In re Llc

• Decision Date: 17 November 2010
• Docket Number: Bankruptcy No. 07-35674-BJH-11,Adversary No. 10-3039-BJH
• Citation: 440 B.R. 457
• Parties: In re VALLECITO GAS, LLC, Debtor. Harvey L. Morton, as Chapter 11 Trustee of Vallecito Gas, LLC, Plaintiff, v. Tom D. Kievit, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

440 B.R. 457

In re VALLECITO GAS, LLC, Debtor.

Harvey L. Morton, as Chapter 11 Trustee of Vallecito Gas, LLC, Plaintiff,

v.Tom D. Kievit, et al., Defendants.

Bankruptcy No. 07-35674-BJH-11.

Adversary No. 10-3039-BJH.

United States Bankruptcy Court,

N.D. Texas,

Dallas Division.

Nov. 17, 2010.

Harvey Leon Morton, Law Office of Harvey L. Morton, Lubbock, TX, for debtor.

Rochelle, Hutcheson & McCullough, LLP, Dallas, TX, for other parties.

MEMORANDUM OPINION AND ORDER

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court is a motion for partial summary judgment (the "Motion") filed by Harvey L. Morton, Chapter 11 Trustee (the "Trustee") of the estate of Vallecito Gas, LLC ("Vallecito" or "the Debtor"). In the Motion, the Trustee seeks summary judgment on only Count 1 of his complaint, and solely against one defendant, Joel Pugh ("Pugh"). The Court has core jurisdiction over this adversary proceeding and the Motion in accordance with 28 U.S.C. §§ 157 and 1334. This Memorandum Opinion contains the Court's findings of fact and conclusions of law regarding the Motion in accordance with Federal Rule of Bankruptcy Procedure 7052.

This dispute has a complicated factual and procedural history, some of which is more fully set forth in (i) the Court's Memorandum Opinion and Order dated August 29, 2008 in Adversary Proceeding No. 08-3132-BJH (the "Tiffany Adversary Proceeding"), (ii) the court-approved disclosure statement in Vallecito's bankruptcy case (Docket No. 203 in Case No. 07-35674-BJH-11), and (iii) the Court's Amended Order Relating to Order to Show Cause (Docket No. 351 in Case No. 07-35674-BJH-11). However, an abbreviated recitation of some of the factual and procedural background of the present dispute is necessary, to which we now turn.

I. FACTUAL AND PROCEDURAL BACKGROUND

Prior to its bankruptcy filing, Vallecito purchased a mineral lease, located on the land of the Navajo Nation in San Juan County, New Mexico, from Tiffany Gas Co., LLC ("Tiffany") known as the "Hogback Lease." Suffice it to say that on the date of Vallecito's bankruptcy filing, there were several competing claims to the Hogback Lease, asserted in litigation pending in other fora, and the status of Vallecito's title to the Hogback Lease was less than clear. Most importantly to the resolution of the Motion, after it received the HogbackLease from Tiffany but before its bankruptcy filing, Vallecito executed an assignment of the Hogback Lease to Briggs-Cockerham, LLC ("B-C"), which entity held 100% of the membership interests in Vallecito.¹ The validity and/or effect of that assignment, which shall be referred to herein as the "B-C Assignment," is the primary issue before the Court in the Motion. As detailed below, the validity of the B-C Assignment has never been judicially determined because the Trustee, the Court, and all parties-in-interest in the Vallecito bankruptcy case believed, until recently, that B-C, while once claiming an interest in the Hogback Lease, had disclaimed any such interest in open court during the course of a Vallecito hearing; and thus, B-C no longer asserted any interest in the Hogback Lease.²

Also prior to its bankruptcy filing, Vallecito entered into several participation agreements with Arcturus Corporation ("Arcturus") that involved certain of Vallecito's oil and gas properties (but not the Hogback Lease) and disputes had arisen between these parties. Specifically, Arcturus sued Vallecito and others in July of 2006 in the 298th Judicial District of Dallas County (the "Arcturus Litigation"). In April of 2007, the judge in the Arcturus Litigation entered a temporary injunction (the "Arcturus Injunction") against Vallecito and Briggs, an indirect principal of Vallecito. The Arcturus Injunction provided that

Vallecito and Briggs, their affiliates, agents, servants, employees, and representatives are hereby commanded forthwith to desist and refrain from accessing, spending, diverting, selling, or transferring, or otherwise disposing of any of their assets (of any kind) and any funds within their actual or constructive possession or control ... and from altering, erasing, or otherwise destroying any and all records that relate to the $1,920,000 they received from Arcturus and its investors, such that all of Vallecito's and Briggs' funds and assets are hereby frozen, and Vallecito and Briggs are hereby restrained from disposing of any of their funds and assets until the final trial on the merits in this case.

The Arcturus Injunction was still in place when Vallecito filed its bankruptcy case on November 14, 2007 (the "Petition Date"). And, as discussed more fully below, the Arcturus Injunction was still in place on the date that B-C purportedly assigned a 5% overriding royalty interest in the Hogback Lease to Pugh.

Shortly after the Petition Date, Arcturus moved for the appointment of a Chapter 11 Trustee for Vallecito. After a hearing on that motion, the Trustee was appointed and began to take steps to marshal the assets of the Vallecito bankruptcy estate.In March of 2008, the Trustee filed a "Motion for Contempt, Sanctions and Appointment of Receiver Against Michael Briggs, Individually" (the "Motion for Contempt"), which was ultimately heard on April 17, 2008. In addition, in order to resolve the competing claims to the Hogback Lease, the Trustee filed an agreed motion for mediation, which was agreed to by many of the competing claimants to the Hogback Lease.³See Docket No. 117 in Case No. 07-35674-BJH-11. At the April 16, 2008 mediation, a settlement was reached with many, but not all, of the parties claiming an interest in the Hogback Lease.

The Trustee also separately settled the dispute between Arcturus and Vallecito, conditioned upon confirmation of a Chapter 11 plan embodying the terms of his settlement and consummation of such a plan.

As noted earlier, the mediation did not resolve all disputes with all of the competing claimants to the Hogback Lease—specifically, it did not resolve disputes with B-C and Briggs, who also claimed ownership of the Hogback Lease. Instead, the Motion for Contempt, which alleged various violations of both the Arcturus Injunction and the Bankruptcy Code, proceeded to hearing the day after the mediation (April 17, 2008). In the midst of that hearing, the parties requested a brief recess and, at the conclusion of the recess, announced that they had reached a settlement. The Trustee placed the terms of the settlement on the record. As is relevant here, one of the terms of the settlement was that "Mr. Briggs, Mr. Cockerham, Briggs-Cockerham, LLLC [sic] are releasing any and all claims they have to anything in the Vallecito estate, including any claims to the Hogback lease and any sale can go forward without they [sic] objection. And they're waiving all of their claims and any assets in Vallecito, including ones if we discover any." Transcript 4/17/08, p. 74:12-18. This "disclaimer" was the source of the Trustee's (among others') belief, until recently, that B-C no longer claimed an interest in the Hogback Lease.

The results of the mediation, the settlement with Arcturus, and the settlement with and "disclaimer" by Briggs, Cockerham, and B-C were thought to remove a further, but not the last, impediment to a liquidation of the Hogback Lease for the benefit of Vallecito's creditors. The last apparent impediment, a dispute with Tiffany over an alleged forfeiture of the Hogback Lease by Vallecito, matured in May of 2008 when Tiffany filed an adversary proceeding against the Trustee seeking a determination that Vallecito had forfeited its rights to the Hogback Lease. In short, Tiffany asserted that the purchase and sale agreement between the parties required Vallecito to obtain approval of the transfer from Tiffany to Vallecito by the Bureau of Indian Affairs ("BIA") by a date certain, that Vallecito (now a Chapter 11 debtor) had failed to timely obtain such approval, and therefore Tiffany was entitled to a return of the Hogback Lease upon its repayment of the purchase price previously paid to it by Vallecito. On August 29, 2008, the Court entered its Memorandum Opinion and Order on the Trustee's motion for summary judgment, in which the Court concluded, as a matter of contract interpretation, that Tiffany was not entitled to a forfeiture of the Hogback Lease. Tiffany appealed the Court's Memorandum Opinion and Order (the "TiffanyAppeal").⁴

Thus, with the exception of the Tiffany Appeal, all of the apparent impediments to confirmation of a plan that would liquidate the Hogback Lease for the benefit of Vallecito's creditors were thought to have been removed. Accordingly, the Trustee proposed the First Amended Plan of Liquidation for the Debtor (the "Plan"). Essentially, the Plan provided that the Hogback Lease would be sold to Vision Energy, LLC ("Vision") in exchange for approximately $6.6 million in cash, subject to certain terms and conditions, with the proceeds to be distributed in accordance with the various settlements with the relevant parties, who agreed to disclaim their alleged interests in the Hogback Lease in order to permit the sale to Vision to occur. One of the conditions to the Plan becoming effective, and the closing of the sale to Vision, was that the Tiffany Appeal be resolved in the Trustee's favor. Another was that the conveyance of the Hogback Lease would be finalized pursuant to an asset purchase agreement that would provide, among other things, for the sale of 100% of the working interest and net revenue interest in the Hogback Lease, subject only to the royalty interest of the Navajo Nation, and that except for the Navajo Nation, all other interests in the Hogback Lease, including but not limited to those of B-C, Briggs, Cockerham, Vallecito, and other named settling parties, would be extinguished upon the transfer of the Hogback Lease to Vision. The Plan was confirmed by Order entered on March 17, 2009 (the "Confirmation Order"). Due to the continued pendency of the Tiffany...