Vanguard Operating, LLC v. Klein (In re Vanguard Natural Res., LLC)
| Decision Date | 11 December 2020 |
| Docket Number | CASE NO: 17-30560,ADVERSARY NO. 18-3178 |
| Citation | 624 B.R. 400 |
| Parties | IN RE: VANGUARD NATURAL RESOURCES, LLC, Debtor. Vanguard Operating, LLC, Plaintiff, v. Michael L. Klein, et al, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
James Tillman Grogan, III, Paul Hastings LLP, Houston, TX, Bryan J. Hall, Blank Rome LLP, Wilmington, DE, for Plaintiff.
Sharon Marie Beausoleil, John P. Melko, Foley & Lardner LLP, Houston, TX, for Defendant.
John Does 1-5, pro se.
AMENDED MEMORANDUM OPINION
This Memorandum Opinion resolves cross-motions for summary judgment filed by the parties—Vanguard Operating, LLC and Michael Klein, et al.1 The dispute centers on the continued existence of a net profits interest2 granted to the NPI Owners' predecessors. Vanguard seeks a declaration that the net profits interest was extinguished on confirmation of its plan of reorganization. The NPI Owners contend that the net profits interest was unaffected by Vanguard's Plan. The motions raise two issues: (1) whether this Court is bound by a judgment from a state-court lawsuit (the "Wyoming Litigation") waged over the existence of the net profits interest; and (2) whether, in light of the outcome of the Wyoming Litigation, Vanguard's Plan extinguished the net profits interest.
The Court is bound by the judgment of the Wyoming Litigation. Because the Court is bound, the Court must adhere to the Wyoming district court's finding that the net profits interest is a covenant running with the land. The net profits interest was unaffected by Vanguard's Plan. Summary judgment is granted to the NPI Owners.
The net profits interest at the center of this dispute originated from the creation of the Pinedale Unit in Wyoming's Pinedale Basin. In the 1950s, Malco Refineries, Inc., El Paso Natural Gas Company, and Continental Oil Company (together, the "First Parties") were granted the right to develop land in the Pinedale Basin by the United States Bureau of Land Management under the Pinedale Unit Agreement. (ECF No. 49 at 3–4). Thereafter, the First Parties began exploration of the land in the Pinedale Unit. (ECF No. 1 at 4). The First Parties' aim was to develop their leases in the Pinedale Unit for oil and gas production. In connection with their efforts to develop the Pinedale Unit, the First Parties entered into an Assignment Agreement with Novi Oil Company.
Under the Assignment Agreement, Novi transferred four mineral leases to the First Parties in exchange for a net profits interest ("NPI"). Pursuant to the Assignment Agreement, Novi was entitled to "5% of the net profits realized from operation for oil and gas by the First Parties under the leases." (ECF No. 45 at 4). Additionally, the parties executed the Pinedale Unit Area Net Profits Contract ("NPC"), detailing how the NPI was to be calculated. (ECF No. 49 at 4). In pertinent part, the NPC provided: (1) the NPI entitled Novi to "5% of the net profits ... resulting from operations for oil and gas by First Parties, or any of them, under those certain leases;" and (2) that "net profits" meant "the gross revenue (not required for payment of overriding royalties ...) from unit operations allocable to said leases after deduction of all expenses of unit operation ...." (ECF No. 2 at 2–3). The NPC was supplemented by a Supplemental Accounting Agreement between the parties, which detailed how the First Parties were to account for and pay Novi amounts due under the NPI. Ultra Res., Inc. v. Hartman , 226 P.3d 889, 899 (Wyo. 2010) ( Hartman I ). On July 26, 1954, the United States Geological Survey (USGS) approved the Pinedale Unit consistent with the Assignment Agreement. Both the NPC and the Supplemental Accounting Agreement were properly recorded in Sublette County, Wyoming.
In the decades following the creation of the NPI, Novi conveyed its NPI to various successors. Hartman I , 226 P.3d at 902. For decades, no payments were made by or to any party pursuant to the NPI because production was "impracticable." Id. In 1977, the Pinedale Unit was contracted to roughly one-quarter of its original acreage. Id. The Pinedale Unit terminated in 1981 without ever earning any profits. Id.
However, two units were created out of the Pinedale Unit in the years following its termination. Id. One unit was known as the Mesa Unit. The agreement creating the Mesa Unit provided that the Mesa Unit was subject to the Pinedale Unit Agreement. Id. Further, the agreement provided that the Pinedale Unit Agreement would merge into the Mesa Unit Agreement in the event oil and gas were produced in paying quantities. Id.
In 2005, leases within the Mesa Unit, which were burdened to the NPI, became profitable. Id. At that time, the NPI Owners sent a letter to the holders of working interests in the leases burdened by the NPI demanding an accounting and payment of the NPI. Id. at 902–03.4 The NPI Owners' demand was denied by those Working Interest Holders. Id. at 902. The NPI Owners then filed suit against the Holders to enforce the NPI. Id.
Central to the ensuing lawsuit was whether the NPI survived the termination of the Pinedale Unit. Id. at 903. The Working Interest Holders asserted that the NPI terminated along with the Pinedale Unit. Id. Without the Pinedale Unit, the Holders argued that the NPI no longer burdened the leases in which they held interests. Id.
The Wyoming district court disagreed. Finding that the NPI was a "covenant running with the leases," which was "analogous to a royalty interest," the district court concluded that the NPI "was not dependent on the continuation and/or modification of the Pinedale Unit." Hartman v. Group A Questar Exploration and Production Co. , No. 06-6843, at 5, 9, 2007 WL 7118254 (Wyo. Dist. Ct. Aug. 01, 2007). Moreover, in its Findings of Facts and Conclusions of Law, the district court found that "Ultra, SRMP, Lance , SWEPI, Williams and Arrowhead"5 were each, as successors to the First Parties, "liable for payment of the NPI, which is a covenant running with the land." Hartman v. Group A Questar Exploration and Production Co. , No. 2006-6843, at 18, 2008 WL 7701150 (Wyo. Dist. Ct. Apr. 11, 2008) (emphasis added). Because it was a covenant running with the land, the NPI continued to burden the Interest Holders' leases, obligating the Holders to pay the NPI. Id. at 22. Additionally, the district court found that the NPI Owners held 4.98% ownership interest in the NPI. Id. That interest entitled the NPI Owners to 4.98% of the net profits of operations under the burdened leases. Id.
All parties appealed from the district court's ruling. Among other things, the Wyoming Supreme Court addressed the district court's conclusions that the NPI did not terminate with the Pinedale Unit and that the NPI Owners owned the NPI. Hartman I , 226 P.3d at 905, 910–11. First, the Wyoming Supreme Court held that the NPI "continued to encumber the relevant leases after" the termination of the Pinedale Unit. Id. at 910. Second, the Court reversed the judgment of the district court to the extent the district court attempted to quiet title to the NPI in the NPI Owners "against any claims by others who [were] not parties to" the Wyoming Litigation. Id. at 913. However, the Court's holding as to ownership of the NPI was predicated on the parties' failure to present a justiciable controversy as to the ownership of the NPI. Id. Essentially, no party to the Wyoming Litigation challenged the NPI Owners' interest in the NPI, nor did any party appear to claim an ownership interest in the NPI. Id. at 910–13.6 Despite its holding that it was not empowered to quiet title to the NPI, the Court nevertheless held that the NPI Owners had established a right to payment under the NPC. Id. at 913.
The Wyoming Supreme Court praised the district court for arriving at "what was essentially a correct resolution of the case." Id. at 939. However, the Supreme Court remanded the case because the district court incorrectly determined how net profits were to be calculated under the NPC. Id. at 940. Further, the Supreme Court reversed, without directing the district court to reconsider, the district court's attempt to quiet title to the NPI, as well as its finding of joint and several liability among the non-operators. Id. at 939–40. In all other respects, the Court affirmed the district court's judgment. Id.
On remand, the Wyoming district court issued an Amended Judgment conforming its original judgment to the Opinion of the Wyoming Supreme Court. See generally Hartman v. Questar Exploration and Production Co. , No. 20066843, 2010 WL 10827093 (Wyo. Dist. Ct. Dec. 08, 2010) ( Hartman II ). In its Amended Judgment, the district court reiterated its conclusion that the NPI continued to burden the Holders' leases after the termination of the Pinedale Unit. Id. at *15. The Amended Judgment did not alter the district court's original conclusion that the NPI is a covenant running with the land. Id. at *12, 15. Additionally, the district court incorporated by reference its finding that the NPI was analogous to a royalty interest. See id. at *14 (); see also Hartman , at 5, 2007 WL 7118254 (). No party to the Wyoming Litigation appealed the district court's conclusions regarding the nature of the NPI.
Nearly seven years later, Vanguard Natural Resources, LLC, and various subsidiaries, filed voluntary petitions for relief under chapter 11 the Bankruptcy Code. Among those subsidiaries was Vanguard Operating LLC, the plaintiff in ...
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