buckingham35

UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS

EASTERN DIVISION

__________________________________________ In re: ) ) ) Chapter 11 BUCKINGHAM OIL INTERESTS, INC. ) ) Case No.: 15-13441 (JNF) ) Debtor. ) __________________________________________) MOTION OF CHAPTER 11 TRUSTEE FOR AN ORDER (A) AUTHORIZING SALE OF

INTERESTS IN OIL AND GAS PROPERTIES FREE AND CLEAR OF LIENS, CLAIMS, ENCUMBRANCES, AND INTERESTS BY INTERNET AUCTION

MECHANISM; (B) AUTHORIZING ASSUMPTION AND ASSIGNMENT OF CERTAIN EXECUTORY CONTRACTS IN CONNECTION THEREWITH; (C) SCHEDULING A SALE HEARING AND POST-AUCTION HEARING; AND (D) GRANTING OTHER

RELATED RELIEF

Charles A. Dale III, the duly appointed Chapter 11 trustee for the bankruptcy estate of the

above-captioned debtor (the “Trustee”), hereby submits this motion (the “Motion”) for an order

substantially in the form attached hereto as Exhibit A (the “Sale Authorization Order”): (a)

authorizing the Trustee to sell certain interests in oil and gas properties free and clear of liens,

claims, encumbrances, and interests by an internet auction mechanism; (b) authorizing the

assumption and assignment of certain executory contracts in connection therewith; (c)

scheduling a sale hearing on this Motion and scheduling a subsequent post-auction hearing for

purposes of reporting the auction results and entry of an order identifying the winning bidders as

good faith purchasers; and (e) granting related relief.

Notably, the sale process outlined by this Motion does not contemplate the Court holding

a so-called “bid procedures” hearing separate from the sale hearing as is commonly done in

Chapter 11 cases. Rather, and for the reasons explained below, the Trustee respectfully

requests a sale hearing on this Motion in approximately 21 days time (i.e., the week of

Case 15-13441 Doc 35 Filed 09/22/15 Entered 09/22/15 19:47:14 Desc Main Document of 22

- 2 -

October 19-23, 2015), at which time he will seek authority to sell the Debtor’s assets

through the proposed internet mechanism, with any objections to the relief sought herein to

be filed with Court by 4:30 p.m. Eastern time on a day that is at least three (3) business

days prior to the hearing.1 Following such hearing, and if such authority is obtained, the

auction will thereafter be conducted and the parties will return to the Court for a report on the

auction results and for approval of the winning bidders.

In further support of this Motion, the Trustee respectfully states as follows:

Jurisdiction and Venue

1. This Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157 and 1334.

Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The Motion is a core proceeding

pursuant to 28 U.S.C. § 157(b). The statutory predicates for the relief requested herein are

sections 363 and 365 of title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the

“Bankruptcy Code”), Rules 2002 and 6004 of the Federal Rules of Bankruptcy Procedure (the

“Bankruptcy Rules”), and Rule 6004-1 of the Local Bankruptcy Rules for the United States

Bankruptcy Court for the District of Massachusetts (the “Local Rules”).

Background

A. General

2. On September 1, 2015 (the “Petition Date”), Buckingham Oil Interests, Inc. (the

“Debtor”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code (the

“Chapter 11 Case”) in this Court.

1 While he is not seeking a bid procedures hearing, the Trustee would welcome a Status Conference prior to the end of October should the Court desire one.


- 3 -

3. On the Petition Date, the United States Trustee (the “U.S. Trustee”) moved, with the

assent of the Debtor, for an order directing the appointment of a Chapter 11 trustee. [Docket No.

2].

4. On September 1, 2015, the Court entered an order authorizing the United States

Trustee to appoint a Chapter 11 trustee to conduct the Debtor’s business. [Docket No. 4].

5. On September 1, 2015, the U.S. Trustee filed the Application for and Certificate of

Appointment of Chapter 11 Trustee, requesting the Court’s approval of the appointment of

Charles A. Dale III as Chapter 11 Trustee (the “Certificate of Appointment”). [Docket No. 5].

6. On September 15, 2015, the Court entered an order approving the appointment of the

Chapter 11 Trustee. [Docket No. 19].

B. The Debtor’s Business and a Description Oil and Gas Assets

7. The Debtor is in the business of oil and gas exploration and production. The Debtor

was incorporated in Texas, but its headquarters are located in Falmouth, Massachusetts. Since at

least 2005, the Debtor has acquired “working interests” in approximately 100 “prospects,” each

comprised of multiple oil and gas leases and wells in sixty (60) counties and parishes in eleven

(11) different states, including Texas and Louisiana. A map reflecting the locations is attached

hereto as Exhibit B. Each prospect is typically owned by multiple parties and governed by one

or more joint operating agreements or similar contracts. Under each joint operating agreement,

one party (referred to as the “operator”) generally has the exclusive right to conduct operations.

Each operator may drill several wells in an effort to discover commercial quantities of

hydrocarbons. Although the Chapter 11 Trustee has not concluded his review, it appears that the

Debtor owns a working interest in as many as 300 individual wells.


- 4 -

8. A high-level understanding of the various property rights and interests involved in the

oil and gas industry is necessary for considering this Motion. As the Seventh Circuit Court of

Appeals has stated: “In attempting to convert dreams of black gold to hard cash, aspiring

capitalists split the property interest in oil into more fragments than the atom or the rainbow.”

Jones v. Salem Nat’l Bank (In re Fallop), 6 F.3d 422, 424 (7th Cir. 1993) (internal citations

omitted).

9. A landowner may sever the right to oil, gas, and other minerals from those to the

surface of his land, among other things, by grant or by reservation in a deed. Once severed, the

right to minerals is referred to as the “mineral estate” and the remainder is the “surface estate.”

The mineral estate generally remains a real property interest of equal dignity to that of the

surface estate and, as a general rule, all of the common law and statutory principles applicable to

real property, such as conveyancing, recordation, and the statute of frauds are equally applicable.

In fact, in Texas (where the majority of the Debtor’s wells are located), the mineral estate is

considered dominant over the surface estate, allowing the mineral rights owner to use as much of

the surface as is reasonably necessary to explore, drill, and produce the minerals underlying the

land, in some cases subject to pre-existing uses.

10. Although the mineral rights owner may explore and drill for himself, it is far more

common for him to “lease” this right to another entity. Simply put, the mineral lease is a grant

by the mineral owner (the lessor) to another (the lessee, or more typically a joint enterprise of

several lessees) authorizing the lessee to explore, drill for, and produce oil, gas, and other

hydrocarbons at its own cost and risk, in exchange for consideration, most importantly a

fractional royalty on any oil obtained from the wells drilled. The lease is granted for a primary

term (typically one to five years) during which the lessee has the right to attempt to drill and

obtain production in “commercial” quantities and, if it does so, to produce the oil and/or gas for


- 5 -

as long thereafter as production is maintained, i.e., to produce the well until oil and/or gas are no

longer produced in “commercial” quantities. Of the Debtor’s 100 prospects, some are already

producing oil and gas in commercial quantities while others are still in the exploration stage (and

some have been determined to be non-commercial or “dry holes”).

11. Although the traditional nomenclature dubs this arrangement a “lease,” Texas and

many other oil-producing states treat a mineral lease as a conveyance of a real property interest,

such as a deed, creating a fee simple determinable estate in the lessee. If oil is found though

such exploration, the lease can then be maintained past the primary term (into the “secondary

term”) by continuous “commercial” production of oil or gas from the well. The end of the

primary term (without production of oil) or the end of production during the secondary term is

the “determinable” event of the fee simple that terminates the lease. In other words, the lease

may continue until all the wells drilled on the lease (or on lands pooled or unitized with the

lease) are no longer commercial, at which point the interest in the mineral estate reverts back to

the lessor.2 The leases comprising Debtor’s 100 prospects are in various stages of their

respective terms.

12. The person who holds the leasehold interest initially possesses the “working interest”3

because he is the person entitled to “work” the land, i.e., drill and develop the minerals. The

working interest owner is also liable for all of the costs of drilling, production, and operations.

Just as the surface of the land can be bifurcated from the minerals underneath it, the working

interest can, and frequently is, severed from the mineral owner, and thereafter, the 2 As a rule, actual production of oil or gas is necessary to maintain a lease, and the production must be in “paying quantities,” i.e., an amount sufficient to exceed the continued cost of operations, or at least enough that a reasonable operator would continue operating the well in anticipation of future profitability. A “temporary” cessation of production will not terminate the lease. Whether the cessation is temporary is determined by a combination of factors such as the reason for the stoppage, the duration, and the lessee’s diligence in restoring production.

3 “Working interest,” although used frequently as though it refers to a type of real property right, is primarily an accounting term that refers to a cost-bearing interest.


- 6 -

recipient/holder is referred to as the “working interest owner.” Often, several companies will

join together in being the working interest owner so that they can share the risks and costs of a

particular project or pool their respective leasehold interests to meet drilling spacing

requirements or achieve economies of scale. In this situation, the working interest is often

fractionalized to reflect each party’s percentage of participation. The Debtor’s primary asset is

its ownership of working interests in over 100 prospects, many of which contain multiple leases

and wells. The Debtor’s percentage working interest various by prospect and, in some cases, by

well. As a general rule, its interest in projects operated by third-parties was around 20% or less

whereas those operated by its affiliate Paint Rock Operating LLC (“Paint Rock”) was around

40%.

13. When the working interest is held among several parties, the owners will usually

execute an agreement to memorialize the rights and obligations of each. These so-called “joint

operating agreements” (and other similar agreements) require each working interest owner to

contribute capital toward the ongoing costs of operations (including drilling). As of the Petition

Date, the Debtor was a party to numerous joint operating and other agreements relative to its 100

prospects. If the Debtor were to sell its working interest in a particular prospect, the conveyance

of that working interest would necessarily remain subject to any associated joint operating

agreement (i.e., it “runs with the land”) and any outstanding obligations associated therewith

would need to be assumed and/or cured at closing.

14. The operator is the company (generally designated by the relevant joint operating

agreement) that actually drills and operates the well. That can be one of the working interest

holders or it can be a “contract operator” hired by the group for a fee to conduct operations on its

behalf. Notably, the Debtor is not an operator. Rather, its prospects are operated by an

unaffiliated third-party or by its affiliate, Paint Rock.


- 7 -

15. The drilling and other costs are communicated to the working interest owners by the

operator. These requests for additional funds to keep drilling over the period of the lease are

commonly called “capital calls.” The working interest owners may, in turn, satisfy their

respective share of these capital calls by looking to their own investors for funding.4 The

Trustee is in the process of quantifying all of the outstanding capital calls for the Debtor’s

prospects, and the Debtor’s respective share of liability on each. It is believed, however, that as

of the Petition Date, the Debtor was subject to dozens of capital calls, which in the aggregate

require over $1.5 million in additional funding. Upon the sale of the Debtor’s working interest in

a particular prospect, any associated capital calls would need to be satisfied.

16. Based on his investigation to-date, the Trustee believes the following table summarizes

the Debtor’s holdings:

Type of Interest Debtor’s Holdings as of Petition Date

Surface Estate Holder (i.e., owner of top of the land)

No

Mineral Estate Holder/Mineral Lessor (i.e., owner of underneath the land)

No

Mineral Lessee (i.e., initially holds the right to explore and drill underneath the land)

No, but certain of the Debtor’s affiliates may hold the mineral lease for certain prospects.

Working Interest Owner (i.e., assigned the right from the mineral lessee to explore and drill underneath the land)

Yes, the Debtor’s percentage ownership varies by prospect, but is typically anywhere between 10-40%.

Operator No, but the Debtor’s affiliate, Paint Rock, operates some of the prospects in which it has a working interest

4 Prior to the Petition Date, certain parties entered into “participation agreements” with the Debtor with respect to certain of the Debtor’s prospects. The Debtor then looked to such parties for the funding necessary to satisfy the associated capital calls on those prospects.


- 8 -

17. Before the working interest owners such as the Debtor may enjoy any of the profits

from their efforts, any number of other parties may be entitled to share in the proceeds, namely

through a royalty interest. A royalty interest is a nonpossessory right to a share of the oil’s value

free of the cost of production. A royalty interest in minerals, unlike royalties under contracts in

other industries, is generally a real property interest subject to all of the same rules of

conveyancing and recordation as any other real property interest. Most commonly, the lessor of

the mineral rights reserves a royalty for himself under the mineral lease (a “lessor’s royalty”).

The lessor’s royalty is paid “off the top” starting with the first barrel out of the ground. As a

result, the royalty value is determined at the well and before the product is gathered, treated, and

transported to market.

18. Overriding royalties are also common. These are royalty interests carved out of a

working interest, i.e., a royalty which all or some of the working interest owners must pay out of

their share of the prospect’s production. Like a lessor’s royalty, overriding royalties are

generally free of costs, meaning the holder does not contribute to the cost of actually getting the

oil out of the ground. Often, an overriding royalty is granted to someone (commonly a landman

or geologist) as a fee or additional consideration for a service provided to one or all of the

working interest owners.

19. Finally, a working interest owner may owe a net profits interest to another entity. A

net profits interest is a type of overriding royalty interest which is payable only after all costs of

production are deducted. Net profits interests are more likely to be granted on a specific well or

group of wells, rather than on an entire prospect or leasehold.

20. As of the Petition Date, it is believed that certain of the Debtor’s holdings were

burdened by royalties, overriding royalties, and/or net profits interests.


- 9 -

C. Other Encumbrances

21. In addition to the joint operating agreements (and pending cash calls thereunder),

royalties, overriding royalties, and net profits interests, certain of the Debtor’s working interests

may be subject to mineral liens or similar type mechanics liens asserted by oilfield service

providers.

22. Certain prospects may be subject to preferential rights of purchase, rights of first

refusal, rights of first negotiations, consents or permissions to assign, approval rights, or similar

rights by nature of joint operating and other agreements between third parties and the Debtor

(collectively, “Preferential Rights”).

23. Additionally, First Financial Bank, N.A. (“First Financial”) asserts a claim against the

Debtor in the amount of $1,290.530.87 as of the Petition Date on account of a prepetition loan to

the Debtor, including $1,272,655.10 of outstanding principal, $13,150.77 of accrued interest, and

$4,725.00 of late fees. First Financial asserts that its claim is secured by a valid, perfected, and

non-avoidable first-priority lien upon certain oil and gas properties in Menard County, Texas,

along with equipment, production contracts, severed hydrocarbons, and other assets related

thereto, including the products and proceeds thereon, all as more particularly described in that

certain Deed of Trust and Security Agreement (Oil and Gas) by and among the Debtor as

grantor, the Bank as beneficiary, and two individuals as trustees executed November 19, 2014.

24. Among other creditors and parties-in-interest, the Trustee intends to serve notice of

this Motion, to the extent ascertainable in its records, on any: (i) mineral lessors, (ii) mineral

lessees, (iii) co-working interest owners (including those subject to joint operating agreements

with the Debtor and parties from whom the Debtor received it interests, even if those interests

are not governed by a joint operating agreement), (iv) operators, (v) holders of royalties,

overriding royalties, or net profits interests, (vi) oilfield service providers contracting with Paint


- 10 -

Rock and other third party operators, (vii) First Financial, and (viii) investors who may have

entered into participation or other agreements with the Debtor or an affiliate to invest capital in

the Debtor’s oil and gas prospects.

Relief Requested

25. Although the Trustee continues to analyze the Debtor’s affairs and consider all

possible restructuring alternatives, he has decided, as a matter of his business judgment, to

initiate a sale process that will efficiently monetize these assets in manner that maximizes their

value to the bankruptcy estate. Based on, among other things, the numerous pending capital calls

on the Debtor’s prospects, the estate’s inability to satisfy capital calls based on existing liquidity

constraints,5 and the Debtor’s general lack of institutional knowledge resulting from Darryl

Buckingham’s death, the Trustee believes that time is of the essence and that he move quickly to

be in a position to consummate sales of the Debtor’s working interests.6

26. After consultation with colleagues that regularly represent clients in the oil and gas

industry, the Trustee has selected EnergyNet.com to assist him with the sale of the Debtor’s oil

and gas interests. Contemporaneously with the filing of this Motion, the Trustee is filing an

application to employ EnergyNet as his sales broker and consultant. As discussed further in its

retention application, EnergyNet is a widely-known, reputable, and professional firm that

specializes in oil and gas marketing and divestitures. EnergyNet conducts efficient oil and gas

auctions, sealed bids, and negotiated sale services that facilitate transactions of producing

working interests (operated and non-operated), overrides, royalties, mineral interests, and non- 5 The Trustee is currently investigating the cause(s) of the Debtor’s liquidity crisis. 6 The Trustee has decided to initiate a sale process that will efficiently monetize and transfer these assets to buyers who can provide such ongoing financial support, provided that a reorganization plan does not materialize in the interim. Based on initial discussions with several prepetition investors, there appears to be significant interest in a reorganization plan that would be supported by additional capital investment from such investors. The Trustee is actively pursuing these discussions. If a plan materializes from these discussions, the Trustee may elect not to sell certain assets pursuant to this Motion.


- 11 -

producing leaseholds. EnergyNet is unique in its approach, as the bulk of its sales solicitations

and auctions are conducted online (similar to E-bay). EnergyNet’s technological reach presents

an oil and gas property portfolio to thousands of potential buyers with multi-billion-dollar buying

power and allows buyers the flexibility and convenience of conducting their acquisition and

divestment activities online. In light of the circumstances leading to the filing of this Chapter 11

Case, the current liquidity crisis facing the estate, and the fact that no prior marketing of the

Debtor’s oil and gas assets has taken place, the Trustee believes the use of EnergyNet’s internet

auction mechanism is in the best interests of the estate.

27. By this Motion, and as discussed further herein, the Trustee respectfully requests entry

of the proposed Sale Authorization Order which shall:

a. authorize the Trustee to sell the Debtor’s oil and gas interests free and clear of all liens, claims, encumbrances pursuant to the sale process described below;

b. authorizing the assumption and assignment of certain designated executory contracts in connection with the proposed sale(s), particularly the joint operating agreements and any other similar agreements concerning exploration and well operations;

c. setting a sale hearing at which the Trustee will seek authority to sell the Debtor’s assets through the EnergyNet internet auction mechanism;

d. setting a post-auction hearing at which the Trustee can report the result(s) of the EnergyNet auction(s) and present an order identifying the winning bidders and seeking to have each qualified as good faith purchasers; and

e. granting other related relief.

The Sale Process

28. The Trustee’s proposed sale process is as follows:

A. General Description of Terms

29. In light of the circumstances of this case, the Debtor’s oil and gas assets will be sold

“AS IS, WHERE IS” to the highest bidder pursuant to the EnergyNet process outlined below.


- 12 -

30. Joint operating agreements and similar executory contracts relating to exploration and

production operations at the Debtor’s existing prospects shall be assumed and assigned to the

winning bidder(s) with any cure amounts to be paid from the respective sale proceeds.

Otherwise, the sales shall be “free and clear” to the broadest extent possible under section 363(f)

of the Bankruptcy Code. Any party asserting a lien, claim, encumbrance, or other interest

(including Preferential Rights) in the oil and gas assets that opposes such relief must object to

this Motion or otherwise be deemed to consent to the relief herein and any valid lien, claim,

encumbrance, or other interest shall attach to the respective proceeds.

B. Hearing Date and Objection Deadline

31. In accordance with MLBR 6004-1(c)(4), the Trustee respectfully seeks a hearing on

this Motion during the week of October 19-23, 2015 (the “Sale Hearing”), with any objections

to the relief sought herein to be filed with Court by 4:30 p.m. Eastern time on a day that is at

least three (3) business days prior to the hearing (the “Objection Deadline”).7 Once the Sale

Hearing and Objection Deadline are set by the Clerk, the Trustee shall include such dates on a

notice of sale, substantially in the form attached hereto as Exhibit C, the “Notice of Sale,” which

shall then be served in accordance with Bankruptcy Rules 2002 and 6004, and MLBR 6004-

1(c)(5).8 Additionally, EnergyNet shall transmit the Notice of Sale to its network of registered

users and potential bidders.

C. The EnergyNet Auction Process and the Qualification of Bidders

32. Contemporaneously with service of the Notice of Sale, the Trustee will begin supplying

EnergyNet with information to populate data rooms concerning the Debtor’s oil and gas assets.

7 In light of the internet auction mechanism proposed hereby, there is no need for the Clerk to assign a date for making higher offers as contemplated under MLBR 6004-1(c)(4). 8 To the extent that any objections are not resolved prior to the Sale Hearing, the Trustee may file response(s) thereto.


- 13 -

33. Prior to opening the data rooms to potential bidders, the Trustee and his professionals

will need to decide: (i) whether to separately market and sell each prospect individually or to

group certain prospects in “lots” depending upon locations, cross-contractual obligations, or

other circumstances; (ii) whether to implement an open cry type auction process (i.e., where

bidders are aware of the current highest bid throughout the bidding period) or a sealed bid

process for each asset or asset lot; and (iii) whether to implement minimum bid requirements or

“no reserve” bidding.9 The Trustee respectfully requests that he be authorized to make these

decisions in his business judgment. Once such decisions are made, and the data rooms are

complete (approximately 2 weeks from service of the Sale Notice), EnergyNet shall notify its

network of registered users and potential bidders of the proposed sale.

34. Immediately after entry of the Sale Authorization Order, EnergyNet shall “open” the

bidding process and notify its network of registered users and potential bidders that they shall

have seven (7) calendar days to submit bids for the assets (provided that the bid deadline is on a

business day other than Monday). Under EnergyNet’s standard procedure, the winning bidder

has two (2) full banking days to deliver the purchase price to EnergyNet’s escrow bank (Wells

Fargo Bank of Amarillo, Texas).

35. Each of the bidding opportunities for the Debtor’s oil and gas assets will be accessible

at https://www.energynet.com/buckingham. Any party potentially interest in submitting a bid for

any of the Debtor’s oil and gas assets that is not already a registered user of the EnergyNet

platform must first complete the registration form at https://www.energynet.com/bidder_reg.pl.

(the “Registration Webpage”). As further set forth on the Registration Webpage, to participate in

bidding, interested parties will have to (i) execute EnergyNet’s “Buyer’s Agreement” and (ii)

9 It is likely that the Trustee will implement minimum bid requirements sufficient to cover applicable cure amounts, including pending cash calls outstanding under joint operating agreements.


https://www.energynet.com/buckingham

https://www.energynet.com/bidder_reg.pl

- 14 -

submit bank contact information so that EnergyNet can (a) verify the party’s financial ability to

consummate similar transactions and (b) establish the party’s “bidding allowance” (i.e., the

maximum amount EnergyNet determines the party can bid at auction(s) based on EnergyNet’s

verification of banking information).

36. EnergyNet’s form “Buyer’s Agreement” which concerns the EnergyNet bid process

(but is not the ultimate operative sale/conveyance document), as modified to address the

circumstances of this proposed sale, is attached hereto as Exhibit D.10 The specific bidding

procedures for each asset or assets lots will be set forth on separate “Property Information Page”

accessible from https://www.energynet.com/buckingham. The Trustee represents that any such

procedures will be substantially consistent with those typically implemented by EnergyNet in

similar circumstances and, thus, shall be familiar to the vast majority potential bidders. The

Trustee respectfully submits that the foregoing satisfies the requirements of MLBR 6004-

1(e)(2)(A)(v). By this Motion, the Trustee requests authority to comply with these procedures.

D. Assumption and Assignment of Certain Executory Contracts

37. Generally speaking, joint operating agreements and similar contracts relating to

ongoing exploration and development operations will be assumed and assigned to winning

bidders with any cure amount to be paid from the sale proceeds of the respective prospect.

Although the Notice of Sale will set forth this intention, the particular executory contracts to be

assumed and assigned along with the proposed cure amount shall be set forth in a notice of

assumption and assignment (the “Assignment Notice”) to be filed and served on all the

respective counterparties by no later than October 6, 2015. Any objection based on the

10 The form Buyer’s Agreement remains subject to further review and material revision by the Trustee and his professionals.


https://www.energynet.com/buckingham

- 15 -

proposed cure amounts, adequate assurance of future performance, or otherwise must be filed

with the Court by no later than the Objection Deadline.

E. Good Faith Purchaser Finding Hearing

38. Based on the foregoing, the Trustee is hopeful that the EnergyNet bidding process shall

conclude by no later than October 29, 2015. Therefore, the Trustee requests that the Court hold a

post-auction hearing on October 30, 2015 where the Trustee can report the results of the bidding,

submit an order identifying the winning bidders, and ask for a finding for each bidder thereby

conferring good faith purchaser protections afforded under section 363(m) of the Bankruptcy

Code (the “Good Faith Purchaser Order”).

F. Closing of Sales

39. Immediately upon entry of the Good Faith Purchase Order, the Trustee shall proceed

with closing the sales through the execution and delivery of the appropriate conveyance

documents to the winning bidders, at which time EnergyNet’s escrow bank shall release the

purchase price to EnergyNet for disbursement to the Trustee less EnergyNet’s commission and

other payments as directed by the Trustee, i.e., cure amounts. By this Motion, the Trustee

requests authority to consummate the sales to the winning bidders (as determined by the

EnergyNet bidding process) and, subject to the terms of any order approving EnergyNet’s

employment, pay EnergyNet’s commission in connection with such transactions.

Basis for Relief

A. The Proposed Sales are Within the Trustee’s Sound Business Judgment

40. Section 363(b)(1) of the Bankruptcy Code provides that “[t]he trustee, after notice and

a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the

estate.” 11 U.S.C. § 363(b)(1). Moreover, section 105(a) of the Bankruptcy Code provides that


- 16 -

bankruptcy courts “may issue any order, process, or judgment that is necessary or appropriate to

carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a).

41. A sale of a debtor’s assets should be authorized pursuant to section 363 of the

Bankruptcy Code if a sound business purpose exists for doing so. In re Aerovox, 269 B.R. 74,

80 (Bankr. D. Mass. 2001); see also In re Martin, 91 F.3d 389, 395 (3d Cir. 1996); In re Lionel

Corp., 722 F.2d 1063, 1071-72 (2d Cir. 1983).

42. A trustee’s business decision should be approved by the court unless it is shown to be

so manifestly unreasonable that it could not be based upon sound business judgment, but only on

bad faith, or whim or caprice. In re Cadkey Corp., 317 B.R. 19, 22-23 (D. Mass. 2004); In re

Aerovox, Inc., 269 B.R. at 80 (citing In re Logical Software, 66 B.R. 683, 686 (Bankr. D. Mass.

1986)). A trustee is often obliged to make difficult business decisions that may later be open to

serious criticism by obstreperous creditors. DiStefano v. Stern (In re J.F.D. Enters., Inc.), 223

B.R. 610, 625 (Bankr. D. Mass. 1998) (citing Mosser v. Darrow, 341 U.S. 267, 273-74 (1951)).

Nevertheless, such decisions are entitled to “great judicial deference.” In re WPRV-TV, Inc.,

143 B.R. 315, 319 (D.P.R. 1991), vacated on other grounds, 165 B.R. 1 (D.P.R. 1992); see also

In re Thinking Machs. Corp., 182 B.R. 365, 368 (D. Mass. 1995) (emphasizing “the high degree

of deference usually afforded purely economic decisions of trustees”), rev’d on other grounds,

67 F.3d 1021 (1st Cir. 1995). In considering approval of a trustee’s business decision, the court

does not act as an arbiter of disputes between creditors and the estate but as an “overseer of the

wisdom with which the bankruptcy estate’s property is being managed by the trustee or debtor-

in-possession.” In re Aerovox, Inc., 269 B.R. at 80 (quoting In re Orion Pictures Corp., 4 F.3d

1095, 1099 (2d Cir. 1993)).

43. Courts have applied various factors in determining whether a sound business

justification exists, including: (i) whether a sound business reason exists for the proposed


http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=164&FindType=Y&ReferencePositionType=S&SerialNum=1986155431&ReferencePosition=686





http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=164&FindType=Y&SerialNum=1994047492



http://www.westlaw.com/Find/Default.wl?rs=++++1.0&vr=2.0&DB=506&FindType=Y&SerialNum=1995204627

- 17 -

transaction; (ii) whether fair and reasonable consideration is provided; (iii) whether the

transaction has been proposed and negotiated in good faith; and (iv) whether adequate and

reasonable notice is provided. See Fulton State Bank v. Schipper (In re Schipper), 933 F.2d.

513, 515 (7th Cir. 1991); see also In re Lionel Corp., 722 F.2d at 1071 (setting forth the “sound

business purpose” test); accord In re Montgomery Ward Holding Corp., 242 B.R. 147, 153-54

(D. Del. 1999). While the Bankruptcy Code does not define “good faith,” the First Circuit has

used the traditional equitable definition of good faith in the context of a good faith purchaser,

requiring that such purchaser provide value in good faith and without knowledge of adverse

claims. Jeremiah v. Richardson, 148 F.3d 17, 23 (1st Cir. 1998).

44. Pursuant to Bankruptcy Rule 2002, twenty-one day notice by mail is sufficient notice of

the proposed use, sale, or lease of property of the estate other than in the ordinary course of

business. Subject to Bankruptcy Rule 6004, the notice of a proposed use, sale, or lease of

property required under Bankruptcy Rule 2002(a)(2) must include the time and place of any

public sale, the terms and conditions of any private sale, and the time fixed for filing objections.

See Fed. R. Bankr. P. 2002(c)(1). Moreover, the notice of a proposed use, sale, or lease of

property is sufficient if it generally describes the property. Id.

45. The Trustee’s proposed sale of the Debtor’s oil and gas assets through the EnergyNet

platform is justified because it will expose the assets to the greatest number of qualified bidders

in the most efficient manner possible. The estate is facing severe liquidity constraints, yet

continues to be subject to cash calls relating to ongoing exploration and production. To the

extent that outstanding cash calls are not satisfied and ongoing operations stall, the estate may be

subject to additional liabilities. The process described herein shall yield maximum purchase

prices and provides good and sufficient notice of the proposed sales. Therefore, the Trustee


- 18 -

submits that he has satisfied the requirements of section 363(b) of the Bankruptcy Code and

Bankruptcy Rules 2002 and 6004.

B. Assumption and Assignment of Executory Contracts

46. By this Motion, the Trustee seeks authority to assume and assign to the winning bidders

the joint operating and similar agreements relating to ongoing exploration and production at the

respective prospects sold. In assuming and assigning these agreements, the Trustee and the

winning bidders shall comply with the provisions of section 365(f)(2) of the Bankruptcy Code.

47. Section 365(f)(2) of the Bankruptcy Code provides, in pertinent part, that:

The trustee may assign an executory contract or unexpired lease of the debtor only if –

(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and

(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

11 U.S.C. § 365(f)(2). Under section 365(a) of the Bankruptcy Code, a trustee, “subject to the

court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.”

11 U.S.C. § 365(a).

48. Section 365(b)(1) of the Bankruptcy Code, in turn, codifies the requirements for

assuming an unexpired lease or executory contract of a debtor. This subsection provides:

(b) (1) If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee –

(A) cures, or provides adequate assurance that the trustee will promptly cure, such default . . . ;

(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and


- 19 -

(C) provides adequate assurance of future performance under such contract or lease.

11 U.S.C. § 365(b)(1).

49. The meaning of “adequate assurance of future performance” depends on the facts and

circumstances of each case, but should be given “practical, pragmatic construction.” EBG

Midtown S. Corp. v. McLaren/Hart Envtl. Eng’g Corp. (In re Sanshoe Worldwide Corp.), 139

B.R. 585, 592 (S.D.N.Y. 1992);see also In re Prime Motor Inns, Inc., 166 B.R. 993, 997 (Bankr.

S.D. Fla. 1994) (“the degree of assurance necessary falls considerably short of an absolute

guaranty”); Carlisle Homes, Inc. v. Azzari (In re Carlisle Homes, Inc.), 103 B.R. 524, 538

(Bankr. D.N.J. 1988).

50. Among other things, adequate assurance may be provided by demonstrating the

assignee’s financial health and experience in managing the type of enterprise or property

assigned. See, e.g., In re Bygaph, Inc., 56 B.R. 596, 605-06 (Bankr. S.D.N.Y. 1986) (adequate

assurance of future performance is present when prospective assignee of lease from debtor has

financial resources and has expressed willingness to devote sufficient funding to business in

order to give it strong likelihood of succeeding).

51. Defaults under any agreement to be assumed and assigned shall be cured from the sale

proceeds relating to the prospect or well covered by such agreement. Moreover, the Trustee

submits that satisfaction of the requirements to become registered bidder on the EnegyNet

platform constitutes evidence sufficient to establish adequate assurance of future performance.

As such, the Trustee satisfies the requirements of section 365 of the Bankruptcy Code with

respect to the proposed assumption and assignments of executory contracts.

52. The Trustee also request that the Court include in the Sale Authorization Order

provisions barring the non-debtor parties to executory contracts, assumed and assigned under


- 20 -

such order, from: (i) asserting any default, loss, or liability against the assignee of such contract

based on any event or circumstance arising prior to the date of assignment; or (ii) objecting to the

assumption and assignment of its contract, unless the non-debtor party timely objects to this

Motion.

D. Authorization for Free and Clear Sale

53. Section 363(f) of the Bankruptcy Code provides that a debtor may sell property “free

and clear of any interest in such property of an entity other than the estate, only if –

(a) applicable non-bankruptcy law permits sale of such property free and clear of such interest;

(b) such entity consents;

(c) such 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;

(d) such interest is in bona fide dispute; or

(e) 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). The Trustee submits that one or more of these elements is present with

respect to the contemplated sales. Accordingly, a sale free and clear of liens, claims, and

interests is permitted under section 363(f)(3) of the Bankruptcy Code.

E. Additional Disclosures as Required Under MLBR 6004-1(e)(2)

54. In accordance with MLBR 6004-1(e)(2), the Trustee hereby represents the following to

the best of his knowledge: (i) neither the Trustee nor any party in interest has any connections

with EnergyNet or any expected bidder; provided, however, as discussed further in the

declaration supporting the Trustee’s application to employ EnergyNet, the Trustee understands

that a significant number of parties in interest, including the Debtor, are registered users of the

EnergyNet platform and, therefore, may be bidders; (ii) the only fees associated with the use of


- 21 -

the proposed internet auction mechanism is the 3.5% commission to be paid to EnergyNet under

their engagement agreement; and (iii) the proposed internet auction mechanism will not provide

auction services or any other services beyond access to its automated on-line services and related

customer support.11

F. Waiver of Stay Imposed by Bankruptcy Rule 6004 and 6006

55. In order to maximize the value of the Debtor’s oil and gas assets, it is essential that the

sales occur on an expedited basis. The financial burden imposed on the Debtor’s operations by

virtue of the estate’s inability to satisfy ongoing cash calls is substantial and will only be rectified

by cure. Accordingly, the Trustee respectfully requests that the Court waive the stays impose by

Bankruptcy Rule 6004(h) and 6006(d) upon entry of the Sale Authorization Order.

Notice

56. In accordance with MLBRs 6004-1(b) and 6004-1(d)(3), upon the Clerk’s scheduling

of the Sale Hearing and the Objection Deadline, this Motion along with the Notice of Sale shall

be served on: (i) counsel to the Debtor; (ii) the Office of the United States Trustee for Region

One; (iii) counsel to First Financial; (iv) any known creditor asserting an alleged lien or security

interest in the Debtor’s property; (v) all parties who have filed appearances in the case; (v); the

twenty (20) largest unsecured creditors; (vi) the Securities and Exchange Commission; and (vii)

any other parties requesting notice. The Notice of Sale shall be served upon all of the Debtor’s

creditors and investors, as well as all known parties identified in paragraphs 21-24 above and

will be mailed electronically to all registered users of the EnergyNet platform. The Trustee

submits that no other or further notice of the relief requested is necessary.

11 The Trustee is aware MLBR 6004-1(d)(6) requires auctioneers to file a bond in an amount fixed by the U.S. Trustee. This bonding requirement appears to be unnecessary in the context of selling oil and gas interests through EnergyNet’s internet auction mechanism since EnergyNet will not be in possession of estate property.


- 22 -

WHEREFORE, the Trustee respectfully request that the Court enter an Order,

substantially in the form attached hereto as Exhibit A: (a) authorizing the Trustee to sell the

Debtor’s interests in oil and gas properties free and clear of liens, claims, encumbrances, and

interests by an internet auction mechanism; (b) authorizing the assumption and assignment of

certain executory contracts in connection therewith; (c) scheduling a sale hearing and a separate

post-auction hearing for purposes of reporting the auction results and entry of an order

identifying the winning bidders as good faith purchasers; and (d) granting other relief as the

Court deems just and appropriate.

DATED: September 22, 2015

Respectfully submitted,

CHARLES A. DALE III, CHAPTER 11 TRUSTEE By his proposed counsel,

/s/ Mackenzie L. Shea Mackenzie L. Shea (BBO No. 666241) David A. Mawhinney (BBO No. 681737) K&L Gates LLP State Street Financial Center One Lincoln Street Boston, Massachusetts 02111 Tel: (617) 261-3100 Fax: (617) 261-3175 E-mail: [email protected] [email protected]

Proposed counsel to the Chapter 11 Trustee


mailto:[email protected]

mailto:[email protected]

buckingham35

Documents

auction hearing

sale hearing

motion of chapter

motion pursuant

authorizing sale of

local bankruptcy rules

certain interests

bankruptcy code