Beta Operating Company, LLC v. Aera Energy LLC et al
Filing
20
MEMORANDUM OPINION AND ORDER re 1 Report and Recommendations MOTION to Withdraw Reference as to Bankruptcy Case No. 17-3365. The Previous Owners' objections to the Bankruptcy Court's R&R are OVERRULED. The Bankruptcy Court's R&R is ADOPTED IN FULL. The motion to withdraw reference is DENIED. Case terminated on 9/20/2018.(Signed by Judge Gray H Miller) Parties notified.(rkonieczny, 4)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re MEMORIAL PRODUCTION
PARTNERS, L.P., et al.,
Debtors.
BETA OPERATING COMPANY, LLC,
Plaintiff,
v.
AERA ENERGY, LLC, et al.,
Defendants.
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CIVIL ACTION H-18-411
ADVERSARY CASE 17-3365
MEMORANDUM OPINION AND ORDER
Pending before the court is a report and recommendation (“R&R”) issued by U.S. Bankruptcy
Judge Marvin Isgur on February 9, 2018. Dkt. 1. In the R&R, Judge Isgur recommends that the
court deny Aera Energy LLC (“Aera”), Noble Energy, Inc. (“Noble”), and SWEPI LP’s (“SWEPI”)
(collectively, the “Previous Owners”) motion to withdraw reference of Bankruptcy Adversary
Proceeding No. 17-03365. Id. The Previous Owners filed an objection to the R&R, plaintiff Beta
Operating Company, LLC (“Beta”) filed a response to the objection, and the Previous Owners filed
a reply. Dkts. 17, 18, 19. After considering the R&R, related documents, the objections, response,
and reply, and the applicable law, the court is of the opinion that the R&R should be ADOPTED IN
FULL and that the motion to withdraw reference should be DENIED.
I. BACKGROUND
The Previous Owners had record title to certain petroleum assets (the “Beta Assets”) that they
leased from the federal government. Dkt. 1.1 They assigned their interests in the Beta Assets to
1
The background facts in this order are taken from the R&R. The parties did not object to
the Bankruptcy Judge’s factual findings, and the court finds no error in the factual findings.
Pacific Energy Resources Ltd. (“PERL”), which eventually sold its assets to Rise Energy Beta, LLC
(“Rise”). Id. Rise is now Beta. Id. While PERL assumed, under the purchase and sales agreements
(“PSAs”), liability for plugging and abandonment obligations associated with the leases, it was
jointly and severally liable for these obligations with the Previous Owners under 30 C.F.R.
§ 556.604(d). Id.; see 30 C.F.R. § 556.604(d) (“Every current and prior record title owner is jointly
and severally liable, along with record title owners and all prior and current operating rights owners,
for compliance with all non-monetary terms and conditions of the lease and all regulations issued
under OCSLA, as well as for fulfilling all non-monetary obligations, including decommissioning
obligations, which accrue while it holds record title interest.”2).
PERL provided the federal government with a U.S. Treasury Note in the amount of $90
million to cover its estimated abandonment liability. Dkt. 1. PERL granted the Previous Owners
a subordinate security interest in the Treasury Note and placed the Note’s proceeds into a trust (the
“Beta Trust”). Id. The Previous Owners are not parties to the trust agreement. Id.
PERL filed bankruptcy and sold the Beta Assets to Rise. Id. Subsequent to filing
bankruptcy, the trustee, Rise, and the government executed an amendment to the trust agreement that
increased the estimated abandonment liability from $90 million to $152 million. Id. Rise made the
deposits to increase the trust balance. Id. In 2016, the government agreed to allow Rise to substitute
$62 million in cash with surety bonds, but the trustee required consent from the Previous Owners.
Id. The Previous Owners refused to consent. Id. Beta contends that this refusal was improper under
various agreements and section 2.4(a) of the Beta Trust. Id. Beta thereafter filed bankruptcy. Id.
2
OCSLA is the Outer Continental Shelf Lands Act, which “define[s] the law applicable to
the seabed, subsoil, and fixed structures of the [Outer Continental Shelf].” Tenn. Gas Pipeline v.
Hous. Cas. Ins. Co., 87 F.3d 150, 153 (5th Cir. 1996).
2
In its chapter 11 plan, Beta listed any claims held by the Previous Owners relating to the Beta
Trust as Class 3B claims. Id. Beta’s chapter 11 plan allowed Beta to either substitute some of the
cash in the trust with surety bonds, leaving the Previous Owners with a lien on the bonds and any
remaining cash, or provide the Previous Owners with “whatever other treatment would render their
claims unimpaired.” Id. The Previous Owners opposed the plan. Id.
On April 14, 2017, the Bankruptcy Court confirmed the plan, with the exception of how it
treated the Previous Owners’ Class 3B claims. Id. Beta proposed to substitute all of the trust funds
with $62 million in dual-obligee performance bonds and $90 million in U.S. Treasury notes. Id. The
government confirmed that this plan was compliant with regulations. Id. The Previous Owners
opposed this plan, and Beta thereafter filed the instant adversary proceeding. Id. Beta filed a motion
for summary judgment and the Previous Owners filed a motion to dismiss. Id. The Bankruptcy
Court eventually granted summary judgment in Beta’s favor. Id. The summary judgment order
required the Previous Owners to execute or deliver any instrument required to transfer the funds.
Id. The order was supplemented and eventually became a final judgment on February 9, 2018. Id.
The Previous Owners had requested withdrawal of reference as an alternative in their motion
to dismiss. Id.; see Dkt. 2. The Bankruptcy Judge issued the R&R denying this request on February
9, 2018. Dkt. 1. The withdrawal of reference is the only issue addressed in this order.
II. LEGAL STANDARD
The Previous Owners moved for withdrawal of reference on mandatory grounds for cause
shown. Dkt. 17. Under 28 U.S.C. § 157(a), a district court may refer cases under Title 11 of the
Bankruptcy Code to a bankruptcy judge. 28 U.S.C. § 157(a). The court may also refer cases arising
under Title 11 or arising in or related to a case under Title 11. Id. Under § 157(b), the bankruptcy
judge “may hear and determine all cases under title 11 and all core proceedings arising under title
3
11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter
appropriate orders and judgments, subject to review under section 158 of this title.” Id. § 157(b).
Under § 157(c), the judge “may hear a proceeding that is not a core proceeding but it otherwise
related to a case under title 11,” but the judge must “submit proposed findings of fact and
conclusions of law to the district court, and any final order or judgment shall be entered by the
district judge after considering the bankruptcy judge’s proposed findings and conclusions and after
reviewing do novo those matters to which any party has timely and specifically objected.” Id.
§ 157(c).
Under the second sentence of § 157(d), the mandatory withdrawal provision, the “district
court shall, on timely motion of a party, so withdraw a proceeding if the court determines that
resolution of the proceeding requires consideration of both title 11 and other laws of the United
States regulating organizations or activities affecting interstate commerce.” Id. § 157(d). “Courts
generally interpret the mandatory withdrawal provision restrictively, granting withdrawal of the
reference when the claim and defense entail material and substantial consideration of nonBankruptcy Code federal law.” Levine v. M&A Custom Home Builder & Developer, LLC, 400 B.R.
200, 203 (S.D. Tex. 2008) (Rosenthal, J.). This is to ensure that the mandatory withdrawal
requirement “‘does not became an “escape hatch” for matters properly before the bankruptcy court.’”
In re Royce Homes LP, 578 B.R. 748, 756 (Bankr. S.D. Tex. 2017) (Bohm, J.) (quoting United
States v. Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y. 1986)). “[C]ourts have generally held
that a mandatory withdrawal of reference is warranted where ‘substantial and material consideration’
of federal statutes other than the Bankruptcy Code is ‘necessary’ to the resolution of a case or
proceeding.” In re Nat’l Gypsum Co., 145 B.R. 539, 541 (N.D. Tex. 1992) (citations omitted). To
trigger mandatory withdrawal, (1) the proceeding must involve ‘a substantial and material question
4
of both title 11 and non-Bankruptcy Code federal law’; (2) ‘the non-Bankruptcy Code federal law
[must have] more than a de minimis effect on interstate commerce’; and (3) ‘the motion for
withdrawal [must be] timely filed.’” Barstad v. CNU of Tex., LLC, No. SA-17-CV-00581-OLG,
2017 WL 7789541, at *4 (W.D. Tex. Dec. 19, 2017) (quoting Kingdom Fresh Produce, Inc. v. Delta
Produce, No. 5:14-MC-899-DAE, 2015 WL 869240, at *3 (W.D. Tex. Feb. 27, 2015).
Under the first sentence of § 157(d), the permissive withdrawal provision, the “district court
may withdraw, in whole or in part, any case or proceeding referred under this section, on its own
motion or on timely motion of any party, for cause shown.” § 157(d).
Permissive withdrawal for cause shown requires a court to examine
the following factors: is the matter core or noncore? Do the
proceedings involve a jury demand? Would withdrawal further
uniformity in bankruptcy administration? Would withdrawal reduce
forum-shopping and confusion? Would withdrawal foster economical
use of resources? Would withdrawal expedite the bankruptcy
process?
Levine, 400 B.R. at 203. The party seeking permissive withdrawal “‘bears the burden of establishing
grounds for permissive withdrawal.’” Tow v. Park Lake Communities, LP, No. H-17-3364, 2018 WL
287861, at *1 (S.D. Tex. Jan. 4, 2018) (Rosenthal, J.) (quoting In re Morrison, 409 B.R. 384 (S.D.
Tex. 2009)).
Here, the Bankruptcy Judge issued an R&R regarding the Previous Owners’s motion to
withdraw reference. The Previous Owners timely filed objections.
The district judge shall make a de novo review upon the record or,
after additional evidence, of any portion of the bankruptcy findings
of fact or conclusions of law to which specific written objection has
been made in accordance with [Federal Rule of Bankruptcy Procedure
9033]. The district judge may accept, reject, or modify the proposed
findings of fact or conclusions of law, receive further evidence, or
recommit the matter to the bankruptcy judge with instructions.
Fed. R. Bankr. P. 9033(d).
5
III. ANALYSIS
The Bankruptcy Judge concluded that withdrawal was not mandatory because the
“proceeding involves only the interpretation of the Beta Trust Agreement under California law” and
consequently “does not involve substantial and material questions under Title 11 and non-bankruptcy
federal law.” Dkt. 1 at 7–8. It also found no cause had been shown for permissive withdrawal
because all of the factors courts consider in determining whether cause exists for permissive
withdrawal weigh against permissive withdrawal. Id. at 10.
The Previous Owners object to the determination that withdrawal is not mandatory, arguing
that the resolution of this matter requires material and substantial consideration of both Title 11 and
other federal law. Dkt. 17. The Previous Owners also object to the Bankruptcy Court’s findings on
permissive withdrawal, arguing, in the alternative, that the dispute is not statutorily core, that it is
not within the Bankruptcy Court’s Constitutional authority, and that the other factors all favor
permissive withdrawal. Id.
Beta contends first that the court may not even consider the motion to withdraw reference
because it is moot. Dkt. 18. Specifically, it asserts that the Bankruptcy Court has already entered
a final order on the merits in the adversary proceeding and, as such, there is nothing left for which
reference may be withdrawn. Id. Beta also argues that moreover, even if Beta were to demonstrate
that reference should have been withdrawn, since the court will review the Bankruptcy Court’s
summary judgment ruling de novo on appeal, any error with having the matter determined by the
Bankruptcy Court in the first instance is harmless. Id. Finally, Beta argues that the motion should
be denied because the R&R is correct in that neither mandatory nor permissive withdrawal is
appropriate. Id.
6
The Previous Owners contend that there is relief that can be granted beyond a mere review
of the Bankruptcy Court’s order because the Bankruptcy Court could not and did not rule on Beta’s
threshold claim that sought a declaration that the Beta Trust funds are property of the estate; it asserts
that they are not property of the estate and thus the Bankruptcy Court cannot rule on this issue and
it, along with the other claims, should be withdrawn and considered by this court. Dkt. 19.
The court will first consider the objection to the Bankruptcy Court’s recommendation
regarding mandatory withdrawal and then will consider the arguments relating to permissive
withdrawal. The court does not address the mootness argument since it has not yet addressed the
Bankruptcy Court’s ruling on the motion for summary judgment.
A.
Mandatory Withdrawal
The Bankruptcy Court determined that this proceeding involves only the interpretation of the
Beta Trust Agreement under California law. Dkt. 1 at 8 (citing ECF No. 40 at 16–17). It specifically
held, in ruling on the motion for summary judgment, that “the Previous Owners may not unilaterally
object to any approval [by the government] of a substitution of current Beta Trust funds with the
proposed performance bonds.” Dkt. 1, Ex. 1 at 17. It based this finding on California contract law.
See id. at 16–17. The Beta Trust has a governing law provision that requires the agreement to be
construed in accordance with California law. Dkt. 17, Ex. 6 ¶ 5.12.
The Previous Owners object to this finding. Dkt. 17. They contend that “bankruptcy issues
are, at best secondary, and, in reality, relevant at all only to the extent the dispute itself is first
resolved.” Id. They argue that determining whether the debtor is entitled to access the funds
requires an analysis of OCSLA, its implementing regulations, and possibly the state law incorporated
under OCSLA. Id. It notes that resolving the trust dispute will require “substantial and material
consideration” of each of these sources of law and that even the incorporated state law is deemed
7
federal law for these purposes. Id. (citing Romero v. Mobil Expl. & Producing N. Am., Inc., 939 F.2d
307, 309 (5th Cir. 1991)). They rely primarily on two cases, Block v. Anthony Tammaro, Inc. and
Wooten v. USA, Through Dep’t of Interior, both of which held that withdrawal was mandatory. Id.
(citing Dkt. 17, Exs. 24, 25). The Previous Owners contend that the Bankruptcy Court, in stating
that the trust agreement is governed according to California law, appeared to rely exclusively on
section 5.12 of the agreement and ignore the sections of the agreement that indicate the agreement
is “‘per 30 CFR 256.52’” and is a “‘lease specific abandonment account pursuant to [the federal
government’s] rules and regulations.’” Id. (citing Dkt. 17, Ex. 6 (Beta Trust Agreement) at 1–2).
The Previous Owners concede that “on its face, those provisions may seem to be in conflict with
Section 5.12 . . . but they are not.” Id. “Instead, [according to the Previous Owners,] the Beta Trust
Agreement is governed by OCSLA and its implementing regulations, which in turn borrow from
governing state law” but any state law borrowed by OCLSA is “surrogate federal law.” Id.
Moreover, the Previous Owners assert that even if California law were relevant in its own right, the
resolution of the Beta Trust dispute requires material and substantial consideration of nonbankruptcy federal law because the trust is an OCSLA decommissioning trust, governed by the
Bureau of Ocean Energy Management’s (“BOEM”) model decommissioning trust agreement, and
its res is subject to 30 C.F.R. § 556.904 and other regulations. Id. The court therefore must
materially and substantially consider each of the federal non-bankruptcy law sources to interpret the
agreement and whether the proposal to remove trust funds is permitted. Id.
Beta asserts that the R&R correctly recognizes that the underlying agreements are governed
by California law and the question of whether Beta’s chapter 11 Plan impaired the Previous Owners
is governed by bankruptcy law. Dkt. 18. Beta notes that the “Previous Owners fail to cite any
federal statute or regulation that, even putatively, prohibits the transactions proposed in the Plan,
8
because no such law exists.” Id. Beta points out that the Previous Owners do not point to any statute
or regulation that precludes Beta from agreeing to the relief ordered by the Bankruptcy Court, and
they do not cite any statute or regulation that allows the Previous Owners to veto the government’s
decision to allow the transaction. Id.
The court has reviewed the Bankruptcy Court’s memorandum opinion regarding Beta’s
motion for summary judgment, which it attached as an exhibit to its R&R. See Dkt. 1, Ex. B. The
Bankruptcy Court noted that the “fundamental issue in this proceeding is whether the substitution
of surety bonds for the case within the Beta Trust results in an impairment of the Previous Owners’
interests under the plan.” Id. It pointed out that the “evaluation and enforcement of a debtor’s plan
are within a bankruptcy court’s subject matter jurisdiction because such actions concern the
administration of a debtor’s bankruptcy case and may only arise in the context of that case.” Id. It
held that this case “arises only in the context of bankruptcy and is thus within [the Bankruptcy
Court’s] subject matter jurisdiction.” Id. It then turned to whether it had Constitutional authority
to issue a final judgment in the proceeding. Id. It noted that “the determination of whether the
Debtor’s chapter 11 plan impairs the Previous Owners’ interests and claims constitutes a ‘core’
bankruptcy proceeding under 28 U.S.C. § 157(b)(2) that stems solely from the bankruptcy itself,
particularly the effect and administration of the Debtors’ confirmed plan on the Previous Owners’
interests.” Id. It noted that the Beta Trust was governed by California law and then analyzed the
trust pursuant to this law. Id. It did not rely on OCSLA or, with the exception of mentioning the
joint and several liability imposed by 30 C.F.R. § 556.604(d), any federal regulations in reaching
decision. Id.
The Previous Owners rely on Wooten and Tammaro to argue that the Bankruptcy Court erred
in concluding that it was not materially relying on federal non-bankruptcy law. In Tammaro, a U.S.
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District Court in New Jersey considered whether to withdraw reference in a case involving a
constructive trust created for the unpaid sellers of produce under the Perishable Agricultural
Commodities Act (“PACA”), which allows “the Secretary of Agriculture to bring an adversary
proceeding to prevent and restrain dissipation of funds subject to the trust.” Block v. Anthony
Tammaro, Inc. (In re Anthony Tammaro, Inc.), 56 B.R. 999, 1000 (D.N.J. 1986). The Secretary filed
a claim on behalf of nine creditors in the debtor’s bankruptcy case and moved for mandatory
withdrawal of reference. Id. The court held that determining if the PACA trust was part of the
bankruptcy estate would “obviously entail material and substantial consideration of both PACA and
Title 11 law” and withdrew the reference. Id. at 1007.
In Wooten, the trustee in a bankruptcy case sought damages from the U.S. Department of the
Interior for alleged overcharges in federal royalty crude oil that the debtor had purchased from the
government. Wooten v. USA, Through Dep’t of Interior, 52 B.R. 74, 75 (W.D. La. Bankr. 1985).
The trustee asserted that the overcharges were in violation of a federal petroleum pricing regulation.
Id. The court determined that bankruptcy issues were secondary and that its primary consideration
was certain federal statutes, including OCSLA, and regulations. Thus, it withdrew reference under
28 U.S.C. § 157(d) (mandatory withdrawal of reference).
Here, unlike in the cases cited by the Previous Owners, the Bankruptcy Court interpreted an
agreement that expressly chose state law, and while there may be mention of federal regulations and
it may be an OCSLA decommissioning trust, there was no need to substantially rely on any federal
law to interpret the contract under California state law. The Bankruptcy Court certainly did not find
it necessary to substantially and materially rely on non-bankruptcy federal law, and this court
likewise will not substantially and materially rely on non-bankruptcy federal law. Accordingly, the
Bankruptcy Court’s finding on mandatory withdrawal is AFFIRMED.
10
B.
Permissive Withdrawal
The Bankruptcy Court held that this is a core proceeding because it involves the evaluation
and enforcement of the debtor’s plan as well as the impairment status of the Previous Owners’
interests and claims. Dkt. 1. Additionally, it determined that all the other permissive factors either
weigh against withdrawal or are neutral. Id.
With the exception of the finding that some of the factors are neutral, the Previous Owners’
object to the Bankruptcy Court’s findings with regard to permissive withdrawal. They contend that
the Bankruptcy Court does not have constitutional or statutory authority to finally decide this
proceeding and that the court should therefore withdraw reference for cause. Dkt. 17. They assert
that the dispute cannot be characterized as relating to the disallowance of claims under 28 U.S.C.
§ 157(b)(2)(B) because they did not file any claims and are not creditors of the estate.3 Id. They
argue that they only participated in the bankruptcy case to reserve their right not to have their
interests in the trust improperly adjudicated. Id. (citing Benedor Corp. v. Conejo Enters., Inc. (In
re Conejo Enters., Inc.), 96 F.3d 346, 353 (9th Cir. 1996), for the proposition that the bankruptcy
court only has core jurisdiction under § 157(b)(2)(B) if the creditor filed a proof of claim, and S.G.
Phillips Constructors, Inc. v. Burlington, Vt. (In re S.G. Phillips Constructors, Inc.), 45 F.3d 702,
707 (2d Cir. 1995), for the proposition that filing a proof of claim triggers § 157(b)(2)(B) subject
matter jurisdiction).4
3
Under 28 U.S.C. § 157(b)(2)(B), proceedings about “allowance or disallowance of claims
against the estate or exemptions from property of the estate, and estimation of claims or interests for
the purposes of confirming a plan under chapter 11 . . . of title 11 but not the liquidation or
estimation of contingent or unliquidated personal injury tort or wrongful death claims against the
estate for purposes of distribution in a case under title 11” are core proceedings.
4
In In re Conejo Enterprises, the Ninth Circuit held that a party subjected its claim to the
bankruptcy court’s core jurisdiction under 28 U.S.C. § 157(b)(2)(B) when it filed a proof of claim.
11
The Previous Owners additionally contend that this case cannot relate to the “confirmation
of the plan” under § 157(b)(2)(L) (which deals with confirmations of plans) because the dispute
centers around determining the validity, priority, and extent of the parties’ interests in non-estate
assets, not in determining plan issues.5 Id. In fact, the Previous Owners contend that this adversary
proceeding was bifurcated from the plan, which was confirmed and had “already gone effective.”
Id. The Previous Owners believe that the Bankruptcy Court relied on the trust funds being property
of the estate as a jurisdictional hook, but that the Bankruptcy Court had no authority to issue final
orders as the “mere assertion that certain assets are estate property is not sufficient to confer a
bankruptcy court with the necessary adjudicatory authority.” Id. Moreover, they argue that if the
focal point of an issue is whether a particular item is estate property, the Bankruptcy Court has no
final adjudicatory authority. Id. (citing King v. ARK Woodworks, Inc., No. 12-23106 HRT, 2014 WL
2890429, at *3 (Bankr. D. Colo. June 25, 2014)). They contend that otherwise a debtor’s mere
assertion that an interest was property of the estate would be like a Trojan Horse allowing debtors
to bring garden variety contract claims to the Bankruptcy Court. Id. (citing Garon v. Peebler (In re
Pali Holdings, Inc.), 488 B.R. 841, 852 n.39 (Bankr. S.D.N.Y. 2013)). The Previous Owners assert
that the adversary proceeding here is a non-bankruptcy law contract dispute that predates the
bankruptcy filing and has no bearing on the reorganization. Id.
In re Conejo Enters., 96 F.3d at 353–54. S.G. Phillips similarly involved core jurisdiction under §
157(b)(2)(B) when a party filed a proof of claim. In re S.G. Phillips Constructors, Inc., 45 F.3d at
704–05. But, as the S.G. Phillips Court acknowledged, the “Bankruptcy Code provides a nonexclusive list of matters that Congress considered to be within the bankruptcy court’s core
jurisdiction.” Id. at 704. Thus, the determinations in these cases that filing a proof of claim resulted
in core jurisdiction is only one of many ways, including many ways listed in the statute itself, that
a bankruptcy court may have core jurisdiction.
5
Under 28 U.S.C. § 157(b)(2)(L), proceedings involving the confirmation of plans are core
proceedings.
12
The Previous Owners further urge that even if the Bankruptcy Court had statutory authority
to hear the dispute, it does not have constitutional authority. Id. They point out that under Article
III of the U.S. Constitution, “only judges with life tenure and salary guarantees can enter final
judgments on plenary matters that are ‘the subject of a suit at the common law, in equity or
admiralty.’” Id. (quoting Burtch v. Huston (In re USDigital, Inc.), 461 B.R.276, 286 (Bankr. D. Del
2011)). They note that there is a public rights exception for disputes under Congressionally created
schemes, such as bankruptcy, but if a debtor seeks to enforce a right created by non-bankruptcy law
that is independent of and antecedent to the reorganization petition, the bankruptcy courts do not
have final adjudicatory power. Id. The Previous Owners understand that the Bankruptcy Court held
that the dispute hinges primarily on a determination of whether the bankruptcy plan impairs the
Previous Owners’ interests, but they argue that the dispute does not hinge on any rights created by
the bankruptcy plan and is independent of and antecedent to the bankruptcy petition. Id. They sum
it up by stating that the debtor’s “attempt to affect interests in property (i.e., the Beta Trust Funds)
not held by [the debtor] at the time of its bankruptcy filing, but instead in the possession of a third
party under a claimed interest adverse to the debtor, is not sufficient to confer bankruptcy court
adjudicatory authority.” Id.
With regard to the other factors, the Previous Owners contend that resolution of the dispute
would be expedited by withdrawing reference now because the motion for summary judgment was
incorrectly decided and if the court refers it back to the Bankruptcy Court to reset the case’s
procedural posture, it will delay things more. Id. They contend that the other factors are not
applicable. Id.
Beta argues that the adversary proceeding was both statutorily and constitutionally core.
Dkt. 18. Beta sought a determination as to whether the proposed treatment of the Previous Owners
13
in Beta’s bankruptcy plan was fair and equitable under the Bankruptcy Code or, alternatively,
whether the plan impaired the Previous Owners under the Bankruptcy Code, which are both core
bankruptcy claims. Id. It also sought a determinations that the property securing the Previous
Owners is property of the bankruptcy estate and limiting the Previous Owners’ claims, both of which
are core bankruptcy questions and could not exist outside of bankruptcy. Id. They assert that the
fact that the court had to rely on state law did not absolve it of jurisdiction or authority, citing 28
U.S.C. § 157(b)(3). Beta argues, with regard to the Previous Owners’ contention that the Bankruptcy
Court’s jurisdiction was limited because the plan had already been confirmed, that this is incorrect
because there is stipulated language in the order confirming the plan that expressly reserved and
preserved all the rights, claims, and defenses of Beta and the Previous Owners with regard to their
treatment under the plan. Id. They also argue that the Previous Owners’ contention that the
distribution of funds held in the trust is not material to the plan cannot be squared with the plan itself
and that the additional cash would provide value to the holders of $1.2 billion in notes that were not
paid in full under the plan. Id. Additionally, Beta asserts that the “Previous Owners’ argument that
they are not ‘creditors’ is absurd.” Id. Beta claims that the Previous Owners have substantial
indemnity claims against Beta and that their interest in the assets of the trust secures those claims.
Id.
With regard to whether the claims are statutorily core, Beta outlines each of its claims and
the provision of the Bankruptcy Code upon which each of the claims rely: (1) declaration that the
trust is property of the estate under 11 U.S.C. § 541; (2) declaration that the Previous Owners cannot
veto BOEM’s direction to the Beta trustee under 11 U.S.C. § 1142(b); (3) declaration that the
Previous Owners are unimpaired under 11 U.S.C. § 1124; (4) approval of the plan’s treatment of the
Previous Owners under 11 U.S.C. § 1129(a)(8)(B) or 11 U.S.C. § 1129(b)(1) & (2)(A);
14
(5) disallowance of contingent claim under 11 U.S.C. § 502 (e); and (6) limitation of post-petition
lien under 11 U.S.C. § 552(a). Id.
With regard to constitutional authority, Beta points out that the U.S. Supreme Court has held
that while Article III prevents bankruptcy courts from entering final judgment on claims that seek
to only augment the bankruptcy estate and would have existed even without the bankruptcy
proceeding, it specifically stated that the holding was narrow and not meant to change the division
of labor in bankruptcy cases. Id. (citing Stern v. Marshall, 564 U.S. 462 (2011)). It then
distinguishes Stern and points out that in this case, the adversary proceeding completed the plan
confirmation proceedings and sought a determination of whether the plan’s treatment of the Previous
Owners was fair and equitable under the Bankruptcy Code. Id.
Beta also argues that the other permissive withdrawal factors are not satisfied. Id. They
assert that there has been no jury demand, a withdrawal would undermine uniformity in bankruptcy
administration and encourage forum shopping, sever a key aspect of plan confirmation from the
Bankruptcy Court’s administration, and provide a back door to litigants who seek to undermine a
Bankruptcy court’s Stern authority. Id. Additionally Beta points out that the court would have to
learn the plan that the Bankruptcy Court confirmed, address issues of bankruptcy law, and invalidate
a final order. Id. It points out that the Previous Owners filed eight substantive briefs in the
Bankruptcy Court and that the Bankruptcy Court held multiple hearings relating to these briefs. Id.
Finally, Beta asserts that the Previous Owners and Beta stipulated to postpone the
adjudication of the plan’s treatment of the Previous Owners’ claims, and the agreement was without
prejudice to any parties’ rights with regard to confirmation. Id.
In reply, the Previous Owners assert that the Beta Trust dispute has nothing to do with Beta’s
already-confirmed plan as the Previous Owners are not creditors and have not consented to the
15
Bankruptcy Court’s jurisdiction or filed proofs of claim. Dkt. 19. They assert that the dispute is an
antecedent and independent dispute over non-debtor property held outside of Beta’s estate in a
federal-law governed decommissioning trust. Id. With regard to Beta’s argument about Stern, the
Previous Owners contend there is substantial pre-Stern caselaw that supports their position, such as
Marathon, Cline, Harrison, Weidhorn, and Taubel-Scott. Id. The Previous Owners contend that
Beta’s Stern analysis is incorrect, but regardless, this other caselaw mandates Article III adjudication.
Id. Specifically, they contend it supports the position that “when a debtor seeks to enforce a right
created by non-bankruptcy law that is ‘independent of and antecedent to the reorganization petition,’
bankruptcy courts do not have final adjudicatory power.” Id. (citing Marathon, 458 U.S. at 71). It
contends that it has the right to have the merits of its claim adjudicated by an Article III court and
that the Bankruptcy Court cannot retain jurisdiction absent its consent. Id. (citing Cline, 323 U.S.
at 98–99). It points out that Beta does not have control over the Beta Trust Funds, which are held
by a third-party trustee who has refused Beta’s demands to release the property. Id. (citing In re Am.
S. Pub. Co., 426 F.2d 160 (5th Cir. 1970)). It asserts that absent a threshold determination that the
Beta Trust Funds are property of the estate, the Bankruptcy Court cannot issue binding orders. Id.
(asserting that the funds are not property of the estate here because Beta has only a contingent,
reversionary interest in the funds).
In Stern, the U.S. Supreme Court considered a case in which a Bankruptcy Court granted
summary judgment on a tortious interference with contract claim and the losing party argued that the
court did not have the power to enter a final judgment because the counterclaim was not a “core”
proceeding. Stern v. Marshall, 564 U.S. 462, 470–71, 131 S. Ct. 2594 (2011). The Court held that
the Bankruptcy Court had the statutory power to enter the judgment, but not the constitutional
authority. Id. at 469. It noted that bankruptcy courts may hear and enter final judgments in core
16
proceedings but must submit proposed findings of fact and conclusions of law to the district court
in non-core proceedings. Id. at 471. The counterclaim was “core” under the plain text of the
relevant statute, 28 U.S.C. § 157(b)(2)(C). Id. at 475. However, the Court determined that
“designating all counterclaims as ‘core’ proceedings raises serious constitutional concerns.” Id. at
477. It noted that “[w]hen a suit is made of ‘the stuff of the traditional actions at common law tried
by the courts at Westminster in 1789,’ . . . and is brought within the bounds of federal jurisdiction,
the responsibility for deciding that suit rests with Article III judges in Article III courts.” Id. at 484
(quoting N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90, 102 S. Ct. 2858
(Rehnquist, J., concurring in the judgment)).
The Stern Court first discussed its holding in Marathon that assigning state-law contract
claims to bankruptcy judges violated Article III of the United States Constitution. Id. at 485
(discussing Marathon, 458 U.S. at 52, 87, 91). It pointed out that Congress revised the statute
governing bankruptcy jurisdiction after the Marathon decision, and the new statute called for
bankruptcy judges to be appointed by the courts of appeals in their districts and to enter final
judgments in only core proceedings. Id. at 486 (discussing 28 U.S.C. § 152(a)). The bankruptcy
courts’ final judgments in core proceedings are binding and enforceable and district courts review
them “only under the usual limited appellate standards.” Id. at 487. The Stern Court noted that the
counterclaim in that case was a “state law action independent of the federal bankruptcy law and not
necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy” and was thus not
“a matter of ‘public right’ that can be decided outside of the Judicial Branch.” Id. at 487–88. It did
not flow from Congress or from a federal statutory scheme. Id. at 493. The Court pointed out all
of the rulings above and beyond the rulings on the proof of claim that would be necessary to
adjudicate the counterclaim and that the claim was “in no way derived from or dependent upon
17
bankruptcy law; it is a state tort action that exists without regard to any bankruptcy proceeding.” Id.
at 499. It ruled that “Congress may not bypass Article III simply because a proceeding may have
some bearing on a bankruptcy case; the question is whether the action at issue stems from the
bankruptcy itself or would necessarily be resolved in the claims allowance process” or falls within
the public rights exception. Id. The court cautioned that its holding was narrow and that it did not
think the removal of counterclaims from core bankruptcy jurisdiction “meaningfully changes the
division of labor in the current statute” as bankruptcy courts could still decide issues that were
related to the bankruptcy proceedings; the district court just had to “‘finally decide’” them. Id. at
502.
The Bankruptcy Court outlined the “fundamental issue in this proceeding” as being “whether
the substitution of surety bonds for the cash within the Beta Trust results in an impairment of the
Previous Owners’ interest under the plan”—“an issue . . . explicitly reserved at the
confirmation . . . that was integral to the confirmation decision.” Dkt. 1, Ex. B at 12 (Bankrtupcy
Court’s order on the motion for summary judgment). It determined that the case was within its
subject matter jurisdiction because it involved “the administration of the Debtors’ chapter 11 plan,
as well as the impairment status of the Previous’ Owners’ interests and claims by that plan” and thus
arose “only in the context of bankruptcy.” Id. With regard to Constitutional authority, the court held
that the proceeding stems solely from the bankruptcy itself, and particularly the effect and
administration of the Debtors’ confirmed plan on the Previous Owners’ interests. Id.
The court agrees with the Bankruptcy Court that this matter is a core issue and that the
Bankruptcy Court’s exercise of jurisdiction was Constitutional. Under Stern, the court must
determine whether the action stems from the bankruptcy itself, and each of the claims at issue stem
from the bankruptcy or the impact of the plan on the Previous Owners’ interests and thus arose only
18
in the context of bankruptcy. The fact that the Previous Owners did not actually file a proof of claim
is of little consequence since the claims concern the administration of the bankruptcy case—whether
the plan impaired the Previous Owners’ interests—and could only arise in the context of
bankruptcy.6 See Dkt. 40, Ex. B at 13.
The other permissive withdrawal factors also weigh in favor of not withdrawing reference.
There is no jury demand. The case will be finalized more quickly if the Bankruptcy Court, which
is already familiar with the issues, decides it. And the costs would be increased if reference were
withdrawn since the Bankruptcy Court has already considered all issues and ruled on them.
The court agrees with the Bankruptcy Court that reference should not be withdrawn. The
motion to withdraw reference is DENIED.
IV. CONCLUSION
The Previous Owners’ objections to the Bankruptcy Court’s R&R are OVERRULED. The
Bankruptcy Court’s R&R is ADOPTED IN FULL.7 The motion to withdraw reference is DENIED.
Signed at Houston, Texas on September 20, 2018.
___________________________________
Gray H. Miller
United States District Judge
6
While the Previous Owners did not file a “proof of claim,” they concede that they
participated in the proceedings “to reserve their right not to have their interests in the Beta Trust and
the Beta Trust Funds improperly adjudicated by a bankruptcy court.” Dkt. 17 at 16.
7
The court notes that the R&R incorporates its attachments for background information,
including a January 19, 2018 order on a motion for partial summary judgment (the “January 19 PSJ
Order”). This court’s adoption of the R&R includes the attachments only to the extent they provide
additional background information on the case. The Previous Owners have appealed the Bankruptcy
Court’s February 9, 2018 order, which also incorporated the January 19 PSJ Order, and the court will
address the appeal of the February 9 order and any legal issues it relies on from the January 19 PSJ
Order at a later date.
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