In re Nicole Energy Services, Inc.

• Decision Date: 08 April 2008
• Docket Number: No. 03-67484.,03-67484.
• Citation: 385 B.R. 201
• Parties: In re NICOLE ENERGY SERVICES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

385 B.R. 201

In re NICOLE ENERGY SERVICES, INC., Debtor.

No. 03-67484.

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus.

April 8, 2008.

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Robert C. Sanders, Upper Marlboro, MD, Grady L. Pettigrew, Columbus, OH, for Debtor.

Stewart H. Cupps, Columbus, OH, for trustee.

Clifford O. Arnebeck, Columbus, OH, for Fulson-Controlled Entities.

Michael T. Gunner, Hilliard, OH, for Nicole Energy Marketing, Inc., Nicole Gas Marketing, Inc. and Nicole Gas Production LLC.

Marcell Rose Anthony, Columbus, OH, for Freddie L. Fulson, Nicole Gas Production Ltd. and Nicole Energy Marketing, Inc.

MEMORANDUM OPINION ON TRUSTEE'S MOTION FOR AN ORDER (1) AUTHORIZING AND APPROVING THE SALE OF CERTAIN ASSETS UNDER ASSET PURCHASE AGREEMENT, FREE AND CLEAR OF LIENS, CLAIMS AND INTERESTS, SUBJECT TO HIGHER AND BETTER OFFERS; (2) APPROVING THE PROCEDURES FOR THE SALE OF ASSETS; AND (3) APPROVING THE FORM OF NOTICE THEREOF

JOHN E. HOFFMAN, JR., Bankruptcy Judge.

I. Introduction

This contested matter is before the Court on the Motion for an Order (1) Authorizing and Approving the Sale of Certain Assets Under Asset Purchase Agreement, Free and Clear of Liens, Claims and Interests, Subject to Higher and Better Offers; (2) Approving the Procedures for the Sale of Assets; and (3) Approving the Form of Notice Thereof ("Sale Motion") (Doc. 286) filed by Larry J. McClatchey, Chapter 11 trustee ("McClatchey" or "Trustee"), on October 25, 2006. By the Sale Motion, the Trustee seeks approval of an asset purchase agreement dated October 17, 2006 (as amended, "APA") between the Trustee and Columbia Gas Transmission Corporation ("TCO"). A number of parties ("Objecting Parties") filed objections to the Sale Motion (collectively, "Objections").¹ On December 8, 2006, the Trustee filed his omnibus reply to the Objections (Doc. 304).² On April 27, 2007, the Trustee filed a motion to amend the original version of the APA, which was attached to the Sale Motion ("Motion to Amend") (Doc. 356). The assets that are the subject of the Sale Motion consist of litigation claims asserted by Nicole Energy Services, Inc. ("NES," "Nicole" or "Debtor") against TCO in state court.

The Trustee requests approval of the APA on two bases. First, he contends that the sale should be approved under 11 U.S.C. § 363(b) because it is in the best interest of the estate and because TCO made the highest and best offer for the purchase of the pending litigation claims held by NES and others. The Trustee also requests approval of the sale as a compromise under Fed. R. Bankr.P. 9019. In response, the Objecting Parties oppose the Sale Motion and argue that the dollar amount of the settlement and sale significantly undervalues the damages that NES allegedly sustained as a result of wrongful actions by TCO.

Under the law of this Circuit, the Court may approve a sale of all of a debtor's assets under § 363(b) "when a sound business purpose dictates such action." Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th Cir.1986). In making its determination under the Stephens Industries analysis, the Court considers the following factors: whether the terms of the proposed sale reflect the highest and best offer for the assets, whether the negotiations were conducted at arm's length, and whether the sale is in the best interest of the estate and its creditors. Applying these factors, for the reasons detailed below, the Court finds that a sound business reason dictates approval of the sale of assets to TCO under the terms and conditions set forth in the APA.

Because the sale effectuates a settlement of claims held by the estate, the Court also must evaluate the agreement between the Trustee and TCO as a compromise under Fed. R. Bankr.P. 9019. In doing so, the Court must review the agreement under the "fair-and-equitable" standard. See Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir.1988) (requiring court to apply fair-and-equitable standard to evaluate proposed compromises). The test for determining whether the proposed compromise is fair and equitable requires the Court to evaluate: (1) the Debtor's probability of success if the litigation proceeds; (2) what difficulties may arise in the collection of any judgment; (3) the complexity, expense and delay that the parties will face; and (4) whether the proposed settlement satisfies the paramount interests of creditors and takes into account their views. See Fishell v. Soltow (In re Fishell), 47 F.3d 1168 (table), 1995 WL 66622 at *3 (6th Cir. 1995). Applying this test, the Court finds that the terms of the proposed settlement are fair and equitable and that each of these elements weighs heavily in favor of approving the compromise. Accordingly, the Court will enter an order granting the Sale Motion.

II. Jurisdiction

The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2)(N) and (O).

III. Events Leading up to the Sale Motion

For several years, four affiliated corporations — Columbia Gas of Ohio, Columbia Gas of Kentucky, Columbia Gas of Pennsylvania (collectively, "LDCs")³ and TCO — were embroiled in litigation with NES in the Court of Common Pleas, Franklin County, Ohio ("State Court").⁴ On November 14, 2003 ("Petition Date") — one business day prior to the beginning of a trial in the State Court — the LDCs and TCO (collectively, "Columbia Entities") filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code against NES pursuant to 11 U.S.C. § 303(b)(1), which was assigned Case No. 03-67484.⁵

A. The State Court Litigation

On July 12, 2002, NES filed a certificate of dissolution with the Ohio Secretary of State and, as of the Petition Date, was in the process of winding up its corporate affairs. Prior to the filing of the certificate of dissolution, NES was a marketer of natural gas, supplying gas for sale to residential and small commercial consumers in Ohio, Kentucky and Pennsylvania. While in business, NES secured supplies of natural gas either from wells owned by an affiliated company or from the commodities market. NES contracted with TCO to transport the gas to the LDCs. In turn, each of the LDCs contracted with NES to deliver the gas to NES's end-user customers in the LDCs' respective states of operation.

Fulson is the principal and sole director of NES, and is also the principal of Nicole Gas Production, Ltd. ("NGP"); Nicole Energy Marketing, Inc. ("NEM"); Nicole Gas Marketing, Inc. ("NGM"); and Nicole Energy Marketing of Illinois, Inc. ("NEMI").⁶

The State Court litigation had been pending between NES and the Columbia Entities for over two years when the Columbia Entities filed the involuntary petition. In the State Court case, the Columbia Entities asserted breach-of-contract claims against NES, seeking to recover damages based on NES's alleged insufficient deliveries of natural gas to the LDCs and alleged failure to pay gas transportation charges to TCO. The Columbia Entities, alleging that a pattern of transfers between Fulson and the various Nicole entities was intended to hinder, delay or defraud creditors, also asserted alter-ego, veil-piercing, successor-liability, fraud and fraudulent-transfer claims against Fulson, NEM, NGP and NGM.

NES, NEM (NES's parent corporation), NGP, NGM and Fulson ("Third-Party Plaintiffs") filed a third-party complaint ("Third-Party Complaint") against TCO in the State Court case. Alleging that TCO failed to properly measure and credit the gas injected into its pipeline system by NGP — NES's production affiliate — NES sought indemnification from TCO for any liability it incurred on the LDCs' breach-of-contract claims. The Third-Party Plaintiffs also sought to recover damages for breach of contract and negligence. According to the Third-Party Complaint, TCO failed to correctly measure and credit the natural gas produced from NGP's metered and unmetered wells. With respect to the metered wells, the Third-Party Plaintiffs claimed that TCO's meters were inaccurate because they were located a considerable distance from NGP's wells and were installed on leaky, ill-maintained gathering lines. The Third-Party Complaint further alleged that TCO breached its contract with NES by failing to install meters on NGP's unmetered wells — a requirement imposed on TCO under its federal natural gas tariff ("Tariff). The Third-Party Plaintiffs asserted that, rather than installing meters to gauge natural gas production as mandated by the Tariff, TCO instead estimated NGP's production from the unmetered wells using a flawed methodology. The Third-Party Plaintiffs sought to recover between $18 million and $48 million in damages from TCO.

B. Post-Petition Events in the Bankruptcy Case

On November 17, 2003, NES filed a response and motion to dismiss the involuntary petition (Doc. 3) in Case No. 03-67484, and also sought the imposition of sanctions against the Columbia Entities, alleging that the involuntary petition was filed in bad faith. At the same time, NES also moved the Court to remand the State Court case under 28 U.S.C. § 1452, or alternatively, to abstain from exercising jurisdiction under 28 U.S.C. § 1334. Thereafter, three judgment creditors — AGF Direct Gas Sales & Servicing, Inc. ("AGF Direct Gas"); R.E. Uptegraff Manufacturing Co.; and Perry Gas Companies, Inc. — filed motions to intervene, seeking leave to join in the involuntary petition under § 303(c).

While these contested motions were pending, on March 12, 2004, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, which was assigned Case No. 04-53678. On that same date, the Debtor moved for a second time in Case No. 03-67484 to...