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In re Goodrich Petroleum Corp.

United States Court of Appeals, Fifth Circuit

June 27, 2018


          Appeal from the United States District Court for the Southern District of Texas

          Before DAVIS, JONES, and HIGGINSON, Circuit Judges.


         In 2014, appellant Fallon Family, L.P. (the "Fallon Family"), as part of a settlement agreement with appellees Goodrich Petroleum Corporation and Goodrich Petroleum Company, L.L.C. (collectively, "Goodrich"), executed a ratification of a previously disputed mineral lease in favor of Goodrich. In March 2016, Goodrich filed a Chapter 11 bankruptcy proceeding. Although the settlement agreement required Goodrich to make substantial cash payments over time to the Fallon Family, the recorded ratification of the lease did not reflect this fact but only indicated that good and sufficient consideration had been paid for the ratification. The Fallon Family argued that because the bankrupt Goodrich failed to make payments under the promissory note made part of the settlement agreement, the Fallon Family had the right to dissolve the settlement agreement on grounds of non-payment, thus divesting Goodrich of its interest in the lease. We agree with the bankruptcy court that when Goodrich filed for bankruptcy, the debtor-in-possession became vested under 11 U.S.C. § 544(a) with all the rights and powers of a bona fide purchaser of the real property rights of Goodrich, including the ratified lease. The lease as ratified may not be dissolved for nonpayment of the obligations in the settlement agreement because the public record reflects that consideration had been fully paid, and a third party was not placed on notice of the remaining payments. We therefore AFFIRM.


         On September 8, 1954, the Fallon Family's predecessor-in-interest, Silas F. Talbert, executed a mineral rights lease (the "Lease") covering a 487-acre tract of land in Caddo and DeSoto Parishes, Louisiana (the "Property"). The Lease provided for a five-year primary term and a secondary term to continue "as long thereafter as oil, gas or other mineral is produced" on the Property. The Lease was properly recorded in the conveyance records of both parishes.

         On February 28, 2012, the Fallon Family petitioned the 42nd Judicial District Court in DeSoto Parish to terminate the Lease and to assess damages and attorney's fees against Goodrich and other parties. Specifically, the Fallon Family alleged that Goodrich had ceased continuous operations on three units of the Property, in violation of the terms of the Lease. On October 2, 2014, the Fallon Family recorded two Notices of Pendency of Action (collectively, the "Lis Pendens") in the conveyance records of Caddo and DeSoto Parishes, which attached the Lease and evidenced the Fallon Family's suit to terminate the Lease.[1] On October 6, 2014, the eve of trial, the Fallon Family agreed with Goodrich and the other defendants to resolve all controversies relating to the Lease.

         The settlement was confirmed in a written agreement (the "Settlement Agreement") between the Fallon Family, Goodrich, and other defendants. The Settlement Agreement spelled out the terms of the parties' October 15, 2014 compromise. In the Settlement Agreement, the Fallon Family agreed to ratify the Lease and to release its claims against Goodrich in consideration for Goodrich's paying $650, 000 within ten business days of the Settlement Agreement and executing a promissory note (the "Promissory Note") in the amount of $1, 000, 000. The Promissory Note was to be paid in $100, 000 biannual installments, with the first installment due on October 15, 2015. The $650, 000 was wired to the Fallon Family and the Promissory Note duly delivered. The Amendment and Ratification of Oil, Gas and Mineral Lease (the "Lease Ratification") was recorded in the conveyance records of both Caddo and DeSoto parishes, with an effective date of October 15, 2014. The recorded Lease Ratification, in relevant part, reads:

NOW, THEREFORE, for the promises and covenants exchanged below, and other good and valuable consideration exchanged by the Parties on or near this date, the receipt and sufficiency of which is hereby acknowledged, the Parties agree [to the listed promises and covenants].

         The stipulated promises and covenants in the Lease Ratification are: (1) that except as to land released by prior agreement, the Lease is "hereby affirmed and ratified in its entirety, and remains in full force and effect;" (2) that the Lease "never ceased to be in full force and effect;" (3) that the Lease is severed by unit for maintenance; and (4) that an additional royalty clause is added to the Lease.

         On October 15, 2015, Goodrich paid the first $100, 000 installment on the Promissory Note; when the second installment came due on April 15, 2016, Goodrich failed to make the payment, leaving a $900, 000 outstanding balance on the Promissory Note. On the same day, it filed voluntary chapter 11 bankruptcy proceedings in the Southern District of Texas bankruptcy court.

         During the course of bankruptcy proceedings, the Fallon Family filed an emergency motion seeking to compel assumption or rejection of the Settlement Agreement as an 11 U.S.C. § 365 executory contract. Had the Fallon Family succeeded in this argument, Goodrich would have been obligated either to perform fully the terms of the Settlement Agreement and thus pay the remainder of the debt or to reject the Settlement Agreement and thus relinquish any interest in the Lease Ratification. Alternatively, the Fallon Family sought to dissolve the Settlement Agreement in its entirety, putting both parties back in their pre-Settlement Agreement positions and thereby stripping Goodrich of its interest in the Lease. Goodrich, in opposition, argued that 11 U.S.C. § 544(a) allowed it to rely, as a bona fide purchaser, on representations in the recorded Lease Ratification that full consideration had been paid thereby preventing dissolution.

         On July 26, 2016, following the receipt of Goodrich's objection and a motion hearing, the bankruptcy court denied the Fallon Family's motion, finding that, though the Promissory Note was integrated into the Settlement Agreement: (1) the Settlement Agreement was not an executory contract under 11 U.S.C. § 365 that Goodrich could be compelled to assume or reject; and (2) the Fallon Family's dissolution rights were not effective as to Goodrich pursuant to 11 U.S.C. § 544.[2] On appeal, the district court affirmed.

         The Fallon Family timely lodged this appeal.


         We exercise jurisdiction pursuant to 28 U.S.C. § 158(d)(1). "We review the decision of a district court, sitting as an appellate court, by applying the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court."[3] Thus, we review the bankruptcy court's findings of fact for clear error and its legal conclusions de novo.[4]


         Central to this case is the interplay between 11 U.S.C. § 544(a), commonly referred to as the "strong arm" provision of the Bankruptcy Code, and the Louisiana Public Records Doctrine, Louisiana Civil Code article 3338. As a threshold matter, the Fallon Family argues that 11 U.S.C. § 544(a) only permits a debtor-in-possession (1) to avoid the transfer of property of the debtor; or (2) to avoid the obligations incurred by the debtor. In other words, the Fallon Family argues that these are the only strong-arm abilities Goodrich has to keep the bankruptcy estate intact.

         These powers, the Fallon Family argues, are irrelevant in determining whether the Fallon Family can dissolve the Settlement Agreement because dissolution is a separate Louisiana statutory right. We agree with Goodrich that the Fallon Family's reading of 11 U.S.C. § 544(a) is much too narrow.

         Because Goodrich, as debtor-in-possession, "occupies the shoes of a trustee in every way" under the Bankruptcy Code, [5] Goodrich's abilities as debtor-in-possession are defined by 11 U.S.C. § 544(a).[6] The relevant text of 11 U.S.C. § 544(a) reads as follows:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-
. . .
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.[7]

         Section 544(a) does not merely bestow upon a debtor-in-possession the ability to avoid either the transfer of a debtor's property or its obligations; instead, a debtor-in-possession is endowed with "the rights and powers" of, inter alia, a "bona fide purchaser of real property."[8] In other words, the Bankruptcy Code creates a legal fiction affording a debtor-in-possession the abilities it would have as a bona fide purchaser of the debtor's interests in immovable property[9] at the time the bankruptcy is filed.[10]


         "While the Bankruptcy Code creates the status of a hypothetical bona fide purchaser, state law defines that status."[11] The Fallon Family argues that debtors-in-possession and bona fide purchasers are not third persons "under Louisiana's law of registry with respect to the ratification of a mineral lease pursuant to a settlement agreement," and thus that Goodrich remains responsible for its obligations under the unrecorded terms of the Settlement Agreement. We agree with Goodrich that this argument is foreclosed by our decision in In re Zedda, which concluded that 11 U.S.C. § 544(a)(3) bona fide purchasers are third persons under the Louisiana Public Records Doctrine.[12]

         The Louisiana Public Records Doctrine requires certain types of instruments affecting immovables to be filed in the public records in order to be effective against third persons.[13] It states:

The rights and obligations established or created by the following written instruments are without effect as to a third person unless the instrument is registered by recording it in the appropriate mortgage or conveyance records pursuant to the provisions of this Title:
(1) An instrument that transfers an immovable or establishes a real right in or over an immovable.
(2)The lease of an immovable.
(3) An option or right of first refusal, or a contract to buy, sell, or lease an immovable or to establish a real right in or over an immovable.
(4) An instrument that modifies, terminates, or transfers the rights created or evidenced by the instruments described in Subparagraphs (1) through (3) of this Article.[14]

         Louisiana Civil Code article 3343 defines a third person as one "who is not a party to or personally bound by an instrument."[15] The article clarifies that, "[a] person who by contract assumes an obligation or is bound by contract to recognize a right is not a third person with respect to the obligation or right or to the instrument creating or establishing it."[16]

         In In re Zedda, a panel of this Court considered the intersection of the Louisiana Public Records Doctrine with 11 U.S.C. § 544(a) where the trustee of a bankruptcy estate claimed that certain property was part of, and could be administered by, the estate.[17] In its analysis, the Court found that, "[f]or purposes of Louisiana's Public Records Doctrine, a creditor or a purchaser is a third person."[18] Applying that doctrine to § 544(a), the Court concluded that it was "clear" that a trustee was "a third person for purposes of the public records when he assume[d] the status of a hypothetical creditor or a bona fide purchaser as of the commencement of the case."[19] This conclusion, the Court continued, was "supported by the Trustee's correct assertion that he occupies the position of a third party who is entitled to rely on the public records."[20] As noted above, Goodrich exercises the identical powers and duties as a trustee.[2 ...

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