Tayfur v. Swepi LP (In re Tayfur)

• Decision Date: 07 July 2014
• Docket Number: Civil Action No. 2:14–413.
• Citation: 513 B.R. 282
• Parties: In re Mustafa TAYFUR, Debtor. Mustafa Tayfur, Appellant, v. Swepi LP, Central Appalachian Petroleum, and Ronda J. Winnecour, Appellees.
• Court: U.S. District Court — Western District of Pennsylvania

513 B.R. 282

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

v.Swepi LP, Central Appalachian Petroleum, and Ronda J. Winnecour, Appellees.

Civil Action No. 2:14–413.

United States District Court, W.D. Pennsylvania.

Signed July 7, 2014.

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

Kirk B. Burkley, Daniel R. Schimizzi, Bernstein Law Firm, P.C., Pittsburgh, PA, for Appellees.

MEMORANDUM OPINION

ARTHUR J. SCHWAB, District Judge.

I. Introduction

This case is before the Court on appeal from a final order of the United States Bankruptcy Court for the Western District of Pennsylvania. The question presented is whether the Bankruptcy Court erred in denying the appellant's motion to reject a lease under 11 U.S.C. § 365(d)(2). For the reasons that follow, the decision of the Bankruptcy Court will be affirmed.

II. Background

Mustafa Tayfur (“Tayfur”) owns roughly 107 acres of real property in Worth Township, which is located in Butler County, Pennsylvania. ECF No. 1–3 at 2. On December 28, 2005, Tayfur executed a lease agreement permitting Central Appalachian Petroleum to extract oil and gas lying beneath the property's surface. ECF No. 1–15 at 6. Although the agreement was signed by Tayfur at the time of its execution, it was never signed by a representative of Central Appalachian Petroleum. ECF No. 1–3 at 2. At a minimum, the agreement was to remain in force for a “primary term” of ten years. ECF No. 1–15 at 6. Tayfur was to be paid $3.00 per year for each acre, totaling an annual payment of $321.00. ECF No. 1–3 at 2. The terms of the agreement provided that the lease could be extended by either the continuation of the prescribed payments or the conduction of operations designed to extract oil or gas from the property.¹ ECF No. 1–15 at 6. Payments due under the lease agreement commenced in a timely manner. ECF No. 1–3 at 2. Central Appalachian Petroleum assigned the lease to East Resources, Inc. (“East Resources”), on July 14, 2006. ECF No. 1–25 at ¶ 3. SWEPI LP (“SWEPI”) is East Resources' successor-by-merger. Id. at ¶ 4. During the relevant period of time, Tayfur received proper payments from SWEPI and its predecessors. Id. at ¶ 5. He cashed every check that was sent to him pursuant to the terms of the lease agreement. Id. at ¶ 6. No exploratory operations have commenced under the lease. Id. at ¶ 8.

On November 14, 2011, Tayfur filed a voluntary petition for bankruptcy under Chapter 13 of the Bankruptcy Code [11 U.S.C. § 1301 et seq.]. ECF No. 1–3 at 2. In a plan dated November 22, 2011, Tayfur expressed an intention to provide the necessary funding through oil and gas payments totaling approximately $120,000.00. Id. He indicated that the payments would most likely commence in June 2012. Id. The United States Bankruptcy Court for the Western District of Pennsylvania confirmed the plan on an interim basis. Id. at 3. Tayfur filed an amended plan on July 30, 2012. Id. He advised that a decline in gas prices had delayed the anticipated drilling on the property, and that payments were expected to begin during the summer of 2013. Id. An interim order confirming the modified plan was entered on September 20, 2012. Id.

Thomas E. McMaster (“McMaster”), an agent for Bounty Minerals, apparently contacted Tayfur during the early part of 2013 to discuss a potential purchase of the right to extract oil and gas from the property. ECF No. 1–29 at 15–16. In a letter to Tayfur dated February 17, 2013, McMaster stated that he had prepared a proposed offer for the purchase of the property's “mineral rights.” ECF No. 1–15 at 5. On February 20, 2013, Tayfur filed a motion to reject the “unexpired lease” pursuant to 11 U.S.C. § 365(d)(2). ECF No. 1–3 at 3. In support of his motion, Tayfur asserted that he “wishe[d] to reject the lease based upon a tentative offer for a substantial amount of money related to [his] subsurface rights.” ECF No. 1–5 at ¶ 6.

SWEPI filed an objection on March 21, 2013, contending that Tayfur's motion should be denied because he had “provide[d] no evidence of the alleged new lease or its purported benefit to the estate.” ECF No. 1–7 at ¶ 3. Attempting to provide an additional ground for the denial of Tayfur's motion, SWEPI argued that 11 U.S.C. § 365(h)(1)(A)(ii) would allow it to remain in possession of the property even if Tayfur were permitted to reject the existing lease. Id. at ¶¶ 4–13. SWEPI maintained that it would “exercise its right of continued possession,” and that Tayfur “w[ould] be unable to lease the premises to another party.” Id. at ¶ 13.

Harry Klodowski (“Klodowski”) is a Pennsylvania attorney whose practice focuses on environmental and mineral rights law. ECF No. 1–12 at ¶ 3. He has negotiated gas leases with SWEPI and its agents. Id. at ¶ 7. In an affidavit signed on March 26, 2013, Klodowski declared that the payment terms of Tayfur's 2005 lease agreement were “significantly below” the “current market value.” Id. at ¶ 10.

An evidentiary hearing was held before the Bankruptcy Court on October 22, 2013. ECF No. 1–29 at 1. Tayfur testified that three different companies had expressed an interest in buying or leasing the “gas and mineral rights” to his property. Id. at 15. He identified McMaster as one of the individuals who had spoken with him about the matter. Id. at 15–16. When questioned about the negotiations, Tayfur acknowledged that he had not received any formal offers from potential lessees. Id. at 16. He explained that he had stopped negotiating with McMaster before receiving such an offer. Id. at 19. Klodowski testified that the estate would benefit from the proposed rejection of the 2005 lease. Id. at 25–26. Although Tayfur's property was surrounded by areas controlled by SWEPI, Klodowski asserted that leases were “like playing cards” that were “routinely traded between companies.” Id. at 26. He denied that potential lessees would avoid the property simply because it was surrounded by property leased to SWEPI. Id. Klodowski maintained that another company “would be happy” to purchase property desired by SWEPI in order to facilitate a subsequent transfer of property surrounding the area owned by Tayfur. Id.

Lester Hebert (“Hebert”), a land representative employed by SWEPI, testified that it was more economical for oil and gas companies to drill “lateral” wells rather than “vertical” wells. ECF No. 1–29 at 61. He stated that Tayfur's 107–acre parcel of land was not large enough to facilitate the creation of a large well. Id. at 56. Hebert insisted that land swaps of the kind described by Klodowski did not happen very often. Id. at 56–57. He expressed doubt that SWEPI would be willing to deal with a company with which it did not have a preexisting business relationship. Id. at 57. Hebert further testified that the parcel's close proximity to Moraine State Park would make lateral drilling even more difficult, since state parks typically had “a lot of surface requirements.” Id. at 61. He responded in the negative when asked whether companies were regularly drilling vertical wells in western Pennsylvania. Id. at 76.

In a memorandum opinion and order dated February 26, 2014, the Bankruptcy Court denied Tayfur's motion to reject the lease. Tayfur v. Swepi LP, 505 B.R. 673 (Bankr.W.D.Pa.2014). On March 8, 2014, Tayfur appealed the Bankruptcy Court's decision to this Court pursuant to 28 U.S.C. § 158(a). ECF No. 1. The matter has been fully briefed and is now ripe for disposition.

III. Jurisdiction and Standard of Review

Federal district courts exercise appellate jurisdiction over final judgments, orders and decrees entered by bankruptcy courts. 28 U.S.C. § 158(a)(1). Federal Rule of Bankruptcy Procedure 8013 provides that a reviewing court “may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr.P. 8013. “[A] bankruptcy court's legal determinations are reviewed de novo, its factual findings for clear error and its exercise of discretion for abuse.” Official Committee of Unsecured Creditors of J. Allan Steel Co. v. Nucor–Yamato Steel Co., 336 B.R. 226, 229 (W.D.Pa.2005). “Mixed questions of fact and law must be broken down and reviewed under the applicable standard.” Titus v. Shearer, 498 B.R. 508, 514 (W.D.Pa.2013).

IV. Discussion

Tayfur seeks to reject the 2005 lease pursuant to 11 U.S.C. § 365(d)(2), which provides that “the trustee may assume or reject an executory contract or unexpired lease of residential real propertyor of personal property of the debtor at any time before the confirmation of a plan.” The “leases of real property” subject to assumption or rejection under that statutory provision “include any rental agreement to use real property.” 11 U.S.C. § 365(m). Although previous plans proposed by Tayfur had been confirmed on an interim basis, no final confirmation order had been entered at the time of his motion. Tayfur, 505 B.R. at 677. The assumption or rejection of an “execulory contract or unexpired lease” is subject to judicial approval. 11 U.S.C. § 365(a). “The standard applied to determine whether the rejection of an executory contract or unexpired lease should be authorized in the ‘business judgment’ standard.” In re: Philadelphia Newspapers, LLC, 424 B.R. 178, 182 (Bankr.E.D.Pa.2010). That standard can be satisfied by a showing that the proposed rejection would benefit the estate. Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872 F.2d 36, 39–40 (3d Cir.1989).

A. The Landlord and Tenant Act

The legal relationships between landlords and tenants in Pennsylvania are governed by the Landlord and Tenant Act of 1951 [68 Pa. Stat. § 250.101 et seq.]. Under the Landlord and Tenant Act, real property “may be leased for a term of not more than three years” by means of an “oral or written contract or agreement.” 68 Pa. Stat. § 250.201. Leases spanning longer periods of time are governed by 68 Pa. Stat. §...