Port of Corpus Christi Auth. v. Sherwin Alumina Co. (In Re Sherwin Alumina Co.)

Case: 18-40557 Document: 00515065090 Page: 1 Date Filed: 08/06/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 18-40557 August 6, 2019
Lyle W. Cayce
In The Matter Of: Clerk
SHERWIN ALUMINA COMPANY, L.L.C.;
SHERWIN PIPELINE, INC.,
Debtors
---------------------------------------------------------
PORT OF CORPUS CHRISTI AUTHORITY,
Appellant
v.
SHERWIN ALUMINA COMPANY, L.L.C.; SHERWIN PIPELINE, INC.,
Appellees
Appeal from the United States District Court
for the Southern District of Texas
Before HIGGINBOTHAM, SMITH, and HIGGINSON, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
A bankruptcy sale extinguished an easement of the Port of Corpus
Christi Authority, an arm of the State of Texas. The Port initiated an adversary
proceeding against the debtors, Sherwin Alumina Company and Sherwin
Pipeline Incorporated, seeking to invalidate the sale and regain its easement.
The bankruptcy court rejected the Port’s sovereign immunity and fraud claims,
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and the district court affirmed. On appeal from the district court, we find no
Eleventh Amendment violation or basis for a claim of fraud. We affirm.
I.
In 1998, the Port of Corpus Christi Authority purchased an 1,100 acre
parcel near Corpus Christi Bay in San Patricio County, Texas, adjacent to land
owned by the Sherwin Alumina Company, together with an easement granting
use and access to a private roadway on the Company’s land known as La
Quinta Road. Fifteen years later, in 2013, the Port and Sherwin Alumina
Company agreed to modify the easement, giving the Port permanent non-
exclusive access along a specific portion of the road and across an adjoining
drainage ditch. 1 The easement provided the primary means of commercial
access to the Port’s parcel.
Three years later, on January 11, 2016, Sherwin Alumina Company and
Sherwin Pipeline Incorporated (collectively “Sherwin”) filed voluntary
petitions for Chapter 11 relief in the Bankruptcy Court for the Southern
District of Texas. Sherwin also filed an initial Joint Plan for reorganization,
proposing in relevant part to sell real property in the bankruptcy estate “free
and clear of all Liens, Claims, charges and other encumbrances” under Section
363(f) of the Bankruptcy Code.
The bankruptcy court approved bidding procedures. The Port bid for a
part of the bankruptcy estate, a port facility that did not include the La Quinta
Road parcel. The Port conditioned its bid on “an access easement . . . over
Seller’s private roadway known as La Quinta Road . . . if Buyer has been
unable to obtain such an easement before the Closing.” On April 21, 2016, the
1In 2015, the Port released broader rights it held from the unmodified pre-2013
easement.
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Port and other bidders participated in an auction from which Corpus Christi
Alumina emerged as the successful bidder.
In the following months Sherwin filed modified plans and associated
purchase agreements in which encumbrances other than those deemed
“permitted” would be stripped off the estate’s property in the proposed sale, as
authorized under Section 363(f) of the Bankruptcy Code. Permitted
encumbrances would be defined in a future proposed confirmation order. None
of these documents suggested that the Port’s easement would be a permitted
encumbrance.
Sherwin filed a final proposed confirmation order in the early hours of
February 17, 2017, the day of the confirmation hearing. As with previous
filings, the proposed confirmation order provided that the buyer would receive
the property free and clear of all encumbrances, subject to a limited exception
for permitted encumbrances. In the proposed order, Sherwin defined permitted
encumbrances to encompass a number of specific servitudes—not including the
Port’s easement—as well as “easements or encumbrances . . . recorded prior to
July 1, 2009.” The definition was not redlined or otherwise identified as a
modification. The Port was served with the proposed confirmation order. Later
that day, the bankruptcy court held a hearing on the proposed plan and
confirmation order, which the Port “attended” telephonically. During the
hearing, Sherwin’s counsel stated that the proposed order submitted earlier
that day included “extensive modifications,” but that Sherwin “d[id]n’t believe
that they are material in any real way.” The court entered the order without
objection, confirming Sherwin’s modified Plan. The Plan went into effect on
February 27, 2017, on which date Sherwin sold its real property to Corpus
Christi Alumina. On March 3, 2017, the Confirmation Order became final and
non-appealable.
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On March 31, 2017, Corpus Christi Alumina sold the land encompassing
La Quinta Road to Cheniere Land Holdings LLC. Cheniere notified the Port
that its easement had been extinguished by the sale of the land. As the time to
appeal the confirmation order had expired, the Port filed an adversary
complaint with the bankruptcy court, collaterally attacking the confirmation
order as having been procured by fraud, barred by the state’s sovereign
immunity, and a denial of due process for want of notice. The bankruptcy court
dismissed the claims of fraud and sovereign immunity, and denied dismissal
of the due-process claim and leave to amend. The Port appealed the dismissals
and denial of leave to amend to the district court, which affirmed. This appeal
followed.
II.
A.
We have jurisdiction to hear the appeal of the district court’s dismissals
of the Eleventh Amendment and fraud claims. 2 We review cases originating in
bankruptcy “perform[ing] the same function, as did the district court: [f]act
findings of the bankruptcy court are reviewed under a clearly erroneous
standard and issues of law are reviewed de novo.” 3 At this stage, we take the
well-pleaded facts as true, viewing them in a light most favorable to the
plaintiff. 4 We review the denial of leave to amend for abuse of discretion. 5
2 Puerto Rico Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 143–44
(1993); 28 U.S.C. § 158(d)(1).
3 In re Soileau, 488 F.3d 302, 305 (5th Cir. 2007) (quoting Nationwide Mut. Ins. Co. v.
Berryman Prods., 159 F.3d 941, 943 (5th Cir. 1998) (emphasis omitted)).
4 Matter of ATP Oil & Gas Corp., 888 F.3d 122, 125–26 (5th Cir. 2018).
5 Lewis v. Fresne, 252 F.3d 352, 356 (5th Cir. 2010).
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B.
Under the Eleventh Amendment, federal courts lack jurisdiction over
“any suit in law or equity, commenced or prosecuted against one of the United
States by Citizens of another State, or by Citizens or Subjects of any Foreign
State,” 6 or the state’s own citizens. 7 “States, nonetheless, may still be bound by
some judicial actions without their consent,” 8 including a bankruptcy
proceeding. Congress has the power to establish “uniform Laws on the subject
of Bankruptcies throughout the United States.” 9 The Supreme Court has read
the Clause “to authorize limited subordination of state sovereign immunity in
the bankruptcy arena.” 10
In Tennessee Student Assistance Corporation v. Hood, the Supreme
Court held that a bankruptcy court’s discharge of an individual’s debt to the
state of Tennessee did not violate the Eleventh Amendment. Debtor Pamela
Hood’s educational debts were guaranteed by and later assigned to the state of
Tennessee. 11 When Hood filed for bankruptcy and sought to have this debt
discharged in an adversary proceeding, Tennessee protested that it did not
consent to the proceeding, and that the bankruptcy court’s discharge would
violate the Eleventh Amendment. 12 The Supreme Court disagreed. It found
that the discharge proceeding was an exercise of the bankruptcy court’s in rem
jurisdiction over the debtor’s estate; the debtor sought no affirmative relief
against the state, and the proceeding did not subject the state to any coercive
6 U.S. CONST. amend. XI.
7 Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 446 (2004) (citing Hans
v. Louisiana, 134 U.S. 1, 15 (1890)).
8 Id.
9 U.S. CONST. art. I, § 8, cl. 4.
10 Cent. Virginia Cmty. Coll. v. Katz, 546 U.S. 356, 363 (2006).
11 Hood, 541 U.S. at 444.
12 Id. at 445.
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judicial process. 13 The federal court’s disposition of a bankruptcy estate within
which a state has interests, where the proceeding is principally in rem and
avoids coercive judicial process against the state, 14 does not implicate, let alone
violate, the Eleventh Amendment. 15
Under Texas law, the Port’s easement is a non-possessory property
interest in Sherwin’s land. 16 That the servient land was within the bankruptcy
estate is not disputed. Exercising jurisdiction over the Sherwin estate, and
thus the servient land, the bankruptcy court approved a Section 363(f) sale
“free and clear” of encumbrances, including the Port’s La Quinta Road
easement. The bankruptcy court did not award affirmative relief nor deploy
coercive judicial process against the Port—it did not exercise in personam
jurisdiction over the state. 17
The Port argues that even if the encumbered land was within the court’s
jurisdiction, the La Quinta Road easement was its property, and not part of
13 Id. at 450; In re Soileau, 488 F.3d at 307 (“[A]n in rem bankruptcy proceeding
brought merely to obtain the discharge a debt or debts by determining the rights of various
creditors in a debtor’s estate—such as is brought here—in no way infringes the sovereignty
of a state as a creditor.”).
14 Hood, 541 U.S. at 446 (analogizing to “in rem admiralty actions when the State is
not in possession of the property”).
15 Id. at 451. Hood is consistent with the previous holdings of this court. In a pre-Hood
case, Texas v. Walker, we similarly held that a bankruptcy court’s discharge of a debt owed
to the State of Texas was not a suit against the state, and therefore did not violate the
Eleventh Amendment. 142 F.3d 813, 822 (5th Cir. 1998) (“Walker’s entitlement to assert his
discharge against the state's claims invoked no Eleventh Amendment consequences. The
state never was hauled into federal court against its will in the bankruptcy.”).
16 Barnhill v. Johnson, 503 U.S. 393, 398 (1992) (“In the absence of any controlling
federal law, ‘property’ and ‘interests in property’ are creatures of state law.”). The Port points
to Texas law under which an easement is compensable if condemned under the State’s
eminent domain power. City of Houston v. Northwood Mun. Util. Dist. No. 1, 73 S.W.3d 304,
310 (Tex. App. 2001); Houston Lighting & Power Co. v. State, 925 S.W.2d 312, 314 (Tex. App.
1996).
17 Hood, 541 U.S. at 453 (“The issuance of process, nonetheless, is normally an
indignity to the sovereignty of a State because its purpose is to establish personal jurisdiction
over the State.”).
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the bankruptcy estate, such that exercise of the bankruptcy court’s in rem
jurisdiction could not reach the easement. Hood instructs otherwise. The Port’s
easement is like Tennessee’s debt claim against Pamela Hood’s estate: the
state holds an interest burdening the bankruptcy res. Hood holds that a
bankruptcy court’s exercise of in rem jurisdiction over the debtor’s estate can
extinguish the state’s interest burdening that res without implicating the
Eleventh Amendment. Section 363(f) specifically provides that, in exercising
core in rem jurisdiction over the bankruptcy estate, the court may strip others’
interests—that is, property rights—in that res. Specifically, Section 363(f)
provides that under certain limited circumstances the trustee may sell estate
property “free and clear of any interest in such property of an entity other than
the estate.” 18 The Port argues that “the Debtors’ attempt to sell the Port’s
Easement could not have complied with the limitations and safeguards of 11
U.S.C. § 363(f).” This argument is foreclosed. As the Port concedes, any Section
363(f) objection had to have been raised on direct appeal of the confirmation
order and cannot be raised in this collateral adversary proceeding. We affirm
the dismissal of the Port’s Eleventh Amendment claim.
C.
Under Section 1144 of the Bankruptcy Code, “[o]n request of a party in
interest at any time before 180 days after the date of the entry of the order of
confirmation, and after notice and a hearing, the court may revoke such order
if and only if such order was procured by fraud.” 19 The elements of a claim for
18 Those circumstances are that “(1) applicable non-bankruptcy law permits sale of
such property free and clear of such interest; (2) [the] entity [with the interest in the property]
consents; (3) [the entity’s] interest is a lien and the price at which such property is to be sold
is greater than the aggregate value of all liens on such property; (4) such interest is in bona
fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept
a money satisfaction of such interest.” 11 U.S.C. § 363(f).
19 11 U.S.C. § 1144.
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fraud are (1) that the debtor or proponent made a materially false
representation or omission to the court; (2) that the representation was made
with knowledge of its falsity or reckless disregard for the truth; (3) that the
representation was made to induce the court’s reliance; (4) that the court
actually relied upon the representation; and (5) the court entered the
confirmation order in reliance on the representation. 20 A claim for fraud in an
adversary proceeding must satisfy the heightened pleading requirements of
Federal Rule of Civil Procedure 9(b). 21 Under Rule 9(b) “[i]n alleging fraud or
mistake, a party must state with particularity the circumstances constituting
fraud or mistake.” 22
We need not proceed beyond the first element, because the Port fails to
allege any false representation. During the confirmation hearing, Sherwin’s
counsel described last-minute changes to the proposed order as “extensive
modifications” that were not “material in any real way.” The Port contends this
was a misrepresentation because Sherwin’s last-minute changes “[f]or the first
time . . . attempt[ed] to directly impact the Port’s easement property rights”—
in other words, the modifications sprang a trap on the Port, isolating its
easement for extinguishment, a material change that should have been
announced as such to the bankruptcy court. But Sherwin’s last-minute
modifications to the proposed confirmation order had no such effect on the
Port’s easement. The Port’s allegation that Sherwin’s last-minute changes for
20 In re Davis Petroleum Corp., 385 B.R. 892, 912 (Bankr. S.D. Tex. 2008).
21 FED. R. BANKR. P. 7009; In re Fornesa, 2016 WL 2930459, at *3 (Bankr. S.D. Tex.
May 13, 2016) (“Rule 9(b), Fed. R. Civ. P., as made applicable by Bankruptcy Rule 7009,
requires that fraud be pled with particularity. The particularity requirement requires that
the pleading identify who, what, when, where, and how the alleged fraud was committed.”).
22 FED. R. CIV. P. 9(b); U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125
F.3d 899, 903 (5th Cir. 1997) (“At a minimum, Rule 9(b) requires that a plaintiff set forth the
who, what, when, where, and how of the alleged fraud.” (internal quotation marks and
citation omitted)).
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the first time “stripp[ed] third party easement property rights” from its land is
inaccurate. From Sherwin’s initial bankruptcy filing, more than a year before
the confirmation hearing, the debtor proposed a sale in which “all property of
the Estates to be acquired by the Buyer . . . shall vest in the Buyer, free and
clear of all Liens, Claims, charges, and other encumbrances.” Under Texas law,
an easement is a type of encumbrance. 23 From the beginning, by the general
terms of Sherwin’s proposed sale, the debtor proposed a Section 363(f) sale that
would extinguish the Port’s easement. The Port’s actions indicate that it so
understood the proposed sale: in its unsuccessful bid for certain estate lands it
also sought to preserve the La Quinta Road easement, on the implicit
understanding that, absent agreement providing otherwise, its La Quinta
Road easement would be extinguished under the terms of the sale.
Sherwin’s last-minute modifications to the plan carved out exceptions to
encumbrances on the estate lands to be extinguished in the sale, preserving a
number of other encumbrances, including those recorded before July 2009.
Debtors’ counsel’s description of the changes as not “material in any real way”
was not misleading because they were not changes at all with respect to the
Port’s easement. They did not affect the La Quinta Road easement, which
remained subject to the same general rule that it would be stripped in the
Section 363(f) sale as a “encumbrance” on the servient estate land. The Port’s
situation remained unchanged by the last-minute modifications. The Port does
not allege the first element of fraud. We affirm the dismissal of the Port’s fraud
claim.
23 City of Beaumont v. Moore, 146 Tex. 46, 55 (1947) (defining an “encumbrance” as a
“burden on land, depreciative of its value, such as a lien, easement or servitude”).
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D.
A court should grant leave to amend freely when justice so requires. 24 It
follows that where amendment would be futile, the court need not grant the
plaintiff leave to amend. 25
Here, the bankruptcy court dismissed the Port’s fraud claim with
prejudice, 26 finding “[i]t would be futile to allow an amendment to the
Complaint because there are no facts that could be plead[ed] to support” the
claim. This determination was no abuse of discretion. The Port’s fraud claim is
premised on an alleged misrepresentation made by Sherwin’s counsel
regarding modifications. The bankruptcy court determined the Port could
plead no additional fact to salvage this claim. The district court did not abuse
its discretion in denying the Port leave to amend.
III.
We AFFIRM the dismissals of the Port’s Eleventh Amendment and fraud
claims, and the denial of leave to amend the complaint.
24 FED. R. CIV. P. 15(a).
25 Jacobsen v. Osborne, 133 F.3d 315, 318 (5th Cir. 1998).
26 The Port’s arguments are restricted to the issue of whether it was entitled to amend
its § 1144 fraud claim.
10