Adam v. Itech Oil Co ( 2000 )

REVISED - June 12, 2000
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 98-11310
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In The Matter of Gibraltar Resources, Inc.,
Debtor
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SCOTT UNDERWOOD ADAM, ET AL.,
Plaintiffs-Appellants,
VERSUS
ITECH OIL COMPANY; FRANK APP, JR.,
Defendants-Appellees.
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Appeal from the United States District Court
for the Northern District of Texas
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May 10, 2000
Before POLITZ, GARWOOD, and DAVIS, Circuit Judges.
DAVIS, Circuit Judge:
In this case we must decide whether the Plaintiffs are barred
by a settlement that was approved by the bankruptcy court. We
conclude that Plaintiffs’ failure to appeal the order approving the
settlement precludes this action. We therefore affirm the
dismissal of Plaintiffs’ damage action.
I.
The instant case arises from post-petition complications
involving an interest in an oil well (“Hannusch Well” or “Well”).
In early January 1993, Gibraltar Resources, Inc., (“Gibraltar” or
“Debtor”) acquired a 75% working interest in the Hannusch Well.
The mineral lease contained a provision that permitted the
landowners to terminate the lease if production ceased for more
than 60 days. Gibraltar, in an unrecorded transaction, agreed to
sell interests in the Well to Scott Underwood Adam, et al.,
(collectively “Plaintiffs”) pursuant to a joint venture agreement.
Under the terms of the joint venture, Gibraltar served as the
manager/general partner and held the power to enter into contracts,
operate the Well, and supervise its drilling. Gibraltar
contracted, with Itech Oil Co. (“Itech”) and its President Frank
App, Jr. (“App”), for Itech to serve as the operator of the Well.
In October 1993, an involuntary petition under Chapter 7 of
the Bankruptcy Code was filed against Gibraltar. On the date of
the petition, Gibraltar held record title to the working interest
in the Well. Plaintiffs filed proofs of claim as creditors in the
bankruptcy case, asserting a general unsecured claim for the amount
of each Plaintiffs’ investment in the Well; alternatively
Plaintiffs asserted that each of them owned a working interest in
the Well based on the joint venture agreement. A letter confirming
the Trustee’s intent to allow the claims as general unsecured
claims in the properly documented “investment” amount was sent to
Plaintiffs’ original counsel. In November 1995, the bankruptcy
court entered an order adjudicating Plaintiffs as general unsecured
creditors.
In August 1994, Itech ceased producing the Hannusch Well.
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Itech represented to the Trustee and to Plaintiffs, however, that
the lease was not in danger of termination, because the landowners
had agreed not to enforce the termination provision for non
production. Despite Itech’s representations, U.S.A. Group, Inc.
(“KCCON”) entered into a new lease with the landowners and recorded
affidavits of non-production to terminate the existing lease under
which the Trustee and the Plaintiffs owned their interests. KCCON
then assigned its 100% working interest under the new lease to
Itech. In April 1995, the Trustee learned that the Well was in
fact producing and that Itech was acting as the 100% owner.
Itech filed suit (“Itech Adversary”) against the Trustee,
seeking a determination that the Trustee owed Itech money for
operating costs and expenses and that Itech had legitimately taken
over 100% of the working interests in the Well. The Trustee
counterclaimed against Itech, based on the termination of the
lease, for breach of contract, fraud, negligence, and constructive
fraud. The Plaintiffs were not named parties in the Itech
Adversary. However, it is undisputed that the Plaintiffs had full
knowledge of the suit and did not intervene.
After the suit had been pending for approximately one year the
parties to the Itech Adversary reached a settlement which was
approved by the bankruptcy court. The terms of the settlement
provided for the Trustee to receive, on behalf of the estate: cash
totaling $132,000, a reduction of secured claims against the estate
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in excess of $584,650, and a 58.5% working interest in the Well.
At the settlement approval hearing Plaintiffs, for the first time,
actively asserted a demand for their working interests in the Well.
Although Plaintiffs objected to the settlement at the hearing, they
did not appeal the bankruptcy court’s order approving the
settlement.
After the settlement, the bankruptcy court authorized the
Trustee to sell the 58.5% working interest at public auction; it
was sold on November 13, 1996 for $60,000. Plaintiffs appealed the
sale but the appeal became moot because Plaintiffs obtained no stay
of the sale order.
Following the bankruptcy court’s approval of the settlement
and the sale of the Hannusch Well lease, the Plaintiffs initiated
an adversary proceeding against Itech, App, and the Trustee
(“Hannusch Well Adversary”) predicated on essentially the same tort
theory as the Trustee’s action in the Itech Adversary. In the
Hannusch Well Adversary, the Plaintiffs asserted inter alia that:
(1) they owned working interests in the Well that the Trustee
acquired under the settlement; and (2) Itech and App were liable to
Plaintiffs for damages arising from the fraudulent termination of
the Hannusch lease and Itech’s acquisition of the Well from KCCON.
Plaintiffs’ theory of the case in the Hannusch Well adversary
was that the parties had agreed to transfer ownership of the Well
to the joint venture and that Plaintiffs had purchased working
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interests in the Well. The bankruptcy court accepted Plaintiffs’
theory and concluded that the parties had intended to transfer
record title to the interest in the Well to the joint venture and
simply had not done so before the Chapter 7 petition was filed.
However, the bankruptcy court denied relief to Plaintiffs on
grounds that they had released their claims against Itech and App
through the settlement.1 The Plaintiffs appealed the bankruptcy
court’s judgment denying them relief against Itech and App in the
Hannusch Well Adversary. The district court affirmed the
bankruptcy court, holding that, because the Plaintiffs were
beneficiaries of the estate represented by the Trustee, they are
bound by the settlement.2 In their appeal to this Court,
Plaintiffs argue that the Trustee’s settlement cannot bind them
because: (1) Plaintiffs based their claims on causes of action that
were not property of the estate; and (2) Plaintiffs were not
parties to the settlement.
1
Following the bankruptcy court’s judgment, Plaintiffs filed
a motion to make additional findings of fact. The bankruptcy court
granted the motion and held that with regard to Plaintiffs’ claims
for fraud and conspiracy against Itech and App, that Itech and App
had made fraudulent misrepresentations and entered into a
conspiracy, causing the Plaintiffs to suffer damages of $61,369.00.
2
For reasons best known by the district court, it held on the
one hand that the settlement of the Itech Adversary was binding on
Plaintiffs, but distributed the proceeds of the sale of the Well
based on Plaintiffs’ share in their ownership of the Well. Neither
the bankruptcy court nor district court explains this contradiction
and no explanation occurs to us. In any event, neither party
complains of the district court’s distribution order in this
appeal.
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II.
A bankruptcy court approves compromises and settlements
pursuant to Bankruptcy Rule 9019, which provides that “on motion by
the trustee and after a hearing on notice ... the court may approve
a compromise or settlement.” Fed.R.Bankr.P. 9019. A bankruptcy
court’s approval of a settlement order that brings to an end
litigation between parties is a “final” order. See In re Cajun
Electric Power Coop., Inc., 119 F.3d 349, 354 (5th Cir. 1997); In
re West Texas Marketing Corp., 12 F.3d 497, 501 (5th Cir. 1994); In
re Medomak Canning, 922 F.2d 895, 900 (1st Cir. 1990). A
bankruptcy court’s final orders are appealable as of right under 28
U.S.C. § 158. A settlement agreement approved and embodied in a
judgment by a court is “entitled to full res judicata effect.”
West Texas Marketing, 12 F.3d at 500. “Under res judicata, a final
judgment on the merits of an action precludes the parties or their
privies from relitigating issues that were or could have been
raised in that action.” Medomak, 922 F.2d at 900 (quoting Allen v.
McCurry, 449 U.S. 90, 94, 101 S. Ct. 411, 414, 66 L. Ed. 2d 308
(1980)).
At the hearing to approve the settlement, Plaintiffs’ counsel
asked the bankruptcy court to enter a judgment denying approval of
the settlement. Counsel’s reasons for objecting to the settlement
included: (1) Plaintiffs owned individual working interests in the
Well; and (2) Trustee, by entering into the settlement, was
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disposing of property that was not property of the estate. Trustee
countered that Plaintiffs had failed to provide any evidence that
they were anything other than general unsecured creditors.
Plaintiffs produced no evidence at the hearing to establish their
working interests and the bankruptcy court approved the settlement
over their objection. Although Plaintiffs objected to the
settlement and had standing to appeal the adverse ruling, under 28
U.S.C. § 158(c), they did not appeal the order approving the
settlement.
We conclude that because Plaintiffs failed to appeal the
bankruptcy court’s order approving the Itech Adversary settlement,
that settlement is binding on Plaintiffs and precludes their action
filed in the Hannusch Well Adversary. Plaintiffs’ theory of their
case in the Hannusch Well Adversary was that Plaintiffs were
working interest owners in the Well rather than general unsecured
creditors of Debtor’s estate. Plaintiffs argued that, for this
reason, the Trustee’s actions in the Itech Adversary could not bind
them. However, Plaintiffs failed to appeal the bankruptcy court’s
order, approving the Itech Adversary settlement, premised on the
fact that Plaintiffs were creditors of the estate and not working
interest owners. The bankruptcy court’s unappealed order approving
the settlement became binding on Plaintiffs and they are not
entitled to relitigate the issue resolved in that order.
III.
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For the reasons stated above, we affirm the judgment of the
district court.
AFFIRMED.
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