Plaintiff’s obligation to pay net profit interest on its working interest in oil and gas leases was not extinguished by its Joint Plan of Reorganization, as net profit interest is a covenant that runs with the land in Wyoming and the Joint Plan of Reorganization unambiguously preserved it. In re Vanguard Nat. Res., LLC, No. 17-30560, 2020 WL 7332890 (Bankr. S.D. Tex. Dec. 11, 2020).
Three entities entered into an agreement with an oil company to develop land in Wyoming’s Pinedale Basin and create the Pinedale Unit. In exchange for four mineral leases to the land, the three entities provided the oil company with a net profit interest in the profits realized from the operation of oil and gas under the leases. In the following decades the Pinedale Unit was terminated, but two new units were created. Additionally, both the oil company and the entities holding the leases transferred their respective rights to various successors. In 2010, the Wyoming District Court addressed the effect of those transfers on the owners of the net profit interest (“NPI Owners”). The Wyoming court held that the net profit interest was a covenant running with the land and therefore, the working interest in the mineral leases continued to be burdened by the net profit interest as the interests in the leases were transferred. Following multiple conveyances, the plaintiff owns working interests in oil and gas leases originating from the Pinedale Unit. Now that those leases are profitable, the NPI Owners are demanding payment of their net profit interest.
The debtor and its various subsidiaries, including the plaintiff, filed petitions under Chapter 11 of the Bankruptcy Code. The entities filed and confirmed a Joint Plan of Reorganization (the “Plan”) in July 2017. The Plan included both a Vesting Clause and a “Royalties and Working Interests” (“RWI”) Clause. The Vesting Clause provided that, unless the Plan states otherwise, all property of the estates, causes of action or property acquired by any debtor pursuant to the Plan would vest in each applicable reorganized debtor “free and clear of…encumbrances.” Additionally, the RWI Clause, which specifically defined RWI to include net profit interest, required that all RWI should be preserved and would not be compromised or discharged by the confirmation of the Plan. However, the plaintiff argued that the net profit interest was an encumbrance on the working interest of the leases and therefore, it was discharged under the Vesting Clause once the Plan was confirmed. Secondly, the plaintiff contended that the decision regarding the transfer of the working interests in the mineral leases made by the Wyoming District Court in 2010 should not be binding on the plaintiff because the plaintiff was not a party to the litigation.
The Bankruptcy Court in the Southern District of Texas rejected the plaintiff’s contentions, finding that the net profit interest was a covenant that ran with the land and that the net profit interest was not disturbed or discharged by the confirmation of the Plan. The plaintiff was precluded from relitigating the issue decided by the Wyoming District Court because the plaintiff was a successor in interest of the very entity that litigated that issue. Additionally, the Plan unambiguously defined RWI to include net profit interest and unambiguously stated that RWI was not to be disturbed or discharged by the Plan. Therefore, the court granted the NPI Owners’ summary judgement motion, holding that the confirmation of the Plan did not discharge the net profit interest.
Courtesy of Jeff Dutson (King & Spalding LLP)
