convey an interest in this collateral? Second, does this interest extend to all of SPC's accounts, general intangibles and personal property, or only such portion of it as would be attributable to a 1.875% working interest? These are genuine issues of fact which preclude summary judgment on the valuation of TAC's secured interest.

III. The 1.875% Working Interest TAC Acquired in August, 1996, is Avoidable Pursuant to 11 U.S.C. § 547

SPC has also moved to avoid the transfer of the "additional" 1.875% working interest conveyed to TAC in 1996. As with the first 1.875% working interest, this additional transfer was evidenced by a financing statement which also purports to cover accounts and 5 ABR 396      general intangibles. Unlike the first transfer, however, the second financing statement was not recorded in the Anchorage Recording District, although it was filed with UCC Central.

The transfer of the additional 1.875% working interest was made within 90 days of the filing of SPC's petition, and was on account of an antecedent debt made while the debtor was insolvent. It would enable TAC to receive more than it would have obtained in a chapter 7 if the transfer had not been made. TAC has not opposed this portion of SPC's motion. There are no factual issues present which would preclude summary judgment. SPC's transfer of the "additional" collateral, as evidenced by the Financing Statement dated August 28, 1996, is avoidable pursuant to 11 U.S.C. § 547(b).

Conclusion

TAC's motion for summary judgment is denied. TAC does not hold a valid production payment. However, TAC does hold a security interest in a 1.875% working interest in the WMRU leases. This interest cannot be avoided by SPC pursuant to 11 U.S.C. § 544(b)(3). SPC's motion for partial summary judgment on this issue is denied. SPC's motion is granted, however, as to the transfer of "additional" collateral within the preference period, and this transfer is avoided pursuant to 11 U.S.C. § 547. In light of this determination, Count IV of SPC's counterclaim is moot, as it seeks to avoid the same transfer as a fraudulent transfer under 11 U.S.C. § 548.

The issues which remain for determination in this proceeding include the following:

1. The value of TAC's security interest in the 1.875% working interest, and whether TAC's security interest covers the additional collateral listed in the 5 ABR 397      Financing Statement dated February 25, 1992.

2. Whether SPC can avoid the payment of $348,496.94 made to TAC in May, 1996, pursuant to 11 U.S.C. §§ 548, 550 (Count III of SPC's counterclaim).

An interlocutory order will be entered consistent with this memorandum. A final order and judgment will be entered after the remaining issues in this proceeding have been determined.

DATED: April 20, 1998.

BY THE COURT


DONALD MacDONALD IV
United States Bankruptcy Judge

1. ¹ 5 ABR 379      Assignments of the 1.875% working interest may have also been executed at the time the Agreement was entered. However, neither party has produced copies of them and, in any event, they were not recorded in the Anchorage Recording District.

2. ² 5 ABR 382      About the same time that these assignments were executed, TAC discovered that assignments of the original 1.875% working interests were never transmitted to the DNR. Assignments of the original 1.875% working interests (indicating an effective date of February 26, 1992) in each of the WMRU leases were also executed and acknowledged by SPC on August 28, 1996. These assignments contained language similar to that which had been inserted on the assignments of the "additional" 1.875% working interest, e.g., that the assignments were for security purposes only and void until a default occurred.

3. ³ 5 ABR 390      Subsection (32) goes on to provide that "the right delegated to a unit operator by a unit agreement is not a working interest." This provision is inapplicable in this case.