Palm Energy Grp., LLC v. Greenwich Ins. Co. (In re Tri-Union Dev. Corp.)
| Decision Date | 28 September 2015 |
| Docket Number | ADVERSARY NO. 11-3032,CASE NO: 03-44908 |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
| Parties | IN RE: TRI-UNION DEVELOPMENT CORPORATION Debtor(s) PALM ENERGY GROUP, LLC, et al Plaintiff(s) v. GREENWICH INSURANCE COMPANY, et al Defendant(s) |
The United States of America, on behalf of the Department of the Interior, Bureau of Ocean Energy Management, and Bureau of Safety and Environmental Enforcement, has filed a motion for summary judgment on its counterclaim against Greenwich Insurance Company. Greenwich has filed a cross-motion for summary judgment. The United States' motion is granted. Greenwich's cross-motion is denied. The United States is entitled to judgment as a matter of law. Greenwich must pay the $3,900,000.00 balance of the surety bonds.
Greenwich has also filed a motion for summary judgment on all claims of Tri-Union Development Corporation, Palm Energy Group, LLC, and Palm Energy Partners, LLC. Summary judgment is granted over Plaintiffs' claim for a permanent injunction. Summary judgment is also granted as to whether Plaintiffs may recover based on the entire value of the contracts at issue. The motion is denied with respect to all other claims. The parties are invited to file briefs regarding the proper disposition of the Phase 2 Escrow by October 20, 2015, at 5:00 p.m.
Tri-Union was an oil and gas company that owned and operated an exploration and production business with several offshore properties located in both federal and Texas waters in the Gulf of Mexico. (ECF No. 154 at 4). Apache Corp. was a predecessor in interest to several of these offshore properties. Id. The properties relevant to this lawsuit are located on the Outer Continental Shelf ("OCS") and are subject to the regulatory authority of the Department of the Interior, pursuant to the Outer Continental Shelf Lands Act, 43 U.S.C. § 1331, et seq. The Bureau of Ocean Energy Management ("BOEM") and Bureau of Safety and Environmental Enforcement ("BSEE") are charged with promoting energy independence, environmental protection, safety, resource conservation, and the economic development of the OCS. (ECF No. 191 at 3; ECF No. 191-1 at 2). BSEE was formerly known as the Bureau of Ocean Energy Management and Enforcement ("BOEMRE"), itself formerly known as the Minerals Management Service ("MMS").
As the owner or operator of offshore oil and gas wells in the OCS, Tri-Union had certain obligations to plug and abandon offshore wells, remove offshore platforms, pipelines, and facilities, conduct site clearance operations, and perform additional decommissioning activities (collectively the "P&A Obligations"). In re Tri-Union Dev. Corp., 314 B.R. 611, 615 (Bankr. S.D. Tex. 2004). In order to enforce the P&A Obligations, MMS required the obligor to arrange for the issuance of surety bonds in favor of MMS. Id. Tri-Union obtained surety bonds from Greenwich with an effective date of July 1, 2001 to replace its previous bonds issued by Frontier Insurance Company. (ECF Nos. 116-1; 116-2). The three bonds at issue are as follows:
Bond Number Amount OCS Lease/ROW Number Area/Block 45035257 $2,500,000 OCS-G 01249 ST 162 45035256 $1,100,000 OSC-G 01249 ST 162 45035259 $300,000 OSC-G 11181 HI A 537
Bonds # 45035257 and 45035256 were issued on June 27, 2001 and stated: "The Surety does hereby absolutely and unconditionally bind itself to the United States of America acting through and by the Minerals Management Service (MMS), or other such official designated by the Secretary of Interior for this purpose, for the payment of all the cost of the plugging and abandonment Obligations." (ECF No. 116-1 at 4, 12).
Bond # 45035259, issued on July 2, 2001, was a Right-of-Way Grant Bond and extended to "any grant of right-of-way issued, maintained, or approved under the Outer Continental Shelf Lands Act . . . within the geographical area specified in Schedule A [the Gulf of Mexico]." (ECF No. 116-2 at 4). The bond also covered any "instrument hereinafter, issued, entered into, or acquired by, the principal authorizing pipeline operations in the [Gulf of Mexico]." Id.
On October 20, 2003, Tri-Union filed for chapter 11 bankruptcy. (Case No. 03-44908; ECF No. 1). Tri-Union's chapter 11 plan was confirmed on September 30, 2004. (Case No. 03-44908; ECF No. 1083). The Confirmation Order incorporated and approved a settlement agreement and term sheet (the "Term Sheet") between numerous parties affected by Tri-Union's P&A Obligations, including Tri-Union, Apache, Greenwich, MMS, and Palm Energy Partners (a Tri-Union affiliate). The Term Sheet laid out general terms for the completion of the P&A Obligations. Tri-Union's properties were to be decommissioned and permanently abandoned intwo separate phases, identified as Phase 1 and Phase 2.1 (ECF No. 193-3 at 33). The properties at issue in this lawsuit for which Greenwich issued surety bonds were Phase 2 properties. (ECF No. 154 at 7).
Under the Term Sheet, PEP and its subsidiary Palm Energy Group (collectively, "Palm") were "obligated to enter into a mutually agreed to all inclusive defined fee Turnkey Contract for the complete offshore well plugging and abandonment platform, facility, and pipeline removal, site clearance, and relating decommissioning . . . until all offshore P&A operations are completed and approved by the MMS. . . .2" (ECF 193-3 at 33). Tri-Union, PEG, and PEP entered into a Turnkey Agreement on October 21, 2004. (ECF No. 1-2 at 8). All other signatories of the Term Sheet were named third-party beneficiaries to the Turnkey Agreement. Id. In accordance with the Turnkey Agreement, PEG was to perform both phases of the required decommissioning. (ECF No. 1-2 at 10).
The Term Sheet also set forth the source of the funds which would be used to conduct the decommissioning process. The parties created two escrow accounts, the Phase 1 Escrow and the Phase 2 Escrow, to pay PEP and PEG for the P&A work. (ECF No. 193-3 at 35). Phase 1 Escrow totaled $7,775,000.00 while Phase 2 Escrow totaled $6,600,000.00, "to be paid in mutually agreeable segregable portions upon completion of the segregable portion of the P&A." Id. Greenwich served as the escrow agent for the Phase 1 and Phase 2 Escrows. A separate escrow account was also established for the Phase 2 Properties using funds paid by Apache (the "Apache Escrow"). Payments for Phase 2 work would "be made as required from the Phase 2 Escrow and the Apache Escrow, as the case may be, in accordance with the terms of the TurnkeyContract and the respective Phase 2 Escrow and the Apache Escrow to be negotiated upon compliance MMS regulations and certification requirements attributable to each of the Phase 2 properties' Obligations." Id. at 38. In addition, PEG could "utilize the Phase 2 Escrow to secure and pay for work commitments to vendors with the consent of Greenwich." Id.
PEG completed the Phase 1 P&A Obligations in 2005. (ECF No. 193 at 7). On December 12, 2005, MMS sent Tri-Union a letter notifying it that the Phase 1 Properties were plugged and abandoned in accordance with MMS requirements. (ECF No. 193-5).
Despite some initial successes, Phase 2 decommissioning did not proceed as smoothly. Palm began decommissioning Phase 2 in 2005 after the completion of Phase 1. On December 13, 2005, MMS requested a timetable for the timely completion of platform removal for South Timbalier Block 162, which had been damaged by Hurricane Katrina. (ECF No. 31-4). Tri-Union and Palm were able to obtain an extension through June 30, 2006, to complete removal of ST 162. (ECF No. 31-5). Unable to meet to meet this deadline, Tri-Union and Palm requested an additional extension through March, 2007. Id. MMS approved this request on August 23, 2006.
On July 31, 2006, MMS issued an Incident of Noncompliance stating that Tri-Union and PEP had not properly abandoned its right of way for OCS-G 11181. Despite this Incident of Noncompliance, Tri-Union and PEP did not request approval to relinquish their right-of-way easement and remove the pipeline until June 11, 2009. (ECF No. 90-3). Tri-Union and Palm proposed that abandonment operations commence on July 15, 2009. MMS approved the application on August 13, 2009. (ECF No. 191-4).
As of April 6, 2010, ST 162 and HI A537 were still not properly decommissioned. (ECF No. 191-1 at 6). MMS granted another extension until May 4, 2010 to allow Palm and Apache to propose a plan for decommissioning. Id. Palm requested that Greenwich disburse the remaining $520,000.00 in the Phase 2 Escrow to allow work to continue, but Greenwich refused, arguing that funds "in excess of the allocated portions under the Turnkey, have been distributed to or on behalf of Palm Group" and further that the P&A Obligations were not completed to MMS's satisfaction. (ECF No. 191-5 at 1-2; ECF No. 198-9). As a result, Palm was unable to pay several of its contractors. By March or April of 2010, Palm was no longer performing any decommissioning activities.
While the Phase 2 operations were proceeding fitfully, PEG, as the plan agent for Tri-Union, had previously filed a motion to close the chapter 11 case on October 18, 2007. (Case No. 03-44908; ECF No. 1505). The case was closed on November 21, 2007. (Case No. 03-44908; ECF No. 1511). On November 1, 2010, Tri-Union and PEG filed a motion to reopen the bankruptcy case, alleging that they were unable to complete the P&A Obligations due to Greenwich's repeated refusal to transfer funds to Tri-Union's operating account. (Case No. 03-44908; ECF No. 1521 at 4). The Court granted the motion on December, 7, 2010.
On January 25, 2011, Tri-Union and PEG filed this adversary proceeding against Greenwich, Apache, and Nippon Oil Exploration U.S.A. Limited.3 (ECF No. 1). Tri-Union and PEG asserted claims for detrimental reliance and breach of contract against...
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