Matter of Texxon Petrochemicals, L.L.C., 67 F.4th 259 (5th Cir. 2023)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, analyzing a recent decision of interest:

SUMMARY

In Matter of Texxon Petrochemicals, L.L.C., 67 F.4th 259 (5th Cir. 2023), a case perhaps more interesting for what it analyzed but didn’t decide than what it did, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) discussed the application of equitable mootness in regard to a proceeding on appeal after the bankruptcy case was dismissed but no plan had been confirmed.  Ultimately bypassing the appellee’s equitable mootness point, it eventually decided the appeal by affirming the decisions of the bankruptcy court and district court denying the debtor’s motion to assume an alleged executory contract on the grounds that the debtor had failed to establish that there was any contract at all.  

To view the opinion, click here.

FACTS

Texxon operated a combined gas station, car wash and convenience store on property it leased from Getty.  Prepetition Texxon emailed Getty about possibly purchasing the property for $350,000.  Getty responded favorably. A further email exchange between the two companies proposed getting together to accomplish the contemplated transaction.  The emails reflected enthusiasm for a deal by both parties.  However, there were no further developments before Texxon filed a Chapter 11 bankruptcy (the “Case”) three years later. 

In the Case, Texxon moved under Bankruptcy Code § 365 to assume what it claimed was the executory contract to buy the property based on the prior email exchange between the parties.  Getty opposed the motion.  Finding that there was no contract for a variety of reasons, the bankruptcy court denied the motion.  Texxon appealed to the district court.  In the meantime, the U.S. Trustee moved to dismiss the Case with prejudice unless Texxon caught up on its fees and filings and confirmed a plan by a specified deadline.  Evidently, Texxon was stumbling through its Chapter 11.  The bankruptcy court granted the motion, setting a deadline for plan confirmation and providing for dismissal of the Case with prejudice without further proceedings if Texxon did not comply with the order. 

The debtor did not confirm a plan by deadline, and the bankruptcy court thereupon dismissed the Case with prejudice while the district court appeal was pending.  Neither party raised the dismissal in the district court proceedings.  Agreeing with the bankruptcy court that there was no contract to assume, the district court affirmed the bankruptcy court’s ruling on the executory contract motion.  Texxon then appealed to the Fifth Circuit, with Getty adding for the first time an equitable mootness theory.  The Fifth Circuit affirmed on the ground that there was no contract.  

REASONING

Before considering the substantive merits of the appeal, in dictum the Fifth Circuit discussed Getty’s equitable mootness argument.  In general confirmation of a plan equitably moots an appeal when the outcome of an appeal will disturb the operation of a plan or adversely affect the settled expectations of others affected by the plan.  By the same token, Getty argued, dismissal of a case has a plan-analogous effect (presumably because dismissal of the Case, like confirmation of a plan, has wide-ranging implications for parties in interest).  As the Fifth Circuit put it, Getty “appears to argue that the dismissal of an underlying bankruptcy proceeding operates similar to the confirmation of a reorganization plan [on the affected interests] and, therefore, effectively forecloses judicial relief.”  Texxon contended in opposition that the issue of whether there is a contract is “ancillary to the bankruptcy.”  The opinion refers to cases that indicate that “ancillary” means in essence that the issue can exist outside the bankruptcy context.  See, e.g., In re Sundaram, 9 Fd.4th 16, 21 (1st Cir. 2021); Spacek v. Thomen (In re Universal Farming Indus., 873 F.3d 1334, 1335-36 (9th Cir. 1989).  Therefore, the theory is, it can persist independent of a bankruptcy.  (In a way, this is similar to “noncore” proceedings in bankruptcy under 28 U.S.C. § 157(c) and “related to” proceedings under 28 U.S.C. § 1334(b).)  In effect, Texxson’s position was that the contract issue does not necessarily have implications for the community of interests that was associated with the Case. 

Citing to its decision in In re Pacific Lumber Co., 584 F3d 229, 240 (5th Cir. 2009), the court delineated the factors governing whether an appeal is equitably moot as developed in the plan confirmation context:  (1) whether a party obtained a stay of the appealed order; (2) whether the plan has been substantially consummated; and (3) whether the relief at issue would affect the rights of parties not involved in the appeal or jeopardize the operation of the plan.  The Fifth Circuit then observed that the question central to the appeal, whether there is a contract between Texxon and Getty, is still potentially a live one even upon dismissal of the Case.  Though the court does not explain how that is, it appears that it may have been thinking that a finding in a bankruptcy court’s decision whether there was a contract could be issue or claim preclusive (collateral estoppel or res judicata) between the parties on that question in later proceedings outside a bankruptcy case. 

But the Fifth Circuit did not adjudicate Texxon based on what it characterized as unresolved and difficult questions of bankruptcy law in addition to whether an issue is “ancillary” to the case.  It would have to resolve a question it had not yet decided:  whether equitable mootness can be applied in the context of a dismissal order rather than mainstream environment of plan confirmation.  Another open question is whether the existence of a contract can be decided in a contested matter rather than an adversary proceeding.  It also noted that Getty did not raise the equitable mootness issue in either the bankruptcy court or the district court.  The court therefore switched to resolving the appeal on the substantive question that was addressed by both lower courts:  whether the was a contract.  On that score, the Fifth Circuit concurred with the decisions below and affirmed.  It, too, found a wholesale absence of facts establishing the fundamentals of a contract (e.g., no evidence of meeting of the minds, incomplete terms, no signatures, property not identified, and so on).  

AUTHOR’S COMMENTS

The Fifth Circuit’s ultimate decision on the merits – that there simply was no contract to assume – was a simple one.  There is nothing controversial about it.  What is of more interest is the opinion’s survey of equitable mootness law and its attendant brief discussion of whether the appeal of an order denying a motion to assume on the basis of the lack of a subject contract when the underlying bankruptcy case is dismissed during the appeal, rather than in the context of a plan confirmed while the appeal is pending, also can be subject to equitable mootness if the central issue is “ancillary” to the bankruptcy case. 

One further point.  One wonders why Texxon wanted to assume the contract even though it had filed a Chapter 11 case and then, after being derelict in its bankruptcy duties, had it dismissed, or why Getty wanted to assure that it remained the owner of the property rather than going through with a sale of it?  The answer for both parties may be that the property had increased in value over the years since Texxon had proposed buying it for $350,000.  If so, both parties saw the prospect of a substantial profit to themselves if they ended up with the property. 

This review was written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Meredith Jury, (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group.  Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.