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In re Particle Drilling Techs.

United States Bankruptcy Court for the Southern District of Texas, Houston Division

July 29, 2009, Decided; July 29, 2009, Filed; July 30, 2009, Entered

Case No. 09-33744, Chapter 11, CASE NO: 09-33830, Jointly Administered Order

Opinion

Memorandum Opinion

Summary

In January of 2004, debtor Particle Drilling Technologies, Inc. executed Royalty Agreements with PSI Distribution, Inc. and Prodril Services International, Ltd ("PSI"). Pursuant to the Royalty Agreements, PSI transferred rights to various patents to Particle Drilling and Particle Drilling granted PSI royalty rights. The Royalty Agreements provided that any future transfer of the patents would be subject to PSI's royalty rights.

Despite this contractual provision, Particle Drilling seeks to sell the patents free and clear of PSI's royalty rights. PSI  [*2] did not obtain a lien securing the royalty rights. Nevertheless, PSI contends that a lien is not necessary because its royalty rights are covenants that run with the patents. ] The Federal Patent Act provides that patents are personal property, while the concept of a "covenant" running with property applies only to real property. Because the patents are personal property, the Court holds that the covenants do not bar a free and clear sale. PSI's remedy is limited to contract damages for breach of the Royalty Agreements.

Background

On May 30, 2009, Particle Drilling filed a voluntary chapter 11 bankruptcy petition. Particle Drilling develops drilling technologies for commercial use in the oil and gas industry. Particle Drilling claims its technology will allow for vastly greater drilling efficiencies. Particle Drilling is not and has never been profitable. Since its inception, Particle Drilling has relied on debt and equity financing. After a major oil company canceled a drilling project with Particle Drilling, investors ceased financing operations, prompting the bankruptcy petition.

On June 15, 2009, Particle Drilling filed a motion to sell substantially all of its assets free and clear  [*3] of any interests in the property pursuant to § 363 of the Bankruptcy Code. The proposed sale, if approved, will occur pursuant to a plan of reorganization. PSI timely objected to the sale, contending that Particle Drilling's patents could not be sold free and clear of PSI's royalty rights. 1 On July 7 and July 14, 2009, the Court held hearings on the sale motion. The Court also requested additional briefing on the nature of PSI's interests in the patents. At the conclusion of the July 14 hearing, the Court orally announced its findings and denied PSIs objections. The Court issues this Memorandum Opinion in support of the Court's oral rulings.

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2009 Bankr. LEXIS 2151 *; 2009 WL 2382030

IN RE: PARTICLE DRILLING TECHNOLOGIES, INC.; fdba MEDXLINK CORPORATION; fdba PDT HOLDINGS, INC.; fdba PARTICLE DRILLING, INC.; fdba PRODRIL ACQUISITION CORP. and PARTICLE DRILLING TECHNOLOGIES INC; fdba PRODRIL ACQUISITION COMPANY, INC; fdba PARTICLE DRILLING, INC; fdba PDTI ACQUISITION CORPORATION, PARTICLE DRILLING TECHNOLOGIES INC, Debtor(s).

CORE TERMS

patents, Drilling, royalty rights, covenants, Royalty, personal property, free and clear, executory contract, license, proposed sale, contends, obligations, bid, financing

Patent Law, General Overview, Real Property Law, Encumbrances, Restrictive Covenants, Covenants Running With Land, Bankruptcy Law, Reorganizations, Debtors in Possession, Powers & Rights, Administrative Powers, Estate Property Lease, Sale & Use, Sales Free of Interest, Ownership, Commercial Law (UCC), Secured Transactions (Article 9), General Provisions, Applicability of Provisions, Perfection & Priority, Perfection, Filing, Financing Statements, Business & Corporate Compliance, Conveyances, Assignments, Executory Contracts & Unexpired Leases, Rejections