UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

TO: ROBERT A. BREEZE, WILLIAM L. STEWART, STEWART PETROLEUM COMPANY, and VIRGINIA BREEZE, trustee of the Robert Breeze Irrevocable Trust,

IT IS ORDERED that,

1. You are enjoined from transferring title to a % overriding royalty interest (ORRI) in the West McArthur River Unit currently held by Virginia Breeze, trustee of the Robert Breeze Irrevocable Trust or the Robert Breeze Irrevocable Trust to any other entity without further court order.

2. You are enjoined from transferring any income from a % ORRI (i.e., a 75% part of the ½ ORRI) in the West McArthur River Unit currently held by Virginia Breeze, trustee of the Robert Breeze Irrevocable Trust or the Robert Breeze Irrevocable Trust to any other entity other than the bankruptcy trustee, plaintiff Kenneth Battley, except, you may transfer to Virginia Breeze, trustee of the Robert Breeze Irrevocable Trust, the income for the % ORRI for the regular install-
      4 ABR 153  ments expected to be paid in the months of October, November, and December, 1995, limited however by a cap of $18,000. There are no prohibitions imposed by this order with respect to the remaining % ORRI held by either Virginia Breeze, trustee, or the irrevocable trust.

TO: ALL PARTIES,

IT IS FURTHER ORDERED that

3. The court will set a trial on this matter before the end of 1995. Pursuant to FRCivP 65(a)(2), the court is advancing the trial to sometime later this year and the evidence presented at the preliminary injunction hearing will be admissible upon trial on the merits except where specifically limited in the preliminary injunction hearing.

4. A trial setting conference is set for Friday, October 6, 1995, at 9:00 A.M. At that time, the court will consider discovery dates, witness list dates, the exchange of exhibits, discovery matters, etc. The previous order in this case setting time limits will be modified to advance these times.

5. Pursuant to FRBP 7065, no security will be required by the trustee as a condition of the injunction.

Introduction - The court heard testimony on the preliminary injunction motion of plaintiff to enjoin any further transfer of proceeds from a ½% overriding royalty interest in the West McArthur River Unit wells by Stewart Petroleum Company or William L. Stewart to Robert Breeze, Virginia Breeze, trustee, or the Robert Breeze Irrevocable Trust.

The Breezes and Battley agreed during the course of the hearing that only a % overriding royalty interest was at issue in the preliminary injunction hearing. Before the hearing, Boyko and Battley stipulated that whatever treatment the Breezes received under Battley's avoidance proceeding, Boyko would be subject to also. Boyko did not actively participate in the preliminary injunction hearing, but was a key witness for Battley.

As the preliminary injunction hearing progressed, the issues were narrowed to:

(a) whether the % ORRI interest held by Virginia Breeze as trustee of the irrevocable trust was ever property of       4 ABR 154  Boyko, Breeze & Flansburg (BB&F), the debtor, so as to be recoverable by Battley, the bankruptcy trustee;

(b) whether Battley has established that he will probably prevail on the merits of his avoidance action brought under AS 10.06.358, 10.06.360 and 10.06.378(b), and 11 USC § 544(b);

(c) whether, if such a case was made, there is likely to be sufficient assets to pay all creditors and administrative expenses in full, with interest, even if no injunction is granted; and,

(d) if there is a question about full payment, does the balance of hardships favor the entry of a preliminary injunction.

Legal framework for granting preliminary injunctions involving loss of income - The criteria for entering a preliminary injunction as stated in Stanley v University of Southern California, 13 F3d 1313, 1319 (9th Cir 1994) is:

In this circuit, a party seeking preliminary injunctive relief must meet one of two tests. Under the first, a court may issue a preliminary injunction if it finds that:

(1) the [moving party] will suffer irreparable injury if injunctive relief is not granted, (2) the [moving party] will probably prevail on the merits, (3) in balancing the equities, the [non- moving party] will not be harmed more than [the moving party] is helped by the injunction, and (4) granting the injunction is in the public interest.

Alternatively, a court may issue a preliminary injunction if the moving party demonstrates either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor. Under this last part of the alternative test, even if the balance of hardships tips decidedly in favor of the moving party, it must be shown as an irreducible minimum that there is a fair chance of success on the merits. There is one additional factor we must weigh.

Where the moving party is seeking to enjoin a loss of income as Battley is seeking by his motion, the court will not generally grant a       4 ABR 155  preliminary injunction if it can be rectified later. Bolivar v Director of the FBI, 846 FSupp 163, 167-168 (D PR 1994), aff'd 45 F3d 423.

A loss can, however, rise to such a magnitude that it will effect the ability to conduct or preserve a business. American Federation of Government Emp., Local 1858 v Callaway, 398 FSupp 176, 193-194 (D Ala 1975), motion denied 427 FSupp 1048 and Art-Metal USA, Inc. v. Solomon, 473 FSupp 1, 4 (DDC 1978).

The ORRI appears to have been the property of BB&F - Although Robert Breeze indicated that the entire 1% ORRI given by Stewart Petroleum by virtue of a letter of September 17, 1991 (Plaintiff's Exhibit 2) was for him individually, the testimony of Edgar Paul Boyko and William Stewart refute this. Stewart denied that the ORRI was for future work on other prospects, other than work to get a recalcerant Ssangyong Oil Refining Co., Ltd., to the table to pay in its agreed working partner's investment, necessary for the development of the West McArthur River Unit.

This appears to have been an adjunct to the 5% commission for finding that investment in the beginning. See letter of February 4, 1991 (Plaintiff's Exhibit 1). All parties agree that the 5% was BB&F's asset, and the 1% ORRI appears to be an enhancement of the 5%.

In the agreement documenting the sharing of the ORRI, Boyko's participation in working on the Stewart Petroleum "corporate opportunity" is acknowledged. See, Plaintiff's Exhibit 3. Breeze testified he exclusively developed this prospect and the 5% was agreed upon only to give a base to BB&F. He said Boyko was not involved to any extent. Stewart supported Boyko's lack of involvement. However, Boyko was the rainmaker of the firm, making two or three times the fees generated by Breeze according to Breeze's own testimony. They split income equally. There is nothing inherently improbable about Robert Breeze agreeing to make this a BB&F asset.

In addition, both the ORRI and the 5% were shown on a BB&F financial statement for September 30, 1991 (Defendants' Exhibit L).

In making the distribution of a portion of the ORRI to Robert A. Breeze, BB&F appears to have violated AS 10.06.358 - BB&F was a professional law corporation. Breeze and Boyko were equal co-owners in September, 1991, when Boyko called for a termination of his business relationship with Breeze. See, Plaintiff's Exhibit 100 at pages 002292-002295.

      4 ABR 156  Boyko suspected Breeze of using trust funds and not depositing all BB&F firm funds in the firm's accounts. A series of memorandum in July, 1991, exemplify the deteriorating relationship. See, Plaintiff's Exhibit 100 at pages 002242-002251. In October and November, 1991, Breeze was indicted for stealing a client's funds. He was also sued several times in Anchorage Superior Court, in each case for hundreds of thousands of dollars for wrongfully taking or refusing to return funds not rightfully his or BB&F's. These events were well publicized in the local Anchorage papers. See, for example, Plaintiff's Exhibits 22, 23, 25, 31, 97.

On October 28, 1991, Breeze and Boyko signed two agreements to split their relationship. One was the Law Firm Partnership Dissolution and Stock Buy Out Agreement and the second the Agreement to Share Over Riding Royalty Interest in Stewart Petroleum Company West McCarther River Prospect and Legal Fees Rendered to Stewart Petroleum Company by the Law Firm of Boyko, Breeze & Flansburg. Plaintiff's Exhibits 4 and 3 respectively. The 1% ORRI was distributed ½ to Robert Breeze, and ¼ each to BB&F and Edgar Paul Boyko. Robert Breeze assigned his interest, at least the % in question here, to the Robert Breeze Irrevocable Trust on December 11, 1991. Plaintiff's Exhibit 5.

The avoidance question concerns whether BB&F made an unauthorized distribution under AS 10.06.358 and/or AS 10.06.360. AS 10.06.358 provides:

Sec. 10.06.358 Distributions; conditions.

(a) A corporation or a subsidiary of the corporation may not make a distribution to the corporation's shareholders as defined in AS 10.06.990 unless

(1) the amount of the retained earnings of the corporation immediately before the distribution equals or exceeds the amount of the proposed distribution; or

(2) immediately after giving effect to the distribution the


(A) sum of the assets of the corporation, exclusive of goodwill, capitalized research and development expenses, evidences of debts owing from directors or officers or secured by the corporation's own shares, and deferred charges, would be at least equal to one and one-fourth times its       4 ABR 157  liabilities, not including deferred taxes, deferred income, and other deferred credits; and

(B) current assets of the corporation would be at least equal to its current liabilities or, if the average of the earnings of the corporation before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the interest expense of the corporation for those fiscal years, at least equal to one and one-fourth its current liabilities.


(b) For purposes of this section,


(1) in determining the amount of the assets of the corporation, profits derived from an exchange of assets may not be included unless the assets received are currently realizable in cash;

(2) "current assets" may include net amounts that the board has determined in good faith may reasonably be expected to be received from customers during the 12-month period used in calculating current liabilities under existing contractual relationships obligating the customers to make fixed or periodic payments during the term of the contracts after in each case giving effect to future costs not then included in current liabilities but reasonably expected to be incurred by the corporation in performing the contracts.


(c) For the purposes of this chapter, the amount of a distribution payable in property shall be determined on the basis of the value at which the property is carried on the corporation's financial statements in accordance with this section.

(d) Only a corporation that classifies its assets as current assets and fixed assets in accordance with this section is governed by (a)(2)(B) of this section.

(e) For the purposes of this section, the board of directors may base a determination that a distribution is not prohibited either on financial statements prepared in accordance with generally accepted accounting principles or on the basis of accounting practices and principles that are fair and reasonable in the circumstances.

(f) Financial statements and determinations prepared or arrived at in accordance with generally accepted accounting principles are fair and reasonable. The fair and reasonable quality of state-
      4 ABR 158  ments and determinations prepared under other practices and principles shall be proved by the corporation. (§ 1 ch 166 SLA 1988; am §§ 12 -- 14 ch 82 SLA 1989)

AS 10.06.360 provides:

Sec. 10.06.360 Prohibited distribution; inability to meet maturing debts and liabilities.

A corporation or subsidiary of a corporation may not make a distribution to the corporation's shareholders if the corporation or the subsidiary making the distribution is, or as a result of the distribution would be, likely to be unable to meet its liabilities as they mature. (§ 1 ch 166 SLA 1988).

Battley also asserted a fraudulent transfer claim under 11 USC § 544(b) and AS 34.40.010 et seq. The court finds that Battley has not established a right to a preliminary injunction under the fraudulent transfer claim of the ORRI from BB&F to Robert Breeze or AS 10.06.360. A fraudulent transfer of the ORRI from Robert Breeze to the Robert Breeze Irrevocable Trust has not been specifically discussed by the parties since they indicated, for the purposes of the preliminary injunction, that Robert Breeze and the irrevocable trust could be treated as if they were one.

The parties both relied on a September 30, 1991, financial statement for BB&F as the jumping off point for their analysis of whether the distribution of the ORRI to Robert Breeze on October 28, 1991, was a violation of AS 10.06.358. Defendant's Exhibit L. No one has identified the preparer of the September 30, 1991, financial statement, but it appears to have been compiled by someone employed by BB&F, and was apparently obtained by Battley from Key Bank of Alaska, one of BB&F's creditors.

Competing declarations were filed by the CPAs hired by the Breezes (Ronald Greisen) and Battley (Charles Bingham). The Breezes tried to show through Greisen that, after recasting the September 30, 1991, financial statement into one based upon accrual accounting, the ratio of assets to liabilities was at least 1.86, well over the 1.25 ratio required under AS 10.06.358(a)(2)(A). See, Greisen's declaration attached to Docket Entry 43. Greisen assumes a going concern, which implies, in
      4 ABR 159  general, a greater value to such assets as accounts receivable and furniture and fixtures.

Bingham, on the other hand, assumed the worst, and said the September 30, 1991, financial statement should have been cast as a liquidation statement, given the substantial business detriment of having a key partner indicted for fraud involving BB&F's activities with its clients and the law suits filed by clients against Breeze and BB&F for misappropriations.

The key points of Bingham's testimony were:

(a) he came up with a ratio of assets to liabilities in a range of .530 to .913, depending on the assumptions;

(b) one assumption was raising the allowance for bad debt to $400,000, from the $219,872 shown on the September 30, 1991, balance sheet;

(c) another assumption was reducing the assets by: (i) $250,000 to reflect the lack of value for the Jeffcoat deeds of trust given to BB&F to secure fees, and (ii) $224,100 to reflect that various real estate held as collateral for fees was not earned and ultimately returned to the client; and,

(d) there were numerous red flags indicating that BB&F had liabilities which were not booked, including the $200,000 or more out-of-trust position of the firm, and the several large claims for refunds which were being pressed by former clients.

Battley established that the Jeffcoat deed of trust asset was worthless and that over $200,000 of the real estate asset which was held for fees was returned as unearned. In addition, Bingham's perception about liquidation value being more appropriate than going concern value is much more realistic. The source of the allowance for doubtful accounts of $220,000 is not known, but the deteriorating reputation of the firm and make up of the accounts receivable make Bingham's analysis more credible than Greisen's. The September 30, 1991, financial statement had a schedule showing the make up of the accounts receivable as being composed of over 64% of 90-day or older accounts:

      4 ABR 160 

Current	$89,607.73
30 days	92,826.43
60 days	49,114.82
90 days and over	414,033.52
Total	$645,582.50

At the preliminary injunction hearing, both parties acknowledged that they had to look over the records of BB&F to see if more reliable financial information is available to advise the court of the true financial status of the firm on October 28, 1991, the date of distribution. Since distribution was not made with the guidance of a financial statement prepared according to generally accepted accounting standards, it will be the Breezes' burden to show how the distribution was in compliance with AS 10.06.358(a)(2)(A). See, AS 10.06.358(e).

In final argument, the Breezes attempted to show they were still within the 1.25 ratio to comply with AS 10.06.358(a)(2)(A), by showing the Jeffcoat and real estate adjustment still left them at 1.27. This is a margin of $9,355.75 in a statement showing assets of $748,732 as calculated by the Breezes. The argument overlooked a number of other discrepancies with the September 30, 1991, financial statement which will reduce this ratio, in all likelihood, to one-to-one or less.

The balance of hardships is a close question, and the court will largely resolve the issue by requiring an early trial - The Breezes attempted to show lack of hardship to the bankruptcy estate by showing that the value of the ¼% interest held by the estate already is worth about $1.2 million. Defendants' Exhibit S. The bankruptcy trustee will have claims and expenses estimated at $430,000.

The Breezes' analysis is not acceptable because it uses an unrealistically low discount rate, 10%, which has the effect of increasing the present value. Secondly, it does not break down the potential recovery from the West McArthur River Units sufficiently to allow the court to segregate the projections from proven reserves from those defined as probable and possible.

William Stewart testified that lenders and investors rely principally on the proven reserves in valuing oil properties, whether for working or overriding royalty interest valuation. Thus, the proven reserves of about 8 million barrels, rather than the probable or possible of about 8 million barrels each, should be used. The Breezes' analysis       4 ABR 161  disingenuously fails to break down the three categories in an analytical way.

Stewart said that 20-25% was a ball park industry discount rate for the type of ORRI involved. I believe a rate toward the high end would be appropriate. We are left to surmise the rate of depletion of the proven reserves, but there is testimony to support that it would be greater in the earlier years (though possibly flat for three or four years) and then decline. The life of the proven reserves might be 10-12 years.

In final argument, the trustee attempted to show a best scenario, using a 25% discount rate, and a fast depletion of about $171,000. Thus if Boyko's ¼% is added to the bankruptcy estate's ¼%, and this is added to the Breezes' % ORRI, a present value of a little less than $600,000 for the % interest is indicated. From this must be taken a possible first lien in favor of Key Bank of Alaska for $120,000, leaving about $480,000 to cover claims of about $430,000. I find it is likely, if the bankruptcy trustee prevails over the Breezes in avoiding the transfer of the % ORRI and the ¼% Boyko interest, he will, over time, have enough to pay all the claims with interest.

On the other hand, given less sanguine projections, the volatility of oil prices, the hazards of the oil industry, and the possibility of the claims exceeding the amount, the trustee feels estate funds are being syphoned off which will most likely never be recoverable given the fact the Robert Breeze is not working and faces incarceration and loss of his law license, and Virginia Breeze is not working and the irrevocable trust has little ability to recompense the bankruptcy estate.

Neither of the Breezes are working now. Robert is under a medical disability for which he collects $7,000 per month and lives in the San Diego area. Virginia has no job and relies on the trust income for support. The hardship on them will be severe under the facts now known. They will not be able to pay their criminal and bankruptcy attorneys, for one thing.

To resolve this matter, I will allow the Breezes to draw the next three months income on the % ORRI held by the irrevocable trust, not to exceed $18,000, and hear the trial on the merits within the next three months.

      4 ABR 162 

This is a good case to invoke FRCivP 65(a)(2) to advance the trial on the merits. The parties indicated it would take a year to prepare. Given the ground work done by both parties for the preliminary injunction, the court will advance the trial to be held within the next three months, if possible.

DATED: October 5, 1995



HERBERT A. ROSS
U.S. Bankruptcy Judge