Court Opinion

ID: 2753150
Source: CourtListenerOpinion
Date Created: 2014-11-19 19:00:47.535369+00
Date Added: 2024-06-11T10:18:56.849649
License: Public Domain

Case: 13-10926             Document: 00512841996      Page: 1     Date Filed: 11/19/2014

             IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT

                                          No. 13-10926                        United States Court of Appeals
                                                                                       Fifth Circuit

                                                                                     FILED
In the Matter of: VALLECITO GAS, L.L.C.,                                     November 19, 2014
                                                                                Lyle W. Cayce
                  Debtor                                                             Clerk

------------------------------

HARVEY LEON MORTON, Trustee,

                  Appellant

v.

JOHN YONKERS; JUDY YONKERS; S. FRANK CULBERSON; TOM
KIEVIT; KYLE KIEVIT; KERRY BURLESON; DAVID ESPOSITO;
KATHLEEN ESPOSITO; STEPHEN MURDOCH; J.L. BRADSHAW TRUST;
LYNETTE ESCH; ESCH FAMILY TRUST; ROLAND MURPHY; LEWIS P.
LANE; LYNN C. LANE; GRAHAM HADDOCK; R. DAVE ADAMS; CONNIE
ADAMS; RAY KOREN; JUDITH ARMOGIDA; THE ROBERT E. AND
ROSALIE T. DETTLE LIVING TRUST; DANIEL MANCHA; THE
DICKINSON FAMILY REVOCABLE LIVING TRUST; JOHN WOLZ;
MILTON DIGREGORIO; BEVERLY DIGREGORIO; ET AL,

                  Appellees

                       Appeal from the United States District Court
                            for the Northern District of Texas

Before JOLLY and JONES, Circuit Judges, and AFRICK*, District Judge.

        *   District Judge of the Eastern District of Louisiana, sitting by designation.
    Case: 13-10926      Document: 00512841996       Page: 2    Date Filed: 11/19/2014

                                    No. 13-10926
E. GRADY JOLLY, Circuit Judge:
      Appellant Harvey Leon Morton (“Morton”), the trustee of the Vallecito
Gas, L.L.C. (“Vallecito”) bankruptcy estate, appeals the district court’s
judgment affirming the bankruptcy court’s judgment in favor of various owners
of overriding royalty interests (collectively, the “Appellees”) to a lease that
Morton seeks to sell on behalf of the bankruptcy estate. For the following
reasons, we AFFIRM the judgment of the district court.
                                          I.
      In March 2006, Vallecito purchased a gas lease called the “Hogback
Lease,” located on Navajo Nation land in New Mexico, from Tiffany Gas Co.,
LLC. Vallecito subsequently made various assignments of the Hogback Lease.
Issues stemming from those assignments form the basis of this appeal.
Vallecito’s assignments of portions of the Hogback Lease to John Burle, and to
a number of other parties, led to litigation (the “Burle litigation”) in New
Mexico in September 2006 over the title to the Hogback Lease. The plaintiffs
in the Burle litigation filed a notice of lis pendens in San Juan County, New
Mexico.     The parties purported to settle the case in November 2006, but
Michael Briggs, one of the defendants, did not perform under the settlement
agreement. The case was resolved on September 28, 2007, when the court held
that the settlement agreement was enforceable, and the decision was never
appealed.
      Vallecito recorded an assignment of the Hogback Lease to Briggs-
Cockerham, LLC, on April 27, 2007, after the Burle litigation had purportedly
settled, but before the settlement had been enforced. 1 Between June 2007 and
January 2009, the Appellees purchased the overriding royalty interests at

      1  The assignment was apparently executed on December 8, 2006, and states that it
was “effective” at 7:00 AM on May 21, 2006.
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                                 No. 13-10926
issue in this appeal from Briggs-Cockerham. No approval of the transfers was
sought from the Navajo Nation.
      On November 14, 2007, Vallecito filed for Chapter 11 bankruptcy.
Morton was appointed as trustee of the Vallecito estate on January 14, 2008.
The Hogback Lease is apparently Vallecito’s only significant asset, and Morton
has sought to sell the Hogback Lease, subject only to the Navajo Nation’s
royalty, to Vision Energy, LLC, for the benefit of Vallecito’s creditors. Under
the bankruptcy plan, Briggs-Cockerham and Briggs apparently disclaimed any
interest in the Hogback Lease. Morton did not consult the San Juan County,
New Mexico, records, however, and he did not learn that the Appellees had
overriding royalty interests, which they had purchased from Briggs-
Cockerham, until November 2009.
      Morton filed an adversary proceeding against the Appellees in March
2010, seeking to void the overriding royalty interests on grounds the Navajo
Nation had not approved the transfer of those interests, as required by the
Navajo Nation Code (the “Navajo Code”). The bankruptcy court concluded that
Morton could not raise the lack of Navajo approval, and it also concluded that
the Appellees, who purchased overriding royalty interests after the bankruptcy
filing, were entitled to a credit against the estate for the amount they paid
because they had purchased the assignments in good faith and without
knowledge of the bankruptcy filing. Morton appealed to the district court,
which affirmed the bankruptcy court’s judgment, and he now appeals to this
Court.   In this appeal, he argues that he can void the overriding royalty
interests based on lack of Navajo Nation approval and that the filing of a lis
pendens in the Burle litigation either provided constructive notice of the
bankruptcy filing or otherwise binds the Appellees to the bankruptcy plan.

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                                  No. 13-10926
                                      II.
      “We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo.” Gamble v. Gamble (In re Gamble), 143 F.3d 223,
225 (5th Cir. 1998). We review evidentiary rulings, however, only for an abuse
of discretion. In re Repine, 536 F.3d 512, 518 (5th Cir. 2008). With these
standards in mind, we turn to the issues in this case.
                                       A.
      Morton’s primary contention on appeal is that he can raise the lack of
Navajo Nation approval to void the Appellees’ overriding royalty interests. The
Navajo Code provides:
      No overriding royalty may be created by any transfer authorized
      hereby without the written consent of the Minerals Department of
      the Navajo Nation nor shall such overriding royalty be approved if
      it is determined by the Minerals Department that it will have such
      an adverse economic impact that it may prevent full recovery of
      the mineral reserves.
18 N.N.C. § 605(A)(6).    It is undisputed that the Appellees never sought
approval from the Navajo Nation for the transfers of the overriding royalties.
Moreover, Morton submitted into evidence a letter submitted by an attorney
in the Navajo Nation Department of Justice, stating that any “purported
overriding royalty interest is invalid under the applicable provisions of the
Navajo Nation Code and is completely void.” The bankruptcy court struck the
letter as inadmissible hearsay.
                                       1.
      First, we conclude that the bankruptcy court did not abuse its discretion
in excluding the letter. Morton does not contest that the letter was hearsay
but instead argues that it was admissible under exceptions in the Federal
Rules of Evidence for public records under Rule 803(8), statements affecting a
property interest under Rule 803(15), or the general hearsay exception found

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                                   No. 13-10926
in Rule 807. Trustworthiness is the linchpin of these hearsay exceptions. See
United States v. Williams, 661 F.2d 528, 531 (5th Cir. 1981); see also Fed. R.
Evid. 807(a)(1). We are persuaded by the district court’s thorough explanation
that the letter is untrustworthy, in large part because it was drafted by
Morton’s counsel and was prepared after Morton’s counsel provided the Navajo
Nation official with only one side of the story.
                                          2.
      Next, we turn to Morton’s primary contention, namely whether Morton
may nonetheless void the overriding royalty interests based solely on the fact
that the Navajo Nation has not approved them. The district court treated the
issue as moot after it excluded the letter. Although we do not find that the
exclusion of the letter moots the issue, we conclude that the bankruptcy court
properly held that Morton could not raise the lack of approval.
                                          a.
      We turn first to those cases interpreting contractual provisions that are
similar to the Navajo Code provision here. A New Mexico appellate court
interpreted a contractual provision that required approval of an assignment by
the Bureau of Indian Affairs (the “Bureau”). Wood v. Cunningham, 147 P.3d
1132 (N.M. Ct. App. 2006). In Wood, the seller of rights to certain oil and gas
leases on Navajo Nation land sought to rescind an agreement with the buyer
of those leases because the buyer had not obtained the Bureau’s approval. Id.
at 1133. The court concluded that the approval provision was not a condition
precedent to contract formation because “[a]n offer was made to assign the oil
and gas leases and the offer was accepted. The contract was thereby formed
and became binding.” Id. at 1135. Additionally, the court noted that the seller
suffered no injury from the buyer’s failure to obtain Bureau approval. Id. The
court emphasized that “this is not a case in which the buyer is seeking
rescission because of a failure to receive title to the oil and gas leases as a result
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                                 No. 13-10926
of the delay from the [Bureau].” Id. at 1136. Thus, the court recognized that
a party protected by a provision is the appropriate party to invoke that
provision in litigation.
      The Navajo Code provision is analogous to the contractual provision in
Wood in several respects. As in Wood, it appears that Briggs-Cockerham and
the Appellees entered into valid contracts for the sale and purchase of the
overriding royalty interests.     Although Morton points out that Briggs
apparently sold these interests fraudulently, the Appellees had no knowledge
of the fraud. Instead, the Appellees paid Briggs-Cockerham consideration, and
Briggs-Cockerham transferred the necessary documents. Like the contract
provision in Wood, the Navajo Code provision does not serve to protect Morton’s
interests. The Navajo Code contemplates approval as a means to protect the
Navajo Nation from exploitation. The Navajo Code, for example, prohibits
approval of an assignment “if the Minerals Department determines that it is
not in the best economic interest of the Navajo Nation.” 18 N.N.C. § 605(B).
Thus, the Navajo Code protects the Navajo Nation, and there is no indication
that Morton falls within the scope of its protection.
      Morton attempts to distinguish Wood because that case involved two
parties to a contract. According to Morton, he can raise the Appellees’ non-
compliance with the Navajo Code because he is not a party to the overriding
royalty transactions. As the bankruptcy court correctly noted, “it would be
anomalous to conclude that non-protected third parties, who are strangers to
the agreement, have greater rights than the parties to the agreement
themselves.” In re Vallecito Gas, LLC, 461 B.R. 358, 383 (Bankr. N.D. Tex.
2011). Although Morton pointed out at oral argument that he is an innocent
party seeking to quiet title, the bankruptcy court pointed out that the
overriding royalty holders are similarly innocent. Id. at 401. We conclude that
the Navajo Code is analogous to the contractual provision in Wood, and we see
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                                       No. 13-10926
no basis to allow a third party like Morton to raise lack of compliance with that
provision to void the overriding royalty interests.
                                              b.
       Next, Morton argues that the Appellees’ analogy to contract provisions
is inapposite because it has raised a Navajo Nation statute, which has the
effect of a state law. He contends that “[s]ection 605 is more akin to a state
licensing or permitting regime than a statute enacted by a guardian
government for the benefit of its ward.” We agree with Morton that this issue
bears similarities to an illegality defense in contract law. Morton has not cited
any authority for his proposition, however, that a third party may assert such
a defense to void a contract between two other parties.
       Generally, only parties to a contract can raise an assertion of illegality.
See In re Peterson’s Estate, 42 N.W.2d 59, 66 n.7 (Minn. 1950) (“Usually the
issue or defense of illegality may be raised only by the parties or those claiming
under them and not by third parties.”). Two cases illustrate this principle.
First, the Alabama Supreme Court held that a licensed real estate broker may
not invalidate a real estate contract that an unlicensed broker made with a
third party on grounds that the unlicensed broker failed to comply with the
licensing statute. Marx v. Lining, 165 So. 207, 210 (Ala. 1935). The court
explained that the licensed broker, “in nowise connected with that contract
[between the unlicensed broker and the seller], and his property rights in no
way affected thereby, cannot plead the invalidity of the contract.” Id. 2 The

       2 At first glance, Morton would appear able to distinguish this case from Marx because
the overriding royalty interests affect the property rights of the bankruptcy estate. The facts
of Marx are actually a useful comparison, though. In Marx, two individuals formed two
separate contracts with the seller, and the licensed realtor sought to void the unlicensed
realtor’s contract. Obviously, the unlicensed broker’s contract affected in some way the
licensed broker’s entitlement to the money under his contract because the seller claimed that
he only owed one of them. Similarly, the overriding royalty interests here affect the
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                                      No. 13-10926
Washington Supreme Court addressed a similar argument in the context of a
statute prohibiting the unauthorized practice of law. See Ferris v. Snively, 19
P.2d 942, 946–47 (Wash. 1933). In Ferris, a lawyer had hired a law clerk to
perform work that included legal services that the law clerk was not licensed
to perform. Id. at 943–45. Thereafter, the lawyer died, and the executrix of
the lawyer’s estate sought to avoid paying compensation to the law clerk for
some of these services on grounds they violated the “licensing” statute, but the
court held that “[w]hile this might have been a good defense if interposed by
the client [the recipient of the unlicensed services], it is not available to this
defendant.” Id. at 946 (emphasis added).
       Morton has not cited any authority to suggest that the Navajo Code
provision should fall outside what we believe to be a well-reasoned general
rule, i.e., that a third party like Morton cannot assert a statute like the Navajo
Code provision to void the overriding royalty interests. Instead, it appears to
us that the Navajo Code provision fits neatly into the framework of Marx and
Ferris. Morton has invoked a statute that is not intended to and does not
protect his interests, in an attempt to void contracts between other parties.
Additionally, we note that Ferris involved an executrix of an estate who, like
Morton, would owe heightened duties to others. Because the Navajo Code
provision does not purport to protect the rights of a bankruptcy trustee like
Morton, we believe that he cannot assert this defense.
       In sum, whether we treat the Navajo Code provision as analogous to a
contractual condition or to state licensing laws, the result is the same. Morton,
a bankruptcy trustee who falls outside the Navajo Code’s protection, cannot

bankruptcy estate, but the bankruptcy estate was in no way involved in the original contract
formation establishing the overriding royalty interests.

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                                No. 13-10926
raise the Navajo Code to void the contracts between the Appellees and Briggs-
Cockerham.
                                      B.
      Finally, Morton raised additional arguments that a lis pendens filing in
the Burle litigation either placed the Appellees on constructive notice of
Vallecito’s bankruptcy or that the Appellees are bound by the bankruptcy plan,
which resolves the title issues to the Hogback Lease that were also at issue in
the Burle litigation. Both the bankruptcy and district courts concluded that
the Burle litigation and the Vallecito bankruptcy proceedings were two
separate actions. Thus, there was nothing in the Burle litigation that would
place the overriding royalty interest holders on notice that Vallecito had
declared bankruptcy, and the New Mexico lis pendens statutes do not bind
these parties to the subsequent litigation surrounding the title to the Hogback
Lease throughout the Vallecito bankruptcy. The district court fully reviewed
the arguments, and we find no error in its conclusions.
                                     III.
      Our review of all the arguments raised by the parties, the evidence in
the record, and the opinions of the bankruptcy and district courts, leads us to
conclude that the judgment of the district court should be AFFIRMED in all
respects.
                                                                   AFFIRMED.

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