In re MTE Holdings LLC

• Decision Date: 18 August 2021
• Docket Number: Case No. 19-12269 (CTG) Jointly Administered
• Citation: In re MTE Holdings LLC, 631 B.R. 690(Mem) (Bankr. Del. 2021)
• Court: U.S. Bankruptcy Court — District of Delaware
• Parties: IN RE: MTE HOLDINGS LLC, et al., Debtors.

631 B.R. 690 (Mem)

IN RE: MTE HOLDINGS LLC, et al., Debtors.

Case No. 19-12269 (CTG) Jointly Administered

United States Bankruptcy Court, D. Delaware.

Signed August 18, 2021

Michele L. Angell, Kenneth R. David, Andrew K. Glenn, Marc E. Kasowitz, David J. Mark, Shai Schmidt, Matthew B. Stein, Kasowitz, Benson, Torres & Friedman LLP, Emanuel C. Grillo, Jacob Herz, Baker Botts LLP, New York, NY, James Barkley, Jason Bennett, Baker Botts LLP, Houston, TX, Daniel B. Butz, Robert J. Dehney, Paige Noelle Topper, Brett Shea Turlington, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, Andrew M. Leblanc, Milbank, Tweed, Hadley & McCloy LLP, Washington, DC, Andrew R. Workman, for Debtor MTE Holdings LLC.

Linda J. Casey, Office of United States Trustee, Wilmington, DE, for U.S. Trustee.

MEMORANDUM OPINION ¹

CRAIG T. GOLDBLATT, UNITED STATES BANKRUPTCY JUDGE

The debtors are parties to various mineral rights leases that authorize them to drill for oil and gas in exchange for the payment of royalties on the oil and gas they extract from the land. Certain of the lessors, known as "interest holders," filed proofs of claim, alleging that they were owed amounts for royalties that were due and owing as of the petition date. The debtors generally do not dispute that they owe money to the interest holders for unpaid royalties, though the precise amounts of those claims have not yet been fully liquidated. The question the parties have put before the Court, however, is whether those claims are secured, and if so, whether the interest holders' liens come ahead of or behind the liens held by the debtors' reserve-based lenders. The interest owners' argument for secured and priority status rests on Texas Business and Commerce Code § 9.343, a non-uniform provision of the Uniform Commercial Code enacted by the Texas legislature to protect the rights of interest owners. The Court concludes that the interest holders' claims are unsecured because the language of section 9.343 does not create a security interest that covers the claims that the interest holders actually hold. While the parties also present other disputes, such as the relative priority of any lien created under section 9.343 and the liens of the RBL lenders in light of the reasoning of In re Semcrude ,² the effect of the cash collateral order on any liens held by the interest holders and the application of the lowest-intermediate balance test to the proceeds of the oil and gas at issue, the Court does not believe, in light of the conclusions reached on the statutory issue, that the outcome of those disputes would affect the conclusion that the interest holders have unsecured claims. The Court accordingly does not reach those issues.

Factual and Procedural Background

The debtors, which are in the oil and gas exploration, drilling and development business, filed for bankruptcy protection in October 2019.³ In the ordinary course, the debtors have entered into numerous mineral leases with various interest holders under which they are obligated to pay interest holders royalties for extracted hydrocarbons. These leases authorize owners of mineral interests to sell or otherwise convey the exclusive right to extract minerals to third parties in exchange for a share of the proceeds from the sale of oil and gas production. The debtors are party to approximately 800 oil and gas leases in Texas.⁴ A number of interest holders have filed proofs of claim for unpaid royalties. In the debtors' tenth omnibus proof of claim objection, D.I. 2334, (the "Objection"), the debtors objected to 42 proofs of claim. In the Objection, the debtors seek to reclassify the claims that were filed as secured claims as unsecured claims. In some cases, the debtors also seek to reduce the amount of the asserted claims.

Six royalty claimants filed responses to the debtors' Objection, which cover 19 of the proofs of claim at issue in the debtors' Objection.⁵ The Court held an evidentiary hearing with respect to these claims allowance disputes on August 11, 2021.⁶ The parties agreed that the question of the amount of unpaid royalties with respect to the 19 proofs of claim was not yet ripe for decision – the parties intended to continue discussions in order to see if those amounts might be reconciled on a consensual basis, with any disputes presented to the Court if those efforts proved unsuccessful. Accordingly, the question now before the Court is not whether any of the 19 claims should be allowed or disallowed, or in what amount. The rights of all parties in that regard are expressly preserved. Rather, the question presented to the Court is only whether those claims should be classified as secured claims. See Aug. 11, 2021 Hearing Tr. 125-126.

Based on the evidentiary record established at the August 11, 2021 hearing, the asserted royalty amounts, and key mineral lease terms are set out below:

1. The King Response and associated proof of claim assert a royalty in the amount of $40,590.23. The governing lease terms, dated April 3, 2014, call for a one-fourth royalty of production. A division order annexed to the mineral lease, with an effective date of January 1, 2019, provides for payments to be made by check to the royalty interest owner.⁷

2. The Finley Response and associated proofs of claim assert a royalty in the amount of $449,949.77.⁸

3. The Wagner Response and associated proofs of claim assert a royalty in the amount of $376,219.39, along with a claim for surface damages in the amount of $66,511.00 that the claimant concedes is a general unsecured claim. The governing lease terms, dated March 13, 2014, call for as royalty either one-fourth of production, or one-fourth of the gross proceeds for the sale of hydrocarbons severed from the land. Various division orders annexed to the mineral lease, with effective dates stemming from June 2015, provide for payments to be made by check to the royalty interest owner. An example of such a check, in the amount of $11,600.20, is provided as Exhibit C to the Wagner Response.⁹

4. The Kesey Response and associated proof of claim assert a royalty in the amount of $88,341.63. The governing lease terms, dated September 30, 2010, call for a one-fourth royalty of the net proceeds of production.¹⁰

5. The Wilson Response and associated proofs of claim assert royalties in the aggregate amount of $71,016.69. The governing lease terms, dated from April 4, 2014, call for a one-fourth royalty of the net proceeds of production.¹¹

6. The Cisneros Response and associated proofs of claim assert a royalty in the amount of $219,128.88. The governing lease terms, dated from September 2, 2015, call for a one-fourth royalty of the gross proceeds of production.¹²

Jurisdiction

This Court has subject-matter jurisdiction over the motion under 28 U.S.C. § 1334(b). This is a core matter under 28 U.S.C. § 157(b).

Analysis

Under Bankruptcy Code § 502(a), a proof of claim is deemed allowed unless objected to. 11 U.S.C. § 502(a). If a proof of claim follows certain requirements under Federal Rule of Bankruptcy Procedure 3001, then it is prima facie evidence of the claim's validity.¹³ As the Third Circuit explained in Allegheny , however, the filing of an objection under Rule 9014 operates to defeat that prima facie case so long as the objection "produces sufficient evidence to negate one or more of the sworn facts in the proof of claim."¹⁴ In that event, the burden is then shifted back to the claimant to demonstrate the validity of the claim.¹⁵ For purposes of the present dispute, the debtors' Objection and supporting declarations, D.I. 2334, 2335, 2411, provided sufficient evidence challenging the secured status of the claims to shift the burden, under Allegheny , to the claimants to demonstrate that their claims are secured.

Section 9.343 creates a senior statutory lien only to secure an obligation to pay the purchase price of produced oil and gas.

The initial question presented to the Court is whether the claims are secured by virtue of the statutory lien created under Texas law by section 9.343. In determining whether a claim asserted by a creditor is secured, bankruptcy courts look to the applicable state law, as "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law."¹⁶ Here, no one disputes that Texas law is applicable. None of the parties, however, has pointed to any decision of the Texas courts, let alone of the Texas Supreme Court, addressing the issue now before this Court. Accordingly, the role of this Court is to predict how this question of would be resolved by the Texas courts, and particularly by its Supreme Court.¹⁷

For the reasons set forth below, the Court finds that, as a matter of ordinary English, the statutory lien created by section 9.343(a) secures only an obligation to pay the purchase of produced oil and gas, as opposed to hydrocarbons in their unproduced (raw material) state. The interest owners here, however, never owned produced oil and gas. That construction (which the Court believes is required by the statutory language) gives rise to a fair question: why would the Texas legislature enact a statute designed to protect interest owners (who typically do not themselves produce oil and gas) that does not cover the amounts typically due to interest owners? A partial response to that question, suggested by a law review article cited by the debtors, is that where the operator is obligated to pay the royalty in kind, meaning in produced oil or gas, rather than cash, the interest owner would become a seller of that produced oil or gas.¹⁸ In that event, the statute would serve its intended purpose of creating a lien to secure the obligation to make the royalty payment. But here, the only record evidence bearing directly on that question is the debtor's testimony that none of the claimants in fact were paid in kind. And while some of the claimants presented evidence suggesting that they had the right, under their contracts,...