In the oil patch, an energy producer in Oklahoma cannot glom unclaimed royalties under a chapter 11 plan, even if the state or owners of unclaimed royalties don’t lay claim before confirmation.
The issue arose following confirmation of a chapter 11 plan by Linn Operating LLC.
An oil and gas producer, the debtor reported to the State of Oklahoma before confirmation that it was holding almost $1 million in royalties unclaimed by royalty owners. The state filed a claim for the unclaimed royalties but did not vote on the debtor’s reorganization plan. After confirmation, the debtor objected to the state’s claim.
The plan provided that holders of unclaimed royalties would have claims to be discharged on confirmation. The plan also vested property in the reorganized debtor.
After confirmation, the state initiated an adversary proceeding to obtain the unclaimed royalties. The bankruptcy court granted the debtor’s motion to dismiss, ruling that the suit was a collateral attack on the plan that barred the claims and gave the funds to the debtor.
In an eight-page opinion on March 29, District Judge Kenneth M. Hoyt of Houston reversed, ruling that the debtor held the royalties as trustee under state law, meaning that the unclaimed funds never became property of the bankrupt estate.
The result stemmed from Oklahoma oil and gas law, which provides, among other things, that unclaimed royalties are “regarded as separate and distinct from all other funds.” The statute also says that anyone in possession of unclaimed royalties “shall hold [the funds] for the benefit of the owners legally entitled thereto.”
Further, the statute requires paying unclaimed property to the state Treasurer, who then holds the funds in escrow for persons “entitled to the receipt of such monies.”
Based on state law, Judge Hoyt held that the unclaimed royalties were “not subject to adjudication by the bankruptcy court as part of the debtor(s) bankruptcy estate and, therefore not subject to the debtor(s) confirmation plan.” [Sic]
Because the money never became property of the estate, Judge Hoyt held that United
Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), was inapplicable.
In Espinosa, Judge Hoyt said, the student loan lender was a “true” creditor. The state, however, “is not a creditor,” he said. Furthermore, the fact that the state filed a claim for unclaimed property did not make it a creditor, he said.
There is no conflict with Espinosa, according to Judge Hoyt, because the bankruptcy court was “without authority to declare unclaimed property [to be] property of a debtor’s estate.”
Judge Hoyt rejected the idea that the state’s suit was a collateral attack on the plan. He said that a seemingly contrary opinion from a bankruptcy court in New York was “off the rails.”
Judge Hoyt ended his opinion by saying that the debtor’s right to hold the funds ends when the state “notifies the debtor of its statutory rights to unclaimed property.” Therefore, he said, “property held by the debtor for the working interest owners . . . is not property of the debtor’s estate.”
Judge Hoyt’s decision raises difficult questions about how and when state law can take property out of an estate and whether creditors can ignore a plan and subsequent confirmation. In that regard, his decision is akin to Title Max v. Wilber (In re Wilber), 876 F.3d 1302 (11th Cir. Dec. 11, 2017), rehearing en banc denied Feb. 14, 2018, where the Eleventh Circuit held that a confirmed plan did not bind the creditor because the lender had previously filed a motion to declare that a car was no longer estate property. To read ABI’s discussion of Wilber, click here.
A professor should write a law review article synthesizing the cases, saying which are wrong and which are right, and laying out principles to guide courts in the future, because the concepts of property of the estate and finality of judgments are in conflict. In practice, Espinosa seems to have done little to resolve the issue.