In re EXCO Servs.

IN RE: EXCO SERVICES, INC. EXCO RESOURCES, INC., et al Debtors

CASE NO: 18-30167

CASE NO: 18-30155

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

April 22, 2020

Jointly Administered Order

CHAPTER 11

MEMORANDUM OPINION

Shell Energy North America (US), L.P. ("SENA") filed a Motion to Enforce the Bankruptcy Court's Jurisdiction (ECF No. 242) seeking an order declaring that this Court retains exclusive jurisdiction over a breach of contract dispute between SENA and Raider Marketing, L.P. ("Raider"). SENA filed its motion following Raider's attempt to demand arbitration of the dispute. The Court holds:

• The parties entered into a valid arbitration agreement prior to bankruptcy.

• The facts do not warrant the denial of the enforcement of the arbitration agreement.

• Raider did not waive its right to compel arbitration.

BACKGROUND

Prior to bankruptcy, EXCO Operating Company contracted to sell natural gas to BG Energy Merchants, LLC.¹ EXCO assigned its rights and obligations under the contract to Raider, EXCO's marketing affiliate. BG Energy assigned its rights and obligations to SENA. Pursuant to the contract, any dispute between the parties was to be resolved through binding arbitration. In November and December 2017, Raider delivered its regular contractual production of natural gas to SENA and issued invoices to SENA totaling approximately $34million. In late December 2017, SENA became concerned with Raider's liquidity and demanded a $45 million adequate assurance payment. SENA believes it made the demand pursuant to the contract due to doubts about Raider's liquidity. Raider claims the demand constituted an unjustified breach. To date, SENA has not paid the invoices and Raider has not paid the adequate assurance demand.

PROCEDURAL HISTORY

On December 27, 2017, Raider filed suit against SENA in the District Court of Harris County, Texas. After EXCO and Raider filed chapter 11 bankruptcy petitions on January 15, 2018, Raider dismissed the state court lawsuit without prejudice. In lieu of the state court suit, Raider initiated a breach of contract adversary proceeding against SENA with the bankruptcy court. In response, SENA moved to compel arbitration of the adversary proceeding. On March 23, 2018, Raider once again dismissed its complaint without prejudice.

SENA filed proofs of claim against Raider and EXCO Operating Company, each in the amount of $45,750,202.85 on April 13, 2018. The Debtors objected to the claim against EXCO, arguing that EXCO was no longer a party to the natural gas contract in November 2017, and moved to estimate the value of that claim at $0.00. However, on December 3, 2018, SENA and Raider pressed pause and agreed to resolve the claims dispute following the effective date of a plan of reorganization. Six months later, on June 18, 2019, the Court entered an order confirming the Debtors' plan of reorganization.

The confirmation order specifically provided that the SENA-Raider dispute would "be adjudicated and determined reasonably promptly following the Effective Date [of the plan], pursuant to a schedule to be mutually agreed upon by SENA and the Debtors." (ECF No. 286 at 9). The confirmation stated that "SENA reserves all rights to exercise its contractual rights toarbitrate the liquidation of the EXCO v. SENA Claims, the SENA POCs, and the Setoff Rights and the Debtors reserve all rights to object to such relief." (ECF No. 286 at 9). The confirmation order was silent as to whether Raider's right to compel arbitration was preserved.

Raider initiated an arbitration proceeding against SENA on October 22, 2019. SENA responded by filing the present motion seeking denial of arbitration.

DISCUSSION

The Supreme Court has held that Congress has expressed a clear policy favoring enforcement of contractual arbitration clauses. Although SENA previously moved to compel arbitration of this dispute, it now asks the Court to deny arbitration. SENA argues that arbitration is inappropriate for two reasons. First, SENA believes the purposes of the Bankruptcy Code would be frustrated by allowing arbitration of this dispute. Second, SENA claims that Raider waived its right to arbitrate by pursuing litigation of the dispute. For the reasons that follow, Raider is entitled to arbitrate this dispute.

There is "a national policy favoring arbitration of claims that parties contract to settle in that manner." Preston v. Ferrer, 552 U.S. 346, 353 (2008). Generally, arbitration is mandatory when a dispute falls within the scope of a valid arbitration agreement. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626-28 (1985). To defeat a valid agreement, "the party opposing arbitration can show that its position is supported by a congressional command that supersedes the direction of the Federal Arbitration Act." In re Mirant Corp., 316 B.R. 234, 237 (Bankr. N.D. Tex. 2004).

Before a bankruptcy court may decline to enforce an arbitration agreement, it must determine "whether the proceeding derives exclusively from the provisions of the Bankruptcy Code and, if so, whether arbitration of the proceeding would conflict with the purposes of theCode." In re Nat'l Gypsum Co., 118 F.3d 1059, 1067 (5th Cir. 1997). The National Gypsum standard forms a two-part test. First, the court must determine whether the proceeding adjudicates rights created exclusively by the Bankruptcy Code. In re Henry, 944 F.3d 587, 590-91 (5th Cir. 2019). If so, the court may proceed to the second inquiry: "whether arbitration would conflict with the purposes of the Bankruptcy Code." Id. at 591. Courts frequently cite the centralized resolution of bankruptcy issues, the need to curtail piecemeal litigation, and the bankruptcy court's undisputed power to enforce its own orders as key purposes of the Code. E.g., In re Trevino, 599 B.R. 526, 541 (Bankr. S.D. Tex 2019). If the proceeding involves rights stemming from the Code and arbitration conflicts with the Code's purposes, the Court may override otherwise mandatory arbitration.

This dispute arises from alleged breaches of a natural gas purchase contract on the eve of Raider's bankruptcy. That contract contains a clause mandating that "[a]ny [d]ispute among the parties" be "resolved through final and binding arbitration." (ECF No. 286 at 2). Both parties agree that the arbitration provision is valid. (See ECF No. 286 at 11). Further, the breach of contract dispute plainly falls within the scope of the arbitration clause. The parties are bound by an arbitration clause, which a federal court must ordinarily respect.

Whether this Court has discretion to deny arbitration first depends on whether the proceeding derives exclusively from the provisions of the Code. This dispute comes before the Court through the claims allowance process, a creature of the Code, but the substantive issues derive from state contract law. SENA argues that because the proceeding arises through the claims allowance process, a feature unique to the Code, the first prong is satisfied. SENA's view focuses solely on the procedural form of the proceeding. Under SENA's interpretation, because the claims objection process is a "classic example of core bankruptcy jurisdiction," a claimobjection always meets the first prong. (See ECF No. 242 at 17 (quoting In re Martinez, No. 06-34385, 2007 WL 1174186, at *5 (Bankr. S.D. Tex. Apr. 19, 2007))). However, the Fifth Circuit expressly states that arbitrability does not hinge on whether a proceeding is core. Nat'l Gypsum, 118 F.3d at 1067 ("Certainly not all core bankruptcy proceedings are premised on provisions of the Code that 'inherently conflict' with the Federal Arbitration Act; nor would arbitration of such proceedings necessarily jeopardize the objectives of the Bankruptcy Code."). National Gypsum directs the Court to look to the "underlying nature of the proceeding," not whether the Court has core or noncore jurisdiction. 118 F.3d at 1067. SENA's interpretation runs contrary to that directive.

Even if the Court adopts SENA's reading and finds that the dispute meets the first prong, the dispute does not meet the second prong. At this late stage of Raider's bankruptcy, arbitration does not offend the purpose of the Code. Consolidation of proceedings before this Court no longer furthers the reorganizational purpose of chapter 11. Raider emerged from chapter 11 in June 2019 and only a handful of claims remain unresolved. Raider completed its reorganization and the confirmed plan describes SENA's treatment should it prevail in this dispute. SENA has not stated a compelling reason why a centralized forum remains necessary.

Arbitration also does not offend this Court's authority to enforce its own orders. Allowing arbitration is consistent with the Confirmation Order. The Confirmation Order expressly preserves SENA's right to seek arbitration and is silent as to Raider's rights to seek arbitration. SENA's retention of its contractual right to arbitrate shows that the parties contemplated that arbitration might occur. The Confirmation Order did not grant this Court exclusive jurisdiction over the dispute.

The dispute will be arbitrated.

Setoff

Raider and SENA acknowledge that there is some chance that resolution of the dispute will result in mutual debts between the parties. That scenario would require a determination of setoff or recoupment rights. Setoff allows a creditor to deduct a debt owed to the debtor from a claim it holds against the debtor, based upon separate transactions. Recoupment is a vehicle used to adjust amounts owed based upon a single transaction. Recoupment "is merely the means used to determine the proper liability on the amounts owed" and it is "derived from the common law pleading rules concerning counterclaims." Schachter v. Tolassi (In re East Second St. Assocs.), 207 B.R. 64, 68 (Bankr. S.D.N.Y. 1997). "Although no federal right of setoff is created by the Bankruptcy Code, 11 U.S.C. § 553(a) provides...