EC Offshore Props. Inc. v. Open Choke Exploration, LLC, CASE NO. 08-51207

• Decision Date: 30 September 2011
• Docket Number: CASE NO. 08-51207,ADVERSARY NO. 10-05014
• Parties: In re: EAST CAMERON PARTNERS, L.P., Debtor EC OFFSHORE PROPERTIES, INC., Plaintiff v. OPEN CHOKE EXPLORATION, LLC, OPEN CHOKE ENERGY, LLC, Defendants
• Court: U.S. Bankruptcy Court — Western District of Louisiana

IN RE: EAST CAMERON PARTNERS, L.P., DebtorEC OFFSHORE PROPERTIES, INC., Plaintiff

v. OPEN CHOKE EXPLORATION, LLC,OPEN CHOKE ENERGY, LLC, Defendants

CASE NO. 08-51207

ADVERSARY NO. 10-05014

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA

SIGNED September 30, 2011.

SO ORDERED.

ROBERT SUMMERHAYS

UNITED STATES BANKRUPTCY JUDGE

MEMORANDUM RULING

EC Offshore Properties, Inc. ("EC Offshore") asserts fraudulent transfer claims under 11 U.S.C. §§ 544, 548, and 550against defendants Open Choke Exploration, LLC ("Open Choke") and Open Choke Energy, LLC. These claims were assigned to EC Offshore as part of the sale of substantially all of the assets of the debtor, East Cameron Partners, L.P., pursuant to 11 U.S.C. § 363. The present matter before the court is Open Choke's Motion for Litigious Redemption of Litigation (the "Redemption Motion") pursuant to Louisiana Civil Code Article 2652. Open Choke seeks to terminate the adversary proceeding by "redeeming" the assigned fraudulent transfer claims under Article 2652. The court took the motion under advisement following a hearing. After considering the parties' arguments and the relevant authorities, the court rules as follows.

JURISDICTION

The court has jurisdiction over the matters asserted in this adversary proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a). This matter is a core proceeding in which this court may enter a final order pursuant to 28 U.S.C. §157(b)(2)(I) and (J). The following Memorandum Ruling shall constitute the court's findings of fact and conclusions of law.

BACKGROUND

On October 16, 2008, East Cameron Partners, L.P. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. East Cameron was an independent oil and gas exploration andproduction company that owned leasehold interests in a producing natural gas and condensate field in federal waters adjacent to Cameron Parish, Louisiana. East Cameron's leasehold interests consisted of a 100% undivided record title interest with a 79.87% net revenue interest subject to certain overriding royalty interests in East Cameron Block 72 ("Block 72"). These lease interests arose from federal oil and gas leases governed by the Outer Continental Shelf Lands Act ("OCSLA") and administered by the Minerals Management Service of the United States Department of the Interior. On February 9, 2010, East Cameron filed a motion to approve the sale of substantially all of its assets pursuant to 11 U.S.C. § 363(f) of the Bankruptcy Code to EC Offshore, including East Cameron's interest in Block 72. East Cameron and EC Offshore entered into an asset purchase and sale agreement (the "Asset Purchase Agreement") in connection with the proposed sale on February 29, 2010. East Cameron's sale motion was contested and, on March 11, 2010, the court held a hearing on the motion. On March 21, 2010, the court entered an order approving the sale. The sale closed on May 11, 2010. East Cameron's liquidating Chapter 11 Plan was confirmed on December 9, 2010.

East Cameron filed the present adversary proceeding on February 26, 2010. East Cameron's complaint asserts fraudulent transfer claims under 11 U.S.C. §§ 544, 548, and 550 against OpenChoke and Open Choke Energy, LLC ("Open Choke Energy"). Open Choke Energy was the general partner of East Cameron, and both Open Choke Exploration and Open Choke Energy were controlled by Campbell Evans. Evans had been a principal of East Cameron. The complaint alleges that East Cameron and Open Choke entered into a farmout agreement involving Block 72 (the "Block 72 Farmout Agreement") in November 2007. (Complaint at ¶¶ 26-27). The Block 72 Farmout Agreement granted Open Choke Exploration the right to develop hydrocarbons at depths below 10,400 feet. East Cameron's complaint contends that this transfer of rights under the Block 72 Farmout Agreement is avoidable as a fraudulent transfer. (Id. at ¶¶ 36-43). The Asset Purchase Agreement includes the assignment of any fraudulent transfer claims arising from the Block 72 Farmout Agreement in addition to East Cameron's remaining interest in Block 72. (Order Approving Motion to Sell, Exh. A [Dkt. #539]). Following the closing of the sale, EC Offshore was substituted as the plaintiff in this proceeding. Open Choke subsequently filed the present Redemption Motion asserting that the assignment of East Cameron's fraudulent transfer claims is subject to "redemption" under Louisiana Civil Code Article 2652.

DISCUSSION

A. Article 2652 and the Assignment of Litigious Rights.

Chapter 15 of the Louisiana Civil Code governs the assignment of rights. Civil Code Article 2642 provides that "all rights maybe assigned, with the exception of those pertaining to obligations that are strictly personal." Article 2652 governs the sale of litigious rights as a specific category of assignments subject to Chapter 15. Article 2652 provides:

When a litigious right is assigned, the debtor may extinguish his obligation by paying to the assignee the price the assignee paid for the assignment, with interest from the date of the assignment. A right is litigious, for that purpose, when it is contested in a suit already filed. Nevertheless, the debtor may not thus extinguish his obligation when the assignment has been made to a co-owner of the assigned right, or to a possessor of the thing subject to the litigious right.

Open Choke contends that it is entitled to "redeem" the assignment of litigious rights to EC Operating pursuant to Article 2652. Open Choke argues that the present adversary proceeding had been commenced and Open Choke had filed its answer prior to the court's entry of the order approving the sale of the claims. Open Choke offers to redeem EC Offshore's litigious rights by paying the price paid for the assignment of these rights pursuant to the Asset Purchase Agreement.¹ If Open Choke successfully redeems these claims under Article 2652, EC Operating's claims under sections544, 548, and 550 will be extinguished upon payment of the "price [EC Operating] paid for the assignment." La. Civ. Code Art. 2652.

EC Offshore opposes Open Choke's Redemption Motion on multiple grounds. First, EC Offshore contends that the assignment of any avoidance claims was incident to the sale of real property - the debtor's interest in Block 72 - and thus is not the type of sale of litigious rights contemplated in Article 2652. Second, EC Offshore argues that Article 2652 does not apply to judicial sales pursuant to the Louisiana Supreme Court's decision in Bluefields S.S. Co. v. Lala Ferreras Cangelosi S.S. Co., 63 So. 96 (La. 1913). According to EC Offshore, the assignment of litigious rights pursuant to the Asset Purchase Agreement was a judicial sale because it required approval by the court under 11 U.S.C. § 363(f) before it could be consummated.² Third, EC Offshore argues that the Bankruptcy Code preempts Article 2652 with respect to a sale of federal claims approved by the court under 11 U.S.C. § 363. Finally, EC Offshore argues that Article 2652 is inapplicable because the Asset Purchase Agreement and the resulting sale of litigious rights is governed by Texas law, not Louisiana law. The court will first address EC Offshore's choice-of-law argument because the determination of the applicable law to Open Choke's rights is a threshold issue that maybe dispositive of the Redemption Motion. See Prescott v. North Lake Christian School, 369 F. 3rd 491, 496 (5th Cir. 2004).

B. Does Federal or State Law Govern?

The first question for the court is whether federal or state substantive law governs Open Choke's rights with respect to the assignment of East Cameron's fraudulent transfer claims. In Martin v. Morgan Drive Away, Inc., 665 F. 2d 598 (5th Cir. 1982), the Fifth Circuit addressed whether an assignment of federal antitrust claims was void under state-law champerty restrictions. The court acknowledged that federal law does not preclude the assignment of federal antitrust claims, but nevertheless looked to state law as to whether the assignment was champertous. Id. at 604. In doing so, the court distinguished between the federal nature of the claims and the law governing the form of the assignment of the claims. Id. ("Our concern here, however, is not with the substance of assignable claims, but the form in which the claim may be assigned.") (citing Sampliner v. Motion Picture Patents Co., 255 F. 244 (2d Cir. 1918)). The Fifth Circuit then performed a choice-of-law analysis and concluded that Louisiana law on the sale of litigious rights governed the validity of the assignment.³ Turningto the present case, the rights that Open Choke seeks to assert under Article 2652, like the provisions of Article 2447 addressed in Martin, are based on the form of the assignment. Accordingly, as Martin makes clear, state law governs any rights Open Choke may have as a result of the assignment of the claims in this case to EC Offshore. See also, Nicholls Pointing Coulson, Ltd. v. Transportation Underwriters of Louisiana, Inc., 777 F. Supp. 493, 496 (E.D. La. 1991) ("There is no federal law of assignments, and the Fifth Circuit has held that the validity of a particular assignment of a federal cause of action is governed by the state law that the appropriate conflict of laws principles dictate should control the contract.") (Citing Martin).

C. Which Choice-of-Law Rules Apply?

Given that state law governs the claims assignment and Open Choke's rights arising from the assignment, the court must next determine which state's law applies. As the court noted in Nicholls Pointing Coulson, the court must look to "the appropriate conflict of laws principles" to determine the applicable law. In Klaxon Co. v. Stentor Elec. Mfg., the Supreme Court held that a court must apply the choice-of-law rules of the forum where it sits when the court's jurisdiction is based on diversity of citizenship. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Given that this court's...