In Re Linn Energy, LLC

Appellant's BRIEF

S.D. Tex.October 20, 2017

Civil Action No. 6: 17-cv-00051 (Bankruptcy Case No. 16-60040) IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS VICTORIA DIVISION IN RE: LINN ENERGY, LLC, ET AL., Debtors DANA FRENCH, as personal representative of the Estate of Clarence J. "Peter" Bennett, Appellant V. REORGANIZED BERRY DEBTORS and REORGANIZED LINN DEBTORS, Appellees Appeal from the United States Bankruptcy Court for the Southern District of Texas The Honorable David R. Jones, Chief Judge APPELLANT'S OPENING BRIEF Kurt F. Vote #160496, Pro Hae Vice Micaela L. Neal #287107, Pro Hae Vice Wanger Jones Helsley PC 265 E. River Park Circle, Suite 310 Fresno, CA 93720 Telephone:(559) 233-4800 Facsimile: (559) 233-9330 kvote@wjhattorneys.com mneal@wjhattorneys.com Attorneys for Appellant Dana French, as Personal Representative of the Estate of Clarence J. "Peter" Bennett Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 1 of 63 TABLE OF CONTENTS I. JURISDICTIONAL STATEMENT ................................................................ 1 A. Bankruptcy Court's Subject-Matter Jurisdiction ........................................ 1 B. District Court's Jurisdiction ........................................................................ 2 C. Filing Dates Establishing Timeliness of Appeal ........................................ 2 D. Appeal From Final Judgment, Order or Decree ......................................... 3 II. STATEMENT OF ISSUES PRESENTED AND ST AND ARD OF REVIEW .................................................................. .4 A. Standard of Review in Reviewing Bankruptcy Court Orders .................... 4 B. Standard of Review in Reviewing Subordination Determinations ............ 5 C. Standard of Review in Reviewing Discovery and Evidentiary Hearing Decisions ................................................................... 6 D. Issues Appealed and Applicable Standards of Review .............................. 7 III. CONCISE STATEMENT OF CASE ........................................................... 10 A. Background Facts .................................................................................... 10 1. The Original Estate............................................................................. 11 2. The Victory Trust .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 13 3. The Purported Linn-Berry Merger ..................................................... 16 4. Post-Merger Payment Dispute ............................................................ 18 B. Procedural History ................................................................................... 20 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 2 of 63 TABLE OF CONTENTS (continued) C. Rulings Presented for Review ................................................................. 22 IV. SUMMARY OF THE ARGUMENT ........................................................... 23 V. ARGUMENT ................................................................................................ 24 A. The Bankruptcy Court Erred in Subordinating Appellant's First, Fourth and Sixth Claims for Relief ............................ 24 1. The Bankruptcy Court Erred in Concluding That Appellant's Claims Arise From the Rescission of a Purchase or Sale of Security of Linn, and/or Are for Damages Arising From the Purchase or Sale of a Security ............................... 26 a. The Interest Underlying Appellants' Claims Is Not a "Security" ............................................................ 27 b. Appellant's Claims Do Not "Arise From" the Rescission of a Purchase or Sale of a Security Interest, Nor Do They Constitute Claims for Damages "Arising From" the Purchase or Sale of a Security Interest.. .................................. 33 B. The Bankruptcy Court Abused Its Discretion in Ruling on the Objection Without Allowing Appellant to First Conduct Discovery and Without Conducting a Full Evidentiary Hearing ............ 40 1. Disputed Issues of Material Fact Existed ........................................... 40 2. Appellant Had a Due Process Right to Discovery ............................. 43 3. Appellant Diligently Pursued Discovery and Preserved Its Right to Due Process ..................................................................... 51 VI. CONCLUSION AND PRECISE RELIEF SOUGHT .................................. 54 ii Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 3 of 63 TABLE OF AUTHORITIES FEDERAL CASES Bank of Am., NT & SA v. PENGWIN, 175 F.3d 1109, 1118 (9th Cir. 1999) ....................................................................... 52 Carrieri v. Job. com Inc., 393 F .3d 508, 517 (5th Cir. 2004) .............................................................................. 5 CIT Group, Inc. v. Tyco Int 'l Ltd. (In re CIT Group Inc.), 460 B.R. 633, 639 (Bankr. S.D.N.Y. 2011) ............................................................ 33 Clark v. Johnson, 202 F.3d 760, 765-766 (5th Cir. 2000) ........................................................... 6, 8, 51 Crosby v. Louisiana Health Serv. & Indem. Co., 647 F.3d 258, 261-262 (5th Cir. 2011) ........................................................... 6, 8, 51 Fielding v. Hubert Burda Media, Inc., 415 F.3d 419, 428 (5th Cir. 2005) .............................................................................. 6 In re Adams Apple, Inc., 829 F.2d 1484, 1487 (9th Cir. 1987) .......................................................................... 3 In re Alper Holdings USA, Inc., 398 B.R. 736, 748-749 (S.D.N.Y. 2008) ................................................................... 6 In re American Housing Foundation, 785 F.3d 143, 151 (5th Cir. 2015) ....................................................................... 4, 39 In re Blondheim Real Estate, Inc., 91 B.R. 639, 640 (Bankr. D. N.H. 1988) ................................................................ 38 In re Bufkin Bros., Inc., 757 F.2d 1573, 1577-78 (5th Cir. 1985) ......................................................... 5, 7, 26 iii Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 4 of 63 In re Daisytek, Inc., TABLE OF AUTHORITIES FEDERAL CASES {Cont.) 323 B.R. 180, 186 (N.D. Tex. 2005) .......................................................................... 6 In re Geneva Steel Co., 281 F.3d 1173, 1175 (10th Cir. 2002) ........................................................................ 3 In re Missionary Baptist Found. of Am., Inc. (Wilson v. Huffman), 712 F.2d 206,209 (5th Cir. 1983) .............................................................................. 5 In re Multiponics, Inc., 622 F.2d 709, 713 (5th Cir. 1980) .............................................................................. 4 In re Royce Homes LP, 466 B.R. 81, 87 (S.D. Tex. 2012) .............................................................................. 3 In re SI Restructuring, Inc., 532 F.3d 355, 357 (5th Cir. 2008) .............................................................................. 3 In re Slatkin, 525 F.3d 805, 810 (9th Cir. 2008) ........................................................................... 52 In re Telegroup, Inc., 281 F.3d 133, 136 (3d Cir. 2002) .................................................................... 5, 7, 26 In re Thorpe Insulation Co. ("Thorpe Insulation''), 671 F.3d 1011, 1024 (9th Cir. 2012) ....................................................................... 52 In re Wyeth Co., 134 B.R. 920, 921-922 (Bankr. W.D. Mo. 1991) ................................................... 39 Landreth Timber Co. v. Landreth, 471 U.S. 681,686 (1985) ........................................................................................ 31 iv Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 5 of 63 TABLE OF AUTHORITIES FEDERAL CASES (Cont.) Matter of Evangeline Refining Co., 890 F.2d 1312, 1321 (5th Cir. 1989) ....................................................................... 51 Mayo v. Tri-Bell Indus., 787 F.2d 1007, 1012 (5th Cir. 1986) ....................................................................... 51 Moran v. Kingdom of Saudi Arabia, 27F.3d 169, 171-172(5thCir.1994) ........................................................................ 7 Morrison v. W. Builders of Amarillo, Inc., 555 F.3d 473, 480 (5th Cir. 2009) ............................................................................. .4 Morton v. Yonkers (In re Vallecito Gas, LLC), 771 F.3d 929, 932 (5th Cir. 2014) .............................................................................. 4 O'Donnell v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), 488 B.R. 394, 399 (9th Cir. 2013) .......................................................................... 29 O'Malley v. US. Fid. & Guar. Co., 776 F.2d 494, 499 (5th Cir. 1985) .............................................................................. 6 Paz v. Brush Engineered Materials, Inc., 555 F.3d 383, 387 (5th Cir. 2009) .............................................................................. 6 Racusin v. Am. Wagering, Inc. (In re Am. Wagering, Inc.), 493 F.3d 1067, 1073 (9th Cir. 2007) ....................................................................... 27 Sea Quest Diving, LP v. S&J Diving Inc., 579 F.3d 411,417 (5th Cir. 2009) ....................................................... 5, 7, 26, 27, 28 V Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 6 of 63 TABLE OF AUTHORITIES FEDERAL CASES (Cont.) Templeton v. O'Cheskey (In re Am. Haus. Found.), 785 F.3d 143, 154 (5th Cir. 2009) ........................................................................... 38 Weissmann v. Pre-Press Graphics Co. (In re Pre-Press Graphics Co.), 307 B.R. 65, 78 (N.D. Ill. 2004) ............................................................................. 34 Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812 (5th Cir. 2004) ............................................................................... 6, 51 Young v. DiFerrante, 416 B.R. 612,615 (S.D. Tex. 2009) ....................................................................... 51 STATUTES 11 U.S.C. Section 101 ................................................................................. 29, 30, 31 11 U.S.C. Section 502 ............................................................................................. 27 11 U.S. C. Section 510 ...................................................................................... passim 28 U .S.C. Section 1334 .............................................................................................. 1 28 U.S.C. Section 157 ................................................................................................ 1 28 U.S.C. Section 158 ........................................................................................... 1, 2 Bankruptcy Local Rule 3007-1 ......................................................................... 44, 45 Bankruptcy Local Rule 9013-2 ............................................................................... 45 Federal Rules of Bankruptcy Procedure Rule 3007 .................................... 44, 45, 46 Federal Rules of Bankruptcy Procedure Rule 7026 ................................................ 45 vi Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 7 of 63 TABLE OF AUTHORITIES STATUTES (Cont.) Page Federal Rules of Bankruptcy Procedure 7028 through 7030 .................................. 46 Federal Rules of Bankruptcy Procedure 7033 ........................................................ 46 Federal Rules of Bankruptcy Procedure 7034 ........................................................ 46 Federal Rules of Bankruptcy Procedure 7036 ........................................................ 46 Federal Rules of Bankruptcy Procedure 8015 ........................................................ 55 Federal Rules of Bankruptcy Procedure 8019 ........................................................ 54 Federal Rules of Bankruptcy Procedure 9014 ............................................ 43, 45, 46 Federal Rules of Civil Procedure 26 ................................................................. 45, 46 Federal Rules of Civil Procedure 30 ....................................................................... 46 Federal Rules of Civil Procedure 33 ....................................................................... 46 Federal Rules of Civil Procedure 34 ....................................................................... 46 Federal Rules of Civil Procedure 36 ....................................................................... 46 SECONDARY AUTHORITIES Black's Law Dictionary (10th ed. 2014) ........................................................... 34, 35 vii Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 8 of 63 I. JURISDICTIONAL STATEMENT . A. Bankruptcy Court's Subject-Matter Jurisdiction The United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") had jurisdiction of the underlying dispute pursuant to 28 U.S.C. §§ 157 and 1334. (Appellant's Bankruptcy Record on Appeal, Hearing Transcript ("HT"), Dkt. 8-4, HT138, 138:1-8 [Judge Jones acknowledging basis for Bankruptcy Court jurisdiction].) Under 28 U.S.C. § 1334(a), "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Pursuant to 28 U.S.C. § 157(b)(l), "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title." Section 157(b )(2)(B) provides that core proceedings include "allowance or disallowance of claims against the estate ... " On appeal here is the Bankruptcy Court's decision and order on Reorganized Debtors' Thirty-Fifth Omnibus Objection to Proof of Claim filed by Dana French, as representative of the Estate of Clarence J. "Peter" Bennett (Equity Interest Claims and Subordination Claims) (the "Objection"). (Appellant's Bankruptcy Record on Appeal, Designated Items ("AR"), Dkt. 8-2, AR01918 - AR02137.) Appellees Linn Energy, LLC, LinnCo, LLC (collectively with Linn Energy, LLC, Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 9 of 63 "Linn" or "Reorganized Linn Debtors") and Berry Petroleum Company, LLC ("Berry" or "Reorganized Berry Debtors", and collectively with Reorganized Linn Debtors, the "Appellees"), by way of the Objection, sought an order subordinating Appellant's claims. B. District Court's Jurisdiction The Bankruptcy Court entered a final order on August 3, 2017, namely the Amended Order Sustaining in Part Reorganized Debtors' Thirty-Fifth Omnibus Objection to Proofs of Claim Filed by Dana French, as representative of the Estate of Clarence J. "Peter" Bennett (Equity Interest Claims and Subordination Claims) (the "Order"), subordinating several of Appellant's claims. (Dkt. 8-2, AR02216 - AR02218.) "The district courts of the United States shall have jurisdiction to hear appeals ... from final judgments, orders, and decrees ... " of bankruptcy judges. 28 U.S.C. § 158(a)(l)-(3). The Fifth Circuit Court of Appeals does not have a Bankruptcy Appellate Panel ("BAP"), and thus no notice of election to have the District Court hear the appeal was necessary under 28 U.S.C. § 158(c)(l). C. Filing Dates Establishing Timeliness of Appeal On August 3, 2017, the Bankruptcy Court entered the Order. (Dkt. 8-2, AR02216 - AR02218.) Appellant filed a Notice of Appeal on August 16, 2017. (Dkt. 1-1.) The Clerk for the Bankruptcy Court issued a Corrected Notice of Filing of an Appeal on August 17, 2017. (Dkt. 2.) On September 22, 2017, a Notice of 2 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 10 of 63 Docketing an Appeal (the "Notice") was entered, setting forth the deadline for the filing of Appellant's Opening Brief as 30 days after entry of the Notice. (Dkt. 11.) D. Appeal from Final Judgment, Order Or Decree The Order partially sustained Appellees' Objection, and subordinated three (3) of Appellant's six (6) underlying claims for relief. (Dkt. 8-2, AR02216 - AR02218.) An order subordinating a creditor's claim is a "final and appealable" order of the Bankruptcy Court. In re Geneva Steel Co., 281 F.3d 1173, 1175 (10th Cir. 2002) (order subordinating claim is final order); In re Adams Apple, Inc., 829 F.2d 1484, 1487 (9th Cir. 1987) (order subordinating claims of creditors disposes of property rights of individuals and is thus final); see, e.g., In re SI Restructuring, Inc., 532 F.3d 355, 357 (5th Cir. 2008) (appeal from order equitably subordinating claims); In re Royce Homes LP, 466 B.R. 81, 87 (S.D. Tex. 2012) ("In the Fifth Circuit, 'an appealed bankruptcy order will be considered final if it constitutes either a final determination of the rights of the parties to secure the relief they seek, or a final disposition of a discrete dispute within the larger bankruptcy case.'") The text of the Order confirmed Appellant's appellate rights with respect to the subordinated claims, providing "entry of this Order and/or amendment of the Restated Claims is without prejudice to the Bennett Estate's right to seek appellate review of this Order." (Dkt. 8-2, AR02217 - AR02218, ,i 5.) The Bankruptcy 3 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 11 of 63 Court also confirmed such appellate rights on the record, noting, "And I want to make sure that I put on the record - because I'm certainly not trying to deprive Ms. French of any appellate right that she may have. If she thinks I'm just wrong about this, and wants to seek review, I want that to happen ... Ms. French is not waiving any right of review or appeal that she may have." (Dkt. 8-4, HT142, 142:9-15.) II. STATEMENT OF ISSUES PRESENTED AND STANDARD OF REVIEW A. Standard of Review In Reviewing Bankruptcy Court Orders "The court reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo." In re American Housing Foundation, 785 F.3d 143, 151 (5th Cir. 2015), citing Morton v. Yonkers (In re Vallecito Gas, LLC), 771 F.3d 929, 932 (5th Cir. 2014); see also In re Multiponics, Inc., 622 F.2d 709, 713 (5th Cir. 1980) ("A Court's conclusions of law are freely reviewable on appeal. As to all findings of fact, however, a reviewing court of a bankruptcy decision must accept the findings as found, unless they are clearly erroneous.") Under the clear error standard, this Court may reverse the Bankruptcy Court's factual findings where the Court has a "definite and firm conviction that a mistake has been made." In re American Housing Foundation, supra, 785 F.3d at 151, citing Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 480 (5th Cir. 2009). However, when a bankruptcy court's "finding of fact is 4 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 12 of 63 premised on an improper legal standard, or a proper standard improperly applied, that finding is reviewed de novo." Carrieri v .. Job.com Inc., 393 F.3d 508, 517 (5th Cir. 2004), citing In re Missionary Baptist Found. of Am., Inc. (Wilson v. Huffman), 712 F.2d 206, 209 (5th Cir. 1983) (noting that finding "loses the insulation of the clearly erroneous rule"). When reviewing mixed questions of law and fact, the court must defer to the factual determinations of the bankruptcy court, but "must independently determine the ultimate legal conclusion adopted by the bankruptcy judge on the basis of the facts found." In re Bufkin Bros., Inc., 757 F.2d 1573, 1577-78 (5th Cir. 1985). B. Standard of Review In Reviewing Subordination Determinations "A grant of summary judgment is reviewed de novo ... Summary judgment is proper when there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." SeaQuest Diving, LP v. S&J Diving Inc. (In re SeaQuest Diving, LP), 579 F.3d 411, 417 (5th Cir. 2009). In SeaQuest, the Fifth Circuit applied the de novo standard, upheld the bankruptcy court's determination that a claim was subject to mandatory subordination under Section 51 O(b ), and upheld summary judgment in favor of debtors. Id. at 425-426. The Third Circuit, in In re Telegroup, Inc., 281 F.3d 133, 136 (3d Cir. 2002), examined on appeal whether the bankruptcy court had erred in subordinating a claim under Section 51 O(b ), and also applied the de novo standard of review. 5 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 13 of 63 C. Standard of Review In Reviewing Discovery and Evidentiary Hearing Decisions "A court's decision to limit discovery is reviewed for abuse of discretion." Crosby v. Louisiana Health Serv. & Indem. Co., 647 F.3d 258, 261-262 (5th Cir. 2011), citing Fielding v. Hubert Burda Media, Inc., 415 F.3d 419, 428 (5th Cir. 2005); see also In re Daisytek, Inc., 323 B.R. 180, 186 (N.D. Tex. 2005) (decision to allow Rule 2004 examination reviewed for abuse of discretion); In re Alper Holdings USA, Inc., 398 B.R. 736, 748-749 (S.D.N.Y. 2008). "Although a court is afforded broad discretion when deciding discovery matters, the court abuses its discretion when its decision is based on an erroneous view of the law." Crosby, supra, 647 F.3d at 261-262, citing Paz v. Brush Engineered Materials, Inc., 555 F.3d 383, 387 (5th Cir. 2009); O'Malley v. US. Fid. & Guar. Co., 776 F.2d 494, 499 (5th Cir. 1985). In Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812 (5th Cir. 2004), the Fifth Circuit found that the district court had abused its discretion, where the district court quashed a subpoena and denied a motion to compel outright "without providing oral or written reasons for doing so," without attempting to explain deficiencies, without attempting to modify the subpoena and without setting or holding a hearing on the matter. Wiwa, supra, 392 F.3d at 818- 819. The abuse of discretion standard has also been applied to the review of an underlying court's decision to grant or deny an evidentiary hearing. Clark v. 6 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 14 of 63 Johnson, 202 F.3d 760, 765-766 (5th Cir. 2000) (applying abuse of discretion standard to district court's denial of discovery and evidentiary hearing); Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 171-172 (5th Cir. 1994) ("[t]he court's denial of an evidentiary hearing is subject to an abuse of discretion standard of review.") D. Issues Appealed and Applicable Standards of Review Appellant presents the following issue and sub-issues on appeal: Whether the Bankruptcy Court erred in sustaining in part the Reorganized Debtors' Thirty- Fifth Omnibus Objection to Proof of Claim filed by Dana French, as representative of the Estate of Clarence J. "Peter" Bennett (Equity Interest Claims and Subordination Claims), including but not limited to the specific issues set forth below. Sub-issues (a) through (k) are subject to de novo review, and the Court "must independently determine the ultimate legal conclusion adopted by the bankruptcy judge on the basis of the facts found." In re Bufkin Bros., Inc., supra, 757 F.2d at 1577-1578; In re SeaQuest Diving, LP, supra, 579 F.3d at 417 (applying de novo standard in reviewing subordination determination under Section 510(b)); In re Telegroup, Inc., supra, 281 F.3d at 136 (applying de novo standard to subordination claim). As set forth infra, the Bankruptcy Court made no factual findings and elected to decide Appellees' request for subordination without allowing any discovery. (Dkt. 8-4, Hf139 - HT140, 139:23 - 140:22.) Sub-issues 7 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 15 of 63 (I) and (m) are subject to review for abuse of discretion. Crosby, supra, 647 F.3d at 261-262 (abuse of discretion standard applied to discovery order); Clark, supra, 202 F.3d at 765-766 (abuse of discretion standard applied to order denying evidentiary hearing). a. Whether the Bankruptcy Court erred in subordinating, pursuant to 11 U.S.C. § 510(b), Appellant's First Claim for Relief (Breach of Merger Agreement) against Linn. (De novo.) b. Whether the Bankruptcy Court erred in finding that Appellant's First Claim for Relief (Breach of Merger Agreement against Linn) arises from the rescission of a purchase or sale of a security of Linn or an affiliate of Linn. (De novo.) c. Whether the Bankruptcy Court erred in finding that Appellant's First Claim for Relief (Breach of Merger Agreement against Linn) is a claim for damages arising from the purchase or sale of a security of Linn or an affiliate of Linn. (De novo.) d. Whether the Bankruptcy Court erred in subordinating, pursuant to 11 U.S.C. § 510(b), Appellant's Fourth Claim for Relief (Elder Abuse) against Linn. (De novo.) Ill Ill 8 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 16 of 63 e. Whether the Bankruptcy Court erred in finding that Appellant's Fourth Claim for Relief (Elder Abuse against Linn) arises from the rescission of a purchase or sale of a security of Linn or an affiliate of Linn. (De novo.) f. Whether the Bankruptcy Court erred in finding that Appellant's Fourth Claim for Relief (Elder Abuse against Linn) is a claim for damages arising from the purchase or sale of a security of Linn or an affiliate of Linn. (De novo.) g. Whether the Bankruptcy Court erred in subordinating, pursuant to 11 U.S.C. § 510(b), Appellant's Sixth Claim for Relief (Breach of Contract) against Berry. (De novo.) h. Whether the Bankruptcy Court erred in finding that Appellant's Sixth Claim for Relief (Breach of Contract against Berry) arises from the rescission of a purchase or sale of a security of Linn or an affiliate of Linn. (De novo.) 1. Whether the Bankruptcy Court erred in finding that Appellant's Sixth Claim for Relief (Breach of Contract against Berry) is a claim for damages arising from the purchase or sale of a security of Linn or an affiliate of Linn. (De novo.) J. Whether the Bankruptcy Court erred in finding that the retirement of shares of stock constitutes the purchase or sale of a security interest, or a rescission of such interest, for purposes of equitable subordination under 11 U.S.C. § 51 O(b ). (Denovo.) Ill 9 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 17 of 63 k. Whether the Bankruptcy Court erred in finding that the payments claimed by Appellant to be due and owing by Linn or, in the alternative, by Berry, constitute a security. (De novo.) 1. Whether the Bankruptcy Court erred in ruling on Linn and Berry's Objection without allowing Appellant to first conduct discovery. (Abuse of discretion.) m. Whether the Bankruptcy Court erred in ruling on Linn and Berry's Objection without a full evidentiary hearing on factual issues. (Abuse of discretion.) III. CONCISE STATEMENT OF CASE A. Background Facts Clarence J. "Peter" Bennett ("Mr. Bennett") was born on December 31, 1922 and passed away on June 26, 2015. (Dkt. 8-2, AR01955, ,i 1.) During his life, Mr. Bennett was a substantial shareholder in the former Berry Petroleum Company ("BPC"). (Dkt. 8-2, AR01956 - AR01960.) Mr. Bennett was also the beneficial owner of a legend (the "B Group Legend") which encumbered certain shares of BPC stock owned by the Victory Oil Company and which called for the "B" Group, of which Mr. Bennett was the last living member, to receive 37.5% of any dividends paid on the shares held by Victory Oil. (Dkt. 8-2, AR01956 - AR01958, ,i,i 11-19.) As part of a 1986 settlement between BPC and Victory Oil, 10 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 18 of 63 certain shares of BPC stock owned by Victory Oil, which were subject to the "B" Group Legend, were retired, and Mr. Bennett received in exchange a guaranteed stream of income. (Dkt. 8-2, AR01957 - AR01958, ,i,i 16-21.) Mr. Bennett received this 37.5% income stream until 2013, when at the behest of Berry and Linn, Mr. Bennett agreed to a merger of the companies. (Dkt. 8-2, AR01958 -AR01960, ,i,i 21-30.) In an effort to effectuate the merger and ensure a smooth transition, Linn asked all of the Berry/Bennett family members - including specifically Mr. Bennett - to preaapprove the merger, and represented to Mr. Bennett that his support would secure the support of other family members. (Dkt. 8-2, AR01959 - AR01960, ,i,i 25-30; Dkt. 8-4, HT120-HT121, 120:3 - 121:14.) After getting what they wanted from Mr. Bennett, both Linn and Berry backtracked, denied his right to payment during his life, and are further attempting to avoid payment to his estate after his death. (Dkt. 8-2, AR01960, ,i,i 31-32, AR02144.) Mr. Bennett's rights as a creditor, and this dispute, arose as follows. 1. The Original Estate In 1927, Mr. Bennett's relative, C.J. Berry, executed a Last Will and Testament. (Dkt. 8-2, AR01956, ,i 8.) He passed away in 1930. (Dkt. 8-2, AR01956, ,i 9.) A Decree of Ratable Distribution was entered in the probate court on September 29, 1931. (Dkt. 8-2, AR01956, ,i 10.) Pursuant to the Will, the remainder of the estate, including 250 shares of Berry Holding Company ("BHC") 11 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 19 of 63 stock, was to be held in trust. (Ibid.) In addition to making dollar distributions, the trust provides that the corpus of the trust was to be held as follows ( emphasis added): 37.5% of the income from the trust is to be paid to seven individuals (H.F. Berry, W.H. Berry, Cora B. Skelton,. Fred C. Berry, Nellie Berry, Alice Edna Berry, and Daisy B. Keller), sometimes referred to as the "A Group," or the survivors of the Group so long as any of them lived. 37.5% of the income is to be paid to 14 individuals (Chandos E. Bush, A. Duane Bush, C. J. Bush, Melba E. Bennett, Alta E. Charles, Pearl B. Boyd, Hazel L. Kuhrts, Wanlyn E. Carswell, Othmar B. Berry, J.C. Berry, Frank L. Keller, Clarence J. Bennett, Wesley W. Coates, and Blanche Collins), sometimes referred to as the "B Group," or the survivors of the Group so long as any of them lived. The remaining 25% was to be held in trust for the benefit of the children then living of four individuals (Othmar B. Berry, A. Duane Bush, Melba E. Bennett and Alta E. Charles), sometimes referred to as the "C Group." The eight children of the four individuals were: Winifred Berry, Wanlyn Berry, Edith Louise Bush, Dorothy Jessel Bush, William Edward Bush, Clarence Jesse Bennett, Ethel Deborah Bennett, and William Charles. When the youngest child reached age 21, the trust was to be distributed to the C Group. (Dkt. 8-2, AR01956 -AR01957, ,r 11.) Mr. Bennett was a member of the "B Group" and the "C Group." (Dkt. 8-3, ARC0008, ,r 12.) On or about March 29, 1949, an agreement (the "1949 Agreement") was reached between BHC and the eight (8) members of the 12 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 20 of 63 "C" Group, wherein it was acknowledged that the youngest member of the "C" Group had reached age 21 and it was agreed that BHC would pay any_ dividends on the 250 shares of BHC stock to what was named the C.J. Berry Trust Beneficiaries Distribution Account. (Dkt. 8-2, AR01957, ,i 13.) BHC would then distribute the dividends to the parties entitled to distributions pursuant to the decree of ratable distribution. (Ibid.) In an Order, dated March 29, 1949, the Superior Court for the City and County of San Francisco approved the 1949 Agreement, and ordered that the 250 shares of BHC stock be distributed to the eight (8) "C" Group members, 31.5 shares each, subject to the 1949 Agreement. (Dkt. 8-2, AR01957, ,i 14.) A legend (the "B Group Legend") reflecting the 37.5% equitable charge of the "B" Group, was placed on all shares of stock ("legend stock" or "legended stock"). (Ibid.) From 1949 until 1986, Mr. Bennett received regular distributions of dividends and/or other funds pursuant to, inter alia, all "B" Group legended stock. (Dkt. 8-2, AR01957, ,i 15.) 2. The Victory Trust In 1986, BHC underwent a merger and became known as Berry Petroleum Company ("BPC", as referenced above). (Dkt. 8-2, AR01957, ,i 16.) As part ofan effort to settle a dispute between BPC and Victory Holding Company ("Victory 13 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 21 of 63 Oil"), BPC proposed to retire the shares in BPC that were held by Victory Oil (948,428 shares known as the "Victory Shares"). (Dkt. 8-2, AR01957 -AR01958, ,r,r 18-19, AR02143.) This proposed retirement would have prejudiced the "B" Group, since no further dividends would be paid on those shares and the 37.5% equitable charge would be ofno value. (Dkt. 8-2, AR01957 -AR01958, ,r,r 18-20, AR02143.) To solve this problem, on or about November 3, 1986, BPC executed a Declaration of Trust (the "Victory Trust") for the benefit of the three (3) then- living members of the "B" Group, including Mr. Bennett. (Dkt. 8-2, AR01957 - AR01958, ,r,r 17-19, AR01995 - AR02014, AR02143.) BPC was established as Trustee. (Dkt. 8-2, AR01958, ,r 19.) The Victory Trust provided that the Victory Oil shares would be retired by BPC, in exchange for which the "B" Group members would continue to receive an income stream in a sum equal to 37.5% of future dividends that BPC would have paid on the Victory Oil shares had they not been retired (the "Income Stream Payments", also referred to as "Deemed Dividend Payments"). (Ibid.; AR02143, AR-1995 - AR02014.) BPC was to pay the Income Stream Payments to the "B" Group on the vesting dates of March 29th and September 29th each year. (Dkt. 8-2, AR01958, ,r 19.) Victory Oil and BPC entered into a Settlement and Release accordingly, and the Victory Shares were retired. (Dkt. 8-2, AR01957 -AR01958, ,r 18.) 14 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 22 of 63 The intent of the parties' agreement was that a stream of income in recognition of the 37.5% Equitable Charge held by the "B" Group on the Victory Shares would continue to be paid, as long as they were to live, as though the Victory Shares had not been retired. (Dkt. 8-2, AR01958, ,i,i 19-20.) However, the "B" Group did not have any equity in the Victory Shares nor did they retain the same risks and liabilities of a shareholder, and did not retain voting rights and other rights and obligations of a shareholder, related to the Victory Shares. (See Dkt. 8- 2, AR01957 - AR01958, ,i,i 16-21.) The Victory Trust was part and parcel to the Settlement and Release, and contemplated provision of an income stream to the "B" Group members to compensate them for their prior equitable (but not equity) interests. (See Ibid., AR02144.) BPC agreed to contribute to the Victory Trust the amount necessary to make the Income Stream Payments, and to keep the monies intended for payment to the "B" Group segregated from other funds. (Dkt. 8-2, AR01958, ,i,i 19-20.) From 1986 until 2013, BPC dutifully paid the "B" Group members a sum equal to 37.5% of any dividend which would have been paid on those retired shares and - for the purposes of payment only - treated the retired shares as having split whenever BPC stock split. (Dkt. 8-2, AR01958, ,i 21, AR02143.) Mr. Bennett consistently received his dividends on the "B" Group shares that he owned, and a stream of income from BPC pursuant to the Victory Trust. (Ibid.) 15 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 23 of 63 3. The Purported Linn-Berry Merger In or around 2013, BPC and LinnCo purportedly negotiated a merger of BPC into Linn, with an effective date of February 20, 2013. (Dkt. 8-2, AR01958, ,i 22, AR02015-02125.) As of the effective date, Mr. Bennett was the last surviving member of the "B" Group. (Dkt. 8-2, AR01958, ,i 23.) Prior to the purported merger agreement, Linn and Linn representatives (including BPC board members) represented to Mr. Bennett, his family and his representatives that the agreement between BPC and Linn was a merger. (Dkt. 8- 2, AR01958 -AR01959, ,i 24.) Linn made these same representations to the SEC and financial community. (Ibid.) In an effort to effectuate the merger and ensure a smooth transition, Linn asked all of the Berry/Bennett family members - including specifically Mr. Bennett - to pre-approve the merger. (Dkt. 8-2, AR01959, ,i 25.) Appellees represented that Mr. Bennett's support would secure the support of other family members. (Dkt. 8-2, AR01959 - AR01960, ,i,i 25-30; Dkt. 8-4, Hf120- HT121, 120:3 -121:14.) On April 30, 2013, Appellant (in his then-capacity of counsel for Mr. Bennett) sent correspondence to Davis O'Connor, the Vice President, General Counsel and Secretary of BPC, asking whether the "B" Group right to Income Stream Payments would be carried over and associated with the LinnCo stock to be issued in exchange for BPC stock as part of the merger. (Dkt. 8-2, AR01959, 16 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 24 of 63 ,r 26.) On May 8, 2013, Candice Wells, the Vice President, Assistant General Counsel and Corporate Secretary of Linn Energy, LLC, emailed Appellant, stating that while she did not believe Linn had any obligation to carry over the "B" Group obligation, Linn would do so in order to secure the timely return of Mr. Bennett's executed voting agreement in support of the merger. (Dkt. 8-2, AR01959, ,r 27, AR02126 - AR02128.) Ken Olson, the Benefits and Equity Plans Manager for BPC, later sent correspondence to Mr. Bennett and Appellant, representing that following the merger, Mr. Bennett's interests would be: • 29,875 BPC shares held outright, which converted to 50,190 Class A Linn shares; • 1,339,029 BPC "B" Group Legend shares (owned 100% by Mr. Bennett, and the dividends for which Mr. Bennett has a 62.5% interest), which converted to 2,249,568 Linn shares subject to Legend; • 2,985,408 BPC "B" Group Legend shares in which Mr. Bennett has a 37.5% dividend interest, which converts to 5,015,485 Linn shares; and • 3,793,712 Victory Trust BPC "B" Group Legend shares in which Mr. Bennett has a 37.5% dividend interest, which converts to 6,373,436 Linn shares. (Dkt. 8-2, AR01959-AR01960, ,r 29.) Ill 17 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 25 of 63 Mr. Olson also calculated the value of Mr. Bennett's post-merger payments to be paid, including calculating the income stream under the Victory Trust using the 1.68:1 share conversion ratio and using the Linn historic monthly dividend payments on all shares. (Ibid.) That historic dividend was to be used by Mr. Olson to calculate the stream of income to be paid under the Victory Trust to Mr. Bennett. (Ibid.) Mr. Bennett signed the Voting and Support Agreement, pre-approving the merger, with the understanding that all of his pre-merger rights and benefits - including the income stream from the "B" Group Victory Trust - would be preserved. (Dkt. 8-2, AR01960, ,r 30, AR02129 -AR02134.) Following the purported BPC/Linn merger, Berry Petroleum Company, LLC ("Berry", referred to as the Reorganized Berry Debtors herein), was the immediate successor-in-interest for BPC. (Dkt. 8-2, AR01960, ,r 31.) Berry stepped into the shoes ofBPC as Trustor and Trustee of the Victory Trust. (Ibid.) 4. Post-Merger Payment Dispute Following the closure of the merger, Linn took the position that it had not assumed the Victory Trust obligations, despite Delaware law providing that in a merger such as this, all obligations are assumed except those expressly disclaimed. (Dkt. 8-2, AR01960, ,r 32, AR02144.) Nothing in the merger agreement disclaimed the Victory Trust obligation. (Dkt. 8-2, AR0215 - AR02125, 18 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 26 of 63 AR02144.) Mr. Bennett no longer received the Victory Trust income stream payments post-merger, although he continued to receive all other required payments. (Dkt. 8-2, AR01960, ,r 32.) Linn contended that there had been no merger and that Berry was responsible to make the Victory Trust payments. (Dkt. 8-2, AR01960, ,r 32, AR02144.) Linn and Berry both contended that any obligation of Berry to pay Mr. Bennett was contingent on Berry declaring a dividend in the future - despite the facts that: (1) Berry was a wholly-owned subsidiary of Linn; (2) the Berry Board of Directors was disbanded after the merger and thus could not meet to declare a dividend; and (3) Berry enjoyed hundreds of millions of dollars of income post-merger, but paid no dividends. (Dkt. 8-2, AR02144.) Following this lack of payment, Linn filed a Complaint for Declaratory Judgment in the United States District Court for the Eastern District of California on November 25, 2014, seeking a declaration .that Linn was not obligated to make payments to Mr. Bennett pursuant to the Victory Trust. (Dkt. 8-2, AR01927, ,r 34.) Appellant filed a Counterclaim for Damages on January 23, 2015, and then a First Amended Counterclaim on December 2, 2015, asserting six (6) claims for relief: (1) breach of merger agreement- against Linn; (2) intentional misrepresentation - against Linn; (3) negligent misrepresentation - against Linn; (4) financial elder abuse - against Linn; (5) breach of fiduciary duty - against Berry; and (6) breach 19 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 27 of 63 of contract - against Berry. (Dkt. 8-2, AR01230 - AR01268, AR01927, ,r 34, AR1975 -AR2137.) B. Procedural History Appellees filed their voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on May 11, 2016. (Dkt. 8-2, AR00001-AA00034.) On September 7 and 8, 2016, Appellant filed three (3) separate Proofs of Claim in the Bankruptcy Court, each in the amount of $9,819,242.76: (1) Court Claim No. 2195 (Prime Clerk Claim No. 3147) against Linn Energy, LLC; (2) Court Claim No. 2196 (Prime Clerk Claim No. 3129) against Berry Petroleum Company, LLC; and (3) Court Claim No. 2197 (Prime Clerk Claim No. 3122) against LinnCo, LLC (collectively, the "Claims"). (Appellant's Bankruptcy Record on Appeal, Proofs of Claim ("POC"), Dkt. 8-3, POC0001-POC0024, POC0028 - POC0075, POC0079-POC0102.) The Claims were based on the six (6) pre-bankruptcy claims for relief that Appellant had made in the Eastern District of California. (See Dkt. 8-3, POC0005-POC0024, POC0032-POC0051, POC0056- POC0075, POC0083-POC0102.) On December 19, 2016, Appellees filed Debtors' Fourth Omnibus Objection to Certain Proofs of Claim (No Liability Claims), objecting to Appellant's claims on the grounds that the claims "are not reflected as liabilities of the Debtors in their books and records." (Dkt. 8-2, AR00058 -AR00103.) Appellant filed a Response 20 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 28 of 63 to Debtors' Fourth Omnibus Objection to Certain Proofs of Claim (No Liability Claims) on January 6, 2017, along with the Declaration of Dana French in Support of Response to Debtors' Fourth Omnibus Objection to Certain Proofs of Claim (No Liability Claims). (Dkt. 8-2, AR01217 -AR01292.) On January 27, 2017, the Court entered an Order Confirming Amended Joint Chapter 11 Plan. (Dkt. 8-2, AR01561 - AR01833.) The Plans' effective date was February 28, 2017. (Dkt. 8-2, AR01915 -AR01917.) On May 26, 2017, Appellees filed the Objection, seeking an Order disallowing and expunging the Claims because they were filed on account of an equity interest in Appellees or, alternatively, subordinating the Claims pursuant to Bankruptcy Code Section 510(b). (Dkt. 8-2, AR01918.) On June 15, 2017, Appellant filed a Response to Reorganized Debtors' Thirty-Fifth Omnibus Objection to Proofs of Claim Filed by Dana French, along with the Declaration of Kurt F. Vote in Support of Response to Reorganized Debtors' Thirty-Fifth Omnibus Objection to Proofs of Claim Filed by Dana French. (Dkt. 8-2, AR02138 - AR02158.) Linn filed Reorganized Debtors' Reply In Support of the Reorganized Debtors' Thirty-Fifth Omnibus Objection to Proofs of Claim Filed by Dana French, a Representative of the Estate of Clarence J. "Peter" Bennett (Equity Interest Claims and Subordination Claims) on July 17, 2017. (Dkt. 8-2, AR02189 - AR02205.) Berry filed Berry Petroleum Company, LLC's Reply In Further 21 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 29 of 63 Support of Objection to Proof of Claim Filed By Dana French, As Representative of the Estate of Clarence J. "Peter" Bennett [Docket No. 2080] on July 17, 2017. (Berry's Record on Appeal ("BR"), Dkt. 9-1, BR01319 -BR01335.) C. Rulings Presented For Review Following oral argument on July 19, 2017, the Bankruptcy Court entered the Order on August 3, 2017, partially sustaining Appellees' Objection. (Dkt. 8-2, AR02216 - AR-2218.) Appellant was granted leave to amend the portion of its Claims based on the intentional and negligent misrepresentation of LinnCo and Linn Energy, and the breach of fiduciary duty of Berry. (Dkt. 8-2, AR02217, ,i 2.) The Bankruptcy Court ordered that "[a]ll other Claims are subordinated pursuant to section 510(b) of the Bankruptcy Code." (Dkt. 8-2, AR02217, ,i 3.) Specifically, the Bankruptcy Court subordinated the following claims for relief: (1) breach of merger agreement- against Linn; (2) elder abuse - against Linn; and (3) breach of contract- against Berry. It is this portion of the Bankruptcy Court's Order that Appellant submits for review. The Order provides that "entry of this Order and/or amendment of the Restated Claims is without prejudice to the Bennett Estate's right to seek appellate review of this Order." (Dkt. 8-2, AR02217 -AR02218, ,i 5.) Ill Ill 22 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 30 of 63 IV. SUMMARY OF THE ARGUMENT The Bankruptcy Court decided as a matter of law that three (3) of Appellant's underlying claims for relief arise from the rescission of a purchase or sale of a security, or are for damages arising from the purchase or sale of a security, requiring mandatory subordination under 11 U.S.C. § 510(b). However, Appellant's right to payment arises from claims for breach of contract and elder abuse, having nothing to do with the purchase or sale of security, but rather arising out of a 1986 settlement agreement and resulting trust, pursuant to which certain shares of stock in Berry's predecessor - owned by a third party - were retired. As part of the retirement of those shares, Appellant received a guaranteed stream of income for life. Appellees breached their respective contracts with Appellant by not paying Mr. Bennett the agreed upon stream of income for the two years between the merger and his death. The retirement of shares held by a third party, retired pursuant to settlement agreement, does not equate to the purchase or sale of a security, or to the rescission of such purchase or sale, making subordination under Section 51 O(b) improper. At the very least, given the complicated history and nature of the transactions at issue giving rise to Appellant's claims, and given the disputed factual issues with respect to the claims themselves, discovery should have been allowed and an evidentiary hearing should have been conducted prior to any 23 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 31 of 63 subordination decision being made. It was an abuse of discretion for the Bankruptcy Court to not require the same. V. ARGUMENT A. The Bankruptcy Court Erred In Subordinating Appellant's First, Fourth and Sixth Claims for Relief Appellant's primary contention herein is that the Bankruptcy Court erred in subordinating three (3) of Appellant's claims to the claims of other creditors in the underlying bankruptcy of Linn and Berry. In requesting the Bankruptcy Court's decision on their Objection, Appellees expressly represented to the Bankruptcy Court there were no factual issues in dispute, and mandatory subordination under 11 U.S.C. § 510(b) could be decided as a matter of law. (Pkt. 8-2, AR02190.) Appellant diligently fought for its right to conduct discovery, with both Appellees and the Bankruptcy Court. (Dkt. 8-2, AR02145 -AR02150, AR02160 - AR02161, ,r,r 3-8, AR02168 - AR02177.) The Court nonetheless decided the question of subordination without allowing any discovery, without conducting an evidentiary hearing, and without making any findings of fact. (See Dkt. 8-4, HT139 - HT140, 139:22 - 140:22.) The Order does not include any factual findings or conclusions of law, but rather simply concludes that, aside from three (3) claims of relief that Appellant was allowed to amend, "[a]ll other Claims are subordinated pursuant to section 510(b) of the Bankruptcy Code." (Dkt. 8-2, AR02217, ,r 3.) These subordinated claims were 24 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 32 of 63 not expressly set forth in the Bankruptcy Court's Order, but were Appellant's First Claim of Relief, for Breach of the Merger Agreement - Against Linn, its Fourth Claim of Relief, for Elder Abuse - Against Linn, and its Sixth Claim of Relief, for Breach of Contract-Against Berry. (Dkt. 8-2, AR01954-AR01973.) At the hearing on the Objection, the Bankruptcy Court similarly made no findings of fact, and provided no analysis or reasoning in support of its conclusions. (Dkt. 8-4, HT139 - HT140, 139:22 - 140:22.) Bankruptcy Court held, simply: All right. Thank you. And to be clear, the reservation - or the complaint is that there is an entitlement to discovery before a decision can be rendered. After hearing the arguments, reading the claims, reading the attachments to the pleadings that have been field, I do find that the majority of the claims do arise from the recision [sic] of a purchase or sale of a security of the debtor or an affiliate of the debtor, or are for damages arising from the purchase or sale of such a security. I don't think, in my mind, that there is any legitimate dispute that what is being complained about, or the transaction or the resulting interest, constitutes a security, both under the Bankruptcy Code, as well as the Uniform Commercial Code. I just don't think that's a - I just don't think that's an area of genuine dispute. So I do find that this - I think it was referred to as a "payment stream," does constitute a security for purposes of 510. And I do think, having looked at it, that all of the claims, with the exception of the misrepresentation claim and the 25 Instead, the Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 33 of 63 (Ibid.) breach of fiduciary duty claim, are properly subordinated and are subordinated under 51 O(b ). I don't think - I haven't heard anything to the contrary. I have not been - there has been no suggestion, that I think is substantive in nature, as to what would be needed to defeat such a claim. And so, on that basis, I'm going to sustain the objection. As set forth above, these legal conclusions of the Bankruptcy Court must be reviewed de nova. In re Bufkin Bros., Inc., supra, 757 F.2d at 1577-78 (the court "must independently determine the ultimate legal conclusion adopted by the bankruptcy judge on the basis of the facts found); In re SeaQuest Diving, LP, supra, 579 F.3d at 417 (applying de nova standard in reviewing subordination determination under Section 510(b)); In re Telegroup, Inc., supra, 281 F.3d at 136 (applying de nova standard to subordination claim, and analyzing legal question of whether appellant's breach of contract claim was "a claim ... for damages arising from the purchase or sale of. .. a security [of the debtor]."). Upon review of the law and the record, it is clear the Bankruptcy Court erred. 1. The Bankruptcy Court Erred In Concluding that Appellant's Claims Arise From the Rescission of a Purchase or Sale of Security ofLinn. and/or Are For Damages Arising From the Purchase or Sale of a Security Mandatory subordination of a claim is appropriate only for "a claim arising from rescission of a purchase or sale of a security of the debtor or an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for 26 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 34 of 63 reimbursement or contribution allowed under section 502 on account of such a claim." 11 U.S.C. § 510(b). The general purpose of Section 510(b) is to ensure payment of creditors ahead of shareholders. SeaQuest Diving, L.P., supra, 579 F.3d at 421. A finding of subordination is proper - and the policy behind Section 51 O(b) fulfilled - where the "claimants bargained for an equity position in the debtors and never converted that equity into debt pre-petition." Id. at 422 ( emphasis added). In contrast thereto, "[b]y redeeming equity for debt before the bankruptcy filing, the claimant can convert from the 'risk/return position of an equity investor' to a 'fixed, pre-petition debt due and owing' the claimant as a creditor." SeaQuest Diving, L.P., supra, 579 F.3d at 422, quoting Racusin v. Am. Wagering, Inc. (In re Am. Wagering, Inc.), 493 F.3d 1067, 1073 (9th Cir. 2007). The key here is the absence of a "security." a. The Interest Underlying Appellants' Claims Is Not a "Security" In their Objection, Appellees contended that the Income Stream Payments - that Mr. Bennett became entitled to as a result of the settlement agreement between BPC and Victory Oil and the resulting retirement of BPC stock - constitute a "security," as defined by the Bankruptcy Code. (Dkt. 8-2, AR01933 - AR01936.) However, Mr. Bennett never "bargained for an equity position" in Debtors relative to the Income Stream Payments, never had an equity position, and his right to 27 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 35 of 63 compensation by Appellees certainly constituted a debt - not equity - pre-petition. See SeaQuest Diving, L.P., supra, 579 F.3d at 421. Additionally, the Bankruptcy Code expressly defines security: ( 49) The term "security" -- (A) includes-- Ci) note; (ii) stock; (iii) treasury stock; (iv) bond; (v) debenture; (vi) collateral trust certificate; (vii) pre-organization certificate or subscription; (viii) transferable share; (ix) voting-trust certificate; (x) certificate of deposit; (xi) certificate of deposit for security; (xii) investment contract or certificate of interest or participation in a profit-sharing agreement or in an oil, gas, or mineral royalty or lease, if such contract or interest is required to be the subject of a registration statement filed with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, or is exempt under section 3(b) of such Act from the requirement to file such a statement; (xiii) interest of a limited partner in a limited partnership; (xiv) other claim or interest commonly known as "security"; and (xv) certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase or sell, a security; but (B) does not include-- Ci) currency, check, draft, bill of exchange, or bank letter of credit; (ii) leverage transaction, as defined in section 761 of this title; (iii) commodity futures contract or forward contract; 28 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 36 of 63 (iv) option, warrant, or right to subscribe to or purchase or sell a commodity futures contract; (v) option to purchase or sell a commodity; (vi) contract or certificate of a kind specified in subparagraph (A)(xii) of this paragraph that is not required to be the subject of a registration statement filed with the Securities and Exchange Commission and is not exempt under section 3(b) of the Securities Act of 1933 from the requirement to file such a statement; or (vii) debt or evidence of indebtedness for goods sold and delivered or services rendered. 11 U.S.C.A. § 101(49). The Income Stream Payments to which Mr. Bennett was entitled during his life, pursuant to the Victory Trust, do not fall within any of the statute's express examples of securities. Appellees have admitted that none of the express examples are applicable. (Dkt. 8-4, HT95, 95:14-16.) The Victory Trust was not an agreement or document required to be filed with the Securities and Exchange Commission, and the Income Stream Payments were not a stock, bond, certificate of deposit or other claim or interest commonly known as a "security." Instead, the payments were most analogous to the items identified not to be securities in the statute. In evaluating whether a particular claim or interest is a "security," the court should "look for an analogous entry on the list." O'Donnell v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), 488 B.R. 394, 399 (9th Cir. 2013). The list of excluded claims or interests includes "currency," and "an investment contract or certificate of interest or participation in a profit-sharing arrangement" of a kind that "is not required to be the subject of a 29 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 37 of 63 registration statement filed with the Securities and Exchange Commission." 11 U.S.C. § 101(49)(A)(xii), (B)(i), B(vi). The Income Stream Payments were provided for by the Victory Trust agreement, which was at its core a settlement agreement between third parties, providing for payment to Mr. Bennett for life as compensation for the payment right he lost when Berry's predecessor retired shares owned by a third party, which shares carried with them an associated right of payment for Mr. Bennett. The Victory Trust was an agreement for the payment of sums that Appellees admit were due and owing to Mr. Bennett, as a result of the obligation to pay Mr. Bennett that arose to Mr. Bennett when Victory Oil's shares in BPC were retired, eliminating the vehicle by which Mr. Bennett's right to payment as a life beneficiary was calculated. (Dkt. 8-4, HT92, 92:3-20.) Counsel for Appellees admitted in oral argument that: And at that time, the Victory share - the shares that Victory held were retired, and that's where we get the. deemed dividend payments. And so, whenever Berry declared dividends, they were to pay the life beneficiaries, which was Mr. Bennett, as if the Victory shares still existed. And so, throughout this time then, Mr. Bennett was receiving the benefits,just as though he were a shareholder receiving dividends. (Dkt. 8-4, HT92, 92:3-20, emphasis added.) Mr. Bennett - by Appellees' own admission - was not a shareholder receiving dividends. He simply received payment calculated based on dividends. 30 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 38 of 63 The only tangential connection that the Income Stream Payments had to any "security" was the method by which such payments were to be calculated - based on the dividends declared by Berry. (Ibid.) Just because that calculation included as simply one variable the amount of Berry's dividends does not mean that the Income Stream Payments were themselves dividends or securities of any kind. Instead, the Income Stream Payments were most akin to the "profit-sharing arrangement" that "is not required to be the subject of a registration statement filed with the Securities and Exchange Commission" referenced in 11 U.S.C. § 101(49)(B)(vi). Pursuant to the Victory Trust, Mr. Bennett was to continue to receive an income stream based on the dividends declared by Appellees, and thus in a way was to share in Appellees' profits. (Dkt. 8-2, AR01957 - AR01958, AR001995 -AR02014.) The United States Supreme Court has identified five characteristics of "stock," including: (i) the right to receive dividends contingent upon an apportionment of profits; (ii) negotiability; (iii) the ability to be pledged or hypothecated; (iv) the conferring of voting rights in proportion to the number of shares owned; and (v) the capacity to appreciate in value." Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985). Mr. Bennett has never carried the risk, benefits and obligations 'of a shareholder relative to the Income Stream Payments. He did not "reap potential 31 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 39 of 63 benefits that a shareholder would ... have, and then stand in line with a creditor." (Dkt. 8-4, HT96, 96:3-8.) While it is true that the "absolute priority rule" in bankruptcy provides that "when creditors are not paid in full, shareholders don't get anything," Mr. Bennett was not a shareholder. (Dkt. 8-4, HT99, 99:22-25.) Mr. Bennett has always been a creditor. Victory Oil owned certain shares of stock, which were used as a calculation point for a property interest bequeathed to Mr. Bennett by his family member. (Dkt. 8-4, HTl 17, 117:1-5.) Appellees have admitted that the Income Stream Payments did not provide Mr. Bennett with any voting rights. (Dkt. 8-2, AR01934, 147.) Mr. Bennett did not have the same risk and benefit expectations that a shareholder would have had. Instead, Mr. Bennett had a right to an income stream. Mr. Bennett, with his fellow beneficiaries at the time, did not "bargain" for anything - they "consented to the retirement of shares, subject to their equitable charge, in exchange for a right to receive payment in trust, not of dividend income, in trust, for the remainder of their lives." (Dkt. 8-4, HT118, 118:11-20.) He had no right to redeem his right to the Income Stream Payments under the Victory Trust for a sum certain, and his right to payment did not appreciate over time. His right to an income stream was calculated based on BPC's declared dividends for many years, then based on Berry's declared dividends, and ultimately should have been based on the dividends declared by the purportedly merged Berry and Linn. So long as dividends were declared, 32 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 40 of 63 Mr. Bennett had a right to payment pursuant to the independent agreement known as the Victory Trust. For these reasons, the interest underlying all of Appellant's claims is not a "security." If anything, the Income Stream Payments are a contractual right to a profit-sharing arrangement - not subject to the Securities and Exchange Commission, and thus expressly not a "security" under the Bankruptcy Code. As such, they do not come within the ambit of 11 U.S.C. § 510(b), and should not have been subordinated. b. Appellant's Claims Do Not "Arise From" the Rescission of a Purchase or Sale of a Security Interest, Nor Do They Constitute Claims for Damages "Arising From" the Purchase or Sale of a Security Interest Courts are not permitted to subordinate a creditor's claim because of a tangential or incidental relationship to the purchase or sale of securities. " ... [T]he existence of a mere 'connection' between the claim and the purchase or sale of a security is not enough to support a finding that the claim 'arises from' the purchase or sale and should be subordinated unless the purposes of the statute would be served thereby." CIT Group, Inc. v. Tyco Int'! Ltd. (In re CIT Group Inc.), 460 B.R. 633, 639 (Bankr. S.D.N.Y. 2011). " ... [T]he real question is whether the claimant bargained for the risks and rewards of a holder of equity rather than a holder of debt." Id. "Based on the legislative history and case law relating to § 51 O(b) ... some causal link must exist between the purchase or sale and the claim 33 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 41 of 63 at issue, but that the causal link need not anse contemporaneously with the purchase or sale of a security." Weissmann v. Pre-Press Graphics Co. (In re Pre- Press Graphics Co.), 307 B.R. 65, 78 (N.D. Ill. 2004); see also Official Comm. of Unsecured Creditors v. FL! Deep Marine LLC (In re Deep Marine Holdings, Inc.), No. 10-03116, 2011 WL 160595, *26 (Bankr. S.D. Tex. 2011) (upholding subordination where claims at issue were "causally linked" to defendants' status as shareholders). The Bankruptcy Code does not define "Purchase", "Sale" or "Rescission." However, Black's Law Dictionary defines "purchase" as "1. The act or an instance of buying. 2. The acquisition of an interest in real or personal property by sale, discount, negotiation, mortgage, pledge, lien, issue, reissue, gift, or any other voluntary transaction." PURCHASE, Black's Law Dictionary (10th ed. 2014). "Sale" is defined as "1. The transfer of property or title for a price ... 2. The agreement by which such a transfer takes place. The four elements are (1) parties competent to contract, (2) mutual assent, (3) a thing capable of being transferred, and (4) a price in money paid or promised." SALE, Black's Law Dictionary (10th ed. 2014). Black's Law Dictionary defines "rescission" as "1. A party's unilateral umnaking of a contract for a legally sufficient reason, such as the other party's material breach, or a judgment rescinding the contract ... 2. An agreement by 34 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 42 of 63 contracting parties to discharge all remaining duties of performance and terminate the contract." RESCISSION, Black's Law Dictionary (10th ed. 2014). None of appellant's claims "arise from" the rescission of a purchase or sale of a security, nor do they constitute claims for damages "arising from" the purchase or sale of a security. This is a quintessential situation of "six degrees of separation" - not involving a sale or purchase at any juncture involving Mr. Bennett. In fact, it would be necessary to delve deep into history to identify a time when a security was ever purchased or sold that may have been the origin of Appellant's eventual claims. Mr. Bennett's right to what eventually became the Income Stream Payments first arose when he was bequeathed - not sold - an interest in payment by his relative, Mr. Berry, in 1931. (Dkt. 8-2, AR01956-AR01957, ,r,r 10-11.) In 1949, an agreement was entered into acknowledging the gift Mr. Berry had left to his family, and placing a legend on certain BPC stock owned by a third party - Victory Oil - pursuant to which Mr. Bennett received "deemed" dividend payments calculated by reference to that third party stock. (Dkt. 8-2, AR01957, ,r,r 13-14.) Then, in 1986, BPC and Victory Oil - without any involvement by Mr. Bennett - agreed to the retirement of certain BPC shares that were held by Victory Oil. (Dkt. 8-2, AR01957 -AR01958, ,r,r 17-19; Dkt. 8-4, HT84, 84:15-20 ("And my client in this case, a creditor, is simply looking for a stream of income 35 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 43 of 63 that is - was created due to a retirement of shares ... not a sale or purchase.") Shares were neither bought nor sold at that time, either. A prior purchase or sale was not rescinded. Instead, shares were retired and a settlement agreement - the Victory Trust - entered into. (Dkt. 8-2, AR01957 - AR01958, ,r,r 17-19.) For 27 years thereafter, Mr. Bennett received payment under the income stream that was agreed to. (Dkt. 8-2, AR01958, ,r 21.) These payments were not dividends and did not result from the purchase or sale of an equity interest ( or rescission thereof). Instead, BPC and Victory Oil agreed to retire shares and confirm a right to compensation. Importantly, the shares on which Mr. Bennett's pnor equitable charge existed, which were retired and resulted in the right to the Income Stream Payments, and which are the only "shares" at issue in this appeal, were not even shares owned by Mr. Bennett. Instead, they were shares owned by Victory Oil. (Dkt. 8-4, HT82, 82:4-14.) At no point in time did Mr. Bennett have an equity interest in Appellees relative to the shares at issue in this appeal. All that Mr. Bennett ever had was a right to payment based on someone else's equity interest. Finally, in 2013, the obligation to pay Mr. Bennett was purportedly transferred to Linn, in the alleged merger between Linn and Berry. (Dkt. 8-2, AR01958 -AR01960, ,r,r 22-30.) Again, there was no purchase, sale or rescission. 36 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 44 of 63 A new entity simply assumed the existing payment obligation that was agreed to as part of the Victory Trust. When Appellees failed to pay Mr. Bennett, the claims at issue on appeal arose. The Bankruptcy Court subordinated the following three (3) substantive causes of action, which provide the basis for each of Appellant's Proofs of Claim that were filed in the Bankruptcy Court (Court Claim No. 2195 (Prime Clerk Claim No. 3147) against Linn Energy, LLC; (2) Court Claim No. 2196 (Prime Clerk Claim No. 3129) against Berry Petroleum Company, LLC; and (3) Court Claim No. 2197 (Prime Clerk Claim No. 3122) against LinnCo, LLC). (See Dkt. 8-3, POC0001-POC0024, POC0028 - POC0075, POC0079-POC0102.) The Subordinated Claims are Appellant's causes of action for breach of the merger agreement against Linn (based on the Reorganized Linn Debtors' failure to pay the Income Stream Payments as agreed), elder abuse against Linn (based on the Reorganized Linn Debtors' fraudulent inducement of Mr. Bennett to agree to the merger), and breach of contract against Berry (based on the Reorganized Berry Debtors' breach of the Victory Trust, which established Berry's indebtedness to Mr. Bennett and Berry's contractual obligation to pay Mr. Bennett for life). (Dkt. 8-3, POC0005-POC0024, POC0032-POC0051, POC0056-POC0075, POC0083- POC0102.) Ill 37 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 45 of 63 There is no "causal connection" between any purchase, sale or rescission of a purchase or sale of Appellees' stock, and the claims made by Appellant. The Bankruptcy Court framed the issue as "whether or not the retirement constitutes the purchase or sale of a security," or whether the retirement could constitute a rescission of that sale. (Dkt. 8-4, HT86, 86:17-21, HT 89, 89:14-19.) However, there is no case law equating "retirement of shares" to the sale or purchase of a security, nor would such an equation make common sense. While counsel for Appellees argued that "rescission" means "retirement," they offered this as a conclusion, without support. (Dkt. 8-4, HT97, 97:21-24.) The retirement of shares of stock does not "undo" an agreement to purchase or sell that stock. Appellant argued accordingly before the Bankruptcy Court. (Dkt. 8-4, HT108 - HTlll, 108:17-111:4.) The Bankruptcy Court acknowledged that "retirement" is not defined in either the Bankruptcy Code or Black's Law Dictionary. (Dkt. 8-4, HTllO - HTlll, 110:24 - 111:13.) Moreover, Mr. Bennett's right to payment pre-dated the retirement of the shares owned by Victory Oil, and thus could not have arisen out of it. A claim for damages that is separate and apart from a shareholder's equity investment is not subject to mandatory subordination. Templeton v. 0 'Cheskey (Jn re Am. Haus. Found.), 785 F.3d 143, 154 (5th Cir. 2009), quoting In re Blondheim Real Estate, Inc., 91 B.R. 639, 640 (Bankr. D. N.H. 1988) (holding a "claim for 38 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 46 of 63 recovery on debtor's promissory note should not be subordinated under 51 O(b )"); In re Wyeth Co., 134 B.R. 920, 921-922 (Bankr. W.D. Mo. 1991) ("the use of the term 'damages' implies more than a simple debt" and holding that debt on promissory notes should not be subordinated). While a claim that functionally seeks to recover an equity investment may be subordinated, that is not the case here. See In re Am. Haus. Found., supra, 785 F.3d at 154 (subordinating claims where creditor was "not merely seeking recovery under independent promissory notes" but was really suing "for the breach of the guarantees of his LP interests (rather than suing directly for repayment of his equity investments in the LPs) ... "). Appellant seeks damages arising out of a right to payment he was bequeathed in 1931. A 1986 settlement agreement and trust reaffirmed Appellant's entitlement to an income stream for life. The fact that Appellant seeks damages via the causes of action underlying its Claims, and the fact that Mr. Bennett was, in addition to a creditor, an equity holder in Appellees (pursuant to other actual equity interest), does not make the claims at issue subject to subordination. The Bankruptcy Court erred in its determination that the retirement - via settlement agreement - of shares of stock held by a third party constitutes the purchase or sale of a security interest, or a rescission of such interest, for purposes of equitable subordination. Ill 39 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 47 of 63 B. The Bankruptcy Court Abused Its Discretion In Ruling on the Objection Without Allowing Appellant to First Conduct Discovery and Without Conducting A Full Evidentiary Hearing At the very least, it was an abuse of discretion for the Bankruptcy Court to rule on Appellees' Objection without allowing Appellant the opportunity to conduct discovery, and without conducting a full evidentiary hearing on the factual issues in dispute. The Bankruptcy Court accepted Appellees' contention that there were no factual issues in dispute, ignoring the complex factual history that would need to be explored and fleshed out in order to establish that some purchase, sale or rescission occurred. This denial of discovery and an evidentiary hearing was a violation of due process. Neither necessary depositions and written discovery to which Appellant was fully entitled, nor a full evidentiary hearing, was conducted prior to the hearing on Appellees' Objection, or prior to the Bankruptcy Court's Order on the same. I. Disputed Issues of Material Fact Existed Disputed issues of material fact exist as to the very basis of each of Appellant's subordinated claims, including but not limited to: (a) what the merger agreement provided for; (b) whether the merger agreement was breached when Linn refused to pay the sums due to Mr. Bennett per the Victory Trust during his life; ( c) whether Linn engaged in financial elder abuse with respect to its treatment 40 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 48 of 63 of Mr. Bennett; and, in the alternative, ( d) whether Berry breached its agreement, as memorialized in the Victory Trust, with Mr. Bennett. Appellees contended that there is no disputed issue of material fact, and that mandatory subordination could be decided as a matter of law. (Dkt. 8-2, AR02190.) However, in their Objection, they relied on statements and conduct of Candice Wells and Ken Olson, and thereby highlighted that a disputed issue of material fact existed. (Dkt. 8-2, AR01927, ,r,r 32-33, 57.) Appellees' Objection cited communications between Candice Wells and Ken Olson, on behalf of Appellees, on the one hand, and Appellant, on the other. (Ibid.) Appellees noted in their Objection that Linn sought the support of certain BPC shareholders, including Mr. Bennett, for the merger. (Dkt. 8-2, AR01927, ,r 32.) Appellees provided that, "[b]ased on a request from Mr. Bennett's counsel, in-house counsel for LinnCo and Linn Energy, wrote in an email to Mr. Bennett's counsel, "While we are not obligated to carry over any restrictive legends under the merger agreement, we will agree to carry forward the Class B legends in order to secure Mr. Bennett's voting agreement in a timely manner." (Ibid.; Dkt. 8-2, AR02161, ,r 9, AR02178 -AR02180.) AppeHees also cited to "a letter purportedly sent by a former employee of BPC", and claim that "[t]his employee had no authority to bind Linn Energy, LinnCo, BPC, Berry, or the trustee." (Dkt. 8-2, AR01927, ,r 33, AR02161, ,r 10, AR02181 - AR02183.) The Objection included the contention 41 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 49 of 63 that "the letter itself does not purport to be a binding representation and presents itself only as an estimation that required verification by Linn." (Dkt. 8-2, AR01927, iJ 33.) At oral argument on the Objection, counsel for all parties discussed the entire history of Mr. Bennett's relationship to Appellees, as part of the explanation of the origin of Mr. Bennett's interest in payment. (Dkt. 8-4, HT91-HT92, 91:20 - 92:22, HT98 - HT99, 98:4 - 99:10, HT103 - HT104, 103:19 - 104:7, HT120, 120:6-24.) Appellant reminded the Bankruptcy Court on the record, "there was discussion today about what happened in 1931. .. None of that is in the record, as well. .. So the idea that we can resolve this cleanly, surgically, from 10,000 feet, with nobody getting their boots on the ground, is really just a - is a misnomer." (Dkt. 8-4, HT126, 126:3-10.) Despite the multiple disputed factual issues that were highlighted in the Objection, the Bankruptcy Court decided the issues raised by the Objection as a matter of law, and subordinated half of Appellant's claims. (Dkt. 8-4, HT139 - HT140, 139:22 - 140:22; Dkt. 8-2, AR02216 - AR02218.) This should not have been done without an adversary proceeding, full discovery and a proper summary judgment motion. Ill Ill 42 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 50 of 63 2. Appellant Had a Due Process Right to Discovery The Bankruptcy Court had an order in place that confirmed Appellant's right to discovery but, nonetheless, wholly denied Appellant discovery. Specifically, near the outset of the bankruptcy case, the Bankruptcy Court entered an Order Approving Omnibus Objection Procedures and Filing of Substantive Omnibus Claims Objections (the "Omnibus Order"). (Dkt. 8-2, AR00035 - AR00057.) Exhibit One (1) to the Omnibus Order, Objection Procedures, at Section Seven (7), "Contested Matter," provides: "Each claim subject to an Omnibus Objection and the Response thereto shall constitute a separate contested matter as contemplated by Bankruptcy Rule 9014, and any order entered by the Court will be deemed a separate order with respect to such claim." (Dkt. 8-2, AR00043, ,i 7.) Section 11 of the Objection Procedures, entitled "Discovery," provides: "If the Debtors determine that discovery is necessary in advance of a hearing on an Omnibus Objection, the Debtors will serve notice on the affected claimant and its counsel of record that the scheduled hearing will be treated as a status conference during which the parties will request that the Court issue a scheduling order to facilitate dismissal or resolution of the litigation. Such notice may be incorporated into the initial agenda letter for the hearing, or may be provided by separate notice." (Dkt. 8-2, AR00046, ,i 11.) Paragraph Three (3) of the Omnibus Order provides: "The Debtors shall file and prosecute any Omnibus Objections in accordance with the 43 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 51 of 63 Objection Procedures attached hereto as Exhibit 1, which are hereby approved, and the other procedural safeguards set forth in Federal Rule of Bankruptcy Procedure Rule 3007(e) and Bankruptcy Local Rule 3007-1." (Dkt. 8-2, AR00036, ~ 3.) Not only are portions of the Omnibus Order themselves violations of due process, but the Bankruptcy Court further denied Appellant due process by failing and refusing to provide Appellant with the discovery called for in the Bankruptcy Court's own order. First, the premise of the Omnibus Order, allowing Appellees to unilaterally control whether discovery was conducted, was itself a violation of due process. Second, it was an abuse of discretion for the Bankruptcy Court to blatantly ignore its own Omnibus Order, which heeded the importance of the "procedural safeguards" set forth in the Federal Rules of Bankruptcy Procedure and the Bankruptcy Local Rules and guaranteed their enforcement. Local Rule 3007-l(e), recognized in the Omnibus Order but ignored by the Bankruptcy Court in the underlying dispute, provides that, "unless otherwise ordered by the court or by consent of the parties, the initial hearing will be non- evidentiary and used as a scheduling conference. The parties should confer prior to the initial hearing regarding any required discovery and other issues necessary for a trial on the merits ... " Additionally, Local Rule 9013-2 provides for the "Exchange of Exhibits, Exhibit Lists and Witness Lists in all Contested Matters and Adversary Proceedings." Rule 9013-2(a) provides that it "shall apply to all 44 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 52 of 63 contested matters and adversary proceedings in which a response is filed," with only four (4) exceptions, one of which is "objections to claims to which no response has been filed," and the other three (3) of which are inapplicable. The Bankruptcy Court judge who issued the Order that is the subject of this appeal, Judge Jones, has his own written Procedures which provide that "the Court intends to strictly enforce Local Rule 9013-2. Unless otherwise specifically ordered, all hearings are evidentiary." Federal Rule of Bankruptcy Procedure 3007, "Objections to Claims," provides that "the contested matter initiated by an objection to a claim is governed by rule 9014, unless a counterclaim by the trustee is joined with the objection to the claim. The filing of a counterclaim ordinarily commences an adversary proceeding ... " Rule 3007(c) sets forth a number of Federal Rules of Bankruptcy Procedure that apply to claims objections. Included is Rule 7026, which incorporates Federal Rule of Civil Procedure 26. Federal Rule of Civil Procedure 26(b ), "Discovery Scope and Limits," provides: "parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery 45 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 53 of 63 outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable." (Fed. R. Civ. Proc. 26(b)(l).) "The .. court may alter the limits in these rules on the number of depositions and interrogatories or on the length of depositions under Rule 30. By order or local rules, the court may also limit the number of requests under Rule 36." (Fed. R. Civ. Proc. 26(b )(2)(A).) Expert witness discovery is also provided for. (Fed. R. Civ. Proc. 26(b)(4).) Federal Rules of Bankruptcy Procedure 7028 through 7030 incorporate Federal Rule of Civil Procedure and set forth guidelines for depositions. Federal Rules of Bankruptcy Procedure 7033, 7034 and 7036 incorporate Federal Rule of Civil Procedure 33, 34 and 36, providing for interrogatories, production of documents and Requests for Admission, respectively. Additionally, Federal Rules of Bankruptcy Procedure 3007(d) and 9014(d) both provide that "testimony of witnesses with respect to disputed material factual issues shall be taken in the same manner as testimony in an adversary proceeding." Moreover, prior to Appellees' petitions for bankruptcy, when the parties' dispute was pending in the Eastern District of California, Appellant and Appellees entered into a Stipulation to Limit Discovery and Resolve Dispute Via Cross- Motions for Summary Judgment, which expressly provided for an exchange of documents and Electronically Stored Information ("ESI"), and for the depositions 46 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 54 of 63 of Mr. Bennett (who was at the time of stipulation still alive), Trey Busch, Bill Bush, Dana French, Kenneth Olson and Candice Wells. (Dkt. 8-2, AR02160, ,r 2, AR02163 - AR02167.) After receiving the Objection, Appellant contacted Appellees in order to schedule these depositions (with the exception of the deposition of Mr. Bennett, who is deceased). (Dkt. 8-2, AR02160 - AR02161, ,r,r 3-8, AR02168 - AR02177.) Appellant communicated to Appellees that the discovery was necessary to provide a proper response to the Objection, especially given the communication and conduct of Mr. Olson and Ms. Wells that was cited in the Objection, and that completion of production of documents and an accurate privilege log (which process had begun pre-bankruptcy) would be necessary in advance of depositions. (Dkt. 8-2, AR02160 - AR02161, ,r,r 4, 6-7, AR02168 - AR02177.) Nonetheless, Appellees maintained that the Objection could be resolved as a matter of law, and refused to produce the requested witnesses or complete any discovery prior to hearing on the Objection. (Dkt. 8-2, AR02160 - AR02161, ,r,r 5, 8, AR02168 - AR02177.) Appellant impressed upon the Bankruptcy Court that these depositions were still necessary for resolution of Appellant's claims and Appellee's Objection. At the hearing on the Objection, counsel for Appellees argued, We don't think there's any discovery that's necessary here. If you've seen the briefing, Your Honor, you've seen that we don't think that there are any disputes of material fact that relate to either of these issues. The 47 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 55 of 63 claimants point to a number of factual disputes certainly, but they don't relate to whether the claim should be recharacterized as being on account of equity or whether the claim should be subordinated. (Dkt. 8-4, HT77, 77:10-17.) The Bankruptcy Court actually recognized the need for an adversary proceeding; --let me ask you this, I didn't see it raised, but I think I have - and if it was, I just missed it, but I think I have an independent obligation to raise it. If part of the relief that you're seeking is a subordination, doesn't that require an adversary? (Dkt. 8-4, HT77, 77:20-24.) Counsel for Appellees continued to argue that no discovery was necessary, while counsel for Appellant argued for the necessity of discovery, arguing: [O]n the threshold issue of is discovery necessary, we believe strongly that it is. Here are several issues that are quintessentially factual in nature .. .including the intent of the parties at the time the Victory Trust transaction was entered into in 1986. The Reorganized Linn Debtors' position is all of the parties' intent can be divined simply by looking at the documents. The Victory Trust is not even an integrated agreement. Under - and it also provides that California law, parol evidence is admissible in the event that the Court needs to interpret an agreement that is not integrated; and in addition, can be used to demonstrate an ambiguity in an agreement that, otherwise, appears to be clear. (Dkt. 8-4, HT80-HT81, 80:14- 81:3.) 48 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 56 of 63 Counsel for Appellant further argued that, [H]ad evidence been taken, the record would show that, prior to the transaction that is or is not a merger, Berry Routinely and consistently paid dividends ... And the Maxwell oil royalties were more than sufficient to cover the Victory Trust payments. The record would also show that, subsequent - or prior to the filing of the petition and the suspension of dividends, Linn had regularly paid dividends. (Dkt. 8-4, HT85 -HT86, 85:22- 86:5.) The Bankruptcy Court provided: I think that, if a retirement is the purchase or sale of a security, then I think that- I think that the debtor is right; that I don't need any evidence, if that's what it was. Although you may convince me that -- ... that's exactly what we need evidence on," but then acknowledged, "if you can convince me that, in fact, the retirement could never be the purchase or sale of a security, in my mind, then I think we're in a different area, and I think that you're probably right, you do need discovery. (Dkt. 8-4, HT87, 87:2-15.) After hearing oral argument, however, the court concluded as follows: All right. Thank you. And to be clear, the reservation - or the complaint is that there is an entitlement to discovery before a decision can be rendered. After hearing the arguments, reading the claims, reading the attachments to the pleadings that have been field, I do find that the majority of the claims do arise from the recision [sic] of a purchase or sale of a security of the 49 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 57 of 63 debtor or an affiliate of the debtor, or are for damages arising from the purchase or sale of such a security. I don't think, in my mind, that there is any legitimate dispute that what is being complained about, or the transaction or the resulting interest, constitutes a security, both under the Bankruptcy Code, as well as the Uniform Commercial Code. I just don't think that's a - I just don't think that's an area of genuine dispute. So I do find that this - I think it was referred to as a "payment stream," does constitute a security for purposes of 510. And I do think, having looked at it, that all of the claims, with the exception of the misrepresentation claim and the breach of fiduciary duty claim, are properly subordinated and are subordinated under 51 O(b ). I don't think - I haven't heard anything to the contrary. I have not been - there has been no suggestion, that I think is substantive in nature, as to what would be needed to defeat such a claim. And so, on that basis, I'm going to sustain the objection. (Dkt. 8-4, HT139-HT140, 139:22-140:22.) In a clear abuse of discretion, the Bankruptcy Court ignored all of the applicable procedural rules, its own Omnibus Order, and the parties' historical agreement, and allowed Appellees to refuse to participate in discovery. Appellant took the position that the Objection and Appellant's Response thereto created a contested matter, entitling Appellant to discovery. (Dkt. 8-2, AR02174 - AR02175.) Appellant attempted to meet and confer with Appellees regarding the need for discovery. (Dkt. 8-2, AR02160 - AR02161, ,r,r 3-8, AR02168 - AR02177.) Nonetheless, Appellees failed and refused to participate in any 50 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 58 of 63 discovery, thereby precluding (under the Omnibus Order) Appellants from conducting any discovery, and the Bankruptcy Court failed and refused to require them to do so. (Ibid.; Dkt. 8-4, Hf139 - HTI40, 139:22 - 140:22.) The Bankruptcy Court proceeded to decide the Objection, subordinate half of Appellant's claims and thereby deny Appellant's right to property without conducting any evidentiary hearing. A number of procedural safeguards were m existence that provided for Appellant's right and opportunity for discovery under the circumstances. Yet, Appellant was wholly denied the opportunity to conduct discovery, and wholly deprived of due process. 3. Appellant Diligently Pursued Discovery and Preserved Its Right to Due Process The District Court reviews the bankruptcy court's decisions on discovery and whether to provide an evidentiary hearing for an abuse of discretion. Young v. DiFerrante, 416 B.R. 612, 615 (S.D. Tex. 2009) (citing Matter of Evangeline Refining Co., 890 F.2d 1312, 1321 (5th Cir. 1989) (citing Mayo v. Tri-Bell Indus., 787 F.2d 1007, 1012 (5th Cir. 1986))); Crosby, supra, 647 F.3d at 261-262 (abuse of discretion standard applied to discovery order); Clark, supra, 202 F.3d at 765- 766 (abuse of discretion standard applied to order denying evidentiary hearing). Where discovery is denied without reason, an abuse of discretion may be found. Wiwa, supra, 392 F.3d at 818-819. 51 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 59 of 63 A bankruptcy court abuses its discretion in denying discovery where the party "diligently pursued its previous discovery opportunities, and can demonstrate that allowing additional discovery would have precluded summary judgment." In re Thorpe Insulation Co. ("Thorpe Insulation"), 671 F.3d 1011, 1024 (9th Cir. 2012), citations omitted; see also In re Slatkin, 525 F.3d 805, 810 (9th Cir. 2008), citing Bank of Am., NT & SA v. PENGWIN, 175 F.3d 1109, 1118 (9th Cir. 1999) ("We review the bankruptcy court's refusal to grant a continuance to permit additional discovery for an abuse of discretion ... '[W]e will only find an abuse of discretion if the movant diligently pursued its previous discovery opportunities, and can demonstrate that allowing additional discovery would have precluded summary judgment."') In Thorpe Insulation, the bankruptcy court disallowed a claim as a matter of law. Thorpe Insulation, supra, 671 F.3d at 1025. The court of appeal upheld the bankruptcy court's decision, where it found that the creditor decided not to pursue discovery, despite the opportunity to do so. Id. Here, Appellant never had an opportunity to conduct discovery, but diligently fought for the opportunity to do so, and explained the need for discovery to Appellee and the Bankruptcy Court. (Dkt. 8-2, AR02145 -AR02150, AR02160 - AR02161, ,i,i 3-8, AR02168 - AR02177.) The Bankruptcy Court effectively granted Appellees summary judgment, without affording Appellant the opportunity to gather the facts and evidence necessary to support its claim and its version of 52 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 60 of 63 events. Had discovery been allowed, summary judgment would have been impossible, as disputed issues of material fact would have been established. Discovery was and is necessary to determine numerous factual issues, including but not limited to: the extent to which Mr. Olson was or was not authorized to represent to Appellant that the Victory Trust payments would continue post- merger, the conditions (if any) on Ms. Wells' agreement with Appellant that the "B" Group Legend payments would continue post-merger, based on Linn shares, whether Berry obtained "reasonable legal advice" per the terms of the Victory Trust prior to determining not to make payments and the content of any such legal advice. 1 It was an abuse of discretion for the Bankruptcy Court to deny discovery and an evidentiary hearing, given the outstanding factual issues. Ill Ill Appellees contended in their briefing to the Bankruptcy Court that the 1986 Declaration of Trust gave the trustee broad power to construe the Declaration of Trust. (Dkt. 8-2, AR01925, ,r 23.) However, such power to construe the Declaration of Trust comes only "after obtaining responsible legal advice." (Ibid.) Wo evidence was presented to the Bankruptcy Court that the trustee actually sought and obtained responsible legal advice prior to utilizing its power to construe the Declaration of Trust. To the extent Appellees could have relied on this contention, they would have had to waive any privilege associated with the purported "responsible legal advice" obtained by the trustee prior to deciding not to pay Mr. Bennett the sums owed to him. Additionally, discovery should have been allowed and conducted on the topic. 53 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 61 of 63 VI. CONCLUSION AND PRECISE RELIEF SOUGHT For aH of the foregoing reasons, Appellant seeks an Order of this Court reversing the Bankruptcy Court's Order subordinating Appellant's Claims for: (1) Breach of Merger Agreement - Against Linn (First Claim for Relief); (2) Elder Abuse - Against Linn (Fourth Claim for Relief); and (3) Breach of Contract - Against Berry. Appellant should be allowed to continue its prosecution of these claims in Bankruptcy Court, and to conduct necessary discovery thereon. Date: October 20, 2017 Isl Kurt F. Vote ---- ------ Kurt F. Vote Statement Regarding Oral Argument (Rule 8019) Appellant requests oral argument on the issues presented in this appeal, as both the issues and factual history are complex, and the precise questions that must be decided are a matter of first impression. Date: October 20, 2017 Isl Kurt F. Vote -- ------ KurtF. Vote 54 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 62 of 63 Certificate of Compliance With Rule 8015(a)(7)(B) This brief complies with the type-volume limitation of Rule 8015(a)(7)(B) because this brief contains 12,716 words, excluding the parts of the brief exempted by Rule 80I5(a)(7)(B)(iii) . Date: October 20, 2017 /s/KurtF. Vote ------ Kurt F. Vote 55 Case 6:17-cv-00051 Document 13 Filed in TXSD on 10/20/17 Page 63 of 63