Asarco, L.L.C. v. Montana Resources, Inc. , 858 F.3d 949 ( 2017 )

Case: 16-40682 Document: 00514018061 Page: 1 Date Filed: 06/02/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fif h Circuit
FILED
No. 16-40682 June 2, 2017
Lyle W. Cayce
ASARCO, L.L.C., a Delaware Corporation; ASARCO MASTER, Clerk
INCORPORATED, a Delaware Corporation,
Plaintiffs - Appellees
v.
MONTANA RESOURCES, INCORPORATED, a Montana corporation;
MONTANA RESOURCES, L.L.P., a Montana limited liability partnership,
Defendants - Appellants
Appeal from the United States District Court
for the Southern District of Texas
Before DAVIS, CLEMENT, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
ASARCO, L.L.C., through an affiliate, became partners in a Montana
copper mine with Montana Resources, Inc. (MRI). Because of financial
troubles in the early 2000s, ASARCO was unable to meet cash calls the
partnership required. When it failed to contribute on four occasions, MRI
covered ASARCO’s portion. But this was not an act of benevolence. By
covering its partner’s cash calls, MRI diluted ASARCO’s interest in the
partnership from 49.9% to nothing.
About eight years after it lost its interest in the mine, ASARCO sent a
letter invoking a clause in the partnership agreement that discusses a right to
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reinstatement. Surprisingly, the clause contains no time limit. In seeking
reinstatement, ASARCO offered to pay MRI the full amount of the missed cash
calls plus interest. MRI refused to bring ASARCO back into the partnership.
ASARCO filed this lawsuit challenging that refusal.
ASARCO’s suit is complicated by a significant legal proceeding that took
place after it missed the cash calls but before it sought reinstatement. Fiscal
problems—likely the same that prevented it from making the partnership
contributions—resulted in ASARCO filing Chapter 11 bankruptcy. MRI
contends that two of ASARCO’s decisions during that bankruptcy prevent it
from now suing for reinstatement. First, it contends that an adversary
proceeding the parties litigated has preclusive effect on the reinstatement
claim. Second, it contends that ASARCO’s alleged failure to disclose the
potential partnership interest to the bankruptcy court estops it from now
pursuing that interest. In this interlocutory appeal, we agree with the district
court that neither of these arguments presents an obstacle to ASARCO’s suit.
I.
An ASARCO affiliate 1 and MRI formed a mining partnership called
Montana Resources in 1989. The partnership agreement provided that if a
partner failed to pay a cash call within thirty days, that partner fell into
default. The nondefaulting party could cover the deficit, but the defaulting
partner’s share would dilute by 1% for every $100,000 it failed to contribute.
According to ASARCO, section 12.02 of the agreement allows for reinstatement
through the following provision: “[T]he defaulting partner may cure such
1 The ASARCO affiliate involved was AR Montana, which at the time was a special-
purpose subsidiary of ASARCO. AR Montana would later merge into ASARCO Master Inc.,
another ASARCO affiliate. For ease of reference, we refer to ASARCO and its affiliates in
this suit as ASARCO and MRI and its affiliates as MRI, unless the identities of the specific
entities makes a difference.
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default by contributing all amounts owed, plus interest at the Overdue Rate,
to the non-defaulting partner and the Partnership, which repayment shall
constitute reinstatement.”
During a fourteen month period starting in 2002, the affiliate missed
four cash calls totaling more than $5 million. MRI covered all of them, which
resulted in a reduction in the affiliate’s interest from 49.9% to 25.3%, to 3.9%,
to 1.2%, and finally to 0%. At that time, MRI purported to dissociate the
affiliate from Montana Resources.
In 2005, ASARCO and its affiliates filed for bankruptcy. As part of those
proceedings, MRI filed Proofs of Claim against ASARCO to recover contingent
environmental liability incurred by the partnership prior to ASARCO’s
bankruptcy. ASARCO responded by initiating an adversary proceeding.
ASARCO alleged fraudulent transfer, breach of contract, and improper
expulsion relating to its affiliate’s dilution and purported dissociation from the
partnership. The original complaint also alleged that ASARCO had a right to
reinstatement after dilution. As a remedy, that complaint sought (1) a
declaration that ASARCO had a right to reinstatement if it cured its default,
and (2) monetary damages for income that ASARCO would have received had
it not been improperly diluted. ASARCO later amended its complaint,
dropping the declaratory judgment claim without prejudice. The other claims
were dismissed with prejudice pursuant to an agreement between the parties,
and shortly after the underlying bankruptcy concluded. The bankruptcy was
a remarkable success: the plan offered full payment to all creditors.
With its newfound solvency, ASARCO tried to get back its interest in the
mine, as the mine was doing well. Two years after the bankruptcy plan was
confirmed, ASARCO sent MRI a letter that tendered the full cure amount to
cover the cash call defaults and notified MRI that ASARCO would commence
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all appropriate action if tender was not accepted within five business days.
MRI did not accept, 2 and ASARCO filed this suit.
The complaint alleges that MRI’s failure to accept the tender constituted
a breach of contract, along with other claims that accrued prebankruptcy. MRI
initially filed a motion to dismiss based on ASARCO’s lack of standing to
prosecute claims postbankruptcy, judicial estoppel, and res judicata. The
district court held that all undisclosed claims that existed during the
bankruptcy or that were not specifically scheduled postbankruptcy were
barred on standing, estoppel, or res judicata grounds.
All was not lost for ASARCO, though, because the district court also
ruled that none of these doctrines could bar the breach of contract claim that
arose from the postbankruptcy tender and demand for reinstatement. For
judicial estoppel and standing, the court reasoned that the breach of contract
claim did not exist during bankruptcy, as the demand for reinstatement and
tender had not yet occurred. For res judicata, the court held that the breach
of contract was a new claim, unrelated to the other claims for coercive relief in
the adversary proceeding. The court also concluded that the dropped request
for declaratory relief concerning the right to reinstatement filed during the
adversary proceeding did not have preclusive effect.
Following discovery, MRI filed a motion for summary judgment, again
arguing lack of standing, judicial estoppel, and res judicata. It also asserted a
limitations defense. The district court rejected those procedural defenses. MRI
also raised the principal merits issue: whether the partnership agreement
2 Although MRI acknowledges the existence of a reinstatement provision, it reads that
provision as allowing reinstatement under different scenarios than the one that led to
ASARCO’s dilution. This is because, MRI contends, to allow reinstatement after dilution
would allow the defaulting partner to take the sweet without the bitter; the defaulting
partner could let its partner cover the cash calls while business was bad, only to step back
into the partnership when business was booming.
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allows ASARCO’s attempted reinstatement. The court concluded that question
could not be decided as a matter of law because of ambiguity in the
reinstatement provision and inconclusive extrinsic evidence. The court was,
however, able to grant summary judgment on another merits question that
greatly weakened ASARCO’s attempted reinstatement: assuming there is a
right to reinstatement, the court held it only allows ASARCO to regain the
1.23% interest it held before the final default.
Even that 1.23% interest in the mine must have significant value as MRI
has pressed full speed ahead in challenging the district court’s refusal to
dismiss the entire case. 3 After the district court certified its rulings on estoppel
and res judicata for interlocutory appeal, MRI successfully obtained
permission from this court to appeal. 4 See 28 U.S.C. § 1292(b).
II.
We turn first to MRI’s contention that ASARCO’s breach of contract
claim is barred by res judicata, which is more descriptively known as claim
preclusion. The district court held that it was not, a determination we review
de novo. Matter of Baudoin, 981 F.2d 736, 739 (5th Cir. 1993). The crux of
MRI’s argument is that ASARCO could have brought its current breach of
contract claim alleging a failure to reinstate during the adversary proceeding,
so it is barred from doing so now.
ASARCO did seek a declaratory judgment in that adversary proceeding
on the main issue the current case raises: whether the partnership agreement
provides ASARCO with a right to reinstatement if it tenders the missed cash
3 Of course, ASARCO would be able to appeal the determination that reinstatement
allows it to regain only that small percentage after a final judgment. As it did not seek
interlocutory review we do not consider that question.
4 The district court had certified its earlier ruling on the motion to dismiss for
interlocutory appeal, but we declined to hear an appeal at that time.
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calls. ASARCO voluntarily dismissed that claim prior to obtaining a ruling,
however, so issue preclusion does not apply. Because that declaratory
judgment was part of the prior case MRI is invoking for claim preclusion, the
parties focus their attention on Kaspar Wire Works, Inc. v. Leco Engineering &
Machine, Inc., 575 F.2d 530 (5th Cir. 1978). That opinion by Judge Rubin is
the seminal decision on the res judicata effect of declaratory judgment claims.
In that pre-Federal Circuit era, this court determined the preclusive effect of a
suit seeking a declaration of patent invalidity and noninfringement on a later
infringement action. Because the earlier declaratory action settled without the
court deciding the issues it raised, issue preclusion was not available although
the court recognized that the doctrine would normally apply when a court
makes a declaration of rights. Kaspar Wire, 575 F.2d at 537 (“Under the usual
rationale of issue preclusion, there is no reason to permit the relitigation of any
issue actually litigated and necessary to the judgment rendered in such an
anticipatory declaratory action.”).
But the nature of declaratory actions led the court to conclude that the
related but distinct doctrine of claim preclusion should not apply. Claim
preclusion of course bars a party from relitigating the same claim that has been
resolved in an earlier suit. What gives claim preclusion far-reaching force,
however, is that it also bars claims that could have been brought in the earlier
suit. Id. at 535 (“Under these rules of claim preclusion, the effect of a judgment
extends to the litigation of all issues relevant to the same claim between the
same parties, whether or not raised at trial.”). Therein lies the problem with
applying the doctrine to declaratory judgment actions. The whole point of a
declaratory judgment action is to decide only a single issue in a dispute, one
that is often preliminary as subsequent events will need to occur before a
traditional lawsuit can be pursued. Parties would be deterred from using that
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efficient process if it would bar all later claims arising out of the same dispute.
See id. at 537; Harborside Refrigerated Servs., Inc.. v. Vogel, 959 F.2d 368, 373
(2d Cir. 1992) (“To permit res judicata to be applied in such a case beyond the
precise issue before the court would subvert the very interests in judicial
economy that the doctrine was designed to serve.”). Another reason claim
preclusion is not a good fit for declaratory actions is that defendants can assert
them by raising “anticipatory” defenses. Kaspar Wire, 575 F.2d at 536. Kaspar
Wire explains the inappropriateness of ordinary claim preclusion rules in this
context as their application would mean a patent “infringer could extinguish a
patent holder’s claim for infringement by suing for declaratory relief and then
voluntarily dismissing the suit with prejudice.” Id. Kaspar Wire also notes
that the Declaratory Judgment Act contemplates that a declaration of rights
will often be followed by a party seeking additional relief in the form of
damages or an injunction. Id. at 537 (citing 28 U.S.C. § 2202).
Kaspar Wire was assessing the preclusive effect of a prior suit that did
not seek those additional equitable or legal remedies; the only claim was one
seeking declaratory relief. That is not our case, because in the adversary
proceeding ASARCO pursued claims seeking monetary relief—breach of
contract, fraudulent transfer—in addition to the request for declaratory relief
it later dismissed. Since Kaspar Wire, courts have addressed this situation
when the prior lawsuit involved both a claim for declaratory relief and one or
more claims seeking damages or other coercive relief. Mandarino v. Pollard,
718 F.2d 845 (7th Cir. 1983), concluded that the Kaspar Wire exception did not
apply to a claim for injunctive relief that was coupled with a request for
declaratory relief arising from the same claim. It reasoned that when coercive
claims are added to declaratory actions, “the policy underlying the declaratory
judgment exception must give way to the policy underlying traditional res
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judicata principles, namely, ‘to protect defendants and the courts from a
multiplicity of suits arising from the same cause of action.’” Id. (quoting
Gasbarra v. Park-Ohio Indus., Inc., 655 F.2d 119, 121 (7th Cir. 1981)). And in
Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co., 503 F. Supp. 2d
699 (S.D.N.Y. 2007), aff’d, 600 F.3d 190 (2d Cir. 2010), the court held that a
claim for breach of contract had preclusive effect despite being combined with
a request for declaratory relief. 503 F. Supp. 2d at 704. In such a situation
the lawsuit is no longer one seeking solely a ruling on a preliminary legal issue
before devoting the resources of “full-blown” litigation; a claim for breach of
contract that happens to also include a request for declaratory relief on the
same claim “cannot be characterized as anything other than a ‘full-scale legal
contest.’” Id. Applying the Kaspar Wire exception in that situation would give
a party another go at the breach of contract claim, multiplying litigation and
squandering judicial resources in the process. See id.; see also Laurel Sand &
Gravel, Inc. v. Wilson, 519 F.3d 156, 164 (4th Cir. 2008); Allan Block Corp. v.
Cty. Materials Corp., 512 F.3d 912, 917 (7th Cir. 2008).
Kaspar Wire and these later cases thus establish the following principle:
when it comes to claim preclusion, a request for declaratory relief neither
giveth nor taketh away. The declaratory claim on its own typically will not
preclude future claims involving the same circumstances (as noted, issue
preclusion may still apply to any declaration the court issues). But in a case
involving both declaratory claims and ones seeking coercive relief, the former
will not serve as an antidote that undoes the preclusive force that traditional
claims would ordinarily have. This is why, despite all the ink in this case
discussing Kaspar Wire, it ends up largely being a sideshow. The declaratory
judgment claim asserted and then dismissed in the adversary proceeding does
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not have preclusive effect. But the traditional claims for damages asserted in
that case are subject to regular claim preclusion analysis.
That analysis finds preclusive effect when: “(1) the parties are identical
or in privity; (2) the judgment in the prior action was rendered by a court of
competent jurisdiction; (3) the prior action was concluded by a final judgment
on the merits; and (4) the same claim or cause of action was involved in both
actions.” Comer v. Murphy Oil USA, Inc., 718 F.3d 460, 467 (5th Cir. 2013).
ASARCO contests the final three requirements, but we need only
address the last because we conclude that it is not satisfied. We use a
transactional test to answer the “same claim” question, barring the new claim
if it arises from the same nucleus of operative facts as the prior claims. N.Y.
Life Ins. Co. v. Gillispie, 203 F.3d 384, 387 (5th Cir. 2000). MRI argues that
the breach of contract claim could have been brought in the adversary
proceeding because ASARCO could have tendered the cure money then. That
would have resulted in MRI rejecting the cure, just as it did when that offer
was made after the bankruptcy. ASARCO could have then brought as part of
the adversary proceeding a contract claim for MRI’s failure to reinstate. The
parties debate whether ASARCO had the means to make the tender during its
bankruptcy. The speculative nature of that inquiry reveals that MRI’s theory
is too far removed from what actually occurred. Breach of contract claims
generally cannot be brought until the breach occurs. See Sid Richardson
Carbon & Gasoline Co. v. Interenergy Res., Ltd., 99 F.3d 746, 756 (5th Cir.
1996) (holding claim preclusion did not apply because the latter claim did not
accrue until after the first proceeding concluded). At the time of the adversary
proceeding, ASARCO had not tendered the cure and MRI had not rejected it.
Additional events needed to take place before the breach of contract claim could
be asserted. The current contract claim thus does not arise from the same facts
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as the claims asserted in the adversary proceeding as it depends on events that
took place later.
MRI responds that courts have nonetheless applied preclusion when the
party asserting the earlier claims had control over the reasons the claim was
not brought in the first case. But the cases it cites involve situations in which
the material facts for the claims had already occurred; the plaintiff just failed
to abide by procedural rules in not bringing these claims in the first proceeding.
In Davis v. Dall. Area Rapid Transit, 383 F.3d 309 (5th Cir. 2004), for example,
we barred plaintiffs from bringing a second Title VII discrimination suit
arising from events related to the discriminatory acts alleged in an earlier Title
VII suit. 383 F.3d at 314. They argued that although the conduct alleged in
the second suit happened before they filed the first one, they could not have
asserted the claims in the earlier suit because they had not cleared the
procedural hurdle of exhaustion with the EEOC. In rejecting this argument,
the panel emphasized that the operative facts alleged in the second case had
occurred before the first lawsuit was filed. The plaintiffs thus could have also
alleged that conduct in the first suit and sought a stay of those claims pending
receipt of a right-to-sue letter from the EEOC. Id. at 314–16.
That is unlike this case, in which the facts that spurred the present
breach of contract claim—MRI’s denial of ASARCO’s cure—had not occurred
at the time of the prior suit. The other cases cited by MRI involve the Davis
scenario when the facts giving rise to the claim occurred before the prior
proceeding. See, e.g., Murry v. GSA, 553 F. App’x 363, 365–66 (5th Cir. 2014)
(applying res judicata when discrimination alleged in plaintiff’s Title VII
claims occurred before the first proceeding, but plaintiff voluntarily split the
claims into two successive actions); Nilsen v. City of Moss Point, 701 F.2d 556,
563 (5th Cir. 1983) (en banc) (applying res judicata when plaintiff’s successive
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section 1983 claim relied on the same facts as her earlier Title VII claim and
thus could have been brought together). The plaintiffs in these cases did not
control the underlying facts of their claims—as MRI asserts—but instead
controlled whether they complied with the procedure necessary to pursue their
claims.
Another way to think about this is that in all of the cases just cited, the
claim asserted in the later suit had accrued at the time of the first suit that did
not include the claim—that is, the statute of limitations began running on the
discrimination claims in Davis, Murry, and Nilsen prior to the filing of the first
suit. But ASARCO’s claim for failure to reinstate did not accrue until MRI
rejected the tender in 2011. “If the purported injury is ‘contingent [on] future
events that may not occur as anticipated, or indeed may not occur at all,’ the
claim is not ripe for adjudication.” Lopez v. City of Houston, 617 F.3d 336, 341
(5th Cir. 2010) (quoting Thomas v. Union Carbide Agric. Prods. Co., 473 U.S.
568, 580–81 (1985)) (alteration in original). This rule from Lopez accurately
describes the facts as they were during the bankruptcy proceeding; ASARCO
may or may not have attempted to cure, and MRI may or may not have denied
ASARCO’s reinstatement. Because the present breach of contract claim was
contingent on future events, ASARCO could not have brought it during the
adversary proceeding. The district court was thus correct in holding that
ASARCO is not precluded from bringing the claim now.
III.
That brings us to ASARCO’s other bankruptcy court conduct that MRI
argues is a bar to this lawsuit: its alleged failure to disclose the existence of
the right to reinstate it now invokes. MRI contends this amounted to conduct
worthy of judicial estoppel, which “is a common law doctrine that prevents a
party from assuming inconsistent positions in litigation.” In re Superior
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Crewboats, Inc., 374 F.3d 330, 334 (5th Cir. 2004). The purpose of the doctrine
is to protect the integrity of the courts, not to protect litigants. Love v. Tyson
Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012). In the bankruptcy context,
estoppel is appropriate when a debtor “fails to disclose an asset to a bankruptcy
court, but then pursues a claim . . . based on that undisclosed asset.” Id. at
261–62. Potential causes of action are assets that must be disclosed. In re
Coastal Plains, Inc., 179 F.3d 197, 208 (5th Cir. 1999). This circuit has not
adopted any firm rules regarding the amount of disclosure required beyond the
guiding principle that “the integrity of the bankruptcy system depends on full
and honest disclosure” by debtors and that “it is very important that a debtor’s
bankruptcy schedules and statement of affairs be as accurate as possible.” Id.
(internal quotation omitted). We review the district court’s rejection of an
estoppel defense for abuse of discretion, including a review to determine that
the discretion was not founded on erroneous legal conclusions. Kane v. Nat’l
Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2008).
MRI is correct that nowhere in its bankruptcy disclosure did ASARCO
Master or its parent explicitly disclose a partnership interest in the mine, or a
right to reinstatement. The closest either came was in Schedule G, where
ASARCO Master listed an interest in a “Joint Venture Agreement” under its
disclosure of all executory contracts. But that was somewhat contradicted by
ASARCO LLC’s Statement of Financial Affairs, where it listed the alleged
interest but described the partnership as “dissolved.” MRI asserted that these
disclosures were inadequate and show that ASARCO intentionally concealed
its alleged interest in the partnership to ensure the interest would survive the
bankruptcy proceeding, only to resurrect the interest in this suit.
The district court disagreed. It emphasized that the purpose of the
disclosure requirement is to protect creditors, as it maximizes the value of the
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estate to ensure that creditors are paid as fully as possible. To that end, the
district court noted that all creditors were paid in full, and the trustee was
undoubtedly aware of the partnership contract because it filed the adversary
proceeding with claims derived from the partnership agreement. Ultimately,
it found that the disclosure of the interest, though scant, was sufficient. The
district court’s decision to not apply judicial estoppel was within the discretion
we afford it in this fact-intensive area. 5
IV.
Finally, MRI asserts that even if ASARCO can evade claim preclusion
and judicial estoppel, the right to reinstatement did not make it through the
bankruptcy because the provision was an executory contract neither assumed
nor rejected at bankruptcy. Executory contracts that are not assumed or
rejected “ride through” the bankruptcy “unaffected by the bankruptcy
proceedings.” In re O’Connor, 258 F.3d 392, 405 (5th Cir. 2001). But MRI
argues that the ride-through doctrine does not apply to executory contracts in
default, which is how it characterizes ASARCO’s alleged right to
reinstatement.
The district court did not rule on this question though. Indeed, it had
not yet decided whether the reinstatement provision is an executory contract
or a nonexecutory option contract. Unlike executory contracts, nonexecutory
contracts—like option contracts—are just assets or liabilities that must be
disclosed along with other interests; they are not subject to assumption,
rejection, or the ride-through doctrine. See CHS, Inc. v. Plaquemines Holdings,
5 MRI also argues that ASARCO should have disclosed that it had a potential breach
of contract claim, not just that it had a partnership interest in the contract. But MRI cites
no case requiring a party to disclose a potential claim for breach of contract when the contract
had not yet been breached. This makes sense, because MRI’s position would require a debtor
to scour its contracts looking for hypothetical claims that another party could maybe breach
in the future.
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LLC, 735 F.3d 231, 239 (5th Cir. 2013) (noting, in a different context, that
option contracts are assets in bankruptcy); see also In re Digicon, Inc., 71 F.
App’x. 442, at *5–6 (5th Cir. 2003). As the district court did not decide whether
the reinstatement provision was an executory or option contract, it did not list
that issue—or whether a defaulted executory contract rides through a
bankruptcy—in its order certifying the case for interlocutory appeal.
“[W]e may address all issues material to the order in question and are
not limited to the ‘controlling question[s] of law.’” Wheeler v. Pilgrim’s Pride
Corp., 536 F.3d 455, 457 (5th Cir. 2008), rev’d en banc on other grounds, 591
F.3d 355 (5th Cir. 2009). 6 As the “may” indicates, whether to do so is a matter
of discretion. See 16 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H.
COOPER, FEDERAL PRACTICE AND PROCEDURE § 3929 (3d ed. 2012) (“The court
may, however, consider any question reasonably bound up with the certified
order . . . .”) (emphasis added). It makes sense to not opine on the complex
ride-through issue in this interlocutory appeal because—in contrast to the
claim preclusion and estoppel issues we have decided that would have ended
this litigation if decided in MRI’s favor—the district court may later decide that
the reinstatement provision is an option contract, rendering our musings
unnecessary. To decide a question that may not be necessary to resolution of
the case would be at odds with the efficiency concerns that underlie limited
interlocutory review. Cf. Ducre v. Exec. Officers of Halter Marine, Inc., 752
F.2d 976, 983 n.16 (5th Cir. 1985) (noting that courts should be inclined to
address questions not listed in the certification order “when the issues outside
the ‘controlling question’ provide grounds for reversal of the entire order”). We
6Wheeler noted that “some Circuits have held that we are ‘obliged to address the order
that was certified rather than the controlling question of law framed by the district court,’”
but nonetheless framed our ability to do so as a “may” rather than a “must.” 536 F.3d at 457
(quoting Cipollone v. Liggett Grp., Inc., 789 F.2d 181, 187–88 (3d Cir. 1986)).
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leave it to the district court to decide in the first instance the nature of the
provision and whether, if it is executory, the ride-through doctrine applies.
***
The district court’s denial of MRI’s motion for summary judgment on
preclusion and estoppel grounds is AFFIRMED.
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