Delta Petroleum Gen. Recovery Trust v. Bwab Ltd. (In re Delta Petroleum Corp.)

• Decision Date: 02 April 2015
• Docket Number: Adv. Proc. No. 12-50898 (KJC),Adv. Proc. No. 12-50877 (KJC),Case No. 11-14006 (KJC)
• Parties: In re: DELTA PETROLEUM CORPORATION, et al., Debtors DELTA PETROLEUM GENERAL RECOVERY TRUST, and PAR PETROLEUM CORPORATION, Plaintiffs v. BWAB LIMITED LIABILITY COMPANY, Defendant DELTA PETROLEUM GENERAL RECOVERY TRUST, and PAR PETROLEUM CORPORATION, Plaintiffs v. ALERON LARSON, JR., Defendant
• Court: U.S. Bankruptcy Court — District of Delaware

In re: DELTA PETROLEUM CORPORATION, et al.,¹ Debtors

DELTA PETROLEUM GENERAL RECOVERY TRUST,and PAR PETROLEUM CORPORATION, Plaintiffs v. BWAB LIMITED LIABILITY COMPANY, DefendantDELTA PETROLEUM GENERAL RECOVERY TRUST,and PAR PETROLEUM CORPORATION, Plaintiffs v. ALERON LARSON, JR., Defendant

Case No. 11-14006 (KJC)

Adv. Proc. No. 12-50898 (KJC)

Adv. Proc. No. 12-50877 (KJC)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

April 2, 2015

Chapter 11

Jointly Administered

(Re: D.I. 34, 74)

MEMORANDUM²

BY: KEVIN J. CAREY, UNITED STATES BANKRUPTCY JUDGE

Currently before the Court are the motions for summary judgment filed by Delta Petroleum General Recovery Trust (the "Trust") and Par Petroleum Corporation ("PPC" or, together with the Trust, the "Plaintiffs")³ seeking a determination about certain rights and claims of (i) the defendant BWAB Limited Liability Company ("BWAB"), based upon two sets of agreements signed in 1994 and 1999 with the Debtors or their predecessor, and (ii) defendant Aleron Larson, Jr. ("Larson"), based upon agreements signed in 1999 with the Debtors. The Plaintiffs argue that the Defendants' rights and claims under the agreements at issue constitute (i) contractual rights to payment or claims that have been discharged by the Debtors' confirmed chapter 11 plan of reorganization, or (ii) real property interests that may be avoided and recovered pursuant to Bankruptcy Code §§ 544(a)(3) and 550. (Adv. D.I.s 34, 35.)⁴ Also before the Court are cross-motions for summary judgment filed by BWAB and Larson, arguing that they hold real property interests that were not part of the Debtors' bankruptcy estate or passed through the bankruptcy case unaffected. (Adv. D.I.s 74, 75.)

For the reasons stated below, the Plaintiffs' motion for summary judgment will be denied, in part, as to the 1994 ORRI (as defined herein), and granted, in part, as to the 1999 ORRIs (as defined herein). BWAB's cross-motion for summary judgment will be granted, in part, as to the 1994 ORRI, and denied, in part, as to the 1999 BWAB ORRI. Larson's cross-motion for summary judgment regarding the 1999 Larson ORRI will be denied. The Plaintiffs' furtherrequest for summary judgment to recover "excess payments" and post-petition payments will be denied.

BACKGROUND

The 1994 Assignment from BWAB Incorporated to Whiting Petroleum Corporation

In 1994, BWAB's affiliate, BWAB Incorporated, acquired an option to purchase a large number of properties from Union Pacific Resources Corporation, including some known as the Point Arguello Properties. (Roitman Decl., ¶7).⁵ The Point Arguello Properties consist of interests in oil and gas leases related to certain property located off the coast of Santa Barbara, California (the "Properties").⁶ By letter agreement dated July 28, 1994, BWAB Incorporated assigned its option to purchase the Properties. (Roitman Decl., Ex. 2.) As part of the consideration for the assignment of the option to Whiting, BWAB Incorporated received an assignment of either: (i) "an undivided 6.5% of the net rights acquired by Whiting in the Properties after the exercise of BWAB's option; or [(ii)] a proportionately reduced 3.5% overriding royalty interest out of the net revenue interest acquired by Whiting after the exercise of BWAB's option, in either case . . . by an assignment in recordable form and containing warranties of title by, through and under Whiting, but not otherwise."⁷ (Roitman Decl., Ex. 2, ¶2.)

On or about December 16, 1994, Whiting exercised the option and acquired the Properties. On that same date, Whiting and BWAB entered into the Assignment of Overriding Royalty (the "1994 Assignment"). (Roitman Decl. Ex. 3.) A copy of the 1994 Assignment was recorded in the Official Records of the County of Santa Barbara, California on January 25, 1995. (Roitman Decl., ¶11.) The 1994 Assignment was also filed with the Minerals Management Service, Pacific OCS Region, on January 11, 1995. (Id., Roitman Decl., Ex. 4.)

The 1994 Assignment includes the following relevant terms:

1. Assignment of Interest. Whiting does hereby grant, convey, assign, set over, and deliver to BWAB an overriding royalty consisting of an undivided Three and One-Half Percent (3.5%) interest in Whiting's Net Revenue Interest from the Subject Properties, to be determined as set forth below. . . . . The interest conveyed and assigned to BWAB in this paragraph 1 is referred to herein as the "BWAB Interest."

2. Payment. It is intended that Whiting will receive the full fractional or percentage share acquired by Whiting from UPRC of all net revenues payable by the operator(s) of the Subject Properties and by the purchaser(s) of production from the Subject Properties. . . . .

. . . .

c. . . . . BWAB shall have the right to require, where practicable, direct payments to BWAB by the operator(s) or purchaser(s) if (i) David A. Frawley is no longer the President of Whiting, or (ii) Whiting is late in making payments to BWAB under Paragraph 2(b) for three consecutive months.

. . . .

4. Preferential Right of Purchase. Whiting shall have a preferential right of purchase as to the BWAB interest, or any portion thereof, which preferential right of purchase shall apply to all the transfers, assignments or conveyances by BWAB other than transfers, assignments or conveyances to a BWAB Affiliate.

(Roitman Decl., Ex. 3.) The BWAB Interest granted in the 1994 Assignment is referred to herein as the "1994 ORRI."

During the fall of 1996, some or all of the leases comprising the Point Arguello Property were unitized into the Point Arguello Unit, pursuant to a unit agreement dated effective October 1, 1996, between Whiting and a number of other working interest owners (the "Unit Agreement"). (Roitman Decl., ¶15.) A unit agreement is an agreement among the owners of several oil and gas leases to operate and produce those leases as one unit. Only owners of oil and gas leases are parties to such unit agreements. (Id.) As a consequence of the unitization, BWAB and Whiting entered into a letter agreement dated June 25, 1997 (the "1997 Agreement"), to document BWAB's agreement "to reduce its overriding royalty by 14.15760% or one-half of the dilution at equalization on October 1, 1996 effective Unitization." (Id., Ex. 5.)

The 1999 Assignments from Delta Petroleum Corporation to BWAB and Larson

In 1999, the debtor Delta Petroleum Corporation ("Delta") attempted to acquire Whiting's ownership interest in the Properties. Larson was the Chairman of the Board of Directors of Delta from May 1987 until sometime in 2005. (Larson Decl., ¶4.)⁸ Larson also was the Chief Executive Officer of Delta from May 1987 until sometime in 2002. (Id.) Although Larson resigned as Chairman of the Board of Directors in 2005, he remained a Director of Delta until June 4, 2011. (Id.)

Delta and BWAB entered into an Agreement dated as effective April 1, 1999, in which Delta agreed to pay a fee, which included an overriding royalty interest, to BWAB in consideration of BWAB's direct efforts in assisting Delta with negotiations to acquire the Properties (the "Fee Agreement"). (Roitman Decl., Ex. 6.)

Delta entered into a Purchase Agreement with Whiting (the "Purchase Agreement"), but Whiting was unable to obtain the consents of the other working interest owners in the Properties due to concerns that Delta did not have the financial strength necessary to fulfill Whiting's working interest obligations, particularly those relating to plugging and abandonment of the offshore wells and platforms. (Roitman Decl., ¶20-21; Bullock Decl., ¶8 and Ex. B.)⁹ As a result, Delta and Whiting amended the Purchase Agreement (the "Amendment") to provide that Whiting would convey to Delta a derivative product which would provide the economic equivalent of conveying title to the Properties. (Bullock Decl., ¶8 and Ex. C.) In December 1999, Whiting executed and delivered a Conveyance and Assignment to Delta (the "Conveyance"), in which Whiting conveyed a net operating interest ("NOI") in the Properties to Delta. (Bullock Decl., ¶9 and Ex. D.)¹⁰ The NOI was defined in the Conveyance as follows:

The net operating interest ("NOI") herein conveyed and assigned is defined as the monthly payable positive or negative cash flow resulting to the Interests from the following eight step calculation:

(i) oil and gas revenue;

(ii) less royalties and overriding royalties;

(iii) less Unit lease operating expenses;

(iv) less severance, production or ad valorem taxes, if any;

(v) less capital expenditures;

(vi) less Unit fees to the Unit operator; and

(vii) plus the positive or less the negative cash flow from the Partnerships[;]

(viii) plus or minus any other miscellaneous costs or revenues that may be related to these interests or operations.

. . . .

[T]he above eight step calculation may result in a positive cash flow or negative cash flow. In the event of positive cash flow, Assignor will pay the excess to Assignee; in the event of a negative cash flow, Assignee will pay the deficit to Assignor.

(Bullock Decl., Ex. D.) Delta and Whiting agreed not to record the Conveyance due to Whiting's concern that the other working interest owners would consider such an action as a conveyance of legal title in violation of its agreements with them. (Roitman Decl. ¶25.)

(i) The BWAB 1999 ORRI

On December 1, 1999, Delta and BWAB entered into an Assignment of Overriding Royalty Interest (the "1999 BWAB Assignment"), in which Delta granted BWAB:

an OVERRIDING ROYALTY INTEREST of three percent (3.0%) in and to the oil and gas leases and lands described on Exhibit "A" attached hereto and by this reference made a part hereof (the "Leases"), which shall burden all the oil, gas and other leased minerals produced, saved and sold from or allocated to the lands covered by said Leases, and any extensions or renewals thereof.

(the "1999 BWAB ORRI"). (Bullock Decl., Ex. E.) BWAB did not record or file the 1999 BWAB Assignment for the same reason the Conveyance was not recorded by Delta. (Roitm...