Vanguard Operating, LLC v. Sublette Cnty. Treasurer (In re Vanguard Nat. Res., LLC)

Decision Date14 January 2020
Docket NumberADVERSARY NO. 18-03250,CASE NO: 17-30560,ADVERSARY NO. 18-03245,ADVERSARY NO. 18-03248,ADVERSARY NO. 18-03247,ADVERSARY NO. 18-03244,ADVERSARY NO. 18-03249,ADVERSARY NO. 18-03246
PartiesIN RE: VANGUARD NATURAL RESOURCES, LLC Debtors VANGUARD OPERATING, LLC Plaintiff v. SUBLETTE COUNTY TREASURER, WYOMING Defendants VANGUARD OPERATING, LLC Plaintiff(s) v. NATRONA COUNTY TREASURER, WYOMING Defendant(s) VANGUARD OPERATING, LLC Plaintiff(s) v. CAMPBELL COUNTY TREASURER Defendant(s) VANGUARD OPERATING, LLC Plaintiff(s) v. JOHNSON COUNTY TREASURER, WYOMING Defendant(s) VANGUARD OPERATING, LLC Plaintiff(s) v. CARBON COUNTY TREASURER, WYOMING Defendant(s) VANGUARD OPERATING, LLC Plaintiff(s) v. PARK COUNTY TREASURER, WYOMING Defendant(s) VANGUARD OPERATING, LLC Plaintiff(s) v. SWEETWATER COUNTY TREASURER, WYOMING Defendant(s)
CourtU.S. Bankruptcy Court — Southern District of Texas

IN RE: VANGUARD NATURAL RESOURCES, LLC Debtors

VANGUARD OPERATING, LLC Plaintiff
v.
SUBLETTE COUNTY TREASURER, WYOMING Defendants

VANGUARD OPERATING, LLC Plaintiff(s)
v.
NATRONA COUNTY TREASURER, WYOMING Defendant(s)

VANGUARD OPERATING, LLC Plaintiff(s)
v.
CAMPBELL COUNTY TREASURER Defendant(s)

VANGUARD OPERATING, LLC Plaintiff(s)
v.
JOHNSON COUNTY TREASURER, WYOMING Defendant(s)

VANGUARD OPERATING, LLC Plaintiff(s)
v.
CARBON COUNTY TREASURER, WYOMING Defendant(s)

VANGUARD OPERATING, LLC Plaintiff(s)
v.
PARK COUNTY TREASURER, WYOMING Defendant(s)

VANGUARD OPERATING, LLC Plaintiff(s)
v.
SWEETWATER COUNTY TREASURER, WYOMING Defendant(s)

CASE NO: 17-30560
ADVERSARY NO. 18-03244
ADVERSARY NO. 18-03245
ADVERSARY NO. 18-03246
ADVERSARY NO. 18-03247
ADVERSARY NO. 18-03248
ADVERSARY NO. 18-03249
ADVERSARY NO. 18-03250

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

January 14, 2020


CHAPTER 11

Page 2

MEMORANDUM OPINION

Vanguard Operating, LLC ("Vanguard") commenced adversary proceedings against seven Wyoming Counties to recover ad valorem taxes. Vanguard Operating paid the disputed ad valorem taxes for two separate years prior to filing chapter 11 bankruptcy and after a Final Decree was entered in its bankruptcy case. (See Case Nos. 18-03244, 18-03245, 18-03246, 18-03247, 18-03248, 18-03249, and 18-03250).1 Vanguard's Complaints seek multiple causes of action against the Counties which include: (i) a declaration of improper Plan distributions for payments made to Campbell, Carbon, Johnson, Natrona, Park, and Sweetwater Counties; (ii) avoidance of the payments as unauthorized post-petition payments under 11 U.S.C.

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§ 549(a);2 (iii) avoidance of preferential payments under 11 U.S.C. § 547 for payments made to Campbell, Johnson, and Sublette Counties; (iv) disgorgement of improper Plan distributions made to Campbell, Carbon, Johnson, Natrona, Park, and Sweetwater Counties under 11 U.S.C. § 105; (v) unjust enrichment against the same; (vi) recovery of the avoided transfers under 11 U.S.C. § 550; and (vii) disallowance of Campbell County's claim under 11 U.S.C. § 502. (See Case Nos. 18-03244, 18-03245, 18-03246, 18-03247, 18-03248, 18-03249, and 18-03250; ECF No. 1).

Background3

Vanguard Natural Resources, LLC, et al. was founded in 2006 and began as an oil and gas production company focused on production from the Appalachian Basin. (Case No. 17-30560; ECF No. 6 at 4). Vanguard later expanded its operations by acquiring properties in Texas, New Mexico, Oklahoma, Montana, Mississippi, and Wyoming. (Case No. 17-30560; ECF No. 6 at 4). As oil and gas prices declined in 2014, Vanguard struggled to maintain its revenue and liquidity. (Case No. 17-30560; ECF No. 6 at 22).

Although Vanguard made significant changes to remedy its financial problems, it ultimately filed chapter 11 bankruptcy on February 1, 2017. (Case No. 17-30560; ECF No. 1). Vanguard's chapter 11 reorganization plan was confirmed on July 18, 2017, and went effective on August 1, 2017. (Case No. 17-30560; ECF Nos. 1109, 1219). On February 2, 2017, the Court entered the Taxes Order authorizing the payment of prepetition taxes. (Case No. 17-30560; ECF No. 59). On November 9, 2017, the Court entered the Final Decree, closing the

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cases of certain debtors, excluding Vanguard Natural Resources ("VNR").4 (Case No. 17-30560; November 9, 2017 Hearing).

Wyoming Tax Assessments

Vanguard's Wyoming oil and gas assets are subject to Wyoming tax laws, which assess an ad valorem property tax on oil and gas that is extracted from reserves. (Case No. 18-03244; ECF No. 28 at 13). The ad valorem tax payments benefit local government entities, such as counties. (Case No. 18-03244; ECF No. 28 at 14). Under Wyoming's tax statute, ad valorem taxes are calculated, assessed, and billed for the proceeding year's production. (Case No. 18-03244; ECF No. 28 at 14). However, the statute places the burden of evaluating the volume and value of production each year on the taxpayer, who then submits the tax assessment return to the Wyoming Department of Revenue. (Case No. 18-03244; ECF No. 28 at 15). The Department of Revenue certifies those values to the counties where they originate. (Case No. 18-03244; ECF No. 28 at 15). The county then assumes responsibility for collecting the assessed ad valorem taxes. (Case No. 18-03244; ECF No. 28 at 15).

Counties issue written tax statements to tax payers on or before October 10, who are then responsible for making payments. WYO. STAT. ANN § 39-13-107(b)(i)(C). The statute allows taxpayers to split the ad valorem taxes into two installments, the first due by November 10, in the same year when statements are issued, and the second due by May 10 of the following year. (Case No. 18-03244; ECF No. 28 at 15-16). To ensure compliance, the Wyoming tax statute allows the county to charge an interest rate of 18.00% per annum on any unpaid balance until paid or collected. WYO. STAT. ANN. § 39-13-108(b)(ii). A separate section of the statute allows

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for the assessment of a penalty to taxpayers who fail to promptly report their ad valorem taxes to the Department of Revenue. That penalty is equal to 1.00% of the taxable value of production. WYO. STAT. ANN. §§ 39-13-108(c)(ii)(B) and 39-14-208(d)(ii). However, if the entire tax (both the first and second installment) is paid on or before December 31, "no interest or penalty is chargeable." WYO. STAT. ANN. § 39-13-108(b)(i).

In September 2016, Campbell, Johnson, and Sublette Counties sent Vanguard invoices for its 2016 ad valorem taxes.5 (Case No. 18-03244; ECF No. 1 at 3-4; Case No. 18-03247; ECF No. 1 at 3; Case No. 18-03246; ECF No. 40 at 6). Vanguard did not pay any of the 2016 ad valorem tax prior to December 31, 2016. (Case No. 18-03244; ECF No. 31 at 4-5). Instead, Vanguard paid the first installment of its 2016 taxes to Campbell, Johnson, and Sublette Counties on January 31, 2017 ("January 2017 Payments") immediately prior to the filing of its bankruptcy petition. (Case No. 18-03244; ECF No. 31 at 5; Case No. 18-03246; ECF No. 40 at 6). In May 2017, Vanguard made the second installment of its 2016 taxes to Campbell, Johnson and Sublette Counties ("May 2017 Payments"). (Case No. 18-03244; ECF No. 28 at 17).6 The January 2017 Payments are summarized in the table below:

Date
County
Ad Valorem Taxes Paid
01/31/2017
Campbell
$268,930.21
01/31/2017
Johnson
$321,659.60
01/31/2017
Sublette
$2,490,829.74

(Case No. 18-03244; ECF No. 28 at 17; Case No. 18-03246; ECF No. 1 at 4).

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Between September and October 2017, six Wyoming Counties mailed tax assessments to Vanguard for its oil and gas produced in 2016 ("2017 ad valorem taxes"). (Case No. 18-03244; ECF No. 28 at 17; Case No. 18-03246; ECF No. 1 at 5). After the Final Decree was entered in Vanguard's bankruptcy case on November 9, 2017, Vanguard made the first installment of its 2017 ad valorem taxes to six separate Counties on November 10, 2017 ("November 2017 Payments"). (Case No. 18-03244; ECF No. 28 at 17; Case No. 18-03246; ECF No. 1 at 5). The November 2017 Payments are summarized in the table below:

Date
County
Ad Valorem Taxes Paid
11/10/2017
Campbell
$178,665.03
11/10/2017
Carbon
$163,655.12
11/10/2017
Johnson
$178,665.03
11/10/2017
Natrona
$330,058.54
11/10/2017
Park
$879,873.80
11/10/2017
Sweetwater
$332,144.79

(Case No. 18-03244; ECF No. 28 at 17; Case No. 18-03246; ECF No. 40 at 21).

Vanguard's Seeks to Recover its Ad Valorem Tax Payments

On August 15, 2018, Vanguard initiated a series of adversary proceedings against the Wyoming Counties which received ad valorem tax payments. (See Case Nos. 18-03244, 18-03245, 18-03246, 18-03247, 18-03248, 18-03249, and 18-03250). Vanguard's Complaints allege that: (i) the January 2017 Payments to Campbell, Johnson, and Sublette Counties are preferential transfers under 11 U.S.C. § 547, and avoidable under 11 U.S.C § 550; (ii) the November 2017 Payments to Campbell, Carbon, Johnson, Natrona, Park, and Sweetwater Counties are improper plan distributions under Vanguard's confirmed chapter 11 plan of reorganization, which should be disgorged pursuant to 11 U.S.C. § 105, or alternatively that the payments constitute an unjust enrichment to the Counties; and (iii) Campbell County's claim

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("Claim 311") should be disallowed under 11 U.S.C. § 502. (See Case No. 18-03244; ECF No. 1; see also Case No. 18-03248; ECF No. 1; Case No. 18-03246; ECF No. 1 at 10).

In response to Vanguard's Complaints, Carbon, Natrona, Park, and Sweetwater Counties asserted counterclaims, seeking allowance of late filed proofs of claim pursuant to Rule 9006(b)(1) of the Federal Rules of Bankruptcy Procedure. (Case No. 18-03245; ECF No. 19 at 8-9). Campbell County asserted a separate counterclaim seeking similar relief—"leave to file a priority claim for Fiscal 2018 Taxes on the ground of excusable neglect." (Case No. 18-03246; ECF No. 11 at 19-20). Both Vanguard and the Counties filed cross motions for summary judgment. (Case No. 18-03244; ECF Nos. 28, 31; Case No. 18-03245; ECF Nos. 24, 26).

Defendants' & Campbell County's Motions for Summary Judgment

Carbon, Johnson, Natrona, Park, Sublette, and Sweetwater Counties seek summary judgment on the basis that: (i) the November 2017 Payments are voluntary payments pursuant to 11 U.S.C. § 524(f), or were otherwise authorized under the Taxes Order; (ii) the January 2017 Payments are not payments on account of an antecedent debt pursuant to 11 U.S.C. §547(b), because the 18.00% interest rate allowed under the Wyoming tax statute is not a penalty;7 and (iii) Vanguard is precluded from asserting chapter 5 causes of action under the terms of the Final Decree. (Case No. 18-03244; ECF No. 28).

The Board of Campbell County's Commissioners ("Campbell County") seeks summary judgment on substantially the same basis as the Counties. (See Case No. 18-03246; ECF No. 40). Campbell County adds...

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