No Bankruptcy Jurisdiction for a Settlement that Contradicts a Chapter 11 Plan

Neither the bankruptcy court nor the district court has jurisdiction under Section 1334 after confirmation to approve the debtor’s voluntary agreement to make a larger payment to creditors whose claims were discharged by the chapter 11 plan, according to the Fifth Circuit.

The facts laid out in detail by Circuit Judge Edith H. Jones were complex. Simplified, here’s what happened.

The debtor was an oil and gas producer with thousands of leases in Pennsylvania. Before bankruptcy, there were two class action suits filed on behalf of lessors contending that the debtor underpaid royalties.

Also before bankruptcy, the debtor and the class plaintiffs agreed to settlements. One would pay $17 million to the class, and the other would pay $7.75 million. Neither was approved by the court before the debtor filed a chapter 11 petition.

For reasons Judge Jones did not explain in her June 8 opinion, only a handful of lessors filed claims in the chapter 11 case. In fact, the class plaintiffs didn’t even file claims on behalf of the classes.

The lessors’ claims were treated under the plan as general unsecured claims destined for a recovery of only 0.1%. The plan was confirmed and became effective without appeal. Naturally, the plan said that the lessors’ pre-petition monetary claims were discharged and that claims would be disallowed if they had not been filed by the bar date.

On the other hand, the plan said that leases would pass through bankruptcy unaffected, except to the extent that pre-bankruptcy monetary claims were discharged.

After the plan became effective, the debtor made new settlements with both class plaintiffs covering 23,000 lessors. For their prepetition claims, the debtor offered to pay more than $6 million to the lessors in both classes. Class members would not be allowed to opt out, and the settlement would modify their royalty arrangements.

The opinion by Judge Jones does not explain why the debtor made the offer to settle after consummation of the plan.

Claiming there was “core” jurisdiction under 28 U.S.C. § 1334(a), the debtor sought preliminary approval of the settlements in the bankruptcy court.

Lessors who had filed claims in the chapter 11 case objected to the settlement. The bankruptcy court overruled the objection, preliminarily approved the settlements, preliminarily certified the classes and approved the form of notices. However, the bankruptcy court decided that an Article III district court’s approval was required for final approval of the settlements and class certifications.

The district court gave final approval for the settlements and class certifications. However, the district court differed with the bankruptcy court in one respect: The district court believed there was “related to” jurisdiction, but no “core” jurisdiction under Section 1334.

Lessors who had filed claims in the chapter 11 case filed an appeal to the Fifth Circuit.

Reversal by the Circuit Court

Judge Jones vacated the judgments of the two lower courts and remanded with instructions to dismiss for lack of jurisdiction.

On the merits of the lower courts’ bankruptcy jurisdiction, Judge Jones began by saying that jurisdiction after confirmation is limited to matters related to implementing and executing the chapter 11 plan. Core jurisdiction, she said, may be employed to interpret the plan.

First addressing core jurisdiction, Judge Jones noted that all lessors’ prepetition monetary claims had been discharged and that their leases passed through bankruptcy unaltered. She examined whether settlements approval fell under the “core” rubric of adjudicating claims.

Judge Jones said that the “lower courts were not empowered to revive never-filed, discharged claims as if they were engaged in a ‘core’ claims adjudication proceeding.” Moreover, “treating the class actions as if there had been timely filed proofs of claim disregards the reorganization process.”

Noting that the plan would have paid 0.1% while the post-bankruptcy settlements were worth more than 20%, Judge Jones said that the debtor’s “unorthodox approach to revising its relationships with thousands of Pennsylvania royalty owners thwarted the transparency of the reorganization process.”

Finding no “core” jurisdiction, Judge Jones turned to the question of “related to” jurisdiction which, she said, was a “closer question.”

Given the discharge of claims, Judge Jones said that the class members had “no recourse in bankruptcy court for their prepetition monetary claims.” The settlements were not related to the bankruptcy because the settlements modified leases that were left intact by the plan.

More bluntly, Judge Jones said that the “settlements contradict the plan” and thus were not related to the bankruptcy.

Judge Jones held that the lower courts lacked jurisdiction under Section 1334. Reversing, vacating the judgments and remanding with instructions to dismiss, she said:

It would make little sense to hold that post-confirmation bankruptcy jurisdiction extends to these agreements, given that they are voluntary arrangements paying off claims that were already discharged by the bankruptcy. This is especially so because the terms of the confirmed Chapter 11 reorganization plan barred the two forms of relief that the agreements purport to grant: additional monetary relief and modification of the leases.