Am. Standard Energy, Corp. v. Geronimo Holding Corp. (In re Am. Standard Energy, Corp.)

585 B.R. 138

IN RE: AMERICAN STANDARD ENERGY, CORP., et al., Jointly Administered Debtors.

American Standard Energy, Corp., a Nevada Corp., and American Standard Energy Corp., a Delaware Corp., Plaintiffs,

v.Geronimo Holding Corporation, Randall Capps, and XOG Operating, LLC, Defendants.

Case No. 15–70104–TMD

Adv. Proc. No. 17–07002–TMD

United States Bankruptcy Court, W.D. Texas, Austin Division.

Signed August 8, 2017

Bernard R. Given, II, Loeb & Loeb LLP, Los Angeles, CA, for Plaintiffs.

Randall A. Pulman, Thomas Rice, Pulman Cappuccio Pullen & Benson LLP, San Antonio, TX, for Defendants.

MEMORANDUM OPINION

TONY M. DAVIS, UNITED STATES BANKRUPTCY JUDGE

The plaintiffs¹ here seek, in part, a judgment declaring that their bankruptcy discharge injunction has been violated; in response, the defendants² filed a motion to dismiss on the theory that state court litigation to establish that term assignments of oil and gas leases have terminated does not involve the assertion of a "claim," and therefore does not violate the discharge injunction.³

I. BACKGROUND ⁴

A. The initial term assignments.

In February of 2012, Geronimo, which is owned by Randall Capps and XOG Operating, LLC, agreed to convey certain leasehold interests to ASEN in several states, including five leases referred to as the Crockett County leases.⁵ Geronimo conveyed the five leases through five term lease assignments, which were recorded in March of 2012, but made effective as of December 1, 2011.⁶ The original primary term of each of the term lease assignments stated:

(5) PRIMARY TERM: Subject to the terms and provisions below, this Assignment shall be for a term of three years from December 1, 2011 (hereinafter called "primary term") and as long thereafter as oil and/or gas, is produced from the Assigned Premises. Actual drilling operations on the Initial Well to be drilled or recompleted hereunder will begin by November 30, 2014.⁷

Another provision in the term lease assignments provided:

Upon termination of all or part of this Assignment under Sections 5 and 6 above Assignee shall reconvey to Assignor by recordable written instrument the identical interest Assignee acquired from Assignor ... Any time after Assignee has become obligated to reconvey such an interest in the assigned lease to Assignor, Assignor shall have the right to enter upon the Assigned Premises and conduct such operations as it deems necessary and said Assigned Premises shall no longer be subject to this Assignment, provided that Assignee shall not be relieved of any obligation or liability theretofore incurred as to the Assigned Premises and Assignee agrees to indemnify and hold Assignor harmless from any such obligation or liability.⁸

B. The term extensions

One year later, Geronimo extended the primary term of the Crockett County lease assignments from three years from the effective date, December 1, 2011, to five years from the effective date.⁹

After the first extension, ASEN defaulted on a credit agreement, but was then able to negotiate new financing and avoided foreclosure. To satisfy one requirement of the new financing, on January 10, 2014 Geronimo again extended the leases owned by ASEN.¹⁰ In the documents accomplishing the second extension, the language defining the primary term, section 5, was altered:

(5) PRIMARY TERM: Subject to the terms and provisions below, this Assignment shall be for a term until December 31, 2017 or the end of the primary term of the Base Lease set out in Exhibit "A," whichever is sooner, (hereinafter called "primary term") and for so long thereafter as oil and/or gas is produced from the Assigned Premises.¹¹

C. The bankruptcy case.

Seven months later, ASEN filed for voluntary relief under chapter 11 of the United States Bankruptcy Code.¹² The Crockett County leases were listed as property of ASEN on the schedules of assets and in the disclosure statement filed by ASEN.¹³ On July 26, 2016, just under a year later, the reorganization plan was confirmed.¹⁴ The plan included a "discharge injunction," which enjoined "all person who have held, hold, or may hold Claims or Interests" against the debtors.¹⁵

D. Litigation in state court.

About three months after confirmation, Geronimo entered into a lease assignment agreement with Amistad Energy Partners, LLC ("Amistad"), which included two of the five Crockett County leases.¹⁶ When ASEN objected to this assignment, Geronimo sued ASEN in state court seeking a declaratory judgment that the term assignment to ASEN terminated and that ASEN breached the assignment contract by failing to reconvey the leases to Geronimo upon termination.¹⁷ In response to the state court suit, AESN filed this adversary proceeding arguing, in part, that it owns the leases and that Geronimo violated the discharge injunction by filing the state court declaratory judgment action.¹⁸

II. ANALYSIS

A. Bankruptcy Court jurisdiction over the termination theories.

Geronimo asserts that the Crockett County term assignments terminated based on two rather suspect theories: (1) there was lack of consideration with respect to the term extensions; and (2) the term assignments terminated upon the signing of the extensions themselves, based on the new language inserted into the extension document.¹⁹ Either termination theory, if correct, would mean that: (1) ASEN breached the term assignments by failing to reconvey the leases to Geronimo after they terminated, and (2) Geronimo and XOG would be able to enter the land and "conduct such operations as [they] deem[ ] necessary...."²⁰

It is tempting to simply reach out and rule on the state law issue of whether the leases have terminated, given the facially suspect arguments advanced by Geronimo. However, the Court will resist that temptation because it, like all Federal Courts, is one of limited jurisdiction,²¹ and unlike Article III courts, also has limited authority to enter final orders.²² In addition, what jurisdiction this Court does have is further limited by the fact that confirmation has happened.²³ Finally, Geronimo has requested abstention.²⁴ For all these reasons, the Court will limit its ruling to the bankruptcy issue of whether the litigation is barred by the discharge injunction.²⁵

B. Motions to Dismiss under Rule 12(b)(6)

Rule 12(b)(6) states that a party can move to dismiss if the pleading party fails to state a claim upon which relief can be granted.²⁶ Here, ASEN seeks a declaratory judgment that Geronimo violated the discharge injunction and the largely identical injunction in the plan,²⁷ by filing the state court lawsuit. If litigation to determine whether the lease assignments at issue have terminated is not a "claim," as defined in the Bankruptcy Code, then no relief can be granted, because there is no violation of the discharge injunction. Thus, the motion depends on the Bankruptcy Code's definition of "claim."

C. What is a "Claim"?

The bankruptcy code defines "claim" as:

(A) [a] right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured; or

(B) [a] right to an equitable remedy for breach of performance, if such breach gives rise to a right of payment , whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.²⁸

The definition of claim is obviously broad in scope,²⁹ and meant to capture all remedies that give rise to a right to payment.³⁰ But there is one important limitation: the right to an equitable remedy for breach of performance where that breach does not give rise to monetary damages; this type of right will not be a claim, and will not be discharged.³¹ For example, several courts have held that covenants not to compete are excluded from the definition of claim, and so are enforceable despite the discharge.³² Thus, the key is to determine whether the breach gives rise to an equitable remedy that has a monetary damages alternative. And even if there is a monetary alternative, some courts have ruled that there is no claim where the monetary alternative is inadequate.³³

The Supreme Court looked at the term "claim" in Ohio v. Kovacs .³⁴ There, Kovacs was enjoined to clean up a waste site, and subsequently filed for bankruptcy. The issue was whether the injunction obligation was a claim, and thus, subject to discharge.³⁵ The Court ruled that the obligation was a claim. In doing so, it affirmed the judgments of the courts below and their reasoning: Because Kovacs, an individual, could not personally clean up the environmental damage he caused, but rather, could only pay money to have it cleaned up, the obligation was a "claim."³⁶

The Fifth Circuit has also stressed that the money damages must be an alternative to the equitable remedy. In Sheerin v. Davis , Sheerin had previously brought a state court lawsuit against Davis for freezing him out of their business partnership.³⁷ Sheerin won a judgment of both monetary and equitable remedies.³⁸ Davis then filed for bankruptcy and attempted to discharge the judgment, which included the equitable remedies of reformation, resulting trust, and partition in kind.³⁹ The court "examine[d] the disputed remedies to determine if alternative remedies of money damages exist[ed]."⁴⁰ The court determined that, based on either Texas law or the findings made by the Texas state trial court, money damages were not available as alternatives to the equitable remedies.⁴¹ Based on this, the court held that the equitable remedies were not claims that could be discharged in bankruptcy.⁴²

Also excluded from the scope of the term "claim" are covenants running with the land, even where the covenant requires the payment of money. For example, in Beeter v. Tri–City Property Management Services , the debtors argued that their homeowner's association violated the automatic stay and discharge injunction by attempting to collect post-petition assessments.⁴³ In...