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In re Chaparral Energy, Inc.

United States District Court, D. Delaware

September 24, 2019

IN RE CHAPARRAL ENERGY, INC., et al., Debtors.
v.
NAYLOR FARMS, INC. and HARREL'S LLC, Appellees. CHAPARRAL ENERGY, L.L.C., Appellant,

          Mark D. Collins, John H. Knight, Richards, Layton & Finger, P.A., Wilmington, DE; Richard A. Levy, Keith A. Simon, Christopher Harris, Latham & Watkins LLP, New York, NY - Attorneys for Appellant

          Seth Niederman, William H. Stassen, Dana S. Katz, Fox Rothschild LLP, Wilmington, DE - Attorneys for Appellees.

          MEMORANDUM OPINION

          NOREIKA, U.S. DISTRICT JUDGE

         This dispute arose in the Chapter 11 cases of debtor Chaparral Energy, LLC (“Chaparral”) and certain affiliates (together, “Debtors”). Before the Court is an appeal by Chaparral from the Bankruptcy Court's May 24, 2017 Memorandum Order (“Memorandum Order”), In re Chaparral Energy, Inc., 571 B.R. 642 (Bankr. D. Del. 2017), regarding proof of claim no. 2179 (CHAP446-86)[1] (“Class Claim”) filed by Naylor Farms, Inc. and Harrel's LLC (“Class Plaintiffs”), on behalf of themselves and all others similarly situated (collectively, “the Class”). Chaparral seeks a reversal of the Bankruptcy Court's decision to grant Class Plaintiffs' request that Federal Rule of Bankruptcy Procedure 7023 be made applicable to the Class Claim.[2] For the reasons set forth herein, the Memorandum Order is affirmed.

         I. BACKGROUND

         A. Oklahoma Class Action and Class Claim

         The following facts are undisputed. On May 9, 2016 (“Petition Date”), the Debtors, including Chaparral, commenced the Chapter 11 cases. Almost 5 years prior, on June 7, 2011, the Class Plaintiffs filed their class action complaint against Chaparral in the United States District Court for the Western District of Oklahoma (the “Oklahoma District Court”).[3] The Oklahoma Class Action seeks, inter alia, recovery of unpaid royalties owed to the Class, which is comprised of royalty owners with mineral interests located in the State of Oklahoma, based on Chaparral's alleged failure to properly report, account for, and distribute royalty interest payments to the Class, dating back to December 1, 1999. (CHAP11, CHAP1108). In particular, Class Plaintiffs in that case allege that Chaparral improperly charged or deducted from royalties certain costs that Chaparral was required to absorb under Oklahoma law.

         On October 13, 2015, Class Plaintiffs moved for class certification (“the Class Certification Motion”) in the Oklahoma District Court. Approximately six months after the Class Certification Motion was filed, and while the motion was fully briefed and under consideration by the Oklahoma District Court, Chaparral filed its Chapter 11 petition. On June 13, 2016, Chaparral filed a motion for entry of an order establishing bar dates (CHAP159-205) (“Bar Date Motion”), which the Bankruptcy Court granted on July 1, 2016 (CHAP206-230) (“Bar Date Order”). In the Bar Date Motion, Chaparral represented that it would serve all known creditors with notice of the bar date. (CHAP168, ¶ 13(a)). The Bar Date Motion requested the claims bar date in the Chapter 11 Cases to be set for August 12, 2016 (“the Bar Date”). (CHAP162). The Bar Date Order required that Chaparral serve notice of the Bar Date on Chaparral's creditors including Class Plaintiffs and Class: “all known potential Claimants and their counsel (if known), ” “all known parties to litigation with the Debtors, ” and “all known Royalty Interest Owners.” (CHAP211). The Bar Date Order further provided notice of the Bar Date in “The Wall Street Journal (national edition) and The Oklahoman, and such other local newspapers, trade journals or similar publications, if any, as the Debtors deem appropriate . . . .” (CHAP212). On July 12, 2016, Chaparral filed the Notice of Deadline for the Filing of Proofs of Claim, Including for Claims Asserted under Section 503(b)(9) of the Bankruptcy Code (“the Bar Date Notice”). (CHAP231- 37). The Bar Date Notice was addressed to “ALL POTENTIAL HOLDERS OF CLAIMS AGAINST THE DEBTORS (AS LISTED BELOW).” (CHAP0231). Relevant to this appeal, Chaparral served the Bar Date Notice on a subset of the Class that included “known royalty interest owners to whom [the Debtors] had made royalty payments within the three years prior to the [Bankruptcy] Petition Date.” (CHAP944, ¶ 19).

         On July 22, 2016, Class Plaintiffs filed a motion seeking limited relief from the automatic stay pursuant to § 362(d) to authorize the Oklahoma District Court to determine the Class Certification Motion, which had been stayed by the Chapter 11 cases. (CHAP238-465). Chaparral stipulated to limited relief from stay to allow the Class Certification Motion to proceed in the Oklahoma Class Action (CHAP487-98), and the Bankruptcy Court approved this resolution on August 16, 2016 (CHAP499-501). On January 17, 2017, the Oklahoma District Court entered an Order granting the Class Certification Motion, with certain modifications, including, inter alia, that the Class was restricted to leases with “Mittelstaedt Clauses.” (CHAP0502-522). The effect of this is that the Class is now comprised of approximately fifty percent (50%) of the leases originally included in the Class description.[4]

         B. Claim Objection and Plan

         In order to protect the interests of the Class, Class Plaintiffs filed the Class Claim on August 15, 2016. (CHAP466-86). At the time of filing of the Class Claim, it was estimated that the Class Claim was in excess of $150 million, inclusive of actual and punitive damages, 12% statutory interest, costs and attorneys' fees. (CHAP471). Class Plaintiffs subsequently amended the Class Claim to $90 million. (CHAP1101-52).

         Chaparral did not immediately object to the Class Claim and continued to move ahead with confirmation of a plan. On December 19, 2016, Chaparral filed the first Amended Plan of Reorganization (as amended, “the Plan”). (CHAP1891-1966). Under the Plan, the Class Claim, along with holders of Prepetition Note Claims and General Unsecured claims, receive their pro rata share of the equity in the reorganized companies. This accounts for approximately 7% of equity of the reorganized company for Class Plaintiffs. (CHAP1102; CHAP2213).

         On January 26, 2017 - nine days after the Class was certified by the Oklahoma District Court and five months after the Class Claim was filed - Chaparral filed the Claim Objection, asserting that the Bankruptcy Court should exercise its discretionary authority by refusing to permit the filing of the Class Claim because it would not be beneficial to apply Bankruptcy Rule 7023. The Debtors reserved for future adjudication the question of whether the Class Claim actually satisfies the requisites of Federal Rule of Civil Procedure 23, [5] as well as additional objections on any other basis. According to Class Plaintiffs, they were informed for the first time in the Claim Objection of Chaparral's limited service of the Bar Date Notice based on the three-year prepetition cut-off period. (CHAP933-1033). On February 15, 2017, Class Plaintiffs filed their response to the Claim Objection. (CHAP1040-1100). On February 28, 2017, the Bankruptcy Court held an evidentiary hearing on the Claim Objection and heard oral argument. (CHAP1757-1890). According to testimony of Chaparral's associate vice president of legal, associate general counsel, and corporate secretary, Ms. Byford, Chaparral served approximately 76% of the royalty interest owners it would have served had it employed a ten year prepetition cut off period. (CHAP1770:7-19). The Bankruptcy Court took the Claim Objection under advisement.

         On March 9, 2017, the confirmation hearing for the Plan was held. (CHAP0531). At the confirmation hearing, no party suggested that the Plan could not be confirmed or could not go effective because of this outstanding issue. On March 10, 2017, the Plan was confirmed, and on March 21, 2017, the Plan went effective. (CHAP2187).

         C. Memorandum Order

         On May 24, 2017, the Bankruptcy Court issued the Memorandum Order determining that Bankruptcy Rule 7023 should be applied to the Class Claim and denying the Claim Objection. Chaparral, 571 B.R. at 650. Noting that whether to permit a class action proof of claim is a matter of discretion, the Bankruptcy Court identified the two-step analysis: “First, the Court must decide whether it is beneficial to apply Bankruptcy Rule 7023, via Bankruptcy Rule 9014(c), to the claims administration process.” Id. at 646 (citing In re Pac. Sunwear of California, Inc., 2016 WL 3564484, at *5 (Bankr. D. Del. June 22, 2016), reconsideration denied, 2016 WL 4250681 (Bankr. D. Del. Aug. 8, 2016)). “Second, the court must determine whether the requirements of Federal Rule 23 have been satisfied, such that a class proof of claim may properly be filed.” Id. (citing In re MF Global Inc., 512 B.R. 757, 763 (Bankr. S.D.N.Y. 2014) and In re Motors Liquidation Co., 447 B.R. 150, 157 (Bankr. S.D.N.Y. 2011).

         Noting that the issue addressed in the Memorandum Order was solely the first step of the analysis - whether to apply Bankruptcy Rule 7023 - the Bankruptcy Court identified the well-recognized three-factor framework set forth in In re Musicland Holding Corp., 362 B.R. 644, 654 (Bankr. S.D.N.Y. 2007), to guide the court's discretion in determining whether Bankruptcy Rule 7023 should be extended to the claims administration process: (1) whether the class was certified prepetition; (2) whether the members of the putative class received notice of the bar date; and (3) whether class certification will adversely affect the administration of the estate (“Musicland factors”). The Bankruptcy Court noted that exercise of its discretion is clearly a fact and case specific analysis and that no single one of the Musicland factors is dispositive. Chaparral, 571 B.R. at 646.

         Because the class was not certified prepetition, the Bankruptcy Court concluded that the first Musicland factor weighed against application of Bankruptcy Rule 7023. Id. The remaining factors, however, weighed in favor of application. The Bankruptcy Court determined that the second Musicland factor - whether the members of the putative class received the notice of the bar date - weighed in Class Plaintiffs' favor “as not all putative class members were served with notice of the bar date.” Id. at 646-47. With respect to the third Musicland factor - whether class certification will adversely affect the administration of the estate - the Bankruptcy Court determined that most of Chaparral's original arguments had been mooted by its determination to go forward with confirmation and consummation of the Plan, including Chaparral's argument that permitting the Class Claim would “creat[e] significant uncertainty with respect to the recovery available for unsecured creditors.” Id. at 648-49. The Bankruptcy Court further disagreed with Chaparral's assertion that the delay associated with reserving 7% of new equity interests for putative class claimants would adversely affect the administration of the estate. Id. at 649. As an additional reason weighing in favor of application of Bankruptcy Rule 7023, the Bankruptcy Court noted that, assuming the Class Claim is well founded - including its “allegation that Chaparral is improperly reporting, accounting for, and distributing royalty interest payments to Royalty Interest Owners” - permitting the filing of a Class Claim could potentially serve as a deterrent, “dissuading the reorganized companies from continuing with the same behavior.” Id. at 650 (citing In re Zenith Labs., Inc., 104 B.R. 659, 662 (D.N.J. 1989)). Based on its thorough weighing of the Musicland factors and a fact and case specific analysis, the Bankruptcy Court exercised its discretion to apply Bankruptcy Rule 7023 to the Class Claim. Id.

         D. Appeals

         Thereafter, on June 7, 2017, Chaparral timely appealed the Memorandum Order, and briefing proceeded in this Court. (D.I. 1). Weeks earlier, on April 28, 2017, Chaparral appealed the Class Certification Order entered by the Oklahoma District Court to the United States Court of Appeals for the Tenth Circuit. The appeal of the Class Certification Order was argued before the Tenth Circuit on March 20, 2018.

         On October 3, 2018, the parties were ordered to submit a joint status report with respect to its appeal in this Court. (D.I. 27). In the Joint Status Report filed by the parties (D.I. 28), Chaparral took the following position: “Appellant believes that while the confirmation of the class certification would not bind the Bankruptcy Court or this Court with respect to the application of Rule 7023 . . ., the denial of class certification would be highly probative in this Appeal” and that “it may be more efficient to defer resolution of this Appeal until a decision is rendered in the Tenth Circuit Appeal.” (Id. at 2). Class Plaintiffs ...


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