Beta Operating Co. v. Aera Energy, LLC (In re Mem'l Prod. Partners, L.P.), CIVIL ACTION H-18-411
| Decision Date | 20 September 2018 |
| Docket Number | CIVIL ACTION H-18-411,ADVERSARY CASE 17-3365 |
| Parties | In re MEMORIAL PRODUCTION PARTNERS, L.P., et al., Debtors. BETA OPERATING COMPANY, LLC, Plaintiff, v. AERA ENERGY, LLC, et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Pending before the court is a report and recommendation ("R&R") issued by U.S. Bankruptcy Judge Marvin Isgur on February 9, 2018. Dkt. 1. In the R&R, Judge Isgur recommends that the court deny Aera Energy LLC ("Aera"), Noble Energy, Inc. ("Noble"), and SWEPI LP's ("SWEPI") (collectively, the "Previous Owners") motion to withdraw reference of Bankruptcy Adversary Proceeding No. 17-03365. Id. The Previous Owners filed an objection to the R&R, plaintiff Beta Operating Company, LLC ("Beta") filed a response to the objection, and the Previous Owners filed a reply. Dkts. 17, 18, 19. After considering the R&R, related documents, the objections, response, and reply, and the applicable law, the court is of the opinion that the R&R should be ADOPTED IN FULL and that the motion to withdraw reference should be DENIED.
The Previous Owners had record title to certain petroleum assets (the "Beta Assets") that they leased from the federal government. Dkt. 1.1 They assigned their interests in the Beta Assets toPacific Energy Resources Ltd. ("PERL"), which eventually sold its assets to Rise Energy Beta, LLC ("Rise"). Id. Rise is now Beta. Id. While PERL assumed, under the purchase and sales agreements ("PSAs"), liability for plugging and abandonment obligations associated with the leases, it was jointly and severally liable for these obligations with the Previous Owners under 30 C.F.R. § 556.604(d). Id.; see 30 C.F.R. § 556.604(d) (2).
PERL provided the federal government with a U.S. Treasury Note in the amount of $90 million to cover its estimated abandonment liability. Dkt. 1. PERL granted the Previous Owners a subordinate security interest in the Treasury Note and placed the Note's proceeds into a trust (the "Beta Trust"). Id. The Previous Owners are not parties to the trust agreement. Id.
PERL filed bankruptcy and sold the Beta Assets to Rise. Id. Subsequent to filing bankruptcy, the trustee, Rise, and the government executed an amendment to the trust agreement that increased the estimated abandonment liability from $90 million to $152 million. Id. Rise made the deposits to increase the trust balance. Id. In 2016, the government agreed to allow Rise to substitute $62 million in cash with surety bonds, but the trustee required consent from the Previous Owners. Id. The Previous Owners refused to consent. Id. Beta contends that this refusal was improper under various agreements and section 2.4(a) of the Beta Trust. Id. Beta thereafter filed bankruptcy. Id.
In its chapter 11 plan, Beta listed any claims held by the Previous Owners relating to the Beta Trust as Class 3B claims. Id. Beta's chapter 11 plan allowed Beta to either substitute some of the cash in the trust with surety bonds, leaving the Previous Owners with a lien on the bonds and any remaining cash, or provide the Previous Owners with "whatever other treatment would render their claims unimpaired." Id. The Previous Owners opposed the plan. Id.
On April 14, 2017, the Bankruptcy Court confirmed the plan, with the exception of how it treated the Previous Owners' Class 3B claims. Id. Beta proposed to substitute all of the trust funds with $62 million in dual-obligee performance bonds and $90 million in U.S. Treasury notes. Id. The government confirmed that this plan was compliant with regulations. Id. The Previous Owners opposed this plan, and Beta thereafter filed the instant adversary proceeding. Id. Beta filed a motion for summary judgment and the Previous Owners filed a motion to dismiss. Id. The Bankruptcy Court eventually granted summary judgment in Beta's favor. Id. The summary judgment order required the Previous Owners to execute or deliver any instrument required to transfer the funds. Id. The order was supplemented and eventually became a final judgment on February 9, 2018. Id.
The Previous Owners had requested withdrawal of reference as an alternative in their motion to dismiss. Id.; see Dkt. 2. The Bankruptcy Judge issued the R&R denying this request on February 9, 2018. Dkt. 1. The withdrawal of reference is the only issue addressed in this order.
The Previous Owners moved for withdrawal of reference on mandatory grounds for cause shown. Dkt. 17. Under 28 U.S.C. § 157(a), a district court may refer cases under Title 11 of the Bankruptcy Code to a bankruptcy judge. 28 U.S.C. § 157(a). The court may also refer cases arising under Title 11 or arising in or related to a case under Title 11. Id. Under § 157(b), the bankruptcy judge "may hear and determine all cases under title 11 and all core proceedings arising under title11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title." Id. § 157(b). Under § 157(c), the judge "may hear a proceeding that is not a core proceeding but it otherwise related to a case under title 11," but the judge must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing do novo those matters to which any party has timely and specifically objected." Id. § 157(c).
Under the second sentence of § 157(d), the mandatory withdrawal provision, the "district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." Id. § 157(d). "Courts generally interpret the mandatory withdrawal provision restrictively, granting withdrawal of the reference when the claim and defense entail material and substantial consideration of non-Bankruptcy Code federal law." Levine v. M&A Custom Home Builder & Developer, LLC, 400 B.R. 200, 203 (S.D. Tex. 2008) (Rosenthal, J.). This is to ensure that the mandatory withdrawal requirement "'does not became an "escape hatch" for matters properly before the bankruptcy court.'" In re Royce Homes LP, 578 B.R. 748, 756 (Bankr. S.D. Tex. 2017) (Bohm, J.) (quoting United States v. Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y. 1986)). "[C]ourts have generally held that a mandatory withdrawal of reference is warranted where 'substantial and material consideration' of federal statutes other than the Bankruptcy Code is 'necessary' to the resolution of a case or proceeding." In re Nat'l Gypsum Co., 145 B.R. 539, 541 (N.D. Tex. 1992) (citations omitted). To trigger mandatory withdrawal, (1) the proceeding must involve 'a substantial and material questionof both title 11 and non-Bankruptcy Code federal law'; (2) 'the non-Bankruptcy Code federal law [must have] more than a de minimis effect on interstate commerce'; and (3) 'the motion for withdrawal [must be] timely filed.'" Barstad v. CNU of Tex., LLC, No. SA-17-CV-00581-OLG, 2017 WL 7789541, at *4 (W.D. Tex. Dec. 19, 2017) (quoting Kingdom Fresh Produce, Inc. v. Delta Produce, No. 5:14-MC-899-DAE, 2015 WL 869240, at *3 (W.D. Tex. Feb. 27, 2015).
Under the first sentence of § 157(d), the permissive withdrawal provision, the "district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." § 157(d).
Permissive withdrawal for cause shown requires a court to examine the following factors: is the matter core or noncore? Do the proceedings involve a jury demand? Would withdrawal further uniformity in bankruptcy administration? Would withdrawal reduce forum-shopping and confusion? Would withdrawal foster economical use of resources? Would withdrawal expedite the bankruptcy process?
Levine, 400 B.R. at 203. The party seeking permissive withdrawal "'bears the burden of establishing grounds for permissive withdrawal.'" Tow v. Park Lake Communities, LP, No. H-17-3364, 2018 WL 287861, at *1 (S.D. Tex. Jan. 4, 2018) (Rosenthal, J.) (quoting In re Morrison, 409 B.R. 384 (S.D. Tex. 2009)).
Here, the Bankruptcy Judge issued an R&R regarding the Previous Owners's motion to withdraw reference. The Previous Owners timely filed objections.
The district judge shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy findings of fact or conclusions of law to which specific written objection has been made in accordance with [Federal Rule of Bankruptcy Procedure 9033]. The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions.
The Bankruptcy Judge concluded that withdrawal was not mandatory because the "proceeding involves only the interpretation of the Beta Trust Agreement under California law" and consequently "does not involve substantial and material questions under Title 11 and non-bankruptcy federal law." Dkt. 1 at 7-8. It also found no cause had been shown for permissive withdrawal because all of the factors courts consider in determining whether cause exists for permissive withdrawal weigh against permissive...
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