Background: Partnership Structure and Nominee Arrangement

Prior to HB2 Origination, LLC's bankruptcy filing, certain oil and gas investors—including insiders of debtor-affiliated entities—formed a Texas partnership to derive economic benefits from working interests in wells, equipment, pipelines, and appurtenant rights located in Webb County and Fayette County, Texas. HB2 held marketable title to 16.3446% of these interests and had initially funded the drilling and completion of the wells.

The business arrangement was structured through two agreements. The General Partnership Agreement provided that "the purpose of the Partnership shall be to derive the economic benefits from the Subject Properties." Under the Agreement, the partners were required to contribute capital to receive an interest in the partnership, and ownership of a partnership interest entitled a partner to allocations of profits and losses and to distributions of cash flow. HB2 did not contribute capital to the partnership and was not assigned a partnership interest. In connection with the General Partnership Agreement, HB2 entered into a Nominee Agreement with the partnership.

The GUC Trustee's Motion for Summary Judgment

Paul Jansen, in his capacity as GUC Trustee and successor-in-interest to HB2 Origination, LLC, moved for summary judgment on several issues relating to whether certain oil and gas interests constitute property of the bankruptcy estate. The motion challenged the partnership's various theories—including express trust, resulting trust, purchase money resulting trust, and constructive trust—asserting rights to the subject properties and related proceeds.

The Court's Rulings on Property of the Estate

The bankruptcy court issued a mixed ruling that largely favored the GUC Trustee. The court found that the GUC Trustee had not demonstrated that the partnership's express trust theory over the subject properties fails as a matter of law. However, the court ruled that to the extent the partnership asserts equitable trust theories over the subject properties, those theories fail.

Most significantly, the court held that "[i]f the Nominee Agreement created an express trust granting the Partnership an equitable interest in the Subject Properties, the equitable interest is avoidable under 11 U.S.C. § 544(a)(3)." This ruling invoked the trustee's strong-arm powers, which allow a bankruptcy trustee to avoid certain transfers that would be avoidable by a hypothetical bona fide purchaser of real property. It was undisputed that no assignment of the subject properties to the partnership was recorded in real property records, and legal title remained with HB2 as of the petition date.

Rulings on Proceeds and Refunds

The court further ruled that the partnership has no equitable interest in the Sale Proceeds, Prorated Refund, Working Interest Owner Payments, or Disbursement Amounts. Additionally, the court held that the partnership's express trust, resulting trust, purchase money resulting trust, and constructive trust theories as to the AFE Refunds all fail.

Implications for Unrecorded Interests

The decision underscores the critical importance of recording assignments and conveyances of oil and gas interests in real property records. Even where parties structure arrangements with nominee agreements and trust-like language, failure to record can render equitable interests avoidable in bankruptcy under § 544(a)(3)'s strong-arm powers, potentially bringing those interests into the bankruptcy estate despite the parties' intentions.