Fifth Circuit: Bankruptcy Court Exceeded Its Authority in Approving Post-confirmation Settlements of Discharged Claims

Fifth Circuit: Bankruptcy Court Exceeded Its Authority in Approving Post-confirmation Settlements of Discharged Claims

After Chesapeake Energy Corporation’s Chapter 11 plan became effective, the debtor sought approval of two settlements of two pre-bankruptcy purported class actions covering approximately 23,000 Pennsylvania oil and gas leases.

No proofs of claim were filed for the claims covered by the settlements. Other similarly situated claimants did file proof of claims and stood to receive around 0.01% of their claims under the Plan. However, under the proposed settlements, the claimants could receive well over 20% of their claims.

The plan also assumed that the oil and gas leases would ride through bankruptcy unaffected. On the other hand, the settlements required material alterations in the terms of the leases.

These factors led the Fifth Circuit to conclude that approval of the settlements was beyond the bankruptcy court’s jurisdiction. The appeals court concluded that there was no core jurisdiction because no proofs of claim were filed with respect to the settled claims. Since the Plan had already become effective, such claims had been discharged.

The court underscored that the bankruptcy court did not have the authority “to revive never-filed, discharged claims as if they were engaged in a “core” claims adjudication proceeding.” It further emphasized that “treating the class actions as if there had been timely filed proofs of claim disregard[ed] the reorganization process.” Although the Fifth Circuit noted that “related to” jurisdiction presented a closer question, it still found such jurisdiction lacking.

This conclusion was based primarily on the conflict the court found between the settlements and the Chapter 11 Plan and Disclosure Statement. Such conflict arose in two matters. First, although the plan discharged the claims covered by the settlements, the settlements provided a much higher recovery to those claims in comparison to other similarly situated creditors’ -timely filed- general unsecured claims.

Second, whereas the plan assumed that the debtor’s oil and gas leases would ride through bankruptcy unaffected, the settlements required material mandatory alterations to thousands of oil and gas leases.

In sum, far from merely enforcing the plan, the settlements contradicted it and purported to grant relief expressly barred thereunder. As a result, the Fifth Circuit concluded that the bankruptcy court lacked jurisdiction to approve the settlements and thus reversed and remanded with instructions to dismiss.