Alta Mesa Holdings, LP v. Kingfisher Midstream, LLC (In re Alta Mesa Res., Inc.)

• Court: U.S. Bankruptcy Court — Southern District of Texas
• Writing for the Court: Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE
• Citation: Alta Mesa Holdings, LP v. Kingfisher Midstream, LLC (In re Alta Mesa Res., Inc.), 613 B.R. 90 (Bankr. S.D. Tex. 2019)
• Decision Date: 20 December 2019
• Docket Number: CASE NO: 19-35133,ADVERSARY NO. 19-03609
• Parties: IN RE: ALTA MESA RESOURCES, INC., et al, Debtors Alta Mesa Holdings, LP, et al, Plaintiffs v. Kingfisher Midstream, LLC, et al, Defendants.

613 B.R. 90

IN RE: ALTA MESA RESOURCES, INC., et al, Debtors

Alta Mesa Holdings, LP, et al, Plaintiffs

v.Kingfisher Midstream, LLC, et al, Defendants.

CASE NO: 19-35133

ADVERSARY NO. 19-03609

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed December 20, 2019

Matthew D. Cavenaugh, Jackson Walker LLP, John F. Higgins, IV, Porter Hedges LLP, Christopher Darnell Porter, Quinn Emanuel et al., Michael Kevin Riordan, Foley Gardere/Foley & Lardner LLP, Patricia Baron Tomasco, Quinn Emanuel Urquhart & Sullivan, Houston, TX, Lawrence S. Robbins, Mark T. Stancil, William J. Trunk, Robbins Russell et al., Washington, DC, for Plaintiffs/Defendants.

Patrick King, Quinn Emanuel Urquhart & Sullivan, LLP, Houston, TX, for Defendants.

MEMORANDUM OPINION

Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE Alta Mesa Holdings, LP contracted with Kingfisher Midstream, LLC to transport Alta Mesa's oil and gas over gathering systems to be constructed by Kingfisher. Because Kingfisher's rights under the gathering agreements "run with the land," the gathering agreements between Alta Mesa and Kingfisher are not subject to rejection under section 365 of the Bankruptcy Code. Summary judgment on the issue of rejection is granted to Kingfisher.

Summary of Decision

Alta Mesa Holdings, LP and Oklahoma Energy Acquisitions, LP (collectively "Alta Mesa"), the debtors and plaintiffs, are Texas limited partnerships doing business in Oklahoma. Alta Mesa is an upstream oil and gas producer whose business model involves locating, extracting, and selling hydrocarbons. Kingfisher Midstream, LLC ("Kingfisher"), the defendant, develops pipeline systems to transport extracted hydrocarbons. Pursuant to original and amended gathering agreements, Kingfisher built a gathering system linking Alta Mesa's wells to central collection points. In exchange, Alta Mesa promised to deliver all of its hydrocarbons, up to certain thresholds, to Kingfisher for fixed gathering fees. Because the fixed fees proved expensive, Alta Mesa filed this adversary proceeding to invalidate the gathering agreements.

This memorandum opinion primarily focuses on Count I of Alta Mesa's complaint. In that count, Alta Mesa seeks a declaration that the gathering agreements are executory contracts subject to rejection under section 365 of the Bankruptcy Code. The answer depends on whether the agreements formed real property covenants running with the land. Under Oklahoma law, the gathering agreements did form real property covenants because they touch and concern Alta Mesa's leasehold interests, Alta Mesa and Kingfisher are in privity of estate, and Alta Mesa and Kingfisher intended that the gathering agreements bind successors. Because real property covenants are not executory and cannot be rejected under the Bankruptcy Code, Kingfisher is entitled to summary judgment on Count I.

Other relief is also sought by summary judgment. For the reasons set forth below, no other summary judgment relief is granted.

Background

Alta Mesa and Kingfisher are commonly owned. Alta Mesa alleges that its controlling owners abused the common ownership structure by agreeing to pay excessive gathering fees to Kingfisher. Kingfisher counters that the fees are fair in light of the expense of building a modern gathering system.

The Alta Mesa plaintiffs are Alta Mesa Holdings, LP ("AMH"), and its wholly owned subsidiary Oklahoma Energy Acquisitions, LP ("OEA"). Alta Mesa is an onshore oil and gas developer. Alta Mesa holds several oil and gas leases in the Oklahoma STACK formation.¹ Through its leasehold interests, Alta Mesa produces oil and natural gas.

Alta Mesa's former CEO Harlan Chappelle, its former COO Michael Ellis, and High Mesa, Inc. ("HMI"), a Delaware corporation, owned over 99.5% of the AMH partnership interests. (ECF No. 107 at 3 ). Another individual, Dale Hayes, owned the remaining portion of AMH. (ECF No. 131 Ex. 27 at 56).

When Alta Mesa produces oil and natural gas, it must transport its product from wellheads to market. One common means of transportation is a gathering system. In 2015, Alta Mesa determined that it would benefit from a modernized gathering system. (ECF No. 110 at 17 ). At that time, HMI entered an agreement with Asset Risk Management, LLC ("ARM") to form Kingfisher. (ECF No. 108 at 4 ). HMI and ARM formed Kingfisher for the purpose of constructing and operating Alta Mesa's new gathering system. (ECF No. 108 at 4 ). Alta Mesa contracted to deliver its oil and gas to receipt points where Kingfisher would then transport the delivered product to market. The intent of the parties was to build a gathering system of pipelines from the initial receipt points to market delivery points.

On August 31, 2015, OEA and Kingfisher entered into two original gathering agreements. (ECF No. 108 at 4 ). The first, the Gas Gathering Agreement, dedicated Alta Mesa's natural gas production to Kingfisher in exchange for Kingfisher's obligation to deliver the gas to market. It was always intended that the gas would be delivered primarily through the new gathering system. (ECF No. 110 at 24 ). The second, the Crude Oil Gathering Agreement, dedicated Alta Mesa's produced oil to Kingfisher for the same consideration. (ECF No. 110 at 23 ). The two agreements are materially identical to one another. On December 1, 2016, OEA and Kingfisher amended both the gas and crude oil gathering agreements to include additional interests in furtherance of the construction and operation of the gathering system. (ECF No. 108 at 4 ).

The original gathering agreements included multiple provisions that are relevant to the Court's inquiry. In Section 3.2, Alta Mesa pledged to convey or assign to Kingfisher "any easement or rights-of-way for purposes of constructing, owning, operating, repairing, replacing and maintaining any portion of the [ ] Gathering System." (ECF No. 107 Ex. 2 at 12).

Section 3.3 dedicates to Kingfisher "all Interests within the Dedicated Area" and required Alta Mesa to "deliver to [Kingfisher] all Committed [oil and gas] produced." (ECF No. 107 Ex. 2 at 12). "Interests" are defined as "[Alta Mesa's] Interests, After-Acquired Interests and Other Interests." (ECF No. 107 Ex. 2 at 9). Schedule 3.3 of the agreements contains a map which sets out the "Dedicated Area." (ECF No. 107 Ex. 2 at 8, 31). Section 4.1 required Alta Mesa to deliver all committed oil and gas to certain receipt points. (ECF No. 107 Ex. 2 at 16). The agreements also carved out of the dedication any oil and gas used in Alta Mesa's operations. (ECF No. 107 Ex. 2 at 13).

Section 3.4 declares that the agreements are "covenants running with the land," and requires the parties to record the agreements. (ECF No. 107 Ex. 2 at 13). Section 3.4 also required the parties to "cause all transferees to execute a written instrument in a form reasonably satisfactory to [Alta Mesa or Kingfisher] acknowledging the Dedication and such transferees' obligations under this Agreement." (ECF No. 107 Ex. 2 at 13).

The agreements also set out the fixed gathering fees, as well as the volume of committed hydrocarbons. The agreements do not contain minimum volume provisions.

The 2016 amended agreements modified the originals in two important ways. First, the amendments adjusted the gathering fees. Although the parties dispute whether the effect was to save Alta Mesa funds, there is no serious question that the adjusted fees saved Alta Mesa money in the short term; the dispute concerns whether the amendments imposed additional long term costs that offset the short term savings. (ECF No. 110 at 30-31 ). Second, the amendments added a "Conveyance of Transportation Right," which the parties intended to "be a conveyance of a portion of [Alta Mesa's] real property interests." (ECF No. 110 at 31 ). The Transportation Right was "the sole and exclusive right to transport [oil and gas] produced from the Producer's Interests and After-Acquired Interests, specifically the right to gather, separate, meter, measure, and store such [oil and gas] that may be produced and saved therefrom." (ECF No. 107 Ex. 4 at 12-13).

Jurisdiction

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b). This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(A) because rejection is a substantive right created by the Bankruptcy Code. A declaratory judgment to determine whether contracts may be rejected under section 365 can only arise in bankruptcy. See In re Southmark Corp. , 163 F.3d 925, 930 (5th Cir. 1999) ("[A] proceeding is core under § 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case."). Counts IV and V allege breaches of fiduciary duty and aiding and abetting breaches of fiduciary duty. The Court has related to jurisdiction over those claims because "their resolution could conceivable have an effect on the estate." In re Allied Sys. Holdings, Inc. , 524 B.R. 598, 607 (Bankr. D. Del. 2015).

Legal Standard

"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). FED. R. BANK. P. 7056 incorporates FED. R. CIV. P. 56 in adversary proceedings. A party seeking summary judgment must demonstrate the absence of a genuine dispute of material fact by establishing the absence of evidence supporting an essential element of the non-movant's case. Sossamon v. Lone Star State of Tex. , 560 F.3d 316, 326 (5th Cir. 2009). A genuine dispute of material fact is one that could affect the outcome of the action or allow a reasonable fact finder to find in favor of the non-moving party. Gorman v. Verizon Wireless Tex., L.L.C. , 753 F.3d 165, 170 (5th Cir. 2014) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ).

A court views the facts and evidence in the light most...