Tex. Gen. Land Office v. Pearl Res. LLC (In re Pearl Res. LLC)

• Decision Date: 23 August 2022
• Docket Number: CASE NO: 20-31585,ADVERSARY NO. 20-3169
• Citation: 643 B.R. 436
• Parties: IN RE: PEARL RESOURCES LLC and Pearl Resources Operating Co. LLC, Debtors. Texas General Land Office, Plaintiff, v. Pearl Resources LLC and Pearl Resources Operating Co. LLC, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

643 B.R. 436

IN RE: PEARL RESOURCES LLC and Pearl Resources Operating Co. LLC, Debtors.Texas General Land Office, Plaintiff,

v.Pearl Resources LLC and Pearl Resources Operating Co. LLC, Defendants.

CASE NO: 20-31585

ADVERSARY NO. 20-3169

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed August 23, 2022

Adam Richard Abrams, Jason B. Binford, Abigail R. Ryan, Office of the Attorney General, Austin, TX, for Plaintiff.

Herbert Charles Shelton, II, Hayward PLLC, Austin, TX, for Defendants.

MEMORANDUM OPINION

Eduardo Rodriguez, United States Bankruptcy Judge

Among the questions presented to the Court is whether a party is permitted to advance counterclaims in reply to the opposing party's counterclaims. This question has caused deep divide among courts across the country and there is no definitive answer within the Fifth Circuit. Additionally, this Court must decide whether a creditor is required to file a proof of claim after the debtor listed its claim as "unknown" in its Schedule E/F but did not list the claim as either disputed, unliquidated or contingent.

The Texas General Land Office initiated this dispute by seeking dismissal of Pearl Resources LLC and Pearl Resources Operating Co. LLC's counterclaim for breach of contract pursuant to Rule 12(b)(6). In addition to its 12(b)(6) motion, the Texas General Land Office also asserted counterclaims in reply for breach of contract and trespass to try title. Additionally, as part of its counterclaim in reply for breach of contract, the Texas General Land Office sought attorney's fees pursuant to the Texas Civil Practice & Remedies Code §§ 37.004 and 38.001.

Pearl Resources LLC and Pearl Resources Operating Co. LLC responded by seeking dismissal of the Texas General Land Office's counterclaim in reply for breach of contract pursuant to Rules 12(b)(1) and 12(b)(6). Pursuant to Rule 12(f), Pearl Resources LLC and Pearl Resources Operating Co. LLC also filed a motion to strike the Texas General Land Office's counterclaims in reply for breach of contract and trespass to try title.

On June 28, 2022, the Court held a hearing. After considering the pleadings on file, arguments of counsel, and applicable law, Pearl Resources LLC and Pearl Resources Operating Co. LLC's motion to strike pursuant to Rule 12(f) is denied. Pearl Resources LLC and Pearl Resources Operating Co. LLC's motion to dismiss pursuant to Rule 12(b)(1) is granted and the Texas General Land Office's counterclaim in reply for breach of contract is dismissed. The Texas General Land Office's request for leave to amend¹ its answer and counterclaims in reply² will be set for further hearing. Pearl Resources LLC and Pearl Resources Operating Co. LLC's motion to dismiss the request for attorney's fees accompanying the Texas General Land Office's counterclaim in reply for quiet title pursuant to 12(b)(6) is denied as moot. Pearl Resources LLC and Pearl Resources Operating Co. LLC's alternative argument for dismissal of the Texas Land Office's counterclaim in reply for breach of contract pursuant to 12(b)(6) is granted. Pearl Resources LLC and Pearl Resources Operating Co. LLC's alternative argument for dismissal pursuant to 12(b)(6) of the Texas General Land Office's claim for attorney's fees in connection with its counterclaim in reply for breach of contract pursuant to Tex. Civ. Prac. & Rem. Code § 37.004 is granted. Pearl Resources LLC and Pearl Resources Operating Co. LLC's alternative argument for dismissal pursuant to 12(b)(6) of the Texas General Land Office's claim for attorney's fees pursuant to the Tex. Civ. Prac. & Rem. Code § 38.001 is denied. Nevertheless, since the Court has already dismissed the Texas General Land Office's counterclaim in reply for breach of contract, the Texas General Land Office's request for its accompanying attorney's fees under Tex. Civ. Prac. & Rem. Code § 38.001 related to that claim is also dismissed. The Texas General Land Office's motion to dismiss pursuant to 12(b)(6) of Pearl Resources LLC and Pearl Resources Operating Co. LLC's counterclaim for breach of contract is denied.

I. BACKGROUND

1. On March 3, 2020, Pearl Resources LLC and Pearl Resources Operating Co. ("Pearl ") filed for relief under chapter 11 of the United States Bankruptcy Code.³

2. On March 5, 2020, the Clerk of Court issued the Notice of chapter 11 Bankruptcy Case ("Notice ").⁴

3. The Notice set the deadline for governmental units to file proofs of claim as September 1, 2020.⁵

4. On March 10, 2020, the Court issued an order jointly administering Pearl's two chapter 11 cases.⁶

5. On March 11, 2020, the Texas General Land Office ("GLO ") appeared in the main bankruptcy case.⁷

6. On March 27, 2020, Pearl filed its Schedule E/F, which scheduled the GLO as having an unsecured claim of "unknown" value.⁸

7. On May 28, 2020, the GLO filed its complaint for declaratory judgment against Pearl ("Complaint "),⁹ asserting one claim, to wit: (1) Count I – Declaratory Judgment.

8. On June 29, 2020, Pearl filed "Defendant, Pearl Resources LLC's Original Answer, Affirmative Defenses and Counterclaim,"¹⁰ In which Pearl asserted two counterclaims, to wit: (1) Quiet Title – Suit to Remove Cloud on Title; and (2) Trespass to Try Title.

9. On August 21, 2020, Pearl filed its Modified Plan of Reorganization for Small Business Under Subchapter V of Chapter 11 ("Modified Plan ").¹¹ The Modified Plan provided that Class 12 was classified and treated as follows:

All potential claims against the Debtors that were not filed in either bankruptcy estate on or before the bar date of May 1, 2021 that have not been separately classified. ... Parties within Class 12 shall not receive any recovery under the Plan. Class 12 is impaired.¹²

10. On August 26, 2020, the Court issued its comprehensive pre-trial scheduling order.¹³

11. On September 29, 2020, Pearl filed "Defendants, Pearl Resources LLC's and Pearl Resources Operating Co. LLC's First Amended Answer, Affirmative Defenses and Counterclaim,"¹⁴ but did not amend its counterclaims.

12. On September 30, 2020, the Court confirmed the Modified Plan.¹⁵

13. On October 29, 2021, Pearl filed "Pearl Resources LLC's and Pearl Resources Operating Co.’s, Second Amended Answer, Affirmative Defenses and Counterclaims"¹⁶ ("Pearl's Second Amended Answer and Counterclaims "), and amended its counterclaims as follows: (1) Counterclaim I - Quiet Title – Suit to Remove Cloud on Title; (2) Counterclaim II - Trespass to Try Title; (3) Counterclaim III – Breach of Contract.

14. On January 7, 2022, the GLO filed "The Texas General Land Office's Motion To Dismiss, Answer To Pearl Resources LLC's and Pearl Resources Operating Co.’s Second Amended Answer ("GLO's Answer "), Affirmative Defenses, and Counterclaims ("GLO's Counterclaims in Reply ") and The Texas General Land Office's Affirmative Defense, and Counterclaims Against Pearl Resources LLC and Pearl Resources Operating Co"¹⁷ ("GLO's Motion To Dismiss ") in which the GLO added the following counterclaims: (1) Counterclaim I: Breach of Contract; (2) Counterclaim II: Trespass To Try Title; and (3) awarding attorney fees pursuant to Tex. Civ. Prac. & Rem. Code §§ 37.004 and 38.001.

15. On February 7, 2022, the Court abated its comprehensive pre-trial scheduling order and permitted the parties to mediate their dispute.¹⁸

16. On April 4, 2022, the Court held a status conference and the parties announced that mediation was unsuccessful.¹⁹ On the same date, the Court issued an amended comprehensive pre-trial scheduling order.²⁰

17. On April 25, 2022, Pearl filed "Pearl Resources LLC and Pearl Resources Operating Co. Motion To Dismiss"²¹ ("Pearl's Motion to Dismiss ").

18. On April 25, 2022, Pearl filed "Pearl Resources LLC and Pearl Resources Operating Co. Motion To Strike"²² ("Pearl's Motion to Strike "). On the same date, Pearl filed its "Response To The Texas General Land Office's Motion To Dismiss"²³ ("Pearl's Response ").

19. On May 2, 2022, the GLO filed "The Texas General Land Office's Reply To Pearl Resources LLC and Pearl Resources Operating Co. Response To The Texas General Land Office's Motion To Dismiss"²⁴ ("GLO's Reply ").

20. On May 16, 2022, the GLO filed "The Texas General Land Office's Objection To Pearl Resources, LLC's and Pearl Resources Operating Co., LLC's Motion To Strike"²⁵ ("GLO's Response to Motion to Strike "). The GLO also filed "The Texas General Land Office's Objection To Pearl Resources, LLC's and Pearl Resources Operating Co., LLC's Motion To Dismiss"²⁶ ("GLO's Response to Motion to Dismiss ").

II. JURISDICTION, VENUE, AND CONSTITUTIONAL AUTHORITY

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under Title 11 or arising in or related to cases under Title 11." An adversary proceeding falls within the Court's "related to" jurisdiction if the "outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."²⁷ Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.²⁸ This Court determines that pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (C) this adversary proceeding involves primarily core matters as it concerns administration of the estate, allowance or disallowance of claims against the estate and counterclaims by the estate."²⁹

Furthermore, this Court may only hear a case in which venue is proper.³⁰ Pursuant to § 1409(a), "a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending."³¹ Debtors’ main chapter 11 case is presently pending in this Court and therefore, venue of this adversary proceeding is proper.

This Court must evaluate whether it has constitutional authority to enter a final judgment in this case. In Stern, which involved a core proceeding brought...