In re Quicksilver Res. Inc., Case No. 15–10585(LSS) Jointly Administered

• Decision Date: 08 January 2016
• Docket Number: Case No. 15–10585(LSS) Jointly Administered,Adversary Proceedings No. 15–51896
• Citation: 544 B.R. 781
• Parties: In re: Quicksilver Resources Inc., et. al.
• Court: U.S. Bankruptcy Court — District of Delaware

544 B.R. 781

In re: Quicksilver Resources Inc., et. al.,¹

Case No. 15–10585(LSS) Jointly Administered

Adversary Proceedings No. 15–51896

United States Bankruptcy Court, D. Delaware.

Signed January 08, 2016

Paul N. Heath, Amanda R. Steele, Richards Layton & Finger, Wilmington, DE, for Debtor.

OPINION²

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE

The Court is asked to determine whether Quicksilver Resources, Inc. ("Quicksilver") granted the Second Lien Parties³ a lien on some 510 real property interests and, if so, whether the estate may avoid the liens pursuant to section 544 of the United States Bankruptcy Code (the "Bankruptcy Code"). Upon review of the record and consideration of the argument of counsel, the Court concludes that the Second Lien Parties have liens on all of Quicksilver's real property interests located in Texas, and that such liens are perfected in the seven counties in which Mortgages are recorded. As such, it is unnecessary for the Court to reach the section 544 issue.

Procedural Posture

On March 17, 2015, Quicksilver and certain of its direct and indirect subsidiaries (collectively, the "Debtors") each filed a voluntary case under chapter 11 of the Bankruptcy Code. The Debtors' cases have been jointly consolidated for procedural purposes only and are being jointly administered. The Debtors continue in the management and operation of their respective businesses and properties as debtors in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.

On March 25, 2015, the United States Trustee for Region 3 appointed an Official Committee of Unsecured Creditors (the "Committee"). As part of its duties, the Committee investigated the liens and securities interests asserted by prepetition secured parties. On October 5, 2015, the Committee filed the Motion of the Official Committee of Unsecured Creditors for Leave, Standing and Authority to Prosecute Claims on Behalf of the Debtors' Estates and for Related Relief⁴ (the "Standing Motion"). By the Standing Motion, the Committee sought leave to prosecute certain causes of action regarding the extent, validity and priority of certain second liens and security interests granted prepetition by Quicksilver to the Second Lien Collateral Agent (defined below). On November 9, 2015, the Court entered the Order Granting in Part and Denying in Part Motion of the Official Committee of Unsecured Creditors for Leave, Standing and Authority to Prosecute Claims on Behalf of the Debtors' Estates and for Related Relief,⁵ which permitted the filing of a complaint. That same day, the Committee initiated this adversary proceeding by filing its nineteen count Complaint for Declaratory Judgment and for Related Relief and Objection to Claims⁶ (the "Complaint") against the Second Lien Parties (defined below). By the Complaint, the Committee seeks separate declaratory judgments regarding various categories of collateral, avoidance of unperfected liens and security interests, and relief under sections 506(c) and 552(b)(1) of the Bankruptcy Code. The Complaint also includes multiple objections to the allowance of the Second Lien Parties' claims.

Because of the sale process being pursued by the Debtors, and the auction currently scheduled for January 20, 2015, the Committee and the Second Lien Parties agreed that the three counts of the Complaint seeking declarations with respect to Quicksilver's hydrocarbon interests would be litigated on an expedited basis to facilitate a possible credit bid by the Second Lien Parties. The parties, therefore, entered into an expedited discovery and hearing schedule⁷ with respect to counts XII, XIII, and XIV of the Complaint, by which the Committee seeks: (i) a declaratory judgment that the certain of Quicksilver's hydrocarbon interests are not subject to the Second Lien Parties' liens and security interests (Count XII); (ii) a declaratory judgment that, even if certain of Quicksilver's hydrocarbon interests are subject to the Second Lien Parties' liens and security interests, such liens and security interests are not perfected (Count XIII); and (iii) to avoid and recover for the Debtors' estates unperfected liens and security interests pursuant to Bankruptcy Code section 544 as it relates to Quicksilver's hydrocarbon interests. (Count XIV).⁸

A three day evidentiary trial was scheduled for December 14–16, 2015. As a result of the discovery and negotiations between the Committee and the Second Lien Parties, however, the factual issues were narrowed considerably, and the three-day trial turned into a one hour legal argument on agreed facts and documents, and simultaneous written submissions.⁹ At the conclusion of the argument, the Court took the matter under advisement.

Background

By way of background, and to frame the issues, the Court takes the following information from the Declaration of Vanessa Gomez LaGatta In Support of First Day Pleadings.¹⁰ None of these statements are controversial nor do they impact the decision in this case.

Quicksilver is an independent oil and gas company engaged in the acquisition, exploration, development, and production of onshore and natural gas in North America and is based in Fort Worth, Texas. Quicksilver's oil and natural gas properties are primarily located in Texas and in the Canadian provinces of Columbia and Alberta. Quicksilver's four development and exploration areas include: (i) the Barnett Shale in the Fort Worth Basin in north-central Texas; (ii) the Delaware basin in western Texas; (iii) the Horn River Basin in British Columbia, Canada; and (iv) the coalbeds of the Horseshoe Canyon in Alberta, Canada. The Barnett Shale is one of the Debtors' core production and development areas. As of December 31, 2014, the Debtors had a total of 980 (587.7 net) producing wells in the Barnett Shale. The Debtors' west Texas assets are an oil and gas exploration opportunity. The Debtors did not recognize a material amount of proved reserves from their west Texas assets in 2014. The Canadian assets are held by non-debtor Canadian entities.

Stipulated Statement of Facts¹¹

On December 7 and 10, 2015 respectively, the Parties entered into two stipulations: the Stipulation and Agreement by and among the Official Committee of Unsecured Creditors, the Second Lien Parties and the Debtors¹² (the "Real Property Stipulation") and the Joint Pre–Trial Stipulation¹³ (together the "Stipulations").

In the Pre–Trial Stipulation, the parties agree that the following facts are admitted and require no proof:

Quicksilver's approximately 7500 real property interests fall into one of three categories: (i) Unencumbered Real Property Interests; (ii) Encumbered Real Property Interests; and (iii) Disputed Real Property Interests. The Unencumbered Real Property Interests are: (i) the Quicksilve's real property interests located in western Texas; and (ii) 1,342 real property interest consisting of: (a) 889 oil and gas leases not listed on any "Exhibit A" to the applicable Mortgages; (b) 450 real property interests owned by debtor Cowtown Pipeline L.P. ("CPLP") such as easements, rights of ways, permits and licenses related primarily to water and gas lift pipeline, roads, and railroads ("TXPLs"); (c) two deeded properties owned by CPLP, and (d) one surface interest owned by CPLP. The Disputed Real Property Interests are 510 real property interests consisting of 413 TXPLs, 39 surface interests, and 58 deeded properties. The Encumbered Real Property Interests are Quicksilver's property interests located within the state of Texas that are not included within the definition of either Unencumbered Real Property Interests or Disputed Real Property Interests.

On June 21, 2013, the Debtors entered into that certain Second Lien Credit Agreement dated as of June 21, 2013 (the "Second Lien Credit Agreement") among Quicksilver, as borrower; the Second Lien Administrative Agent; JPMorgan Chase Bank, N.A., as syndication agent; Bank of America, N.A., Citigroup Global Markets Inc., Deusche Bank Securities Inc. and Wells Fargo Bank, National Association, as co-documentation agents; and the lenders party thereto, which made available to Quicksilver a $625 million second lien term loan. Defendant Credit Suisse AG is the administrative agent (the "Second Lien Administrative Agent") under the Second Lien Credit Agreement. Defendant The Bank of New York Mellon Trust Company, N.A. ("BNYM"), is the trustee (the "Second Lien Indenture Trustee") under the Second Lien Credit Agreement.

On the same day, Quicksilver also issued that certain second lien senior secured floating rate notes due 2019 indenture (the "Second Lien Indenture") dated as of June 21, 2013 with Quicksilver as issuer, Cowtown Pipeline Funding, Inc., Cowtown Pipeline Management, Inc., Cowtown Pipeline L.P., Cowtown Gas Processing L.P., QPP Parent LLC, QPP Holdings LLC, Barnett Shale Operating LLC, Silver Stream Pipeline Company LLC as guarantors and BNYM as trustee and second lien collateral agent.

Also on June 21, 2013, Quicksilver entered into that certain Mortgage, Deed of Trust, Assignment of As–Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement (collectively, as filed or recorded in the appropriate office of recorder of deeds for the applicable jurisdiction in which the subject real property is located, the "Mortgages") from Quicksilver as mortgagor to BNYM, as second lien agent, or alternatively, to Linda Daugherty, as trustee for the benefit of BNYM, as second lien agent, for itself and for the ratable benefit of the other secured parties dated as of June 21, 2013, as amended or modified. Defendant Linda Daugherty is the trustee under the Mortgages (in such capacity, the "Mortgages Trustee").

The Mortgages are identical except with respect to the "Exhibit A" accompanying each mortgage. The Exhibit A accompanying each of the Mortgages describes certain property interests in the corresponding county. Of particular importance to the instant dispute are the...