July 23, 2015  | By McCathern Law

by Eric M. Van Horn, July 23, 2015
Originally published in Dallas Bar Association Headnotes

When oil and gas companies file bankruptcy, a variety of important issues arise for creditors, often on short notice, and can require immediate attention to the flurry of early pleadings. This article generally focuses on how creditors can preserve and protect their interests and critical deadlines for doing so, including those set by early case orders.

Initially, when a bankruptcy is filed, the “automatic stay” under §362 is imposed and, generally speaking, automatically prevents creditors from initiating, or continuing, acts to collect upon their debts from the debtor or its assets constituting “property of the estate” by §541. Certain exceptions, discussed herein, may apply for oil and gas creditors.

Royalty owners, as lessors of oil and gas leases, are sometimes the largest type of creditors. Some oil and gas leases provide for automatic termination for unpaid royalties. When conditions precedent for termination are satisfied pre- or post-bankruptcy, the royalty owner, in an abundance of caution, may want to seek relief from the automatic stay, or, at least seek a “comfort order” declaring the lease terminated.

To preserve valuable leases, debtors frequently obtain authority to pay royalties to prevent termination. Additionally, royalty owners in Texas are generally protected as automatically perfected secured creditors not requiring relief from the automatic stay. Tex. Bus. & Com. Code §9-343. But in complex bankruptcy cases, this protection may not be enough when another state’s laws governing perfection and priority of such liens apply.

Creditors in oil and gas cases may have a variety of other mechanisms to protect their claims and interests, but must know the important methods and deadlines for doing so. Creditors who supply goods to debtors within 45 days of bankruptcy have an ability to reclaim them, but must demand reclamation in writing by the 20th day after the bankruptcy filing. §546(c). Moreover, creditors who supplied goods within 20 days before a bankruptcy case may also file applications for administrative expense claims (generally the highest priority unsecured claims) for the value of such goods. §503(b)(9). Creditors must be careful to monitor all pleadings filed and served upon them because deadlines are frequently established early in a case to file such claims.

Oil and gas creditors may also have contractual (e.g., arising under joint operating agreements) or statutory lien rights that need perfected post-bankruptcy. See e.g., Tex Prop. Code Ann. §§ 53.001-53.260; 56.001-56.045. Exceptions to the automatic stay and the trustee/debtor’s lien avoidance powers exist to allow such perfection. §§362(b)(3), 546(b). Notices of perfection are filed in the bankruptcy case, and perfection is done under applicable non-bankruptcy law. A pitfall can exist in cases with multiple debtors because the bankruptcy notice will likely be filed in a jointly administered bankruptcy under the name of a lead debtor, and that lead debtor may not be the same as the liable debtor. Furthermore, such lien rights might be prejudiced early in a case by orders granting the debtor’s secured creditors superior lien rights in exchange for post-petition financing. See e.g., §364. Creditors may object to try to prevent such “priming” of their liens.

Creditors may also have rights of setoff or recoupment. The Bankruptcy Code preserves state law rights to setoff §553. To set off, “mutuality” (the same agreement) must exist between the creditor and debtor and automatic stay relief must be obtained. Bankruptcy courts generally will not allow triangular setoffs involving multiple debtors and a creditor, which frequently arise under “master netting agreements” in oil and gas cases. Recoupment, which involves netting of obligations within in the same transaction, however, does not require relief from the automatic stay, but is more narrowly applied.

As more bankruptcy cases result in asset sales under §363, creditors who are counterparties to contracts (like joint operating agreements) and unexpired leases being assumed and assigned to a buyer must pay close attention to important notices and deadlines set by orders establishing bidding and sale procedures. Such creditor-counterparties must have their pre-bankruptcy claims cured, and they must be provided “adequate assurance of future performance” by the proposed buyer. §365(b) (note, in Texas §365 does not apply to oil and gas leases because they are considered interests in real property). Notice of the proposed “cure” amounts will be sent to counterparties who will have deadline by which to object if they disagree with the amounts. Similarly, counterparties will have a deadline by which to object to the sale, or the proposed buyer, which is usually a short amount of time between the determination of the successful bidder at an auction and the sale hearing.

Oil and gas bankruptcy cases raise a number of unique issues (including these and others) for creditors. The Bankruptcy Code provides a variety of mechanisms (and potential pitfalls) for creditors to protect their liens, claims, and interests that attorneys must be careful to navigate given the deadlines that can established on short notice in cases with voluminous pleadings that can quickly overwhelm the client creditor and/or attorney.

Eric M. Van Horn is Of Counsel at McCathern, PLLC and can be reached at ericvanhorn@mccathernlaw.com.