Tayfur v. Swepi LP (In re Tayfur)

• Decision Date: 26 February 2014
• Docket Number: No. 11–26940JAD.,11–26940JAD.
• Citation: 505 B.R. 673
• Parties: In re Mustafa TAYFUR, Debtor. Mustafa Tayfur, Movant, v. SWEPI LP, Central Appalachian Petroleum and Ronda J. Winnecour, Respondents.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

505 B.R. 673

In re Mustafa TAYFUR, Debtor.Mustafa Tayfur, Movant,

v.SWEPI LP, Central Appalachian Petroleum and Ronda J. Winnecour, Respondents.

No. 11–26940JAD.

United States Bankruptcy Court, W.D. Pennsylvania.

Signed Feb. 26, 2014.

Daniel R. Schimizzi, Kirk B. Burkley, Bernstein–Burkley, P.C., Pittsburgh, PA, for Shell Exploration & Production Co. (Respondent).

Mary Bower Sheats, Frank Gale, Bails, Murcko & Pocrass, P.C., Pittsburgh, PA, for Debtor.

Gary H. Simone, Rishor Simone, Butler, PA, for Diane Lohman, Mariah Lohman (Respondents).

MEMORANDUM OPINION

JEFFERY A. DELLER, Chief Judge.

The matter before the Court is the Debtor's Motion to Reject Oil and Gas Lease Pursuant to 11 U.S.C. § 365(d)(2). The Debtor is a lessor of an oil and gas lease and seeks to reject his oil and gas lease as not being in the best interest of the estate due to (a) the allegedly inadequate amount of compensation received thereunder, and (b) the expectation of securing a new lease that will enable him to pay his creditors in full. This matter is a core matter pursuant to 28 U.S.C. § 157(2)(A). This Memorandum Opinion constitutes this Court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052. For the reasons expressed below, the Motion to Reject Oil and Gas Lease Pursuant to 11 U.S.C. § 365(d)(2) shall be denied.

I.

The Debtor, Mustafa Tayfur, is party to an oil and gas lease dated December 28, 2005 (the “Lease”). The Lease was originally with Central Appalachian Petroleum and subsequently assigned to East Resources in July of 2006. SWEPI LP (“SWEPI”) is a successor by merger of East Resources.

Pursuant to the Lease, the Debtor granted the lessee certain rights to explore and produce oil and gas on 107 acres in Worth Township, Butler County, Pennsylvania. The primary term of the Lease is ten years “or as long thereafter as prescribed payments are made, or for as long thereafter as operations are conducted on the Leasehold in search of or production of oil, gas, or the their constituents, or for as long as a well capable of production is located on the Leasehold ...” See Doc. # 94, Ex. 3. The Lease provides for the Debtor to receive $3.00 per acre as delay payment. Id. At the time the Debtor entered into the Lease, he had no formal offers for the purchase of the rights transmitted under the Lease. The Lease was signed by the Debtor as Lessor but was not signed by the original lessee, Central Appalachian Petroleum.

Payments commenced timely under the Lease and have continued at the established rate of $321.00 per year. The Debtor has cashed each of the checks received from SWEPI and/or its predecessors. To date, there have not been any drilling operations on the Debtor's property. Nor has there been any production of oil or gas in Worth Township, Butler County, Pennsylvania in paying quantities.

On November 14, 2011, the Debtor filed a voluntary Chapter 13 petition. In his schedules, the Debtor listed the Lease on Schedule B indicating that he was assuming the Lease and using the proceeds to fund the chapter 13 plan. ¹ In his Chapter 13 Plan dated November 22, 2011, the Debtor stated that he anticipated oil and gas payments totaling approximately $120,000 to commence in June 2012 to be used to fund the plan. See Doc. # 7. That plan was then confirmed on interim basis. On July 30, 2012, the Debtor filed an Amended Plan stating that drilling had been delayed due to the decline in gas prices and payments were expected to begin the summer of 2013.² It was again acknowledged by the Debtor that the payments under the oil and gas Lease would be sufficient to pay one hundred per cent of the allowed undisputed claims asserted in this bankruptcy case. An interim order confirming the plan as modified was entered on September 10, 2012.

The Debtor thereafter had a change of heart and filed the subject Motion to Reject Oil and Gas Lease Pursuant to 11 U.S.C. § 365(d)(2) (the “ Motion to Reject ”) on February 20, 2013. Contemporaneously, an Amended Chapter 13 Plan Dated February 20, 2013 was filed stating that the Debtor was proceeding with a motion to reject the current oil and gas Lease and the Debtor would be proceeding with a new lease or sale of his rights as he had received an alleged substantial tentative offer for the oil and gas rights. Further, it was indicated that payments were expected to begin in the summer of 2014. See Doc. # 75.

An objection to the Motion to Reject was filed by Respondent SWEPI. An evidentiary hearing was held on the Motion to Reject, the parties have submitted their Post–Trial Briefs and replies thereto and the matter is now ripe for determination.

II.

The Debtor seeks to reject the oil and gas Lease pursuant to 11 U.S.C. § 365(d)(2) on the basis of an alleged tentative offer related to the subsurface rights of the Debtor's property. It is alleged that rejection of the Lease is in the best interest of the creditors as the Debtor expects to secure a new lease or sale of his subsurface rights that would pay all creditors in full. Further, it is asserted that the amount paid under the current Lease is “grossly inadequate in view of the offers received by the debtor from other sources.” See Doc. # 62, ¶ 9.

Although not alleged in the Motion to Reject, it was further argued by the Debtor at the time of the pretrial submissions that because the Lease was signed only by the lessor, and not the lessee, it is an “at will” lease. As such, it is argued that the Lease can be terminated at any time by the Debtor. In support of this theory, the Debtor relies upon Pennsylvania Landlord/Tenant law and the Statute of Frauds.

SWEPI disputes that the Lease is subject to Landlord/Tenant law and argues that the Statute of Frauds is inapplicable. SWEPI further contends that even if the Statute of Frauds is applicable, it has produced sufficient writings to meet its burden. SWEPI also argues that the principle of estoppel should be applied to bar the Debtor from seeking to terminate the Lease. Finally, SWEPI asserts that even if this Court were to allow the rejection of the Lease, it is entitled to remain on the premises pursuant to 11 U.S.C. § 365(h)(1)(A)(ii).

III.

11 U.S.C. § 365 provides that a trustee may assume or reject an executory contract or unexpired lease of the debtor. 11 U.S.C. § 365(a). In this chapter 13 case, such assumption or rejection may be at any time prior to confirmation of a plan. 11 U.S.C. § 365(d)(2). Although this Debtor has proposed a plan and an amended plan that have been confirmed on an interim basis, there has been no final confirmation of a chapter 13 plan in this case. ³

Section 365 of the Bankruptcy Code provides that an executory contract or unexpired lease may be assumed or rejected subject to the court's approval. 11 U.S.C. § 365(a). The Bankruptcy Code does not set forth a standard for making a determination as to whether assumption or rejection should be authorized; however, courts have adopted the standard of the business judgment test. See e.g., In re Philadelphia Newspapers, LLC, 424 B.R. 178, 182 (Bankr.E.D.Pa.2010); N.L.R.B. v. Bildisco (In re Bildisco), 682 F.2d 72, 79 (3d Cir.1982), aff'd465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). The decision of the debtor must also be in the best interest of the estate. See Chestnut Ridge Plaza Assocs., L.P., 156 B.R. 477, 485 (Bankr.W.D.Pa.1993).

IV.

In order to determine whether the Lease can be rejected pursuant to 11 U.S.C. § 365, the Court first examines the Debtor's contentions that the Lease is an “at will” lease. To support his assertion that the Lease is an “at will” lease, the Debtor relies upon Pennsylvania statute 68 P.S. § 250.202. That statute provides that real property leased for a term of greater than three years by a landlord to a tenant “must be in writing and signed by the parties making or creating the same, otherwise it shall have the force and effect of a lease at will only and shall not be given any greater force or effect either in law or equity....” 68 P.S. § 250.202.

The statutory subsection quoted above is part of Pennsylvania's Landlord and Tenant Act of 1951 found at 68 P.S. 250.101 et seq. It is settled law in Pennsylvania that an oil and gas lease does not fall within the context of a landlord/tenant lease. See e.g., Rice v. Chesapeake Energy Corp., No. 2:12–cv–00391, 2012 WL 3144318, *3 (W.D.Pa. Aug. 1, 2012) (“In Pennsylvania, an oil and gas lease is not presumed to carry with it principles of lease construction found in the landlord/tenant arena.”)( citing Kepple v. Fairman Drilling Co., 380 Pa.Super. 52, 551 A.2d 226, 230–31 (1988)); see also Derrickheim Co. v. Brown, 305 Pa.Super. 173, 451 A.2d 477, 479 (1982) (“[o]il and gas leases are not controlled by normal landlord and tenant law”) ( citing Kuntz, A Treatise on The Law of Oil and Gas, section 52.1 (1978)).

The Debtor also relies upon the Pennsylvania Statute of Frauds found at 33 P.S. § 1. This statute provides that all “leases, estates, interests ... not put in writing, and signed by the parties so making or creating the same, ... shall have the force and effect of leases or estates at will only....”. 33 P.S. § 1. The Debtor asserts that the failure of the lessee to affix a signature on the lease renders the lease to be one that is not for a term of years, but rather one that is “at will” only.

Upon closer examination, this Court concludes that the Debtor's reliance upon the Statute of Frauds in this instance is unavailing. The Statute of Frauds provides that an agreement for the sale of real estate will not be enforced unless it is in writing and signed by the party to be charged. See Fannin v. Cratty, 331 Pa.Super. 326, 480 A.2d 1056, 1058 (1984). Its purpose is to “prevent assertions of verbal understandings and thus to obviate the opportunity for fraud and perjury.” Id. ( citing Brotman v. Brotman, 353 Pa. 570, 46 A.2d 175 (1946); Manley v. Manley, 238 Pa.Super. 296, 357 A.2d 641 (1976)).

The Court finds the...