Matter of Haber Oil Co., Inc.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_____________________

No. 92-1481
_____________________

IN THE MATTER OF: HABER OIL, CO., INC.,

Debtor.

HABER OIL, CO., INC.,

Appellant,

v.

DAVID D. SWINEHART,

Appellee.

_____________________

No. 92-9067
_____________________

IN THE MATTER OF: HABER OIL COMPANY, INC.,
and JAY D. HABER,

Debtors,

HABER OIL COMPANY, INC.,

Appellant,

v.

DAVID SWINEHART,

Appellee.

********************************

_________________________________________________________________

Appeals from the United States District Court
for the Northern District of Texas
_________________________________________________________________
(January 12, 1994)
Before KING and BARKSDALE, Circuit Judges and DUPLANTIER*,
District Judge.

KING, Circuit Judge:

Just as medieval alchemists bent all their energies to

discovering a formula that would transmute dross into gold, so

too do modern creditors' lawyers spend prodigious amounts of time

and effort seeking to convert their clients' general, unsecured

claims against a bankrupt debtor into something more substantial.

The creditor's lawyer in this case achieved success in this

regard that can only be described as phenomenal, transforming the

lead of a breach of contract claim into the gold of a

constructive trust and, in turn, into the platinum of cash when

it turned out that the real property on which the trust was

belatedly to be imposed had been sold. Under our Bankruptcy

Code, such sorcery demands the highest attention to the

requirements of pleading and proof by its practitioner. Because

those requirements were not met, we are required to REVERSE in

part the decision of the court below.

I. BACKGROUND

A. Facts

The appellant in this case is the bankrupt debtor, Haber

Oil, Inc. ("Haber Oil"), a corporation that was involved in the

acquisition, promotion, and development of oil and gas leases.

*
District Judge of the Eastern District of Louisiana,
sitting by designation.

2
The appellee is one of Haber Oil's creditors, petroleum geologist

David Swinehart.

Swinehart and Haber Oil entered into a series of four

contracts, under the terms of which Swinehart agreed to locate,

evaluate, and recommend oil and gas drilling prospects to Haber

Oil. The dispute in this case concerns only the third and fourth

contracts. The third contract, dated July 9, 1982, expressly

superseded the prior contract and provided that Swinehart would

receive, as compensation for his services, a monthly retainer of

$8000 (subject to reduction for production revenues received by

Swinehart) and 50% of Haber Oil's carried working interest or

other retained revenue interest. The third contract was to

expire on December 31, 1983. Before the expiration of the third

contract, however, Swinehart and Haber Oil entered into the

fourth contract, dated November 21, 1983. The fourth contract,

which did not expressly supersede the third contract, provided

that it would go into effect on December 1, 1983, and would

expire on June 30, 1984. Under the fourth contract, Swinehart

was entitled to receive a monthly retainer of $6000 (subject to

reduction for production revenues received by Swinehart) and some

office and car expenses. Additionally, Swinehart was entitled to

a 6% working interest in wells drilled by Haber Oil on prospects

reviewed and recommended by Swinehart, and 25% of other interests

retained by Haber in prospects without drilled or completed

wells.

3
 It appears that Haber Oil's drilling program was largely

unsuccessful during much of the period the third contract was in

effect. While the third contract was in effect, and before the

parties executed the fourth contract, Swinehart reviewed and

recommended to Haber Oil six prospects, namely the West Mohat,

Cooks Lake, Rosenberg, Deep Bayou, Northwest Englehart, and Black

Jack Creek East prospects ("the disputed properties"). Drilling

on the disputed properties did not begin until after the

effective date of the fourth contract, and significant amounts of

oil and gas were eventually discovered on some of the disputed

properties. No attempt to drill was ever made on the Black Jack

Creek East prospect.

The relationship between Swinehart and Haber Oil grew ever

more strained, and a dispute arose between Swinehart and Haber

Oil regarding the ownership interest due Swinehart. Finally, in

the spring of 1984, Haber Oil sent Swinehart a notice that it was

terminating their contractual relationship. Swinehart, in turn,

filed a lawsuit against Haber Oil and its president, Jay Haber,

in August 1984 in Texas state district court ("the state

lawsuit"). In the state lawsuit, Swinehart sought, among other

things, a constructive trust to be imposed on certain properties

based on breach of a confidential relationship between Swinehart

and Haber Oil, an accounting, and compensatory and punitive

damages. It appears that purchasers of the minerals produced

from the disputed properties paid funds into the state court's

registry during the pendency of the state lawsuit, awaiting the

4
eventual determination of ownership. This litigation was still

pending when Haber Oil filed for protection under Chapter 11 of

the United States Bankruptcy Code on March 2, 1987.

B. Procedural History

After Haber Oil filed for bankruptcy, Swinehart filed a

proof of claim in the bankruptcy court seeking damages in the

amount of $2,300,000. Swinehart did not claim that he held any

security interest for his claim, but he apparently attached to

his proof of claim his pleadings from the state lawsuit against

Haber Oil and Jay Haber. Haber Oil filed an objection to

Swinehart's claim, alleging that the claim was "disputed

contingent and unliquidated," and also alleging that more than

enough funds had been placed in escrow to satisfy Swinehart's

claim. Swinehart responded to the objection, alleging that he

would be entitled to priority status as to part of his claim

following a favorable outcome in his pending state lawsuit.

On July 22, 1988, Swinehart filed an "expedited application

to temporarily allow claim for the purpose of voting on plan of

reorganization." Three days later he filed an objection to

confirmation of the plan of reorganization, contending that the

plan would discharge his claim pending in the state court without

ever being adjudicated.

At this point, a significant discrepancy develops between

the account of the proceedings given by Swinehart in his brief

and the documents actually contained in the record. According to

Swinehart's brief before this court, he filed an adversary

5
proceeding on July 21, 1988 (elsewhere in his brief he states

that the date was July 27, 1988), raising issues of contract

application and fraud and seeking the imposition of a

constructive trust. He also states that the bankruptcy court

logged this proceeding as Adversary No. 288-2054. Swinehart,

however, does not provide any citations to the record to

substantiate these assertions, and we have been unable to

discover any complaint or summons in the record as would have

been necessary to initiate an adversary proceeding. We do find,

however, the above-mentioned "objection to confirmation of plan,"

which was filed on July 25, 1988, under docket numbers 287-20131

and 287-20130 (the case numbers assigned to the Haber Oil and Jay

Haber bankruptcies). Needless to say, an objection to a

reorganization plan is a far cry from the formal filings required

to initiate an adversary proceeding. The objection did state

that Swinehart was seeking a constructive trust in the pending

state lawsuit, and that a discharge in bankruptcy without

resolution of the state lawsuit would allow the debtor or its

successors to "unjustly and inequitably" hold title to interests

rightfully belonging to Swinehart.

The bankruptcy court approved the debtor's plan of

reorganization by order entered on July 28, 1988. Under the

plan, McFadden Acquisition Corporation ("McFadden"), an unrelated

entity, was to advance to Haber Oil the cash required to fund the

plan and was to obtain a security interest in all property in the

Haber Oil estate. Although Swinehart is not specifically treated

6
in the plan, there is a handwritten notation by the bankruptcy

judge at the bottom of the approval order to the effect "that

Haber Oil will not seek to withdraw the funds held in escrow on

account of the Swinehart [claim]." The post-confirmation

committee filed an objection to Swinehart's claim in October

1988. Swinehart filed a response to the committee's objection,

in which he stated, "The Post-Confirmation Committee is supposed

to represent the interests of all the general unsecured creditors

of J. D. Haber and Haber Oil Company, Inc. David D. Swinehart is

a member of that class, having filed a valid timely Proof of

Claim in each of these matters."

The record next discloses that counsel for Haber Oil filed a

trial memorandum in support of the objection to Swinehart's claim

on November 22, 1988. The trial memorandum is devoted largely to

the issue of whether Swinehart's compensation with respect to the

disputed properties should be determined by the third contract or

the fourth contract (Haber Oil arguing that the fourth contract

should govern). On November 30, 1988, counsel for Swinehart

filed an unsigned trial memorandum in support of Swinehart's

claim; in this document, that claim has ballooned into an amount

"in excess of 4.35 million dollars." Swinehart's counsel also

alleged in his memorandum that a "confidential relationship"

existed between Swinehart and Haber Oil in connection with their

joint activities, and the memorandum requested the court to

impose a constructive trust on the disputed properties and award

Swinehart either his ownership interests in the properties or

7
their fair market value. The memorandum also contains a general

allegation of fraud.

The bankruptcy court held a hearing on these matters on

December 1, 1988. The clerk called the case as "case number 287-

20131 and 287-20130, Haber Oil Company, Inc., Jay D. Haber on an

objection to the claim of David Swinehart brought by the debtors,

and it's also adversary number 288-2054, David Swinehart versus

Haber Oil Company and Jay D. Haber for trial." The bankruptcy

court decided that two issues were presented for its decision:

(1) whether the third or fourth contract governed Swinehart's

rights, and (2) accounting and valuation. The court limited the

scope of the hearing to the first issue. After hearing

testimony, the bankruptcy court ruled that the third contract

governed Swinehart's rights and that the fourth contract was to

operate only prospectively, with respect to new prospects

reviewed and recommended by Swinehart. The court ordered Haber

Oil to provide a complete accounting of the amounts due Swinehart

under the court's ruling, and it scheduled a hearing in March

1989 for the purpose of addressing any accounting issues, noting

expressly that the "adversary proceeding rules would apply" and

stating that the parties would be given copies of the court's

instructions concerning adversary proceedings. Finally, the

court recommended to Haber Oil that it recover the properties if

it had conveyed away Swinehart's interests in them.

On December 9, 1988, a motion was filed on behalf of Haber

Oil urging the bankruptcy court to determine that the ongoing

8
claims objection proceedings were related proceedings rather than

core proceedings. Haber Oil sought this determination in order

to prevent the bankruptcy court from entering binding findings of

fact and conclusions of law. Swinehart responded to the motion.

This matter was consolidated with the other matters reserved by

the bankruptcy court for later decision at the December 1, 1988,

hearing. Haber Oil and Swinehart filed pretrial memoranda, and

the bankruptcy court heard these matters on July 20 and 21, 1989.

The bankruptcy court denied the December 9, 1988, "motion to

determine related proceeding character" by written order entered

July 26, 1989, because the motion was signed by Jay Haber's

attorney and not by Haber Oil's attorney.

The bankruptcy court did not enter its written order and

award concerning Swinehart's claim until September 4, 1990. The

court found that the third contract governed Swinehart's claim

for compensation with respect to the disputed properties. The

court further found that "since the spud date of the first well

on each of the prospects which are the subject of this dispute,

Swinehart has owned the . . . percentage and type interest in the

prospect" consistent with the terms of the third contract. The

court then directed Haber Oil to prepare in recordable form an

assignment of interest for each affected property reflecting the

amount and type of Swinehart's interest and backdated to the spud

date of the first well on each property. With respect to the

funds being held in escrow in the state court (roughly $410,000),

the court found that Swinehart owned those funds and Haber Oil

9
had no claim to them. Observing that Haber Oil had contended

that the real property interests could not be given to Swinehart

because they had been sold to McFadden, the court noted that

Swinehart had "agreed to accept in cash the present value of

those interests." Thus, the court ordered that Swinehart was to

execute documents assigning his interests in those properties to

Haber Oil, with an effective date of sale of January 1, 1989, and

Haber Oil was to pay Swinehart some $971,000 for those interests.

The court also allowed Swinehart an unsecured class 5 claim

against Haber Oil in the amount of some $996,000, entitling him

to some $318,000 under the confirmed plan of reorganization.

Haber Oil filed a motion to reconsider and vacate the

September 4, 1990, award, and it also moved to alter or amend the

judgment and for a new trial. The bankruptcy court held a

hearing on these matters on October 19, 1990, at which time Haber

Oil and several entities that had purchased minerals from the

disputed properties argued strenuously that the bankruptcy court

should not have awarded Swinehart interests in real property in

the September 4 order because the protracted litigation leading

up to that order had not been a full-fledged adversary proceeding

as required by the bankruptcy rules, but rather a mere contested

matter. On November 16, 1990, the bankruptcy court denied the

motion for new trial and modified its September 4 order to

reflect that it adjudicated only the rights of Haber Oil and

Swinehart vis-a-vis the funds held in escrow in the state

10
lawsuit, and Haber Oil filed a notice of appeal of the September

4 order to the district court.

Haber Oil also initiated an adversary proceeding by filing a

complaint to avoid transfer of real property interests under 11

U.S.C. § 544 on October 3, 1990. The complaint requested the

bankruptcy court to void Swinehart's unrecorded property

interests by virtue of the strong-arm powers conferred on Haber

Oil by § 544 at the time of the commencement of Haber Oil's

Chapter 11 bankruptcy proceeding. In Swinehart's response, he

contended that the litigation culminating in the September 4

order was a true adversary proceeding and not mere "claims

litigation" as asserted in Haber Oil's complaint. He also

asserted 11 U.S.C. § 541(d) as a defense to Haber Oil's claim of

§ 544 powers. On March 7, 1991, stipulations of fact and a

stipulation on the admissibility of exhibits were filed with the

bankruptcy court. The bankruptcy court entered an order

dismissing Haber Oil's adversary proceeding with prejudice on

July 1, 1991. The court held that § 544 was not applicable

because the interests in question were awarded to Swinehart post-

petition rather than pre-petition; the court further held that

Haber Oil could not avail itself of the court's equitable powers

because it was seeking "to profit from its own misdeeds" and

because "Chapter 11 of the Bankruptcy Code must not be used as a

tool to perpetrate a fraud on a third party." The court also

noted that avoidance of the transactions in question would not

benefit the creditors of the bankrupt because they were

11
contractually limited to the recovery promised them under the

plan of reorganization. Haber Oil filed notice of its appeal

from the dismissal to the district court.

The United States District Court for the Northern District

of Texas affirmed the dismissal of Haber Oil's adversary

proceeding on April 30, 1992, and it affirmed the September 4,

1990, bankruptcy court order on November 10, 1992. Haber Oil

appeals from both of these district court orders in this

consolidated appeal.

II. STANDARD OF REVIEW

This court reviews findings of fact by the bankruptcy court

under the clearly erroneous standard and decides issues of law de

novo. Killebrew v. Brewer (In re Killebrew), 888 F.2d 1516, 1519

(5th Cir. 1989). "A finding of fact is clearly erroneous 'when

although there is evidence to support it, the reviewing court on

the entire evidence is left with a firm and definite conviction

that a mistake has been committed.'" Wilson v. Huffman (In re

Missionary Baptist Found. of Am., Inc.), 712 F.2d 206, 209 (5th

Cir. 1983) (quoting United States v. United States Gypsum Co.,

333 U.S. 364, 395 (1948)).

III. ANALYSIS

A. Constructive Trust

We turn first to the crux of this case, which is the

bankruptcy court's holding that

12
 since the spud date of the first date of the first well
on each of the prospects which are the subject of this
dispute, Swinehart has owned the indicated percentage
and type interest in the prospect, the leases and lands
which make up the prospect and each and every well
drilled by or operated under the auspices of Haber Oil
on such prospect and that Swinehart has been entitled
to receive the proceeds from the sale of hydrocarbons
produced by these wells attributable to his interests
in such wells since that time.

The court thus held that Swinehart owned all the funds paid by

purchasers of minerals from the disputed properties that were

being held in escrow due to the pending state lawsuit. Because

Haber Oil contended before the bankruptcy court that the disputed

properties had been sold to McFadden, and because Swinehart had

"agreed to accept in cash the present value" of his interests in

those properties, the court directed Swinehart to execute

documents assigning his interests in the disputed properties to

Haber Oil, and it directed Haber Oil to pay for those interests.

Both parties characterize the bankruptcy court's decision as

imposing a constructive trust on the disputed properties. In

fact, the bankruptcy court's award to Swinehart combined some

features of a constructive trust (primarily in the form of

priority over other creditors with respect to trust property)

with an award of damages (giving Swinehart cash because the trust

res was unavailable). Haber Oil argues that the bankruptcy

court's award is on a record devoid of the pleadings, proof, and

findings of fraud that are part and parcel of the constructive

trust remedy. Swinehart, on the other hand, defends the

bankruptcy court's decision to impose a constructive trust

remedy. It is our task, then, to determine whether the

13
bankruptcy court properly awarded Swinehart the value of his

interests in the disputed properties in "hundred-cent dollars."

1. Constructive Trusts and the Bankruptcy Code

We begin our analysis by reviewing the interface between

federal bankruptcy law and state laws providing for the

imposition of a constructive trust.

It has been well and often said that "ratable distribution

among all creditors is one of the strongest policies behind the

bankruptcy laws." Torres v. Eastlick (In re North Am. Coin &

Currency, Ltd.), 767 F.2d 1573, 1575 (9th Cir. 1985), cert.

denied, 475 U.S. 1083 (1986); see also Buckingham v. McLean, 54

U.S. (13 How.) 151, 166 (Dec. Term 1851) (describing the ratable

distribution of property as "one of the two great objects of the

[bankruptcy] law"); American Nat'l Bank v. MortgageAmerica Corp.

(In re MortgageAmerica Corp.), 714 F.2d 1266, 1274 (5th Cir.

1983) (noting that the fundamental bankruptcy policy of "equality

of distribution among creditors" permeates almost every provision

of the Bankruptcy Code).

In effecting its underlying policies, the Bankruptcy Code

defines the bankruptcy estate very broadly, encompassing most of

the property held by the bankrupt. 11 U.S.C. § 541. Herein,

however, lies the potentially uneasy interaction between federal

and state law: in the absence of controlling federal bankruptcy

law, the substantive nature of the property rights held by a

bankrupt and its creditors is defined by state law. Chiasson v.

J. Louis Matherne and Assocs. (In re Oxford Management, Inc.), 4

14
F.3d 1329, 1334 (5th Cir. 1993); see also Butner v. United

States, 440 U.S. 48, 55 (1979) ("Property interests are created

and defined by state law. Unless some federal interest requires

a different result, there is no reason why such interests should

be analyzed differently simply because an interested party is

involved in a bankruptcy proceeding."). The states can therefore

have some effect on the operation of the federal bankruptcy

system by exercising their power to define property rights. We

have emphasized that "[s]tate law defining property rights may

not, of course, go so far as to manipulate bankruptcy

priorities." Vineyard v. McKenzie (In re Quality Holstein

Leasing), 752 F.2d 1009, 1014 n.10 (5th Cir. 1985).

The constructive trust doctrine common to many states takes

on great significance in bankruptcy cases because of § 541(d) of

the Code. Under that provision, if a debtor holds only legal

title and not an equitable interest in property at the

commencement of the bankruptcy case, that property becomes

property of the estate "only to the extent of the debtor's legal

title to such property, but not to the extent of any equitable

interest in such property that the debtor does not hold." 11

U.S.C. § 541(d). Under the usual version of the constructive

trust doctrine, one who has been unjustly enriched at another's

expense is treated under state law much like a trustee, holding

legal title for the injured party's benefit. Emily L. Sherwin,

Constructive Trusts in Bankruptcy, 1989 U. ILL. L. REV. 297, 301

(1989). We have thus consistently recognized that § 541(d)

15
accords the beneficiary of a constructive trust, properly imposed

under state law, the right to recover the trust property from the

bankruptcy trustee or the debtor. E.g., In re Quality Holstein

Leasing, 752 F.2d at 1012; Georgia Pac. Corp. v. Sigma Serv.

Corp., 712 F.2d 962, 968 (5th Cir. 1983); see also 4 COLLIER ON

BANKRUPTCY ¶ 541.13 (Lawrence P. King et al. eds., 15th ed. 1993)

("Where the existence of a [constructive] trust has been

established, the bankruptcy trustee will be ordered to turn over

the property or proceeds [to the trust beneficiary] . . . .").

Because § 541(d) excludes property subject to a constructive

trust from the bankruptcy estate, we have also held that § 541(d)

prevails against the trustee's strong-arm powers under § 544.

Sandoz v. Bennett (In re Emerald Oil Co.), 807 F.2d 1234, 1238

(5th Cir. 1987); In re Quality Holstein Leasing, 752 F.2d at

1012-15; see also Wisconsin v. Reese (In re Kennedy & Cohen,

Inc.), 612 F.2d 963, 966 (5th Cir.), cert. denied, 449 U.S. 833

(1980). Other courts have agreed with this approach. See, e.g.,

Universal Bonding Ins. Co. v. Gittens and Sprinkle Enters., Inc.,

960 F.2d 366, 372 & n.2 (3d Cir. 1992); Sanyo Elec., Inc. v.

Howard's Appliance Corp. (In re Howard's Appliance Corp.), 874

F.2d 88, 93-95 (2d Cir. 1989). But see Carlos J. Cuevas,

Bankruptcy Code Section 544(a) and Constructive Trusts: The

Trustee's Strong Arm Powers Should Prevail, 21 SETON HALL L. REV.

678, 723-69 (1991) (arguing that "a trustee should be immune from

the affirmative defense of a constructive trust when using

16
section 544(a) to avoid an . . . unrecorded interest in real

property").

The remedy of a constructive trust is thus a potent one in

bankruptcy because it gives the successful claimant "priority

over the defendant's unsecured creditors" to the extent of the

property subject to the trust. Sherwin, supra, at 305. As a

result, creditors of the bankrupt debtor have every incentive to

argue that their unsecured claims are eligible under state law

for the remedy of a constructive trust. Because the constructive

trust doctrine can wreak such havoc with the priority system

ordained by the Bankruptcy Code, bankruptcy courts are generally

reluctant "to impose constructive trusts without a substantial

reason to do so." Neochem Corp. v. Behring Int'l, Inc. (In re

Behring Int'l, Inc.), 61 B.R. 896, 902 (Bankr. N.D. Tex. 1986);

see also Dinkel Enters., Inc. v. Colvin (In re Bailey Pontiac,

Inc.), 139 B.R. 629, 635 (N.D. Tex. 1992) ("A constructive trust

is an equitable remedy that should not be imposed cavalierly,

especially in the context of a bankruptcy proceeding."). The

burden of establishing the existence of the constructive trust

rests on the claimant, as does the burden of identifying or

tracing the trust property. In re Oxford Management, 4 F.3d at

1335 & n.8; see also In re Emerald Oil, 807 F.2d at 1238 ("To

profit from § 541(d), a party must demonstrate that state law

impresses property that the debtor holds with an equitable

interest in his favor that attached prior to bankruptcy.").

17
 From the foregoing, it is clear that we must survey the law

of Texas before we can determine whether Swinehart adequately

demonstrated that he was entitled to a constructive trust in the

disputed properties at the time Haber Oil's bankruptcy case

commenced. See In re Quality Holstein Leasing, 752 F.2d at 1014

n.10 ("[S]ection 541(d) overcomes the trustee's section 544

powers only where state law confers equitable title on a third

party effective prior to the commencement of the bankruptcy

case."). Under Texas law, a constructive trust is not actually a

trust, but rather an equitable remedy imposed by law to prevent

unjust enrichment resulting from an unconscionable act. Ellisor

v. Ellisor, 630 S.W.2d 746, 748 (Tex. App.SQHouston [1st Dist.]

1982, no writ); Lowther v. Lowther, 578 S.W.2d 560, 562 (Tex.

Civ. App.SQWaco 1979, writ ref'd n.r.e.); see also Monnig's Dep't

Stores, Inc. v. Azad Oriental Rugs, Inc. (In re Monnig's Dep't

Stores, Inc.), 929 F.2d 197, 201 (5th Cir. 1991) (applying Texas

law). The two circumstances that generally justify the

imposition of a constructive trust are actual fraud and the

breach of a confidential or fiduciary relationship. Meadows v.

Bierschwale, 516 S.W.2d 125, 128 (Tex. 1974); Thigpen v. Locke,

363 S.W.2d 247, 250-53 (Tex. 1962); Grace v. Zimmerman, 853

S.W.2d 92, 97 (Tex. App.SQHouston [14th Dist.] 1993, no writ);

Mims v. Beall, 810 S.W.2d 876, 881 (Tex. App.SQTexarkana 1991, no

writ); see also In re Monnig's Department Stores, 929 F.2d at 201

(applying Texas law). We have summarized the elements of a

constructive trust under Texas law as (1) breach of a fiduciary

18
relationship or, in the alternative, actual fraud, (2) unjust

enrichment of the wrongdoer, and (3) tracing of the property to

an identifiable res. In re Monnig's Department Stores, 929 F.2d

at 201; see also Rosenberg v. Collins, 624 F.2d 659, 663 (5th

Cir. 1980) (holding that, under Texas law, a constructive trust

can attach only "to some identifiable property which can be

traced back to the original property acquired by fraud").

Although Swinehart predicated his constructive trust claim

in the state lawsuit on breach of a "confidential relationship,"

at oral argument Swinehart expressly disavowed any effort on his

part, in the bankruptcy court or on appeal, to rely on breach of

a fiduciary relationship, claiming instead that he had relied and

continued to rely solely on the theory of actual fraud to justify

the bankruptcy court's imposition of a constructive trust in his

favor. We therefore concern ourselves only with the elements of

fraud in Texas. It is well-established in Texas that a party

claiming fraud must prove: (1) a material representation was

made; (2) the representation was false; (3) the speaker made the

representation knowing it was false or made it recklessly without

any knowledge of its truth and as a positive assertion; (4) the

speaker made the representation with the intent that it be relied

upon by the party; (5) the party acted in reliance on the

misrepresentation; and (6) the party thereby suffered injury.

Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 723 (Tex.

1990); DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex.

1990), cert. denied, 111 S. Ct. 755 (1991); see also Jackson v.

19
Speer, 974 F.2d 676, 679 (5th Cir. 1992) (applying Texas law);

Walker v. Federal Deposit Ins. Corp., 970 F.2d 114, 122 (5th Cir.

1992) (applying Texas law). We note that a promise of future

performance does not constitute actionable fraud unless the

promisor did not intend to perform at the moment he made his

promise. In re Bailey Pontiac, 139 B.R. at 636 (citing Spoljaric

v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986)).

Swinehart defends the decisions of the bankruptcy court,

arguing strenuously that the court made sufficient findings to

justify the remedy it awarded Swinehart and that the evidence

supported that finding. We thus turn next to the issues of

pleading, proof, and judicial findings.

2. Pleadings

We may begin our analysis with the proposition that if

Swinehart's claim against the Haber Oil estate was one seeking an

equitable interest in property, such as a constructive trust,

rather than a general unsecured claim, it was incumbent on him to

file an adversary proceeding in the bankruptcy court. A

proceeding "to recover money or property" is an adversary

proceeding, as are proceedings "to determine the validity,

priority, or extent of a lien or other interest in property" and

"to obtain an injunction or other equitable relief." Bankruptcy

Rule 7001(1), (2), (7); see also Village Mobile Homes, Inc. v.

First Gibraltar Bank, FSB (In re Village Mobile Homes, Inc.), 947

F.2d 1282, 1283 (5th Cir. 1991) (holding that a claim for damages

for conversion is an adversary proceeding); In re Jensen, 946

20
F.2d 369, 372 (5th Cir. 1991) ("[A]n accounting and a

constructive trust are traditionally equitable remedies.").

Adversary proceedings are governed by Part VII of the Bankruptcy

Rules, Bankruptcy Rule 7001, and the rules in Part VII generally

"either incorporate or are adaptions of most of the Federal Rules

of Civil Procedure." Id. advisory committee's note.

Swinehart agrees that he made a demand for relief that

necessitated an adversary proceeding under Bankruptcy Rule 7001,

but he insists that the proceedings leading up to the bankruptcy

court's September 4, 1990, order were in fact a full-blown

adversary proceeding "for all substantive purposes." As we have

noted, Swinehart variously states in his brief that he filed the

adversary proceeding on July 21 or July 27, 1988. If Swinehart's

statement is true, then he must have filed a complaint in keeping

with Federal Rule of Civil Procedure 3, which is incorporated by

Bankruptcy Rule 7003, and obtained and served a summons in

keeping with Bankruptcy Rule 7004. See also In re Village Mobile

Homes, 947 F.2d at 1283 ("As [an adversary proceeding], the claim

required the filing of a 'complaint.'"). Yet, Swinehart does not

direct us to those documents in the appellate record, and our

thorough search of the record has not brought them to light. As

a result, other key elements of adversary proceedings are

missing, including an allegation of jurisdiction and a statement

that the proceeding was "core or non-core." Bankruptcy Rule

7008(a). Additionally, Bankruptcy Rule 7016 adopts Federal Rule

of Civil Procedure 16 in adversary proceedings, meaning that a

21
pretrial order should have been entered by the bankruptcy court

to "control the subsequent course of the action unless modified."

FED. R. CIV. P. 16(e). We find no pretrial order in the record,

and the absence of a pretrial order has created more problems for

this court than all of the other deficiencies in this record

combined.1

Having detailed the deficiencies in the proceedings below,

we now survey the pleadings that do appear in the record.

Several of these pleadings relate to the plan confirmation

process. On July 22, 1988, Swinehart filed an "expedited

application to temporarily allow claim for the purpose of voting

on plan of reorganization." This document states that Swinehart

was seeking, inter alia, a constructive trust in the state

lawsuit, but it does not state the amount of his claim against

the bankruptcy estate. He filed an objection to confirmation of

the reorganization plan on July 25, 1988. The objection also

states that Swinehart was seeking a constructive trust in the

state lawsuit. The objection does not seek relief from the

bankruptcy court, except in an assertion that "[t]he primary

post-confirmation fund as defined in the Plan should include a

contested claim reserve fund to satisfy claims currently in

litigation in collateral state court proceedings." On July 28,

1
The mere fact that the clerk of the court announced the
number of the case as including the adversary number cited by
Swinehart does not change the analysis. Ordinary claims
litigation is not transformed into an adversary proceeding simply
by labelling it as one. Moreover, the clerk's announcement
certainly did not afford Haber Oil the procedural safeguards of
an adversary proceeding.

22
1988, the bankruptcy court confirmed the reorganization plan, but

included in the confirmation order an additional order "that

Haber Oil will not seek to withdraw the funds held in escrow on

account of the Swinehart [claim]."

The next round of pleadings, as might be expected post-

confirmation, focused on Swinehart's claim and the debtors'

objections thereto. On October 5, 1988, the committee charged

with responsibility under the plan for objecting to claims filed

an objection to allowance of Swinehart's "unsecured claim in the

Jay D. Haber bankruptcy in the amount of $2,300,000.00" and his

"unsecured claim in the same amount in the Haber Oil Co., Inc.

bankruptcy." No reference was made to an adversary proceeding or

to a claim for a constructive trust or other equitable relief.

Swinehart responded. It is important to note that Swinehart's

response not only fails to mention any claim for a constructive

trust, specific performance, or any other equitable remedy, but

also states as follows:

The amount of the unsecured claims filed by David
D. Swinehart is a good faith representation of the
amount of damages suffered by David D. Swinehart as a
result of the actions of Jay D. Haber and Haber Oil,
Inc. These matters have as yet to be adjudicated, but
are scheduled for hearing before this court on November
28, 1988.

(emphasis added). Not surprisingly, the trial memorandum filed

on November 22, 1988, by counsel for Jay Haber on behalf of Jay

Haber and Haber Oil is absolutely silent on the subjects of fraud

and constructive trusts, but rather devotes much attention to the

issue of whether the third or fourth contract should govern

23
Swinehart's rate of compensation for the disputed properties. On

November 30, 1988 (the day before the hearing commenced in the

bankruptcy court), Swinehart's counsel filed its "trial memo in

support of claim of D. D. Swinehart." In this document, for

apparently the first time in the bankruptcy proceedings,

Swinehart prays for a constructive trust to be imposed on the

disputed properties. The memo continues, "In the event the court

is unable to award to Swinehart actual ownership interests in the

oil and gas properties, Plaintiff prays the court will award

damages for the fair market value of the reserves for those

properties in which Swinehart has an interest." No predicate for

the imposition of a constructive trust is presented in

Swinehart's request for a constructive trust. Swinehart does

allege in his statement of facts, however, that a "confidential

relationship" existed between him and the Haber defendants, and

later in the memo, Swinehart claims, "All of the actions of Haber

and Haber Oil which have unjustifiably deprived Plaintiff [of]

the receipt of proceeds due to him are being undertaken

willfully, maliciously, and fraudulently by the Haber

Defendants." In an equally conclusory passage, Swinehart alleges

in the alternative that the actions of Haber Oil constituted

conversion of Swinehart's interests.

To sum up, then, Swinehart had filed a lawsuit in state

court against Jay Haber and Haber Oil seeking a variety of

remedies, such as compensatory and punitive damages and a

constructive trust, before the Haber defendants filed for

24
bankruptcy. From his very first involvement in the bankruptcy

proceedings, Swinehart's conduct was consistent with that of an

unsecured creditor. Although he occasionally adverted to the

fact that he was seeking a constructive trust in the pending

state lawsuit, these references always occurred in conjunction

with actions taken to protect his unsecured claim against Haber

Oil. These actions include his filing of an unsecured proof of

claim, his application to have his claim allowed for the purpose

of voting on the plan of reorganization, and his objection to the

plan, which includes a passage urging the primary post-

confirmation fund to include a "contested claim reserve fund to

satisfy contested claims currently in litigation in collateral

state court proceedings." Not until literally the eve of the

hearing on December 1, 1988, did Swinehart attempt to make his

state constructive trust claim an issue in the federal bankruptcy

proceedings. As will be seen, this failure on Swinehart's part

is fatal to his claim that Haber Oil effectively received all the

procedural protection guaranteed by the adversary proceeding

rules.

The defects in the above-listed pleadings and proceedings,

if they are viewed as an attempted adversary proceeding, are

legion. As we have already stated, we find no pleadings in the

record to indicate that Swinehart ever attempted to comply with

the requirements of the bankruptcy rules governing adversary

proceedings. Even if Swinehart's trial memo could have sufficed

as a bare-bones complaint had it been filed and served in a

25
timely manner, it conspicuously fails to comply with the long-

standing requirement that, in a pleading averring fraud, "the

circumstances constituting fraud . . . shall be stated with

particularity." FED. R. CIV. P. 9(b) (made applicable to

adversary proceedings by Bankruptcy Rule 7009). Although the

defendant's state of mind may be averred generally, the party

claiming fraud must allege "the existence of facts and

circumstances sufficient to warrant the pleaded conclusion that

fraud ha[s] occurred." Glinka v. Dartmouth Banking Co. (In re

Kelton Motors Inc.), 121 B.R. 166, 187 (Bankr. D. Vt. 1990)

(quoting Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 119 (2d

Cir. 1982)); see also Unimobil 84, Inc. v. Spurney, 797 F.2d 214,

217 (5th Cir. 1986) ("To state a cause of action for fraud,

however, requires a plaintiff to allege with particularity the

defendant's acts which the plaintiff contends amount to fraud.");

Askanase v. Fatjo, 148 F.R.D. 570, 574 (S.D. Tex. 1993) ("The

allegations should allege the nature of the fraud, some details,

a brief sketch of how the fraudulent scheme operated, when and

where it occurred, and the participants."). Bankruptcy courts

should and do insist that the stringent standard imposed by

Bankruptcy Rule 7009 be observed by parties claiming fraud,

particularly if the party asserting fraud has first hand

knowledge of the fraudulent transaction. In re Kelton Motors,

121 B.R. at 187. In short, Swinehart did not satisfy the

pleading requirements imposed in bankruptcy proceedings on

creditors who wish to assert claims based on fraud.

26
 Swinehart's contention that, "for all substantive purposes,

an adversary proceeding was held" suggests that Haber Oil may

have waived compliance with the requisites of an adversary

proceeding. We have recognized that such a waiver is possible.

In re Village Mobile Homes, 947 F.2d at 1283. But see In re

McClain Airlines, Inc., 80 B.R. 175, 180 (Bankr. D. Ariz. 1987)

("[F]ailure to proceed by complaint when one is required is

reversible error."). This case, however, does not present an

appropriate circumstance for a finding of waiver. Swinehart

argues that "[a]ll issues then existing between Haber Oil and

Swinehart were fully ventilated." See Trust Corp. v. Patterson

(In re Copper King Inn, Inc.), 918 F.2d 1404, 1407 (9th Cir.

1990) (holding that a party had waived its right to an adversary

proceeding because an "extensive hearing and subsequent briefing"

gave the party "ample time to air its position"). The difficulty

with this position is that the record shows that Haber Oil was

not given proper notice prior to the commencement of the post-

confirmation proceedings in the bankruptcy court that it was

being called upon to defend claims of fraud and constructive

trust rather than a simple unsecured contract claim. Cases

suggest that courts should not find waiver of the procedural

protections required in adversary proceedings unless the parties

are apprised of and have a chance to address all the issues being

decided. See, e.g., In re Copper King Inn, 918 F.2d at 1407

(noting that the party against whom waiver was asserted did not

show that it was "materially prejudiced by the course of

27
events"). Because none of Swinehart's actions up to the eve of

the hearing suggested that he was seeking to enforce anything but

an unsecured claim in the federal bankruptcy proceedings, Haber

Oil cannot be held to have waived the adversary proceeding rules

in this case.

The instant case demonstrates the difficulties that are apt

to arise if the bankruptcy court too easily permits parties to

circumvent the rules governing adversary proceedings. For

instance, the informality of the proceedings below created a

substantial question as to whether the proceedings were core or

non-core proceedings; indeed, the attorneys for Jay Haber filed a

motion (on Haber Oil's behalf) soon after the bankruptcy court

orally rendered its ruling from the bench on December 1, 1988,

seeking a determination that the proceedings were mere "related

proceedings" instead of core proceedings. The adversary

proceeding rules are designed precisely to assist the bankruptcy

court in resolving this type of controversy early in the

proceedings. 9 COLLIER ON BANKRUPTCY, supra, at ¶ 7008.03. Because

Haber Oil was entitled to receive notice of the nature of

Swinehart's claims against itSQnot to mention specific notice of

the acts or omissions claimed to be fraudulentSQand Haber Oil

apparently did not receive such notice as required by the

bankruptcy rules governing adversary proceedings and claims of

fraud, the bankruptcy court erred by reaching and ruling on

Swinehart's claim seeking imposition of a constructive trust.

3. Proof and Findings

28
 We have seen that the pleadings and proceedings below were

seriously defective. The deficiencies in the evidence in support

of Swinehart's constructive trust claim and in the bankruptcy

court's findings, however, were more grievous still. Perhaps

recognizing these deficiencies, Swinehart does not direct our

attention to any portions of the record that demonstrate specific

fraudulent conduct by Haber Oil; indeed, Swinehart's own

statement of the facts does not refer to a single

misrepresentation that might constitute a fraudulent act. In

lieu of specific citations to evidence of fraud in the record,

Swinehart merely alleges in his brief that "the actions of Haber

Oil were replete with fraudulent undertones." Our independent

review of the record, particularly the transcripts of the

hearings held before the bankruptcy court, reveals the cause of

Swinehart's reticenceSQrecord evidence of the elements of fraud

is lacking.

We turn first to the evidence adduced at the December 1,

1988, hearing, after which the bankruptcy court orally advised

Haber Oil to reacquire any of Swinehart's interests that might

have been conveyed away. Swinehart testified primarily about the

circumstances surrounding the negotiation of the fourth contract

and his understanding that the contract applied only

prospectively. He also testified that in 1983 Haber Oil fell

behind in paying him monies to which he was entitled under the

contract then in effect and that Jay Haber continually made

excuses to Swinehart to put off paying him. Apparently Jay Haber

29
often told Swinehart that an accounting was necessary and would

be forthcoming, and he also said that the revenues and the

expenses attributable to Swinehart's interests were probably "a

wash." Swinehart also contradicted Jay Haber's testimony from

earlier in the hearing regarding the reasons Jay Haber ultimately

terminated Haber Oil's relationship with Swinehart.2 At the end

of the hearing, in closing argument, Swinehart's attorney agreed

with Haber Oil's attorney's characterization of the issue before

the court as "a fairly plain and simple contractual dispute."

Swinehart also testified at the second hearing, held July

20-21, 1989. The purpose of this hearing, as the bankruptcy

court explained it at the end of the first hearing, was simply to

resolve any lingering issues of accounting and valuation, and the

opening statement by Haber Oil's attorney indicates his belief

that the court's award to Swinehart of "prospect profit and the

unassigned interest" arose out of a "pre-petition breach of

contract, which is a claim for monetary damages." The vast

majority of Swinehart's testimony focused on intricate accounting

issues, but before plunging into those issues he did testify

briefly about his attempts to get Jay Haber to pay him his

compensation before and during 1983. At one point Swinehart may

have begun to scratch the surface of the necessary elements for

2
Jay Haber had testified that Swinehart withheld files and
information belonging to Haber Oil, and that, after repeatedly
asking Swinehart to return the files and seeking advice from
counsel, he terminated Haber Oil's contractual relationship with
Swinehart. According to Swinehart, Haber Oil was never denied
access to the files.

30
fraud when he testified that Jay Haber had rebuffed his efforts

by showing him Haber Oil's profit analysis (apparently for 1982)

in order to make him "feel comfortable." He also opined, "Well,

he [Jay Haber] wanted to demonstrate to me that we were doing

very well, we were making a lot of money, keep up the good work

and go out and find some more prospects."3

In our view, the testimony from Swinehart, Jay Haber, and

others indicates that Swinehart's relationship with Haber Oil

deteriorated in 1984, leading ultimately to the termination of

that relationship, and that Swinehart and Haber Oil disagreed

regarding the amount of compensation due him for his services

that he had already performed. What the record does not show is

that Haber Oil ever defrauded Swinehart under the Texas

definition of fraud. We find no evidence that any of Jay Haber's

factual representations to Swinehart were false or that Haber

made any promises to him with the intent not to carry them out,

as is required under Texas law for a promise of future

performance to be actionable fraud. Spoljaric v. Percival Tours,

Inc., 708 S.W.2d 432, 434 (Tex. 1986). The mere fact that Haber

3
Swinehart's testimony on this score is so brief and
cryptic that it is impossible for us to discern precisely what
Swinehart was seeking from Jay Haber when Haber made these
alleged reassurances. In any event, because the third contract
was already in force when these reassurances were made, Swinehart
could not have relied on the reassurances to his detriment. All
the damages he now claims stems from Haber Oil's breach of the
third contract, and he was already bound by that contract when
the reassurances were made. Thus, there could not have been a
causal link between the reassurances and his entering into the
third contract. Moreover, Swinehart's testimony does not come
close to establishing the mens rea element of fraud.

31
Oil failed to perform is not evidence of fraudulent intent. In

re Bailey Pontiac, 139 B.R. at 636 (citing Dodson v. Kung, 717

S.W.2d 385, 389 (Tex. App.SQHouston [14th Dist.] 1986, writ ref'd

n.r.e.)). The evidence proves only that Haber Oil failed to

perform and frequently stalled Swinehart in his efforts to

collectSQnot an unusual course of action for a debtor beginning a

slide into bankruptcy. In short, Swinehart did not prove that

Haber Oil knowingly or recklessly misrepresented facts to him

with the intent of inducing reliance, or that he did rely on any

such misrepresentations to his detriment.

Given the dearth of record evidence to support a finding of

fraud, we are not surprised to find that the bankruptcy court

never made specific findings that Haber Oil defrauded Swinehart.

The only "express" finding of fraud by the court below that

Swinehart cites comes from the bankruptcy court's dismissal of

Haber Oil's adversary proceedings based on § 544 (and not, it may

be noted, from the September 4, 1990, order in which the court

awarded Swinehart real property interests in the disputed

properties). In the dismissal order, the bankruptcy court

stated, "In this Adversary Proceeding, Haber Oil seeks to gain an

advantage from its failure to carry out its contracts. Clearly

Chapter 11 of the Bankruptcy Code must not be used as a tool to

perpetrate fraud on a third party." Swinehart's argument that

this passage is an express finding by the bankruptcy court that

Haber Oil committed the fraud necessary to justify imposition of

a constructive trust is, to say the least, without merit. We

32
believeSQas the first quoted sentence from the bankruptcy court's

dismissal order suggestsSQthat the bankruptcy court's order of

September 4, 1990, in reality awarded Swinehart a constructive

trust as the remedy for a simple breach of contract claim.

The bankruptcy court's decision to impose a constructive

trust on the disputed properties in favor of Swinehart suffers

from a further defect: a constructive trust can attach only to a

specific res, or to some identifiable property that can be traced

back to the original res acquired by fraud. Rosenberg, 624 F.2d

at 663; see also Meadows, 516 S.W.2d at 129 ("[A] constructive

trust on unidentifiable cash proceeds is inappropriate."). This

requirement, which is also commanded by federal bankruptcy law,

In re Kennedy & Cohen, 612 F.2d at 966, was not satisfied in the

instant case, at least with respect to the real property itself.

Indeed, as far as we can tell, no serious effort was made in the

proceedings below to award Swinehart his real property interests

in the disputed properties, or to determine who was in possession

of those properties. Instead, upon hearing Haber Oil's

contention that the properties had been sold to McFadden, the

bankruptcy court devised a unique remedy that Swinehart had not

even requested: a "deemed sale" of the disputed properties from

Swinehart back to Haber Oil. This technique may not be used to

circumvent the tracing requirements inherent in the assertion of

a constructive trust theory in bankruptcy proceedings.

The bankruptcy court's award of the funds paid into the

registry of the state court during the pendency of the state

33
lawsuit to Swinehart is subject to analysis similar to that

applicable to the properties themselves, although tracing is not

a problem with respect to the funds. The bankruptcy court's

conclusion that Swinehart owned those funds was dependent on its

finding that Swinehart owned the real property interests that

generated the funds. As we have seen, however, Swinehart never

established, through proper pleadings and proof, that he was a

constructive trust beneficiary, or indeed that he was anything

except an unsecured creditor. Because his entitlement to the

suspended funds in the state court stands or falls with his

status as "owner" of interests in the disputed properties, the

bankruptcy court's finding that Swinehart is the outright owner

of all the funds being suspended because of the state lawsuit

must also be reversed.4

We can only conclude, judging from the remarkable steps

taken by the bankruptcy court in this case to give Swinehart a

preferred status vis-a-vis the general unsecured creditors of

Haber Oil, that the court below felt that the equities of the

case strongly favored granting Swinehart special relief. Even

the broad powers of bankruptcy courts to fashion equitable

remedies, however, must be exercised only within the confines of

4
We do not understand our course of action to disturb the
unchallenged order confirming the plan of reorganization, which
merely directed Haber Oil not to seek to withdraw the funds
placed in escrow because of the Swinehart claim. Clearly this
order was to last only until a court with proper jurisdiction
determined who was entitled to those funds. Our disposition of
this appeal does, of course, reverse the bankruptcy court's
determination of Swinehart's entitlement to the funds.

34
the Bankruptcy Code. Norwest Bank Worthington v. Ahlers, 485

U.S. 197, 206 (1988). The bankruptcy courts are not "roving

commission[s] to do equity." United States v. Sutton, 786 F.2d

1305, 1308 (5th Cir. 1986). Haber Oil clearly breached its

contract with Swinehart, and it added insult to injury by

promising payment and then failing to deliver. The bankruptcy

reporters, however, are replete with the stories of creditors who

have furnished goods or services to a debtor, only to find that,

despite their frequent demands and the debtor's countless

reassurances, the debtor's promise of payment continues in

breach. It would spawn chaos in the careful order of priorities

established by the bankruptcy law if bankruptcy courts made

special exceptions for these creditors. The requirements of

pleadings, proof, and findings must be strictly enforced against

constructive trust claimants to protect the integrity of the

bankruptcy system.

Because the orders of the bankruptcy court imposing a

constructive trust on the disputed properties in favor of

Swinehart, deeming a hypothetical sale of those properties back

to Haber Oil, and awarding Swinehart the funds held in suspense

in the state court were not supported by the necessary pleadings,

proof, and findings, they must be reversed.

B. Contract Interpretation

Haber Oil argues that the bankruptcy court erred in ruling

that Swinehart's interest in the disputed properties should be

determined according to the terms of the third contract rather

35
than those of the fourth contract. The interpretation of an

unambiguous contract is a question of law and is therefore

subject to our de novo review. Guidry v. Halliburton Geophysical

Servs., Inc., 976 F.2d 938, 940 (5th Cir. 1992). However, when a

contract is ambiguous and its construction turns on the

consideration of extrinsic evidence, we review the interpretation

of the court below for clear error only. Id. The initial

determination that a contract is ambiguous and that its

interpretation requires the consideration of extrinsic evidence

is a legal conclusion subject to de novo review. Id. State law,

however, provides the rules governing the interpretive process

itself. River Prod. Co. v. Webb (In re Topco, Inc.), 894 F.2d

727, 738 (5th Cir. 1990).

We hold that the third and fourth contracts are ambiguous

with respect to the proper method to calculate Swinehart's

interest in the disputed properties. A contract is ambiguous if

its terms are susceptible to more than one reasonable

interpretation. Amoco Canada Petroleum Co. v. Wild Well Control,

Inc., 889 F.2d 585, 587 (5th Cir. 1989); Coker v. Coker, 650

S.W.2d 391, 393 (Tex. 1983). In our view, Haber Oil and

Swinehart both propose plausible interpretations of the contracts

at issue. The fourth contract simply does not address the

subject of the compensation due Swinehart for his review and

recommendation of prospects to Haber Oil prior to the effective

date of the fourth contract when actual drilling was postponed

until after the effective date of the fourth contract.

36
 Reviewing the contracts and the record of the December 1,

1988, hearing, we conclude that the bankruptcy court did not

clearly err in holding that the terms of the third contract

dictated Swinehart's compensation for his review and

recommendation of the disputed properties to Haber Oil. In the

first place, the tone of the fourth contract is distinctively

prospective. By its terms, Swinehart promised to "locate,

evaluate, and recommend to Haber [Oil] a minimum of six (6)

acceptable drilling prospects during the term of this contract."

In return, Haber Oil promised to deliver specified interests to

Swinehart "[f]or any prospects reviewed and recommended by

Swinehart," suggesting to us that these rates of compensation

were intended to apply only to the new prospects located by

Swinehart during the lifetime of the fourth contract. We note

also that the fourth contract did not expressly supersede the

third contract, although the third contract did expressly

supersede the contract that preceded it.

The bankruptcy court also made the cogent observation that,

at the time the parties executed the fourth contract, Swinehart

had already performed all his obligations under the third

contract with respect to the disputed properties. His

compensation under that contract had already been earned. If the

parties had intended to alter the compensation due under the

third contract, one would expect the fourth contract to deal with

that obligation expressly. Finally, the court heard testimony

from both parties as to their understanding of the meaning of

37
these contracts, and it was entitled to give credence to whatever

testimony it found believable. This is not to say that Haber

Oil's arguments that the fourth contract should govern

Swinehart's return from the disputed properties are wholly

without logical force. We hold only that, under our deferential

standard of review, the bankruptcy court's interpretation was not

a clearly erroneous one.

C. The Frnka Prospect

We must delve deeper into the facts of this case before

addressing Haber Oil's argument that the bankruptcy court erred

in its holding regarding Swinehart's rights in the Frnka

prospect.

The Frnka prospect was a property reviewed and recommended

to Haber Oil by Swinehart during the lifetime of the third

contract. Under that contract, Swinehart had the right to return

up to 75% of his earned interest and to "be paid by Haber [Oil]

an amount equal to the completion costs of the well in which such

interests are held." The bankruptcy court found that Swinehart

returned his interest in the Frnka prospect in accordance with

the terms of the third contract. Therefore, the court held that

"no completion costs for the Frnka Prospect shall be included in

the calculation of 'Completion costs Haber paid on Swinehart's

behalf.' Swinehart shall not include any sum attributable to his

return of the Frnka interest as a portion of the compensation due

him from Haber Oil."

38
 Haber Oil now argues that we should reverse the bankruptcy

court's decision, which allowed Swinehart to avoid bearing his

proportionate share of the cost of completion of the well on the

Frnka prospect. According to Haber Oil, this is inequitable

because Swinehart did not try to return this interest until some

two years after the well was completed, when it was clear that

the completion was uneconomical. Jay Haber testified at the July

20-21, 1989, hearing that drilling on the Frnka prospect

commenced around December 1982 or January 1983, and that the well

was productive but not profitable. He also testified that the

first attempt Swinehart made to return his interest in the Frnka

prospect was in mid-1984. Haber Oil therefore argues that the

bankruptcy court erred in interpreting the contract to allow

Swinehart to return his interest in the Frnka prospect and avoid

paying completion costs after it had become clear that the well

would not become a profitable one.

Jay Haber and Swinehart both testified at the July 20-21,

1989, hearing that several attempts to complete a well on the

Frnka prospect were made and failed before a producing well was

successfully completed. Swinehart conceded that he did not

withdraw from participation in that prospect until after the

second attempt to complete a well had failed, and he testified

that he should bear his share of those costs. He also testified

that he told Jay Haber at this point that he wanted out of the

Frnka operation and that the enterprise would not succeed, and

Jay Haber sent him an "election form," apparently to allow

39
Swinehart to withdraw from future Frnka operations. Swinehart

then sent Haber Oil a telegram notifying it that he was

exercising his option to return 75% of his interest in the Frnka

prospect.

The bankruptcy court examined the terms of the third

contract and found no language providing that Swinehart could not

return his interest in a prospect after some work had been

completed. It therefore allowed a credit to Swinehart for his

share of the completion costs of the Frnka well, and it

disallowed any claim by Swinehart to compensation based on his

interest in the Frnka prospect. Haber Oil's argument that the

third contract should not be interpreted to allow Swinehart to

exercise his option "years after the completion of the well,"

although logical, is not supported by the record. Indeed, the

record indicates that Swinehart withdrew from the Frnka

enterprise before the well was successfully completed. Again

confronted with an ambiguous contract provision, we hold that the

bankruptcy court did not clearly err in its interpretation of the

third contract with respect to the Frnka prospect controversy.

D. The Black Jack Creek East Prospect

Haber Oil argues that the bankruptcy court erred in ruling

that Swinehart did not have to bear a proportionate share of the

expenses and losses attributable to the promotion of the Black

Jack Creek East prospect. Jay Haber testified at the December 1,

1988, hearing that this prospect, located in the panhandle of

Florida, was reviewed and recommended to Haber Oil by Swinehart

40
in early 1982, and Haber Oil acquired leases in that prospect in

mid-1982. Haber Oil was unable to attract investors in the

prospect, and its leases eventually expired, resulting in a loss

to the company. The bankruptcy court, in its September 4, 1990,

order, held that Swinehart was not required to share in the

expenses and overall loss generated by the Black Jack Creek East

prospect.

According to Haber Oil, the language of the third contract

clearly required Swinehart to pay a proportionate share of the

losses and expenses Haber Oil suffered in connection with the

Black Jack Creek East prospect. Haber Oil relies on a

handwritten clause, initialed by Jay Haber and Swinehart, in the

third contract that reads, "Lease profits shall be defined as all

cash profits less all cash losses from lease transactions during

any calculation period." Swinehart, therefore, should have been

required to participate in the Black Jack Creek East losses. The

bankruptcy court reached the opposite result by relying on a

different section of the third contract. The clause relied upon

reads, "Haber shall deliver to Swinehart 50 percent of that

carried working interest and/or other revenue interest that is

retained by Haber after sale to investors or other party of

prospect solicited, reviewed and recommended by Swinehart,

subject to the following adjustment: . . . ." The bankruptcy

court viewed this section as limiting Swinehart's liability for

losses to those prospects in which he actually possessed an

interest; because the Black Jack Creek East prospect was never

41
sold to investors, the court reasoned, Swinehart never received

an interest in the prospect and thus never became liable for the

losses generated by the prospect.

We hold that the contract was ambiguous in that it does not

clearly define the circumstances under which Swinehart's

liability for a proportionate share of costs should begin. It

certainly does not address the issue of which party should bear

promotion costs for prospects, such as Black Jack Creek East,

that failed for lack of investors. Because the bankruptcy

court's interpretation was not clearly erroneous, we affirm it.

IV. CONCLUSION

The bankruptcy court erred in granting Swinehart a

constructive trust in the disputed properties and in awarding him

the funds held in escrow because of the state lawsuit.

Accordingly, the district court's order affirming the award of

the full value of those properties ($971,689) and the suspended

funds to Swinehart must be REVERSED and these cases REMANDED to

the district court with instructions to REMAND to the bankruptcy

court for further proceedings consistent with this opinion. In

all other respects the court below is AFFIRMED. Each party shall

bear its own costs.

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