Texas American Energy Corporation v. Citizens Fidelity Bank & Trust Company

736 S.W.2d 25 (1987)

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Nature of the Case

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Facts

P entered into a $ 24,000,000 Revolving Loan Agreement with Ds to provide funds to P for the periodic purchase of natural gas from its supplier. Such purchased gas is extracted from natural gas fields in Texas and Louisiana and piped to P's pipeline distribution system in Kentucky. P then stores surplus gas in its underground storage fields during the off-season and retrieves it during the peak demand mid-winter months for distribution to its customers. A security interest was to be conveyed in P's gas in storage. A dispute occurred as to whether that interest was in personal property under Article 9 of the Uniform Commercial Code (K.R.S. 355.9-102 (1) (a)) as insisted by P or whether such stored gas upon injection became an interest in real estate, the encumbrance of which could be accomplished only by a real estate mortgage, as argued by Ds. The storage fields are comprised of underground acreage leased from mineral owners containing various types of sandstone formations capable of accepting and containing natural gas because of being surrounded by strata that are impervious to the migratory characteristics of natural gas. Once foreign gas is injected into these storage reservoirs, it is trapped, cannot escape, and remains exclusively within P's control. P and D both sought a declaratory ruling as to whether the gas was personal property or whether it reverted back to an interest in real estate. The trial court ruled for P and the appeals court reversed. P appealed.