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Oklahoma State Treasurer v. Linn Operating, Inc.

United States District Court, S.D. Texas, Victoria Division

March 29, 2018



          Kenneth M. Hoyt, United States District Judge.


         This appeal by the appellant, the Oklahoma State Treasurer (“the Treasurer”), seeks review and reversal of the Bankruptcy Court's Order dismissing the Treasurer's adversary complaint pursuant to Fed. R. Civ. Pro., Rule 12(b)(6). The Court has appellate jurisdiction under 28 U.S.C. § 158(a)(1). The Treasurer asserts that the Bankruptcy Court erred by granting the debtor's motion to dismiss. After a careful review of the briefs, argument and attachments contained in the record, the Oklahoma Statutes and the Bankruptcy Court Order, this Court determines that the order of dismissal should be reversed.


         On May 11, 2016, Linn Operating, LLC, successor-by-conversion to Linn Operating, Inc., and fourteen affiliated entities filed voluntary petitions for relief in Bankruptcy Court.[1] On August 29, 2016, the Treasurer filed proofs of claim against certain of the debtor affiliates seeking possession of all “unclaimed property”, pursuant to Oklahoma law. See 52 OK STAT §§ 52-551 et. seq (2017). On December 19, 2016, the debtors sought a vote from the Treasurer concerning the Plan(s) of Reorganization. The Treasurer did not return the ballot and, thereby, did not vote to accept or reject the debtors' Plan. Thereafter, on January 27, 2017, the Bankruptcy Court entered an Order confirming the debtors' Plan. On February 28, 2017, the Plans became effective pursuant to the Plan's terms and Linn Operating, LLC, became the successor-by-conversion of the several Chapter 11 affiliated bankrupt entities.

         On May 25, 2017, the debtor objected to the Treasurer's claims on the bases that the debtor was not liable to the Treasurer, and further, because of Bankruptcy Code preemption. The Treasurer filed a response and later an amended response. Again, on June 14, 2017, the Treasurer amended its claim citing Oklahoma State Statutes in support of its claim and specifying the amount of unclaimed property sought. Thereafter, the Treasurer filed an adversary proceeding seeking to obtain funds designated as unclaimed property. In turn, the debtor filed a motion to dismiss the Treasurer's adversary proceeding arguing that the suit violates the Plan Discharge Provision, the Plan Injunction, the Plan Vesting Provision, and was barred by the doctrine of bankruptcy preemption.

         On November 8, 2017, the Bankruptcy Court granted the debtor's motion to dismiss finding that: (a) the Treasurer received more than adequate “due process” thereby permitting it to make and prosecute its claim; (b) the Treasurer's complaint is a collateral attack on a confirmed Plan; and (c) the Treasurer failed to act in “good faith”, presumably by, not diligently pursuing its claim according to the Bankruptcy Code.[2]


         In four points of error, the debtor asserts that the Bankruptcy Court properly dismissed the Treasurer's complaint because: (a) the complaint is barred by res judicata because the Treasurer “could have raised” the adversary proceeding issues during the Plan confirmation process; (b) adoption of the confirmation Plan by the Bankruptcy Court “renders the Treasurer's appeal both constitutionally and equitably moot”; (c) the Bankruptcy Court “correctly concluded that no set of facts exists . . .” upon which the Treasurer has a cognizable claim; and, (d) the Bankruptcy Code preempts Oklahoma concerning unclaimed property statutes.


         A. Standard on Bankruptcy Appeal

         In reviewing a bankruptcy court's decision, a district court operates much like an appellate court, applying the standards of review typically applied in federal courts of appeal. See In re Webb, 954 F.2d 1102, 1103 - 04 (5th Cir. 1992) (internal citation omitted). To this end, a district court will not set aside a bankruptcy court's findings of fact, unless they are clearly erroneous. In re IFS Financial Corp., 803 F.3d 195, 203 (5th Cir. 2015) (citing In re Martinez, 564 F.3d 719, 726 (5th Cir. 2009)). “A finding of fact is clearly erroneous only if ‘on the entire evidence, the court is left with the definite and firm conviction that a mistake has been committed.'” Robertson v. Dennis (In re Dennis), 330 F.3d 696, 701 (5th Cir. 2003) (quoting Hibernia Nat'l Bank v. Perez (In re Perez), 954 F.2d 1026, 1027 (5th Cir. 1992)). A bankruptcy court's conclusions of law, however, are reviewed de novo. In re Dennis, 330 F.3d at 701. Mixed questions of law and fact within a bankruptcy case are also reviewed de novo. In re San Patricio Cty. Cmty. Action Agency, 575 F.3d 553, 557 (5th Cir. 2009) (citing In re Seven Seas Petroleum, Inc., 522 F.3d 575, 583 (5th Cir. 2008).

         B. Standard Under Federal Rule of Civil Procedure 12(b)(6)

         Under the demanding strictures of a motion brought pursuant to Fed.R.Civ.P. 12(b)(6), a “plaintiff's complaint is to be construed in a light most favorable to the plaintiff, and the allegations contained therein are to be taken as true.” Oppenheimer v. Prudential Sec., Inc., 94 F.3d 189, 194 (5th Cir. 1996) (citing Mitchell v. McBryde, 944 F.2d 229, 230 (5th Cir. 1991)). Dismissal is appropriate only if, the “[f]actual allegations [are not] enough to raise a right to relief above the speculative level, on the assumption that all the allegations in ...

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