Bankruptcy in the Oil PatchOCAPL, Monday, Nov. 2, 2015

Melissa R. GardnerAttorneyPhillips Murrah, PCmrgardner@phillipsmurrah.com

Types of Bankruptcy

Chapter 7 Chapter 11

• Trustee appointed to replace management in order to liquidate property

• Debtor remains in possession of company and management stays in place (debtor-in-possession)

• Business ceases • Preserving value of business

• Court supervision of distribution of proceeds and liquidation of assets

• Court supervised reorganization of on-going business

• No restructuring obligation • Once Court approves plan, a company emerges

• Formula for payment distribution

• Forum for negotiation, no formula

• 120 days to establish plan

Automatic Stay Automatic at the time of the filing

Prohibits some business activities Demanding payment Acceleration of debt Enforcement of dilution or squeeze out remedies Filing or continuing litigation Foreclosing on property Possessing collateral

Doesn’t prevent actions against guarantors

Can be lifted on motion of the Court

There are some exceptions to the stay, but not many that would apply to oil and gas companies.

Automatic Stay and OGLs

Courts have generally found that an automatic stay will not preclude the termination of an OGL upon its own terms.

Royalty owners are unsecured creditors. However, the Court will often allow royalty payment to maintain the OGL, as a valued asset.

Process

In Chapter 7 proceedings, the Court sets a date, all claims must be filed before then.

In Chapter 11 proceedings, the debtor creates a schedule of their debt, it is a creditor’s obligation to make sure that its debt is correctly represented there. Correct claims DO NOT guarantee recovery, but recovery is traditionally impossible without a claim.

Claims are allowed unless objected to. In the event of an objection, claims don’t move forward until

there is a resolution.

Traditionally recover a pro rata distribution.

Process

Debtor formulates its plan to exist after the process.

Creditors and interest holders may vote on the plan.

Court must confirm. Often only considers the Debtor’s plan.

Claims

Secured claims Limited to the value of collateral securing the claim Must be perfected prior to the petition

Administrative claims Reasonable and necessary to preserve the

bankruptcy estate

Unsecured claims Amount can be negotiated

Filing a Claim

Filing Chapter 7 – Creditor must file Chapter 11 – Doesn’t have to file, if on schedule, but

might be best to as it serves as proof of claim

Timing Chapter 7 – Within 90 days of creditor meeting Chapter 11 – Fixed by the Court

Critical Vendor Payments

You can avoid the stay in limited cases, under the necessity of payment doctrine. It’s critical to continued business Debtor will be harmed if payment not made There is no practical alternative

Rare to grant this exception.

Reclamation Rights

Trustee can call back business activity that has occurred prior to the filing of the petition. Goods delivered within 45 days may be reclaimed by

a written demand. If no letter, the vendor is granted an administrative claim.

Reclamation goods are subject to priority treatment.

Contested Matters

Within the bankruptcy case

Often involves discovery and testimony

Examples Motions to lift automatic stay Claim objections Motions addressing executory contracts Motions to sell property Confirmation of a Plan of Reorganization

Adversary Proceedings

Rule 7001 Recovery of money or property Determining the validity of a lien Approval of property Challenging a discharge Revoking a confirmation order Determining the dischargeability of debt Obtaining an injunction Subordinating any allowed claim Obtaining a declaratory judgment Determining a removed claim or cause of action

Preference

Enables trustee or debtor in possession to pull back property and redistribute it to other creditors according to the statutory priority.

To prevent race to the courthouse.

Preferences can be voided if they are 1) a transfer 2) of an interest in the debtor’s property 3) on account of an antecedent debt 4) made within the preference period 5) while the debtor was insolvent 6) to or for the benefit of the creditor 7) that permits the creditor to receive more than it would under chapter 7 had the transfer not been made.

Fraudulent Transfer

Within and outside of bankruptcy law.

Three types: Actual Fraud Constructive Fraud Partnership Transfers

Actual Fraud

Must prove intent to avoid payments and interfere with normal collection processes.

Evidence The inadequacy or absence of consideration Relationship between parties Use of property Financial condition of parties Pattern

Constructive Fraud

Must prove that less than value; the company was insolvent or nearly so. Transferring to insiders qualifies

Oil and Gas Specifics

Joint Operating Agreements Executory contracts – not enforceable against

bankrupting party Operator usually agrees to plan Non-Operators often reject the plan

Eliminate non-consent penalties Reduce threshold for Operator’s negligence Allow for a more favorable JOA

Non-bankruptcy parties still have to perform their obligations

Oil and Gas Specifics

Farm-Out Agreements Interest in liquid or gaseous hydrocarbons that the

debtor has agreed to transfer are excluded from bankruptcy party’s property.

Production Payments Considered an interest in real property.

Plugging obligations Up to the state to determine if they are still

enforceable on a case by case basis.

Oil and Gas Specifics

Contracts Cannot generally be terminated if value to bankrupting party

can be proven.

Title Standards – Chapter 7 Prior to Oct. 1, 1979 and bankruptcy property is sold, the Order

Approving the Trustee should be filed of record. You must also have the petition to sell, notice to creditors, affidavit of notice, Order to Sell, Report of Sale, and an Order Confirming Sale.

After Oct. 1, 1979 and bankruptcy property is sold, you must have the Petition and Order; schedule of real property; qualifications of Trustee; Order Approving; and the Conveyance, which should be filed of record.

Oil and Gas Specifics

Title Standards – Chapter 11 The confirmed Plan and the approved Disclosure

Agreements must be provided.

How to avoid being cut out

Obtain pre-payment whenever possible.

Obtain deposits.

Have financial relationships guaranteed by a third party.

Avoid changing payment terms.

Become active in the Unsecured Creditors’ Committee.

Questions?

Please limit these to questions wherein my answers will sound intelligent. These include: Oklahoma State Football Thunder Basketball Rowing Title Bankruptcy