Sarnosky v. Chesapeake, 70 F.4th 273

Background

Chesapeake filed Chapter 11 (June 2020) and confirmed a reorganization Plan with an Effective Date of February 9, 2021; a claims bar date was set for Oct. 30, 2020.
Before bankruptcy, thousands of Pennsylvania lessors sued Chesapeake in putative class actions: Demchak (MEC leases) and Brown–Suessenbach (non‑MEC leases); the Pennsylvania AG also brought related claims and timely filed a proof of claim.
Few individual lessors (161) and the PAAG filed timely proofs of claim; the vast majority of putative class members did not file claims and therefore their prepetition monetary claims were discharged by the Plan.
The PAAG settled pre‑Effective Date (approved in bankruptcy process). A month after the Effective Date, Chesapeake negotiated separate MEC and non‑MEC class settlements (paying $5M and $1.25M, and mandatorily altering future royalty formulas for class members).
The bankruptcy court preliminarily approved the post‑Effective Date settlements; the district court affirmed and ultimately granted final approval. The Fifth Circuit reviewed whether the bankruptcy and district courts had jurisdiction to approve those post‑confirmation, forward‑looking settlements.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether bankruptcy court had "core" post‑confirmation jurisdiction to approve class settlements resolving prepetition claims of non‑filers	Lessors: No — Plan discharged unfiled prepetition claims; court cannot revive discharged claims	Chesapeake: Yes — settlements resolve monetary and interpretation claims; they are claims‑handling within core jurisdiction	Held: No core jurisdiction; courts cannot use core claims procedures to revive/resolve discharged, unfiled prepetition claims
Whether "related to" post‑confirmation jurisdiction (Craig’s Stores test) permitted approval	Lessors: Settlements do not principally deal with post‑confirmation relations; they conflict with the Plan and are not necessary to plan implementation	Chesapeake: Settlements "relate to" the Plan and fall within post‑confirmation jurisdiction; practical vehicle for recovery	Held: No — Craig’s Stores factors (post‑confirmation relations, pre‑existing antagonism, facts/law deriving from plan) weigh against jurisdiction
Whether settlements impermissibly modified leases and provided disparate treatment to non‑filers vs. general unsecured creditors	Lessors: Settlements mandate lease modifications and grant non‑filers much greater recovery, undermining Plan and Disclosure Statement promises	Chesapeake: Settlements are reasonable and harmonize with PAAG settlement; appropriate relief for class members	Held: Settlement terms contradict the Plan (leases were to ride through; non‑filers were discharged), supporting lack of bankruptcy jurisdiction
Remedy: Whether lower courts’ approvals must stand	Lessors: Approvals are void for lack of jurisdiction	Chesapeake: Final approval was procedurally and substantively proper; district court applied related‑to standard	Held: Vacated and remanded with instruction to dismiss for lack of jurisdiction

Key Cases Cited

In re Craig’s Stores of Texas, Inc., 266 F.3d 388 (5th Cir. 2001) (three‑factor test for post‑confirmation "related to" jurisdiction)
In re U.S. Brass Corp., 301 F.3d 296 (5th Cir. 2002) (post‑confirmation jurisdiction limits; interpretation of plan may be core)
In re Wood, 825 F.2d 90 (5th Cir. 1987) (adjudication of prepetition claims is a core proceeding)
Matter of Edgeworth, 993 F.2d 51 (5th Cir. 1993) (discharge in bankruptcy releases debtor from personal liability for discharged claims)
In re Enron Corp. Sec., 535 F.3d 325 (5th Cir. 2008) (application of post‑confirmation jurisdiction principles)
Pettibone Corp. v. Easley, 935 F.2d 120 (7th Cir. 1991) (chapter 11 confirmation permits debtor to resume business without court supervision)
In re Galaz, 841 F.3d 316 (5th Cir. 2016) (de novo review of subject‑matter jurisdiction in bankruptcy appeals)