United States District Court, D. Delaware
IN RE CHAPARRAL ENERGY, INC., et al., Debtors.
NAYLOR FARMS, INC. and HARREL'S LLC, Appellees. CHAPARRAL ENERGY, L.L.C., Appellant,
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
Niederman, William H. Stassen, Dana S. Katz, Fox Rothschild
LLP, Wilmington, DE - Attorneys for Appellees.
NOREIKA, U.S. DISTRICT JUDGE
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) (“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. For the reasons set forth herein, the
Memorandum Order is affirmed.
Oklahoma Class Action and Class Claim
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”). 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.
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).
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.
Claim Objection and Plan
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.
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.
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,  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.
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).
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).
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.
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.
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.
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 ...