Failure to Appeal Confirmation Bars Claims to Estate Property, Fifth Circuit Holds

Without citing the Supreme Court’s Espinosa decision, the Fifth Circuit ruled that the State of Oklahoma could not collaterally attack a confirmation order by contending that unclaimed property belonged to the state, not to the debtor.

In Espinosa, the chapter 13 debtor confirmed a plan that discharged student loans, in violation of the debtor’s obligation to file an adversary proceeding and obtain a declaration that the student loans were dischargeable under Section 523(a)(8). Although the plan violated Section 523(a)(8), the Supreme Court ruled that the student loans were nevertheless discharged. United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010).

In some respects, the case in the Fifth Circuit was easier. In chapter 11, an oil and gas producer reported to Oklahoma after filing that it was holding almost $1 million in unclaimed royalties. The debtor made a similar report to Texas about $1.5 million in unclaimed royalties. In contrast with what it would have done outside of bankruptcy, the debtor did not turn the unclaimed property over to the states.

Oklahoma filed an unsecured proof of claim for the $1 million.

Texas filed an adversary proceeding before bankruptcy, demanding that the debtor turn the $1.5 million over to the state. The confirmation order carved out the dispute with Texas, allowing Texas to pursue its claim for the $1.5 million after confirmation.

Oklahoma, by contrast, did nothing before confirmation aside from filing the proof of claim. It did not object to the plan, which became final. Two months after confirmation, the debtor objected to Oklahoma’s claim. Oklahoma then filed an adversary proceeding contending that the $1 million was not estate property and that the debtor was obliged to turn the $1 million over to the state.

Chief Bankruptcy Judge David R. Jones of Houston granted the debtor’s motion to dismiss the adversary proceeding, saying that Oklahoma could not collaterally attack the plan and confirmation order.

Oklahoma appealed and won in district court, where the judge believed that the unclaimed funds never became the debtor’s property.

Circuit Judge Edith H. Jones reversed the district in an eight-page opinion on June 19, reinstating the decision by Bankruptcy Judge Jones dismissing the state’s complaint.

The debtor made four arguments. Circuit Judge Jones said it was necessary only to rule that the state was barred from collaterally attacking the confirmation order. She described the chapter 11 plan as “clearly” stating “that unclaimed mineral royalties would be treated as unsecured debt, that upon the Plan’s approval all remaining property would vest in [the debtor], and that no parties could bring further claims against” the debtor after confirmation.

Judge Jones began with Travelers Indemnity Co. v. Bailey, 557 U.S. 137 (2009), where the Supreme Court held that res judicata applies whether or not the bankruptcy court’s final orders were proper exercises of jurisdiction. Travelers went on to say that a creditor could not collaterally attack a plan when it had been given “a fair chance” to challenge the provisions during the case.

Because the plan clearly gave the unclaimed funds to the debtor and Oklahoma had not contested the plan, Judge Jones said that the state’s “challenge is too late now.” She therefore reinstated the dismissal by Bankruptcy Judge Jones.

In a footnote at the conclusion of the opinion, Circuit Judge Jones was careful to say the appeals court was not passing on the validity of the plan provision that conveyed trust property to the debtor’s estate.

Observations

The case in the Fifth Circuit was not about jurisdiction. The bankruptcy court clearly had personal, subject matter and in rem jurisdiction because the debtor was holding the disputed funds, albeit perhaps as a trustee. In substance, plan confirmation established as to Oklahoma (but not as to Texas) that the funds were estate property, not trust property. The implied decision may have been wrong, but it was not appealed, and there was subject matter jurisdiction.

The judges Jones thus properly analyzed the case in terms of the preclusive effect of confirmation, not jurisdiction.