In re McConathy

IN RE: Patrick L. McConathy Patricia Chapman McConathy Debtors

Case Number: 90-13449

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA SHREVEPORT DIVISION

June 14, 2021

Chapter 7

Amended Memorandum Ruling

This case involves chapter 7 debtors who filed bankruptcy more than 30 years ago but failed to disclose certain mineral rights in their bankruptcy schedules. Nearly three decades later, one of the debtors, Patrick L. McConathy, filed suit in Kansas state court alleging that he acquired the mineral rights before his bankruptcy case commenced, and that he has maintained continuous ownership since then. In the lawsuit, Debtor and other parties claiming to hold an interest in the mineral rights seek $15 million from the defendants under various legal theories.

After the Kansas litigation commenced, this court reopened the bankruptcy case to permit the trustee to administer the undisclosed mineral rights. The law is clear that any property owned by a debtor as of the commencement of the case but not scheduled, remains property of the estate pursuant to 11 U.S.C. § 554. Thus, the unscheduled mineral rights remain property of the estate and are subject to the trustee's exclusive administration.

In its order reopening this case, this court declared that all actions involving estate property are automatically stayed. This court's order notwithstanding, Debtor and his counsel continued to prosecute the state court lawsuit. As a result, the trustee filed a motion to enforce the stay, which led this court to enter an Agreed Order staying the entire state court litigation.

The matter before the court is a motion to modify the automatic stay. Certain non-debtor parties in the state court litigation are seeking modification of the stay in order to proceed with that litigation. For reasons that follow, the motion is denied. The automatic stay remains undisturbed.

Background

Pursuant to Fed. R. Bankr. P. 7052, made applicable to this contested matter by virtue of Fed. R. Bankr. P. 9014, the court makes the following findings:

1. On December 31, 1990, Patrick L. McConathy ("McConathy") and Patricia Chapman McConathy (collectively, "Debtors") commenced this case under chapter 7 of the Bankruptcy Code. Thereafter, Debtors received a discharge. A final decree closing this case was entered on October 25, 1994.

2. On April 15, 1996, Debtors reopened their case to disclose overriding royalty interests in Texas which were not listed in their bankruptcy schedules. The court issued a second final decree closing this case on January 7, 1997.

3. On July 3, 2006, this case was reopened yet again when Brammer Engineering, Inc. filed a motion to reopen. This court issued a third final decree closing this case on October 9, 2006.

4. On August 13, 2019, McConathy and McConathy Oil and Gas Co., a Louisiana Partnership (the "Partnership"), among others, filed suit in the 25th Judicial District Court in Kearny County, Kansas, Case No. 19-cv-0011, asserting that, since 1987, McConathy has owned undivided working interests and leasehold rights in over 4,000 acres located in Kearny County, Kansas (the "Kansas Mineral Rights"). Further, McConathy asserted that he acquired 100% of the interests in the Kansas Mineral Rights upon the dissolution of the Partnership from the other partners when he assumed the debts of the Partnership in exchange for an assignment of their interests to him in the Kansas Mineral Rights.¹

5. The Kansas lawsuit was joined by other plaintiffs. Each plaintiff claims to be an owner of undivided working interests in various oil and gas leases, including the same leases in which McConathy claims to own a fractional interest.

6. The petition in the Kansas lawsuit identifies other "interested parties" whomay also assert an interest in the same mineral leases at issue.

7. The Kansas lawsuit seeks, inter alia, a determination of ownership of the working interests and other interests related to oil and gas leases described in the petition.

8. The Kansas lawsuit alleges that various oil and gas leases described in the petition were the same leases covering the same lands at issue in an earlier partition lawsuit. Plaintiffs claim that the order of partition does not affect their interests because they were not served with the partition lawsuit and had no notice of it.

9. In their state court petition, plaintiffs assert claims for conversion (the oil produced and sold belongs to plaintiffs), unjust enrichment (proceeds for oil produced and sold belong to plaintiffs as do the leasehold rights), trespass (drilling of the wells constitutes a violation of plaintiffs' property rights), ejectment (turn over operation of the wells to someone else) and general title / declaratory judgment (declaring plaintiffs as the owners of the Kansas Mineral Lease Rights). Second Amended Petition, ¶¶ 17, 54-61, 68-91, docket no. 182-4, pp. 41-64.

10. The Kansas lawsuit seeks $15 million in damages from the defendants. Docket no. 182-6.

11. At some point, third-party defendants were added. In turn, one or more of the third-party defendants claim to own a net-profits interest ("NPI") by virtue of an unrecorded (and, perhaps, unexecuted) instrument which, if effective,would burden the estate's working interests.

12.On January 20, 2021, this court reopened this bankruptcy case for a third time on the grounds that Debtors did not properly disclose McConathy's claimed interest in the Kansas Mineral Rights, the existence of a Partnership, or certain pre-petition transfers.

13.In the order reopening this case, this court stated: "[p]ursuant to 11 U.S.C. § 362, the automatic stay is hereby in effect and all actions involving property of the bankruptcy estate are hereby stayed."

14.On January 22, 2021, the defendants in the Kansas litigation filed a Suggestion of Bankruptcy into the record of that case which admonished the parties to "take notice of the attached Order from the [Bankruptcy Court]." More importantly, it stated that the parties should immediately halt any proceedings involving property of the bankruptcy estate, further providing that the automatic stay is in effect.

15. Despite the filing of the Suggestion of Bankruptcy, McConathy and his counsel (who also serves as counsel to other parties) continued to prosecute the Kansas litigation in violation of the automatic stay.

16. Thereafter, the trustee filed a motion in this court to enforce the stay (docket no. 196).

17. This court entered an Agreed Order (docket no. 201) staying the entire state court litigation.

18. A motion to modify the stay was filed by the non-debtor co-plaintiffs and thethird-party defendants in the Kansas litigation: Foundation Energy Fund IV-A, LP, a Delaware Limited Partnership; Foundation Energy Fund IV-B Holding, LLC, a Texas Limited Liability Company; Dolores Jo Matson Trust; Roger Melvin Matson Trust; Willis J. Magathan; Entech Enterprises, Inc.; and Black Stone Minerals Company, LP.

19. The motion to modify the stay seeks the entry of an order permitting the moving parties to go forward with their claims in the Kansas lawsuit.

20. The trustee and the defendants in the Kansas litigation oppose the motion.

21. The court held an evidentiary hearing on the motion. All parties submitted evidence.

Conclusions of Law and Analysis

A. Jurisdiction, venue and core status.

This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and by virtue of the reference by the district court pursuant to 28 U.S.C. § 157(a) and LR 83.4.1. Venue is proper in this district. 28 U.S.C. §§ 1408 and 1409(a). This matter constitutes a "core" proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (G), and (O).

B. Debtor's interest in the mineral rights constitutes property of the bankruptcy estate.

As a threshold issue, the court must decide if McConathy's mineral rights constitute property of the estate. If they do, the automatic stay applies. If not, the stay will not apply.

This is an easy issue to put to rest. 11 U.S.C. § 541(a)(1) defines property ofthe bankruptcy estate to include: "all legal or equitable interests of the debtor in property as of the commencement of the case." The Fifth Circuit has broadly construed the scope of section 541(a)(1) and has described it as "all encompassing." In re S.I. Acquisitions, Inc., 817 F.2d 1142, 1149 (5th Cir. 1987) (" 'all legal and equitable interests of the debtor in property' is all-encompassing . . ."); see also Burgess v. Sikes (In re Burgess), 392 F.3d 782, 785 (5th Cir. 2004) (scope of property of the estate includes intangible property and causes of action).

In the Kansas litigation, McConathy alleges that he has individually owned 100% of the Partnership's interest in the Kansas Mineral Rights continuously since 1987, which is prior to the commencement of his bankruptcy case. Therefore, he had a statutory duty to disclose his interest in the Partnership, or to list the mineral rights as part of his personal assets. 11 U.S.C. § 521.

After a careful review of the bankruptcy record, the court has determined that Debtors failed to comply with their statutory duty to disclose McConathy's ownership of the Kansas Mineral Rights or the Partnership. As a result, this property remains property of the bankruptcy estate. As the Fifth Circuit has noted, "[i]n a Chapter 7 case, at the close of the bankruptcy case, property of the estate that is not abandoned under § 554 and that is not administered in the bankruptcy proceedings—including property that was never scheduled—remains the property of the estate." Kane v. Nat'l Union Fire Ins. Co., 535 F.3d 380, 385 (5th Cir. 2008).

C. The automatic stay applies to the Kansas litigation because it involves property of the estate.

Having established that there is property of the estate at issue, the nextquestion is whether the automatic stay applies to the Kansas litigation.²

Section 362(a)(3) of the Bankruptcy Code provides that the filing of a bankruptcy petition "operates as a stay" of "any act ... to exercise...