In Re: WBH Energy, LP

Filing 15

OPINION AND ORDER that the Opinion on Consolidated Objections to U.S.Energy Development Corporation Claims and Order Granting Consolidated Objections to U.S. Energy Development Corporation Claims, each rendered by the United States Bankruptcy Court for the Western District of Texas, Austin Division on 05/20/16, are AFFIR1VIED. Signed by Judge Lee Yeakel. (klw)

F Lh
!

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION

2011

FEB 17

PM

3:

LL

IN RE: WBH ENERGY, LP, WBH

§

ENERGY PARTNERS LLC, WBH
ENERGY GP, LLC

§
§
§

U.S. ENERGY DEVELOPMENT
CORPORATION,

§

APPELLANT,

§

§

CAUSE NO.

1: 16-C V-884-LY

§

V.

§
§

CL III FUNDING HOLDING
COMPANY, LLC,

APPELLEE.

§
§

§

MEMORANDUM OPINION AND ORDER
This cause is an appeal of two orders entered on May 20, 2016, by the United States
Bankruptcy Court for the Western District of Texas, Austin Division.

Before the court are

Appellant's Brief filed August 19, 2016 (Clerk's Doe. No. 8), Appellees' Brief filed September
19, 2016 (Clerk's Doe. No. 9), and Appellant's Reply

Brief filed October 19, 2016 (Clerk's Doe.

No. 10). On November 21, 2016, the court entertained oral argument, at which all parties were

represented by counsel. Having carefully considered the briefs, argument of counsel, applicable
law, and record on appeal, the court concludes that the bankruptcy court's orders should be

affirmed for the reasons to follow.
I. Background
In September 2011, WBH Energy LLC ("Debtor LLC") entered into a Joint Operating

Agreement (the "Operating Agreement") with WBH Energy LP ("Debtor LP") and U.S. Energy
Development Corporation ("U.S. Energy"), under which Debtor LLC was the operator, and
1

37

Debtor LP and U.S. Energy were the working interest owners. WBH Energy GP, LLC ("Debtor
GP") was the general partner of Debtor LLC, but is not a party to the Operating Agreement. The
Operating Agreement contains the following provision:

Costs and Attorneys' Fees: In the event any party is required to
bring legal proceedings to enforce any financial obligation of a
party hereunder, the prevailing party in such action shall be
entitled to recover all court costs, costs of collection, and a
reasonable attorney's fee, which the lien provided for herein shall
also secure.
U.S. Energy brought suit in state court in December 2014 against Debtor LP and Debtor
LLC, seeking to remove Debtor LLC as operator under the Operating Agreement (the "State

Court Proceeding"). U.S. Energy obtained a temporary restraining order at the beginning of the
case in December 2014, and ultimately voluntarily dismissed the case.
On January 4, 2015, Debtor LP, Debtor LLC, and Debtor GP (collectively, "Debtors")
each voluntarily filed for bankruptcy under Chapter

11

of the Bankruptcy Code ("Bankruptcy

Proceeding"). The cases are jointly administered.
U.S. Energy later filed an adversary proceeding in the bankruptcy court to remove Debtor
LLC as operator under the Operating Agreement ("Operator Adversary Proceeding").

U.S.

Energy obtained a preliminary injunction in the bankruptcy court removing Debtor LLC as
operator.

The proceeding was ultimately dismissed pursuant to an agreement between U.S.

Energy and the Debtors.
U.S. Energy also filed an action in interpleader in the bankruptcy court to resolve billings
U.S. Energy owed to Debtor LLC ("Interpleader Adversary Proceeding").

action was disposed of by an agreed final judgment.
2

The interpleader

On September 9, 2015, Debtors sold substantially all of their assets to CL III Funding

Holding Company, LLC ("CL III") pursuant to a sale approved by the bankruptcy court.
In May 2015, U.S. Energy submitted to the bankruptcy court claims against Debtors in

the amount of $11,400,000 for attorney's fees. U.S. Energy based its claims on the Costs-and-

Attorneys'-Fees provision of the Operating Agreement and asserted a lien on the assets of the
Debtors based on U.S. Energy's alleged entitlement to attorney's fees.

Debtors' assets, CL III objected to the allowance of the claims.

As then-owner of

On May 20, 2016, the

bankruptcy court rendered orders granting CL III's objections and denying U.S. Energy's claims,
which U.S. Energy now appeals.

II. Standard of Review
On appeal, this court may affirm, modify, or reverse a bankruptcy court's judgment,

order, or decree, or remand the matter at issue with instructions to the bankruptcy court to

conduct further proceedings. See Fed. R. Bankr. 8013. The district court reviews the bankruptcy

court's findings of fact under a clearly erroneous standard and conclusions of law de novo.
Matter of Berryman Products, Inc., 159 F.3d 941, 943 (5th Cir. 1998). Mixed questions of fact
and law are subject to de novo review. In re CPDC, Inc., 337 F.3d 436, 441 (5th Cir. 2003).

III. Analysis
U.S. Energy argues that the bankruptcy court erred in granting the objections of CL III
and denying the secured claim of U.S. Energy to recover attorney's fees. U.S. Energy disputes

the bankruptcy court's conclusion that U.S. Energy was not entitled to attorney's fees under the

terms of the Operating Agreement.

The Operating Agreement states, "[tjhis agreement and all matters pertaining hereto,

including but not limited to matters

of.

.

.

remedies

.

.

and interpretation or construction, shall

.

be governed and determined by the law of the state in which the Contract Area is located." The

Contract Areas as defined in the contract are all in the state of Texas. The court will therefore
apply Texas law. See DeSantis v. Wackenhurt Corp., 793 S.W.2d 670, 677 (Tex. 1990).

Under Texas law, contracting parties may set their own standard for recovery of

attorney's fees. Intercontinental Group Partnership

KB Home Lone Star, 295 S.W.3d 650,

v.

653 (Tex. 2009); Hometown 2006-1 1925 Valley View

v.

Prime Income Asset Management, 595

F. App'x 306, 313 (5th Cir. 2014). To determine whether U.S. Energy is entitled to attorney's

fees, this court will look to the requirements set by the parties in the Operating Agreement.

In order for U.S. Energy to recover costs and attorney's fees under the Operating

Agreement, U.S. Energy must: (1) be required (2) to bring a legal proceeding (3) to enforce a

financial obligation, and (4) be the prevailing party of those proceedings. U.S. Energy cites four
proceedings as the basis of U.S. Energy's entitlement to costs and attorney's fees: the State Court
Proceeding, the Operator Adversary Proceeding, the Bankruptcy Proceeding, and the
Interpleader Adversary Proceeding.
A. State Court Proceeding and Operator Adversary Proceeding

In the State Court Proceeding and Bankruptcy Operator Adversary Proceeding, U.S.
Energy sought to remove Debtor LLC as operator.

First, U.S. Energy did not bring these

proceedings for the purpose of enforcing a financial obligation. The bankruptcy court referred to

Black's Law Dictionary and Merriam-Webster Dictionary to determine that "financial

4

obligation" means a "monetary or pecuniary obligation." U.S. Energy disputes the bankruptcy

court's definition, saying that the court effectively construed the term to require U.S. Energy to
obtain a monetary payment. U.S. Energy argues that a financial obligation is not necessarily an

obligation involving payment.
At the beginning of the section containing the Costs-and-Attorneys'-Fees provision, the

Operating Agreement states, "[i]f any party fails to discharge any financial obligation under this

agreement

.

. .

within the period required for such payment hereunder

.

.

.

the remedies specified

below shall be applicable" (emphasis added). The court concludes that under the terms of the
Operating Agreement, a financial obligation means an obligation involving payment. The main
issue and relief sought and obtained by U.S. Energy in both the State Court Proceeding and
Operator Adversary Proceeding were to remove Debtor LLC as operator and have U.S. Energy
named as successor operator. U.S. Energy does not dispute this. The court in each proceeding
ordered only injunctive relief, and neither court ordered a monetary judgment.
Second, U.S. Energy argues that U.S. Energy did enforce a financial obligation because it
was necessary for U.S. Energy to become operator in order to subsequently enforce the financial

obligations of Debtor LLC and Debtor LP. Even before it became operator, U.S. Energy could
have brought a proceeding to enforce Debtor LP and Debtor LLC's financial obligations. Under
the Operating Agreement, "non-defaulting parties

.

.

.

may sue

.

.

.

to collect the amounts in

default." U.S. Energy therefore was not required to bring the operator removal proceedings to
enforce a financial obligation as required under the Operating Agreement for a party to be
entitled to attorney's fees.

5

The court concludes U.S. Energy was not required to bring the State Court Proceeding or

the Operator Adversary Proceeding for the purpose of enforcing a financial obligation, and that
the proceedings were not brought to enforce a financial obligation. U.S. Energy therefore fails to

meet the first and third requirements of the Costs-and-Attorneys' -Fees provision of the Operating
Agreement.
B.

Bankruptcy Proceeding
The next proceeding U.S. Energy points to is the Bankruptcy Proceeding. U.S. Energy

asserts that it prevailed in that proceeding because the Confirmed Plan of Reorganization

rendered by the bankruptcy court continued U.S. Energy's status as substitute operator.
However, the Confirmed Plan of Reorganization resulted from the Debtors' voluntary petitions
for relief. U.S. Energy did not bring the bankruptcy proceeding and therefore fails the second

requirement to recover costs and attorney's fees under the Operating Agreement.
C. Interpleader Adversary Proceeding
Finally, U.S. Energy asserts it is entitled to costs and attorney's fees because U.S. Energy

brought an interpleader action to determine the appropriate payment for approximately $1.9
million representing joint-interest billings that U.S. Energy admits it owed to Debtor LLC. The
proceeding resulted in an agreed final judgment pursuant to which the court distributed funds
deposited by U.S. Energy into the court registry to creditors of Debtor LLC. U.S. Energy did not
bring the Interpleader Adversary Proceeding to

enforce

an obligation, but to determine the proper

payees for its own obligation. U.S. Energy therefore fails to meet the third requirement of the

Costs-and-Attorneys'-Fees provision with regard to the Interpleader Adversary Proceeding.

III. Conclusion
U.S. Energy is not entitled to recover attorney's fees because U.S. Energy has not

identified proceedings that meet the requirement for an award of attorney's fees under the
Operating Agreement.

Accordingly, the court concludes that the bankruptcy court correctly

granted objections filed by CL III to the secured claims of U.S. Energy.

IT IS THEREFORE ORDERED that the Opinion on Consolidated Objections to U.S.
Energy Development Corporation Claims and Order Granting Consolidated Objections to U.S.
Energy Development Corporation Claims, each rendered by the United States Bankruptcy Court
for the Western District of Texas, Austin Division on May 20, 2016, are AFFIR1VIED.

SIGNED this

day of February, 2017.

LE
EAKEL
UN TED STATES DIS RICT JUDGE

7