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In re Linn Energy, L.L.C.

United States Court of Appeals, Fifth Circuit

June 19, 2019

In the Matter of: LINN ENERGY, L.L.C.; BERRY PETROLEUM COMPANY, L.L.C.; LINNCO, L.L.C.; LINN ACQUISITION COMPANY, L.L.C.; LINN ENERGY FINANCE CORPORATION; LINN ENERGY HOLDINGS, L.L.C.; LINN EXPLORATION & PRODUCTION MICHIGAN, L.L.C.; LINN EXPLORATION MIDCONTINENT, L.L.C.; LINN MIDSTREAM, L.L.C.; LINN MIDWEST ENERGY, L.L.C.; LINN OPERATING, INCORPORATED; MID-CONTINENT I, L.L.C.; MID-CONTINENT II, L.L.C.; MID-CONTINENT HOLDINGS I, L.L.C.; MID-CONTINENT HOLDINGS II, L.L.C., Debtors
v.
LINN OPERATING, INCORPORATED, Appellant OKLAHOMA STATE TREASURER, Unclaimed Property Division, Appellee

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

          Before DAVIS, JONES, and DENNIS, Circuit Judges.

          EDITH H. JONES, CIRCUIT JUDGE.

         The district court held that the bankruptcy court erred in dismissing a post-confirmation attempt by the Oklahoma State Treasurer ("Treasurer") to obtain the right to unclaimed royalty payments owed by the oil and gas debtor. Because the Treasurer sat on its rights during the entire Chapter 11 process, res judicata bars its claim. We REVERSE the district court judgment and reinstate the bankruptcy court's DISMISSAL of the Treasurer's case.

         I. BACKGROUND

         Linn Energy, LLC ("Linn") is an oil and gas company that operates in Texas and Oklahoma. In May 2016, Linn and fourteen affiliated entities filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The bankruptcy court set a deadline requiring all "Proofs of Claims" from "[a]ll governmental units holding claims . . . that arose . . . prior to the Petition Date" to be filed by November 7, 2016. The Treasurer timely filed three proofs of claim on August 29 for "unknown/contingent" amounts, which it described as "unsecured." The Treasurer stated that it had filed the claim pursuant to Oklahoma's "unclaimed property law," and that it was "acting as a conservator or custodian on behalf of the classes of persons . . . who have failed to claim property owing to them for the statutory period of abandonment."

         In November 2016, Linn filed a report with the Treasurer indicating that it possessed $956, 212.72 in unclaimed property but did not transfer those assets to the Treasurer. The Treasurer contends that Linn was required by state law to deliver the unclaimed-property funds when it filed the report, but it did not then file an adversary complaint demanding that Linn turn over the funds. Significantly, on December 5, the Texas Comptroller filed an adversary complaint against Linn for unclaimed property owed to Texas residents after Linn disclosed $1.5 million in unclaimed-property holdings to that agency. See Complaint for Turnover and Payment of Unclaimed Property and Related Relief, In re Linn Energy, LLC, No. 16-06023 (Bankr.S.D.Tex. Dec. 5, 2016), ECF No. 1.

         On December 19, Linn sent all claimants in the bankruptcy case- including the Treasurer and the Texas Comptroller-a ballot for voting on its proposed Plan of Reorganization ("the Plan"). The Treasurer did not vote, but the Texas Comptroller filed an objection to confirmation because the Plan purported to distribute the unclaimed property assets of Texas residents, as unsecured assets, among parties other than the Comptroller.[1] On January 27, 2017, the bankruptcy court entered an order confirming the Plan, but the order expressly authorized the Texas Comptroller to pursue its claims for unclaimed property.

         Several features of the Plan are critical here. First, a section titled "Preservation of Royalty and Working Interests" provided that "any right to payment from a Royalty and Working interest, if any, shall be treated as a Linn General Unsecured Claim under this Plan and shall be subject to any discharge and/or release provided hereunder." Second, the vesting clause stated that, except as otherwise provided in the Plan, "all property in each Estate, all Causes of Action, and any property acquired by any of the Linn Debtors pursuant to the Plan shall vest in [Linn], free and clear of all Liens, Claims, charges, Interests, or other encumbrances" once the Plan became final. Finally, the Plan's discharge provision stated that, pursuant to Section 1141(d) of the Bankruptcy Code, and except as otherwise stated by the Plan, "the distributions, rights, and treatment that are provided in the Plan shall be in complete satisfaction, discharge, and release, effective as of the Effective Date[ ] of Claims[, ] . . . Interests, and Causes of Action of any nature whatsoever." That section of the Plan further enjoins any parties to the proceedings from commencing or continuing a claim related to the bankruptcy estate after the Plan received final approval.

         All parties to the bankruptcy case had fourteen days in which to appeal the order, see Fed. R. Bankr. P. 8002, and on the final day of the appeal period, a group of claimants moved for reconsideration and relief from the order.[2]After the claimants agreed to a stipulation with Linn, the motion for reconsideration was withdrawn with prejudice on March 6.[3] Thereafter, no claimant appealed the order or moved for reconsideration, and the confirmation became final on March 20.

         About two months later, Linn objected to the Treasurer's proofs of claim for "unknown contingent" unclaimed property, asserting that it was not liable for such claims and that the Bankruptcy Code preempted state unclaimed property laws. The Treasurer responded to the objection and then filed an adversary complaint against Linn. The Treasurer asserted that Linn possessed, but did not own, $965, 216.72 in unclaimed property consisting of investors' mineral royalties from Linn's Oklahoma oil and gas operations and that Linn was required by Oklahoma law to turn over the funds to the Treasurer.

         Linn moved to dismiss the Treasurer's adversary complaint pursuant to Bankruptcy Rule 7012(b)(6), analogous to Fed.R.Civ.P. 12(b)(6), asserting that the claim violated the Plan's injunction, vesting, and discharge provisions and was barred by the principles of res judicata and preemption. The Treasurer re-emphasized that the unclaimed property never belonged to Linn. Consequently, it never became part of the bankruptcy estate and could not be governed by the Plan. After a hearing, the bankruptcy court sided with Linn. Granting the motion to dismiss, the court concluded that the Treasurer had "received more than adequate due process," and that its complaint amounted to a prohibited "collateral attack" on the confirmed Plan.

         The Treasurer appealed to the district court, which reversed the bankruptcy court's dismissal on the grounds that the unclaimed property never became part of the bankruptcy estate, and therefore the bankruptcy court did not have jurisdiction to adjudicate its status. Linn moved ...


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