Warrior v. Found. Energy Fund IV-A, L.P. (In re McConathy)

111 F.4th 574

In the Matter of Patrick L. McCONATHY and Patricia Chapman McConathy, Debtor,

American Warrior, Incorporated; Heartland Oil, Incorporated; Mid Continent Resources, Incorporated, Appellants, v. FOUNDATION ENERGY FUND IV-A, L.P.; Foundation Energy Fund IV-B Holding, L.L.C.; Dolores Jo Matson Trust; Roger Melvin Matson Trust; Willis J. Magathan, Appellees, American Warrior, Incorporated; Heartland Oil, Incorporated; Mid Continent Resources, Incorporated, Appellants, v. Black Stone Minerals Company, L.P.; Entech Enterprises, L.L.C., Appellees, American Warrior, Incorporated; Heartland Oil, Incorporated; Mid Continent Resources, Incorporated, Appellants, v. Black Stone Minerals Company, L.P.; Entech Enterprises, L.L.C., Appellees, American Warrior, Incorporated; Heartland Oil, Incorporated; Mid Continent Resources, Incorporated, Appellants, v. Foundation Energy Fund IV-A, L.P.; Foundation Energy Fund IV-B Holding, L.L.C.; Dolores Jo Matson Trust; Roger Melvin Matson Trust; Willis J. Magathan Estate, Appellees.

No. 23-30529

United States Court of Appeals, Fifth Circuit

FILED August 1, 2024

Appeal from the United States District Court for the Western District of Louisiana, USDC Nos. 5:22-CV-5769, 5:22-CV-5771, 5:22-CV-5772, 5:22-CV-5773, S. Maurice Hicks, Jr., U.S. District Judge

Michael H. Rubin, Esq. (argued), McGlinchey Stafford, P.L.L.C., Baton Rouge, LA, Patrick Lawrence McCune, Wiener Weiss & Madison, Baton Rouge, LA, Roger Joseph Naus, Wiener, Weiss & Madison, A.P.C., Shreveport, LA, for Appellants.

Bradley Loy Drell (argued), Heather M. Mathews, Esq., Gold, Weems, Bruser, Sues & Rundell, Alexandria, LA, for Appellees Foundation Energy Fund IV-A, L.P., Foundation Energy Fund IV-B Holding, L.L.C., Dolores Jo Matson Trust, Roger Melvin Matson Trust, Willis J. Magathan.

Sarah Anne Kirkpatrick (argued), Brandon Gee Pang, Bradley, Murchison, Kelly & Shea, L.L.C., Shreveport, LA, for Appellees Black Stone Minerals Company, L.P., Entech Enterprises, L.L.C.

Before Jones, Clement^*, and Wilson, Circuit Judges.

Edith H. Jones, Circuit Judge:

In this appeal from a bankruptcy court decision, American Warrior, the defendant in a Kansas oil and gas title suit, seeks to leverage whom it may have to pay into what forum will decide the parties' dispute. The Debtors, to be sure, lacked integrity in concealing ownership of their interest in the properties thirty years ago. But as the current bankruptcy matter has evolved, AWI settled with the Debtors' trustee, there is no bankruptcy issue remaining between other plaintiffs and AWI, and the bankruptcy court permissively abstained. We find no reversible error in the bankruptcy court or district court decisions and accordingly AFFIRM.

I. BACKGROUND

Patrick and Patricia McConathy ("Debtors") filed a bankruptcy case in Louisiana in 1990 but failed to disclose their undivided working interests and leasehold rights in various tracts of land covering more than 3,000 acres in Kearny County, Kansas. The Debtors' bankruptcy case was re-opened twice over the decades.

The third reopening occurred in 2021 on the initiative of American Warrior ("AWI"), when discovery in a Kansas state court lawsuit revealed previously undisclosed property of the estate. The lawsuit was filed in 2019 by the Debtors (and other plaintiffs including Foundation Energy Appellees) against AWI and other defendants ("Kansas Litigation").¹

During discovery, AWI learned that the Debtors had declared bankruptcy but did not include the Kansas oil and gas interests in their bankruptcy schedule. AWI was thus aware of the bankruptcy "defect" regarding the Debtor's nondisclosure as early as April 2020, but did not move to re-open the bankruptcy proceeding until January 2021 at an allegedly crucial juncture in the litigation.

On January 24, 2021, the bankruptcy court entered an order granting the motion to reopen, which stated that "[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." Despite this order, the Debtors and their lawyers (who are also counsel to other plaintiffs in the Kansas Litigation) continued to prosecute the Kansas Litigation in violation of the automatic stay. The Chapter 7 trustee then successfully moved, under an agreed order, to stay the entire Kansas Litigation pending further order of the bankruptcy court.

In May 2021, non-debtor plaintiffs and third-party defendants in the Kansas Litigation, including the Foundation and Black Stone Appellees, moved to modify the stay. The Bankruptcy Court denied the motion in June 2021. In doing so, the bankruptcy court explained that any adjudication of rights and royalties in the Kansas Litigation could have an impact on the property of the estate under Section 362(a)(3) of the Bankruptcy Code because the estate's property rights were hopelessly intermingled with the other plaintiffs' claimed interests. See 11 U.S.C. § 362(a)(3); The bankruptcy court also concluded that the moving parties failed to make a showing of "cause" to lift the stay under 11 U.S.C. § 362(d)(1). Foundation Energy and Black Stone Appellees did not appeal the June 2021 Order.²

In April 2022, the Chapter 7 trustee filed an adversary proceeding on behalf of the estate against all parties in the Kansas Litigation. The adversary proceeding sought determination of the nature and fractional ownership of the Kansas mineral lease rights at issue in the Kansas Litigation. That proceeding ultimately led to a settlement between the trustee and AWI, under which the trustee (on behalf of the bankruptcy estate) transferred all its rights to AWI. In exchange, AWI paid $175,000 to the trustee, released all its claims against the estate, and agreed to pay an additional $50,000 to the trustee "in the event that the Estate's rights conveyed to AWI by virtue of this compromise are ultimately determined to be free and clear of any Net Profits Interest claim or Net Profits Interest burden as currently being asserted and claimed in the Kansas Litigation." The bankruptcy court granted the motion to compromise over the limited objections of Black Stone.

Around the same time, AWI had moved for civil contempt sanctions under 11 U.S.C. § 105(a) against the Debtors and two of their lawyers, on the basis that that their filing and continued prosecution of the Kansas Litigation, in spite of their prior knowledge of the bankruptcy case, violated the automatic stay. AWI also sought a discretionary declaration under Section 105(a) that the Kansas Litigation was void ab initio. Foundation Energy countered with a motion to annul the stay.

The bankruptcy court ruled on both motions in a single memorandum opinion in May 2022. The court deemed the Debtors and two of their lawyers in contempt of court as alleged and stated its intention to impose monetary sanctions against the lawyers but not the Debtors.³ The bankruptcy court went on to deny AWI's void ab initio claim, concluding that AWI failed to adequately allege a violation of the stay by non-debtor co-plaintiffs in the Kansas Litigation. As to Foundation Energy's motion to retroactively annul the stay, the court rejected it because Foundation should not be afforded a "third bite at the apple" for such relief. But the bankruptcy court observed that "the moving parties may no longer care whether the stay is annulled" in light of the "court's ruling that AWI failed to adequately plead a violation of the stay by the non-debtor co-plaintiffs." These rulings also were not appealed by any party.

After approving the AWI-trustee settlement in July 2022, the bankruptcy court asked the non-debtor parties to file an abstention motion in the adversary proceeding and/or a motion to determine whether the automatic stay had been terminated. The Foundation and Black Stone parties filed separate motions asserting the same rights; both motions were opposed by AWI. The motions sought confirmation under 11 U.S.C. § 362(j) of the Bankruptcy Code that the automatic stay had terminated due to the estate's transfer and relinquishment of its Kansas mineral lease interests, as well as both permissive and mandatory abstention pursuant to 28 U.S.C. § 1334(c)(1) and (2). At a hearing on October 5, the bankruptcy court reaffirmed its previous rulings that the non-debtor parties did not violate the automatic stay:

The non-debtor parties did not violate the automatic stay by filing their claims in the Kansas litigation or pursuing them in the Kansas state court before this bankruptcy case was reopened. To be absolutely clear, this Court never held or even suggested that the non-debtor parties [violated] the automatic stay. Instead, I ruled that the automatic stay prevented the non-debtor parties from adjudicating their claims in state court after the bankruptcy case was reopened.

(emphasis added).

The next day, the bankruptcy court signed four orders, which are the subjects of the current consolidated appeal. In explaining the orders, the bankruptcy court concluded that following the estate's settlement with AWI, property of the estate was no longer at issue, and the adjudication of non-debtor claims in the Kansas Litigation had only been stayed because those claims "were hopelessly intertwined with the estate's claims." The bankruptcy court emphasized again that "the non-debtor parties did not violate the automatic stay in any way," and the Kansas Litigation was not void ab initio. The court ordered that no stay "is in effect with respect to any claim, cause of action, or defense asserted by or against any non-debtor party" in the Kansas Litigation, and it granted the motion to terminate the automatic stay or deem the stay terminated under 11 U.S.C. § 362(j).

The bankruptcy court further decided to permissively abstain from the Kansas Litigation under 28 U.S.C. § 1334(c)(1), providing the following reasons:

1. The issues presented in this adversary proceeding are substantially similar to those

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