Plan Enforcement: Beware of Advisory Opinions

In re Cubic Energy, Inc., 587 B.R. 849 (Bankr. D. Del. 2018) –

Two nondebtor parties sought a bankruptcy court order interpreting and enforcing provisions in a confirmed plan of reorganization that addressed certain litigation and barred further claims. The court declined to rule on the matter on the grounds that it would constitute an advisory opinion.

The litigation involved disputes concerning a mineral lease: “Gloria’s Ranch” granted a mineral lease to “TEI” which later assigned an undivided 49% interest to “Cubic.” Cubic had a contract with “Fossil” to conduct oil and gas operations on the leased property. “Wallen” purportedly owned and had a controlling interest in TEI.

After a series of additional transactions (including a sale of TEI’s interest, release of a mortgage that required an assignment of a profits interest, and further assignments of interests), Gloria’s Ranch sent a letter to various parties requesting information and stating its view that the lease had expired due to lack of production. Gloria’s Ranch was not satisfied with the response, so it demanded that the parties provide a recordable act evidencing expiration of the lease.

When no one complied, Gloria’s Ranch sued the parties, including TEI and Cubic. The trial court ruled that the lease expired and was canceled and awarded damages to Gloria’s Ranch. A final judgment was entered that was affirmed on appeal.

Cubic then filed bankruptcy. Its plan of reorganization stipulated that the automatic stay did not apply to TEI or other non-debtor entities and allowed appeals relating to the judgment to continue. The plan also included on injunction provision and releases relating to the litigation.

Subsequently TEI filed its own bankruptcy. A plan proposed by Gloria’s Ranch was confirmed over the objection of TEI and Wallen. Under the plan Gloria Ranch’s attorney was named trustee of the TEI estate for the benefit of a liquidating trust. The TEI trustee was responsible for collecting claims and pursuing causes of action, specifically including a transfer of ~$14 million from TEI to Wallen and his affiliates. In the meantime, Gloria’s Ranch commenced a second lawsuit asserting claims related to liability under the prior judgment against TEI, Fossil, Wallen and others.

Eventually Wallen and Fossil filed a motion in the Cubic bankruptcy seeking the court’s interpretation and enforcement of the injunction and discharge provisions in Cubic’s plan – specifically including holdings that:

  • Wallen and Fossil were Released Parties as defined in the plan.
  • The debtors were Releasing Parties.
  • All claims relating to or arising from the acts or omissions giving rise to the judgment constituted an attempt to collect the judgment in violation of the Cubic plan.
  • The TEI trustee and all other Releasing Parties were barred from asserting claims against Wallen and Fossil to the extent that they related to the judgment or sought to hold them liable for damages under the judgment.

The TEI trustee objected that the motion was procedurally improper on several grounds, including that it asked the court to issue an advisory opinion.

The court began by noting that Article III of the U.S. Constitution limits judicial power to “cases” and “controversies,” which prevents federal courts from addressing “questions that cannot affect the rights of litigants in the case before them.” In other words, federal courts cannot give “opinions advising what the law would be upon a hypothetical state of facts.” Under governing precedent, in the bankruptcy context “an opinion is not advisory where it actually invalidates a clause, orders a party to do something, or otherwise resolves the parties’ litigation.”

In support of his objection the TEI trustee pointed to a case in which a bankruptcy court order determined that confirmation did not discharge a bank’s mortgage lien. On appeal this was found to be advisory since there was no actual existing controversy between the parties. The bankruptcy court was not asked to avoid the mortgage lien and the mortgagee had not yet attempted to enforce it.

That case also noted that it may be helpful to consider the issue from the perspective of ripeness. In this context courts consider (1) whether the parties have adverse interests, (2) conclusiveness of the judgment, and (3) the practical help or utility of the judgment.

In this case the motion “has not asked the Court to strike a provision in the Cubic Plan, prevent ongoing litigation, or force the parties to do something.” Although the TEI trustee signaled that he may be willing to pursue claims, he had not yet done so. Imminent litigation was not sufficient. The court reasoned that ultimately a decision would turn on specific facts such as the nature of the claims brought by the trustee. So, a current ruling on the motion would not be determinative. The motion also failed under a ripeness analysis.

While acknowledging that there might be a dispute in the future that the court would have power to address, it declined to rule on the current motion since that would constitute an advisory opinion.

Typically, a plan of reorganization is the product of negotiations. As reflected in plan provisions it is often critical to the parties that there be a mechanism to enforce the provisions in a friendly forum – i.e. the bankruptcy court. However, as suggested by this case that may be easier said than done.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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