No Actual Notice, No Discharge: Partial Assignment of a Louisiana Surface Lease Creates Privity Requiring Formal Bankruptcy Notice

Commentary on Placid Oil, L.L.C. v. Avalon Farms, Inc., No. 23-11120 (5th Cir. Mar. 27, 2025) (per curiam) (unpublished)

Introduction

This Fifth Circuit decision addresses a recurring collision between decades-old oilfield operations and legacy bankruptcy discharges: when does a landowner’s claim survive a Chapter 11 discharge because the debtor failed to give the landowner actual notice? The answer in this case turns on whether the debtor was in contractual privity with the landowner by virtue of an “executory contract” during the bankruptcy—specifically, whether a 1965 instrument by which the debtor acquired an undivided half-interest in a 1962 Louisiana surface lease was an assignment (creating privity with the lessor) or a sublease (breaking privity).

The parties are Placid Oil, L.L.C. (debtor-appellant) and Avalon Farms, Inc. (landowner-appellee), successor to the Zenor family, lessors of the 20-acre tract in St. Mary Parish, Louisiana where Placid operated the Patterson I and II gas-processing facilities from the late 1960s through 1991. Placid’s Chapter 11 plan was confirmed in 1988 with a broad discharge and a plan provision that assumed all executory contracts not expressly rejected. Three decades later, Avalon sued a number of oil and gas companies in Louisiana state court for contamination; it added Placid in 2020. Placid responded by reopening its bankruptcy case to seek a determination that Avalon’s claims had been discharged.

The key issue: Were Avalon's predecessors-in-interest (the Zenors) entitled to actual notice of Placid’s bankruptcy, bar dates, and confirmation under 11 U.S.C. § 365 and Fifth Circuit precedent? That turns on whether Placid and the Zenors were counterparties to an executory contract—here, an unexpired surface lease—during the bankruptcy. The answer depends on Louisiana law distinguishing assignments from subleases. The bankruptcy court and district court found the 1965 instrument to be an assignment of a one-half undivided interest, not a sublease, creating privity with the Zenors and thus an actual-notice obligation. The Fifth Circuit affirmed.

Summary of the Opinion

Applying de novo review to legal and mixed questions (and clear-error review to facts), the Fifth Circuit:

• Agreed that Louisiana law governs whether the 1965 instrument was an assignment or a sublease.
• Held that the 1965 instrument conveyed to Placid an undivided one-half interest in the 1962 surface lease, with Placid expressly assuming the lease’s covenants and obligations, and structured mutual rights and rent-sharing in a manner consistent with joint ownership, not a sublease.
• Concluded that Placid and the Zenors were in contractual privity as lessee and lessor under an unexpired lease during the pendency of Placid’s Chapter 11 case, making the Zenors counterparties to an executory contract within the meaning of § 365.
• Reaffirmed that counterparties to executory contracts are entitled to actual, formal notice of plan provisions affecting assumption/rejection and of bar dates and confirmation (citing Matter of National Gypsum Co.).
• Because Placid did not provide actual notice to the Zenors, Avalon's claims (as successor) were not discharged by the 1988 confirmation order despite the plan’s “assume all not rejected” clause.

The Fifth Circuit therefore affirmed the district court’s judgment, which had affirmed the bankruptcy court’s summary judgment in favor of Avalon.

Analysis

Precedents Cited and Their Influence

• Standard of Review:
  • In re JFK Capital Holdings, L.L.C., 880 F.3d 747 (5th Cir. 2018); In re Woerner, 783 F.3d 266 (5th Cir. 2015) (en banc); Matter of Cowin, 864 F.3d 344 (5th Cir. 2017). These cases frame the appellate posture: de novo review for legal and mixed questions, clear error for facts.
• Executory Contracts and Notice:
  • Matter of National Gypsum Co., 208 F.3d 498 (5th Cir. 2000). National Gypsum supplies the central bankruptcy principle: a debtor bears responsibility to provide actual, formal notice to non-debtor counterparties to executory contracts about assumption/rejection and plan treatment. This case links due process and § 365, making constructive notice or generalized publication insufficient for known counterparties.
  • 11 U.S.C. § 365; Fed. R. Bankr. P. 6006. These govern assumption/rejection of executory contracts and require procedural regularity and notice.
• Contract Interpretation Under Louisiana Law:
  • In re Liljeberg Enterprises, Inc., 304 F.3d 410, 439 (5th Cir. 2002) (citing Exxon Corp. v. Crosby-Mississippi Resources, Ltd., 154 F.3d 202 (5th Cir. 1998)). Contracts are the law between the parties and are read for plain meaning under Louisiana law.
• Assignment vs. Sublease in Louisiana:
  • Smith v. Sun Oil Co., 116 So. 379 (La. 1928): “Every sublease is, in a sense, an assignment, but every assignment of a lease is not a sublease.” This foundational statement underscores that labels and even overlaps in form do not control substance.
  • Hebert v. Hines, 615 So. 2d 44 (La. App. 3 Cir. 1993); Dixie Services, L.L.C. v. R & B Falcon Drilling USA, Inc., 955 So. 2d 214 (La. App. 4 Cir. 2007), writ denied, 957 So. 2d 182 (La. 2007); Webb v. Theriot, 704 So. 2d 1211 (La. App. 3 Cir. 1997). These cases explain that a sublease creates a separate contract lacking privity between sublessee and original lessor; an assignment maintains or creates privity.
  • Smith v. McKeller, 638 So. 2d 1192 (La. App. 1st Cir. 1994): Title/labels do not control; substance does.
  • Broussard v. Hassie Hunt Trust, 91 So. 2d 762 (La. 1956); Prestridge v. Humble Oil & Refining Co., 131 So. 2d 810 (La. App. 3 Cir. 1961). These decisions identify hallmarks of a sublease—e.g., independent rental or overriding royalty payable to the sublessor, and retained asymmetric control or reversion—versus features typical of an assignment.
  • Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., 63 So. 3d 159 (La. App. 2 Cir. 2011), writs denied, 69 So. 3d 1161, 1162 (La. 2011). Offers broader context and acknowledges doctrinal difficulty in drawing the line between assignment and sublease.

Together, these authorities guided the Fifth Circuit’s pathway: use Louisiana law to characterize the 1965 instrument; if that instrument created privity with the landowner, then National Gypsum and § 365 require actual notice, and the absence of notice defeats discharge.

Legal Reasoning

1. Anchoring the Bankruptcy Question in Contract Privity

   The court framed the discharge issue through the lens of notice: were the Zenors entitled to actual notice of Placid’s Chapter 11 proceedings? Under National Gypsum, such an entitlement hinges on being a counterparty to an executory contract, here an unexpired surface lease. If yes, lack of actual notice precludes the discharge from binding the counterparty’s claims.

2. Characterizing the 1965 Instrument Under Louisiana Law

   The 1965 instrument is captioned “Assignment of Interest in Leases and Right of Way,” identifies Cockrell as “Assignor” and Placid as “Assignee,” and “GRANT[S], ASSIGN[S], and CONVEY[S]” an undivided one-half of Cockrell’s right, title, and interest in the 1962 surface lease. The instrument expressly subjects Placid to the 1962 lease’s “covenants and obligations.”

   While labels do not control, the court examined the instrument’s substance against Louisiana indicia:

   • Equal Ownership and Control: The agreement’s right-to-release and reassignment provisions operate symmetrically. If one co-owner elects not to maintain the lease and the other elects to do so, the non-electing party must reassign its interest. This functions as a mutual right of first refusal reflecting co-lessee status—not a reversion to a sublessor retaining superior control (a sublease hallmark).
   • Rent Obligation Structure: Although Cockrell transmitted rent to the lessor, the 1965 instrument split rent responsibility between Cockrell and Placid proportionate to their respective ownership interests. The bankruptcy court aptly characterized this as a “payment mechanism” consistent with assignment. By contrast, a sublease typically features an independent rental stream to the sublessor or an overriding royalty and does not allocate rent based on co-ownership.
   • Assumption of Covenants: Placid expressly assumed the covenants and obligations under the 1962 lease—a classic assignment feature.
   • Partial, Undivided Interest: Louisiana law permits assignment of an undivided fractional lease interest, creating co-lessees. The fact that Cockrell conveyed only 50% did not transmute the transfer into a sublease.

   Placid’s counterarguments—that Cockrell retained control (via release rights), that Placid took on additional duties beyond the 1962 lease, and that rent passed only through Cockrell—did not persuade. Read holistically, the rights and obligations were shared equally and tracked co-ownership, not a sublessor-sublessee relationship with vertical rent and asymmetric control.

3. Privity and the Executory-Contract Consequence

   Because the 1965 instrument effected an assignment, Placid stood as a direct lessee of the Zenors under an unexpired lease—an executory contract. The 1962 lease expressly contemplated assignment and sublease “in whole or in part” without consent, ensuring that successors and assigns would be bound. Placid could not credibly claim surprise at being in privity with the landowners; the deal documents not only identified the lease but explicitly subjected Placid to it.

   As a counterparty to an executory contract, the Zenors were entitled to actual notice of plan provisions, bar dates, and confirmation—particularly significant because Placid’s plan provided that all executory contracts not rejected as of the confirmation date were deemed assumed and included cure and rejection-damage procedures. The Fifth Circuit, applying National Gypsum, held that constructive notice was insufficient for these known counterparties. Placid concededly did not serve the Zenors (though it did serve Cockrell Oil Corporation and Pennzoil, reflecting its awareness of leasehold stakeholders). That failure deprived the Zenors of due process and prevented the discharge from cutting off their claims.

4. Disposition

   The court affirmed: Avalon’s claims, as successor to the Zenors, were not discharged by the 1988 confirmation order. The Fifth Circuit did not need to decide alternative issues such as the precise accrual date of the contamination claims; the lack of notice was dispositive.

Impact and Practical Significance

Though unpublished and nonprecedential under Fifth Circuit Rule 47.5, the decision is a clear, persuasive application of National Gypsum to legacy oilfield liabilities intertwined with Louisiana lease law. Its practical implications are substantial:

• Bankruptcy Notice Practices
  • Debtors with unexpired leases must identify and serve the titled landowners/lessors—not merely their co-lessees or sublessees—if the debtor holds an assigned lease interest. “Assume-by-default” plan provisions are ineffective against unserved contract counterparties.
  • Schedules and service lists should be cross-checked against public records for lessors of immovable property to avoid downstream discharge challenges decades later.
• Oilfield Legacy Claims
  • Landowners in Louisiana bringing contamination or restoration claims may overcome a debtor’s discharge defense where the debtor was a co-lessee by assignment and failed to provide actual notice in the bankruptcy case. The opinion offers a roadmap for establishing privity through the assignment-vs-sublease analysis.
• Contract Drafting and Due Diligence
  • Parties intending a sublease should structure the arrangement with classic sublease hallmarks (e.g., independent rental to the sublessor, asymmetric reversion/control, reserved overrides), and avoid language that expressly assumes the original lease’s covenants.
  • Conversely, where the intent is co-ownership by assignment, symmetry of rights and obligations and proportionate rent allocation will support privity findings—triggering bankruptcy notice obligations.
• Litigation Strategy
  • For debtors asserting a discharge defense, the threshold inquiry should be: Was the claimant a known counterparty to an executory contract? If so, can the debtor prove actual, formal notice of the plan, bar dates, and confirmation? Absent proof, the discharge defense is vulnerable.
  • For claimants, the existence of an assignment—even of a partial undivided interest—can establish privity and defeat a discharge argument where service was deficient.

Complex Concepts Simplified

• Executory Contract

  A contract where both sides still have significant performance remaining (e.g., an unexpired lease requiring the lessee to pay rent and comply with covenants, and the lessor to provide possession). In Chapter 11, executory contracts must be either assumed (kept) or rejected (breached, with damages claims).

• Actual vs. Constructive Notice

  Actual notice means formal service of bankruptcy papers (e.g., bar-date notice, plan, confirmation) to a known creditor or counterparty. Constructive notice (publication or general knowledge) does not suffice for known parties whose rights will be affected by plan provisions like assumption/rejection or discharge.

• Assignment vs. Sublease (Louisiana)

  An assignment transfers the lessee’s interest (in whole or in part) to the assignee, creating privity between assignee and original lessor; the assignee typically assumes lease obligations. A sublease creates a separate derivative lease between sublessor and sublessee; there is no privity between sublessee and original lessor. Indicators of a sublease include independent rent to the sublessor, reserved overriding interest, and retained asymmetric control or reversion.

• Privity of Contract

  A direct contractual relationship between parties, allowing them to enforce obligations against each other. Here, assignment of a partial undivided lease interest made Placid a co-lessee directly in privity with the landowner lessor.

• Bar Date and Discharge Injunction

  The bar date is the deadline for filing claims in bankruptcy. The discharge injunction, entered at confirmation, prevents collection of discharged prepetition claims. Neither binds a known creditor/counterparty who did not receive required actual notice.

• Assumption and Cure

  If a debtor assumes an executory contract, it must cure existing defaults and provide adequate assurance of future performance. Plans often include “assume all not rejected” clauses, but assumption that affects counterparties still requires notice and an opportunity to assert cure claims.

Key Passages and Their Significance

• “The 1965 Agreement is an assignment…consistent with joint ownership.”

  This crystallizes the core classification: equal rights and pro rata rent obligations signal assignment/co-ownership, not a vertical sublease structure.

• “Placid agreed to assume the covenants and obligations of the [1962] Surface Lease…a payment mechanism consistent with an assumption.”

  Express assumption is powerful evidence of assignment under Louisiana law; the rent-transmission via Cockrell does not negate privity when obligations are borne proportionally.

• “Because [the Zenors] and Placid were parties to an executory contract…Placid was obligated to provide…actual notice…[it] did not…[Avalon’s] claims were not discharged.”

  This is the dispositive bankruptcy holding: executory-contract counterparties require actual notice; the discharge does not bind unserved parties.

Practice Pointers

• For Debtors:
  • Audit all unexpired leases for which the debtor holds any assigned interest, including partial undivided interests. Serve title owners/lessors with bar-date and plan notices, and document service meticulously.
  • Avoid reliance on “assumption by silence” clauses without individualized service. Where cure is required, affirmatively notice counterparties of cure amounts and objection deadlines.
• For Landowners:
  • When facing a discharge defense, examine chain-of-title and lease assignments to establish privity. If you or your predecessors were never served during the debtor’s bankruptcy, argue lack of due-process notice under National Gypsum.
• For Drafters of Lease Transfers:
  • If the goal is a sublease, avoid express assumption of the original lease’s covenants by the transferee, and consider independent rent to the sublessor or reserved override. If the goal is co-lessee status, explicitly share rights and obligations proportionally to ownership and include symmetric rights of first refusal.

Conclusion

Placid Oil v. Avalon Farms reinforces a straightforward but critical rule at the intersection of state property law and federal bankruptcy procedure: when a debtor holds a leasehold by assignment—even a partial undivided interest—the debtor remains in privity with the lessor. That privity makes the lessor a counterparty to an executory contract and entitles the lessor to actual, formal bankruptcy notice of bar dates, plan provisions, and confirmation. A debtor’s failure to provide such notice prevents its discharge from cutting off the lessor’s claims, even decades later.

The decision is a cautionary tale for reorganized debtors with historical oilfield operations in Louisiana and beyond: the discharge is only as strong as your notice file. It also offers doctrinal clarity on the assignment-sublease boundary under Louisiana law, emphasizing substance over labels, the symmetry of rights and obligations, and assumption of covenants as lodestars for classification. While unpublished, the opinion provides a cogent template for courts and practitioners confronting legacy environmental claims and bankruptcy discharge defenses hinging on executory-contract notice.