PAPCO, Inc. v. Oleum Expl., LLC, 3:19-CV-00589
| Decision Date | 19 July 2019 |
| Docket Number | NO. 3:19-CV-00589,3:19-CV-00589 |
| Parties | PAPCO, INC., Appellant, v. OLEUM EXPLORATION, LLC, Appellee. |
| Court | U.S. District Court — Middle District of Pennsylvania |
(JUDGE CAPUTO)
Bankruptcy: 5:19-bk-00664-RNO
Presently before me is an appeal from the Bankruptcy Court (Doc. 1) filed by Appellant PAPCO, Inc. PAPCO appeals the Bankruptcy Court's March 22, 2019 Order (Doc. 1-1) which held that certain funds were the property of the bankruptcy estate (i.e., Appellee Oleum Exploration, LLC's estate), rather than PAPCO. (See id.). The Bankruptcy Court further ordered the turnover of those funds to the estate from the state court in Texas where they were being held. (See id. at 4). PAPCO argues, among other things, that the Bankruptcy Court erred in determining the funds were Oleum's because no adversary proceeding was conducted as required by Bankruptcy Rule 7001. (Doc. 10 at 42-48). Oleum responds with two technical points: first, the March 22 Order is not final, so PAPCO's appeal should be dismissed (see Doc. 2); and second, the Bankruptcy Court was correct to conclude PAPCO waived whatever right to an adversary proceeding it had (Doc. 12 at 15-21). I conclude that the March 22 Order is appealable, so Oleum's Motion to Dismiss (Doc. 2) will be denied. I further hold that an adversary proceeding was required under Bankruptcy Rule 7001, that PAPCO did not waive its rights, and that the failure to hold an adversary proceeding was not harmless error. The March 22 Order will therefore be vacated, and the matter remanded to the Bankruptcy Court for further proceedings.
I write primarily for the parties, who are familiar with the factual and procedural background of this matter.
In April 2017, PAPCO assigned two oil and gas leases to Oleum. (Doc. 1-1 at ¶ 3). The leases cover oil-producing property located in Jefferson County, Texas. (Id. ¶ 4). Oleum sells the oil to third parties, including to Plains Marketing, L.P. (Id. ¶ 6). Later in 2017, a dispute arose over who was entitled to certain proceeds from the oil sold to Plains—Oleum, or PAPCO. (See id. ¶¶ 8-10). Plains accordingly filed an interpleader action in the District Court of Jefferson County, Texas to force Oleum and PAPCO to litigate the issue. (Id. ¶ 10). Upon filing the interpleader action, Plains deposited about $330,000 with the Texas court, representing the sum of the contested oil proceeds. (Id. ¶ 9). It appears that the interpleader action is still ongoing.
Oleum then filed a voluntary petition under Chapter 11 on February 16, 2019. (Id. ¶ 1). Three days later, Oleum filed an emergency turnover motion requesting the Bankruptcy Court order the Texas court to turn over the contested oil proceeds to the bankruptcy estate per 11 U.S.C. § 542, as Oleum believed it was property of the estate under 11 U.S.C. § 541. (See id. ¶ 11). The motion, having been served on the Texas court and PAPCO, proceeded to hearing on February 26, 2019. In re Oleum Exploration, LLC, 5:19-bk-00664, Doc. 6-5 (Bankr. M.D. Pa. Feb. 19, 2019); (Doc. 10-1 at 583). PAPCO objected on substantive grounds and presented some evidence, but after closing the evidentiary record the Bankruptcy Court held that the oil proceeds were property of the bankruptcy estate. (See Doc. 10-1 at 706). Before fully deciding the emergency turnover motion, however, the Bankruptcy Court directed the parties to brief a few issues, and scheduled a hearing for March 22, 2019. In re Oleum Exploration, LLC, 5:19-bk-00664, Doc. 30 (Bankr. M.D. Pa. Feb. 26, 2019). In its brief filed before the March 22 hearing, PAPCO argued that Oleum's emergency turnover motion should have been brought as an adversary proceeding, and that proceeding by motion violated PAPCO's due process rights. (See Doc. 1-1 at ¶ 20). The Bankruptcy Court overruled PAPCO's objection, finding PAPCO waived whatever right to an adversary proceeding it had. (Id. ¶ 21). In its March 22 Order, the Bankruptcy Court reiterated its holding that the oil proceeds were property of the bankruptcy estate, and ordered the Texas court to turn over the proceeds to the estate. .
PAPCO timely filed its notice of appeal on April 5, 2019. (Doc. 1). Oleum immediately moved to dismiss the appeal, arguing the March 22 Order is non-final and unappealable. The appeal (including Oleum's Motion to Dismiss) has been fully briefed and is now ripe for review.
Pursuant to 28 U.S.C. § 158(a)(1), this Court has jurisdiction to hear appeals from a Bankruptcy Court's "final judgments, orders, and decrees." I review the legal conclusions of the Bankruptcy Court de novo, "its factual conclusions for clear error, and its exercise of discretion for abuse thereof." In re O'Brien Envtl. Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999).
The threshold issue is whether this Court has jurisdiction over PAPCO's appeal. Oleum moves to dismiss the appeal on the ground that the March 22 Order is an unappealable non-final order, and would not qualify as an appealable interlocutory order, either. (See Doc. 2). In Oleum's view, "nothing prevents" PAPCO from "seeking a declaratory judgment or similar relief in the bankruptcy proceeding to determine the extent of its interest, if any, in [Oleum's] cash." (Doc. 12 at 9). PAPCO responds that the Order is final because it conclusively resolves whether the "oil well proceeds . . . became property of PAPCO or remained property of Oleum." (Doc. 3-5 at 11).
I agree with PAPCO that the March 22 Order is a final, appealable order. Had the Order done "nothing more than direct that funds be turned over to a receiver," it would not be final. F.T.C. v. Overseas Unlimited Agency, Inc., 873 F.2d 1233, 1235 (9th Cir. 1989). But the Order held that the oil proceeds "are property of the estate," not of PAPCO, and directed the Texas court to turn the proceeds over to the estate. (Doc. 1-1 at 3-4). A turnover order such as this one, which "finally resolve[s] the parties' rights to [the] assets," CFTC v. Topworth Int'l, Ltd., 205 F.3d 1107, 1112 (9th Cir. 1999), or which "finally dispose[s] of discrete disputes within the larger case," In re Moody, 817 F.2d 365, 367 (5thCir. 1987) (quotation omitted), is an appealable final order. In re Prof'l Ins. Mgmt., 285 F.3d 268, 281-82 (3d Cir. 2002) (citing In re Moody, 817 F.2d at 366); see In re O'Dowd, 233 F.3d 197, 201 (3d Cir. 2000) (); accord In re Booth, 260 B.R. 281, 283-84 (B.A.P. 6th Cir. 2001) (); In re Baine Smith Transp., Inc., 85 F.3d 626 (5th Cir. 1996) (). Oleum's unsupported assurances that PAPCO might yet convince the Bankruptcy Court to change its mind does not convert an otherwise final order into a non-final one. The Order is therefore a final order, and Oleum's Motion to Dismiss the appeal will be denied.
The next issue on appeal is threefold: first, whether the Bankruptcy Court should have adjudicated the parties' rights to the oil proceeds through an adversary proceeding; second, if such a proceeding was required, whether PAPCO waived its right to one; and third, if there was no waiver, whether the Bankruptcy Court's error in not conducting an adversary proceeding was harmless. See, e.g., Reed v. Nathan, 558 B.R. 800, 822-23 (E.D. Mich. 2016) ().
Neither party squarely addresses the first point, but it is clear an adversary proceeding was required. Bankruptcy Rule 7001 provides that certain matters "constitute adversary proceedings governed by the rules of Part VII of the Bankruptcy Rules." In re MF Global, Inc., 531 B.R. 424, 431 (Bankr. S.D.N.Y. 2015). "The Rules are binding and courts must abide by them unless there is an irreconcilable conflict with the Bankruptcy Code." In re Mansaray-Ruffin, 530 F.3d 230, 235 (3d Cir. 2008). Here, an adversary proceedingshould have been conducted because Oleum's emergency turnover motion (directed at the Texas court) was "a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee" under Rule 7001(1). In re MF Global, Inc., 531 B.R. at 431 ); see Reed v. Nathan, 558 B.R. 800, 821 (E.D. Mich. 2016) (). Additionally, Oleum's motion constituted "a proceeding to determine the validity . . . of a lien or other interest in property" under Rule 7001(2), as PAPCO notes. See, e.g., In re Whitehall Jewelers Holdings, Inc., No. 08-11261 (KG), 2008 WL 2951974, at *6-7 (Bankr. D. Del. July 28, 2008) (); In re Ace Indus., 65 B.R. 199 (Bankr. W.D. Mich. 1986) (...
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