Jonah LLC v. Ultra Petroleum Corp. (In re Ultra Petroleum Corp.)

• Citation: 611 B.R. 813
• Decision Date: 19 December 2019
• Docket Number: ADVERSARY NO. 16-03278,CASE NO: 16-32202
• Parties: IN RE: ULTRA PETROLEUM CORP., et al, Debtor(s) Jonah LLC, et al, Plaintiff(s) v. Ultra Petroleum Corp., et al, Defendant(s)
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas

611 B.R. 813

IN RE: ULTRA PETROLEUM CORP., et al, Debtor(s)Jonah LLC, et al, Plaintiff(s)

v.Ultra Petroleum Corp., et al, Defendant(s)

CASE NO: 16-32202

ADVERSARY NO. 16-03278

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed December 19, 2019

Filed December 20, 2019

Phil Barber, Phillip D. Barber, PC, Denver, CO, Kate Harrison Easterling, Jarrod B. Martin, McDowell Hetherington LLP, Houston, TX, for Plaintiffs.

Christopher T Greco, Kirkland & Ellis LLP, New York, NY, Gregory F. Pesce, Kirkland and Ellis LLP, Chicago, IL, Andrew Brian Raber, Joseph G. Thompson, III, Porter Hedges LLP, Houston, TX, David R Seligman, Kirkland Ellis LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION

Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE

Jonah LLC¹ et al owns overriding royalty interests ("ORRIs") carved out of federal oil and gas leases in the Pinedale Field in Sublette County, Wyoming. Ultra Petroleum Corp.² is the operator under the leases. The other defendants are Ultra affiliates. The dispute in this adversary proceeding concerns the method of calculation of the payments required to be made by Ultra pursuant to Jonah's ORRIs.

On April 29, 2016, Ultra filed for chapter 11 bankruptcy. (See Case No. 16-32204; ECF No. 1). On December 19, 2016, Jonah filed this adversary proceeding against Ultra seeking: (i) a determination of the validity and extent of its ORRIs; (ii) payments that Ultra allegedly failed to make, and (iii) a determination that any underpaid ORRIs did not become property of Ultra's bankruptcy estate. (ECF No. 1 at 17–24). Both parties filed competing motions for partial summary judgment. (ECF Nos. 48; 49). On August 24, 2017, the Court denied both summary judgment motions. (ECF No. 71). The Court found that further examination of the agreements was needed to establish whether the gas price is set at the wellhead or at the delivery point. (ECF No. 71 at 10–11).

On November 14, 2018, the Court held a hearing to determine at which point the oil and gas should be valued according to the ORRIs. (ECF No. 134 at 8). At the hearing, Jonah argued that the instruments creating Classes 2, 3, and 4 of its ORRIs, and the instruments creating the farm-out overrides do not allow for deductions and do not have the requisite specific language regarding what costs of production may be deducted from Jonah's ORRI payments. Jonah argued that the absence of specific language requires the application of the Wyoming Royalty Payment Act ("WRPA").³ (ECF No. 134 at 32). Jonah further argued that although the 2000 Amendment creating Class 5 ORRI allowed for deductions, Ultra was bound by a letter from its predecessor in interest (SWEPI), which altered those deductions. Because of the SWEPI letter, Jonah alleges that Ultra could not take post-production deductions on Jonah's ORRIs. (ECF No. 134 at 215).

Ultra argued that ORRI Classes 2, 3, and 4 were sufficiently specific to be removed from the confines of the relevant WRPA provisions.⁴ (ECF No. 134 at 64–65). Alternatively, Ultra asserted that the WRPA cannot be applied retroactively to replace the bargained-for terms of the ORRIs executed decades before the WRPA's enactment. The Court held that based on the market that existed at the time the leases were executed, oil and gas was valued at the wellhead; therefore, wellhead prices were an assumption underlying the contracts for Classes 2, 3, and 4. (ECF No. 134 at 338). At the conclusion of the hearing, the Court requested further briefing on: (i) whether the WRPA can apply retroactively to alter an assumption of the contract, and (ii) the treatment required of a class of overrides not in the complaint but listed as a contested matter in the pretrial order. (ECF No. 134 at 336–39).

For the reasons set forth below, the Court finds that: (i) the WRPA cannot apply retroactively to Classes 2, 3, and 4; (ii) the WRPA applies to the farm-out overrides; and (iii) Ultra is not bound by the 2004 SWEPI Letter.

Background ⁵

Ultra owns working interests in federal oil and gas leases located in the Pinedale Field of Sublette County, Wyoming. (ECF No. 1 at 5). These leases stem from fifteen Bureau of Land Management (the "BLM") leases issued between 1950 and 1952. (ECF Nos.1 at 6; 49 at 9). Jonah owns ORRIs burdening some of Ultra's leases. (ECF No. 1 at 6). These ORRIs are defined by 28 separate instruments. (ECF No. 49 at 10). Jonah categorizes these instruments into five classes:

i. Class 1 includes ORRIs created through three assignments by Donald and Patricia Anderson to Blue Royalties, Inc. in 1952. (ECF No. 1 at 6). These assignments stated that the ORRIs "shall be computed and paid at the same time and in the same manner as royalties payable to the United States ...." (ECF No. 1-1 at 1).

ii. Class 2 includes ORRIs reserved by the Andersons in 1955. (ECF No. 1 at 6). The Andersons assigned to third parties their entire working interest in certain BLM leases, reserving for themselves the Class 2 ORRIs using a BLM form of assignment. (ECF No. 49 at 11). Class 2 ORRIs include language that allows assignees to deduct from the value of oil or gas the "full amount of any taxes required to be paid ...." (ECF No. 1-2 at 4).

iii. Class 3 includes ORRIs reserved by Hondo Oil & Gas on September 5, 1978. (ECF No. 1 at 7). Hondo completed 14 assignments of its working interests in the BLM leases in exchange for a reservation of an ORRI of 3-1/8 of 8/8ths using a BLM form of assignment. (ECF Nos. 1-3 at 1; 49 at 11). The forms of assignment do not include any other language describing how the ORRI should be computed. (ECF No. 1-3).

iv. Class 4 includes an August 1, 1951, assignment reserving an ORRI of one percent of all oil, gas, and other hydrocarbons produced on the covered property. (ECF No. 1-4 at 1). The form of assignment does not include language describing how the ORRI should be computed. (ECF No. 1-4).

v. Class 5 includes ORRIs carved out of portions of the working interest burdened by other classes of ORRIs. (ECF No. 1 at 8, 9). The Class 5 ORRIs are governed by an amendment executed in 2000 by McMurry Oil Company, Nerd Enterprises, Inc., Fort Collins Consolidated Royalties, Inc., and a group of ORRI owners. The 2000 Amendment explicitly allows for the deduction of reasonable, actual costs of transportation incurred from the wellhead to the location of a sale from the proceeds of production when computing the Class 5 ORRIs. (ECF No. 1-5 at 1).⁶

Atlantic Richfield Company ("ARCO") and Burlington Resources & Gas Company, L.P. ("Burlington") originally owned the working interests burdened by these five classes of ORRIs. (ECF No. 1 at 9). Burlington's working interest was burdened by Classes 1, 2, 3, and 5, while ARCO's interest was burdened by Classes 1, 2, and 4. (ECF No. 1 at 9). In 1992, ARCO sold substantially all of its working interest to McMurry Oil, Nerd Enterprises, and Fort Collins Consolidated Royalties. (ECF No. 1 at 9). Burlington sold a majority of its working interest to Ultra in 1997; Ultra Continues to own this portion. (ECF No. 1 at 9). The amendment to the ORRIs burdening the ARCO working interest was executed in 2000. (ECF No. 1 at 9). After the 2000 Amendment, the ARCO working interest was burdened only by Class 5. In late 2014, Ultra acquired the ARCO working interest, making Ultra responsible for payment of the Class 5 ORRIs. (ECF No. 1 at 10). Ultra continues to own a large working interest in the Sublette County leases it originally acquired from Burlington in 1997. (ECF No. 1 at 9).

In 2013, a dispute arose between Jonah and some of the Ultra defendants regarding the proper method of paying the Class 1, 2, 3, and 4 ORRIs burdening Ultra's working interest in the Pinedale Field. (ECF No. 1 at 11). Jonah agreed that the Class 1 ORRIs were not subject to the WRPA and therefore must be paid in accordance with their express terms. (ECF No. 1 at 11). Conversely, Jonah claimed that the Class 2, 3 and 4 ORRIs were subject to the WRPA's definitions and payment provisions because they did not contain specific language providing how to pay the ORRIs. (ECF No. 1 at 11). Thus, as to Classes 2, 3, and 4, Ultra could not deduct post-production costs in contravention of the WRPA. In response to Jonah's contentions, Ultra alleged that it had paid all of Jonah's ORRIs in the same manner as the federal royalty interest. (ECF No. 1 at 12). Ultra argued that this payment calculation was justified by the language of the Class 1 ORRIs and the instruments creating Classes 2, 3, and 4. (ECF No. 1 at 12).

On October 1, 2014, Jonah sued Ultra in Wyoming state court. (ECF No. 71 at 4). The parties agreed to allow discovery and summary judgment briefing on the proper deductions that may be taken under the Class 1, 2, 3, and 4 ORRI instruments as the first phase of the litigation. (ECF No. 1 at 13). Through discovery, Ultra first learned of the 2000 Amendment. (ECF No. 1 at 13). Based upon a belief that Ultra was underpaying the Class 5 ORRIs, Jonah demanded an accounting from Ultra. (ECF No. 1 at 14). Receiving no response, Jonah filed a separate lawsuit on April 28, 2016, also in Wyoming state court. (ECF No. 71 at 4).

On April 29, 2016, Ultra filed for chapter 11 bankruptcy, staying the two Wyoming state court lawsuits. (Case No. 16-32202, ECF No. 1).

On December 19, 2016, Jonah filed this adversary proceeding against Ultra seeking:

i. A declaratory judgment on the validity and scope of ORRI Classes 1, 2, 3, 4, and 5;

ii. A declaratory judgment that all unpaid ORRIs are property of Jonah;

iii. Damages for breach of contract and the WRPA by Ultra;

iv. Damages for conversion of Jonah's ORRIs by Ultra;

v. Damages for fraud and misrepresentations by Ultra;

vi. A constructive trust or equitable lien against proceeds from production attributable to Jonah's ORRIs;

vii. A requirement that Ultra disgorge and reimburse Jonah for Ultra's unjust enrichment at the expense of Jonah's ORRIs;

viii. An accounting of Jonah's ORRIs;

ix. A permanent injunction

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