Mon 09/20/2021 18:15 PM
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This afternoon Judge Christopher Sontchi dismissed an adversary complaint for unpaid royalties brought by oil and gas lessors in the Extraction Oil & Gas cases, finding that Colorado law and its “administrative exhaustion” requirements apply but have not been satisfied by the claimants. Because the matter had not been raised and adjudicated via the Colorado administrative process, Judge Sontchi concluded, the bankruptcy court lacked jurisdiction.

The decision is at odds with prior rulings sidestepping state law administrative exhaustion requirements to resolve disputes that are central to a bankruptcy case. It may also provide additional leverage to oil and gas debtors, which routinely face disputes with royalty claimants during bankruptcy.

The Colorado resident plaintiffs alleged over $2 million in underpayments for Extraction’s sale of oil and gas from the leased properties at “below market prices.” However, Colorado law provides that the Colorado Oil and Gas Conservation Commission has jurisdiction to determine “[t]he amount of proceeds plus interest, if any, due a payee by a payer” for the sale of oil and gas produced at Colorado wells. The statute precludes the Commission from exercising jurisdiction over a “bona fide contract interpretation dispute,” but whether such a dispute exists is to be determined by the Commission. Further, under Colorado law, a party must pursue available administrative remedies before filing suit in court, subject to exceptions not addressed by the court.

The royalty claimants argued that the Colorado administrative procedure does not apply because only the bankruptcy court could adjudicate the dispute. Specifically, the claimants assert that the suit requires a determination of what is and what is not estate property.

Judge Sontchi disagrees, finding that the complaint largely implicates Colorado state law rights and that the mere filing of a bankruptcy “does not automatically bring those claims within the subject matter jurisdiction of this Court.”

The judge acknowledges that Count Two of the complaint, which seeks declaratory judgment that any underpaid royalties are not property of the estate, may arguably seek relief that is available only in the bankruptcy court. Judge Sontchi nevertheless distinguishes cases where bankruptcy courts overrode state law exhaustion requirements to address turnover and other claims arising under the Bankruptcy Code and finds that Count Two is seeking an advisory opinion: “The Court does not need to answer the question of whether the purported underpayments are property of the estate without a factual finding that underpaid amounts remain due from Extraction to the Plaintiffs.”

Judge Sontchi thus concludes that the complaint “does not fall within the exclusive jurisdiction of this Court” but instead “raises state law claims subject to the same procedures that apply to traditional litigation.” “The Court does not have subject matter over the Claims if exhaustion requirements preclude exercising jurisdiction,” the opinion holds.

Turning to whether, under Colorado law and in light of the nature of the parties’ dispute, the exhaustion requirements apply, the judge sides with the debtors’ position that the Commission should determine whether it has jurisdiction. “The Plaintiffs ask this Court to determine the scope of the Commission’s authority under Colorado law instead of allowing the Commission to interpret its own authorizing statute,” Judge Sontchi reasons, but the Commission “can and should determine whether it has the authority to resolve the Claims.”

For similar reasons Judge Sotchi concludes that Commission review would not be “futile” and that the debtors’ plan of reorganization does not affect the Commission’s jurisdiction.
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