TXCO Res., Inc. v. Peregrine Petroleum, L. L.C. (In re TXCO Res., Inc.), Bankruptcy No. 09–51807–RBK.

• Decision Date: 26 July 2012
• Docket Number: Bankruptcy No. 09–51807–RBK.,Adversary No. 09–5125–RBK.
• Citation: 475 B.R. 781
• Parties: In re TXCO RESOURCES, INC., et al., Debtors. TXCO Resources, Inc. v. Peregrine Petroleum, L.L.C.
• Court: U.S. Bankruptcy Court — Western District of Texas

475 B.R. 781

In re TXCO RESOURCES, INC., et al., Debtors.TXCO Resources, Inc.

v.Peregrine Petroleum, L.L.C.

Bankruptcy No. 09–51807–RBK.

Adversary No. 09–5125–RBK.

United States Bankruptcy Court,

W.D. Texas,

San Antonio Division.

July 26, 2012.

James M. Truss, Meghan E. Bishop, Patrick L. Huffstickler, Thomas Rice, Cox Smith Matthews Incorporated, San Antonio, TX, for TXCO Resources, Inc.

Bruce K. Spindler, David S. Gragg, Maria Cristina E. Nelson, Natalie F. Wilson, Sara Murray, Langley & Banack, Inc., San Antonio, TX, for Peregrine Petroleum, L.L.C.

Opinion

RONALD B. KING, Chief Judge.

TXCO Resources, Inc. (“TXCO” or “Debtor”) was a publicly traded oil and gas exploration and production company based in San Antonio, which, along with its subsidiaries, filed a voluntary Chapter 11 case on May 17, 2009. Prior to confirmation, the Debtor agreed to sell most of its oil and gas assets to Newfield Exploration Company (“Newfield”) and Anadarko E & P Company L.P. (“Anadarko”). The sale was included in the Debtor's Second Amended Plan of Reorganization (the “Plan”). On January 27, 2010, this Court entered an order (the “Confirmation Order”) confirming the Plan. On February 11, 2010, the Plan became effective and Reorganized TXCO (“RTXCO”) emerged from Chapter 11. All creditors were paid in full, including interest and attorney's fees, and equity holders received a distribution. The remaining oil and gas assets that were not transferred to Newfield or Anadarko were transferred to the TXCO Liquidating Trust. Newfield is the only shareholder of record in RTXCO and the sole beneficiary of the Liquidating Trust.

On November 23, 2009, prior to confirmation, the Debtor brought this adversary proceeding against Peregrine Petroleum, L.L.C. (“Peregrine”) alleging causes of action for misappropriation of trade secrets, violation of the Texas Theft Liability Act, unfair competition by misappropriation, breach of contract, tortious interference with prospective business relations, and for the imposition of a constructive trust to prevent unjust enrichment. TXCO alleged that Peregrine impermissibly used TXCO's confidential information and trade secrets to acquire oil and gas leases in the Maverick Basin of south Texas. (ECF No. 43) The rights in and to this adversary proceeding against Peregrine were preserved in the Plan and transferred from the Debtor to RTXCO, which continued the pursuit of this action. A forty-one day trial took place between May 31, 2011 and September 12, 2011. The Court will render judgment for RTXCO on its misappropriation of trade secrets cause of action, but all other requested relief will be denied.

Jurisdiction

This is a not a core proceeding under 28 U.S.C. § 157(b)(2). The parties have consented, both in their filed pleadings and verbally on the record, to the entry of a final judgment by this Court. See28 U.S.C. § 157(c)(1)–(2) (2005). This Opinion constitutes the findings of fact and conclusions of law of the Court, pursuant to Fed. R. Bankr.P. 7052. In the event that this Court does not have the authority to render a final judgment, this Opinion may be treated as proposed findings of fact and conclusions of law subject to de novo review. 28 U.S.C. § 158(c)(1) (2005); Fed. R. Bankr.P. 9033(d).

Facts

I. Introduction to the Maverick Basin and the Cage Ranch.

The Maverick Basin is an area of southwest Texas that borders Mexico and is comprised of parts of Maverick, Dimmit, Zavala, and Webb Counties. (Pl.'s Ex. 580) It contains a wealth of hydrocarbons in several distinct geologic formations piled atop one another under the earth's surface, including the Eagle Ford and Pearsall shales and the Georgetown and Glen Rose formations. (Pl.'s Ex. 24) The Eagle Ford Shale, which is actually a borderline carbonate reservoir rather than a shale, is a highly calcareous source rock for other formations. The high carbonate content makes the formation brittle and easier to stimulate through hydraulic fracturing or “fracking,” which is significant because both oil and natural gas are capable of being produced at higher rates of recovery than in other traditional shale plays.¹ (Pl.'s Ex. 580; Tr. 96, May 31, 2011 p.m.) Oil and gas drilling in the Maverick Basin historically yielded hit-or-miss results because vertical drilling was inadequate to consistently and economically produce hydrocarbons. (Pl.'s Ex. 580) In October 2008, an announcement by Petrohawk Energy Corporation of the completion of a horizontal Eagle Ford well in La Salle County, Texas, east of the Maverick Basin, drew new attention to the long-known, but previously undeveloped, geologic formation. ( Id.) By that time, horizontal drilling had become widely used in the oil and gas industry. Consequently, the Maverick Basin and other areas within the Eagle Ford trend experienced a rapid increase in leasing and drilling activity throughout 2009 and 2010.

One of the largest ranches in Maverick County, the Cage Ranch, consists of approximately 65,000 acres. (Tr. 11–12, June 1, 2011 a.m.) For oil and gas leasing purposes, the Cage was divided into a 25,000–acre southern portion (“Block A”), and a roughly 24,744–acre northern portion (“Block B”).² (Pl.'s Ex. 73; Tr. 19–22, 85, June 1, 2011 a.m.) Mineral ownership of the Cage Ranch is subdivided in a checkerboard pattern across the entire property. (Pl.'s Ex. 73) Each square in the checkerboard contains 640 acres. (Tr. 15–25, July 1, 2011 a.m.) One half of the checkerboard squares (the “Cage Acreage” or the “Dark Squares”) are owned by the Cage family and Doug Vander Ploeg (collectively, the “Cage Owners”) in an undivided 15/16 and 1/16 interest, respectively. ( Id.) Ownership of the other half of the checkerboard (the “BLS Acreage” or the “White Squares”) is split between three groups of owners—the Briscoe group, the Lloyd group, and the West–Stedman group (collectively, the “BLS Owners” or “BLS Lessors”). ( Id.) Within each of the 640–acre checkerboard squares of the BLS Acreage, 480 acres are owned by the Briscoe and Lloyd groups in varying proportions, and 160 acres are owned by the West–Stedman group. ( Id.)

II. TXCO's Acquisition of the Cage Ranch.

“The Exploration Company” was formed in 1979 and began operations in the Maverick Basin in 1989 in formations other than the Eagle Ford. (Tr. 83–86, May 31, 2011 p.m.) In approximately 2007, it changed its name to TXCO Resources, Inc. Between 1989 and 2008, TXCO dramatically increased its acreage position in the area, eventually acquiring leases on roughly one million net acres of land in Dimmit, Maverick, Webb, and Zavala counties. ( Id.) Included in TXCO's assets was an interest in Block B of the Cage Ranch, which it acquired in a 2005 deal with Saxet Energy Corporation. (Tr. 15–25, July 1, 2011 a.m.) TXCO was an early entrant in the Maverick Basin and drilled the first horizontal Eagle Ford well. (Tr. 94, May 31, 2011 p.m.)

Because of the complicated mineral ownership of the Cage Ranch, TXCO's interest in Block B consisted of several distinct leases. (Tr. 15–25, July 1, 2011 a.m.) The Block B Cage Acreage was held by leases between TXCO and the Cage Owners. ( Id.) The 24,744–acre Block B BLS Acreage was held by leases which treated the property as if it were divided into three roughly proportionate subsections across the northern, central, and southern portions of the property (“Section A”, “Section B”, and “Section C”). ( Id.) The BLS Owners executed multiple leases with TXCO according to their proportional ownership in Section A, Section B, and Section C. ( Id.; Pl.'s Ex. 645) During the primary term of the leases, drilling a well anywhere on the BLS Acreage satisfied TXCO's drilling requirements to maintain its leases on Section A, Section B, and Section C, regardless of whether a well was drilled on that particular subsection during the primary term. (Tr. 15–25, July 1, 2011 a.m.) Once the secondary term began, TXCO's leases on the BLS Acreage required it to maintain production or conduct continuous drilling operations on each subsection. (Trs. 15–25, July 1, 2011 a.m., 85–88, July 5, 2011 a.m.) If TXCO failed to meet any of its obligations in the secondary term as to Section A, Section B, or Section C, its lease terminated on that acreage. (Tr. 15–25, July 1, 2011 a.m.)

III. TXCO's Farmouts with Encana and Anadarko.

In 2005, TXCO's board of directors decided to expand the company by partnering with another company. (Tr. 85, May 31, 2011 p.m.) For that purpose, the company entered into a farmout and Joint Exploration Agreement (“JEA”) with Encana Oil & Gas (USA) Inc. (“Encana”).³ (Pl.'s Ex. 86; Tr. 86, May 31, 2011 p.m.) Under the JEA, Encana conducted drilling operations on TXCO's leased acreage to satisfy TXCO's leasehold obligations. (Trs. 85–87, May 31, 2011 p.m., 9–12, June 1, 2011 a.m.) In exchange, Encana received a 50% working interest in TXCO's acreage on which it drilled and completed wells. ( Id.) TXCO and Encana thereafter became equal owners or “partners” on approximately 200,000 acres. ( Id.) Included in Encana's acquired interests was Block B of the BLS and Cage Acreage. (Tr. 9–16, June 1, 2011 a.m.)

TXCO and Encana's relationship changed as Encana successfully drilled wells and earned portions of TXCO's acreage. Eventually, TXCO sought to alter the relationship to gain back acreage it assigned under the 2005 agreement. Because TXCO was not financially able to buy Encana's 50% interest, TXCO and Encana entered into a new JEA on September 20, 2007 (the “Encana Farmout”), which allowed TXCO to reacquire acreage through several phases of drilling operations on the acreage previously acquired by Encana.⁴ (Tr. 9–16, June 1, 2011 a.m.) The Encana Farmout provided for the mutual exchange of geological, geophysical, engineering, and production data. (Tr. 85–88, May 31, 2011 p.m.) Under the agreement, each party would maintain the confidentiality of the information it received. (Tr. 13, June 1, 2011 a.m.)

During this time frame,...