NGP Capital Res. Co. v. ATP Oil & Gas Corp. (In re ATP Oil & Gas Corp.)

• Decision Date: 06 January 2014
• Docket Number: ADVERSARY NO. 12-03443,CASE NO: 12-36187
• Court: U.S. Bankruptcy Court — Southern District of Texas
• Parties: IN RE: ATP OIL & GAS CORPORATION Debtor(s) NGP CAPITAL RESOURCES COMPANY Plaintiff(s) v. ATP OIL & GAS CORPORATION Defendant(s)

IN RE: ATP OIL & GAS CORPORATION Debtor(s)NGP CAPITAL RESOURCES COMPANY Plaintiff(s) v. ATP OIL & GAS CORPORATION Defendant(s)

CASE NO: 12-36187

ADVERSARY NO. 12-03443

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

SIGNED January 6, 2014

CHAPTER 11

MEMORANDUM OPINION

NGP Capital's Motion for Summary Judgment is denied. (Case No. 12-3443, ECF No. 77).

Background

This motion for summary judgment relates to whether certain prepetition transactions between ATP (the debtor in the bankruptcy case 12-36187) and NGP Capital were real property conveyances (as they are characterized in the respective documents) or were actually debt instruments. NGP Capital filed a Motion for Summary Judgment on February 11, 2013 seeking a ruling on whether the Conveyance(s) between ATP and NGP Capital is a disguised financing transaction or a true sale of incorporeal immovable (real) property interests. (Case No. 12-3443, ECF No. 77).

ATP entered into at least sixteen agreements that were characterized as ORRI conveyances. (Case No. 12-36187, ECF No. 15-1). ATP now argues that these transactions are "disguised financing" transactions. The individual characteristics of these transactions differ,sometimes greatly, and therefore the ultimate outcomes may vary. Some prior history is necessary to place this motion in its proper context.

The Contested ORRIs and NPIs

ATP noted in its first-day motions that it "has outstanding trade and other payables in excess of $170 million and outstanding balances under the ORRIs and NPIs in excess of $489 million." (Case No. 12-36187, ECF No. 6 at 6). ATP now disputes whether these interests are real property interests (in the form of ORRIs or NPIs) under applicable law.¹

Generally, an ORRI is "[a]n interest in oil and gas produced at the surface, free of the expense of production, and in addition to the usual landowner's royalty reserved to the lessor in an oil and gas lease." 8 PATRICK H. MARTIN & BRUCE M. KRAMER, WILLIAMS & MEYERS OIL AND GAS LAW 757 (2012). The Bankruptcy Code defines a term overriding royalty to be "an interest in liquid or gaseous hydrocarbons in place or to be produced from particular real property that entitles the owner thereof to a share of production, or the value thereof, for a term limited by time, quantity, or value realized." 11 U.S.C. § 101(56A).

An NPI is "a share of gross production from a property, measured by net profits from operation of the property." Id. at 646; see also La. Land & Explor. Co. v. Donnelly, 394 F.2d 273, 277 (5th Cir. 1968) (using the same definition and quoting the Williams & Meyers treatise).²

The interests at issue relate to outer-continental shelf lands leased by ATP (hereinafter "OCS Leases") from the United States under the Outer Continental Shelf Lands Act (43 U.S.C. §§ 1331 et seq.). (See, e.g., Case No. 12-3516, ECF No. 4-24 at 34). ATP received more than $700 million as a result of the various ORRI and NPI transactions. (Case 12-36187, ECF No. 4 at 5).

ATP, in its capacity as debtor in possession, argues that these are "disguised financing" transactions. That is, although characterized in the relevant documents as ORRIs, the economic substance is that of a financing arrangement. In addition to the NGP Capital transaction, ATP has made the same argument with regards to ATP transactions with several other parties, including TM, Keba, Macquarie, Diamond, and Seacor:

An actual controversy exists between ATP and [NGP Capital] regarding the proper characterization of the Conveyance and related agreements, including whether the Conveyance and related agreements constitute a "disguised" financing arrangement, which controversy directly affects the administration of ATP's bankruptcy estate and the rights and obligations of the parties.

The economic realities of the transactions contemplated by the Conveyance and the related agreements confirm that the transactions are a disguised financing arrangement.

For instance, ATP's continuing obligations following the Conveyance, including, without limitation, its obligation to operate the properties, to market production from the properties, and to collect and dispense the proceeds of sale of production from the properties, are obligations normally associated with ownership.

The other operative provisions of the Conveyance and related agreements are consistent with a traditional financing arrangement and not a sale or absolute conveyance of a property interest.

(Adversary Proceeding 12-3517, ECF No. 18 at 23).

Additionally, ATP argues that it lacked the legal authority to convey ORRI or NPI interests:

Under OCSLA, the title that ATP acquired from the Government pursuant to the OCS Leases was that of a lessee, and did not constitute absolute title in the Leased Lands.

The OCS Leases are simply executory contracts and/or unexpired leases.

As a lessee, ATP could convey to [NGP Capital] (either directly or by assignment) no greater title in the OCS Leases and the Hydrocarbons produced therefrom than that which it obtained from the Government.

Because the OCS Leases are executory contracts and/or unexpired leases and ATP could convey no greater title to the OCS Leases than it received, the Conveyances and related agreements with Diamond are derivatives of ATP's executory contracts or unexpired leases.

(Id. at 29).

NGP argues that the characterizations contained in the relevant documents accurately describe the nature of these transactions—conveyances of real property interests (in the form of ORRIs) under applicable law. (Adversary Proceeding 12-3443, ECF No. 77). It disputes that these are "disguised financing" transactions. (Id.). Thus, NGP necessarily argues that ATP had the ability to convey ORRI interests.

NGP-ATP Transaction

NGP purchased Term Overriding Royalties related to six OCS Leases on two properties, known as the Gomez Properties and the Telemark Properties, for a total purchase price of $65,000,000.00.³ (Case No. 12-3443, ECF No. 77 at 7). Under the agreement, NGP is entitled to receive its proportionate share of the proceeds of any and all hydrocarbons produced, saved, and sold from the Properties for each production month. Id.

On June 20, 2011, ATP and NGP entered into a transaction that included agreements labeled "Conveyance of Term Overriding Royalty Interest" and "Purchase and Sale Agreement"(collectively "Original Conveyance."). (Case No. 12-03443, ECF No. 110 at 7). Under the Original Conveyance, ATP purported to convey to NGP a limited term ORRI payable out of three OCS Leases, Mississippi Canyon 711, 754, and 755, in exchange for $25,000,000.00. The parties agreed that the Term ORRI remained in effect until the cumulative Royalty Payments received by NGP equaled the Total Sum. The "Total Sum" is defined in the Original Conveyance as "the full amount of the Primary Sum; plus an amount equal to the interest (the "Notional Interest") which would accrue at the Notional Rate on the unliquidated balance of the Primary Sum outstanding from time to time during the period from the date of execution of this Conveyance..." (ECF No. 77-1 at 45).

On December 29, 2011, the Term ORRI was amended when the parties executed the "First Supplement and Amended Conveyance of Term Overriding Royalty Interest" and "First Supplemental Purchase and Sale Agreement" (collectively "First Supplemental Conveyance."). Under the First Supplemental Conveyance, the parties agreed to amend the Term ORRI by increasing the Primary Sum by $15,000,000.00 and amending the Notional Interest Rate.

On July 2, 2012 the Term ORRI was again amended when the parties executed a "Second Supplement and Amended Conveyance of Term Overriding Royalty Interest" and "Second Supplemental Purchase and Sale Agreement" (collectively "Second Supplemental Conveyance."). Under the Second Supplemental Conveyance, the parties agreed to amend the Term ORRI by increasing the Primary Sum by $25,000,000.00 and extending the Term ORRI to cover OCS Leases AT63, MC941, and MC942.

Bifurcated Proceedings

On November 29, 2012, this Court bifurcated this adversary proceeding into two phases. (Case No. 12-03433, ECF No. 57). The first phase of the adversary proceeding is generally limited to the issues of (i) whether the NGP Conveyance constituted outright transfers of ownership of property such that the conveyed interests are not property of ATP's estate and (ii) whether the conveyances of the subject interests are executory contracts or leases which the Debtor may reject under 11 U.S.C. § 365.

Summary Judgment Standard

"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Fed. R. Bankr. P. 7056 incorporates Rule 56 in adversary proceedings.

A party seeking summary judgment must demonstrate: (i) an absence of evidence to support the non-moving party's claims or (ii) an absence of a genuine dispute of material fact. Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326 (5th Cir. 2009); Warfield v. Byron, 436 F.3d 551, 557 (5th Cir. 2006). A genuine dispute of material fact is one that could affect the outcome of the action or allow a reasonable fact finder to find in favor of the non-moving party. Brumfield v. Hollins, 551 F.3d 322, 326 (5th Cir. 2008).

A court views the facts and evidence in the light most favorable to the non-moving party at all times. Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir. 2009). Nevertheless, the Court is not obligated to search the record for the non-moving party's evidence. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir. 2003). A party asserting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record, showing that the materials cited do not establish the absence or presence of a genuine dispute, or showing that an adverse party cannot produce admissible evidence to support thefac...