In re Northstar Offshore Grp., LLC
| Decision Date | 10 July 2020 |
| Docket Number | CASE NO: 16-34028 |
| Citation | 628 B.R. 286 |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
| Parties | IN RE: NORTHSTAR OFFSHORE GROUP, LLC, Debtor(s) |
Jason Wayne Billeck, Holland, TX, Lydia Thekla Protopapas, Houston, TX, Renee D. Wells, Wells Law PLLC, Pearland, TX, Ruth Elena Wolf, Katy, TX, Anthony C. Marino, Liskow & Lewis, Nadage A. Assale, Slattery Marino & Roberts, New Orleans, LA, for Debtor.
Christine A. March, Stephen Douglas Statham, Office of the US Trustee, Houston, TX, for U.S. Trustee.
Kelly Greenwood Prather, The Greenwood Prather Law Firm, P.C., Houston, TX, for Trustee.
Andrew B. Zollinger, DLA Piper LLP (US), Dallas, TX, for Creditor Committee.
On May 1, 2019, Medco Energi US LLC filed an amended application seeking allowance and payment of an administrative expense pursuant to 11 U.S.C. § 503(b)(1)(A) in the amount of $1,512,305.00. The $1,512,305 represents Northstar's pro rata liability for decommissioning work provided on two leases—the EC 317 Lease and the EC 318 Lease—it co-owned with Northstar Offshore Group, LLC. As set forth below, there is no dispute that Northstar owes this amount to Medco Energi. The sole issue is whether the claim has priority over other general unsecured claims. It does not.
Medco Energi argues that its claim is entitled to administrative priority either in the form of: (i) reimbursement by virtue of Northstar and Medco Energi's co-ownership of the EC 317/318 Leases in accordance with federal and state law; or, (ii) alternatively through subrogation of its claim to that of a state agency pursuant to 11 U.S.C. § 503(a).
On May 22, 2019, Northstar filed an objection to Medco Energi's amended application for allowance and payment of an administrative expense, arguing that Medco Energi's claim does not qualify for administrative priority pursuant to 11 U.S.C. § 503(b)(1)(A) because: (i) the leases were no longer property of the estate at the time the decommissioning costs were incurred; (ii) the costs were not actual or necessary and they did not benefit the bankruptcy estate; (iii) costs incurred as part of decommissioning the EC 318 Lease are prepetition obligations; and (iv) there exists no administrative claim, in light Northstar's rejection of the leases, to which Medco Energi can subrogate its claim.
On July 16, 2019, Northstar filed a supplemental objection to Medco Energi's amended application, setting forth additional arguments. Northstar maintained that, in addition to the reasons set forth in its original objection, Medco Energi is further not entitled to an administrative expense pursuant to 28 U.S.C. § 959(b) because: (i) once rejected, the EC 317/318 Leases were no longer a part of the estate and therefore no longer subject to § 959(b), which requires that a debtor-in-possession or trustee to manage and operate the property in his possession ; and (ii) Northstar had sold substantially all of its assets at the time the decommissioning costs were incurred and therefore had ceased all business operations. In essence, there was no property to manage.
On July 17, 2019, the Court held a hearing on Medco Energi's amended application. The Court noted that in light of the fact that the parties did not contest the existence of a claim nor the contractual responsibilities of each party as to the EC 317/318 Leases, the only issue remaining was whether Medco Energi's claim was entitled to administrative priority. At the conclusion of the hearing, the Court requested that the parties file further briefing on the issue of whether Medco Energi was entitled to subrogation under 11 U.S.C. § 509.
For the reasons set forth below, the Court finds that Medco Energi is not entitled to subrogation pursuant to § 509(a).
Northstar Offshore Group, LLC ("Northstar") was an oil and gas company headquartered in Houston, Texas, focused on offshore oil and gas exploration. (ECF No. 106 at 6–7). In 2012, Northstar shifted the focus of its business from actively producing oil and gas wells to the discovery of new oil fields and began leveraging debt to finance its exploration and test drilling. (ECF No. 106 at 25).
By the second half of 2014, oil prices began to drop, which also coincided with a criminal fraud investigation into the Platinum Partner entities that formed Northstar's parent organization. (ECF No. 106 at 25). These events caused Northstar to experience a liquidity crisis and made it difficult to continue operating in the Gulf of Mexico. (ECF No. 106 at 25).
Northstar's financial situation came to head on August 12, 2016, when Alliance Offshore, LLC, Alliance Energy Services, LLC, and Montco Oilfield Contractors, LLC—three of Northstar's creditors—filed an involuntarily bankruptcy petition for Northstar pursuant to 11 U.S.C. § 303. (ECF Nos. 106 at 25; 1346 at 1). At Northstar's request, the Court granted relief and converted Northstar's case to a voluntary case under Chapter 11 on December 2, 2016. (ECF No. 1346 at 1 (citing ECF No. 88)).
On December 6, 2016, the Court entered an order setting the bar date for proofs of claim. (See ECF No. 131). The order established March 1, 2017, as the deadline by which proofs of claim were required to be filed by holders of claims other than governmental units, and May 31, 2017, as the deadline by which proofs of claim were required to be filed by governmental units. (ECF Nos. 131; 1346 at 2).
On August 2, 2017, the Court entered an order, which approved the sale of substantially all of Northstar's assets and the assumption and assignment of certain executory contracts, and further granted other related relief ("Sale Order"). (See ECF No. 792). Pursuant to the Sale Order, Northstar sold substantially all of its assets free and clear to Northstar Offshore Ventures, LLC ("NOV") on August 3, 2017. (See ECF Nos. 792; 800; 1346 at 2).
Thereafter, on August 18, 2017, Northstar filed its first omnibus motion to reject executory contracts and unexpired leases. (See ECF No. 828). Among the contracts and leases which Northstar wished to reject were the "EC 317 and EC 318 Agreements":
(ECF No. 828 at 5). All three agreements related to the operation of the Leases in question between Northstar and Medco Energi US LLC (the "Operating Agreements"). (ECF No. 828 at 5). The Court entered an order granting Northstar's motion to reject certain agreements and unexpired leases on September 11, 2017. (ECF No 846 at 13). The agreements' rejections became effective on August 18, 2017 (the "Rejection Date"). (See ECF Nos. 1342 at 5; 1346 at 3 ()).
The Court confirmed Northstar's Second Amended Plan of Liquidation on December 22, 2017. (See ECF No. 1078). The terms of the Second Amended Plan created the Northstar Litigation Trust (the "Trust"), which received all of Northstar's causes of action on the effective date of the Plan—January 19, 2018. (ECF Nos. 969 at 17–18; 1342 at 3). The terms of the Plan also established James Katchadurian as the administrator of the Trust. (ECF No. 969 at 11). In his role as Litigation Trustee, James Katchadurian was approved to "oversee the implementation of the Plan and the Liquidation of" Northstar's estate, "including the filing of claim objections." (ECF No. 1346 at 3).
The plan established February 18, 2018, as the administrative expense claims bar date and April 19, 2018, as the bar date for administrative claim objections. (ECF No. 1346 at 3). On April 2, 2018, Northstar moved to extend the objection deadline, which the Court approved on April 10, 2018. (ECF No. 1185). The order extended the objection deadline through July 18, 2018. (ECF No. 1185 at 1). Thereafter, Northstar requested and obtained further orders extending its claim objection deadline until September 30, 2019. (See ECF Nos. 1239; 1300; 1340).
On July 1, 1983, the United States Department of the Interior through the Minerals Management Service ("MMS") granted a mineral lease to Mobil Oil Exploration & Production Southeast Inc. and Sohio Petroleum Company covering EC Block 317. (ECF No. 1342 at 3). The lease bears Serial No. OCS-G 5392. (ECF No. 1342 at 3). On the same date, the United States Department of the Interior through the MMS also granted a mineral lease to Mobil Oil Exploration & Production Company and Sohio Petroleum Company covering EC Block 318. (ECF No. 1342 at 3). The lease bears Serial No. OCS-G 5393. (ECF No. 1342). The eventual decommissioning of these two leases are at the center of the dispute before the Court.
Prior to Northstar's bankruptcy filing, Northstar and Medco Energi US LLC ("Medco Energi") co-owned operating rights in certain oil and gas leases located on the Gulf of Mexico Outer Continental Shelf (the "OCS"), adjacent to the state of Louisiana.2 (ECF Nos. 1342 at 4; 1346 at 3). Those leases are the East Cameron Block 317 (the "EC 317 Lease") and the East Cameron Block 318 (the "EC 318 Lease").3 (ECF Nos. 1342 at 3–4; 1346 at 3). The parties' rights and interest in the EC 317/318 Leases were conveyed by the United States Bureau of Ocean Energy Management ...
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