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Another Possible Chip Away from the Finality of Confirmed Bankruptcy Plans

Posted in Bankruptcy, Oil and Gas Operations, Oil and Gas Production

A Texas court has recently carved out an exception to the Supreme Court’s ruling in United Student Aid Funds, In. v. Espinosa, 559 U.S. 260 (2010), on the finality of confirmed bankruptcy plans.  In Oklahoma State Treasurer v. Linn Operating, the United States District Court for the Southern District of Texas held Espinosa’s rule that a confirmed plan cannot be collaterally attacked post-confirmation does not apply to unclaimed royalty proceeds that a debtor had been holding for third parties and thus that the Oklahoma State Treasurer could object post-confirmation to a plan provision allocating such unclaimed property to the reorganized debtor.  Concluding that these proceeds were never property of the estate, the court reasoned that, although the Treasurer never objected to the debtor’s reorganization plan, the Treasurer could, nonetheless, object post-confirmation to the treatment of that property because it was never property of the estate in the first place.

To understand the district court’s ruling, it is important first to understand the holding in Espinosa

In Espinosa, a student, Espinosa, took out several federal student loans and later filed for relief under Chapter 13 of the Bankruptcy Code.  Normally, such loans would be non-dischargeable in bankruptcy unless the student could show that not discharging the loans would create “undue hardship,” which can be determined only in an adversary proceeding.  Espinosa sought to discharge the interest payment obligations under his student loans and included provisions to that effect in his proposed plan.  However, Espinosa never filed the requisite adversary proceeding to do so.  United Student, as the manager of Espinosa’s loans, received notice of the proposed plan, but did not object to the proposed discharge of the student loan interest and the plan was subsequently confirmed.  United Student did not file an appeal.

Years later, United Student came to its senses and filed a motion to have the plan declared void based on the procedural deficiency that Espinosa never filed an adversary proceeding, which United Student claimed deprived it of due process.  After the bankruptcy court ruled in favor of Espinosa, the district court ruled in favor of United Student and the Ninth Circuit ruled in favor of Espinosa, the Supreme Court took up the case and affirmed.  The Court noted first that confirmed plans of reorganization constitute final judgments of the bankruptcy court and cannot be overruled except in the case of a void order, which can result from a jurisdictional error or a violation of due process, which is what United Student asserted.  The Court ultimately ruled that because United Student received actual notice of the plan confirmation process and chose to sit quiet without objection and then, following the order confirming the plan, continued to sit quiet without appeal, it received proper notice of the treatment of the student loans, but waived any objection to that treatment by not voicing that objection during the confirmation process.  Although Espinosa should have brought an adversary proceeding, United Student could not claim to have been deprived due process so as to deny it the opportunity to be heard.

Returning to Linn Operating

The Oklahoma State Treasurer filed proofs of claim in Linn’s bankruptcy, seeking possession of certain unclaimed royalties under Oklahoma’s statutes on unclaimed property.  These statutes require an oil and gas operator to pay certain unclaimed royalties from production into an escrow account held by the Treasurer.  The Treasurer did not object during the plan confirmation process, but rather, after the plan was confirmed, filed an adversary proceeding, seeking to recover the royalties from the estate.  Linn countered, among other things, that the Treasurer’s efforts were barred by Espinosa because the Treasurer had notice of Linn’s proposed plan but did not object until after the plan was confirmed.  The bankruptcy court agreed with Linn and dismissed the Treasurer’s claim.

On appeal, the district court reversed.  The court first distinguished the facts from those in Espinosa.  Specifically, the court characterized the royalties as being similar to property subject to a bankruptcy constructive trust, which put them outside of the bankruptcy estate, and thus, outside the jurisdiction of the plan.  Under section 541(d) of the Bankruptcy Code, when the debtor holds only legal, but not equitable title, to property, that property is included in the estate only to the extent of the debtor’s legal title.  The consequence of this is that the debtor/trustee cannot use its avoidance powers to avoid transfers of property that it held in trust for another because it never had equitable title to the property to begin with.

The district court noted that the Treasurer was akin to a debtor acting as trustee over a constructive trust in that the Treasurer was effectively a trustee over the escrowed funds for the unknown beneficiaries.  Thus, stated the district court, the Treasurer was not a “true creditor” as defined by section 101(10)(A) of the Bankruptcy Code even though it filed a proof of claim.  The court further reasoned that the unclaimed royalties were never properly capable of being adjudicated by the bankruptcy court because they were not part of the bankruptcy estate.  The court ruled that Espinosa did not apply because the bankruptcy court’s confirmation of the plan was void for lack of jurisdiction insofar as it related to the unclaimed royalties and thus fit within one of the two exceptions stated in Espinosa to the prohibition against attacking a confirmed plan post-confirmation.  The district court’s reasoning why this defect was a jurisdictional one is opaque and should not be read too broadly.  If there is a colorable claim that the proceeds could be property of the estate (for example, if there is a dispute whether the proceeds belong to a royalty owner or instead the debtor), then this reasoning falls flat.

It is worth noting that the district court ruled the Treasurer to be the trustee of the constructive trust as opposed to Linn, the debtor.  With this ruling, the district court sidestepped a tricky issue.  Under the constructive trust doctrine, the debtor is treated as the trustee of the constructive trust, not the party asserting a claim to the property.  If the court had ruled that the Oklahoma statutes create a constructive trust over which the debtor is the trustee, it would not necessarily follow that the Treasurer could pursue any post-confirmation claims.  Although the debtor may have had legal title over the royalties, it would have held them in trust for whoever the unknown beneficiaries of the royalties were and, thus, would not have had equitable title.  This is more in line with the holdings of cases to which the district court cited, including Matter of Haber Oil Co., Inc., 12 F.3d 426 (5th Cir. 1994), and Begier v. I.R.S., 496 U.S. 53 (1990).  In both cases, the debtor was held to be trustee of a constructive trust, created under applicable nonbankruptcy law.  But the Treasurer is in the same position for any proceeds it holds: it has only legal, and not beneficial, title to such proceeds; the Treasurer is not free to spend those proceeds as part of Oklahoma’s government spending.

Thus, while the bankruptcy court perhaps lacked the authority to convey equitable title to these proceeds to Linn, it seems that the bankruptcy court nonetheless would have jurisdiction to address the debtor’s legal title to these proceeds.  Thus, it seems that the bankruptcy court could have allowed the debtor to continue holding these proceeds post-confirmation, at least if the Treasurer did not timely object.

This decision acts as a reminder that Espinosa is not the end of the story.  It is still generally true that once a plan is confirmed and the appeal period has run, that plan cannot be attacked thereafter.  However, creditors and debtors alike should be aware that issues remain over the extent to which state law controls what property is even subject to the plan to begin with.

BOEM Proposes Beaufort Sea Lease Sale for 2019

Posted in BOEM, Outer Continental Shelf

In late March, the United States Bureau of Ocean Energy Management (BOEM) issued a Call for Information and Nominations for a proposed sale in the Beaufort Sea Planning area in late 2019.  The Beaufort Sea is a marginal sea of the Arctic Ocean north of the Northwest Territories, the Yukon, and Alaska and west of Canada’s Artic islands.  The stated purpose of the Call is to “solicit industry nominations for areas of leasing interest and to gather comments and information on the area included in the Call for consideration in planning for the proposed OCS [Outer Continental Shelf] oil and gas lease sale.”

Pursuant to federal regulation, BOEM has requested comments from the industry and public regarding:

Industry interest in the area proposed for leasing, including nominations or indications of interest in specific blocks within the area;

(a) Geological conditions, including bottom hazards;

(b) Archaeological sites on the seabed or near shore;

(c) Potential multiple uses of the proposed leasing area, including subsistence and navigation;

(d) Areas that should receive special concern and analysis; and

(e) Other socioeconomic, biological, and environmental information.

One BOEM official has recently stated that he believes the Beaufort Sea possesses great oil and gas potential, but that because of its unique and environmentally sensitive areas important to the subsistence needs of the region’s Alaska Native communities, this Call process is integral to identify which areas can be safely drilled and which should be protected for wildlife and traditional uses.

Once the Call process is complete and BOEM has had an opportunity to review and analyze the comments, BOEM will proceed to area identification, where it will develop a recommendation of the area proposed for leasing and an environmental analysis.  If Interior Secretary Zinke approves the proposal, the agency will then publish the proposed area for leasing in the Federal Register.  BOEM appears to recognize that its timeframe for potentially leasing blocks in the Beaufort Sea is ambitious; the Call itself states that for a lease sale to happen in 2019, “and given the long lead time needed to prepare for a proposed sale, the planning process must begin now.”

In the past, the federal government has been reticent to allow drilling in the Arctic.  The Trump Administration has clearly taken a more robust approach to drilling for oil and gas in this area.  While BOEM is satisfying its regulatory requirements before making an official decision to lease this area—and purportedly a final decision has yet to be made—it seems all but certain that it fully intends to start leasing blocks.  But we must wait to see where exactly the industry will have new opportunities and what areas will remain preserved for environmental and Native concerns.

At last month’s Gulf of Mexico sale, the BOEM offered 77 million acres up for lease; however, it drew little interest in undeveloped areas lacking established infrastructure.  So even if BOEM ends up having a lease sale for the Beaufort Sea, it remains to be seen whether industry will jump at any new opportunity in the Arctic.

Reverberations from Trump’s Steel Tariffs Likely to Reach the Oil and Gas Industry

Posted in Energy Costs, Oil and Gas Operations, Tariffs

President Trump’s proposed 25% steel tariffs will obviously affect industries beyond the domestic steel producers. One of those industries is the oil and gas industry. From first producers to pipeline companies to liquefied natural gas (LNG) transporters, steel is an essential material for the necessary infrastructure.

At the recent CERAWeek energy conference in Houston, Senator Lisa Murkowski (R, Alaska) voiced concern over the effects the steel tariffs are likely to have on a planned natural gas export terminal in Alaska, which is part of a $43 billion joint development deal with China-based companies involving an 800-mile pipeline. According to Murkowski, the tariffs could add $500 million to the cost of the terminal. The project is aimed at selling more LNG to Asia, including South Korea, a principal U.S. natural gas importer. On the heels of the United States becoming a net natural gas exporter in 2017, Murkowski said,

Higher prices for steel–which accounts for a significant portion of project costs–could easily set us back.”

Murkowski is not alone in her disagreement with the President. Senator John Cornyn (R, Texas) has also criticized the protectionist attitude driving the proposed tariffs for its potential negative affect on industries in his state of Texas.

The oil and gas industry is especially concerned because the type of steel used in pipelines and other energy infrastructure comes at a higher cost because of its unique grade and quality, which led many domestic producers to abandon that market. Steel already accounts for a large portion of the production costs, and the tariff would add to that already high cost.

Industry leaders plan to ask the Trump administration for an industry-wide exemption from the tariffs, but it is unclear how the administration will react. GAMB will continue to monitor this issue as it develops and encourages anyone possibly affected to contact us with questions.

Full Fifth Circuit Clarifies What Constitutes a Maritime Contract

Posted in Maritime, Oil and Gas Operations

This month, the Fifth Circuit en banc unanimously set aside prior precedent and adopted a “simpler, more straightforward test” for determining whether a contract relating to oil or gas activities on navigable waters constitutes a maritime activity.  In re Larry Doiron, Inc., No. 16-30217, 2018 WL 316862 (5th Cir. Jan. 8, 2018) (en banc).  This classification is important because it often determines whether an indemnity provision is unenforceable under state law or instead is enforceable under general maritime law.  This decision will have profound effects on oil and gas operations and represents a significant departure from the Fifth Circuit’s prior approaches.

In 2005, Apache Corporation entered into a master services contact with Specialty Rental Tools & Supply, L.L.P.  In 2011, Apache issued an oral work order that directed Specialty to perform “flow-back” services to remove obstructions affecting the flow of a gas well in navigable waters in Louisiana.  The only access to the well was via a stationary production platform.  This work order did not require a vessel, and neither party anticipated that a vessel would be necessary to perform the job.

After an unsuccessful attempt to fulfill the work order, the Specialty crew determined that it needed a different piece of equipment, which would require a crane to be moved.  However, the production platform was too small to accommodate a crane, so Specialty suggested that Apache engage a barge equipped with a crane to move the equipment.  Apache agreed to this suggestion and hired Larry Doiron, Inc. to provide a crane barge.  During operations, one of the Doiron crane operators accidently struck and injured a Specialty crewmember.

After the injured crewmember sued Doiron, Doiron sought a declaration that it was entitled to indemnity from Specialty under  Specialty’s master services contract, while Specialty conversely sought a declaration that Doiron was not entitled to immunity.  The resolution of this issue hinged on whether the master service contract was a maritime contract.  If so, general maritime law would enforce its indemnity provisions.  However, if it was not a maritime contract, Louisiana law would apply, and the Louisiana Oilfield Indemnity Act, La. Rev. Stat. § 9:2780,would preclude enforcement of the indemnity provisions.  The district court held that maritime law applied, thus enforcing the indemnity provisions in favor of Doiron against Specialty.

On appeal, a three-judge panel of the Fifth Circuit affirmed on the basis of Circuit precedent in Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990), directing courts to consider six factors when determining whether the a contract is or is not a maritime contract:

(1) What does the specific work order in effect at the time of injury provide? (2) What work did the crew assigned under the work order actually do? (3) Was the crew assigned to work aboard a vessel in navigable waters? (4) To what extent did the work being done relate to the mission of that vessel? (5) What was the principal work of the injured worker? and (6) What work was the injured worker actually doing at the time of injury?

After exhaustively analyzing the Davis & Sons factors, the panel held that the “district court did not err by determining maritime law applies,” and therefore affirmed.  However, Judge Davis, joined by Judge Southwick (the author of the panel opinion), specially concurred.  Although Judge Davis joined the majority opinion because it faithfully followed precedent in Davis & Sons and its progeny, he recognized the criticism this case had received, especially in light of recent Supreme Court precedent.  Finding that the test enumerated in Davis & Sons was “too inflexible to allow the parties or their attorneys to predict whether a court will decide if a contract is maritime or non-maritime or for judges to decide the cases consistently,” he urged the full Fifth Circuit to take the case en banc and correct this issue.  See In re Larry Doiron, Inc., 869 F.3d 338 (5th Cir. 2017) (panel opinion).  Under most circumstances, three-judge panels are bound to follow Circuit precedent.  However, when a case is taken en banc, the full court may overrule or modify Circuit precedent by a majority vote.  The Fifth Circuit heeded Judge Davis’s request and granted rehearing en banc.

On rehearing, Judge Davis wrote unanimously for the entire court (newly appointed Judges Willett and Ho did not participate in this decision).  He highlighted that the Supreme Court’s later decision in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14 (2004) allowed them to “avoid[] most of the unnecessary analysis required by Davis & Sons.”  Under Kirby, Judge Davis emphasized, courts must look not just to whether a ship or other vessel was involved in the dispute, nor simply to the place of the contract’s formation or performance (those are tort factors, not contract factors), but instead must focus on the nature and character of the contract; “the true criterion” is whether the contract has reference to maritime services or maritime transactions.  Judge Davis further recognized that the emphasis in Kirby that “the fundamental interest giving rise to maritime jurisdiction is the protection of maritime commerce.”

Based on Kirby, the Fifth Circuit adopted a two-prong test to determine whether a contract is maritime:

First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?  The answer to this inquiry will avoid the unnecessary question from Davis & Sons as to whether the particular service is inherently maritime.  Second, if the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?  If so, the contract is maritime in nature.

Nevertheless, the Fifth Circuit did not fully dispose of Davis & Sons, and explained that its factors may be relevant when the scope of the contract is unclear.  Applying this new test to the specific facts of the case, the Court reasoned that the vessel to lift equipment was an insubstantial part of the job and therefore the contract was non-maritime, subjecting it to Louisiana law.  As such, Louisiana’s anti-indemnity statute barred enforcement of the master service contract’s immunity provisions.

Kudos again to Judge Davis.  Yet again, he brings refreshing clarity to an issue mired in confusion and uncertainty for decades.  As federal appeals courts infrequently hear cases en banc, this case is a rare and paradigmatic example of what the procedure was intended to accomplish and why it is so important.  Parties engaged in oil and gas operations within the Fifth Circuit can now have far better certainty how their contracts will be classified, which in turn permits them to better assess their risks.  This information behooves all parties involved.

Can Parties Form an Enforceable Contract to Sell Assets Based on Exchanged Emails When the Bid Procedure Required a Purchase and Sale Agreement? Texas Court of Appeals says Maybe

Posted in Transactions

A recent Texas case highlights the importance of making clear which agreements are binding and which are not.  In Le Norman Operating LLC v. Chalker Energy Partners III, LLC, No. 01-15-01099-CV, 2017 WL 4366265 (Tex. App. Oct. 3, 2017), a group of sellers of oil and gas interests closed a transaction with Jones Energy to sell those assets, but not before being sued by a jilted third party, Le Norman Operating LLC (“LNO”).  LNO alleged that the sellers had entered into a prior binding agreement with LNO for the sale of the same assets.  As the Texas Court of Appeals reminds us, it is important for a seller in a completive sale process to comply with its own bidding procedures and to ensure that the actions of its representatives do not unintentionally create a binding agreement.

In Le Norman Operating, a group of sellers sought to divest their oil and gas interests located in the Texas panhandle and engaged a financial services company, Raymond James, to conduct a competitive bidding process.  Raymond James provided potential purchasers with access to a virtual data room and typical bid documents: an information memorandum, a confidentiality agreement, a data room presentation, two confidential bid instruction letters and a form purchase and sale agreement.

After receiving the first round of bids, Raymond James asked the two highest bidders, LNO and Jones Energy, to increase their bids.  The sellers’ representative, Chalker Energy, selected LNO’s increased bid for 100% of the assets to present to the other working interest owners.  However, the sellers were willing to sell LNO only 82% of the assets, subject to a reversionary interest.  After several counter-offers, LNO informed Chalker Energy via email that it would no longer pursue the transaction “as altered by the Sellers.”

Five days later, the sellers offered to sell a smaller percentage of the assets to LNO.  On November 19, 2012, LNO responded by sending Raymond James an email with the subject line “RE: Counter Proposal” that listed the following specific terms:

  1. $230 M for 67% of the 8/8ths [Raymond James] supplied database property set
  2. Eff date same at 9 1 12
  3. Execution of the PSA on or before 11 20 12, closing on or before 12 31 12
  4. Non-compete for ALL owners for one year with two mile halo around any unit being sold
  5. PSA similar to what we returned with the above caveats
  6. Our interest is not subject to the development agreement
  7. All parties staying in will execute JOA, it will be attached to the PSA

Further, the email stated:

We will not be modifying or accepting any changes to the base deal described above and don’t want to be jerked around anymore.  We will give you [until] 5:00 pm CST tomorrow [November 20] to accept.  Best we can do and you hopefully understand I have recommended to my Board to pass if the timeline is not met or a counter proposal is sent.  Good luck.

The email did not reference the formal bid procedures.  LNO’s proposed procedure specifically conflicted with the bid procedures which would have allowed each seller 24 hours from receipt of a recommendation by Chalker Energy to make a written election to participate.  The sellers did not receive Chalker’s recommendation until November 20—the same day their acceptance was due to LNO.

Nevertheless, the sellers decided to participate.  Raymond James emailed LNO before LNO’s deadline and stated: “We have the group on board to deliver 67% subject to a mutually agreeable PSA.  We are calling to discuss next steps and timing.  Chalker et al. will be turning a PSA tonight to respond to your last draft.  Please give me a call to discuss schedule and timing.”

LNO and the sellers began finalizing the PSA and key exhibits, including escrow agreements, a non-compete agreement and a joint operating agreement.  During the PSA negotiations, several emails were exchanged between various sellers and LNO referring to LNO “winning the bid” and “what is being sold to [LNO].”

On November 21, 2012 (the day before Thanksgiving), Chalker Energy emailed LNO an updated draft of the PSA.  Yet, after sending that draft, the sellers accepted a competing offer from Jones Energy.  The sellers and Jones Energy finalized and executed their PSA on November 28.  That same day, LNO delivered its response to Chalker Energy’s prior draft PSA.  However, after LNO learned of the Jones Energy agreement, LNO sent the first of several written demands that the sellers honor the “contract” they had entered into with LNO on November 19-20.

The Jones Energy deal closed, but Jones Energy refused to release $12.5 million in escrowed funds.  Jones Energy alleged that the sellers’ failure to disclose LNO’s demands was a breach of the Jones Energy PSA.  LNO later filed suit against the sellers for, among other things, breach of their November 19–20 agreement.  The district court granted partial summary judgment for the sellers, dismissing LNO’s breach of contract claim in part because there was no meeting of the minds and no evidence that the parties intended to be bound by any agreement.  LNO appealed.

The Texas Court of Appeals, First District, examined whether a valid contract existed between LNO and the sellers.  It outlined the applicable test as follows:

Parties form a binding contract when the following elements are present: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party’s consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding.  Whether the parties formed a contract is generally a fact question, although it may be determined as a matter of law.

Further, the court specified that “[a] binding agreement may exist when parties agree on some terms sufficient to create a contract, leaving other provisions for later negotiation” and “when an agreement leaves essential (or material) matters open for future negotiation and those negotiations are unsuccessful, however, the agreement is not binding upon the parties and merely constitutes an agreement to agree.”

The sellers argued that the terms of the bid documents and the confidentiality agreement governed any potential contract between LNO and the sellers.  The sellers maintained that the terms of these documents precluded the existence of a valid, binding contract in the absence of an executed PSA.

The court relied on guidance from the Texas Supreme Court “that the determination of whether a ‘contemplated formal document’ was a condition precedent to the formation of a contract or ‘merely a memorial of an already enforceable contract’ depended on the intent of the parties, which is usually a question for the trier of fact.”  The court noted that the initial bid procedure failed to result in a sale of the assets.  LNO’s November 14 email stated that it could no longer pursue the transaction.  The court stated that LNO sent its November 19 email after the initial bid process had concluded, and the email did not conform to the requirements of the bid process.  Moreover, the sellers continued to negotiate with LNO after it had deviated from the established bidding procedures.  The court determined that LNO had “raised a genuine issue of material fact regarding whether the alleged contract set out in the November 19–20, 2012 emails was subject to the bid process rules.”

The court also concluded that “the plain language of the Confidentiality Agreement does not preclude, as a matter of law, the existence of a valid, binding contract in the absence of an executed PSA.”  The Confidentiality Agreement provided that “until a definitive agreement has been executed and delivered, no contract or agreement providing for a transaction between the Parties shall be deemed to exist,” and that a letter of intent or preliminary agreement was not a definitive agreement.  Yet the Confidentiality Agreement did not further define what constituted a “definitive agreement.”  This omission led the court to conclude that a “fact issue exists as to whether the November 19–20 email chain and subsequent written elections were sufficient to constitute a ‘definitive agreement’ for the sale of the Assets.”

The sellers also argued that there was no meeting of the minds between them and LNO or any intent to be bound.  Nonetheless, the court found that a fact question existed “as to whether the parties intended to be bound by the terms set out in the November 19–20 emails and as to whether the November 19–20 emails and written elections were sufficiently definite, certain, and clear as to the essential terms of the sale as to constitute an enforceable contract.”  In support, the court referenced the specific terms and language in LNO’s November 19 email and the fact that the sellers ultimately elected to participate in the transaction.  Even though the sellers and LNO had not negotiated or agreed on every provision of the sale, the court reasoned that there was “at least some evidence that the parties agreed and had a meeting of the minds on the essential terms of the sale sufficient to create a contract . . . .”

So what’s the lesson?  As Le Norman Operating illustrates, parties to a competitive bidding process and their agents should strictly adhere to any prescribed bidding procedures.  Procedural deviations and meanderings by either party may establish a course of action that unintentionally couples the parties to what may have been intended to be non-binding negotiations.

Louisiana Secretary of State Adopts New Rule For Domestic Entities in Certain Parishes and Foreign Entities

Posted in Louisiana Corporate Law, News

Effective January 1, 2018, the Louisiana Secretary of State will require domestic entities domiciled in Ascension, Bossier, Caddo, Calcasieu, East Baton Rouge, Jefferson, Lafayette, Livingston, Orleans, Ouachita, Rapides, St. Tammany, Tangipahoa, and Terrebonne to file all available business documents online through GeauxBiz.com.  GeauxBiz.com is the Secretary of State’s official online portal for filing formation documents, amendments, annual reports, and other organizational filings.  Although online filing with the Secretary of State via GeauxBiz.com has been an available alternative to filing in person or via U.S. mail for some time now, online filing will be the exclusive means of transmitting such documents to the Secretary of State for Louisiana businesses domiciled in the above-listed parishes beginning January 1, 2018.  According to the Secretary of State, this new rule will also apply to all foreign entities (i.e. entities domiciled outside of Louisiana) that are registered to do business in Louisiana, regardless of their principal places of business within Louisiana.  Online filing will remain optional for Louisiana entities domiciled in parishes other than the ones listed above.

In some instances, online filing may provide businesses with a more convenient option for filing documents with the Secretary of State.  But there is a tradeoff.  In an attempt to “streamline” the registration process for businesses in 2015, GeauxBiz integrated online filing capabilities for the Louisiana Department of Revenue and the Louisiana Workforce Commission with that of the Secretary of State.  The intention for this change was to provide business owners a “one-stop shop” for online filing; however, in practice, the change instead has complicated and protracted this process.  For instance, to form a business using GeauxBiz, the business owner must register for a federal tax identification number from the IRS and apply for an unemployment insurance tax account number before submitting the required formation documents to the Secretary of State.  Such ancillary filings may be wholly unnecessary in some instances, such as when forming a single-member LLC that will not employ anyone in its operation.  Additionally, in some instances, online filing requires the filer to provide personally identifiable information (e.g., Social Security numbers) for shareholders, members, officers, and/or managers which may prohibit same-day entity formation.  In light of the upcoming change, affected business owners who have not previously filed documents via GeauxBiz should familiarize themselves with the online portal and, where possible, anticipate complications.

Gordon Arata Montgomery Barnett has experience using GeauxBiz and would be happy to assist clients with their GeauxBiz filings.

Louisiana First Circuit Tosses Out Commissioner of Conservation Order

Posted in Environmental

The Louisiana Court of Appeal for the First Circuit in Louisiana Environmental Action Network v. Welsh, 2016-0906 (La. App. 1 Cir. 6/14/17); 224 So. 3d 383, recently ruled that an order issued by the Commissioner of Conservation was overly broad, arbitrary and capricious.  Reversing the lower court’s ruling upholding the Commissioner’s order allowing construction of a new transfer station for oil and gas exploration and production waste, the First Circuit held that, despite the Commissioner’s broad authority over the State’s oil and gas resources, the order violated lawful procedure because it was beyond the scope of what was requested in the underlying application.

FAS Environmental Services, LLC (“FAS”) submitted an application to the Louisiana Department of Natural Resources seeking a permit to construct and maintain a new transfer station located in St. Mary Parish.  The proposed transfer station consisted of a truck unloading area with above ground storage tanks to receive and temporarily store energy and production waste.  The waste would later be transferred by pipeline to FAS’s existing disposal facility and then eventually injected into FAS’s disposal wells.  In the permit application, and during the later legal proceedings, FAS represented that the new transfer station would replace FAS’s existing station, which required the use of barges to transfer the waste from the station to the disposal facility.  The new station’s proposed location was about one and a half miles north of the existing transfer station and, due to the use of a pipeline, would eliminate the necessity of barging the waste.

After conducting a public hearing and receiving public comment, the Commissioner issued Conservation Order No. ENV 2015-03 CFT approving FAS’s application for the new transfer station.  Even though closure of FAS’s existing transfer station and relocation of its operations to the new transfer station were expressed in FAS’s application, the order did not condition the approval to construct the new station on the closure of the existing station.  Thereafter, several environmental groups filed suit in the 19th JDC for East Baton Rouge Parish seeking judicial review of the order.  The district court upheld the order, and the plaintiffs appealed that holding to the First Circuit on four bases:

  1. that the Commissioner violated statutory law by failing to consider conflicts with St. Martin Parish’s master plan before approving the order, which would move industrial activity through a residential area and affect nearby recreational and tourism resources;
  2. that the Commissioner was arbitrary and capricious in approving the order when the record does not establish, as required by the Commissioner’s rules, that the containment wall surrounding the storage tanks will withstand the velocity of a 100–year flood;
  3. that the Commissioner committed legal error in concluding that local zoning ordinances were preempted and therefore irrelevant to his decision; and
  4. that the Commissioner was arbitrary and capricious in approving the order, which authorized FAS to operate a second transfer station without requiring FAS to close the first transfer station.

Focusing on the plaintiffs’ fourth argument, the First Circuit noted that FAS’s application was for the “relocation” of its existing station, not for the operation of a new station in tandem with the existing station. The court also noted that the environmental data and information submitted in conjunction with the application was limited to the operation of one station and that public comment was invited as to the operation of one station. Although the Commissioner has exclusive jurisdiction to regulate the disposal of waste products (including the disposal facility and transfer stations at issue), the court nevertheless held that the Commissioner’s order was arbitrary and capricious because no rational basis existed in the administrative record to permit FAS to operate both the new transfer station and the currently operating station.

Interestingly, the court acknowledged that the absence of conditional language regarding the closure of the existing transfer station may have been unintentional.  Moreover, the court’s opinion never mentions whether FAS ever signaled any intention of relying on the order to continue operating the existing station once the new station was operational.  Although the Court may have considered other, unreported factors, it appears that the court believed that, by showing a mere possibility that the Commissioner’s order hypothetically could have allowed FAS to operate both transfer stations, the plaintiffs had satisfied their burden of showing that the Commissioner’s order was arbitrary and capricious.

The court’s opinion was conspicuously silent about the plaintiffs’ three other arguments.  It is unclear whether the plaintiffs will be able to push any of the three other arguments on remand.  On the one hand, the plaintiffs might argue that, because the First Circuit did not address these issues, the plaintiffs are free to push them again on remand.  On the other hand, FAS might argue that the First Circuit necessarily, even if only implicitly, rejected these three arguments, or otherwise would have reversed, rather than just vacated, the Commissioner’s order.  These issues will remain for resolution on another day.

U.S. Fifth Circuit Rejects OCSLA-Based Criminal Charges Against Contractors

Posted in BSEE, Outer Continental Shelf

In an important case of first impression, the federal Fifth Circuit has just affirmed that contractors cannot be criminally prosecuted for violations of various safety regulations under the Outer Continental Shelf Lands Act (OCSLA). See United States v. Moss, No. 16-30561 (5th Cir. Sept. 27, 2017).  This decision has broad implications—both in the criminal and civil context and for both contractors working in the OCS and holders and operators of leases and rights-of-way on the OCS.

Black Elk Energy Offshore Operations, LLC owned and operated a federal oil and gas lease covering West Delta Block 32 on the OCS in the Gulf of Mexico and had a three-platform production facility on the block. Black Elk retained several contractors to provide various services on the platforms.

In 2012, while some contractors were performing welding work for Black Elk on one of the platforms, a fatal explosion occurred, killing three workers, injuring many others, and discharging pollutants into the Gulf of Mexico. Although the exact cause of the explosion is disputed, the federal government indicted Black Elk and many of these contractors for allegedly violating multiple OCSLA regulations administered by the Bureau of Safety and Environmental Enforcement (BSEE) by failing to obtain proper authorization to weld, failing to conduct appropriate pre-work inspections, and failing to ensure the construction area was safe for the welding work.

The government waited nearly three years to issue its indictments. The government charged the defendants with violating 43 U.S.C. § 1350(c), which provides that any person who willfully violates any OCSLA regulation may be criminally liable and punished by a fine of up to $100,000 and imprisonment of up to ten years.  Specifically, the government charged Black Elk and the contractors with violating various safety regulations under 30 C.F.R. §§ 250.113(c) and 250.146(c).

The contractors moved the district court to dismiss these OCSLA charges against them on grounds that none of the pertinent regulations applies to oilfield contractors. Central to their argument was that each of the pertinent regulations imposes requirements only on “You,” which another OCSLA regulation defines as follows:

        You means a lessee, the owner or holder of operating rights, a designated operator or agent of the lessee(s), a pipeline right-of-way holder, or a State lessee granted a right-of-use and easement.

The district court agreed and thus dismissed all OCSLA charges against the contractors. In the first appellate case to address this issue, the Fifth Circuit has now affirmed this dismissal.

On appeal, the contractors argued that OCSLA, read as a whole, precludes the government from criminally prosecuting anyone who is not a holder of OCS leases or permits for violating regulations under OCSLA. While finding “much to be said” for this argument, the Fifth Circuit stopped short of deciding it head on.  Instead, it affirmed the dismissal on the narrower grounds that the regulations at issue did not purport to regulate contractors.

The Fifth Circuit easily rejected the government’s argument that the OCSLA regulations apply not only to lessees and operators, but also to the person actually performing the activity at issue. The court dismissed this argument as contrary to “hornbook principles of interpretation,” namely, that two provisions in a statute or regulation cannot be read in isolation, but rather must be construed together.  The court emphasized that regulations at issue all applied only to “You,” but that BSEE’s definition of “You” does not cover contractors.  Indeed, BSEE itself had publicly stated that “you” “DOES NOT include a CONTRACTOR.”  The court also noted various earlier explanations by the agency that it intended to limit regulatory liability to just lessees and operators, that “it does not regulate contractors” and that it had rejected a proposal that “You” be defined more broadly to cover contractors.  Finally, the Fifth Circuit stressed that the “virtually non-existent past enforcement of OCSLA regulations against contractors confirms that the regulations never intended to apply to [contractors]” and that, in other, recently promulgated regulations (see 30 C.F.R. § 585.112), BSEE has “gone out of its way to specifically include contractors and subcontractors within the regulatory purview.”  For all these reasons, the Fifth Circuit affirmed the district court, holding that the OCSLA regulations at issue do not apply to contractors and therefore cannot provide a basis for criminal liability of contractors.

The Fifth Circuit’s legal reasoning is almost assuredly correct. The plain words of the OCSLA regulations at issue, coupled with the regulatory history and long practice thereafter, strongly support the conclusion that contractors are not governed by these regulations.  However, it is a separate issue whether BSEE should rethink the narrow reach of these regulations by amending them to cover contractors as well.  The criminal penalties available under § 1350(c) for violations of OCSLA’s regulations provide a powerful disincentive against potential violators.

But of course subjecting contractors to criminal penalties would not be cost-free. If BSEE amends these regulations to expressly cover contractors, then that would present squarely the issue whether BSEE in fact has the statutory power to promulgate regulations enforceable against contractors.  Indeed, the Fifth Circuit may soon be addressing that issue, as the government has recently appealed a ruling by another Louisiana federal court in Island Operating Co. v. Jewell that BSEE does not have the statutory authority under OCSLA to issue civil penalties or fines against contractors.  But even if the Fifth Circuit ultimately determines that BSEE has the statutory authority to regulate contractors, there may be practical reasons why it might not be wise for BSEE to do so.  As the Fifth Circuit astutely observed, “complex, overlapping cross-indemnity provisions are an inherent feature through the oil and gas industry.”  Thus, tinkering with a regulatory scheme that has been in place since OCSLA’s enactment over sixty years ago could cause unintended consequences that “could adversely impact multiple layers of contractors and subcontractors,” as it would upend the historical allocations of cost and risk among the numerous players on the OCS.  Among other things, any such change would necessitate lessees and operators to undertake a wholesale review of all their agreements with contractors and others.  So if you’re a contractor, lessee or operator on the OCS, stay tuned.

Message from Gordon Arata Montgomery Barnett Regarding Hurricane Harvey

Posted in Seminar/Events

We at Gordon Arata Montgomery Barnett express our sincere heartfelt sympathy to all those who are in the path of Hurricane Harvey.  You assisted us when Katrina and Rita hit Louisiana twelve years ago and we are here now to assist our friends in Texas.

We have been in contact with some of you already and appreciate your concerns.  We stand ready to assist you in your time of need.  If for example, you should need office space, please contact us.  We have limited office space available in our Houston office and additional spaces in New Orleans, Lafayette and Baton Rouge offices.  Also, the firm has set up a Harvey Emergency Recovery Team to assist with your needs, including the following:

  • Business Interruption Claims/Insurance Coverage
  • FEMA assistance/SBA Loans
  • Tax Relief
  • Force Majeure Issues
  • Real Estate Issues/Leasing Issues
  • Environmental/Toxic Tort
  • Employment Issues
  • Oil & Gas Issues
  • Admiralty and Maritime
  • Bankruptcy and Creditors’ Rights
  • Construction Issues

Please do not hesitate to contact us at gambharvey@gamb.law.

We also want to provide you with some information regarding the federal and state tax return filing and payment relief which has just been made available to victims of Hurricane Harvey.

Federal Tax Return Filing and Payment Relief to Victims of Hurricane Harvey; 2016 Returns on Valid Extension Have Until Jan. 31st to File

The Internal Revenue Service announced today that Hurricane Harvey victims in parts of Texas have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out on Oct. 16th, and businesses with extensions that run out on Sept. 15th.

The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, 18 counties are eligible, but taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 23, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. Please note that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.

A variety of business tax deadlines are also affected including the Oct. 31st deadline for quarterly payroll and excise tax returns. In addition, the IRS will waive late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017. Details on available relief can be found on the disaster relief page on IRS.gov.

The IRS will automatically provide filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with taxpayers who live outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area must contact the IRS at 866-562-5227. This relief also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016). See IRS Publication 547 for details.

Currently, the following Texas counties are eligible for relief: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to Hurricane Harvey, please visit: https://www.usa.gov/hurricane-harvey.

Relief from Texas Tax Filing and Payment Deadlines for Taxpayers in Disaster Areas

Texas Comptroller Glenn Hegar announced on Friday that taxpayers in declared disaster areas affected by Hurricane Harvey can postpone paying state taxes while they recover from storm-related losses. Businesses located in those areas can call the Comptroller’s office and request up to a 90-day extension to file and pay certain monthly and quarterly state taxes.

In addition to allowing the Comptroller to extend tax-filing deadlines, Texas law exempts certain recovery-related expenses from sales tax, including:

  • the cost of labor to repair storm-damaged, nonresidential property, including office buildings and stores. Labor charges must be separately stated on the repair bill. Texas does not impose sales tax on labor for residential repairs.
  • services used to restore storm-damaged tangible personal property, including dry cleaning of clothing and draperies, rug and carpet cleaning, and appliance repairs regardless of whether the property is residential or nonresidential.

For more information or to request a tax filing extension, call the Texas Comptroller’s toll-free tax assistance line in Austin at 800-252-5555, or go to the Comptroller’s website for answers to frequently asked questions.

Gordon, Arata, Montgomery, Barnett, McCollam, Duplantis & Eagan, LLC
201 St. Charles Ave., 40th Floor | New Orleans, LA 70170-4000
Main:  (504) 582-1111
gambharvey@gamb.law
www.gamb.law

Disclaimer:  Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, this Firm would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

BSEE Finally Allows Pipeline ROWs To Be Co-Owned

Posted in BSEE

Are you pining for the cheery days of yore when regulations made at least some business sense?  Happy days are here again, at least for BSEE’s new policy on ownership of pipeline rights-of-way (ROW) on the outer continental shelf (OCS).  After years of refusing to recognize multiple owners of a pipeline ROW, the Bureau of Safety and Environmental Enforcement (BSEE) has just advised that it will now allow a pipeline ROW to be assigned to more than one party with a single operator to be designated to act on behalf of the co-owners.

Historically, BSEE’s predecessor, the Minerals Management Service (MMS), had permitted a pipeline ROW on the OCS to have multiple co-owners.  Many years ago, however, the MMS adopted an internal policy that it would no longer approve assignments for co-owners.  And—until now—BSEE has continued that policy.

That policy seemed entirely misplaced, as it ignored the realities of business on the OCS.  Frequently (if not more often than not), developments on the OCS have multiple co-owners.  Joint venturers who co-own an oil and gas lease almost universally agree to share among themselves not only production revenues from the lease, but also the related costs and expenses.  Because production facilities on the OCS are not near refineries or other end users of such production, pipelines are an absolute necessity for OCS production.  But under this old policy, only one party would be recognized as the owner of a pipeline ROW on the OCS, even if multiple parties were responsible for paying for any pipeline facilities on the ROW.

This old policy caused multiple problems.  On the one hand, without a government-recognized ownership interest in a ROW, a party who nonetheless was obligated to pay for a portion of the costs and expenses for such ROW would have to concoct a set of contractual provisions that would do Rube Goldberg proud.  But even then, it was uncertain how effective those contractual efforts would be.  For example, if such a “non-owner” co-owner attempted to mortgage its “non-owner” interest, how would foreclosure work?  What exactly could a marshal seize and sell if the “non-owner” owner defaulted on its financing?  On the other hand, any equally daunting set of contractual arrangements would be needed to protect a “non-owner” owner in the event that the BSEE-recognized owner sought to mortgage (or otherwise encumber) its ROW interest—which, per BSEE, was 100%.  Nor did this policy serve the public: by recognizing only a single owner, BSEE effectively limited the possible number of parties it could pursue to enforce decommissioning obligations for a ROW or if there was ever a spill from a pipeline on the ROW.  Thus, for example, if the BSEE-recognized owner went belly up and its bonds to the government were not sufficient to satisfy a clean-up obligation, BSEE would have had difficultly pursuing any “non-owner” owners for any payment or contribution.

By its NTL No. 2017-N04 issued effective August 18, 2017, BSEE has now finally come to its senses to cure these self-inflicted problems.  BSEE will now, once again, allow a pipeline ROW to be assigned to more than a single party.  Thus, government-recognized ownership in a pipeline ROW on the OCS may now, once again, mirror the parties’ actual economic interests in the ROW.  Of course, as 30 C.F.R. § 250.1701(b) has long recognized, co-owners of a pipeline ROW will be jointly and severally (or, as we Louisiana lawyers would say, solidarily) liable for meeting the related decommissioning obligations.  [The new NTL is silent whether there can be separate co-ownership for each pipeline segment authorized under a single ROW; fortunately, however, that should not be a big concern, as it has been decades since multiple pipeline segments were designated under a single ROW.]  On the flip side, BSEE will now require that a single party be designated as the “operator” for a pipeline ROW—at least when there are two or more co-owners.  Identifying an operator won’t relieve the pipeline ROW holders of any responsibility for the ROW.  If an operator defaults, the pipeline ROW holders are still responsible for complying with the ROW grant and applicable law, regulations and orders.  While 30 C.F.R. § 550.147(c) is express and clear that an operator under a lease is jointly and severally liable with the lessee(s) for various regulations relating to the lease, there is no comparable express regulation for operators of ROWs.  Although the new NTL states that BSEE may disqualify a pipeline ROW operator or revoke its identification as an operator for a ROW if its performance is “unacceptable,” the new NTL never expressly states that a ROW operator who is not also a holder of the ROW may itself be liable (jointly, severally or otherwise) for any decommissioning or other obligations for the ROW.

So if you have an interest in a pipeline ROW where BSEE lists someone else as the sole owner or if BSEE recognizes you as the sole owner of a ROW that, as a contractual matter is co-owned by two or more parties, you should consider whether now to file an appropriate assignment with BSEE so that the ownership of record mirrors the parties’ contractual arrangements.  But pay attention to the details: for example, if the owner of recorded granted a mortgage on the ROW (or even just on its rights under the ROW), you might want to obtain appropriate partial releases from the mortgage holder.  Co-ownership of ROWs of course raises many of the same issues that occur with co-ownership of leases.  But we’re better for the new scheme: letting the parties have the flexibility to determine what works best for them is almost always far superior than a one-choice-is-all-you-get approach to government regulation.

If you have any questions about pipeline ROWs or other issues on the OCS, give us a call.