Fifth Circuit Rules Bankruptcy Court Lacked Jurisdiction to Approve Post-Confirmation Settlement That Conflicted With Plan

Sarnosky v. Chesapeake Energy Corp. (In re Chesapeake Energy Corp.), No. 21-20323 (5th Cir. June 8, 2023)

On June 8, 2023, the U.S. Court of Appeals for the Fifth Circuit vacated a judgment approving a settlement agreement, entered into after confirmation of a chapter 11 plan of reorganization, that conflicted with the plan and was not supported by any proofs of claim.  In a dispute involving Pennsylvania oil and gas lessors, as well as the state’s attorney general, the debtors were accused of underpaying royalties prior to their bankruptcy filing. After entering bankruptcy, some lessors filed proofs of claim, whereas others did not. Those who filed proofs of claim were slated to receive approximately 0.01% of their claims under the confirmed chapter 11 plan, while the claims that were not filed were discharged.

It was assumed that the oil and gas leases would persist unaffected by the bankruptcy. According to the settlements, the lessors could secure well over 20% of their claims, albeit at the cost of substantial alterations to the lease terms.

The debtors attempted to gain bankruptcy court approval for two class-action settlements regarding pre-petition claims, which did not have any proofs of claim filed. These efforts were met with opposition from creditors in similar situations who had filed proofs of claim.

Despite this, the bankruptcy court ruled that it had “core” jurisdiction over the settlements, determined that the settlements were in the best interests of the debtors’ estates, and approved the settlements. While the District Court affirmed these decisions, it clarified that the bankruptcy court had “related to” jurisdiction as opposed to “core” jurisdiction.

However, the Fifth Circuit vacated and remanded the decisions with instructions to dismiss. The Fifth Circuit determined that the bankruptcy court lacked jurisdiction to approve post-confirmation settlements of discharged claims. It was particularly problematic that these settlements conflicted with the confirmed chapter 11 plan and disclosure statement, especially given the fact that no proofs of claim had been filed for these claims.

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