The Real Reason Norse Energy filed for bankruptcy … And what happens to their lawsuit against the Town of Dryden?
It has been a tough week for sharp-elbow business practices in the fracking sector.
In Virginia, a federal judge certified class action status in a lawsuit accusing two fracking companies of drilling on properties that had not been leased, and cheating thousands of landowners in Appalachia out of millions of dollars in royalties. (The gas companies lost the class action certification fight even though it turns out – as confirmed in a report issued this week by the Office of the (Virginia) State Inspector General– that a high-ranking lawyer in the Virginia Attorney General’s office improperly provided the gassers with strategy advice aimed at defeating certification.)
In Texas last week, the city of Fort Worth sued Chesapeake Energy, alleging that Chesapeake had shorted the city of millions of dollars in gas lease royalties, including by deducting costs incurred under “sham contracts” with related (to Chesapeake) companies. (The City of Arlington, Texas and the Dallas Fort Worth Airport have brought similar suits against Chesapeake.)
In Pennsylvania, Chesapeake came under fire last week for including within its gas leases language purporting to authorize the company to deduct (for purposes of calculating royalties payable to landowners) the much lauded ‘impact fee’ that under Pennsylvania law is specifically prohibited from being passed through to landowners. (Separately, last month Chesapeake agreed to pay millions of dollars to settle a Pennsylvania class action suit alleging that the company had cheated landowners when computing royalties.)
And here in New York, last week Norse Energy announced the conversion of its Chapter 11 bankruptcy case to a Chapter 7. (There are generally two types of bankruptcy available to businesses: Chapter 11, and Chapter 7. Chapter 11 is a ‘reorganization,’ and Chapter 7 is a liquidation.)
Predictably, the ‘drill now, we’ll prove it’s safe later’ crowd is foaming at the mouth, insisting that Norse’s demise came about because NYS has not issued a finalized SGEIS for fracking. But let me tell you the REAL reason Norse filed bankruptcy.
Back in December of 2011, one of Norse’s drilling partners – Bradford Drilling Associates – brought suit alleging that Norse had engaged in fraudulent and deceptive practices so as to induce Bradford to invest $9 million in a Herkimer formation drilling program to be run by Norse.
(The subject drilling program was not in any way, shape, or form dependent upon finalization of the SGEIS; in fact, it appears that at the time the suit was commenced, Norse had drilled about one-half the number of wells contemplated by the contract between Norse and Bradford, albeit with significant cost overruns.)
The suit alleged (i) that Norse knowingly and intentionally made false and deceptive statements to Bradford about the drilling program because Norse was short of funds and needed an infusion of cash if it was to maintain operations as a going concern, (ii) that Norse was a profoundly incompetent operator – that significant cost overruns occurred because Norse utilized incorrect equipment and untrained crews, and (iii) that a result of “improper training, equipment, and oversight on the part of Norse” the “preventable and unnecessary death of a [gas field] worker” occurred.
Bradford filed its suit in Erie County (NY) State Supreme Court.
(Erie County is in the western part of NY. According to various gasser blogs, because of the history of gas drilling operations in the western part of the state, state Supreme Court judges sitting there are particularly experienced and sophisticated about gas drilling matters.)
The Erie County Supreme Court judge hearing the matter concluded that Bradford was, in fact, likely to be successful on the merits of its claim, and ordered Norse to turn over $7,650,000 to Bradford (to be held in escrow) within two days of the date of the Order.
But Norse did not want to comply with the Judge’s order, and THAT is the primary reason the company filed for bankruptcy: to side step the order of the Erie County Supreme Court that Norse turn over $7,650,000 to Bradford.
[Under federal bankruptcy law, a company or person who files bankruptcy is referred to as a ‘debtor.’ When a debtor commences a bankruptcy filing, a concept called the ‘automatic stay’ goes into effect. The automatic stay essentially halts actions on behalf of creditors to collect debts from the debtor. In this situation, one effect of the automatic stay was to prevent Bradford from enforcing the judge’s Order that Norse turn over $7,650,000 to Bradford.]
Many readers of this piece will recall that in September 2011 a company named Anschutz Exploration filed suit against the Town of Dryden (NY), alleging that Dryden’s protective law prohibiting certain gas drilling-related activities was invalid because the legal authority of towns to pass such a law was supposedly preempted or taken away by the state. During the pendency of that case, representatives of Anschutz boldly proclaimed that Anschutz would appeal if it lost at the trial court level.
Anschutz did lose, but they did not appeal. Instead, Anschutz apparently sold or transferred at least one or more of its Dryden leases to Norse, and Norse then stepped into Anschutz’ shoes to prosecute the appeal. The appeal was heard before the Third Judicial Department of the Appellate Division, and in May of this year that court ruled unanimously against Norse and in favor of the town, unequivocally holding that New York municipalities wishing to do so DO have the legal authority to pass local land use laws to prohibit gas drilling activities within their municipal borders.
(In NYS civil matters, the Appellate Division is the first level appellate court; the next level of appellate review is the Court of Appeals, which is the highest court in the state.)
Prior to having its bankruptcy case converted to a Chapter 7 liquidation, the Court of Appeals ruled that it would hear Norse’s appeal of the Third Department decision. Because of that, a number of people have written to us asking ‘What happens to the appeal in the Dryden matter, now that Norse is no longer a going concern?’
The answer is that it depends.
The leases obtained by Norse from Anschutz (for approximately 75 acres) are assets (that is, property) of the Norse bankruptcy ‘estate’, and are technically owned by the bankruptcy trustee. The Chapter 7 liquidation process envisions that the bankruptcy Trustee will cause the assets of the estate to be sold to the highest bidder, and the proceeds apportioned among the debtor’s creditors according to their respective priority.
Sometimes assets of a liquidating debtor are abandoned by the Trustee (if a buyer can’t be found), but presumably someone or some group will attempt to purchase Norse’s interest in the former Anschutz lease(s).
If a third party purchases the leases, and depending upon whether the purchased leases are by their terms even still in effect, the purchaser would then be free to ask the Court of Appeals to allow the purchaser to step into Norse’s shoes for purposes of prosecuting an appeal of the Third Judicial Department’s unanimous decision against Norse.
We spoke with the Clerk’s office of the Court of Appeals and were told that the Clerk will be sending out an inquiry to both Norse and the Town of Dryden on the impact they see the Chapter 7 bankruptcy will have on the pending case. The Court of Appeals will then consider the responses, and determine whether or not the Norse/Dryden appeal will continue.
The Cooperstown Holstein v Middlefield appeal will continue, no matter what happens with the Dryden case. The Court of Appeals will, in any event, reach a decision on the home rule issue.
Posted on October 23, 2013
by David Slottje