50 F.3d 233 (3rd Cir. 1995), 93-7409, In re Columbia Gas System Inc.

Docket Nº:93-7409.
Citation:50 F.3d 233
Party Name:In re COLUMBIA GAS SYSTEM INC.; Columbia Gas Transmission Corporation, Debtors. ENTERPRISE ENERGY CORPORATION, Appellant, v. UNITED STATES of America, On behalf of the I.R.S., Thomas E. Ross, Trustee.
Case Date:March 10, 1995
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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50 F.3d 233 (3rd Cir. 1995)

In re COLUMBIA GAS SYSTEM INC.; Columbia Gas Transmission

Corporation, Debtors.



UNITED STATES of America, On behalf of the I.R.S.,

Thomas E. Ross, Trustee.

No. 93-7409.

United States Court of Appeals, Third Circuit

March 10, 1995

Argued Jan. 19, 1994.

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[Copyrighted Material Omitted]

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Robert J. Sidman, (argued), Duke W. Thomas, Vorys, Sater, Seymour & Pease, Columbus, OH, for appellant Enterprise Energy Corp.

Robert S. Brady, Young, Conaway, Stargatt & Taylor, Wilmington, DE, for appellees Columbia Gas System Inc. and Columbia Gas Transmission Corp.

Linda E. Mosakowski, (argued), Gary R. Allen, David E. Carmack, U.S. Dept. of Justice Tax Div., Washington, DC, for appellee U.S. on behalf of I.R.S.

Before: SLOVITER, Chief Judge, SCIRICA and LEWIS, Circuit Judges.


SCIRICA, Circuit Judge.

In this bankruptcy matter, we must decide whether certain terms in a class action settlement agreement constitute an executory contract under 11 U.S.C. Sec. 365 (1988). The Internal Revenue Service contended the settlement agreement was not an executory contract. Both the bankruptcy court and the district court 1 agreed with the IRS, and the class members appealed. We will affirm.


The facts are undisputed. Columbia Gas System, Incorporated, its subsidiary, Columbia Gas Transmission Corporation (TCO), and their affiliates comprise a natural gas system which explores, produces, purchases, stores, transmits, and distributes natural gas. TCO is Columbia Gas System's principal gas purchaser from producers in the Southwest, Midcontinent, and Appalachia and operates extensive underground storage facilities.

On July 26, 1985, Enterprise Energy Corporation and two other companies filed a class action against TCO in the United States District Court for the Southern District of Ohio. The district court certified as a class 2 the producers of natural gas in the Appalachian region who were parties to gas purchase contracts with TCO. The class comprised 2163 member producers who held 852 gas purchase contracts. TCO had invoked a price reduction under a cost recovery clause which formed the basis of their complaint.

The gas purchase contracts set the price for each unit of natural gas delivered to TCO at the maximum price permitted under the Natural Gas Policy Act of 1978 during the month of delivery. The class members alleged that TCO breached their gas purchase contracts by paying less than the maximum price after it invoked the cost recovery clause.

For five years there was extensive discovery. As trial loomed, the parties entered into a Stipulation of Proposed Class Action Settlement ("settlement agreement"), which the district court approved on June 18, 1991. Enterprise Energy Corp. v. Columbia Gas Transmission Corp., 137 F.R.D. 240 (S.D.Ohio 1991). Incidental to its approval under Federal Rule of Civil Procedure 23(e),

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id. at 248, the court issued an order stating in part:

f. Named plaintiffs, Class Members and defendant [TCO] shall now consummate and be bound by the Settlement.

g. Except for claims arising under the Settlement on behalf of Class Members or Columbia, and at such time as this Order of the Court approving the Settlement as final is non-appealable, named plaintiffs and all Class Members ... shall be deemed to release and forever discharge the defendant ... from any and all claims of the type asserted in this litigation relating to defendant's exercise of the cost recovery clause contained in the Class Members' gas purchase contracts at any time during the period commencing on or about July 10, 1985 and ending on or about July 10, 1991.

h. Jurisdiction is hereby retained as to matters related to the interpretation, administration and consummation of the Settlement as approved in this Order.

Id. at 252. The order became final and unappealable on July 18, 1991.

The settlement agreement required TCO to deposit $30 million into an escrow account "in settlement of, and as a full and complete discharge and release of TCO, for all of [the class members'] claims arising on or before January 1991." Enterprise Energy Corp. v. United States ex rel. IRS (In re Columbia Gas System, Inc.), 146 B.R. 106, 109 (D.Del.1992). TCO was to pay $15 million into escrow by March 21, 1991, and the other $15 million by March 23, 1992. This schedule was apparently set for TCO's convenience; TCO's duty to make the second payment was not contingent on the class members' performance of any of their obligations. TCO paid the first $15 million on time but then filed for bankruptcy.

Under the settlement agreement, class members were entitled to receive their share of the escrow monies only after they executed a release of claims and a supplemental contract. The settlement agreement stated "payments to individual Class Members out of the escrowed amounts will be contingent upon receipt by [TCO] of a duly executed release of all such Claims and a duly executed contract supplement...." J.App. at 57-58. While each class member had to execute a release to get payment from the escrow fund, the claims each held against TCO were to be extinguished (and they in fact were, see supra, district court order p g) by the court order accepting the settlement agreement.

The supplemental contracts were designed to implement amendments and clarifications of pricing and other terms concerning future gas deliveries to TCO. The settlement agreement established the terms of these contracts, including increasing the price TCO would pay to the class members. Because many class members relied on TCO as the principal purchaser of their gas, the supplemental contracts were important to them, a point made in the following exchange at oral argument before the district court:

The Court: So that ... supplying the supplemental agreements, contracts, was not just an option that [the class members] had. It was necessary for their continued operation?

[Counsel for the Class]: Exactly, your honor. Exactly.

Id. at 276.

By July 31, 1991, the class members involved in forty-one of the purchase contracts had completed the execution of the release and supplemental contracts and were entitled to their share of the escrow monies. But on that day, thirteen days after the settlement agreement had become final, TCO filed a voluntary Chapter 11 petition in bankruptcy in Delaware. On February 20, 1992, the class members filed a motion to compel TCO to assume or reject the settlement agreement under the Bankruptcy Code, 11 U.S.C. Sec. 365. 3 TCO and the class members had agreed that TCO would assume the settlement

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agreement and jointly filed a proposed order.

After notice of the proposed order was sent to the proper parties, the United States filed an objection on behalf of the Internal Revenue Service, one of TCO's creditors. 4 Finding the settlement agreement was not executory within the meaning of 11 U.S.C. Sec. 365, the bankruptcy court upheld the objection and denied the class members' motion. 5

The class members appealed to the United States District Court for the District of Delaware. The district court held that the settlement agreement was a contract, but affirmed the bankruptcy court on the grounds the contract was not executory for purposes of Sec. 365. In re Columbia Gas, 146 B.R. at 113-14. Therefore TCO did not have the option of assuming or rejecting the settlement agreement. Id. at 114. This appeal followed.


We "exercise plenary review of the legal standard applied by the district and bankruptcy courts, but review the latter court's findings of fact on a clearly erroneous standard." In re Abbotts Dairies, Inc., 788 F.2d 143, 147 (3d Cir.1986) (citations omitted). "Because in bankruptcy cases the district court sits as an appellate court, our review of the district court's decision is plenary." Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988); see also Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101 (3d Cir.1981).

Jurisdiction in the bankruptcy court was proper under 28 U.S.C. Sec. 157(a) (1988). The district court had jurisdiction over the appeal from the final order of the bankruptcy court, id. Sec. 158(a), and we have jurisdiction over the appeal of the district court's judgment under 28 U.S.C. Sec. 158(d).


In this appeal, we must decide whether the settlement agreement was a contract, and if so, whether it was executory so that TCO could elect to assume or reject it under Sec. 365 of the Bankruptcy Code.

The IRS argues the settlement agreement is not a contract but a judgment of the court. 6 It maintains "[s]ince the Settlement Agreement was merged into the court's judgment, it cannot be an executory contract within the meaning of Bankruptcy Code Section 365." Appellee's Br. at 32. The bankruptcy court apparently agreed, observing "there is authority to the effect that the phrase 'executory contract' should not normally be applied to a judicial order." J.App. at 178. While the bankruptcy court did not explicitly hold the agreement was a judgment, the cases it cited 7 hold that where contracts have been reduced to judgment there is no "contract" remaining for purposes of Sec. 365. The district court, however, distinguished those cases, holding "[f]or bankruptcy purposes ... it is appropriate to treat the judicially approved settlement agreement in this case as a contract." In re Columbia Gas, 146 B.R. at 113.

At the outset, we should ask whether this settlement agreement would be considered a

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contract had there been no bankruptcy. Generally, application of the Bankruptcy Code does not change the attributes of a given legal relationship. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Thus, if the settlement agreement should be considered a contract under relevant...

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