Two years ago, Bankruptcy Judge Stacey G. C. Jernigan of Dallas wrote an opinion with important bankruptcy jurisprudence: Publication by notice does not extinguish the claim of a creditor with an executory contract that either rode through chapter 11 or was assumed by the plan.

Judge Jernigan’s decision from June 3, 2022, was upheld by the Fifth Circuit on March 27. By the time the case had reached the circuit court, the appellant-debtor had essentially abandoned any argument that notice by publication was sufficient for a known creditor.

For the time being skipping over an important question of Louisiana real property law, here’s how it went down.

The debtor, an oil and gas producer, filed a chapter 11 petition in 1986 and confirmed a plan in 1988. Years before bankruptcy, the debtor had leased 20 acres of real property in Louisiana from the owner. After acquiring the lease and before bankruptcy, the debtor built a natural gas treatment plant on the leased property. In bankruptcy papers, the debtor did not schedule the unexpired lease.

The debtor never gave the owner-lessor any notices about the bankruptcy. The plan provided that any unexpired leases and executory contracts that were not rejected would be assumed. Likewise, the owner never received any notice about confirmation or filing a claim for “cure.”

The debtor continued operations on the property until it sold the property several years after confirmation. Having discovered environmental impairment on the property in 2019, the owner sued the debtor and other defendants in Louisiana state court in 2020.

Reopening the 1986 bankruptcy case, the debtor filed an adversary proceeding asking Judge Jernigan to rule that the claim was discharged by confirmation in 1988. The debtor and the owner filed cross motions for summary judgment.

The debtor claimed that the owner was an unknown creditor whose claims were discharged by publication of the bar date in the 1986 case and by confirmation of the plan. In her opinion, Judge Jernigan took sides with the owner and held that the claims were not discharged because the lease was either assumed or rode through the chapter 11 case.

Even though the debtor had not scheduled the lease, the owner qualified as a “known” creditor. As a “known” creditor rather than an “unknown” creditor, notice by publication was not sufficient. As a “known” creditor, Judge Jernigan held that the owner’s claims were not discharged in 1988. Placid Oil Co. v. Avalon Farm Inc. (In re Placid Oil Co.), 20-03149, 2022 BL 192803, 2022 Bankr. Lexis 1565 (Bankr. N.D. Tex. June 3, 2022). To read ABI’s report, click here.

After the district court affirmed, the debtor appealed to the circuit, which handed down a per curiam, nonprecedential affirmance on March 27.

As we said in our report on Judge Jernigan’s opinion, much of her decision dealt with whether the debtor’s lease was an assignment or a sublease. If it were a sublease, the owner would not have been entitled to notice about the bankruptcy.

The Fifth Circuit’s opinion is an exhaustive survey of Louisiana law regarding the distinctions between subleases and assignments. As the Fifth Circuit said, distinguishing between an assignment and a sublease in Louisiana “is not always a simple task.”

Notably, the Fifth Circuit did not certify a question to the Louisiana Supreme Court. Rather the circuit court ruled on the merits and said, “we are not persuaded that the district court and the bankruptcy court erred in their resolutions of this issue.”

Having found that the debtor had an assignment of a lease and not a sublease, the Fifth Circuit returned to bankruptcy law by holding that the debtor “was obligated to provide the [owner] with actual notice of the proceeding,” since the debtor was a party “to an executory contract during the pendency of the bankruptcy case.”

The Fifth Circuit affirmed Judge Jernigan because the owner’s “claims were not discharged in [the debtor’s] Chapter 11 bankruptcy case.”

Note

Because our readers are mostly bankruptcy nerds, we won’t recount the Fifth Circuit’s explication of Louisiana law. However, the opinion is good reading for readers who practice in Louisiana.