Ursa Operating Company LLC v. ( 2023 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 22-1729
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IN RE: URSA OPERATING COMPANY, LLC,
Debtor
AIRPORT LAND PARTNERS, LTD; JOHN ANDERSON; FERNANDO JOSE
ARROYO; BAR SEVEN L, LLC; ALLEN BYERLEY; RICHARD N. CASEY; ALICE
COLTON; DON COLTON; GREGG COLTON; DANIELS PETROLEUM COMPANY
AND BARRETT BAKER AS PRESIDENT; VERNON P. DEDISSE, JR.; MARY
RUTH DEDISSE, DIVIDE CREEK ENTERPRISES, LLC; ENERGY INVESTMENTS,
INC., HUNTER FAMILY LIMITED PARTNERSHIP; JERRY D. JONES,
INDIVIDUALLY AS TRUSTEE OF THE PAULA JONES SPECIAL NEEDS TRUST;
CHRISTINE JONES; JUHAN LP; JUHAN-RAY, LLC; JUHAN FORDHAM
MINERALS, LLC; PETER LANGEGGER; LARAMIDE GEOSCIENCES, LLC;
THOMAS D. LAWSON; FRED LIMBACH; PAUL LIMBACH; NANCI LIMBACH;
STACIE ANDERSON MALONE; MAP2003-NET, AN OKLAHOMA GENERAL
PARTNERSHIP; MAP2004-OK. AN OKLAHOMA GENERAL PARTNERSHIP,
MAP99A-NET, A TEXAS GENERAL PARTNERSHIP; KRISTINE M. PETERSON;
MICHAEL PINNELL; PIONEER OIL AND GAS; KELLEY ANDERSON RINEHART;
ROY ROYALTY, INC.; JASON ALAN SCOTT; JOSEPH EDWARD SCOTT;
REBECCA P. SCOTT; SHARON SALGADO; SHIDELER ENERGY COMPANY,
LLC; SHIDELEROSA, LLP; PATRICK L. SHUSTER; TONI M. SHUSTER; THE
CITY OF RIFLE, COLORADO; TITAN ENERGY RESOURCES CORPORATION;
WATSON RANCHES, LTD; BRETT JAMES WATSON; DIANA K. WATSON;
JAMES L. WATSON; LEE WATSON AND EVADEAN WATSON, AS CO-
TRUSTEES OF THE WATSON FAMILY REVOCABLE TRUST, AND VELMA
WEINREIS (COLLECTIVELY, THE “ROYAL CLAIMANTS”),
Appellants
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On Appeal from the United States District Court for the
District of Delaware
(D.C. No. 1-21-cv-00495)
District Judge: Hon. Maryellen Noreika
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Argued on June 15, 2023
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Before: PORTER, FREEMAN, and FISHER
Circuit Judges.
(Filed: December 1, 2023)
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OPINION ∗
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Duston K. McFaul
Maegan Quejada
Sidley Austin LLP
1000 Louisiana Street
Suite 5900
Houston, TX 77002
Robert S. Velevis [ARGUED]
Sidley Austin LLP
2021 McKinney Avenue
Suite 2000
Dallas, TX 75201
Robert S. Brady
Edmon L. Morton
Kenneth J. Enos
Joseph M. Mulvihill
Young Conaway Stargatt & Taylor LLP
Rodney Square
1000 N King Street
Wilmington, Delaware 19801
*
This disposition is not an opinion of the full Court and, under I.O.P. 5.7, is not binding
precedent.
2
Counsel for Appellee Ursa Operating Company LLC
Ana Alfonso [ARGUED]
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, NY 10019
John H. Knight
Amanda R. Steele
Richards Layton & Finger
One Rodney Square
920 N King Street
Wilmington, DE 19801
Counsel for Appellee Wells Fargo Bank NA
George A. Barton [ARGUED]
Barton and Burrows LLC
5201 Johnson Drive
Suite 110
Mission, KS 66205
Counsel for Appellants
PORTER, Circuit Judge.
This case arises from the bankruptcy of Ursa Operating Company, LLC and its
affiliates (collectively “Ursa”), an extractor and seller of oil and gas in the western United
States. Ursa operated wells on leased property owned by the Plaintiff-Appellants (“the
Royalty Claimants”). The Royalty Claimants allege that Ursa wrongfully retained
mineral royalties due under the leases. They contend those funds are their property and
therefore not part of Ursa’s bankruptcy estate.
The Royalty Claimants are correct that under Colorado law they have a real
property interest in unpaid royalties. And Colorado’s constructive trust doctrine supports
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imposition of a constructive trust if a factfinder concludes that Ursa was unjustly
enriched at the Royalty Claimants’ expense. Accordingly, we will vacate the order of the
District Court and require remand to the Bankruptcy Court for further proceedings.
I
The Royalty Claimants contend that for eight years, Ursa withheld royalties from
natural gas sales due to them under the leases. “[N]atural gas purchasers remitted the
entire payment for [gas] purchases to Ursa, which was then responsible to pay the
Royalty Claimants their percentage share of the natural gas sale proceeds.” Appellant Br.
4. From there, two types of Royalty Claimants emerge. The first consists of Claimants
who expressly contracted for payments to be made to them “without deductions” of
“various post-production costs.” Appellant Br. 7 & n.3. They contend that Ursa deducted
costs in violation of their agreements, accumulating undisbursed royalties in excess of
$24 million. The second category of Claimants negotiated “silent” leases that did not
address the question of payments being pre- or post-deduction. They argue that Ursa
violated Colorado law by failing to pay royalties based on the sale price of natural gas at
the location of the first commercial market.
Both types of Royalty Claimants assert a real property interest in the royalties
generated by the leased properties and argue that a constructive trust must be established
to hold those proceeds before Ursa’s estate can be presented to the Bankruptcy Court for
resolution. The Bankruptcy Court and District Court concluded that each of the Royalty
Claimants’ underpayment claims should be classified as unsecured non-priority claims
because the underpaid royalties retained by Ursa are property of its estate.
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II
The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(b). The District
Court had jurisdiction to review the Royalty Claimants’ appeal under 28 U.S.C. § 158(a),
and we have jurisdiction to review that final decision under 28 U.S.C. § 158(d)(1).
“When the District Court sits as an appellate court for the Bankruptcy Court, ‘our
review duplicates that of the district court and we view the bankruptcy court decision
unfettered by the district court’s determination.’ ” In re Energy Future Holdings Corp.,
990 F.3d 728, 736 (3d Cir. 2021) (quoting In re Brown, 951 F.2d 564, 567 (3d Cir.
1991)). We review the Bankruptcy Court’s conclusions of law de novo. Id.III
Whether any funds currently in Ursa’s possession are traceable to those claimed
by the Royalty Claimants is a factual issue that has not yet been resolved below and
cannot be resolved here. The questions presented are whether any withheld royalties are
the Royalty Claimants’ property and, if so, whether the equitable remedy of a
constructive trust is available. The analysis of these questions is the same for both sets of
Claimants.
A
The Royalty Claimants argue that under Colorado law, the royalties due to them
never became part of Ursa’s estate and, therefore, cannot be disbursed to Ursa’s creditors
according to the normal priority of claims. Their argument is premised upon two statutes.
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The first is 11 U.S.C. § 541(d), which states, in relevant part, that
[p]roperty in which the debtor holds, as of the commencement of the case,
only legal title and not an equitable interest . . . becomes property of the estate
under subsection (a)(1) or (2) of this section only to the extent of the debtor’s
legal title to such property, but not to the extent of any equitable interest in
such property that the debtor does not hold.
The second is Colo. Rev. Stat. § 38-30-107.5, which provides that
[a]ny conveyance, reservation, or devise of a royalty interest in minerals or
geothermal resources, whether of a perpetual or limited duration, contained
in any instrument executed on or after July 1, 1991, creates a real property
interest which vests in the holder or holders of such interest the right to
receive the designated royalty share of the specified minerals or geothermal
resources or the proceeds therefrom in accordance with the terms of the
instrument. 1
Reading the two together: If a debtor holds only legal title to but not an equitable interest
in property, that property will not become part of the debtor’s bankruptcy estate, 11
U.S.C. § 541(d); and under Colorado law, a reservation of a royalty interest in minerals
or geothermal resources creates a real property interest in the designated share of
royalties, Colo. Rev. Stat. § 38-30-107.5. Therefore, when Ursa leased lands to extract
and sell minerals or geothermal resources, it did not have an equitable interest in the
1The Royalty Claimants cite Colo. Rev. Stat. § 38-30-107.5 for the first time on appeal
before this Court. Ursa contends that because Appellants are “claiming for the first time
that they have a statutorily granted property interest,” they are “shifting to a new
argument” which has been waived. Appellees’ Br. 27. But, as discussed below, this
statute codified longstanding Colorado common law, and the Royalty Claimants argued
below that they have a property interest in royalty proceeds under Colorado law. See,
e.g., App. 2512–19. Their argument is therefore preserved for appeal. See United States v.
Joseph, 730 F.3d 336, 342 (3d Cir. 2013). And we will take judicial notice of the statute.
Gallup v. Caldwell, 120 F.2d 90, 93 (3d Cir. 1941) (calling it “well established” that we
may “take[] judicial notice of the laws of every state of the Union, because those laws are
known to the court below as laws alone, needing no averment or proof”) (quoting Hanley
v. Donoghue, 116 U.S. 1, 6 (1885)).
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Royalty Claimants’ designated share of the proceeds that it received from the sale of
those resources.
The Royalty Claimants are correct. They “reserv[ed] . . . a royalty interest in
minerals or geothermal resources.” Id. Those reservations were “contained in . . .
instrument[s] executed on or after July 1, 1991.” Id. Therefore, a “real property interest”
in royalty proceeds from natural gas sales was vested in the Royalty Claimants by the
leases entered with Ursa. Id. The language of the statute and the nature of the leases
establish that interest.
As the Royalty Claimants note, the statute codifies longstanding Colorado
common law on the nature of the interest retained by lessors of land for mineral and
geothermal resource extraction. Keller Cattle Co. v. Allison, 55 P.3d 257, 263 (Colo.
App. 2002).
Ursa argues that “Appellants’ argument would create a new super priority in
bankruptcy that would surpass even that of purchase money security interests, by
allowing contract claims to completely circumvent the bankruptcy process by claiming to
be owners of a debtor’s operating cash.” Appellee Br. 31. But this misconstrues the
Royalty Claimants’ position. They do not contend that any contract claim creates a
property interest in a debtor’s operating cash. Instead, they argue that the specific oil and
gas leases at issue created a property interest in mineral proceeds under Colorado law.
And excluding their property from Ursa’s before the estate is parsed out is not a new
invention in bankruptcy law; it is explicitly provided for in the code. 11 U.S.C. § 541(d).
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The code contemplates that a debtor in bankruptcy may be holding property that
equitably belongs to another and provides that such property should not be disbursed to
creditors along with the debtor’s own. That is the scenario here.
Colorado law gives the Royalty Claimants a property interest in royalties on the
leases that they granted to Ursa. The remaining question is whether the remedy of
constructive trust is available to them in defense of that interest.
B
On that issue, we face a preliminary choice-of-law question. The Royalty
Claimants direct us to Colorado courts’ rules for imposing a constructive trust. Ursa’s
arguments vary between reliance on state and federal authorities. We will apply Colorado
law.
We generally look to state law to determine the existence of a trust relationship.
City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 95 (3d Cir. 1994) (“We are satisfied
that in determining whether a trust has been created we look to the entire body of
germane state law, including the relevant case law.”). However, we have previously
noted an exception to that rule when the issue before us “sufficiently implicates important
federal interests to warrant the application of federal common law.” In re Columbia Gas
Sys. Inc., 997 F.2d 1039, 1055 (3d Cir. 1993). In determining whether that exception is
satisfied, we look to “(1) the need for a nationally uniform law; (2) whether incorporation
of state law would frustrate specific objectives of the federal program at issue; and (3) the
extent to which application of a federal common law rule would upset commercial
expectations that state law would govern.” Id. In Columbia Gas, we chose to apply
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federal common law because the customer refunds at issue in that case were “created by
an order of [the Federal Energy Regulatory Commission]”—and thus were extensively
regulated by federal regulation—and implemented the central objective of the federal
Natural Gas Act. Id. at 1055–56.
In this case, we see no reason to apply our exception rather than the rule. The
underpaid royalties are not subject to any federal statutory provision or federal regulatory
oversight; it is Colorado law that creates the real property right in this case. Colo. Rev.
Stat. § 38-30-107.5. So, unlike in Columbia Gas, we are not faced with any uniformity
concerns or uniquely federal program. And because we are applying longstanding,
precedential state law and not fashioning a new and unforeseen federal common law rule,
the parties’ commercial expectations cannot be upset.
Applying Colorado law, we hold that a constructive trust is a legally available
remedy in this case. Colorado law defines constructive trusts broadly: “A constructive
trust is a remedial device designed to prevent unjust enrichment,” and it is “imposed . . .
because the person holding the title to the property would profit by a wrong or would be
unjustly enriched if he were permitted to keep the property.” Mancuso v. United Bank of
Pueblo, 818 P.2d 732, 737 (Colo. 1991) (citations and quoted source omitted). “Unjust
enrichment occurs when[,] . . . at the plaintiff’s expense, . . . the defendant received a
benefit . . . under circumstances that would make it unjust for the defendant to retain the
benefit without paying.” Lawry v. Palm, 192 P.3d 550, 564 (Colo. App. 2008). “The
doctrine of constructive trusts is extremely flexible” and is not limited to instances of
“fraud, duress, or abuse of confidential or fiduciary relationships.” Mancuso, 818 P.2d at
9
737–38 (specifying that those are only “some instances” where a constructive trust may
be imposed).
A constructive trust remedy is available in this case if Ursa was unjustly enriched
at the Royalty Claimants’ expense. 2 As alleged by the Royalty Claimants, Ursa failed to
pay the Royalty Claimants their percentage share of the natural gas proceeds, either by
deducting costs in violation of their agreement or failing to pay royalties based on the
sale price of natural gas at the location of the first commercial market. Ursa then retained
those proceeds to its benefit. Because Ursa would be unjustly enriched if it were
permitted to retain the benefit of the property that belongs to the Royalty Claimants, a
constructive trust may be imposed.
Ursa’s arguments to the contrary are unpersuasive. Ursa first contends that the
Royalty Claimants’ claim is for an alleged breach of contract under the leases and
therefore, pursuant to Lawry, a constructive trust is unavailable. But Lawry in fact
forecloses this very argument. The Colorado Court of Appeals in Lawry “disagree[d]”
with the defendants’ argument that it was “improper . . . to impose a constructive trust . . .
under the theory of unjust enrichment because the parties had a written contract.” 192
P.3d at 564. The court made clear that “[a] plaintiff is entitled to recover based on the
unjust enrichment of a defendant when the plaintiff has no alternative right under an
enforceable contract, if justice requires.” Id.; see also, e.g., Syfrett v. Pullen, 209 P.3d
2The Bankruptcy Court reserved for a future hearing whether Ursa made any improper
deductions and, if so, the amounts of those deductions as related to each Royalty
Claimant. App. 2570–71. On remand, additional factfinding will be necessary to
determine which if any Royalty Claimants may be entitled to a constructive trust remedy.
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1167, 1172 (Colo. App. 2008) (imposing constructive trust for funds not otherwise
recoverable under a written, enforceable contract). Because the Royalty Claimants have
no such alternative rights following Ursa’s discharge pursuant to the Chapter 11 Plan,
imposition of a constructive trust is an available remedy for any unjust enrichment.
Ursa also argues that the Royalty Claimants cannot establish the elements of
unjust enrichment because it did not keep the funds for its own benefit but instead
distributed them to its secured lenders. But if Ursa did keep and retain the benefit of the
Royalty Claimants’ property for over eight years prior to filing for bankruptcy, as
Royalty Claimants allege, the elements of unjust enrichment are satisfied even if Ursa
later distributed the property. See Yetter Well Serv., Inc. v. Cimarron Oil Co., 841 P.2d
1068, 1070 (Colo. App. 1992) (stating that imposing a constructive trust, including in
instances of unjust enrichment, is “appropriate” even if “innocent third persons have
subsequently acquired an interest in the property”). And in any event, the underpaid
royalties were not property of Ursa’s bankruptcy estate to distribute with priority to
secured lenders.
Although we hold that a constructive trust is an available remedy under Colorado
law, none of this absolves the Royalty Claimants of the responsibility of identifying the
funds that they assert to be equitably theirs. “To protect the interests of secured and
unsecured creditors, beneficiaries of trust funds bear the burden of identifying and tracing
their trust property.” Columbia Gas, 997 F.2d at 1063. On remand, the Royalty Claimants
will have the opportunity to satisfy that burden. If they do so, the Bankruptcy Court shall
11
consider whether the equitable remedy of a constructive trust is appropriate as to each
Royalty Claimant.
C
Finally, Ursa raises the issue of the Debtor-in-Possession (DIP) Order issued by
the Bankruptcy Court, alleging that failure to go through the DIP Order’s prescribed
Challenge Procedure precludes any challenge to the composition of Ursa’s estate now.
The DIP Order states that “Debtors represent, stipulate, acknowledge, and agree,
on their own behalf and their estates, and subject to Paragraph 6 of this Final Order, that
all of the Debtors’ cash, including any cash in deposit accounts of the Debtors, wherever
located, constitutes Cash Collateral of the Prepetition Secured Parties.” App. 575. The
Order goes on to state that this stipulation shall be binding on all creditors and parties in
interest “unless, and solely to the extent that, a party in interest with standing . . .
challenges the Debtors’ Stipulations by commencing a Challenge Proceeding . . . by a
date that is on or before . . . seventy-five (75) days following the entry of the Interim
[DIP] Order.” App. 601.
Ursa argues that the Debtors’ stipulations are binding on the Royalty Claimants,
the Royalty Claimants are already outside of the seventy-five-day window to initiate the
Challenge Proceeding, and their whole effort here is estopped.
The Royalty Claimants argue a variety of reasons why they did not improperly
ignore the orders. One is sufficient: the DIP financing facility was secured by first-
priority liens on Ursa’s assets, and those liens do not extend to property that was never
part of Ursa’s estate in the first place. If a financing facility is a secured agreement
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backed by a lien on Ursa’s assets, it follows that it could not extend to what was never
part of Ursa’s estate in the first place and therefore could not defeat a collateral challenge
on the composition of the estate as such. See JP Morgan Chase Bank v. Altos Hornos de
Mexico, S.A. de C.V., 412 F.3d 418, 426 (2d Cir. 2005) (“Bona fide questions of property
ownership . . . are antecedent to the distributive rules of bankruptcy administration
because they seek to determine whether an asset is actually part of the debtor’s estate,
rather than deciding the entitlement of certain creditors to pieces of that estate. Property
ownership questions thus precede distribution[.]”).
* * *
For the foregoing reasons, we will vacate the order of the District Court and
require remand to the Bankruptcy Court for further proceedings consistent with this
opinion.
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