Hartman v. Ultra Petroleum Corp. (In re Ultra Petroleum Corp.)
| Decision Date | 16 May 2017 |
| Docket Number | CASE NO: 16–32202,ADVERSARY NO. 16–3250 |
| Citation | 571 B.R. 755 |
| Parties | IN RE: ULTRA PETROLEUM CORP., et al, Debtor(s) Doyle Hartman, et al, Plaintiff(s) v. Ultra Petroleum Corp., et al, Defendant(s) |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Peter A. Kerr, The Dacus Firm, PC, Deron R. Dacus, Attorney at Law, Tyler, TX, Jason R. Searcy, Attorney at Law, Longview, TX, for Plaintiff.
Christopher T. Greco, Kirkland & Ellis LLP, New York, NY, David R. Seligman, Michael B. Slade, Kirkland and Ellis LLP, Chicago, IL, Joseph G. Thompson, III, Watt Thompson Frank & Carver LLP, Houston, TX, for Defendant.
Doyle and Margaret Hartman filed this adversary proceeding against Ultra Petroleum Corporation et al seeking to recover a percentage of Ultra's gains attributable to its oil and gas hedging transactions. The Hartmans allege that hedging gains must be included within their net profits interest, which was created by the 1954 Pinedale Unit Area Net Profits Contract (the "Pinedale Contract"). Ultra moved to dismiss the Hartmans' complaint and amended complaint under FED. R. CIV. P. 12(b)(6) as to their hedging claim; Ultra's motion to dismiss argues that the Pinedale Contract precludes recovery of hedging gains by the Hartmans. All parties agreed to treat Ultra's Rule 12(b)(6) motion to dismiss as a motion for partial summary judgment. The Hartmans subsequently filed a cross motion for summary judgment in which they argue that Ultra's hedging gains should be included in the calculation of their net profits interest.
Ultra's motion for partial summary judgment is granted. The Hartmans' cross motion is denied.
Effective April 1, 1954, Malco Refineries, Inc., El Paso Natural Gas Company, and Continental Oil Company (the "First Parties") entered into the Pinedale Contract with Novi Oil Company. (ECF No. 36–2; ECF No. 2 at 5). Under the Pinedale Contract, Novi assigned its working interest in four leases within the Pinedale Unit Area of Sublette County, Wyoming, to the First Parties in exchange for a sum representing 5% of the First Parties' net profits. (ECF No. 36–2; ECF No. 2 at 5). The Pinedale Contract computes net profits "on the basis of all operations under the Pinedale Unit applicable to said leases."
(ECF No. 36–2 at 1). "Net profits" is defined in the Pinedale Contract as "the gross revenue ... from unit operations allocable to said leases after deduction of all expenses of unit operations ... except those charged to the working interest owners." (ECF No. 36–2 at 2).
Gross revenue for oil and gas is computed by taking "into account the proceeds of production sold for delivery at the wellhead." (ECF No. 36–2 at 2). "As to production not so sold, the fair market value of such production at the wellhead shall be taken into account; provided, however, that as to gas the value to be taken into account shall be equivalent to the price that Continental is entitled to receive for its share of gas under the provisions of that certain agreement by and between Continental and El Paso entitled ‘Option to Purchase Gas Agreement.’ " (ECF No. 36–2 at 2).
Under the Option to Purchase Gas Agreement, until sufficient reserves were developed and a pipeline created to transport gas out of the local area, El Paso held "an option to purchase all of Continental's interest in gas produced from the subject lands." (ECF No. 36–8 at 4). "If El Paso is selling the gas in one temporary market, it shall pay Continental for Continental's gas the wellhead price El Paso is receiving for the gas, if sold at the wellhead, or if not sold at the wellhead, a wellhead price consistent with the price El Paso is obtaining for such gas." (ECF No. 36–8 at 6–7). If El Paso sells Continental's gas at different prices, it shall pay Continental "a wellhead price equal to the weighted average wellhead price El Paso is receiving ... or if not sold at the wellhead, a wellhead price consistent with the average price El Paso is receiving, weighted by volume." (ECF No. 36–8 at 7). If El Paso and Continental elected to buy and sell gas amongst each other according to the model Gas Purchase Agreement included in the Option to Purchase Gas Agreement, the purchase price would be "the market value at the delivery point." (ECF No. 36–8 at 24).
The Pinedale Contract requires the First Parties to issue payments of net profits "whenever it shall appear at the end of such month that net profits have been realized as a result of operations under said leases, taking into consideration all expenses theretofore incurred in connection with such operations." (ECF No. 36–2 at 4).
Ultra eventually became a successor in interest to the First Parties while the Hartmans became successors in interest to Novi. (ECF No. 27 at 7; ECF No. 35 at 9). As of 2006, 22 of the 62 original leases covered by the Pinedale Contract were still in place. Ultra Res., Inc. v. Hartman , 226 P.3d 889, 902 (Wyo. 2010). Today, the Hartmans own a 2.49% net profits interest that burdens leases in the Pinedale Field. (ECF No. 2 at 6; ECF No. 2 at 3).
In May 2005, the remaining leases burdened by the Pinedale Contract became profitable. Hartman , 226 P.3d at 902. Consequently, the Hartmans sent a letter to Ultra on February 22, 2006, stating that they owned a net profits interest and demanding payment and an accounting of their interest. Id. After Ultra failed to meet their demands, on March 31, 2006, the Hartmans brought suit in Wyoming state court. Id. The Hartmans' complaint asserted multiple claims for relief, including a declaratory judgment as to the validity of the net profits interest under the Pinedale Contract, a breach of the Pinedale Contract by Ultra, and a breach of Ultra's duty of good faith and fair dealing. Id. at 903. After a bench trial, the district court granted the Hartmans' summary judgment motion on the following issues, amongst others: the successors to the First Parties—Ultra—breached their obligations under the Pinedale Contract; Ultra owed $4,896,589.00 on the net profits interest; Ultra was liable to the Hartmans for unpaid net profits; and Ultra remained obligated under the Pinedale Contract for accounting and payment of the net profits interest. Id. at 904.
Ultra subsequently appealed the district court's determination. Id. On appeal, the Supreme Court of Wyoming affirmed the state district court's ruling in part and reversed and remanded in part for proceedings consistent with its opinion. Id. at 940. The Wyoming Supreme Court found that the district court properly ruled that the net profits interest continued to encumber the still existing and relevant leases, that the Hartmans sufficiently proved their ownership of the net profits interest to entitle them to payment from Ultra, and that the non-operating Ultra defendants breached the Pinedale Contract. Id. at 939. However, the Wyoming Supreme Court also concluded that the district court made several errors in its damages award to the Hartmans, particularly by concluding that produced gas used on the burdened leases was to be included as revenue for the net profits calculation under the Pinedale Contract. Id. at 940. Accordingly, the Wyoming Supreme Court reversed and remanded the district court's damages award for recalculation. Id.
The Hartmans filed a second lawsuit in Wyoming district court in order to enforce the Wyoming Supreme Court's and district court's judgments against Ultra and challenge Ultra's proffered net profits interest accounting in post-appeal proceedings. Hartman v. Ultra Resources, Inc. , 2014 WL 4647857 (2014). Ultra appealed the district court's orders on the merits of the Hartmans' claims issued in the second lawsuit, including an order refusing to allow Ultra to charge expenses invoiced prior to January 1, 2007, to the calculation of the net profits interest starting January 1, 2007. Ultra Res., Inc. v. Hartman , 346 P.3d 880, 886 (Wyo. 2015). The Wyoming Supreme Court affirmed the district court's orders, finding that the district court's interpretation of the Pinedale Contract was correct in regards to when expenses were "incurred" under the contract. Id. at 906.
Neither proceeding brought by the Hartmans in regards to the Pinedale Contract and their net profits interest dealt with the interpretation of the Pinedale Contract's revenue provisions, or whether revenue from hedge transactions should be included in the calculation of the Hartmans' net profits interest. (ECF No. 35 at 10).
On April 29, 2016, Ultra filed a voluntary chapter 11 bankruptcy petition. Case No. 16–32202. The Hartmans filed Proof of Claim 157 in Ultra's chapter 11 bankruptcy on August 23, 2016; Proof of Claim 157 asserts multiple claims against Ultra, including one for allegedly underreported revenue realized from Ultra's hedge transactions. (ECF No. 27 at 9). On November 7, 2016, the Hartmans filed this adversary proceeding to recover monies allegedly due to them from Ultra under their net profits interest after Ultra refused to include in the net profits interest accounting the full fixed-price hedge gains received from net profits interest-burdened lease production. Case No. 16–03250. (ECF No. 2 at 23).
The Hartmans' adversary proceeding specifically seeks to: determine the true status of the net profits interest account for the net profits interest accounting period beginning January 1, 2007; declare the parties' rights and obligations with respect to the proper method of net profits interest accounting; determine that the gross revenue for the net profits interest should include the amount of overriding royalties paid to any of the First Parties; determine the parties' rights and obligations with respect to the audits of the total net profits interest revenues received and expenses incurred on the net profits interest-burdened leases; determine Ultra's obligations to provide the Hartmans with all requested information related to producing operations and...
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