In re GHR Energy Corp.

• Decision Date: 27 May 1986
• Docket Number: 84-03475-H2-5.,No. 84-03474-H1-5,84-03474-H1-5
• Citation: 62 BR 226
• Parties: In re GHR ENERGY CORP., f/k/a Good Hope Refineries, Inc., and GHR Pipeline Corp., f/k/a Southern Pipe Line Corporation, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Texas

62 B.R. 226 (1986)

In re GHR ENERGY CORP., f/k/a Good Hope Refineries, Inc. and GHR Pipeline Corp., f/k/a Southern Pipe Line Corporation, Debtors.

Nos. 84-03474-H1-5, 84-03475-H2-5.

United States Bankruptcy Court, S.D. Texas, Houston Division.

May 27, 1986.

H.S. Finkelstein, A. David Benjamin Finkelstein, Susan Raphael Finkelstein, Irrevocable Trust, Three Sisters Trust, Medallion Oil Co., Finkelstein Group: Paul P. Daley, Albert A. Notini, Hale & Door, Boston, Mass., Hugh M. Ray, J. Douglas Bacon, Andrews & Kurth, Frank Douglass, Morgan L. Copeland, Christopher Fuller, Scott, Douglass & Luton, Houston, Tex., for claimants.

Robert J. King, James M. Dash, John C. Nabors, J. Michael Dorman, Liddell, Sapp & Zivley, Houston, Tex., for debtor.

MEMORANDUM OPINION

MANUEL D. LEAL, Bankruptcy Judge.

Came on for oral argument the Finkelstein group's motion for partial summary judgment on the liability aspect of their proof of claim which was filed on November 21, 1984. The issue is whether these debtors' are judicially precluded from challenging the underlying gas purchase agreement when they applied and obtained a court order allowing the debtor to reject the executory contract. We hold that the debtor is not precluded from raising the defense of lack of consideration under Texas law and that fact issues exist as to the alleged failure of consideration. In addition, res judicata and collateral estoppel would not operate to bar GHR from litigating the validity of Finkelstein's overriding royalty interest of El Paso Natural Gas in the Dolores & Corralitos subdivision in Zapata County, Texas because fact issues exist which are currently being litigated in adversary proceeding number 85-0946. Finally, this Court cannot rule that the "prevailing price", in and of itself, establishes Finkelstein's damages with reasonable certainty as a matter of law. Accordingly, the Finkelstein motion for summary judgment is DENIED.

FACTS

Southern Pipe Line Corp. (predecessor to GHR Pipeline which is now Transamerica Pipeline Corp.) entered into a gas purchase contract with Finkelstein on October 1, 1974. Prior to this contract, the parties had entered into a letter agreement, dated January 24, 1974 in which GHR agreed to convey overriding royalty interests to Finkelstein in return for Finkelstein offering his leasehold properties to GHR. The letter agreement stated:

The parties hereto agree and stipulate that the following described trades have already been submitted to Stanley by Finkelstein and they have agreed that in the event such trade is closed by Stanley, the overriding royalty interest to be assigned to Finkelstein, as to each of the following trades, is a fraction out of Stanley\'s net revenue interest as indicated by the fraction set opposite each trade, to-wit:

Leases covering all or parts of the land or mineral interests owned by Lloyd M. Bentson, et al, El Paso Natural Gas Company, Jesse M. McNeel, in the Dolores Subdivision and the Corralitos Subdivisions in Zapata County, Texas____1/16th

This agreement was recorded in the public records of Zapata County on July 23, 1974.

On October 31, 1975 Pipeline & Energy filed voluntary petitions under Chapter XI of the Bankruptcy Act of 1898 in Massachusetts. On February 3, 1976, the U.S. Bankruptcy Court in Massachusetts entered three orders which related to the gas purchase contract and letter agreement. First, an order was signed which allowed the debtor to assume the gas purchase contract. The order stated that it relied on the facts alleged in debtor's motion to assume and recited:

I find that the Debtors\' ability to purchase natural gas pursuant to a contract with H.S. Finkelstein dated October 1, 1974, and to transport such gas for a fee, is desirable for the continued operation of the Debtors\' respective businesses, and in the best interest of the Debtors and their creditors, would be in the ordinary course of business for the Debtors, and that execution of an agreement providing that the Finkelstein Group will waive any right it may have to terminate said contract by reason of the Debtors\' having filed Chapter XI petitions, and also providing satisfactory assurances to the Finkelstein Group that the contract will remain in effect and that it will be paid for gas sold and delivered to the Debtors under said contract, will ensure a continuing supply of gas.

The application which the debtor filed with the bankruptcy court stated:

Natural gas is presently in short supply, and the debtors believe that the contract, which provides a long-term source of such gas to the debtors at reasonable prices, is a valuable asset which would be lost were the Finkelstein Group to terminate the contract.

5. Gas purchased by the debtors from the Finkelstein Group is transported by pipeline by Southern, and is then in turn resold by Good Hope to Lo-Vaca Gathering Corporation ("Lo-Vaca") pursuant to existing contractual arrangements between the debtors and Lo-Vaca (the "Lo-Vaca contract").

Also incorporated into the order allowing assumption of the contract was an agreement which stated:

2. Pursuant to the authorization of the Bankruptcy Court referred to above, Southern and Good Hope as debtor-in-possession, each hereby ratifies and assumes the contract, as modified hereby, and each waives the right which it would otherwise have to reject the contract pursuant to the provisions of the Bankruptcy Act.

The second order granted the debtor the authority to execute assignments. This order stated:

1. The debtors have a valid and binding agreement with H.S. Finkelstein, pursuant to which, inter alia, the debtors have agreed to deliver to Finkelstein certain assignments more fully described in the application.

The third order approved the establishment of the "prevailing price" as that term is used in the contract. This order found that price to be fair and further stated:

1. It would be in the ordinary course of business of the debtor to fulfill the obligations incurred by it in the Gas Purchase Contracts signed by Southern Pipe Line Corporation on October 1, 1974 with H.S. Finkelstein.

Plans of arrangement were approved by the bankruptcy court in May, 1980.

On February 16, 1983 and January 26, 1983, GHR Pipeline and Energy respectively filed Chapter 11 petitions under the Bankruptcy Code of 1978. Almost a full year and a half later the debtor, GHR, filed an application to reject an executory contract with H.S. Finkelstein. An objection to the application was filed by the Finkelstein group. A hearing was held on September 25, 1984, evidence was taken. In the midst of the evidentiary hearing, a settlement was reached. An agreed order was submitted to the Court and signed on September 25, 1984. This order stated:

A hearing having been held on September 25, 1984 on H.S. Finkelstein, et al, verified emergency motion and motion for an emergency hearing concerning certain contracts with the debtors filed on July 20, 1984, and on the debtors\' application to reject executory contract with H.S. Finkelstein filed on August 27, 1984, upon consideration of the pleadings, memoranda, and other papers filed by the parties and the testimony offered and evidence introduced at this hearing and the preliminary hearing held on August 29, 1984 it is hereby

FOUND:

1. That H.S. Finkelstein and Medallion Oil Company (hereinafter referred to as "Finkelstein") entered into an agreement with John R. Stanley. Good Hope Refineries, Inc. (n/k/a GHR Energy Corp.), and Gasland, Inc. (hereinafter collectively referred to as "GHR"), as of January 24, 1974, as supplemented and amended on October 1, 1984 (the "Contract").

2. Under the Contract GHR was to assign an overriding royalty interest in certain leases then existing and to be acquired in Webb and Zapata Counties;

3. That pursuant to the supplement to the Contract, on October 1, 1974 a gas purchase agreement was entered between Southern Pipe Line Corporation (n/k/a GHR Pipeline Corp.) and H.S. Finkelstein (the "Gas Purchase Agreement");

4. That H.S. Finkelstein and his assignees hold at the very least an overriding royalty interest in the gas produced under the leases covered by the Contract whether or not the Gas Purchase Agreement is rejected or deemed rejected;

and it is hereby ORDERED

1. That the debtors shall pay H.S. Finkelstein and his assignees each month the amount due to holders of royalty interests in the leases covered by the Contract from the date of this order.

2. That the debtors shall direct the Continental Illinois National Bank and Trust Company of Chicago to transfer from the royalty suspense account or the escrow account established pursuant to the order of this court dated September 10, 1984, an amount sufficient to pay H.S. Finkelstein and his assignees their allocable share due to holders of royalty interests in the leases covered by the Contract from May 1, 1984 through the date of this Order.

4. That the Gas Purchase Agreement be and hereby is rejected.

5. Paragraph 3 of the supplemental letter agreement dated January 24, between John R. Stanley and H.S. Finklestein shall be interpreted with the terms of this agreed order.

6. That the debtors make an accounting to H.S. Finkelstein for all assignments due under the Contract and all royalty or purchase payments made under the contract from the commencement of this proceeding to this date and thereafter.

7. That H.S. Finkelstein shall file his claim for damages if any within sixty (60) days from the date of this order; the debtors shall have sixty (60) days thereafter to file any counterclaim against H.S. Finkelstein; each party shall cooperate with each other for any discovery required to file any claim or counterclaim.

Signatures deleted.

Debtor paid Finkelstein the amounts due under the override until early 1985. In 1985, GHR ceased making payments. Finkelstein commenced an adversary proceeding seeking damages and equitable relief caused by GHR's refusal to pay for the overriding...