Adam v. Itech Oil Co

REVISED - June 12, 2000

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
______________________________________

No. 98-11310
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In The Matter of Gibraltar Resources, Inc.,
Debtor
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SCOTT UNDERWOOD ADAM, ET AL.,
Plaintiffs-Appellants,

VERSUS

ITECH OIL COMPANY; FRANK APP, JR.,
Defendants-Appellees.
_______________________________________________________

Appeal from the United States District Court
for the Northern District of Texas
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May 10, 2000

Before POLITZ, GARWOOD, and DAVIS, Circuit Judges.

DAVIS, Circuit Judge:

In this case we must decide whether the Plaintiffs are barred

by a settlement that was approved by the bankruptcy court. We

conclude that Plaintiffs’ failure to appeal the order approving the

settlement precludes this action. We therefore affirm the

dismissal of Plaintiffs’ damage action.

I.

The instant case arises from post-petition complications

involving an interest in an oil well (“Hannusch Well” or “Well”).

In early January 1993, Gibraltar Resources, Inc., (“Gibraltar” or

“Debtor”) acquired a 75% working interest in the Hannusch Well.
The mineral lease contained a provision that permitted the

landowners to terminate the lease if production ceased for more

than 60 days. Gibraltar, in an unrecorded transaction, agreed to

sell interests in the Well to Scott Underwood Adam, et al.,

(collectively “Plaintiffs”) pursuant to a joint venture agreement.

Under the terms of the joint venture, Gibraltar served as the

manager/general partner and held the power to enter into contracts,

operate the Well, and supervise its drilling. Gibraltar

contracted, with Itech Oil Co. (“Itech”) and its President Frank

App, Jr. (“App”), for Itech to serve as the operator of the Well.

In October 1993, an involuntary petition under Chapter 7 of

the Bankruptcy Code was filed against Gibraltar. On the date of

the petition, Gibraltar held record title to the working interest

in the Well. Plaintiffs filed proofs of claim as creditors in the

bankruptcy case, asserting a general unsecured claim for the amount

of each Plaintiffs’ investment in the Well; alternatively

Plaintiffs asserted that each of them owned a working interest in

the Well based on the joint venture agreement. A letter confirming

the Trustee’s intent to allow the claims as general unsecured

claims in the properly documented “investment” amount was sent to

Plaintiffs’ original counsel. In November 1995, the bankruptcy

court entered an order adjudicating Plaintiffs as general unsecured

creditors.

In August 1994, Itech ceased producing the Hannusch Well.

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Itech represented to the Trustee and to Plaintiffs, however, that

the lease was not in danger of termination, because the landowners

had agreed not to enforce the termination provision for non

production. Despite Itech’s representations, U.S.A. Group, Inc.

(“KCCON”) entered into a new lease with the landowners and recorded

affidavits of non-production to terminate the existing lease under

which the Trustee and the Plaintiffs owned their interests. KCCON

then assigned its 100% working interest under the new lease to

Itech. In April 1995, the Trustee learned that the Well was in

fact producing and that Itech was acting as the 100% owner.

Itech filed suit (“Itech Adversary”) against the Trustee,

seeking a determination that the Trustee owed Itech money for

operating costs and expenses and that Itech had legitimately taken

over 100% of the working interests in the Well. The Trustee

counterclaimed against Itech, based on the termination of the

lease, for breach of contract, fraud, negligence, and constructive

fraud. The Plaintiffs were not named parties in the Itech

Adversary. However, it is undisputed that the Plaintiffs had full

knowledge of the suit and did not intervene.

After the suit had been pending for approximately one year the

parties to the Itech Adversary reached a settlement which was

approved by the bankruptcy court. The terms of the settlement

provided for the Trustee to receive, on behalf of the estate: cash

totaling $132,000, a reduction of secured claims against the estate

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in excess of $584,650, and a 58.5% working interest in the Well.

At the settlement approval hearing Plaintiffs, for the first time,

actively asserted a demand for their working interests in the Well.

Although Plaintiffs objected to the settlement at the hearing, they

did not appeal the bankruptcy court’s order approving the

settlement.

After the settlement, the bankruptcy court authorized the

Trustee to sell the 58.5% working interest at public auction; it

was sold on November 13, 1996 for $60,000. Plaintiffs appealed the

sale but the appeal became moot because Plaintiffs obtained no stay

of the sale order.

Following the bankruptcy court’s approval of the settlement

and the sale of the Hannusch Well lease, the Plaintiffs initiated

an adversary proceeding against Itech, App, and the Trustee

(“Hannusch Well Adversary”) predicated on essentially the same tort

theory as the Trustee’s action in the Itech Adversary. In the

Hannusch Well Adversary, the Plaintiffs asserted inter alia that:

(1) they owned working interests in the Well that the Trustee

acquired under the settlement; and (2) Itech and App were liable to

Plaintiffs for damages arising from the fraudulent termination of

the Hannusch lease and Itech’s acquisition of the Well from KCCON.

Plaintiffs’ theory of the case in the Hannusch Well adversary

was that the parties had agreed to transfer ownership of the Well

to the joint venture and that Plaintiffs had purchased working

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interests in the Well. The bankruptcy court accepted Plaintiffs’

theory and concluded that the parties had intended to transfer

record title to the interest in the Well to the joint venture and

simply had not done so before the Chapter 7 petition was filed.

However, the bankruptcy court denied relief to Plaintiffs on

grounds that they had released their claims against Itech and App

through the settlement.1 The Plaintiffs appealed the bankruptcy

court’s judgment denying them relief against Itech and App in the

Hannusch Well Adversary. The district court affirmed the

bankruptcy court, holding that, because the Plaintiffs were

beneficiaries of the estate represented by the Trustee, they are

bound by the settlement.2 In their appeal to this Court,

Plaintiffs argue that the Trustee’s settlement cannot bind them

because: (1) Plaintiffs based their claims on causes of action that

were not property of the estate; and (2) Plaintiffs were not

parties to the settlement.

1
Following the bankruptcy court’s judgment, Plaintiffs filed
a motion to make additional findings of fact. The bankruptcy court
granted the motion and held that with regard to Plaintiffs’ claims
for fraud and conspiracy against Itech and App, that Itech and App
had made fraudulent misrepresentations and entered into a
conspiracy, causing the Plaintiffs to suffer damages of $61,369.00.
2
For reasons best known by the district court, it held on the
one hand that the settlement of the Itech Adversary was binding on
Plaintiffs, but distributed the proceeds of the sale of the Well
based on Plaintiffs’ share in their ownership of the Well. Neither
the bankruptcy court nor district court explains this contradiction
and no explanation occurs to us. In any event, neither party
complains of the district court’s distribution order in this
appeal.

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 II.

A bankruptcy court approves compromises and settlements

pursuant to Bankruptcy Rule 9019, which provides that “on motion by

the trustee and after a hearing on notice ... the court may approve

a compromise or settlement.” Fed.R.Bankr.P. 9019. A bankruptcy

court’s approval of a settlement order that brings to an end

litigation between parties is a “final” order. See In re Cajun

Electric Power Coop., Inc., 119 F.3d 349, 354 (5th Cir. 1997); In

re West Texas Marketing Corp., 12 F.3d 497, 501 (5th Cir. 1994); In

re Medomak Canning, 922 F.2d 895, 900 (1st Cir. 1990). A

bankruptcy court’s final orders are appealable as of right under 28

U.S.C. § 158. A settlement agreement approved and embodied in a

judgment by a court is “entitled to full res judicata effect.”

West Texas Marketing, 12 F.3d at 500. “Under res judicata, a final

judgment on the merits of an action precludes the parties or their

privies from relitigating issues that were or could have been

raised in that action.” Medomak, 922 F.2d at 900 (quoting Allen v.

McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308

(1980)).

At the hearing to approve the settlement, Plaintiffs’ counsel

asked the bankruptcy court to enter a judgment denying approval of

the settlement. Counsel’s reasons for objecting to the settlement

included: (1) Plaintiffs owned individual working interests in the

Well; and (2) Trustee, by entering into the settlement, was

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disposing of property that was not property of the estate. Trustee

countered that Plaintiffs had failed to provide any evidence that

they were anything other than general unsecured creditors.

Plaintiffs produced no evidence at the hearing to establish their

working interests and the bankruptcy court approved the settlement

over their objection. Although Plaintiffs objected to the

settlement and had standing to appeal the adverse ruling, under 28

U.S.C. § 158(c), they did not appeal the order approving the

settlement.

We conclude that because Plaintiffs failed to appeal the

bankruptcy court’s order approving the Itech Adversary settlement,

that settlement is binding on Plaintiffs and precludes their action

filed in the Hannusch Well Adversary. Plaintiffs’ theory of their

case in the Hannusch Well Adversary was that Plaintiffs were

working interest owners in the Well rather than general unsecured

creditors of Debtor’s estate. Plaintiffs argued that, for this

reason, the Trustee’s actions in the Itech Adversary could not bind

them. However, Plaintiffs failed to appeal the bankruptcy court’s

order, approving the Itech Adversary settlement, premised on the

fact that Plaintiffs were creditors of the estate and not working

interest owners. The bankruptcy court’s unappealed order approving

the settlement became binding on Plaintiffs and they are not

entitled to relitigate the issue resolved in that order.

III.

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 For the reasons stated above, we affirm the judgment of the

district court.

AFFIRMED.

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