Brady, Texas, Mun. Gas Corp., Matter of

• Decision Date: 24 July 1991
• Docket Number: No. 90-8282,90-8282
• Citation: 936 F.2d 212
• Parties: , Bankr. L. Rep. P 74,121 In the Matter of BRADY, TEXAS, MUNICIPAL GAS CORPORATION, Debtor. George O. SANDERS, George H. O'Brien, and Tanbark Oil Company 1978-1, Ltd., Appellants-Cross-Appellees, v. CITY OF BRADY, Successor-in-Interest, Appellee-Cross-Appellant. In the Matter of BRADY, TEXAS, MUNICIPAL GAS CORPORATION. The CITY OF BRADY, TEXAS, Appellee-Cross-Appellant, v. George O. SANDERS, et al., Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 212

936 F.2d 212

21 Bankr.Ct.Dec. 1531, Bankr. L. Rep. P 74,121

In the Matter of BRADY, TEXAS, MUNICIPAL GAS CORPORATION, Debtor.

George O. SANDERS, George H. O'Brien, and Tanbark Oil

Company 1978-1, Ltd., Appellants-Cross-Appellees, v. CITY OF BRADY, Successor-in-Interest, Appellee-Cross-Appellant.

In the Matter of BRADY, TEXAS, MUNICIPAL GAS CORPORATION.

The CITY OF BRADY, TEXAS, Appellee-Cross-Appellant, v. George O. SANDERS, et al., Appellant-Cross-Appellee.

No. 90-8282.

United States Court of Appeals, Fifth Circuit.

July 24, 1991.

John W. Harris, Steven P. Shreder, Gresham, Davis, Gregory, Worthy & Moore, San Antonio, Tex., for appellants-cross-appellees.

Evelyn Biery, Fulbright & Jaworski, San Antonio, Tex., Samuel Downing McDaniel, Austin, Tex., for City of Brady, Tex Appeals from the United States District Court for the Western District of Texas.

Before THORNBERRY, JOLLY, and SMITH, Circuit Judges.

THORNBERRY, Circuit Judge:

The bankruptcy court confirmed a municipal gas corporation's plan of reorganization that rejected a farm-out agreement with the appellants but gave them the right to pursue a damage claim against the debtor for breaching the agreement. Rather than remaining in the federal court, the appellants proceeded against the debtor and its successor-in-interest in a Texas state court, which ruled that the bankruptcy court's confirmation of the debtor's reorganization plan collaterally estopped the appellants from pursuing their damage claim against the debtor and its successor-in-interest. The appellants returned to the bankruptcy court, but that court dismissed their claim, holding that the state court's erroneous interpretation of the effect of the reorganization plan was binding on the federal bankruptcy court under the Full Faith and Credit Act, 28 U.S.C. Sec. 1738. The district court summarily affirmed the bankruptcy court's order.

We agree with the reasoning of the bankruptcy court, and, therefore, we AFFIRM the order dismissing the appellants' claim against the debtor and its successor-in-interest. Our resolution of this dispute obviates a discussion of the issues raised in the cross-appeal.

FACTS AND PROCEDURAL HISTORY

Brady, Texas, Municipal Gas Corporation (Brady Gas) owned mineral and gas leases in Brown County, Texas. In April 1978, Brady Gas signed a farm-out agreement with George H. O'Brien, which provided that Brady Gas would assign its leases, or a portion of them, to O'Brien for any acreage on which O'Brien completed one or more wells. In July 1978, O'Brien assigned a portion of his interest in the farm-out agreement to Vista Resources, Inc. One month later, Vista assigned all its interest to Tanbark Oil Company. George O. Sanders is the successor-in-interest to Vista and Tanbark. For convenience, these entities and individuals will be referred to, collectively, as the "appellants."

In September 1979, the appellants sued Brady Gas in the Texas State District Court in Brown County, Texas, alleging that they had completed three wells on acreage covered by the agreement but that Brady Gas had refused to assign to them the leases to those areas. The appellants asked the court either to award them equitable title to those leases or to award them damages for the cost of completing the wells. In June 1980, before the state court had made any ruling in the case, Brady Gas filed for bankruptcy under Chapter 11. The City of Brady, which owned the entire equity interest of Brady Gas, filed a proof of interest.

On October 20, 1980, Brady Gas filed a proposed plan for reorganization that rejected the farm-out agreement as an executory contract. See Bankr.Code Sec. 365(a). On that same day, the appellants initiated an adversary proceeding against Brady Gas asking the bankruptcy court to order Brady Gas to assign the leases to them. The next month, Brady Gas filed an answer to the adversary proceeding and also filed a counterclaim, which asserted that the farm-out agreement was ambiguous, and which asked the bankruptcy court either to reform it or to declare it null and void.

Under the Bankruptcy Code, the rejection of an executory contract constitutes a breach of the contract, and an aggrieved party can assert a claim for damages. See id. Secs. 365(g)(1), 502(g). Accordingly, in December 1980, the appellants filed a proof of claim in the bankruptcy court asking for $1,650,000 in damages. Therefore, in the bankruptcy court, the appellants had filed the adversary proceeding seeking specific performance and a proof of claim seeking damages. Meanwhile, the state court action was still pending.

On January 12, 1981, Brady Gas filed its First Alternate Plan of Reorganization. See Record on Appeal ("R."), vol. 8, tab 6. This plan proposed that the City of Brady In February, the bankruptcy court approved the Alternate Plan over the appellants' objection. Two days after the plan was confirmed, the appellants filed a notice of appeal, but the district court dismissed the appeal in October 1982 for failure to prosecute. From February 1981 until October 1983, the appellants took no further action in either the bankruptcy court or in the state court.

                would pay the bond debts and current liabilities of Brady Gas and would assume its contracts and obligations.  In exchange, Brady Gas would transfer its assets to the City.  Like the initial plan, the Alternate Plan proposed to reject the farm-out agreement as an executory contract.  The Alternate Plan proposed to pay the appellants' claim "in an amount equal to and at such time as a court of competent jurisdiction determine[d] that such claims are due and in what amount."    But Article IX of the plan also stated that the bankruptcy court "[would] retain jurisdiction" over the "determination of all causes of action, controversies, disputes, or conflicts, whether or not subject to pending action as of the date of confirmation."
                

In October 1983, the appellants returned to the state court and filed an amended petition adding the City of Brady as a defendant. Approximately one year later, the City moved for summary judgment, asserting that the confirmation of the reorganization plan barred the appellants' state court action under the doctrine of res judicata. In December 1984, the state trial court entered summary judgment against the appellants. See Vista Resources, Inc. v. Brady, Texas, Mun. Gas Corp., No. 21,138 (Dist.Ct. of Brown County, 35th Judicial Dist. of Texas, Dec. 18, 1984), reprinted in R., vol. 8, tab 13. The appellants appealed the trial court decision to the Texas Court of Appeals in Eastland.

Meanwhile, in October 1984, the clerk of the bankruptcy court notified the appellants and the City that the adversary proceeding had been pending for almost four years without any activity and, therefore, that a status conference would be conducted on November 15. The appellants did not appear at the status conference, and on December 5, 1984, the presiding bankruptcy judge signed an order dismissing the adversary proceeding. On December 20, 1984, the appellants filed a motion for reconsideration.

In August 1985, in an unpublished opinion, the Texas appellate court affirmed the decision of the trial court. See Tanbark Oil Co. 1978-1, Ltd. v. City of Brady, No. 11-85-080-CV (Tex.App.--Eastland, Aug. 22, 1985, writ ref'd n.r.e.), reprinted in R., vol. 8, tab 14 [hereinafter Texas Court of Appeals Opinion]. Its justification for doing so, which forms the core of this appeal, is reprinted below.

[The City of Brady's] motion for summary judgment urged that the bankruptcy proceeding operated as res judicata of all appellants' claims.

In a single point of error, appellants urge that the trial court erred in granting the summary judgment because at least one genuine issue of material fact still exists. Appellants concede that the trial court was correct in granting the motion with respect to the claim alleging equitable title. They argue, however, that the bankruptcy proceeding left intact their claim for damages resulting from the alleged breach of contract by Brady Gas. Under the Bankruptcy Code, a rejection gives rise to a legal fiction that a breach of the contract occurred immediately prior to the filing of the petition. Thus, a claim is allowable for damages resulting from the breach. However, the claim for damages is to be presented to and determined by the bankruptcy court. Appellants pursued no such claim in the bankruptcy court.

The plan in the instant case was confirmed by the bankruptcy court. An arrangement confirmed by a bankruptcy court has the effect of a judgment rendered by a district court. Any attempt by the parties to relitigate any of the matters that were raised or could have been raised therein is barred under the doctrine of res judicata. Because appellants could have pursued the damage claim in the bankruptcy court but failed Id. at 2-3 (citations omitted and emphasis in original). The appellants applied for a writ of error, which the Texas Supreme Court refused to grant, see Tanbark Oil Co. 1978-1, Ltd. v. City of Brady, No. C-4779, 29 Tex.Sup.Ct.J. 140-41 (Jan. 18, 1986).

to do so, the claim is now barred by res judicata.

While the application for the writ of error was pending before the Texas Supreme Court, the appellants returned to the bankruptcy court and filed a motion asking the bankruptcy court to compel the City of Brady to distribute to them $1,650,000, the amount in their proof of claim. The appellants reasoned that this was now an allowed claim because the City had not objected to it. See Bankr.Code Sec. 502(a). Based on this same reasoning, the appellants initiated a second adversary proceeding on March 17, 1986, seeking an injunction forbidding Brady Gas and the City from disputing their liability for damages in the state courts.

The City contended, however, that the state judgment barred the appellants from pursuing their claim in the bankruptcy court. The state court had held that...