Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Jan. 21 — A bankruptcy court correctly interpreted the sale order in a debtor's bankruptcy case to be limited to only “disclosed” claims — those listed on the debtor's schedules of assets and liabilities — and claims not disclosed weren't sold by the trustee, a district court in Texas held Jan. 15.
Judge Sam A. Lindsay of the U.S. District Court for the Northern District of Texas concluded that in light of the Fifth Circuit's ruling in Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197 (5th Cir. 1999), requiring a debtor to disclose even potential causes of action in his schedules under Bankruptcy Code Section 521, the bankruptcy court correctly interpreted the sale order in the debtor's case to not include the causes of action that appellant Upton Creditors, LLC is asserting in a state court lawsuit.
According to the bankruptcy court, the “bankruptcy schedules are a method of disclosing assets which ‘all creditors rely.'” Debtors should be more cautious when completing these schedules to ensure that all assets and liabilities are disclosed to prevent issues later on when assets are sold to third parties.
The debtor's description in the schedules wasn't specific enough to notify the trustee that the debtor could potentially assert these claims, and the sale order explicitly said that the trustee was only authorized to sell “disclosed” assets, the court said. The appellant Upton Creditors is trying to pursue claims in a state court lawsuit that are materially different from the causes of action sold under the sale order and not disclosed in any way.
Creditors MHR Institutional Partners III loaned $22 million to Texas oil and gas company Uptex Energy LLC, which was founded by debtor John Albert Upton. The loan was secured by Uptex Energy's assets. After Uptex Energy defaulted, MHR acquired a majority of equity in the company, resulting in the debtor's resignation.
Shortly thereafter, the debtor filed for Chapter 7 protection in which a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.
Under an amended schedule of assets, the debtor disclosed other personal property as including: “causes of action relation to wrongful foreclosure of Debtor's interest in Uptex entities; cause of action against Drake and Cooper for breach of fiduciary duty; cause of action against Noberto Guillen & Noberto Guillen, Inc. for gross negligence; cause of action against Jeremy Bronfman for breach of contract.”
When the bankruptcy court approved the sale of certain assets of the debtor under Bankruptcy Code Section 363, the sale order stated that sale property included:
The Upton Creditors then sued MHR, Uptex Energy, Uptex Energy's officers Drake and Cooper and various other individuals and entities related to alleged misappropriation of oil and gas assets.
The same day it filed the state court lawsuit, Upton Creditors asked the bankruptcy court to interpret the order approving the sale of certain assets under Section 363.
Upton Creditors wanted the bankruptcy court to interpret the sale order to include:
The bankruptcy court ruled that other than the cause of action against Drake and Cooper for breach of fiduciary duty, the debtor didn't disclose the claims in his bankruptcy schedules and, thus, they weren't sold by the trustee under the sale order.
The bankruptcy court authorized the trustee to sell the estate's remaining assets, and they were sold to MHR as the successful bidder.
Upton Creditors appealed to the district court, arguing that the bankruptcy court committed reversible error when it said certain claims hadn't been disclosed.
According to Upton Creditors, the debtor sufficiently disclosed his assets in his amended schedules and at the creditor's meetings.
Appellees Uptex Energy and MHR Institutional Partners III contended that the bankruptcy court was correct in applying the law to the facts because the debtor never disclosed the claims in his schedules or at the creditor's meetings. As a result, those assets were never sold to Upton Creditors under the sale order, according to the appellees.
The district court followed In re Coastal Plains, Inc., for what it said appeared to be an uncontroversial position — “disclosed means scheduled” in the bankruptcy context.
The causes of action that the appellant is asserting in the state court weren't disclosed and therefore not sold, the court said.
Jeffrey M. Goldfarb, Goldfarb PLLC, Dallas, represented appellant Upton Creditors LLC; Yvette Ostolaza, Penny P. Reid, Robert S. Velevis, Yolanda Cornejo Garcia, Sidley Austin LLP, Dallas, represented appellees MHR Institutional Partners III LP, MHR Capital Partners (100) LP, MHR Capital Partners Master Account LP, IP III UE LP; Dwight M. Francis, Aimee Cook Oleson, Gardere Wynne Sewell, Dallas, represented appellee Uptex Energy LLC; Bradley James Purcell, Keith Miles Aurzada, Bryan Cave, LLP, Dallas, represented appellee Scott Seidel; Richard C. Grant, Culhane Meadows PLLC, Dallas, represented appellee Sung Hee Ahn; Mark Ian Agee, Mark Ian Agee, Attorney at Law, Dallas, represented debtor/appellee John A. Upton.
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