Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 1 of 11 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: Alpha Natural Resources, Inc., et al., Debtor Chapter 11 Case No. 15-33896 (KRH) Jointly Administered SUPPLEMENTARY MEMORANDUM IN SUPPORT OF FURTHER OBJECTION TO THE DEBTORS THIRD OMNIBUS MOTION OF THE DEBTORS FOR AN ORDER (I) AUTHORIZING THEM TO (A) REJECT CERTAIN UNEXPIRED LEASES OF NONRESIDENTIAL REAL PROPERTY AND (B) ASSUME CERTAIN UNEXPIRED LEASES OF NONRESIDENTIAL REAL PROPERTY, (II) EXTENDING THE DEADLINE TO ASSUME OR REJECT CERTAIN UNEXPIRED LEASES OF NONRESIDENTIAL REAL PROPERTY AND (III) GRANTING RELATED RELIEF AND TO NOTICE OF REDESIGNATION PURSUANT THERETO Come now Mary Evelyn Amstutz, Anne E. Franklin, Mary Evelyn Amstutz Testamentary Trust, Nancy P. Gettinger, John Paul Organ and Judith Lynn Organ ( the Objectors ), and file this Supplementary Memorandum in Support of their Further Objection To The Debtors Third Omnibus Motion Of The Debtors For An Order (I) Authorizing Them To (A) Reject Certain Unexpired Leases Of Nonresidential Real Property And (B) Assume Certain Unexpired Leases Of Nonresidential Real Property, (II) Extending The Deadline To Assume Or Reject Certain Unexpired Leases Of Nonresidential Real Property And (III) Granting Related Relief (the Augustus C. Epps, Jr., Esquire (VSB No. 13254) Clint A. Nichols, Esquire (VSB No. 86375) CHRISTIAN & BARTON, LLP 909 East Main Street, Suite 1200 Richmond, Virginia 23219-3095 Telephone: (804) 697-4100 Facsimile: (804) 697-6112 Counsel for Objectors
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 2 of 11 Motion ) and the Debtors Notice of Redesignation of Unexpired Leases of Nonresidential Real Property as Rejected Leases filed March 29, 2016 as Docket No. 1882 (the Notice ). 1. The Objectors are the successors in interest to John E. Organ and Eunice Organ, husband and wife (collectively, the Organs ). The Organs are the beneficiaries of a nonparticipating royalty interest memorialized in a Letter of Proposed Settlement dated January 18, 1969, executed by and between the Organs, on the one hand, and Ayrshire Collieries Corporation, 1 on the other hand, (the Agreement ) 2 memorialized for recordation in a Memorandum of Agreement executed on July 9, 1974, by the Organs (the Memorandum ). The Agreement recites that its purpose is to resolve certain differences respecting certain coal interests Mr. Organ then goes on to say that he will accept the interests set out hereinafter as full settlement. Furthermore, he states that its provisions shall be binding upon and inure to the benefit of the successor [sic] and assigns of the parties hereto. Under the terms of the Agreement the Objectors, as successors of the Organs, are to receive payment of royalties on mined coal from the subject property through December 31, 2019. The Memorandum was properly recorded in the land records of Campbell County, Wyoming on July 29, 1974 in Book 299 at page 284. A copy of the Memorandum as recorded is attached hereto as Exhibit B. 3 2. Debtor Alpha Wyoming is the lessee under the two leases described in paragraph 6, infra. 1 Ayrshire is a direct predecessor in interest of debtor Alpha Wyoming Land Company, L.L.C. 2 A copy of the Agreement is attached hereto as Exhibit A. 3 The Objectors are aware of no assertion by the Debtors that Ayrshire is not the predecessor in interest of debtor Alpha Land Wyoming, L.L.C., or that Ayrshire was not the lessee under the two leases described in paragraph 5 hereof at the time the Agreement was executed. 2
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 3 of 11 3. Pursuant to the Agreement the Objectors (or their predecessors in interest) have been paid monthly on account of their non-participating royalty interest by Debtor Alpha Wyoming Land Company, LLC and its predecessors in interest continuously since 1969 (except for a period of approximately six years during which no coal was mined on the property subject to the Agreement). 4. On February 28, 2016, the Debtors served the Motion on the Objectors. 5. The Motion proposed the assumption of the Agreement. 6. The Motion also proposed the assumption of eleven mine leases between the United States Department of the Interior as lessor and Debtor Alpha Wyoming Land Company, LLC (successor to Ayrshire Collieries Corporation) as Lessee. The Agreement affects two of these eleven leases: (A) a Lease between Alpha Wyoming Land Company, LLC and the U.S. Department of the Interior, Bureau of Land Management, dated September 1, 1965, Debtor ID # AWL-00144 (see page 271 of the assumption schedule of the Motion), and (B) a Lease between Alpha Wyoming Land Company, LLC and the U.S. Department of the Interior, Bureau of Land Management, dated September 1, 1965, Debtor ID # AWL-00147 (see page 271 of the assumption schedule to the Motion) (This property is not currently being mined). (collectively, the Leases ). Upon information and belief, only one of the two Leases involves property currently being mined. 7. On March 29, 2015, the Debtors filed their Notice of Redesignation of Unexpired Leases of Nonresidential Real Property as Extended Deadline Leases [Docket No. 1885]. In this notice, all of the leases between the United States Department of the Interior, as Lessor, and Debtor Alpha Wyoming Land Company, LLC as Lessee, were so designated. Thus, the 3
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 4 of 11 Objectors assume that the Debtors intend to defer their judgment as to whether to assume or reject the Leases. Also pursuant to this notice, Debtors have stated their intention to reject the Agreement even though they are deferring their judgment with respect to assumption or rejection of the related Leases. 8. On June 22, 2016 the Debtors filed their Certain Exhibits to Second Amended Plan of Reorganization (Docket No. 2757). On Schedule 2.G.4 thereof the Debtors state that the Agreement has been assumed and will be assigned. DISCUSSION 9. First, and most important, the Debtors are attempting to divest themselves of the Agreement by categorizing it as an executory contract that they have the choice of assuming or rejecting. However, the Agreement creates a property interest and is in no way executory. Therefore the Debtors cannot reject it any more than they could cleanse the title to real property of an easement or other impediment to title by claiming it to be executory. 10. A mineral interest generally consists of a real property interest in the minerals in place under a parcel of property, typically in fee simple, and the exclusive right to explore, drill, and produce such minerals from the land. Through a written agreement, owners of mineral interests often sell or otherwise convey the exclusive right to capture minerals to a third party in exchange for either a share of production or payments in lieu of a share of production. The third party s interest may be subject to or burdened by various other interests in minerals, production, or profits, which may have been created before or after the lease was entered into or that may exist in the absence of a lease. Such interests can take many forms including, but not 4
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 5 of 11 limited to, overriding royalty interests, non-participating royalty interests, net profits interests, production payments, and unleased mineral interests. 11. The interest the Objectors are claiming is an overriding royalty. The term overriding royalty has been defined in numerous judicial opinions as an interest in oil and gas production at the surface, free of the expense of production, and in addition to the usual land owner s royalty reserved to the lessor in an oil and gas lease. As stated in 2 Williams and Meyers, Oil and Gas law, 418.1, p. 341: An overriding royalty is, first and foremost, a royalty interest. Cities Service Oil Co. v. Pubco Petroleum Corp., 497 P.2d 1368, 1372 (Wyo. 1972) (citing Williams and Meyers, Oil and Gas Law, Manual of Terms volume p. 314). See also Connaghan v. Eighty-Eight Oil Co., 750 P. 2d 1321 (Wyo. 1987). 12. In Picard v. Richards, 266 P. 2d 119 (Wyo. 1961), the Wyoming Supreme Court, citing a Texas case, described a non-participating interest as non possessory in that it does not entitle the owner to produce the minerals himself, or permit him to join in leases of the mineral estate to which the royalty is appurtenant It merely entitles the owner to a share of production under [the] lease free of expense of exploration and production Id. at 825 (internal citation omitted). We have long held an overriding royalty to be an interest in real property. Id. at 122 (citing, inter alia, Dame v. Mileski, 340 P. 2d 205 (Wyo. 1957); Denver Joint Stock Land Bank of Denver v. Dixon, 122 P.2d 842 (Wyo. 1942). 13. The right of the Lessee to extract coal from the real property cannot be separated from its obligation, as Lessee, to pay the required royalty payments pursuant to the Agreement. See, e.g., Dame v. Mileski, 340 P.2d at 209 ( The royalty interests in the issue here relate to the certain land from which the oil or gas is to be taken, and... must be held to be real property and subject to the law relating thereto. ) See also Boley, et al. v. Greenough, 22 P. 3d 854, 860 5
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 6 of 11 (Wyo. 2001) ( Being the fee owners of the estate in question, the Greenough s could convey as little or as much thereof... as they saw fit. ) 14. [A]n overriding royalty is part and parcel of a mineral lease and does not have a life independent from the mineral lease. Hence, the mineral lease and related overriding royalty require that the two stand or fall together if they are subjected to the provisions of 365. In re Bronco Hazelton Co., et al, Case No. 06-70378 (Docket No. 724, Bankr. S.D. Ind. January 18, 2008) at *8-9. To allow Debtors to take the benefits of the Leases but then strip away the obligations to pay the Overriding Royalties would ignore the fundamental nature of the relationship between leases and their coinciding royalties and violate the mandates of the cum onere rule. Id. at *10. 4 15. In Ferguson v. Coronado Oil Co., 884 P. 2d 971 (Wyo. 1994), the Wyoming Supreme Court ruled that under Wyoming law, after oil and gas has been brought to the surface it becomes personal property and therefore the plaintiff had a property right in the oil and gas severed from the property and to royalties, arising out of the proceeds from their sale, paid as a money equivalent of the property interest. Coronado Oil, 884 P. 2d at 975-76. 16. In Coronado Oil, the Supreme Court of Wyoming first noted that under the instrument that created the net profits interest, there are at least four [sic] realistic possibilities: (1) it can be a contractual right that is personal to the parties, (2) it can be a covenant running with the land or with a lease, (3) it can be a charge on the land, 4 It should be noted that in Bronco Hazleton two of the royalty claimants, Nash and Kerr, did not obtain the contractual right to an override until many years after the lease was executed. Furthermore, and contrary to the facts of the present case, neither made any filings of record regarding their contractual rights. Even absent their doing so, however, Judge Lorch ruled that the contracts giving rise to the Royalty Claims were assumed by the Debtors together with the Leases and, as such, the Debtors remain liable to the Royalty Claimants under these individual agreements. Bronco Hazleton, supra, at *11. A copy of Judge Lorch s opinion is attached hereto as Exhibit C. 6
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 7 of 11 (4) it can create a lease or a sublease, or (5) it can be a separately identifiable property interest with its own recognized incidents. Id. at 976. After determining that the interest conveyed was not a mineral interest which is an interest in real property, the Wyoming Supreme Court determined that the interest in profits was kin to a separate identifiable personal property right rather than contractual in nature. Id. at 976-77. 17. Although Coronado Oil appears at first blush to confuse the Wyoming law as to non-participating royalty interests and net profits interests, applying Coronado Oil to the present facts nonetheless results in the Objectors being the owners, because the interest that the owner of a non-participating royalty interest or a net profits interest possesses is a personal property interest that is not property of the estate but property of the interest holder. Because it is property of the holder, it, as with other personal property, was susceptible to conversion. Id. at 977. See Coronado Oil Co., supra. 5 Furthermore, the way in which the Supreme Court of 5 In this regard this Court should note that Judge Phillips of this Court so found and ordered in In re Penn Virginia Corporation, et al; Case No.16-32395. In his Final Order (I) Authorizing Payment on (a) Mineral Payments and (b) Working Interests Disbursements and (II) Granting Related Relief (Doc. No. 249 entered June 9, 2016), Judge Phillips order stated: Interest Burdens, and the amounts owed to Mineral Payees on account thereof, are not property of the Debtors estates under section 541 of the Bankruptcy Code...and also Working Interests held by Working Interest Holders, and the amounts owed to Working Interest Holders on account thereof, are not property of the Debtors estates under section 541 of the Bankruptcy Code...). In the Motion Granted by this Order, the debtors set forth the definitions that were used in both the Motion and the Order: A fee simple is [a]n interest in land that, being the broadest property interest allowed by law, endures until the current holder dies without heirs; esp., a fee simple absolute. Black s Law Dictionary (9th ed. 2009). Overriding royalty interests are non-possessory interests in oil and gas produced at the surface, free of the expense of production. Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil & Gas Law 418 (LexisNexis Matthew Bender 2015). Net profits interests are shares of gross production from a property, measured by net profits from operation of a property. Id. at 424. Production payments are shares of the minerals, up to a specified quantum of production or dollar amount, produced from the described premises, free of the costs of production at the surface. Id. at 422. 7
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 8 of 11 Wyoming distinguished its holding in Coronado Oil from its earlier opinion in Dame provides additional support for the objectors position: Torgeson [Torgeson v. Connelly, 348 P.2d 63 (Wyo. 1959)], Dame and Denver Joint Stock involved quiet title actions where the existence of the royalties was in dispute. Thus the dispute was over the ownership of proceeds from minerals which were still in the ground and real property. This case and Young [Young v. Young, 709 P.2d 1254 (Wyo. 1985)] involve the disposition of the proceeds due to the royalty (or net profits) owner after the oil and gas has been removed from the ground and sold. Once the oil and gas were removed, they became personal property. Id. at 977 (internal citation omitted). 18. Thus in the present case the right of the Objectors to royalty payments is an interest in real property but the right to its share of the net realization, which arises when coal is severed from the land, is personal property of the Objectors from the moment it comes into existence. Therefore neither the right to royalties nor the royalties themselves are property of the estate. 19. Accordingly, the Debtors at most hold bare legal title to the property of the Objectors and likely hold no legal title to the percentage of the coal net realization the Agreement grants the Objectors. Indeed, the Debtors only take possession of proceeds from the sale of the Objectors share of coal net realization because they market and sell the coal and thereafter remit the Objectors share thereof to them. Another court has held that in such situations, a resulting trust was established on behalf of the holders of oil and gas royalty interests. See Vess Oil Corp. v. SemCrude, L.P. (In re SemCrude, L.P.), 418 B.R. 98, 106 The Court found that each of these interests to be property interests in which the estate had no interest because they were not property of the estate. 8
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 9 of 11 (Bankr. D. Del. 2009) (holding that funds in debtors possession held on behalf of royalty interest holders were held in a resulting trust for such parties, debtors only held bare legal title to such property, and thus such funds were not property of the estate). The Supreme Court has held that property held by debtors for a third party (such as funds held on account of a resulting trust) is not property of the estate. Begier v. Internal Revenue Service, 496 U.S. 53, 59 (1990) ( Because the debtor does not own an equitable interest in property he holds in trust for another, that interest is not property of the estate. ); United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.10 (1983) (noting that Congress plainly excluded property of others held by the debtor in trust at the time of the filing of the petition from the bankruptcy estate). Thus, any property held by the Debtors on account of the Objectors is not property of the Debtors estates. 20. Lest there be any confusion as to the efficacy of the recordation of the Memorandum, Objectors point out that the Memorandum was properly recorded and indexed. The fact that the Memorandum was executed only by the Organs is of no moment. It is common practice in Wyoming for a memorandum of lease or other document to be filed although executed by only one party to the underlying instrument. Furthermore, WY Stat Sec. 34-8-103 has effected a cure of any defects in the execution, attestation, acknowledgment, certificate of acknowledgment, recording or certificate of recording. A copy of this section of the Wyoming Code is attached hereto as Exhibit D. WHEREFORE, the Objectors pray that this Court not permit the Debtors to reject the Agreement (as put on record notice by the Memorandum), both because it is not an executory contract and also because it has been both validly executed and the Memorandum thereof is duly recorded, meaning that the rights to royalty payments do not constitute property of the 9
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 10 of 11 estate. Furthermore, they request that the Debtors be required to assume the Agreement if the underlying leases are ultimately assumed. Dated: June 27, 2016 MARY EVELYN AMSTUTZ, ANNE E. FRANKLIN, MARY EVELYN AMSTUTZ TESTAMENTARY TRUST, NANCY P. GETTINGER, JOHN PAUL ORGAN AND JUDITH LYNN ORGAN By: /s/ Augustus C. Epps, Jr. Augustus C. Epps, Jr., Esquire (VSB No. 13254) Clint A. Nichols, Esquire (VSB No. 86375) CHRISTIAN & BARTON, LLP 909 East Main Street, Suite 1200 Richmond, Virginia 23219-3095 Telephone: (804) 697-4100 Facsimile: (804) 697-6112 Counsel for the Objectors 10
Case 15-33896-KRH Doc 2778 Filed 06/27/16 Entered 06/27/16 09:37:59 Desc Main Document Page 11 of 11 CERTIFICATE OF SERVICE I hereby certify that on June 27, 2016, I caused a copy of the foregoing pleading to be served by email on the Core Parties, 2002 List Parties and the Affected Parties as shown on Exhibit E, and all parties receiving notices in this case through the ECF system. /s/ Augustus C. Epps, Jr Augustus C. Epps, Jr. 1981027 11
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