Fifth Circuit Upholds Lease Grace Periods During COVID-19 Production Curtailments and Affirms Bankruptcy Court Jurisdiction Over Lease-Termination Disputes
Fifth Circuit affirms that a 40-day cessation of production during the March 2020 COVID-19 oil price collapse did not terminate South Texas mineral leases under their express 120-day grace period, rejecting landowners' trespass and administrative expense claims in EP Energy's Chapter 11 bankruptcy. The panel held the bankruptcy court possessed core jurisdiction under 28 U.S.C. § 157(b)(2)(B) to resolve underlying state-law lease-termination issues as part of the administrative expense determination.
Background
Storey Minerals, a group of South Texas mineral interest owners, challenged EP Energy E&P Company's continued operations on leased acreage following a temporary production shutdown during the March 2020 oil price collapse. The mineral leases at issue contained habendum clauses providing for a 120-day grace period following cessation of production before automatic termination would occur. When EP Energy curtailed production for approximately 40 days in response to market conditions, the mineral owners asserted the leases had terminated and EP Energy's subsequent production constituted trespass.
The dispute arose within EP Energy's pending Chapter 11 bankruptcy proceedings. Storey Minerals filed claims seeking administrative expense priority status, arguing that if the leases had terminated, EP Energy's post-cessation production constituted post-petition trespass entitling them to administrative expense treatment for the value of extracted hydrocarbons.
Jurisdictional Issue
A threshold question concerned whether the bankruptcy court possessed subject matter jurisdiction to adjudicate the state-law lease-termination dispute. Storey Minerals contended the underlying lease-termination question was a non-core proceeding requiring review by the district court. The Fifth Circuit rejected this characterization, holding that resolution of the lease-termination issue was integral to determining whether the mineral owners held valid administrative expense claims. Because administrative expense determinations fall squarely within the bankruptcy court's core jurisdiction under 28 U.S.C. § 157(b)(2)(B), the court concluded the bankruptcy court properly exercised jurisdiction over the entire dispute, including the predicate state-law questions necessary to resolve the administrative expense claim.
Cessation of Production Analysis
On the merits, the Fifth Circuit affirmed that the 40-day production hiatus did not trigger lease termination under the express terms of the habendum clauses. The leases unambiguously provided a 120-day grace period following any cessation of production, during which the lessee could restore production without forfeiting the leasehold estate. Because EP Energy resumed production well within the contractually specified 120-day window, the court held the leases remained in full force and effect throughout the temporary shutdown.
Having determined the leases did not terminate, the court necessarily rejected the derivative trespass and administrative expense claims. Without lease termination, EP Energy's continued operations remained authorized under valid leasehold rights, precluding any basis for trespass liability or administrative expense priority.