Texaco, Inc. et al v. Texaco, Inc.

Filing 20

OPINION AND ORDER: For the foregoing reasons, the judgment of the United States Bankruptcy Court, dated August 3, 2010, is hereby AFFIRMED. The Clerk of the Court is respectfully directed to docket this decision in, and terminate, the pending appeal, (Case No. 10-CV-8151). (Signed by Judge Cathy Seibel on 9/28/2011) (mml)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
TEXACO INC., TEXACO CAPITAL INC., and TEXACO
CAPITAL, N.V.,
Reorganized Debtors.
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KLING REALTY COMPANY, INC., WALET PLANTING
COMPANY, et al.,
OPINION AND ORDER
Appellants,
No. 10-CV-8151 (CS)
- against TEXACO, INC.,
Appellee.
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Appearances:
Peter Van N. Lockwood
Leslie M. Kelleher
Caplin & Drysdale, Chartered
Washington, D.C.
William E. Steffes
Steffes, Vingiello & McKenzie, LLC
Baton Rouge, LA
J. Michael Veron
Alonzo P. Wilson
Veron, Bice, Palermo & Wilson, LLC
Lake Charles, LA
Counsel for Appellants
Martin J. Bienenstock
Henry J. Ricardo
Philip Abelson
Dewey & LeBoeuf LLP
New York, New York
Counsel for Texaco Inc., Reorganized Debtor
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Seibel, J.
Before the Court is the appeal of Appellants Kling Realty Company, Inc., Walet Planting
Company, et al. (collectively, “Kling”), (Doc. 1), filed on December 30, 2010, from an Order of
the United States Bankruptcy Court for the Southern District of New York, dated August 3, 2010
(the “Order”), (Doc. 38741). For the following reasons, the Order of the Bankruptcy Court is
affirmed.
I.

Background
A.

The 1946 Lease and Subsequent Releases

In 1946, the parties2 entered into an oil and gas lease (the “Lease”) that allowed Appellee
Texaco Inc. to explore for and produce oil and gas on property in Iberia Parish, Louisiana in
exchange for royalty payments to Kling. (See Declaration of Henry J. Ricardo, Doc. 15 (“Ricardo
Decl.”), Ex. 2.) The Lease allowed Texaco to release portions of the leased property:
Lessee may at any time, and from time to time during the lease, execute and
deliver to Lessor or place of record a release covering all or any portion or
portions of the leased premises as to all or any specified mineral or minerals, and
thereupon shall be relieved of all obligations as to the acreage surrendered, or as
to that acreage as to only the particular mineral or minerals specified, as the case
may be. After a release of this lease in its entirety as to only part of the acreage,
the rentals payable hereunder shall be reduced in the proportion that the acreage
covered hereby is reduced by such release.
(Id. ¶ 8.) The Lease also obligated Texaco to pay for any damage it caused to the land:

1

References to documents 3837 and above refer to the Bankruptcy Court docket. These documents are listed
on the Designation of Record. (Doc. 2.) The docket numbers of the jointly administered chapter 11 case were 87-B20142 to 44.
2

Any reference to the parties includes the parties’ predecessors and successors in interest.

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[T]he Lessee shall, without undue delay, pay and reimburse to the Lessor any and
all damages, in full, to Lessor’s lands, crops, roads, and property, caused by its
operations, either of drilling wells or laying pipelines, or in maintaining,
operating, and also in constructing or using buildings, roads, and other works on
the said land as permitted herein.
(Id. ¶ 10.) Over the years, Texaco released certain parts of sections (referred to as numbered
“Sections”) of the land covered by the Lease. For instance, in 1974, Texaco released parts of
Section 21. (Ricardo Decl. Ex. 5.)
At issue in this case is a release Texaco executed on June 6, 1986 (the “1986 Partial
Release”). (Ricardo Decl. Ex. 9.) Texaco released “any and all rights whatsoever” to almost all
of the land under the Lease. (Id. at Bates No. B2003900 0001024.) The 1986 Partial Release,
granted on request of Kling, (see Ricardo Decl. Exs. 7–8), excluded only 30 acres surrounding
Well 14, located on Section 26 and the only productive well remaining under the Lease, and also
reserved surface rights across neighboring Section 27 so that Texaco could access Well 14:
Lessee further reserves and retains such rights-of-way, easements,
servitudes and privileges for the operations of pipelines and other facilities
located over, upon and across that portion of the leased premises hereby released
[i.e. Section 27], which are necessary or convenient to Lessee’s continued
operations on the lands retained under the [Lease].
(1986 Partial Release Bates No. B2003900 0001025; see also Letter From Roger J. Keller, Land
Manager, to Minos R. Armentor (May 14, 1986), Ricardo Decl. Ex. 8 (“In issuing this release . . .
Texaco will retain the use of the surface of the released acreage which is necessary or convenient
for continued operations.”).)3 After production at Well 14 ended in July, 1987, (Stipulation ¶ 14),
3

Texaco also executed a 1984 partial release of a certain portion of land in Section 27 (the “1984 Release”).
This release contained the same reservation of surface rights. (Stipulation of Facts for Hearing on Contempt Motion
(“Stipulation”), Ricardo Decl. Ex. 6 ¶ 7.) This 1984 release does not affect this Court’s opinion, as nothing of
relevance occurred between the 1984 and 1986 Releases.

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Texaco released all remaining rights under the Lease on July 20, 1987 (the “1987 Release”).
(Ricardo Decl. Ex. 10.) The 1987 Release was publicly recorded on November 12, 1987. (Id.)
B.

Bankruptcy Proceedings

Before the 1987 Release was executed or recorded, Texaco filed a Chapter 11 petition
with the Bankruptcy Court on April 12, 1987 (the “Petition Date”). (Stipulation, Definitions ¶ 1.)
As of the Petition Date, “the only portion of the property subject to the 1946 Lease that was not
the subject of a partial release” was the 30-acre portion surrounding Well 14 on Section 26.
(Stipulation ¶ 11.) Oil production on Section 27 had ceased on November 3, 1986. (Id. ¶ 9.) The
cause of Texaco’s bankruptcy filing was a large jury verdict against Texaco and in favor of
Pennzoil in an unrelated case. (See Hr’g Tr. 35:21–36:6, Jan. 28, 2010, Doc. 3866.)
On January 26, 1988, the Bankruptcy Court set a bar date of March 15, 1988 (the “Bar
Date”).4 (Bar Date Notice ¶ 2.)5 Any claim not filed by the Bar Date, with a few exceptions, was
“forever barred and the debtors and their estates [were] forever discharged from any and all
indebtedness or liability to the holder of the claim.” (Id.)6 One exception, relevant to Kling’s
position in this case, was for “any holder of an administrative expense under section 503(b) of the
Bankruptcy Code entitled to priority under section 507(a)(1) of the Bankruptcy Code.”

4

Rule 3003(c)(3) of the Federal Rules of Bankruptcy Procedure states, “The court shall fix and for cause
shown may extend the time within which proofs of claim or interest may be filed.”
5

“Bar Date Notice” refers to Notice of Bar Date for the Filing of Proofs of Claims. (Ricardo Decl. Ex. 11.)

6

Rule 3003(c)(2) states,
Any creditor or equity security holder whose claim or interest is not scheduled or scheduled as
disputed, contingent, or unliquidated shall file a proof of claim or interest within the time
prescribed by subdivision (c)(3) of this rule; any creditor who fails to do so shall not be treated as
a creditor with respect to such claim for the purposes of voting and distribution.

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(Id. ¶ 3.)7,8 That same month, Texaco mailed notice of the Bar Date to creditors and potential
creditors (Affidavit of Service by Mail of Notice of Bar Date for the Filing of Proofs of Claim,
Ricardo Decl. Ex. 12), including to the address that it had on file for Kling, (Stipulation ¶ 36).
Kling did not submit a proof of claim. (Id. ¶ 39.)
Texaco then submitted the Reorganization Plan,9 which the Bankruptcy Court confirmed
on March 23, 1988 (the “Confirmation Date”). (Confirmation Order.)10 All debts and claims that
arose before the Confirmation Date were discharged, (id. ¶ 22),11 and creditors were precluded
from asserting any such claim, (Reorganization Plan art. VII I at A-15). Administrative claims
were to be paid in full. (Id. art. III A(1) at A-11.) All executory contracts and unexpired leases
were assumed unless objected to, per section 365 of the Bankruptcy Code.12 (Id. art. VI at A-13;
see also Confirmation Order ¶ 28.)

7

“After notice and a hearing, there shall be allowed administrative expenses . . . including the actual,
necessary costs and expenses of preserving the estate including wages, salaries, and commissions for services
rendered after the commencement of the case . . . .” 11 U.S.C. § 503(b)(1)(A)(i).
8

“The following expenses and claims have priority in the following order: . . . Second, administrative
expenses allowed under section 503(b) . . . .” 11 U.S.C. § 507(a)(2).
9

“Reorganization Plan” refers to the Second Amended Joint Plan of Reorganization Proposed by Texaco Inc.,
Texaco Capital Inc., Texaco Capital N.V. and Pennzoil Company. (Ricardo Decl. Ex. 1.)

10

“Confirmation Order” refers to the Order (i) Confirming Second Amended Joint Plan of Reorganization and
(ii) Authorizing Texaco Inc. To Incur Secured Indebtedness for Purpose of Consummating Plan. (Ricardo Decl. Ex.
13.)

11

There is a yet unresolved issue as to whether the Confirmation Date or Petition Date is the date of discharge.
Olin Corp. v. Riverwood Int’l Corp. (In re Manville Forest Prods. Corp.), 209 F.3d 125, 128 n.1 (2d Cir. 2000). This
Court need not resolve this question because, as discussed below, Kling’s claims arose prior to both dates.

12

“The trustee shall timely perform all the obligations of the debtor . . . , arising from and after the order for
relief under any expired lease of nonresidential real property, until such lease is assumed or rejected . . . .” 11 U.S.C.
§ 365(d)(3).

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C.

The Louisiana Action and the Bankruptcy Court Decision

Almost twenty years later, on September 25, 2007, Kling filed an action against Texaco in
Louisiana state court (the “Louisiana Action”). (Petition for Damages, Ricardo Decl. Ex. 14.)
Kling sought damages for contamination of Section 27 allegedly resulting from Texaco’s “oil and
gas exploration and production activities.” (Id. ¶ 3.) According to Kling, it did not intend to
pursue any claims that were discharged in bankruptcy. (Id. ¶ 29.)
But Texaco claimed, and still does in this Court, that all alleged contamination in Section
27 occurred prior to the Petition Date, and thus any claim to compensation for such injury was
discharged in bankruptcy. (Texaco Br. 11–12.)13 As a result, Texaco filed its Motion to Reopen14
in the Bankruptcy Court seeking an order requiring Kling to dismiss the Louisiana Action. After
multiple rounds of briefing, the Bankruptcy Court issued an oral ruling on May 28, 2010 (the
“Bench Ruling”). (Order Ex. A.) The Bankruptcy Court sided with Texaco, finding that Kling
asserted pre-petition claims, since discharged by the Confirmation Order. (Bench Ruling 26:17–
21.) The Bankruptcy Court also denied Kling’s request to file a late proof of claim, finding that
Kling did not establish that its failure to file a proof of claim prior to the Bar Date was due to
“excusable neglect.” (Bench Ruling 27:3–8, 31:11–16.) Following the Bench Ruling, the
Bankruptcy Court issued the Order granting Texaco’s Motion to Reopen and forever enjoining
Kling from re-asserting any claims from the Louisiana Action.

13

“Texaco Br.” refers to the Answering Brief of Texaco Inc. (Doc. 14.)

14

“Motion to Reopen” refers to the Motion of Texaco Inc. for Order (i) Reopening Texaco’s Chapter 11 Case,
(ii) Enforcing Confirmation Order Dated March 23, 1988, (iii) Finding Respondents in Civil Contempt of 11 U.S.C. §
524(a)(2) and Confirmation Order, and (iv) Directing Respondents to Dismiss Their Discharged Claims Against
Texaco Inc. in the Louisiana Actions. (Doc. 3837.)

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II.

Discussion
A.

Standard of Review

This Court has jurisdiction to hear appeals from decisions of a bankruptcy court pursuant
to 28 U.S.C. § 158(a), which provides in pertinent part that “[t]he district courts of the United
States shall have jurisdiction to hear appeals from final judgments, orders, and decrees . . ., [and,]
with leave of the court, from interlocutory orders and decrees of bankruptcy judges . . . .” A
district court reviews a bankruptcy court’s findings of fact for clear error and its legal conclusions
de novo. Overbaugh v. Household Bank N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir.
2009).
B.

Kling’s Claims

On this appeal, Kling argues that both contract and tort claims for restoration of Section
27 arose as a result of the 1987 Release, after the Petition Date, (Kling Br. 4–5), and thus, under
various provisions of the Lease, the Bankruptcy Code, and Louisiana law, the Confirmation Order
did not discharge Texaco’s restoration obligation. (Kling Br. 13–19.) I disagree, addressing each
of Kling’s arguments in turn.
1.

Federal Bankruptcy Claims

Federal bankruptcy law determines when Kling’s state-law contract or tort claims arose.
Pearl-Phil GMT (Far East) Ltd. v. Caldor Corp., 266 B.R. 575, 581 (S.D.N.Y. 2001) (“[I]t is
well-settled that the Bankruptcy Code governs when a claim arises.”) (emphasis in original);
Riverwood Int’l Corp. v. Olin Corp. (In re Manville Forest Prods. Corp.), 225 B.R. 862, 866
(Bankr. S.D.N.Y. 1998) (“While the existence of a claim is governed by non-bankruptcy law, the
determination of when a claim arises is governed by the Code.”), aff’d, 209 F.3d 125 (2d Cir.
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2000); see also In re R.H. Macy & Co., 283 B.R. 140, 145 (S.D.N.Y. 2002) (“The determination
of when a claim arises is determined by the Bankruptcy Code.”) (citing LTV Steel Co. v. Shalala
(In re Chateauguay Corp.), 53 F.3d 478, 496 (2d Cir. 1995)).15 The Bankruptcy Code defines a
“claim” as including a “right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured.” 11 U.S.C. § 101(5)(A). The Second Circuit, looking to
Supreme Court precedent and legislative history, has held that “the term ‘claim’ is sufficiently
broad to encompass any possible right to payment.” Mazzeo v. United States (In re Mazzeo), 131
F.3d 295, 302 (2d Cir. 1997). The Bankruptcy Code’s definition “‘contemplates that all legal
obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the
bankruptcy case.’” United States v. LTV Corp. (In re Chateauguay Corp.), 944 F.2d 997, 1003
(2d Cir. 1991) (quoting H.R. Rep. No. 95-595, at 309 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, 5963, 6266).
2.

Kling’s Contract Claim

A valid pre-petition claim requires that 1) “the claimant . . . possess a right to payment”
and 2) “that right . . . arise[] prior to the filing of the bankruptcy petition.” Olin Corp. v.
Riverwood Int’l Corp. (In re Manville Forest Prods.), 209 F.3d 125, 128 (2d Cir. 2000). This
Court finds that whatever right to payment Kling had under the Lease arose prior to the Petition
Date and was thus discharged by the Confirmation Order.

15

Kling cites Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007), for the
proposition that “federal bankruptcy law must be determined in accordance with state law as of the date of the
bankruptcy petition.” (Kling Br. 4 (citing Travelers, 549 U.S. at 451 (“[W]hen the Bankruptcy Code uses the word
‘claim’ . . . it is usually referring to a right to payment recognized under state law.”).) This Court does not read
Travelers to say that state law determines when a federal bankruptcy claim arises. Indeed, the sentence before the
one cited by Kling states only that “state law governs the substance of claims.” Travelers, 549 U.S. at 450.

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Contingent claims, mentioned but undefined in the Bankruptcy Code, are “‘obligations
that will become due upon the happening of a future event that was within the actual or
presumed contemplation of the parties at the time the original relationship between the parties
was created.’” Ogle v. Fid. & Deposit Co. of Md., 586 F.3d 143, 146 (2d Cir. 2009) (quoting In
re Manville, 209 F.3d at 128–29); In re Chateguay Corp., 944 F.2d at 1004 (same).
Accordingly, a claim is “deemed to have arisen pre-petition if the relationship between the
debtor and the creditor contained all of the elements necessary to give rise to a legal obligation—
a right to payment—under the relevant non-bankruptcy law.” Ogle, 586 F.3d at 146 (internal
quotation marks omitted). Contract claims arise upon execution of an agreement. See id. at
146–47 (extending this principle from indemnification agreements to “post-petition costs arising
out of pre-petition contracts more generally”); In re Manville, 209 F.3d at 129 (“We also agree
with the bankruptcy and district courts that [appellant’s] claims arose pre-petition. Here, the
relationship between the parties was created upon the signing of the indemnity agreements . . .
.”). The fact that environmental liability, the contingency here, “materialize[s] post-petition does
not transmogrify the claim into a post-petition claim, but merely means that the contingent claim
moved closer to becoming liquidated upon the happening of the contingency.” Id.; see also
Pearl-Phil GMT, 266 B.R. at 581 (“[U]nder the Code, a right to payment need not be currently
enforceable in order to constitute a claim.”).
Here, Kling’s restoration claim for Section 27 arose prior to the Petition Date. Kling and
Texaco executed the Lease prior to the Petition Date. Paragraph 10 of the Lease specifically
obligated Texaco, “without undue delay,” to pay for any and all damage that its oil operation
caused to Kling’s land. (Lease ¶ 10.) Any such damage and restoration payment was thus
within the actual contemplation of the parties when they signed the Lease. Indeed, the alleged

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damage to Section 27 occurred before the bankruptcy filing, as production had stopped in 1986
and the filing was in 1987. As a result, Kling’s right to a restoration payment was a pre-petition
claim contingent upon Texaco contaminating the land, which itself occurred pre-petition.16
Kling presents several arguments that its restoration claim arose after the Petition Date,
none of which persuade me. First, Kling argues that Texaco’s production on Section 26 after the
Petition Date, (Stipulation ¶ 12), maintained the Lease in full effect. (Kling Br. 21–22.) For
support, Kling cites paragraphs 2 and 8 of the Lease:


“[T]his lease shall remain in force for a term of five years from this date . . . and
as long thereafter as either oil or gas is produced from said land hereunder.”
(Kling Br. 21 (omission in original and emphasis omitted) (quoting Lease ¶ 2).)



“[Drilling or] production on any portion of the leased premises shall (so far as
concerns the continuance of this lease) inure to the benefit of the owners of the
lease upon all portions of the leased premises.” (Id. at 22 (quoting Lease ¶ 8).)

Kling also cites Article 114 of the Louisiana Mineral Code, (Id. at 21), which provides,
“operations on the land burdened by the lease . . . sufficient to maintain the lease according to its
terms will continue it in force as to the entirety of the land burdened.” La. Rev. Stat. Ann. §
31:114.
Kling’s argument overlooks two points. First, as discussed above, the Bankruptcy Code,
not Louisiana law, controls when a bankruptcy claim arises. Second, the Lease specifically
permitted Texaco to release “all or any portion or portions of the leased premises as to all or any
specified mineral or minerals, and thereupon . . . be relieved of all obligations as to the acreage

16

The only producing well under the Lease as of the Petition Date was Well 14, located on Section 26.
(Stipulation ¶ 12.) Thus, Kling had a fully matured pre-petition claim for contamination damages on Section 27.
Kling does not dispute that the contamination on Section 27 occurred before the Petition Date. (Kling Br. 16.)

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surrendered.” (Lease ¶ 8.) In the 1986 Partial Release, Texaco released all mineral rights in, and
thus had no further obligation regarding, Section 27; it was no longer part of the “leased
premises.” Drilling and production on Section 26 past the Petition Date did not continue the
Lease as to Section 27.
Second, Kling argues that the 1984 and 1986 Releases were null and void because the
reservations of surface rights in these releases go beyond the plain terms of paragraph 8 of the
Lease. (Kling Br. 24–26.) Specifically, Kling argues that paragraph 8 authorizes relief of all
obligations “‘as to the acreage surrendered’” only when the acreage surrendered is released “‘in
its entirety.’” (Id. at 25 (quoting Lease ¶ 8.) But I do not read the Lease this way. Paragraph 8
is clear that Texaco could release its rights as to all or some minerals, and if it released its rights
as to all (as it did here in the 1984 and 1986 Partial Releases), it was “relieved of all obligations
as to the acreage surrendered.” The cleanup obligation of paragraph 10 of the Lease thus arose,
at the latest, upon the release of all mineral rights.17 That Texaco reserved surface rights to
Section 27, and Kling agreed to or at least acquiesced in this reservation, does not make the
release of all mineral rights any less valid under paragraph 8. Kling cites no authority for the
opposite proposition. In any event, if Kling thought that Texaco, upon release of Section 27, had
breached its obligation to pay for contamination damages, it could have said so at the time,
which was pre-petition. The last sentence of paragraph 8, on which Kling relies, relates to
rentals and does not affect Texaco’s contamination obligation or void the Partial Releases.

17

Neither Kling nor Texaco assert that a full release would have voided any pre-existing cleanup obligation.
Indeed, it is unreasonable, and contrary to the purpose of paragraph 10 of the Lease, to conclude that the parties
would have agreed to allow Texaco simply to release contaminated land without abiding by its commitment to make
good on the damage promptly. See Corbello v. Iowa Prod., 850 So.2d 686, 693 (La. 2003) (“Since a contract
establishes the law between the parties, the purpose of contract interpretation is to determine the common intent of
the parties. The meaning and intent of the parties to a written instrument should be determined within the four
corners of the document and its terms should not be explained or contradicted by extrinsic evidence.”) (citations
omitted). That obligation survived the Partial Releases but arose before Petition Date.

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Third, Kling argues that Article 2683 of the Louisiana Civil Code imposed a separate
obligation on Texaco to restore Section 27 at the termination of the 1946 Lease, which occurred
upon execution of the 1987 Release, after the Petition Date. (Kling Br. 26–29.) In support of
this argument, Kling cites a Louisiana Supreme Court decision, Marin v. Exxon Mobil Corp., 48
So. 3d 234 (La. 2010). Again Kling’s argument here fails for three reasons. First, it is based in
state law, not the Bankruptcy Code, and in any event the parties here chose to accelerate that
state-law obligation by contract through the requirement that Texaco make good on any damage
it caused promptly upon causing it. Second, as discussed above, Texaco’s 1986 Partial Release
prevented any new restoration claims from accruing as to Section 27. Third, Marin dictates that
any claim Kling had obligating Texaco to pay to clean up its contamination of Section 27 arose
before the Petition Date. Article 2683(3) binds a lessee to “return the thing at the end of the
lease in a condition that is the same as it was when the thing was delivered to him, except for
normal wear and tear or as otherwise provided hereafter.” La. Civ. Code Ann. art. 2683(3).
Under the Bankruptcy Code, this is merely a contingent claim that arose at the signing of the
Lease. For the reasons above, any right to payment under this provision of the Louisiana Civil
Code arose before the Petition Date as a matter of federal law.
Further, Marin held that a lessee still has a pre-termination claim for damages arising
from contamination under other sections of the Louisiana Civil Code18:
While La. C.C. art. 2683 contains obligations that only arise at the end of
the lease, i.e., “to return the thing at the end of the lease in a condition . . . ,”
there is absolutely no language to suggest that the other obligations imposed by
these codal provisions are not operational until termination of the lease. These
provisions continue throughout the term of the lease and a lessor need not wait
until the end of the lease to sue a lessee for damage to his property.

18

Among others, the Marin court cited the following provision: “The lessee is liable for damage to the thing
caused by his fault . . . .” Marin, 48 So. 3d at 256 (citing La. Civ. Code Ann. art. 2687).

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Marin, 48 So. 3d at 256. Thus, even if Marin, a Louisiana case, controlled when Kling’s federal
bankruptcy claim arose under the Louisiana Civil Code, Kling would still have a pre-petition
claim.
Next, Kling argues that its restoration claims are administrative expenses, and thus not
discharged by the Confirmation Order. (Kling Br. 29–37.) The Bar Date Notice did not bar
administrative expenses, and the holder of administrative claims is entitled to “full satisfaction.”
(Confirmation Plan art. III-A at A-11.) The Bankruptcy Code defines “administrative expenses”
as “the actual, necessary costs and expenses of preserving the estate,” including “wages, salaries,
and commissions for services rendered after commencement of the case.” 11 U.S.C. § 503(b)(1).
Provisions allowing administrative claims “must be tightly construed,” Howard Delivery Serv.,
Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 669 (2006), because administrative expenses have
priority under Section 507(a)(1), and thus each creditor holding an unsecured claim pays a part
of the administrative claim, see Supplee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.),
479 F.3d 167, 172 (2d Cir. 2007). An expense is administrative (1) “only if it arises out of a
transaction between the creditor and the bankrupt’s trustee or debtor in possession” and (2) “only
to the extent that the consideration supporting the claimant’s right to payment was both supplied
to and beneficial to the debtor-in-possession.” Id. (internal quotation marks omitted).
As discussed earlier, Kling’s contingent right to payment for contamination of Section 27
arose out of the execution of the Lease, which specifically provided that Texaco reimburse Kling
for any and all damages to the land without undue delay. Because this execution (as well as
Texaco’s obligation to clean up) occurred prior to the Petition Date, Kling’s claim cannot qualify
for administrative priority. See Brook v. Jalbert (In re Servisense.com, Inc.), 382 F.3d 68, 72
(1st Cir. 2004) (“For a claim to be entitled to administrative priority in bankruptcy, it must arise

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after the bankruptcy petition has been filed.”); In re Baths Int’l, Inc., 31 B.R. 143, 145 (S.D.N.Y.
1983) (administrative priority denied; “When [the closing date of a contract] falls before the
filing of a Chapter 11 petition, the performance is rendered to a pre-petition company, not the
debtor.”) (internal quotation marks omitted). Further, even if the obligation to pay arose postpetition, there was no consideration for it supplied to or benefitting Texaco after its bankruptcy
filing, so the second requirement for an administrative expense is also not met.
3.

Kling’s Tort Claim

Kling also argues that its restoration claim arose under a tort theory when Texaco finally
released Section 27 without reservation in 1987. (Kling Br. 37–47.) Specifically, Kling asserts
that Article 2315 of the Louisiana Civil Code creates an independent tort claim rather than one
based on a breach of contract. (See Kling Br. 39–41.) Additionally, Kling cites Reading Co. v.
Brown, 391 U.S. 471 (1968), (Kling Br. 37–38), which held that a post-petition tort of the debtor
constituted an “actual and necessary cost[]” of administration of the estate. Reading, 391 U.S. at
485.
Kling’s arguments are unavailing. Article 2315 provides, “Every act whatever of man
that causes damage to another obliges him by whose fault it happened to repair it.” La. Civ.
Code. Ann. art. 2315(A). But, as discussed above, the Bankruptcy Code controls when a statelaw claim arises. The tortious act, the contamination of Section 27, occurred prior to the Petition
Date. Thus, the Confirmation Order discharged any tort-based claim. See Palley v. Refco Inc.
(In re Refco Inc.), 331 F. App’x 12, 13 (2d Cir. 2009) (affirming a denial of administrative
priority because “[a]lthough post-petition tort claims are given administrative priority, [plaintiff]

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has not shown that the debtor committed tortious acts after the bankruptcy filing”) (citing
Reading, 391 U.S. at 485).19
4.

Texaco’s Restoration Obligation Under 365(d)(3)

Kling also argues that the 1946 Lease was an “unexpired lease of nonresidential
property” under Section 365(d)(3) of the Bankruptcy Code, and thus Texaco’s restoration
obligation was an administrative expense. (Kling Br. 42–47.) Section 365(d)(3) states, “The
trustee shall timely perform all the obligations of the debtor . . . arising from and after the order
for relief under any unexpired lease of nonresidential real property, until such lease is assumed or
rejected, notwithstanding section 503(b)(1) of this title.” 11 U.S.C. § 365(d)(3). Kling’s
argument raises two issues: 1) whether a Louisiana mineral lease, and the Lease here
specifically, can be an “unexpired non-residential lease” under Section 365(d)(3) and, 2) if so,
whether this section applies to Texaco’s cleanup “obligation” under the Lease.
As to the first issue, the parties present dueling case law. Kling cites Texaco Inc. v. La.
Land & Exploration Co. (La. Land), 136 B.R. 658 (M.D. La. 1992), for the proposition that
Louisiana mineral leases are “‘executory contracts’ or ‘unexpired leases’” subject to assumption
under the Bankruptcy Code.” (Kling Br. 44.) Texaco cites In re Ham Consulting Co./William
Langnion/JV, 143 B.R. 71 (Bankr. W.D. La. 1992), for the proposition that these leases “are not

19

This Court need not reach the question of whether a separate claim stemming from any tortious act actually
exists or if Kling is simply repackaging its contract claim as a tort claim. However, the following passage from
Bunge Corp. v. GATX Corp., quoted in Kling’s brief, suggests that this distinction is irrelevant when there is a prepetition contract, as there is here: “[W]hen a party has been damaged by the conduct of another arising out of a
contractual relationship, the former may have two remedies, a suit in contract or an action in tort . . . .” 557 So. 2d
1376, 1385 (La. 1993) (emphasis added) (internal quotation marks omitted). Thus, under Bunge, a right to payment
pursued in a Louisiana tort claim for damage could still be a contract claim for the purposes of federal bankruptcy
law. This Court also need not reach the question of whether Reading is limited to involuntary creditors with no prepetition contractual relationship with the debtor, although that strikes the Court as a reasonable reading. (See
generally Kling Br. 41; Texaco Br. 40.)

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‘unexpired leases of non-residential property.’” (Texaco Br. 43.) This Court finds In re Ham
more persuasive.
The relationship between a mineral lessor and lessee in Louisiana is not what is
contemplated by Section 365. Section 365(d)(3) was enacted to allow a commercial landlord to
enforce ongoing duties of a tenant who went bankrupt, such as payment of rent and common area
charges. Adelphia Bus. Solutions, Inc. v. Abnos, 482 F.3d 602, 608 n.3 (2d Cir. 2007) (citing 130
Cong. Rec. S8891 (1984) (statement of Sen. Hatch), reprinted in 1984 U.S.C.C.A.N. 590, 598–
99). And in Louisiana, commercial lessors and lessees both have affirmative obligations, La.
Civ. Code. Ann. §§ 2682–2713, while a mineral lessor has none other than warranty of title and
non-interference, La. Rev. Stat. Ann. § 31:119, and “virtually all performance is by the lessee.”
In re Ham, 143 B.R. at 74 (internal quotation marks omitted) (referring to the right to “explore
for and produce minerals” under La. Rev. Stat. Ann. § 31:114). Here, I find nothing in the Lease
that indicates that Kling and Texaco had anything other than a standard mineral lessor-lessee
relationship. For instance, Texaco did not owe Kling periodic rent payments, only royalties on
any oil and gas mined from the land, (see Lease ¶ 3), which ended for Section 27 pre-petition.
Thus, the Lease, like Louisiana mineral leases in general, is not an “unexpired non-residential
lease” under Section 365(d)(3).20
Further, even if a Louisiana mineral lease can be considered an “unexpired, nonresidential lease,” only those obligations that arise post-petition and pre-rejection are entitled to
20

La. Land does not contradict this holding. In that case, the court declined to decide whether a Louisiana
mineral lease is an “unexpired lease” under Section 365. La. Land, 136 B.R. at 666–67 (“Thus, the holding of [a
Fifth Circuit case deciding the issue for a Texas mineral lease] does not prevent classification of the Louisiana
mineral lease as an ‘unexpired lease,’ although it is not authority to the contrary either. This court need not resolve
that issue because an unexpired lease is only one type of executory contract.”) Instead, the court held that the lease
at issue was an “‘executory contract’ within the meaning of 365(a).” Id. at 668. Whether a mineral lease is an
executory contract is not relevant to Section 365(d)(3), as this subsection does not address executory contracts. Cf.
11 U.S.C. 365(a) (“[T]he trustee, subject to the court’s approval, may assume or reject any executory contract or
unexpired lease of the debtor.”).

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administrative priority under Section 365(a)(3). See In re BH S & B Holdings LLC, 426 B.R.
478, 483 (Bankr. S.D.N.Y 2010) (“[B]etween the filing of a bankruptcy petition and a debtor-inpossession’s decision whether to assume or reject an unexpired lease, section 365(d)(3) requires
a debtor-in-possession to timely perform all the obligations of the debtor . . . . Expenses arising
out of this performance are entitled to automatic administrative expense status.”); In re Nat’l
Refractories & Minerals Corp., 297 B.R. 614, 617 (Bankr. N.D. Cal 2003) (“[I]f the trustee or
debtor-in-possession fails to timely perform any lease obligations that accrue during the postpetition, pre-rejection period, the lessor is entitled to an administrative claim for damages
regardless of whether the use of the leased property during this period benefitted the estate.”)
(citing Towers v. Chickering & Gregory (In re Pac.-Atl. Trading Co.), 27 F.3d 401, 403–05 (9th
Cir. 1994)).21 Here, as discussed above, Texaco’s cleanup obligation arose pre-petition, and with
the 1986 Partial Release at the latest. Section 365(d)(3) does not afford administrative priority to
damages arising from Texaco’s allegedly unfulfilled cleanup obligation, and any claim to such
damages was discharged in bankruptcy.
C.

Late Proof of Claims

Given that Kling’s restoration claim is pre-petition, I now review whether the
Bankruptcy Court erred in refusing to allow it to file a late proof of claim. (See Kling Br. 47–
48.)

21

Post-termination or post-rejection cleanup expenses result in a breach of contract, and thus are pre-petition
claims. See 11 U.S.C. 365(g)(1) (“[T]he rejection of an executory contract or unexpired lease of the debtor
constitutes a breach of such contract or lease—if such contract or lease has not been assumed under this section or
under a plan confirmed under [chapter 11], immediately before the date of the filing of the petition”); In re Ames
Dep’t Stores, Inc., 306 B.R. 43, 60 (Bankr. S.D.N.Y. 2004) (“[S]ections 365(g) and 502(g) provide, unambiguously,
that rejection claims are pre-petition claims.”); id. at 58 (“Landlord’s cleanup costs after rejection . . . do not warrant
administrative expense treatment under section 365(d)(3).”).

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1.

Standard of Review

This Court reviews such denials for abuse of discretion. Midland Cogeneration Venture
L.P. v. Enron Corp. (In re Enron Corp.), 419 F.3d 115, 124 (2d Cir. 2005). Rule 9006(b)(1) of
the Federal Rules of Bankruptcy Procedure allows Kling to file its late claim if it can meet its
burden of proving that its failure to file on time resulted from “excusable neglect.” See id. at 121
(“The burden of proving excusable neglect lies with the late-claimant.”) (internal quotation
marks omitted). The determination of whether excusable neglect exists “is at bottom an
equitable one, taking account of all relevant circumstances surrounding the party’s omission,”
including these four factors: “the danger of prejudice to the debtor, the length of delay and its
potential impact on judicial proceedings, the reason for delay, including whether it was within
the reasonable control of the movant, and whether the movant acted in good faith.” Pioneer Inv.
Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380, 395 (1993). But “‘inadvertence, ignorance
of the rules, or mistakes construing the rules do not usually constitute “excusable” neglect.’” In
re Enron, 419 F.3d at 126 (citing Pioneer, 507 U.S. at 392). The Second Circuit focuses on the
reason for delay and whether it was within the reasonable control of the movant; the other three
factors are more relevant in close cases. See id. at 122–23.
2.

The Bankruptcy Court’s Decision

The Bankruptcy Court found no basis for permitting Kling to file a late proof of claim.
(Bench Ruling 29.) Kling argued below that it was confused by the fact that the Confirmation
Plan paid creditors, including unsecured creditors, in full, and also that it thought it had an
administrative claim. (Id.) It also argued that it was confused by previous bankruptcy filings of
Texaco. (Id.; see also Texaco Inc. v. Bd. of Comm’rs for the LaFourche Basin Levee Dist.
(LaFourche), 254 B.R. 536, 549–51 (Bankr. S.D.N.Y. (2000) (describing various filings

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regarding assumption of leases as “a paradigm of ambiguity,” “incorrect,” and “at best, highly
misleading”).) But the Bankruptcy Court below found it clear, reviewing those prior filings and
the subsequent Restoration Plan and Bar Date Notice, that Kling would have had to file a timely
proof of claim. (Bench Ruling 29–30.)22
Moreover, the Bankruptcy Court found that Kling’s long history of seeking to enforce
pre-petition claims for damages to the property caused by Texaco supported the conclusion that
Kling would have been aware that they had an unsecured pre-petition claim. (See id. at 30;
Ricardo Decl. Exs. 18 (1981 scientific test report finding hazardous soil contamination), 19
(1981 communication from Kling’s attorney seeking information from Texaco regarding land
covered under Lease).) Kling claims that Texaco performed “superficial” cleanup operations,
such as pit closures, on Section 27 before and after the Petition Date, seeking to “bury the
contamination left from its operations.” (Kling Br. 18.) Kling also argues that Texaco assured
Kling that it would “restore the property to its pre-lease condition,” and that Kling “reasonably
and justifiably relied on these representations.” (Id. at 18–19.) But this Court does not find clear
error in the Bankruptcy Court’s conclusion. Kling should have protected itself, despite Texaco’s
assurances, by filing a claim.
Looking to other excusable neglect factors, the Bankruptcy Court found that this was not
a close case. (Bench Ruling 30–31.) Indeed, it has been over twenty years since the Bar and
Confirmation Dates. And prejudice would likely result for Chevron, which purchased Texaco in
reasonable reliance upon the Bar Date and discharge, and Chevron shareholders, who would
ultimately have to pay any judgment resulting from Kling’s late filing. (Id. at 31.)

22

Indeed, given that Texaco fully released all remaining rights in the Lease in 1987, Kling could not
reasonably have thought that it would be treated like those mineral lessors whose leases were still active in 1988
when the Bar Date Notice was sent.

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This Court, on review of the record, finds that the Bankruptcy court did not commit clear
error in making any findings of fact, nor did it abuse its discretion in denying Kling's request to
file a late proof of claim.

III.

Conclusion
For the foregoing reasons, the judgment of the United States Bankruptcy Court, dated

August 3, 2010, is hereby AFFIRMED. The Clerk of the Court is respectfully directed to docket
this decision in, and terminate, the pending appeal, (Case No. lO-CV -8151).

SO ORDERED.

g,

Dated: September).. 2011
White Plains, New York

UtJo~__
CATHY SEIBEL, U.S.D.J.

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