Month: April, 2018

Texas District Court Finds Unclaimed Oil and Gas Royalties Are Not Property of the Estate

by Bradley Lehman

By: Bradley Lehman, Esquire

McElroy, Deutsch, Mulvaney & Carpenter, LLP

A recent opinion from the U.S. District Court for the Southern District of Texas, on appeal from the bankruptcy court in the District, is likely to have broad applicability in pending and future energy producer bankruptcy cases. In Oklahoma State Treasurer v. Linn Operating, Inc., 6:17-CV-0066, 2018 WL 1535354 (S.D. Tex., March 29, 2018), the Chapter 11 plan filed by Linn Operating LLC, an Oklahoma-based oil and gas producer, provided that the claims of owners of the approximately $1 million in unclaimed royalties held by the debtor would be discharged upon confirmation of the plan and the debtor would retain the funds. The bankruptcy court confirmed the plan, and the State of Oklahoma filed an adversary action against the debtor seeking turnover of the unclaimed royalties to the state. The bankruptcy court dismissed the complaint, finding that the adversary case was merely a post-confirmation collateral attack on the debtor’s plan.

Oklahoma appealed the dismissal of its adversary case to the Southern District of Texas, and Judge Kenneth M. Hoyt entered an opinion reversing the bankruptcy court’s decision. The District Court found that, as a matter of state law, unclaimed oil and gas royalties are held in trust by the producer for the owners of the royalties. Therefore, the unclaimed royalties were never property of the debtor’s bankruptcy and were not subject to the bankruptcy court’s jurisdiction or to confirmation of the debtor’s Chapter 11 plan.

Supreme Court Finds Determination of Insider Status Rests with the Bankruptcy Court and “Clear Error” is the Appropriate Standard of Review

by Bradley Lehman

By: Bradley P. Lehman, Esquire

McElroy, Deutsch, Mulvaney & Carpenter, LLP

A recent decision by the United States Supreme Court in U. S. Bank N. A., Trustee, by and through CWCapital Asset Management LLC v. Village at Lakeridge, LLC, 138 S.Ct. 960  (2018) clarified the standard of review to be applied to bankruptcy court determinations of who counts as an “insider” of the debtor under the Bankruptcy Code.

When Village at Lakeridge declared bankruptcy, it had two primary creditors: U.S. Bank and MBP Equity Partners (“MBP”). MBP also owned Village at Lakeridge. Village at Lakeridge proposed a Chapter 11 plan pursuant to which both of its creditors were in separate impaired classes. U.S. Bank would not consent to the proposed plan, and MBP’s vote could not be counted because, being the owner of the debtor, it was the classic insider. MBP devised a plan to bypass this inconvenience by selling its claim to someone else who would vote in favor of the plan. Thus, an MBP board member approached the doctor whom she was dating about buying MBP’s claim, and he agreed to purchase the $2.76 million claim for $5,000.

U.S. Bank argued that the purchaser of MBP’s claim was still an insider, albeit a non-statutory insider, and therefore could not be counted as an affirmative vote in favor of the debtor’s plan. The bankruptcy court disagreed and found that he was not an insider because he purchased the claim as a speculative investment and did so in the context of an arms-length transaction. U.S. Bank appealed, and the Ninth Circuit held that there was no clear error in the lower court’s determination that the transaction was at arm’s length. U.S. Bank appealed to the United States Supreme Court, arguing that the Ninth Circuit should have reviewed the lower court’s determination de novo.

The Supreme Court disagreed in its unanimous opinion finding that the clear error standard utilized by the Ninth Circuit was appropriate because the answer to the mixed question of law and fact involved more factual work than legal work.   Thus, deference to the bankruptcy court on the appeal through use of the clear error, rather than de novo, standard of review was appropriate.