Ohio Land Management, LLC v. Chesapeake Exploration, L.L.C. et al

Filing 35

Memorandum Opinion and Order: plaintiff's motion for partial summary judgment is granted in part and denied in part. (Related Doc. # 27 ). Defendants motion for summary judgment is denied. (Related Doc. # 29 ). Having now ruled on wh at plaintiffs interest is, the case now proceeds to the determination of the amount owed. I order counsel to meet and confer in an effort to reach an agreement on that amount. This must take place before 11/1/18. Counsel must exchange information necessary to meaningfully discuss an agreement no later than seven days before the conference. Counsel must then file a joint report with the Court regarding agreements reached or disputes of material facts remaining for determination by trial on or before 11/15/18. I understand that if defendants object to the ruling I have made herein, and any agreement it may reach regarding damages is without prejudice to its right to appeal the ruling. Magistrate Judge William H. Baughman, Jr., on 09/28/2018. (S,MD)

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

OHIO LAND MANAGEMENT, LLC,
Plaintiff,
v.
CHESAPEAKE EXPLORATION,
L.L.C., et al.,
Defendants.

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CASE NO. 4:15 CV 1754
MAGISTRATE JUDGE
WILLIAM H. BAUGHMAN, JR.

MEMORANDUM OPINION &
ORDER

Introduction
I have before me the motion of plaintiff Ohio Land Management, LLC (“OLM”) for
partial summary judgement1 and the motion of defendants Chesapeake, L.L.C., et al.
(“Chesapeake”) for summary judgment.2 The parties have filed response and reply briefs
on these motions, and the Court has heard oral argument.
I previously entered a memorandum opinion and order denying Chesapeake’s
motion to stay pending arbitration.3 The opinion and order sets out the relevant facts and
certain rulings of law relevant to the pending motions. I, therefore, incorporate by
reference herein that memorandum opinion and order.

1

ECF No. 27.
ECF No. 29.
3
ECF No. 12.
2

Undisputed Facts
Persons not parties to this suit figure prominently in the underlying dispute. James
and Sandra Bell, and their son Michael,4 owned property in Columbiana County, Ohio as
of October 2010. On October 19, 2010, James and Sandra entered into a lease with a
predecessor of Chesapeake for their two-thirds interest in the mineral rights of the property.
Michael did not join in that lease. On May 15, 2012, Michael and his wife, Amanda, filed
a petition for bankruptcy under Chapter 7 of the Bankruptcy Code. Then on May 23, 2015,
Michael signed an amended lease with James and Sandra purporting to transfer his onethird interest in the mineral rights to Chesapeake.
The Trustee in bankruptcy, to whom Michael’s interest in the property transferred
upon the filing of the bankruptcy petition, conveyed Michael’s one-third interest to OLM
under a fiduciary deed approved by the bankruptcy court.
In 2015, Chesapeake obtained a permit to install a well on the property, placed the
well in production, and since has extracted petroleum from the property.

Issue
Both motions raise the same fundamental issue:
As of May 14, 2012, Michael owned a third interest in the property at
issue. On May 15, 2012, Michael filed a Chapter 7 bankruptcy
petition. On September 4, 2013, the bankruptcy trustee conveyed
Michael’s interest to OLM by fiduciary deed approved by the
bankruptcy court. On May 23, 2012, Michael, James, and Sandra
4

There is some question about the extent that Michael’s wife, Amanda, is involved in the
relevant transactions. For purposes of this decision, that involvement, if any, is not
material. Therefore, she will only be referred to as necessary for context.
2

signed an amendment and ratification of the lease to Chesapeake,
purporting to convey Michael’s third interest in the mineral rights to
that company. Does this amendment trump the trustee’s conveyance?
As I ruled in my earlier memorandum opinion and order, the answer is “no.”
Michael could not effectively lease any interest to the property to Chesapeake after the
filing of the bankruptcy petition.

Analysis
The parties have renewed and advanced their arguments about the significance of
the amendment and ratification and the trustee’s fiduciary deed in the context of the
pending motions.
11 U.S.C. § 362(a)(3) provides that a petition for bankruptcy protection “operates
as a stay, applicable to all entities, of “any act to . . . exercise control over the property of
the estate.” This stay must be understood in light of 11 U.S.C. § 541, under which
Michael’s legal and equitable interests in the real estate here at issue “became the property
of the estate as of the petition date.”5 This is critical because, as noted previously, at the
moment of filing, Michael lost the right to encumber or transfer any property of the estate
without the authorization of the bankruptcy court6 – an authorization he never sought in
this case.
Two foundational facts are now established: (1) under § 541, the bankruptcy estate,
not Michael, possessed all of Michael’s legal and equitable interests in his property

5
6

In re Mahendra, 131 F.3d 750, 755 (8th Cir. 1997) (emphasis added).
Id.
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effective the moment the petition was filed; and (2) Michael was stayed by operation of §
362(a)(3) from taking any action to exercise control over that property at the moment the
petition was filed.
Chesapeake’s response to these facts is to admit, in essence, that Michael had no
interest in the property at the time he signed the lease amendment, and to tacitly concede
the fact that the filing, by statute, stayed his taking any action to exercise control over the
property, but then to claim that because the trustee never sought to formally avoid
Michael’s actions, those actions are ratified, giving effect to the operation of the lease
amendment as it concerns OLM.
Both parties point to the Sixth Circuit’s decision in Easley v. Pettibone Michigan
Corp.7 as providing the basis for deciding what effect should be given to Michael’s action
in this case. In Easley, Carl and Mary Easley filed a product liability suit in state court
against Pettibone Michigan Corp. (“Pettibone”) after Pettibone had filed for federal
bankruptcy protection, an action which on its face violated the automatic stay provisions
of 11 U.S.C. § 362(a)(1).8 The Sixth Circuit began its analysis by observing that – as to
actions taken against the debtor in violation of the automatic stay – “invalid” was “a more
appropriate adjective to use” because bankruptcy courts retain the power to modify the
automatic stay so as to permit actions to proceed against the debtor.9 Easley reasoned that

7

Easley v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir. 1993).
Id. at 909.
9
Id. at 909-910 (citing 11 U.S.C. § 362(d)).
4
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although the automatic stay remained an important protection for the debtor against
collection actions initiated after the bankruptcy filing, in a limited number of cases it would
be inequitable to let a debtor use the stay as a shield “where the debtor unreasonably
withholds notice [of the stay]” and where an innocent creditor would be prejudiced.10
In recognizing this “equitable exception to the operation of the stay,” Easley
emphasized that “unless equity dictates otherwise, these actions [taken in violation of the
automatic stay] will be voided by the court in which the invalid action against the debtor
was filed.”11 Easley’s precise holding, then, was that “only where the debtor unreasonably
withholds notice of the stay and the creditor would be prejudiced if the debtor is able to
raise the stay as a defense, or where the debtor is attempting to use the stay as a shield to
avoid an unfavorable result, will the protections of the [automatic stay] be unavailable to
the debtor.”12
A more recent Sixth Circuit decision applying Easley provides an analytical path to
resolution of the present matter. In Baxter v. Sarmadi,13 Deborah Sarmadi – seeking to
recover money owed her by Dean Baxter – purchased from a bank a note made by Baxter,
which note was secured by one of Baxter’s properties.14 Although Sarmadi informed
Baxter that she had purchased the loan and that she wanted to be repaid what he owed her,

10

Id. at 910.
Id. at 909.
12
Id. at 911.
13
Baxter v. Sarmadi, 602 F. App’x 322 (6th Cir. 2015).
14
Id. at 323.
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11

Baxter did not respond to her inquires and made no effort to repay her.15 Consequently, on
May 23, 2013, Sarmadi, through her attorney, foreclosed on Baxter’s property, recording
the deed on May 29, 2013.16
After the sale and the resulting recording of the deed, Sarmadi discovered that
Baxter had filed for bankruptcy on May 22 – just one day before the foreclosure.17
Sarmadi’s attorney testified that prior to the foreclosure he had checked the bankruptcy
filings for the Middle District of Tennessee, where he believed Baxter lived and where the
property was located, but found nothing because Baxter had filed for bankruptcy protection
in the Western District.18 In addition, Baxter produced an email to Sarmadi’s attorney –
dated May 22, the date of filing – stating that Baxter had filed for bankruptcy protection
and that he assumed the foreclosure sale scheduled for the next day would be canceled.19
Prior to completion of the bankruptcy proceedings, the Trustee filed a motion to
dismiss the proceedings for want of prosecution, and shortly thereafter Sarmadi’s counsel
moved the bankruptcy court to annul the automatic stay and to ratify the foreclosure sale.20
Citing “overwhelming evidence” that Baxter had not filed the bankruptcy petition in good

15

Id.
Id.
17
Id.
18
Id.
19
Id.
20
Id. at 324.
16

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faith, the bankruptcy court annulled the automatic stay as to Sarmadi, and ratified the
foreclosure sale.21 Baxter appealed.22
In its decision upholding the action of the bankruptcy court, the Sixth Circuit began
by noting that the automatic stay was for the benefit of “honest but unfortunate debtors”
that the bankruptcy code was enacted to protect.23 That said, Baxter then observed that the
bankruptcy code also provides that “‘[o]n request of a party in interest and after notice and
a hearing, the court shall grant relief from the stay . . . such as by terminating, annulling,
modifying or conditioning such stay,’ for reasons that include ‘for cause, including the lack
of adequate protection of an interest in property of such a party in interest.’”24
Baxter noted that a debtor’s lack of good faith in filing for bankruptcy may
constitute “cause” for lifting the automatic stay.25 Further, the stay may be annulled and
invalid post-petition actions ratified upon a finding of “exceptional circumstances” as was
detailed in Easley.26
Here, Chesapeake suggests that its situation is analogous to that of Deborah
Sarmadi, and that it is entitled to the same remedy from this Court as Sarmadi received
from the bankruptcy court. But, the analogy does not hold up under scrutiny. Most
significantly, this Court is not the bankruptcy court that decided Michael Bell’s case, and

21

Id.
Id.
23
Id. (citation omitted).
24
Id. at 324-25 (citation omitted).
25
Id. at 325 (citation omitted).
26
Id. (citation omitted).
22

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there never was a motion before that court by Chesapeake to annul the automatic stay and
then ratify Michael’s invalid post-petition transfer on one of the narrow equitable grounds
recognized by either the statute or controlling case authority. Instead, Chesapeake appears
to argue that the automatic stay need not be annulled by an express order of the bankruptcy
court, but may simply be declared annulled by any court purely because the bankruptcy
trustee had never raised an issue as to existence of the stay nor claimed that the invalid act
violated the stay.27
There is simply no authority for Chesapeake’s understanding of how the automatic
stay may be annulled and any invalid post-petition action ratified. As the preceding
discussion makes clear, the limited power to annul the automatic stay is an equitable power
of the bankruptcy court that has jurisdiction over the estate.28 Moreover, as Baxter noted,
the bankruptcy court may do so only on a motion by a party in interest and after notice and
a hearing.29
Therefore, while I accept the general proposition that the automatic stay is subject
to being lifted, I find no basis for my authority to actually do so in place of the bankruptcy

27

ECF No. 32 at 6. Although 11 U.S.C. § 549 permits the trustee to avoid a transfer not
authorized by the Bankruptcy Code or the bankruptcy court, it does not impose a duty on
the trustee to do so or imply that the failure to do so nullifies a transfer made by the trustee
with court approval, which the trustee sought and obtained here. As stated in my earlier
decision, the trustee received value for the estate in exchange for the deeding of Michael’s
interest to OLM. Having done so, the trustee had no obligation to spend the estate’s limited
resources in avoiding Michael’s purported transfer to Chesapeake in violation of the
automatic stay.
28
Baxter, 602 F. App’x at 324-25 (citations omitted).
29
Id.
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court. Nor, as is evident in the present record, has there been any notice given to Michael
of any claim that his filing for bankruptcy was not in good faith, or that some other basis
exists to annul the automatic stay that rendered his post-petition transfer invalid.
Moreover, in addition to the lack of any notice, there has been no motion made by
Chesapeake as a “party in interest” to the relevant bankruptcy court to request the relief of
annulling the automatic stay for any recognizable reason, and so there has been no hearing
by that court and no findings made.
Accordingly, Michael’s post-petition transfer of a leasehold interest to Chesapeake
was invalid under the automatic stay provisions of the bankruptcy code, and nothing
subsequent to that invalid transfer has either ratified that act or provided me with a basis
for undertaking a de novo review of that act and its subsequent effects. Therefore,
Chesapeake holds no interest in the property by reason of Michael’s invalid act, and the
terms of the lease have no effect on any rights claimed by OLM against Chesapeake for
actions taken by Chesapeake on Michael one-third interest in the property.

Further Proceedings
As evident from the statements of counsel at the oral argument on the pending
motions,30 OLM is owed something based on its interest in the property in question for the
petroleum products extracted by Chesapeake therefrom. Having now ruled on what OLM’s
interest is, the case now proceeds to the determination of the amount owed.

30

I strongly recommend that counsel order a copy of the transcript of that argument to
assist their discussions going forward. See ECF No. 34.
9

I order counsel to meet and confer in an effort to reach an agreement on that amount.
This must take place before November 1, 2018. Counsel must exchange information
necessary to meaningfully discuss an agreement no later than seven days before the
conference. Counsel must then file a joint report with the Court regarding agreements
reached or disputes of material facts remaining for determination by trial on or before
November 15, 2018.
I understand that Chesapeake objects to the ruling I have made herein, and any
agreement it may reach regarding damages is without prejudice to its right to appeal the
ruling.
If a trial is necessary in this case, it will commence on February 4, 2019, with a final
pretrial conference on January 28, 2018. Following counsel’s report as ordered herein, I
will issue a separate trial order if necessary.

Conclusion
OLM’s motion for partial summary judgment is granted in part and denied in part.
Chesapeake’s motion for summary judgment is denied.
IT IS SO ORDERED.

Dated: September 28, 2018

s/ William H. Baughman, Jr.
United States Magistrate Judge

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