Bankruptcy Discharge Bars Claim of Purchaser Agst Former Oil Well Operator

March 27th, 2012

In Shelton Property Rural Acreage, LLC v Placid Oil Co., 2011 U.S. App. LEXIS 16681 (5th Cir. 8/10/11), Placid Oil operated oil wells on leased property from 1942 to 1956. In 1986, Placid filed a chapter 11 bankruptcy proceeding. The bankruptcy court issued a confirmation order in 1988 that contained a discharge of all claims except those created or assumed by the reorganization plan. The order also included a discharge for any future claims for damages that occurred prior to the discharge.

In 2002, Shelton Property Rural Acreage, LLC (Shelton) purchased the property that had been leased by Placid. After discovering contamination associated with the prior drilling operations,Shelton commenced a lawsuit against Placid in state court. Placid filed an adversary proceeding with the bankruptcy court, arguing that since the property owner at the time of the bankruptcy proceedings had not filed a proof of claim for any alleged environmental damage to the property, Shelton’s claim had been discharged by the bankruptcy court’s 1988 order.

In response,Shelton argued the discharge should not apply to its claim because the prior landowner had not receive adequate notice of Placid’s bankruptcy proceeding. Shelton asserted that the prior owner should have been considered a known creditor because a water study published in 1958 had showed that water wells on the property were contaminated due to oil and gas activities. Moreover,Shelton said an article in a June 1964 issue of Oil and Gas Journal discussed that the Little River bordering Shelton’s property was being polluted due to unlined oil and gas pits.

The bankruptcy court upheld the discharge and the Fifth Circuit affirmed. The appeals court said there was no specific information in the record to suggest that Placid knew of any claims related to property it leased from Shelton’s predecessor. The court said no environmental complaints had been made between 1956 and 1986. The court rejected Shelton’s assertion that the environmental damage was easily identifiable since it had taken Shelton six years to notice the damage. Finally, the court noted that Placid had tens of thousands of former leaseholds and it would have been unreasonable to require Placid to give each lessor actual notice of the bankruptcy. In light of this evidence, the appeals court agreed that Shelton’s predecessor was an unknown creditor who was only entitled to notice by publication. This requirement was satisfied when Placid published notice of its bankruptcy on three separate occasions in the Wall Street Journal.

It is unclear of Shelton performed any environmental due diligence prior to acquiring the property. However, a good historical search would have revealed the prior oil leasing activities, could have identified the responsible party and revealed the bankruptcy proceeding. If Shelton had been armed with this information prior to taking title, it could have explored various risk management strategies instead of becoming forced to bear the full brunt of the cleanup.

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