CTF, Ltd. v. Encino Energy, L.L.C. (In re Chesapeake Energy Corp.)

• Decision Date: 02 June 2021
• Docket Number: Adv. No. 21-01021-JDL
• Parties: In re: Chesapeake Energy Corporation, et al., Debtors. CTF, Ltd., Ronald E. and Judy L. Carlton, Richard A. and Catherine A. Carlton, Bruce D. and Catherine B. Carlton, and Lawrence J. Fechko, Plaintiffs, v. Encino Energy, L.L.C., and Encino Acquisition Partners, L.L.C., Defendants, v. Encino Energy, L.L.C. and Encino Acquisition Partners, L.LC., Third-Party Plaintiffs, v. Chesapeake Exploration, L.L.C., Chesapeake Appalachia, L.L.C., CHK Utica, L.L.C., MC Mineral Co., L.L.C., Chesapeake Plan Development Co., L.LC., Chesapeake Energy Marketing, LLC., Chesapeake Royalty, L.L.C., and MidCon Compression, LLC., Third-Party Defendants.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

In re: Chesapeake Energy Corporation, et al., Debtors.

CTF, Ltd., Ronald E. and Judy L. Carlton, Richard A. and Catherine A. Carlton,Bruce D. and Catherine B. Carlton, and Lawrence J. Fechko, Plaintiffs, v. Encino Energy, L.L.C., and Encino Acquisition Partners, L.L.C., Defendants, v. Encino Energy, L.L.C. and Encino Acquisition Partners, L.LC., Third-Party Plaintiffs, v. Chesapeake Exploration, L.L.C., Chesapeake Appalachia, L.L.C.,

CHK Utica, L.L.C., MC Mineral Co., L.L.C., Chesapeake Plan Development Co., L.LC.,

Chesapeake Energy Marketing, LLC., Chesapeake Royalty, L.L.C.,

and MidCon Compression, LLC., Third-Party Defendants.

Adv. No. 21-01021-JDL

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

June 2, 2021

The following is ORDERED:

In the United States Bankruptcy Court for the Southern District of Texas

Case No. 20-33233

Ch. 11

Jointly Administered

ORDER GRANTING IN PART MOTION TO ABSTAIN, SEVER AND REMAND CASE AND GRANTING IN PART MOTION TO TRANSFER

I.Introduction

In this drawn-out jurisdictional chess match,¹Plaintiffs, royalty and mineral interest owners and lessors of oil and gas leases, seek to have their claims for breach of those leases against the assignee of the lessees remanded back to state court for trial.In the state court the assignee, Encino Energy, L.L.C.("Encino"), has asserted a third-party claim for indemnification from its assignor of the leases, Chesapeake Energy Corporation("Chesapeake"),² for any amount for which it might be adjudged liable to the Plaintiffs.Chesapeake filed bankruptcy under Chapter 11 in the United States Bankruptcy Court for the Southern District of Texas in June 2020 and confirmed its Chapter 11 Plan of Reorganization on January 16, 2021.On March 3, 2021, pursuant to 28 U.S.C. § 1452(a), Chesapeake filed its Notice of Removal affecting removal of the state courtaction, including the Plaintiffs' claims against the assignee and the assignee's third-party claims against Chesapeake, to this Court in order to have this Court transfer the case to the United States District Court for the Southern District of Texas.[Doc. 1].

Chesapeake and Encino argue that this Court has jurisdiction over the State Court action because the Plaintiffs' claims against Encino and Encino's third-party claims against Chesapeake are related to the administration of Chesapeake's bankruptcy case.Chesapeake also seeks transfer of this case to the Southern District of Texas where Chesapeake's bankruptcy is pending.In response, Plaintiffs assert that the Federal Courts lack jurisdiction over the state law claims made by them against Encino arguing the claims are not related to the administration of the Chesapeake bankruptcy by virtue of Encino's claims for indemnification against Chesapeake.As an alternative to remanding the entire case to State Court, Plaintiffs ask the Court to sever their action against Encino and remand its claims against Encino so it can proceed to trial.

Before the Court for consideration are four pleadings of the parties addressing Chesapeake's seeking transfer of venue:

1.Chesapeake's Third-Party Defendants' Amended Motion for Entry of an Order Transferring Venue to the United States Bankruptcy Court for the Southern District of Texas[Doc. 15]:

2.Plaintiffs' Response in Opposition to Third-Party Defendants' Amended Motion for Entry of an Order Transferring venue to the United States Bankruptcy Court for the Southern District of Texas[Doc. 29];

3.Chesapeake's Reply in Support of its Motion to Transfer to the Houston Bankruptcy Court[Doc. 34]; and

4.Plaintiffs' Corrected Response in Opposition to Third-Party Defendants' Amended Motion for Entry of an Order Transferring Venue to the United States District Court for the Southern Districtof Texas[Doc 35].

There are five pleadings related to the Plaintiffs' motion seeking remand of the case(or severing part of it) back to the State Court:

1.Plaintiffs' Combined Motion to Abstain, Sever, and Remand(the "Motion")[Doc. 16];

2.Plaintiffs' Supplement to Plaintiffs' Combined Motion to Abstain, Sever, and Remand[Doc. 17];

3.Encino's Response to Plaintiffs' Combined Motion to Abstain, Sever, and Remand(the "Response")[Doc. 31];

4.Chesapeake's Opposition to Plaintiff's' Combined Motion to Abstain, Sever, and Remand(the "Opposition")[Doc. 32]; and

5.Reply in Support of Plaintiffs' Combined Motion to Abstain, Sever and Remand("Plaintiff's Reply")[Doc. 33].

II.Background

1.The Plaintiffs are Ohio mineral owners that entered into oil and gas leases with Oklahoma-based Chesapeake in 2011.The leases gave Chesapeake the right to produce and sell oil and gas from the Plaintiffs' land.In exchange, Plaintiffs receive a royalty interest in the oil and gas produced and sold under leases.Chesapeake operated the wells drilled under the leases until 2018 when it assigned the leases to non-debtor Encino through its affiliates Encino Acquisition Partners, LLC, and BAP Ohio, LLC, (unless otherwise specified, collectively and individually referred to as "Encino").The leases provided that with the consent of the lessors (here the Plaintiffs) the leases were assignable, but the assignor, here Chesapeake, remained liable for any breach notwithstanding the assignment.

2.In late 2017 and early 2018, Plaintiffs gave Chesapeake notice that it was underpaying royalties owed them under the leases, and that as a result the Leases were subject to termination.On December 19, 2018, Plaintiffs filed suit for breach of the Leases against both Chesapeake and Encino in the District Court of Beaver County, Oklahoma("Original Action").³

3.On June 28, 2020, Chesapeake filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas.⁴As a result of the bankruptcy, the state court action against Chesapeake was stayed; however, on August 27, 2020, the State Court ordered the case"severed," restyled it with only Encino as a defendant and permitted the Plaintiffs to proceed with their claims against Encino (the "Severed Action").⁵In granting severance, the state court recognized the continuing application of the automatic stay of the original litigation against Chesapeake which remained pending after the severance order as to Encino.

4.On February 9, 2021, Chesapeake emerged from bankruptcy.On February 26, 2021, Chesapeake removed the Original Action, in which it was a defendant, to this Court.⁶

5.On or about March 2, 2021, Encino filed an Answer and Third-Party Petition in the Severed Action against Chesapeake, naming as third-party defendants the eight newly-reorganized Chesapeake entities seeking indemnification for any liability under the Leases for which Encino might be adjudged liable to the Plaintiffs.Encino's Third-Party Petition was based on "indemnity obligations" that the newly reorganized Chesapeake entities allegedly assumed inthe "bankruptcy plan of reorganization, which was confirmed by entry of the confirmation order on January 16, 2021."⁷

6.In the Severed Action remaining in State Court, on March 3, 2021, the Plaintiffs mailed to the State Court their Emergency Motion to Sever and Stay Third-Party-Petition and for Entry of Proposed Scheduling Order which sought the State Court to let Plaintiffs' claims against Encino only proceed to trial.Apparently unbeknownst to Plaintiffs, on the same day, March 3, 2021, Chesapeake filed the Notice of Removal in this case.On March 23, 2021, the Plaintiffs' Motion to Sever and Stay Third-Party Petition came on for hearing in the State Court.The judge concluded that because of the Notice of Removal filed by Chesapeake on March 3, 2021, it lacked jurisdiction to consider Plaintiffs' Emergency Motion to Sever which would permit Plaintiffs to proceed only against defendant Encino.⁸

III.Discussion

A.Motion to Remand v. Motion to Transfer

As stated above, there are two separate motions before the Court: a motion to transfer venue pursuant to 28 U.S.C. §§ 1412and1404 filed by Chesapeake and (2) a motion by Plaintiffs for abstention, severance and/remand pursuant to 28 U.S.C. § 1452(a).When a court is presented with both a motion to transfer venue and a motion to abstain and/or remand, it must decide which one to consider first.Courts are divided on the issue.Some courts hold that the bankruptcy court in which the bankruptcy is pending (usually referred to as the "home-court") is in the best position to determine the issues underlying motions to abstain or remand.See, e.g. Aztec Industries, Inc.v. Standard Oil Co., (In re Aztec Industries, Inc.), 84 B.R. 464, 467-68(Bankr. N.D. Ohio1987);Kinney Systems, Inc. v. Intermet Realty Partnership(In re Convent Guardian Corp.), 75 B.R. 346,347(Bankr. E.D. Pa.1987).The cases which hold that the court should transfer a removed case to the "home"bankruptcy court for a decision on abstention or remand are often referred to as employing the "conduit" theory because they treat the local bankruptcy court as a mere conduit with little role in determining where the removed lawsuit should be heard.Frelin v. Oakwood Homes Corp., 292 B.R. 369, 379(Bankr. E.D. Ark.2003)(but holding that a motion to remand should be decided first).These courts argue that the "home-court" is "more familiar with the pending bankruptcy case and what may be required for its efficient administration."

Another line of case law holds that the bankruptcy court to which the state court lawsuit is removed ("the local bankruptcy court") has the right to, and should, decide a pending motion to abstain or remand before determining whether venue is proper in the home bankruptcy court.Work/Family Directions, Inc. v. Children's Discovery Centers, Inc., 223 B.R. 40(1^st Cir. BAP1998)("This Court should decide the jurisdictional issues raised....If there is a jurisdictional defect and the parties and the action are not properly before the Court, any action taken by...