Katchadurian v. NGP Energy Capital Mgmt., LLC (In re Northstar Offshore Grp., LLC)

• Decision Date: 20 April 2020
• Docket Number: Case No: 16-34028,Adversary No. 18-03079
• Citation: 616 B.R. 695
• Parties: IN RE: NORTHSTAR OFFSHORE GROUP, LLC Debtor(s). James Katchadurian Plaintiff(s) v. NGP Energy Capital Management, LLC, et al Defendant(s)
• Court: U.S. Bankruptcy Court — Southern District of Texas

616 B.R. 695

IN RE: NORTHSTAR OFFSHORE GROUP, LLC Debtor(s).James Katchadurian Plaintiff(s)

v.NGP Energy Capital Management, LLC, et al Defendant(s)

Case No: 16-34028

Adversary No. 18-03079

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

Signed April 20, 2020

Robert Bernard Bruner, Norton Rose Fulbright US LLP, Wyatt J. Dowling, Robert K. Ellis, R. Paul Yetter, Yetter Coleman LLP, Houston, TX, for Plaintiff.

David Mark Bennett, Thompson & Knight, Dallas, TX, Stephen Bender Edmundson, Gregory S. Hudson, Cozen O'Connor, Houston, TX, for Defendants.

MEMORANDUM OPINION

Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE

James Katchadurian, as Litigation Trustee of Northstar's Litigation Trust, initiated this adversary proceeding asserting claims against NGP Energy Capital Management, et al.¹ The Trustee's claims against the Defendants stem from two separate points in time—(i) a 2012 purchase and a 2014 sale.

In 2012, Northstar Offshore Group, LLC ("Northstar") created a Board comprised of nine board members. As part of the decisions undertaken by the Board, Northstar purchased assets, including oil and gas leases and wells, in an area known as the Creole Field from Propel Energy, LLC in mid-2012. Thereafter, in November 2013, Northstar obtained a $120 million short-term bank loan from Wells Fargo. As part of the loan, NGP made a $75 million capital commitment, which could be accessed upon request by Northstar, along with individual capital commitments from several of the directors sitting as board members of Northstar.

On July 2016, NGP-NOG, and the minority shareholders of Northstar, signed a Purchase and Sale Agreement with Lafitte Energy Corp. As part of that sale, NGP-NOG agreed to pay off Northstar's bank debt and working capital deficit in exchange for a net profits interest in Northstar's fields, and the release of the obligations concerning both the $75 million capital contribution and the individual director capital contributions.

On April 9, 2018, the Trustee filed its Complaint, which sets forth six causes of action against the Defendants: (i) a fraudulent transfer claim against all defendants pursuant to 11 U.S.C. § 544(b) and TUFTA §§ 24.005 – 24.006 ; (ii) a fraudulent transfer claim against all defendants pursuant to 11 U.S.C. § 548(a)(1) ; (iii) a breach of fiduciary duty claim against the NGP Directors, the Northstar Directors, and NGP-NOG; (iv) a breach of contract claim against NGP-NOG; (v) a conspiracy claim against the NGP Entities; and (vi) an aiding and abetting claim against the NGP Entities, the Northstar Directors, and NGP-NOG. Thereafter, on June 4, 2018, NGP Energy Capital Management, L.L.C., et al filed a motion to dismiss the Trustee's Complaint, setting forth fourteen reasons for which the Court should dismiss the Trustee's Complaint. NGP Energy's motion to dismiss attached various exhibits to support its argument for dismissal of the Trustee's Complaint.

Subsequently, on June 21, 2018, NGP Energy filed a jury demand in which it declined to consent to a jury trial in bankruptcy court, or the entry of a final order by this Court. On July 13, 2018, the Trustee filed a motion to strike five of the six exhibits attached to NGP Energy's motion to dismiss along with a motion opposing NGP Energy's motion to withdraw the reference.

The Court held a hearing on (i) the Defendants' motions to dismiss, (ii) the Trustee's motion to strike, (iii) NGP Energy's motion to stay discovery, and (iii) NGP Energy's motion to withdraw the reference on September 1, 2018. Thereafter, the Court issued a report and recommendation to the district court recommending that the district court withdraw the reference of this adversary proceeding, but only upon this Court's certification that all pre-trial and dispositive matters have been concluded and are ready for trial. The district court issued a Memorandum and Order adopting this Court's report and recommendation on November 9, 2019.

For the reasons set forth below, the Court: (i) grants the Trustee's motion to strike in part and denies the motion in part; (ii) grants NGP Energy's motion to dismiss in part and denies the motion in part; (iii) and allows the Trustee to amend his Complaint.

Background ²

Northstar was an oil and gas company headquartered in Houston, Texas, focused on offshore oil and gas exploration. (Case No. 16-34028, 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. (Case No. 16-34028, 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. (Case No. 16-34028; 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. (Case No. 16-34028; ECF No. 106 at 25).

Northstar's financial situation came to head on August 12, 2016, when three creditors filed an involuntarily bankruptcy petition against Northstar pursuant to 11 U.S.C. § 303. (Case No. 16-34028; ECF No. 106 at 25). At Northstar's request, the Court granted relief and converted Northstar's case to a voluntary case under Chapter 11 on December 2, 2016. (Case No. 17-03448; ECF No. 15 at 7). The Court confirmed Northstar's Second Amended Plan of Liquidation on December 22, 2017. (See Case No. 16-34028; 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. (Case No. 16-34028; ECF No. 969 at 17–18). The terms of the Plan also established James Katchadurian as the administrator of the Trust. (Case No. 16-34028; ECF No. 969 at 11).

Relationship between NGP and Northstar

NGP is a multi-billion-dollar hedge fund that invests in the energy industry through affiliates. (ECF No. 39 at 10). In the past, NGP has partnered with Northstar executives on oil and gas investments, selling two prior Northstar companies for a combined $480 million. (ECF No. 1 at 2).³ Northstar was the third investment undertaken by NGP with the "Northstar executive team." (ECF No. 1 at 2).

Northstar's Board was formed in February 2012. (ECF No. 39 at 10). The Board was composed of nine directors: Christopher Ray, Jesse Bomer, Tomas Ackerman, David Albin, David Hayes, S. Glynn Roberts, Gaylon Freeman, Mark Stevens, and James P. Ulm. (ECF No. 39 at 10). The Litigation Trustee refers to the first five of these directors—Ray, Bomer, Ackerman, Albin and, Hayes—as "NGP Directors" and the last four—Roberts, Freeman, Stevens, and Ulm—as "Northstar Directors" or officers. (ECF No. 1 at 8).

In mid-2012, Northstar purchased assets, including oil and gas leases and wells in an area of the Gulf known as the Creole Field (the "Creole Field Assets") from Propel Energy, LLC. (ECF No. 1 at 8). Northstar initially proposed an $80 million-dollar bid for the Creole Field Assets; however, Northstar later increased that bid and paid Propel Energy $113 million. (ECF No. 1 at 2, 8). Northstar alleges that NGP, using its control of Northstar through the NGP Directors, caused the bid increase, which resulted in an overpayment on the part of Northstar for the Creole Field Assets. (ECF No. 1 at 8).

In November 2013, Northstar obtained a $120 million-dollar short-term loan from Wells Fargo. (ECF No. 39 at 10). As part of the loan, Wells Fargo required that NGP commit to funding $75 million in additional capital to Northstar upon Northstar's request. (ECF No. 39 at 10). On the same day the loan was executed, NGP Entities—NGP X, NGP Parallel, and NGP X US—entered into a contract with Northstar solidifying NGP's commitment to provide Northstar with $75 million at Northstar's request. (ECF No. 39 at 10). Along with the NGP entities, the Northstar Directors also provided individual capital contributions to Northstar as part of the Wells Fargo loan. (ECF No. 56 at 126). For reasons for which the parties disagree, Northstar did not call upon NGP's commitment in full, and later released the Northstar Directors from their individual capital commitments. (ECF Nos. 1 at 3; 19 at 19–20).

On July 16, 2014, NGP-NOG and the minority shareholders of Northstar signed a Purchase and Sale Agreement with Lafitte Energy Corp., a subsidiary of Platinum Partners. (ECF No. 1 at 11). On August 1, 2014, NGP-NOG and NGP X US signed a contract with Northstar under which NPG-NOG agreed to pay off Northstar's "Bank Debt and eliminate the Working Capital Deficit" at the closing of the Lafitte Sale in exchange for: (i) a "significant net profits interest in [Northstar's] most promising fields" and (ii) the release of both NGP-NOG's $75 million capital contribution and the Northstar Directors' individual capital contributions ("the Contract"). (ECF Nos. 1 at 11–12; 39 at 12).

On September 22, 2014, the date of the closing of the Lafitte Sale, Platinum Partners made an $80 million-dollar payment directly to Wells Fargo, while NGP funded $40 million of its $75 million capital contribution commitment. (ECF Nos. 1 at 11; 56 at 63). NGP and Northstar disagree on the extent of NGP's obligation as to the working capital deficit under the terms of the Contract. Northstar argues that NGP failed to comply with its commitment to pay off the bank debt and eliminate its "working capital deficit." (ECF No. 1 at 4). In contrast, NGP claims that it provided Northstar with an amount sufficient to pay the Northstar's "Working Capital Deficit", as defined in the Final Settlement Statement and therefore, provided an amount "sufficient to pay [Northstar's] existing liabilities" at the time of the Lafitte Sale in compliance with their agreement. (ECF Nos. 1 at 11; 19 at 13; 46 at 8). Thus, the Trustee's breach of contract claim against the Defendants turns on the meaning...