Bankruptcy in the Oil Patch
OCAPL, Monday, Nov. 2, 2015
Melissa R. Gardner
Attorney
Phillips Murrah, PC
mrgardner@phillipsmurrah.com
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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
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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
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Can be lifted on motion of the Court
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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:
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 Title
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Bankruptcy