Manville Forest Products Corp., In re

• Decision Date: 07 February 1990
• Docket Number: D,No. 589,589
• Citation: 20 BCD 145,896 F.2d 1384
• Parties: , Bankr. L. Rep. P 73,226 In re MANVILLE FOREST PRODUCTS CORPORATION, Debtor. GULF STATES EXPLORATION CO., Appellant, v. MANVILLE FOREST PRODUCTS CORPORATION, Appellee. ocket 89-5019.
• Court: U.S. Court of Appeals — Second Circuit

Page 1384

896 F.2d 1384

20 Bankr.Ct.Dec. 145, Bankr. L. Rep. P 73,226

In re MANVILLE FOREST PRODUCTS CORPORATION, Debtor GULF STATES EXPLORATION CO., Appellant, v. MANVILLE FOREST PRODUCTS CORPORATION, Appellee.

No. 589, Docket 89-5019.

United States Court of Appeals Second Circuit.

Argued Dec. 21, 1989.

Decided Feb. 7, 1990.

Frederick W. Bradley, New Orleans, La. (Liskow & Lewis, New Orleans, La., Lansing R. Palmer, New York City, John T. McMahon, and Elkins & Yount, Houston, Tex., on the brief), for appellant Gulf States Exploration Co.

C.A. Martin III, Monroe, La. (George Wear, Jr., and Shotwell, Brown & Sperry, Monroe, La., Edmund M. Emrich, and Levin, Weintraub & Crames, New York City, on the brief), for appellee Manville Forest Products Corp.

Before TIMBERS, CARDAMONE and PRATT, Circuit Judges.

TIMBERS, Circuit Judge:

Appellant Gulf States Exploration Co. ("Gulf") appeals from an order entered May 9, 1989, in the Southern District of New York, Michael B. Mukasey, District Judge, affirming an order of the bankruptcy court, Burton R. Lifland, Chief Bankruptcy Judge, entered August 5, 1988, which expunged Gulf's proof of claim filed in the bankruptcy proceeding of Manville Forest Products Corporation ("M.F.P."). In re Manville Forest Products Corp., 89 B.R. 358 (Bankr.S.D.N.Y.1988). The proof of claim alleged that M.F.P. breached a hydrocarbon exploration agreement by refusing to grant Gulf drilling rights in a geological formation known as the "Wilcox". The bankruptcy court held that M.F.P. fully sustained its objection to Gulf's proof of claim, and accordingly expunged the claim. It further held that, even if Gulf were entitled to damages for the alleged contract breach, it could not assert the claims of its working interest partners. The district court affirmed the order of the bankruptcy court, but declined to consider the claims of Gulf's working interest partners since it found against Gulf on the merits.

Gulf also appeals from an order entered April 30, 1986, in the Southern District of New York, John E. Sprizzo, District Judge, denying Gulf's motion to withdraw the reference to the bankruptcy court and affirming an order of the bankruptcy court, entered November 19, 1985, which denied Gulf's motion for transfer of venue and held that the adversary proceeding constituted a "core" proceeding within the meaning of 28 U.S.C. Sec. 157 (1988).

On appeal, Gulf contends that Judge Sprizzo erred in affirming the bankruptcy court's determination that the adversary proceeding is a core proceeding, and in denying its motion to withdraw the reference to the bankruptcy court. It also contends that the court erred in affirming the bankruptcy court's denial of its motion for transfer of venue. With respect to its breach of contract claim, Gulf contends that Judge Mukasey incorrectly applied Louisiana law to the hydrocarbon exploration agreement. Specifically, Gulf contends that Judge Mukasey erred (1) in applying the doctrines of apparent authority and agency by estoppel; (2) in applying the doctrine of ratification; and (3) in interpreting the agreement. It also contends that the district court erred in declining to consider the bankruptcy court's holding that it could not assert the claims of its working interest partners.

For the reasons which follow, we affirm the orders of Judge Sprizzo and Judge Mukasey in all respects.

We reach our determination of the issue of core jurisdiction in light of In re Ben Cooper, Inc., 896 F.2d 1394 (2 Cir.1990), also decided today, and assume familiarity with that opinion.

I.

We shall summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

On August 26, 1982, M.F.P., a wholly owned subsidiary of Manville Corporation, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. Prior to this filing, M.F.P. and Gulf, an oil and gas exploration company wholly owned by Gulf States Oil and Refining Company, entered into a hydrocarbon exploration agreement.

In October 1980, J.C. Ogden, chief operating officer of Gulf, approached and negotiated with Donald R. Worden to obtain rights to explore for, and develop, oil and gas on properties owned by M.F.P. in Louisiana. Worden, who was Exploration and Mineral Manager of M.F.P. and, after May 1982, Director of Energy Resources, had express written authority from M.F.P.'s president, John D. Mullens, to bind M.F.P. to contracts and leases for up to 1000 acres. This limited authority was filed in the public records of Grant Parish, Louisiana.

The negotiations between Ogden and Worden involved a particular area of M.F.P.'s property known as sections 4-10, Township 8 North, Range 3 West, Grant Parish, Louisiana (the "area of interest"). Ogden believed that two rock formations in the area of interest, the Mooringsport (a deep formation found at 9,000 to 10,000 feet beneath the earth's surface) and the Wilcox (a shallow formation at 1200 to 4400 feet), would produce oil. The area of interest involved more than 1000 acres of land and therefore was in excess of Worden's granted authority.

In October 1980, Worden had M.F.P.'s counsel draft an exploration agreement, which Mullens signed on behalf of M.F.P. Worden signed this agreement merely as a witness. The agreement explicitly excluded mineral rights to the Wilcox formation. Nevertheless, it required Gulf to "log" the Wilcox each time it drilled through that formation to the deeper Mooringsport. "Logging" is an electronic method used to determine the potential for oil and gas production in a formation.

Ogden found the agreement unacceptable because it excluded the Wilcox and limited leases to 160 acres. In January 1981, Worden agreed to include the Wilcox in the exploration agreement. Several proposed changes were added by Gulf as interlineations to the agreement. One of these interlineations provided that the Wilcox formation was "to be included under separate agreement." Ogden signed the interlineated exploration agreement on behalf of Gulf on January 2, 1981, but held it until he received assurances from Worden that a letter regarding the Wilcox was forthcoming.

On February 11, 1981, Worden prepared, signed and mailed a letter (the "Wilcox letter") regarding Gulf's rights in the Wilcox formation. In response to Worden's assurance that the letter had been sent, Ogden sent the interlineated agreement to Worden, who, upon receipt, initialled the interlineations. Both the interlineated agreement and the Wilcox letter involved more than 1000 acres of land, which exceeded Worden's authority to execute contracts and leases on behalf of M.F.P. Mullens, however, did not sign the Wilcox letter, nor did he initial the changes on behalf of M.F.P.

In 1981, Gulf drilled four wells in the area of interest. Gulf's logs of the Wilcox formation, which were sent to M.F.P. pursuant to the exploration agreement (both original and interlineated), indicated possible productive hydrocarbon "shows" (i.e., indications of potential reservoirs of oil).

In mid-May 1982, Worden showed the logs to one Jim V. Haddox. Haddox requested a lease. In late May, Worden sent the logs to the Hogan Exploration Company ("Hogan"). After reviewing the logs, Robert F. Meredith, president of Hogan, requested a lease on June 16, 1982. Worden replied that Haddox previously had requested the rights to the Wilcox formation and suggested that Meredith and Haddox should resolve the matter between themselves. Meredith and Haddox settled on an arrangement and informed Worden on June 27, 1982 of their agreement that Hogan acquire the lease. On August 9, 1982, Worden executed a revised Wilcox lease in favor of Hogan, effective as of June 16, 1982, the date of the verbal request by Meredith.

In early August 1982, Ogden requested on behalf of Gulf a lease for drilling rights to the Wilcox. Worden, however, refused because M.F.P. already had granted the lease to Hogan.

M.F.P. filed a petition for reorganization under Chapter 11 on August 26, 1982, in the bankruptcy court for the Southern District of New York. Gulf timely filed a proof of claim, alleging that M.F.P.'s refusal to grant the Wilcox rights constituted a breach of contract. It sought $16,035,000 damages. M.F.P. objected to the proof of claim. It did not assert any counterclaims against Gulf.

At a hearing held on November 6, 1985, the bankruptcy court denied Gulf's motion for transfer of venue of the adversary proceeding to the United States District Court for the Western District of Louisiana, based principally on the following grounds: (1) its in-depth involvement in the matter; (2) its responsibility to adjudicate the remaining issues in the case; and (3) its view that it would be inappropriate to shift the burden of determining those issues to another court, which would have "to adopt and be involved in a new learning curve." The court also held that the adversary proceeding constituted a "core" proceeding within the meaning of 28 U.S.C. Sec. 157 (1988), reasoning that the adversary proceeding involved a plain and simple objection to a claim and, accordingly, was clearly a "core matter." Gulf appealed to the district court, and also filed a motion to withdraw the reference to the bankruptcy court pursuant to 28 U.S.C. Sec. 157(d), on the ground that Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), required that its breach of contract claim be adjudicated by an Article III judge. On April 30, 1986, Judge Sprizzo affirmed the order of the bankruptcy court in all respects and refused to withdraw the reference.

By an order entered August 5, 1988, the bankruptcy court, after a bench trial, concluded that M.F.P. sustained its objection to Gulf's proof of claim and accordingly expunged the claim. Manville, supra, 89 B.R. at 377. It determined that Louisiana law does not recognize the doctrines of apparent authority...