On October 30, 2018, the Rockies Region 2006 Limited Partnership (“RR2006”) and Rockies Region 2007 Limited Partnership (“RR2007”) (together the “Partnerships”) filed Chapter 11 bankruptcy petitions with the bankruptcy court in Dallas Texas which are jointly administered under Bankruptcy Court Case No. 18-33513.
Prior to that, on December 20, 2017, four limited partners of the RR2006 and RR2007 Partnerships filed a Complaint against PDC and certain PDC officers and directors on behalf of the Partnerships in the Federal District Court in Denver entitled Dufresne et al. v. PDC et al., Case No. 17-cv-03079 (“Dufresne Action”). An amended complaint was filed in the Dufresne Action on July 10, 2018, adding class action causes of action on behalf of all the limited partners individually, and one additional named plaintiff was added. The most recent complaint filed in the Dufresne Action can be found here.
The limited partners who are suing PDC on behalf of the RR2006 and RR2007 Partnerships and the individual limited partners of those Partnerships are Robert Dufresne, Jeff Schulein, Bill McDonald, Ron Glickman, and Mike Gaffey. Each of these gentlemen are experienced businessmen who have invested in oil and gas partnerships in the past. The law firm of Foley Bezek Behle & Curtis LLP (“FBBC”) is representing Messrs. Dufresne, Schulein, McDonald, Glickman, and Gaffey, collectively referred to as the “Plaintiffs” in the Dufresne Action against PDC. Because the District Court in the Dufresne Action has not yet certified the case as a class action, FBBC currently only represents the five named Plaintiffs
In the Dufresne Action, FBBC on behalf of its clients has alleged that PDC, as managing general partner, breached both the Partnership Agreements for the RR2006 and RR2007 Partnerships and its fiduciary duties to both Partnerships and the limited partners.
In 2014, FBBC and its co-counsel obtained a $37,500,000 cash settlement from PDC which, after payment of attorneys’ fees and costs approved by the Court, was paid to the limited partners of PDC’s 2002, 2003, 2004, and 2005 partnerships in a class action entitled Schulein v. Petroleum Development Corp., filed in the United States District Court for the Central District of California (Case No. 8:11-cv-01891-AG-AN) (“Schulein Action”.) Jeff Schulein and William McDonald, who are serving as plaintiffs in the Dufresne Action for the benefit of the Partnerships and the limited partners, were two of the named plaintiffs in the Schulein Action against PDC.
At issue in the Schulein Action was PDC’s purchase from the limited partners units of interest of the 2002, 2003, 2004 and 2005 partnerships through merger transactions. In the Schulein Action, FBBC alleged that PDC wrongfully obtained the limited partners’ consent to the mergers when it represented to the limited partners that those partnerships only owned the rights to specific vertical wells, known as a “wellbore” interest, and that those vertical wells were no longer economical to operate. FBBC alleged in the Schulein Action that this was a false representation by PDC because those partnerships owned mineral rights based on leases on valuable acreage in Colorado’s Wattenberg Field. In sum, FBBC alleged in the Schulein Action that PDC grossly undervalued the assets of the 2002, 2003, 2004, and 2005 partnerships which allowed PDC to pay the limited partners a fraction of what their interests in those partnerships were worth. PDC initially paid the limited partners of the 2002, 2003, 2004, and 2005 partnerships approximately $102 Million. The $37.5 Million settlement in the Schulein Action was in addition to the $102 Million PDC initially paid to the limited partners of those partnerships.
In the Dufresne Action, as to the RR2006 and RR2007 Partnerships, PDC is again contending that these Partnerships own only “wellbore” interests in vertical wells and not mineral rights in leases in the Wattenberg Field in Colorado purchased with Partnership funds. In the Dufresne Action, FBBC has alleged that PDC violated its fiduciary and contractual obligations to the RR2006 and RR2007 Partnerships and the individual limited partners of those Partnerships through its mismanagement and outright misappropriation of the Partnerships’ assets. In fact, PDC has refused to take any steps to permit the Partnerships to realize the value of their assets by recompleting their existing vertical wells and has been drilling horizontal wells through the Partnerships’ oil and gas leases for the past several years, extracting oil and gas from those horizontal wells without paying anything to the limited partners of the Partnerships. The Dufresne Action, filed on behalf of the limited partners of the Partnerships, seeks to recover monetary damages on behalf of the RR2006 and RR2007 Partnerships and the limited partners of those two Partnerships for the value of the oil and gas extracted by PDC from the Partnerships’ leasehold acreage in the Wattenberg Field. However, because of the bankruptcy filings in Dallas Texas, the Dufresne Action is currently stayed.
On behalf of our clients, FBBC has hired bankruptcy counsel in Dallas and our clients are participating in the bankruptcy cases for the RR2006 and RR2007 Partnerships in Dallas to protect the interests of both the Partnerships and the limited partners. We have provided information to the bankruptcy court so that it is aware of the true value of the Partnerships’ assets and the horizontal wells that PDC has drilled (and continues to drill) through the Partnerships’ leasehold acreage in the Wattenberg Field.
To show the bankruptcy court the value of the RR2006 and RR2007 Partnerships leasehold acreage in the Wattenberg Field, FBBC has retained Gustavson Associates (“Gustavson”) as an expert witness to prepare a valuation report for the RR2006 and RR2007 Partnerships for their combined assets. Gustavson is the same firm which served as an expert witness in the Schulein Action. Gustavson’s amended preliminary expert witness report is that the combined value of the limited partners’ interest in the RR2006 and RR2007 Partnerships is approximately $89.16 to $105.61 Million.
PDC’s strategy of getting its drilling partnerships into bankruptcy to obtain partnership assets at a low value is not new. In 2013, PDC hired an individual named Karen Nicolaou to act as the “Responsible Party” to determine what was in the best interests of 12 limited partnerships which were collectively referred to as the Eastern Partnerships. Ms. Nicolaou was paid by PDC to act as the Responsible Party for the Eastern Partnerships. PDC hired Ms. Nicolaou to determine what was in the best interests of the Eastern Partnerships because PDC had a conflict of interest in that PDC wanted to purchase all the oil and gas interests of those Eastern Partnerships but could not do so directly because it had a fiduciary duty to the Eastern Partnerships and the limited partners of those partnerships as the managing general partner.
Ms. Nicolaou filed bankruptcy petitions for the Eastern Partnerships with the bankruptcy court in Dallas, Texas, and sought to sell the oil and gas assets of the 12 partnerships at a bankruptcy court auction sale. However, whoever purchased the oil and gas interests of the Eastern Partnerships at the auction had to take those assets subject to each of the Eastern Partnerships’ existing Drilling & Operating Agreements with PDC. As such, it was unlikely that any third party would bid for the Eastern Partnerships assets because PDC would continue to control the assets of the Eastern Partnerships based on the Drilling & Operating Agreements.
The bankruptcy court in the Eastern Partnerships bankruptcy appointed a Committee of Equity Holders—made up of limited partners—which undertook an investigation of the circumstances surrounding the bankruptcy filing of the Eastern Partnerships, PDC’s pre-petition actions as the Partnerships’ general partner and the independence of Ms. Nicolaou in her capacity as their “Responsible Party.” Through this investigation the Committee of Equity Holders concluded that the Eastern Partnerships and their limited partners held viable claims against PDC for breach of the partnership agreements and for breach of fiduciary duty, and that Ms. Nicolaou had a conflict of interest. Based on these findings, the Committee objected to Ms. Nicolaou’s proposed Chapter 11 plan for the Partnerships and filed a motion seeking the appointment of a Chapter 11 trustee alleging that Ms. Nicolaou had conflicts of interest and was not acting in a manner which was in the best interests of the limited partners of the Eastern Partnerships. The Committee further demanded that the Eastern Partnerships prosecute the claims against PDC. Based on the Committee’s demand, the Eastern Partnerships filed an action asserting that PDC had breached the partnership agreements and its fiduciary duties to the partnerships by, among other things, failing to transfer to the Partnerships oil and gas leases that PDC had acquired on their behalf (the “Eastern Partnership Claims”).
Ultimately, Ms. Nicolaou, PDC, and the Committee of Equity Holders participated in a voluntary settlement conference known as a “mediation” administered by a retired judge. At that mediation, the participants agreed to a Joint Plan to be filed with the bankruptcy court whereby PDC paid $6 Million to the Eastern Partnerships’ bankruptcy estates in settlement of the Eastern Partnership Claims and an additional $1 Million for distribution to the Partnership limited partners who agreed to the third party releases as contained in the Joint Plan of any direct claims such limited partners held against PDC for breach its fiduciary duties to the limited partners of the Eastern Partnerships.
On May 2, 2018, PDC hired the same Karen Nicolaou to serve as the Responsible Party for the RR2006 and RR2007 Partnerships. On October 30, 2018, Ms. Nicolaou signed and directed the filing of bankruptcy petitions for the RR2007 and RR2007 Partnerships in Dallas, Texas. On the same day, Ms. Nicolaou, as the purported “independent fiduciary” for the RR2006 and RR2007 Partnerships, entered into a Term Sheet with PDC. In the Term Sheet, without consulting with any of the limited partners of the RR2006 and RR2007 Partnerships, Ms. Nicolaou agreed to sell RR2006’s oil and gas assets to PDC for $304,000, and RR2007’s oil and gas assets to PDC for $458,000. These are the same oil and gas assets that Gustavson opines that the limited partners’ interests are worth collectively $89.16 to $105.61 Million. The Term Sheet also provided that PDC would pay limited partners of the RR2006 Partnership who agreed to sign releases of all claims against PDC, Ms. Nicolaou, and their respective attorneys an additional $2,360,000, and to pay limited partners of the RR2007 Partnership who agreed to sign a similar release an additional $2,920,000.
On behalf of our clients who are limited partners of the RR2006 and RR2007 Partnerships, FBBC and our bankruptcy counsel filed a written objection with the bankruptcy court to Ms. Nicolaou’s application to be appointed the Responsible Party for the RR2006 and RR2007 Partnerships. We also filed a motion with the bankruptcy court to have the bankruptcy petitions filed by Ms. Nicolaou for the RR2006 and RR2007 Partnerships dismissed.
One of the arguments we have made in the bankruptcy court in our motion to dismiss the bankruptcy petitions is that the RR2006 and RR2007 Partnership Agreements state, at Sections 9.02 and 9.03, that only PDC or a “Liquidator” elected by a majority of the limited partners can liquidate and wind up the Partnerships, and Sections 6.03(b)(1) of the Partnership Agreements state that PDC cannot sell “all or substantially all” of the assets of the Partnerships without having first received the written consent of the holders of the majority of the outstanding units held by limited partners of those Partnerships. It will be important for each limited partner of the RR2006 and RR2007 Partnerships to inform the bankruptcy court at the appropriate time whether he or she approves or objects to Ms. Nicolaou’s Plan selling the assets of the RR2006 and RR2007 Partnerships to PDC without first obtaining a vote of a majority of the limited partners.
After Messrs. Dufresne, Schulein, McDonald, Glickman and Gaffey filed objections to Ms. Nicolaou’s appointment as the purported Responsible Party for the RR2006 and RR2007 Partnerships, and the motion to dismiss the bankruptcy petitions, Ms. Nicolaou and PDC agreed to participate in a voluntary mediation with limited partners of the RR2006 and RR2007 Partnerships represented by FBBC. That mediation to be administered by a retired bankruptcy court judge will take place in Dallas on February 27th and 28th 2019. At the mediation on February 27th and 28th, Messrs. Dufresne, Schulein, McDonald, Glickman, and Gaffey will attempt to negotiate a settlement on behalf of all the limited partners of the RR2006 and RR2007 Partnerships. If we are successful in negotiating a settlement at the mediation, we will ask the Federal District Court in Denver to approve the settlement on behalf of all limited partners of the RR2006 and RR2007 Partnerships. If the District Court in Dufresne Action approves the settlement, all limited partners of the RR2006 and RR2007 Partnerships will be offered the opportunity to participate in a class action settlement in the Dufresne Action administered by the Federal District Court in Denver. Any limited partners of the RR2006 or RR2007 Partnerships who do not want to participate in a class action settlement will have the right to opt-out of any settlement with PDC in the Dufresne Action.