Bruce H. White, J. Thomas Beckett and Brian M. Rothschild
Table of Contents
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This chapter describes corporate reorganization strategies—both bankruptcy and non-bankruptcy—generally with an emphasis on practical application to enterprises in the mining and oil and gas sectors. We discuss the alternatives in the order in which they should be considered, which generally corresponds to the depth of the enterprise’s problems. The alternatives range from simple recapitalization to complete reorganization under chapter 11 of the Bankruptcy Code. Section 2.02 is a brief overview of the economic pressures currently stressing the mining and oil and gas sectors, giving rise to a sector-wide need for reorganization. Section 2.03 describes non-bankruptcy reorganization strategies ranging from recapitalization to tender and exchange offers to reduce an enterprise’s debt load. Section 2.04 provides an overview of the chapter 11 process and the benefits and limitations of chapter 11. Section 2.05 describes key aspects of mining and oil and gas law and frequently recurring issues in bankruptcy and non- bankruptcy reorganizations of mining and oil and gas companies. This chapter as a whole is meant to be an overview of the wide range of strategies that can be employed to reorganize troubled companies in the mining and hydrocarbon sectors with an emphasis on practical application of the tools of reorganization to solve real-world problems.
The mining and oil and gas sectors as a whole are in desperate need of reorganizations and workouts.1 Causes (or symptoms and effects) include commodity prices in a downward spiral; slowdown in demand for com- modities from the world’s biggest buyer, China; domestic and foreign overproduction; and overinvestment in capacity.2 Debt-financed increases in production capacity and diversification of commodity type production have created their own feedback loops, causing debt-laden companies to produce more and more of every commodity they produce at lower prices to meet periodic debt service, further depressing prices and exacerbating the problem.3
In the last 24 months, at least 42 oil and gas and a number of large mining companies have filed chapter 11 bankruptcies in the United States.4 More are very likely on the way.
Some use reorganization as synonymous with chapter 11 bankruptcy, but a variety of non-bankruptcy options may be cheaper, faster, and poten- tially more effective depending on the difficulties the enterprise is facing. Non-bankruptcy options range from simple recapitalizations to negotiated forbearances, consensual workouts, and tender or exchange offers.
Different reorganization mechanisms should be used to solve different problems. The choice of mechanism should be determined by the enter- prise’s capital and debt structure and the cause of the enterprise’s distress. Solving a lightning-strike type event that temporarily stops the cash flow of an otherwise profitable enterprise may only require recapitalization in the form of additional equity or a loan. In contrast, an enterprise that is operationally cash-flow positive but cannot service its debt may need to reduce its debt through an exchange offer. Businesses that are not able to meet the current costs of operation may simply need to be sold to stop the bleeding. Reorganization strategies may be used separately or in combination with one another to right the corporate ship.
The following is a description of some of the common variations and their respective advantages and limitations.
Sometimes all an enterprise needs to recover from a stressful event is a quick infusion of cash. Such an infusion can take the form of a new equity investment, debt financing, or a debt-for-equity exchange. However, the present economic environment makes finding such financing more difficult or, even if it can be found, costly.5 But proven operations that need a finite amount of cash to overcome an explainable and surmountable difficulty should not have too much trouble finding and structuring such financing. Care should be taken that the new debt structure does not over- whelm the enterprise, i.e., that the cost of servicing the new debt is not so high that the enterprise cannot service its new debt.
A recapitalization will generally not fix a structural problem that makes the enterprise operationally cash-flow negative, such as when the well is tapped out, extraction at the site is more expensive than the commodity price, or the debt load (before or after the recapitalization) is higher than the operations can service. Recapitalization in this scenario is counter- productive and only delays the inevitable.6
If an enterprise is cash-flow positive but temporarily cannot service its debt, the debtor may be able to negotiate a forbearance with the lender. In a forbearance, a lender agrees to a pause in debt service payments or makes other accommodations to allow the debtor to catch up or weather a temporary financial storm. A forbearance can be as modest as waiving a breach of a loan covenant or as substantial as granting a significant grace period before resuming payments. Forbearance, like recapitalization, will do nothing to fix an enterprise that is chronically unable to service its debt because it has insufficient cash flow. Rather, it can solve an issue that causes a temporary interruption in cash flow.
Forbearances may benefit both debtors and lenders in that they can pre- vent good debt from becoming bad debt and preserve the value of both parties’ investment. But forbearances have potential pitfalls for both sides. Lenders can sometimes insist on onerous conditions such as restrictive debt covenants, interest rate increases, additions to principal, monitoring or reporting requirements, additional collateralization, control accounts, and other terms in exchange for the forbearance.
Forbearances have pitfalls for the lender, too, including the potential for giving the debtor a defense to the strict enforcement of the debt instrument based on waiver, the risk that the debtor will use the grace period to preferentially pay other creditors that the debtor considers more critical, and the potential for compromising the lender’s claim in the event of a bankruptcy case.
Refinancing existing indebtedness with a new lender or on new terms with an existing lender can solve a host of problems. Often, a debtor’s relationship with its primary creditor has soured over the course of the relationship as a result of disappointed expectations resulting in a lack of trust. The debtor may need more liquidity or capital investment and, therefore, a different loan with a different term may be in order. It is also possible that, depending on the lending environment, a better interest rate or other terms more favorable to the business may be available.
Restructuring a project’s corporate organization may be a preparatory step prior to selling or disposing of an unprofitable project, or it may be a restructuring unto itself. If a corporate entity owns more than one project, the projects’ risks and rewards are pooled for good or ill.
For example, suppose an entity owns two assets, one profitable, and the other unprofitable. The owners may be unable to realize the profits from the good asset because its profits are required to pay the creditors of the unprofitable asset. If the good asset can be spun off into its own entity, the owners can profit from it and limit their liability to continue subsidizing the unprofitable asset.
Once the unprofitable asset is safely segregated in its own entity, the entity or asset may be sold, abandoned, dissolved, wound down, placed into a receivership, assigned for the benefit of creditors, or placed into a bankruptcy proceeding under chapter 7 or 11. The owners will then be left with only the profitable asset in the remaining entity and can collect the profits without being subject to creditors of the unprofitable asset.
The obvious risk of a spinoff transaction is that the creditors of the unprofitable entity may seek to avoid the transfer of the profitable asset to the new entity as a fraudulent transfer, either under the applicable state Uniform Fraudulent Transfer Act (UFTA) or the Bankruptcy Code.7 This risk can be mitigated if the transfer is made in exchange for reasonable equivalent value or if the entity with the unprofitable asset is able to service its debts for the applicable fraudulent transfer reach back period (also called “look-back” period), which operates like a statute of limitations against creditors seeking to set aside the transfer.8 Further, the realizable value of a mining or oil and gas asset, especially an operationally insolvent asset, is subject to the current state of the market, which, with respect to mining and oil and gas properties, is severely depressed. Therefore, there may be no realizable value in the sale and the sole benefit to the surviving entity is staunching the bleeding.
Oil and gas companies have employed this strategy where their productive assets are being hobbled by their unproductive or speculative assets. For example, Linn Energy, LLC (Linn) filed one of the largest oil and gas chapter 11 cases in 2016 with more than $10 billion in debt.9 On the petition date, Linn announced a prearranged plan to spin off Berry Petroleum Co., which Linn acquired in 2013.10
Sometimes, multiple assets that are unprofitable when operated separately can achieve profitability through a merger.11 Merged enterprises can benefit from economies of scale, increased market share, expansion into new segments, and reduction in duplicative overhead such as management, employees, or equipment. There are an endless number of situations in which a merger may benefit a troubled company. For example, if a company’s supply chain is reducing profitability, merging with a company that produces the needed supplies can allow the resulting company to control and stabilize its supply needs.
Alternatively, sometimes two entities have complementary assets that, when operated together, would result in increased profits. For example, one entity owns the only rare earth mine on the continent with substantial quantities of lithium, but it cannot profitably extract the finished product with its current technology. The other entity has developed technological expertise to efficiently extract rare earth resources but does not have a rare earth mine with sufficient reserves to fully take advantage of its technology. The merger of the two would allow the owners to deploy the second entity’s technology on the first entity’s mine, resulting in increased profits for the resulting enterprise.
The most common concerns for mergers include (1) antitrust liability, (2) the assumption of unknown liabilities, (3) division of control over the resulting entity, (4) compliance with negative covenants in existing debt, (5) compliance with securities laws, and (6) tax consequences.
When the enterprise is faced with deeper structural problems rendering the enterprise unable to service the amount of existing debt even under the best-case scenario, the debtor may have to seek a consensual reduction of its debt load.
Why would a lender agree to reduce the amount of debt it is owed? In short, a consensual reduction may be the least-bad option for the lender holding distressed debt and, in situations (discussed below) involving securitized debt that is traded in debt markets, may actually be welcomed by holders who acquired the debt at a discount. There are two main ways of accomplishing a consensual debt reduction. First, a tender offer is an offer by the debtor to the lender to accept repayment of a reduced amount in accord and satisfaction of the entire debt. The debtor usually accomplishes this by obtaining a new loan to cash out the old lender. The debtor benefits by having a reduced debt load, the new lender holds “good” debt, and the old lender gets cashed out of its old bad debt. Second, an exchange offer is an offer by the debtor to exchange old debt for new debt with a lower face amount and, possibly, other incentives (usually equity). Debt that is too far undervalued is difficult to sell as only certain types of buyers (usually qualified institutional buyers) with a high tolerance for risk can purchase such debt. Institutional lenders often have tax12 and regulatory incentives13 to clear nonperforming loans from their balance sheets. To incentivize the lender, a debtor often offers the lender an equity stake in the debtor.
Debt issued under a trust indenture typically specifies a consent threshold for tenders or exchanges prior to maturity, e.g., 75%, 90%, or 100% of the holders must consent, which will “drag along” the nonconsenting holders. If fewer than the threshold percentage of holders consent to the exchange, the tender or exchange offer will fail. The higher the threshold percentage, the more difficult it will be to successfully complete a tender or exchange offer. Successful completion of a tender or exchange offer is one of the few consensual means of fixing a structural problem that makes the enterprise unable to service its existing debt. But tender and exchange offers are tricky, often heavily negotiated, and can be expensive.
To improve the chances of a successful tender or exchange offer, the debtor may (and most often does) include a “stick” in the form of a backup prepackaged chapter 11 plan of reorganization. This means that, if the necessary consent threshold is not reached, the debtor will file a petition for relief under chapter 11 of the Bankruptcy Code, and will seek confirmation of a chapter 11 plan that accomplishes the same debt reduction (or per- haps even more debt reduction) as was to have been effected in the tender or exchange offer. In bankruptcy, the consent threshold is prescribed by the Bankruptcy Code as two-thirds in amount and one-half in number of any particular class of claims.14 The debtor can solicit the tender or exchange offer and, at the same time, solicit acceptances of the chapter 11 plan should the out-of-court tender or exchange offer fail.15 The prospect of further debt reduction and a drawn-out chapter 11 case can motivate security holders to consent to an out-of-court tender or exchange offer.
If successfully executed, a tender or exchange offer is one of the few effective out-of-court strategies that can reduce an enterprise’s debt load to a manageable level.
One time-honored strategy for acquiring distressed assets is to purchase the secured debt of an enterprise at a discount and then foreclose (or obtain a deed in lieu of foreclosure). The purchaser could be an outsider or a party friendly with (or even related to) the old owners. If the debtor’s owners want to de-leverage the enterprise and can acquire the secured debt at a discount, they can create a new entity that purchases the debt at a discount, and then cooperate in the foreclosure.
The main issues of concern are:
(1) Secured Status. Whether the secured debt is properly attached, perfected, and unavoidable. The acquiring entity should do careful diligence on the security documents to ensure that it is protected.
(2) Priority. Whether the secured debt is first priority. If there are any security interests of higher priority, they will need to be paid in full from the proceeds of the foreclosure sale.
(3) Unencumbered Assets. Whether there are any assets that were not subject to the security interest. If so, the acquiring entity will need to purchase them separately.
(4) Successor Liability. Under common law, the new entity may be subject to the claims of creditors—particularly trade creditors—if it is a “mere continuation” of the previous enterprise or if it shares an identity of interest with the previous enterprise.16
If none of the above strategies are possible or successful, it may be time to abandon ship. State law mechanisms for more or less cleanly abandoning an enterprise include (1) giving the secured creditor a deed in lieu of fore- closure; (2) using the state’s assignment for the benefit of creditors (ABC) law, which is essentially a state-court chapter 7 liquidation; or (3) simply abandoning and dissolving the enterprise.
In the mining and oil and gas sectors in particular, abandonment of operating assets with the potential to cause disastrous environmental harm is extremely disfavored: so much so that such an abandonment can lead to personal liability for a company’s directors and officers under state and federal environmental laws. State regulators often hold deposits or require performance bonds to secure mining companies’ reclamation obligations and oil and gas companies’ obligations to plug wells, which the regulators will use to do the work if the company abandons the mine or well. If the deposit is used and/or the bond is called, the cost to the company can exceed the value of the entire enterprise and leave the enterprise with a worthless reclaimed mine or plugged wells instead of operable assets. Permits become difficult, if not impossible, to revive and transfer, and the regulator will demand an increased security for future operations, reducing the value of the asset even further. To avoid these dire consequences, companies should be proactive and sell any serviceable wells or mines to an operator with sufficient wherewithal prior to reclamation or shuttering even if the value is negligible, if only to avoid forfeiting security deposits and having bonds called.
Accordingly, directors and officers in the discharge of their duties prior to resignation or termination should ensure that regulators are properly notified and steps are taken to ensure that such assets are properly shut in/ capped/shut down and do not cause environmental harm.
Directors and officers can also be personally liable for unpaid employee wages.17 Failure to pay wages can even subject directors and officers to punitive damages and criminal penalties.18
Although directors and officers are not ordinarily personally liable,19 a shuttering company should take care to avoid potential Worker Adjustment and Retraining Notification Act20 liability.
There is a wide range of restructuring tools available under the Bankruptcy Code. These range from a simple liquidation of the debtor’s assets under chapter 7 or 11, to multi-year reorganization plans that effect fundamental changes to the debtor’s operational, debt, capital, and/or corporate structure. The following is an overview of the common benefits and requirements of a bankruptcy proceeding followed by a discussion of some of the more common restructuring strategies and tools available to debtors in bankruptcy courts.
The debtor commences a voluntary21 bankruptcy case by filing a petition for relief under chapter 11 of the Bankruptcy Code in an appropriate bankruptcy court.22 The venue rules for bankruptcy cases make it possible that there could be several judicial districts in which filing a case would be appropriate. The venue statute provides for a great deal of flexibility:
[A] case under title 11 may be commenced in the district court for the district—
(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the  days immediately preceding such commencement, or for a longer portion of such [180- day] period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or
(2) in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership.23
This “super flexible” bankruptcy venue provision allows the debtor considerable leeway to select a favorable venue for filing a case. As a result, the U.S. Bankruptcy Court for the Southern District of New York, which includes Manhattan, and the U.S. Bankruptcy Court for the District of Delaware have become highly specialized and are generally regarded as sophisticated forums with panels of bankruptcy judges experienced in handling large and complicated bankruptcy restructurings.24 Many entities that have little or no connection to Delaware or New York are either incorporated in Delaware or New York or have an affiliate incorporated in Delaware or New York, or maintain substantial assets in financial institutions chartered in Delaware or New York, and thus can avail themselves of the Bankruptcy Court for the District of Delaware or the Southern District of New York.25
The choice of venue must be defensible, however, as a party in interest may request a change of venue under 28 U.S.C. § 1412, which provides that “[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”26 Thus the discretion of the debtor to select a venue, even one that meets the requirements of 28 U.S.C. § 1408, is not unfettered.
The filing of a bankruptcy petition is perhaps the most significant and often-referenced event in a bankruptcy case. The date on which the petition is filed (the “petition date”) marks an important boundary in the debtor’s financial affairs. From the petition date forward, all assets, income, liabilities, and actions will be categorized as either “pre-petition” or “post- petition.”27 Unless the court orders otherwise, the debtor is required to close out all existing bank accounts and close all books at the petition date, and open new “debtor-in-possession” bank accounts and start a new accounting ledger as of the petition date.28
The filing of the petition creates a legal “estate” that includes all of the debtor’s property and interests, wherever located and however held as of the petition date.29 Section 541 of the Bankruptcy Code “is broadly construed to encompass all conceivable interests of the debtor in property.”30
In a feature that is entirely unique to chapter 11 cases in the United States, a trustee is not appointed automatically at the outset of the case. Rather, the debtor after filing a petition for relief remains in possession of its estate and continues to operate its business and hold its assets in the ordinary course of business.31 Many sections of the Bankruptcy Code authorize the trustee to perform various acts on behalf of the debtor’s estate, but, under section 1107(a), “a debtor in possession shall have all the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this chapter.”32 Thus, the debtor in possession in a chapter 11 case is the functional equivalent of a trustee for nearly all purposes.33
Creditors’ committees can play a major role in chapter 11 cases.34 The court may order the U.S. trustee to appoint additional committees of creditors or of equity security holders, upon the request of a party in interest if necessary to ensure adequate representation of creditors or of equity security holders.35
A statutory committee may employ attorneys, accountants, or other professionals, whose fees and expenses must be paid by the debtor.36 A committee may consult with the trustee or debtor in possession concerning the administration of the estate, conduct investigations, participate and sponsor plans, and perform many other functions.37 The official commit- tees are an important voice in chapter 11 reorganizations, and the debtor is well advised to have open communication and to work cooperatively with these official committees to smooth the reorganization process.
In addition to the appointment of a trustee or examiner and creditors’ committees discussed above, the U.S. trustee plays a major role in chapter 11 cases, including monitoring creditors’ committees, monitoring the debtor’s business, conducting the section 341 meeting, and ensuring that all reports are timely filed and that the case is progressing.38 The U.S. trustee has standing to raise, appear, and be heard on any issue in a chapter 11 case, with the only limitation being that the U.S. trustee may not file a plan.39
The filing of the petition for relief “operates as a stay, applicable to all entities” of the commencement, continuation, or enforcement of virtually all proceedings against a debtor to determine, collect, or enforce a pre- petition debt.40 According to the legislative history:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.41
The debtor may take advantage of this “breathing spell” to turn its attention to restructuring without being concerned about the collection efforts of its creditors.
Actions taken by creditors in violation of the automatic stay are void and of no effect.42 Creditors that willfully violate the automatic stay can be liable for sanctions under the contempt power of the court for actual and, in the case of individuals, punitive damages.43
The automatic stay is not, however, a gratuitous shield of infinite duration. The Bankruptcy Code provides that:
the court shall grant relief from the stay . . . such as by terminating, annulling, modifying, or conditioning such stay—
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.44
The phrase “does not have equity in such property” or, more often, “lack of an ‘equity cushion,’ ” is shorthand for being undersecured, meaning that the amount of the creditor’s secured claim is greater than the value of the collateral.45 Alternatively, the secured creditor can show that it is not adequately protected, as will be the case if the property is diminishing in value, which could threaten its ability to recover on its claim.46 In that case, the court may order the debtor to make so-called “adequate protection” payments as a condition of maintaining the automatic stay.47
With respect to other situations—eviction, continuation of pre-petition litigation, etc.—the court analyzes whether there is “cause” on a case-by- case basis to determine whether it would be fair to modify or lift the automatic stay.48 For example, a court may lift the automatic stay to allow a creditor to continue pre-petition litigation to determine the amount of its claim against the debtor.49 It would consider how far the pre-petition litigation had progressed, the fairness of requiring the debtor and the creditor to litigate in the bankruptcy court versus the non-bankruptcy court, whether the case was before a specialized tribunal, and other factors related to basic fairness and efficiency.50
A debtor seeking the protection of the bankruptcy court is required to disclose detailed information regarding its assets, liabilities, and operations.51 All information filed with the court is, by default, publicly avail- able unless the filer seeks and obtains a protective order in advance.52 The debtor (or, in the case of an entity, a knowledgeable representative of the debtor) must appear and answer questions under oath at a public meeting of its creditors.53 The debtor and anyone else who may have information relating to property of the estate may be subject to examination by any party in interest.54 In addition, during a chapter 11 case, the debtor is subject to ongoing monthly reporting of its operations.
Most of the important documents, events, and motions in the bankruptcy proceeding require that the trustee or debtor in possession notify the affected parties. For certain important events—the petition and order for relief, notices of claims bar deadlines, certain other deadlines, dismissal, disclosure statement, and plan—the rules require notice to all parties in interest on the debtor’s full matrix (or mailing list) of creditors.55 For large enterprises, the creditors’ matrix may contain tens of thousands of parties. Large mailings in the case can be expensive and administratively difficult. Accordingly, an industry of professional claims and noticing agents has developed with expertise in bankruptcy noticing and other matters.
If there are assets to distribute, the trustee will notify creditors that they should file claims on the prescribed form and simultaneously inform them of the deadline for doing so.56 In a chapter 11 case, the court fixes the dead- line to file proofs of claim.57 All creditors whose claims are not scheduled in the debtor’s schedules of liabilities are required to file proofs of claim on the prescribed form.58
The filing of a proof of claim, or the scheduling of the claim on the debtor’s schedules of assets and liabilities, is considered prima facie evidence of the validity of that claim.59 Unless the debtor objects to a claim, it will be allowed.60 Debtors may object to claims on any of the bases listed in section 502(b) of the Bankruptcy Code, including that the claim is not valid under applicable non-bankruptcy law,61 is for unmatured interest,62 is for future rent in excess of a statutory cap,63 or is a claim for severance (so-called golden parachute payments) in excess of one year’s salary.64
Section 365(a) of the Bankruptcy Code provides that a debtor in possession, “subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.”65 With respect to any executory contract, the debtor has essentially three choices:
(1) the debtor may assume the contract,66
(2) the debtor may reject the contract,67 or
(3) the debtor may assume the contract and then assign the contract to another party.68
In chapter 11 cases, executory contracts or unexpired leases involving either residential real property or personal property can be assumed or rejected at any time before confirmation of any plan of reorganization.69 Parties in interest, however, may file a motion requesting that the debtor be ordered, upon cause shown, to assume or reject a particular contract (other than those involving non-residential real property) within a specified period of time.70
In order to assume or assume and assign an executory contract, the debtor must first cure its defaults under the contract and provide the non- debtor party to the contact with both the “actual pecuniary” losses incurred as a result of any defaults under the agreement and adequate assurance of future performance of obligations imposed by the contract.71 “Cure” under the Bankruptcy Code requires cure of both monetary and nonmonetary defaults, with the exception of certain ipso facto clauses, which specify that a contract automatically terminates upon a debtor’s bankruptcy filing and are generally not enforceable.72
Alternatively, if the debtor decides to reject the executory contract, the non-debtor party to the contract is left with only (1) potential recoupment rights, and (2) a claim for contract/lease rejection damages calculated as if such claim arose before the petition date.73
The provisions relating to executory contracts under section 365 of the Bankruptcy Code, including the right to assume and assign valuable con- tracts and the right to reject unprofitable contracts, are important tools for restructuring a debtor’s obligations and maximizing the value of the estate for creditors.
The debtor in possession will need cash to continue operating, pay its employees, and fund the expenses of the chapter 11 case, which expenses can be significant. If the debtor’s assets are subject to an all-asset security interest in favor of its secured lender, the debtor cannot use its existing pre- petition cash on hand as of the petition date without the secured lender’s consent because it likely constitutes cash collateral74 subject to the secured lender’s lien.75
The debtor must (1) obtain immediate post-petition financing and/or get permission to use cash collateral. Obtaining post-petition financing or consent to use cash collateral is critical, and denial of the motion is usually fatal to a case because the debtor will run out of money and be forced to cease operations.
In general, a debtor cannot use cash collateral without the consent of the secured lender or an order of the court, even in the ordinary course of business. Section 363(c)(2) provides that:
The trustee may not use, sell, or lease cash collateral . . . unless—
(A) each entity that has an interest in such cash collateral consents; or
(B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section.76
The surest way to obtain approval to use cash collateral is with the con- sent of the existing secured creditor. Absent consent, the court will only allow use of cash collateral if it finds that the objecting lender is adequately protected, meaning that its ability to recover on its claim is not likely to be affected by the debtor’s use of its cash collateral because it has a sufficient equity cushion or has been provided additional collateral to protect the secured creditor’s ability to recover.77
Section 364 of the Bankruptcy Code governs the ability of the debtor in possession to obtain post-petition financing (i.e., debtor-in-possession or DIP financing) to pay the costs of administration and operation of the business and estate. The following outlines the provisions of section 364 and offers some insight into the post-petition financing process.
All post-petition financing, other than unsecured credit in the ordinary course of business under section 364(a), requires court authorization after notice and a hearing. There several different types of post-petition financing.
Unsecured Credit Under Section 364(a) or (b). To obtain unsecured credit under section 364(a) or (b), which is accorded an administrative priority under section 503(b)(1) of the Bankruptcy Code, the debtor must prove that the credit serves the “actual, necessary costs and expenses of preserving the estate.”78 The debtor can obtain such credit under section 364(a) without court authorization only if the credit is extended in the ordinary course of business.79
Secured Credit Under Section 364(c). The primary distinction between section 364(c) and (d) is that credit extended under section 364(c) does not affect the rights of pre-petition secured creditors. A party extending credit under section 364(c) may obtain a special administrative expense priority, or acquire secured status through a lien on unencumbered estate property or a junior lien on encumbered estate property. The special administrative expense priority under section 364(c)(1) has priority over other chapter 11 administrative expenses. In light of the effect of this treatment on administrative and general unsecured creditors, a debtor cannot obtain credit under section 364(c) unless unable to obtain unsecured credit permitted under section 364(a) or (b).80
Priming Secured Credit Under Section 364(d) and Adequate Protection. Although the debtor in possession would rather obtain unsecured financing or secured financing that is junior to its existing secured lenders, post-petition lenders will typically be hesitant to extend financing to a debtor in possession unless they receive a lien on substantially all of the debtor’s assets that primes all existing security interests. Before authorizing a priming lien, the court must determine that the interests of all junior lienholders are adequately protected. Adequate protection requirements will vary with (1) the purpose of the proposed loan (i.e., for working capital or preservation of collateral), and (2) the value of the collateral of the pre-petition lender and any other property upon which a replacement lien may be granted to the pre-petition lender as adequate protection against displacement of its pre-petition lien.81
If the pre-petition secured lender objects to the financing, the court may nevertheless allow the debtor to obtain post-petition financing and grant a priming lien.82 In order to obtain court approval of post-petition financing on a superpriority, secured, and priming basis under section 364(d), the debtor must establish (1) that it is unable to obtain credit otherwise, (2) that the transaction is within the debtor’s business judgment, and (3) that the interests of all primed lienholders are adequately protected.83
With regard to determining whether the primed creditor is adequately protected, “[t]he existence of an equity cushion seems to be the preferred test in determining whether priming of a senior lien is appropriate under section 364.”84 Courts generally hold that an equity cushion of 20% or more constitutes adequate protection.85
Section 364(e) of the Bankruptcy Code provides that any appellate reversal or modification of an order authorizing post-petition financing under section 364(b) through (d) will not affect the validity or priority of the authorized debt if the appeal was not stayed under Fed. R. Bankr. P. 8005, and the lender extended the credit in good faith. As such, the complaining party must seek a stay of the financing order pending appeal, which is rarely granted, or the appeal will likely be dismissed as moot.86
Lender incentives and protections that may be approved include:
Lenders often offer a provision for “carve-out” or subordination of liens and a priority to professional fees and expenses of the debtor to entice the debtor to accept the above-mentioned terms.
In sum, to obtain court approval for post-petition financing, a debtor must be prepared to make an evidentiary showing that the proposed financing is the only reasonable alternative, after a diligent search for alternatives and arm’s-length negotiation of terms, and that the other constituencies in the case (e.g., the creditors’ committee) were involved in the process.
A chapter 7 liquidation is not a reorganization strategy, nor is it a favored mechanism for dissolving or shuttering a failed enterprise. Preparation of a chapter 7 filing is expensive relative to state law dissolution or ABC procedures. Chapter 7 trustees also have incentives to collect and recover as much property as they can for the benefit of creditors. Therefore, chapter 7 trustees tend to file a multiplicity of claw-back litigations to avoid pre-petition transfers as fraudulent transfers88 or preferences.89 These litigations can reverse payments made to creditors and other stakeholders, which is often undesirable from the perspective of a debtor’s former owners and management as it can result in angry creditors and others who will look to the former owners and management for satisfaction. Further, there is no upside to a chapter 7 case for the debtor entity or its former owners or managers because entities are not entitled to a discharge.90 Because state law proceedings, particularly ABCs, offer similar finality with a much lower risk of multiplying litigation, state wind-down proceedings are generally preferable to chapter 7 liquidations.91
Given the limitations and downsides of chapter 7 cases, almost all useful bankruptcy reorganizations are done through chapter 11 cases. There are two main pathways available in a chapter 11 case: (1) sale of the debtor’s assets through section 363 of the Bankruptcy Code, and (2) confirmation of a chapter 11 plan. Each pathway is discussed below in greater detail.
Sale of a debtor’s assets under section 363 of the Bankruptcy Code is increasingly a tool of choice for buyers who want to acquire distressed assets as free and clear from prior claims as possible.92 Section 363 has been used recently in some of the largest bankruptcies ever (e.g., GM, Chrysler), leading some commentators to note that section 363 sales are the new norm and traditional chapter 11 processes are becoming rarer.93
The chief attraction for purchasers of a sale under section 363 of the Bankruptcy Code is the quality of title. Section 363(f) provides that a purchaser takes title “free and clear of any interest in such property” from all third parties.94 “[T]he term ‘interest,’ although not defined in the Bankruptcy Code, should be interpreted broadly.”95 This “free and clear” provision is particularly useful where the assets are subject to multiple asserted liens and interests, which, outside of bankruptcy, would cause a prolonged sale process. Other times, section 363(f) can provide assurance to a purchaser concerned about potential claims (e.g., fraudulent transfer) of creditors of the property owner. Acquiring assets “blessed” by the bankruptcy court under section 363(f) alleviates these concerns and could cause more interest among potential purchasers (particularly the risk-averse), resulting in a higher price for such assets.
Section 363(f) sets forth the criteria for a sale under section 363(f) free and clear:
The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) 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;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.96
Because section 363(f) uses the disjunctive “or,” the court may authorize the sale if one or more of the above criteria are satisfied.97
Section 363(m) of the Bankruptcy Code protects the estate and good- faith purchasers, enabling them to close a sale under an order even though (1) the appeal period may not have run, or (2) an appeal of the order authorizing the sale may have been filed. Unless the appellant obtains a stay pending appeal or has evidence supporting bad faith/collusion, the appeal becomes moot upon the closing of the sale. Section 363(m) provides as follows:
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.98
This provision, a codification of the equitable mootness doctrine, is an important protection that removes the leverage a would-be spoiler might have to disrupt the consummation of the sale.99 The overwhelming majority of courts hold that sales under section 363(b) of assets free and clear under section 363(f) are protected by section 363(m).100 However, in one outlying case decided by the U.S. Bankruptcy Appellate Panel of the Ninth Circuit, the panel held that section 363(m) did not apply to the sale free and clear under section 363(f), and thus allowed the sale to be set aside on appeal.101 Most commentators believe the panel decision was incorrect, and there are even prior cases decided by the U.S. Court of Appeals for the Ninth Circuit applying section 363(m) to moot an appeal of a sale under section 363(f).102
A section 363 sale can be fully orchestrated between the debtor and a proposed purchaser prior to a chapter 11 filing, or the debtor could find a buyer while in chapter 11. The better course, however, is to arrange the sale prior to the chapter 11 filing in order to spend as little time (and money) as possible in chapter 11.
First, the pre-bankruptcy debtor markets its assets and identifies a “stalking horse” bidder who will make an offer for the assets. Second, the parties negotiate and agree on sale terms and draft an asset purchase agreement. Third, the stalking horse bidder will conduct diligence on the assets, and satisfy itself that it is prepared to consummate the sale. Fourth, the debtor files the petition for relief and becomes a debtor in possession in chapter 11. The debtor should file its motion to approve bid and auction procedures for the sale on the petition date if at all possible. The bid and auction procedures must include a procedure that allows for competitive bidding on the assets by other interested parties, including an auction.
Once the auction (if any) is concluded and the highest bidder is identified, the debtor seeks approval of the sale by asking the court to hold a hearing and enter the sale order. The sale order should include specific factual findings, based on evidence before the court, that the sale price was the highest and best offer available and that the buyer purchased in good faith.103
One often disputed aspect of the sale and bid procedures is the built-in protections for the stalking horse bidder, including break-up fees, expense reimbursements, and overbid increments. Such bid protections, usually negotiated as part of the asset purchase agreement, are common features of out-of-court asset sales designed to compensate the stalking horse bidder for the time and money invested in formulating and documenting a trans- action and establishing a “floor” or baseline for potential terms that might be offered by other bidders. Likewise, a minimum overbid and specified bid increment can ensure that any overbid be substantial enough to war- rant switching to a new buyer. Courts generally ask the following questions to determine the reasonableness of the proposed bid protections: “(1) is the relationship of the parties who negotiated the break-up fee tainted by self- dealing or manipulation; (2) does the fee hamper, rather than encourage, bidding; (3) is the amount of the fee unreasonable relative to the proposed purchase price?”104
An overbid minimum or break-up fee that is set too high may chill competitive bidding to the detriment of creditors, and some courts have become critical and declined to approve bid protections that they view as unnecessary and stifling of competition.105 Similarly, so-called “no-shop” clauses that limit the ability of the debtor to advertise or solicit other bids are nearly per se illegal given their inherent incompatibility with the bankruptcy proceeding’s purpose of maximizing return for creditors.106
Although section 363(f) allows the trustee to sell assets of the estate free and clear of interests, including liens, section 363(k) provides an important protection to secured creditors who have a lien on such assets. Under section 363(k), the secured creditor “may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.”107 Thus, if the secured creditor is concerned that the proposed sale price is too low, it may use its claim, and potentially other funds, to bid on the asset at the auction.
The right to credit bid is not, however, absolute, as section 363(k) also provides that a secured creditor may credit bid “unless the court for cause orders otherwise.”108 Examples of “cause” for a court to deny a secured creditor its right to credit bid all or part of its secured claim may include bad faith on the part of the secured creditor; (2) the existence of a genuine dispute about the amount, validity, or secured status of the creditor’s claim; (3) a finding that allowing the secured creditor to bid its whole claim would unreasonably chill competitive bidding for the assets; or (4) the secured creditor purchased the debt at a distressed price.109
If the debtor has sold substantially all of its assets, it may choose to liquidate in bankruptcy through a plan of liquidation or, if the remaining assets are not sufficient to justify administering, it may seek a structured dismissal of the chapter 11 case.
The goal of most chapter 11 cases is to propose and confirm a chapter 11 plan. A chapter 11 plan is a flexible tool by which the debtor can restructure its corporate organization, operations, management, and debt, among other things. Section 1123(b) of the Bankruptcy Code, which sets forth the optional contents of the plan, lists a number of potential things that a plan could do but also permits a plan to “include any other appropriate provision not inconsistent with the applicable provisions of this title.”110 Except with respect to small business debtors, the Bankruptcy Code does not specify a time within which the debtor must propose and confirm a plan, but as noted above, the U.S. trustee may move to dismiss or convert a case if it believes that the debtor is not progressing towards confirming a plan.111 The debtor does, however, have a limited “exclusivity” period during which only the debtor may propose and solicit a plan, but on the expiration of such period, any party in interest may propose and solicit a plan.112
Procedurally, the plan process requires (1) filing a plan and a proposed disclosure statement; (2) obtaining court approval at a hearing of the adequacy of information in the disclosure statement; (3) circulating the disclosure statement and plan to the parties entitled to notice, and soliciting votes from classes entitled to vote on the plan; (4) seeking entry of an order confirming (approving) the plan at a hearing; and (5) implementing or effectuating the plan. The following describes each step in that process and the most relevant legal issues at each step.
The disclosure statement must be filed by the proponent of a plan of reorganization at the time the plan is filed or within a time fixed by the court.113 The function of the disclosure statement is to serve as a basis for the good-faith, court-approved solicitation of acceptances and rejections of the plan.114 The disclosure statement must contain “adequate information” as defined in section 1125(a)(1) of the Bankruptcy Code.115
The court must hold a hearing on the proposed disclosure statement and must approve the disclosure statement as having “adequate information” before it can be used in conjunction with the solicitation of acceptances or rejections of a plan.116
Pre-petition solicitation of acceptances of a plan is allowed pursuant to section 1126(b) of the Bankruptcy Code and Fed. R. Bankr. P. 3018(b). The filing of a plan for which the required acceptances have been received prior to the filing of the petition greatly compresses the procedures and time necessary for confirmation, but it rarely occurs.
Alternatively, after the disclosure statement has been approved, the debtor or proponent of a plan can solicit acceptances of the plan during the case. The plan proponent must mail all of the following to all creditors or equity security holders:117
In addition, a form of ballot must be mailed to all creditors and equity security holders entitled to vote on the plan.119 A class of claims has accepted a plan if the plan has been accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors.120
The provisions required in a chapter 11 plan are set forth in sections 1122 and 1123 of the Bankruptcy Code. A chapter 11 plan separates creditors and equity holders into classes based on the differences in their claims.121 Claims placed together in a class must be “substantially similar,” a term of art with a significantly developed case law.122 In general, each secured claim is placed in its own class because each differs as to its priority and collateral. Unsecured claims may be placed together with other substantially similar unsecured claims.
Next, the plan specifies the proposed treatment for each class.123 Unless otherwise agreed to by the holder of a claim, all claims classified together must be treated alike.124
The plan will describe the means or mechanisms by which the debtor will implement the plan.125 This provision allows for nearly unlimited flexibility. For example, the debtor may propose to sell all or a portion of its assets,126 merge with another entity,127 restructure an existing credit agreement or debt security by changing the interest rate or maturity date,128 or reject or assume any executory contract.129 Finally, the Bankruptcy Code, in its ultimate state of flexibility, provides that the plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.”130
The treatment of each claim or interest in the plan will be described as either “impaired” or “unimpaired.” A class is considered impaired unless the plan “leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.”131 The plan may, however, reinstate maturity and cure a debt, provided that all monetary damages and missed payments are paid, and such reinstated debt will be considered “unimpaired.”132
The designation of “impaired” and “unimpaired” is important because only impaired classes that receive some value are entitled to vote on the plan. Section 1126 states that “a class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.”133 Conversely, “[a] class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests.”134 Thus, only classes that are receiving some value, but are not being paid in full, are entitled to vote on a plan.
The court, after notice, holds a hearing on confirmation of a plan.135 Any party in interest may file an objection to confirmation of a plan, which will be addressed at the hearing.136
The requirements for confirmation are set forth in section 1129 of the Bankruptcy Code and must be established to the court’s satisfaction, even in the absence of any objections, for confirmation to be granted.
Section 1129 of the Bankruptcy Code enumerates 16 requirements that must be met before a plan can be confirmed. The most commonly applicable and disputed confirmation requirements are as follows:
(1) Section 1129(a)(7)—Best Interest of Creditors Test. The “best interest of creditors test” requires that a given creditor in a class must either (a) accept the plan or (b) “receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain” in a hypothetical chapter 7 liquidation.137 Thus, a court will not confirm a plan that treats an objecting class of creditors worse than if the debtor simply liquidated.
(2) Section 1129(a)(8)—Each Class Has Accepted the Plan. Section 1129(a)(8) requires that each class of claims or interests has accepted the plan or is unimpaired,138 meaning that its rights are unaffected by the plan.139 In section 1129(b) there is, however, an exception to this requirement that enables the proponent to “cram down” the plan on a nonconsenting class, as discussed below.
(3) Section 1129(a)(9)—Payment of Priority Claims and Expense. Section 1129(a)(9) provides that certain priority claims and administrative expenses of the estate must be paid, in full, in cash, on the effective date unless otherwise agreed.140 This means that the debtor must have sufficient cash on the effective date of the plan to pay the fees and expenses of the bankruptcy case and certain other claims.
(4) Section 1129(a)(10)—Impaired Consenting Class. Section 1129(a)(10) provides that “[i]f a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.”141 As indicated by the plain meaning of the provision, it is necessary to convince at least one class that is impaired to consent to the class’s treatment under the plan.
(5) Section 1129(a)(11)—Feasibility Test. The court must find that the plan is feasible, meaning that implementation of the plan will not simply lead to another bankruptcy case or liquidation, unless the plan calls for a liquidation.142 This requirement, because it is forward looking, is often the subject of expert testimony and speculative financial projections.143
(6) Section 1129(b)—Cramdown on Nonconsenting Classes. If the plan meets all of the confirmation criteria except section 1129(a)(8) (each impaired class has not accepted the plan) the court will nevertheless confirm the plan if certain criteria are met.144 The first criterion is that the plan “does not discriminate unfairly.”145 “Does not discriminate unfairly” is a term of art meaning that “a dissenting class will receive relative value equal to the value given to all other similarly situated classes.”146
The tests for overriding a nonconsenting class vary depending on whether a class of claims is secured or unsecured.
As to a dissenting class of impaired secured creditors, the “fair and equitable” requirement is not satisfied with respect to a secured claim unless the claimholder (1) retains its lien;147 and (2) receives “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property.”148
As to a dissenting class of impaired unsecured creditors, such a plan may be found to be “fair and equitable” only if the allowed value of the claim is to be paid in full,149 or, in the alternative, if “the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property . . . .”150 The latter is the core of what is known as the “absolute priority rule.”151
If the plan’s treatment of the claims meets section 1129(b), the court will confirm the plan over the objection of the nonconsenting class(es).
As discussed in § 2.03, above, a proposed tender or exchange offer can be solicited alongside a “backup” prepackaged plan of reorganization that effects the tender or exchange offer within a chapter 11 case. A tender or exchange offer that failed outside of bankruptcy can be consummated in a bankruptcy because the Bankruptcy Code substitutes its consent thresholds for those of the indenture or private credit agreement. In a bankruptcy, consent of a class is obtained by a vote of “at least two-thirds in amount and more than one-half in number” of the claims.152 Thus, if the consent threshold in the indenture was not reached but the vote would have surpassed the consent threshold in the Bankruptcy Code, a chapter 11 plan can be used to effect the tender or exchange offer over the objection of the dissenting holders of less than one-third in amount and a minority in number of claims.
The debtor accomplishes this by soliciting the tender or exchange offer simultaneously with a draft plan and disclosure statement. The ballot on the tender and exchange offer will provide that, in the event the required out-of-court consent threshold is not reached, a “yes” vote on the tender or exchange offer will be deemed a “yes” vote on the plan. The Bankruptcy Code explicitly allows solicitation of acceptance of a plan prior to the petition date, provided that “adequate information”153 was provided at the time of solicitation.154 Including a backup prepackaged plan of reorganization may also incentivize holders to consent to an out-of-court tender or exchange offer, particularly if the holders’ treatment is slightly better on the out-of-court tender or exchange offer, thus increasing the likelihood that the consent threshold will be met and avoiding the need for a chapter 11 case and its attendant expenses.
If the debtor has the luxury of negotiating with its creditors prior to its need to file for bankruptcy protection, it could pre-negotiate and pre- package a plan of reorganization. The more that can be resolved prior to filing the petition, the shorter the duration of the debtor’s stay in chapter 11 will be likely to be. Expediting the bankruptcy case can save costs and reduce the time that potential spoilers have to mobilize and object to the plan.
The variations on the amount of pre-petition work that can be accomplished are nearly unlimited. A debtor can negotiate, disclose, and solicit its plan prior to filing the petition.155
It is possible and even desirable to effect other corporate reorganizations through the chapter 11 plan process, including mergers, acquisitions, and spinoffs. Just as acquiring assets subject to multiple asserted liens can be achieved more efficiently through a section 363 sale, two troubled entities may be able to effect a merger more efficiently and quickly through a pre- packaged chapter 11 that provides for the merger of the entities. In 2008, Vertis Holdings, Inc. (aka Vertis Communications) prepared and solicited a prepackaged plan of merger with ACG Holdings, Inc. (aka American Color Graphics).156 After soliciting the plan, the debtors filed simultaneous chapter 11 cases on July 15, 2008.157 The debtors filed their plan, disclosure statement, and report of voting on the petition date. The court held a confirmation hearing and entered the order confirming the plan on August 26, 2008, a mere 42 days after the petition date.158 In the mergers and acquisitions world outside of bankruptcy, a 42-day merger of two companies is virtually unheard of.
Mining and oil and gas companies have unique business models and organizations, and unique property and contract regimes, which create challenges for reorganizations. This section discusses the issues that most frequently arise in mining and oil and gas reorganizations and how the courts have approached them.
Among bankruptcy law’s first principles perhaps the most important is that property interests and all other legal rights, whether creations of property, contracts, statutes, or otherwise, are created and governed by non- bankruptcy law.159 Bankruptcy law does not create any of these substantive rights; it only creates a regime for resolving competing claims against the same debtor. To understand how the bankruptcy mechanisms discussed above (e.g., the right to reject, assume, or assign executory contracts, the right to obtain post-petition financing, and the right to sell property) might interact in bankruptcy, it is first necessary to understand a little about the substantive non-bankruptcy laws governing the debtor and its creditors and assets, which are described below.
This summary is meant to assist readers unfamiliar with the basic concepts to ground themselves sufficiently to understand the application of reorganization and bankruptcy concepts to the substantive law of mining and is not meant as a thorough exploration of the topic. Of course, mining businesses range from single owner operators of small stakes to large multinational operations that own, operate, or lease mining stakes under a wide variety of arrangements with other owners and operators. Some concepts, however, are general.
In the United States, a mining claim is either a patented or unpatented mining claim. A patent is a parcel of public land that the owner has purchased from the federal government for $2.50 per acre (for placer claims) or $5.00 per acre (for lode claims) under the General Mining Act of 1872.160 Once the owner has purchased the patent, he owns the land, including the mineral and surface rights, in fee simple. Congress imposed a moratorium on new mining patents on October 1, 1994. Since the owner holds the title to the property outright, the owner does not need to pay royalty interests upon severing the minerals. Further, patented mining claims may be split into surface and mineral estates, which may then be sold or held separately.
Unpatented mining claims, on the other hand, are stakes on federal land limited to the mineral rights. Public lands managed by the Bureau of Land Management (BLM) or U.S. Forest Service are open for prospecting and staking claims in accordance with the requirements of 43 C.F.R. pts. 3830, 3832, and 3833, provided such lands have not been designated as national monuments, set aside for the protection of endangered species, or other- wise shut off from mining activities.161 Once a claim is staked, it must be maintained by payment of yearly fees or it will be forfeited.162 Alternatively, a minimum dollar-value of development may be performed each year, which exempts the holder from the fees.163
Major mining companies may locate and develop their own claims, or they may work with a junior or partner prospector or developer who has an economic claim.
Mining claims may be leased to operating companies, but these “leases” are also generally considered real property interests, and not contracts,164 and therefore not subject to the provisions of section 365 regarding the assumption and assignment of executory contracts.165
Even though mining leases are generally considered conveyances of real property, they sometimes contain anti-assignment provisions akin to an anti-assignment provision in a contract. In these cases, bankruptcy courts generally allow assignment anyway under the trustee’s ability to sell free and clear under section 363(b) and/or (f).166
Another question is whether the mining regulator that permits the mine, typically a state agency, will allow transfer of the permit and under what conditions. Section 363 does not have any mechanism to compel state regulators to accept the purchaser as the new operator under the same terms as the prior operator, although, as a practical matter, most regulators prefer to have a going concern operating a mine rather than a dissolving debtor in bankruptcy. Transfer processes, however, are agency-specific and may not be forced by fiat from the bankruptcy court the way an executory contract might be.
Economic terms may vary and are subject to negotiation, but the use of a joint venture limited liability company (LLC) has become one standard corporate model of joint venture organization.167 An LLC agreement is a flexible contract that specifies each member’s rights and responsibilities with respect to the project, including with respect to capital calls, expenditures, membership percentage, loans, guarantees, contributions, voting rights, and other matters.
Another form of organization is the tenancy in common (TIC), which is a form of land ownership where two or more entities own undivided interests in real property in specified percentages. The division of the TIC interests and each joint venture partner’s rights and responsibilities are specified in a separate joint venture agreement. Where one partner has contributed the mining claim (typically a junior prospector) and the other party will, in the future, contribute assessment, development, and operational expenditures (typically a major), the joint venture will be an “earn-in agreement” whereby the major will earn a higher percentage of the TIC interests as it makes more qualifying expenditures.
In a joint venture LLC or TIC, the parties to a joint venture are given different membership percentages in the LLC or TIC at the outset based on their contributions to the joint venture, such as one member’s contribution of the mining claim or another member’s expenditures on assessment and development. The membership percentages may change as the project continues based on subsequent events such as capital calls or a member’s qualifying expenditures on the project.
The joint venture’s assets may include the mining claims, whether patented or unpatented; infrastructure, reports, analyses, and other forms of knowledge about the mining claims; and product in progress such as ore or concentrate. Often, a large part of any mining operation’s assets are its proven reserves, typically defined as the minerals that have yet to be produced but that can be extracted economically. The value of such reserves will, of course, fluctuate with the present value and expected near- to mid-term price of the mineral. The credibility of the analysis of the proven reserves can be a pivotal issue in bankruptcy on such issues as post-petition financing, relief from stay, adequate protection, treatment and classification of secured claims, the best interest of creditors test, feasibility, and many other issues.
The joint venture may borrow from institutional lenders like banks to fund its capital expenditures, land acquisitions, infrastructure, exploration, or operating costs. Typically, institutional debt is secured by the joint venture’s land, claims, infrastructure, receivables, and cash. The joint venture may also have trade debt for an outside operator, outside contractors, professionals, materials, employees, and other costs. These daily extensions of credit are typically unsecured, except to the extent that they are subject to statutory liens.
A joint venture LLC’s corporate structure, debt, and assets would look like the following:
A joint venture TIC would look similar, except that the assets would be directly owned by the joint venture partners:
Use of either an LLC or a TIC joint venture can create a number of issues when one of the members of the joint venture becomes a debtor in a bankruptcy proceeding. Each of these is discussed as follows.
An LLC is a creation of state statutory law, but there is no provision of the Bankruptcy Code specifying whether the LLC agreement, which resembles a contract, is an executory contract and, if so, whether it can be rejected, assumed, or assigned under section 365 of the Bankruptcy Code. In some states, the bankruptcy of one member dissolves the LLC unless the LLC agreement specifically provides otherwise.168 Any provision in law or the LLC agreement that terminates the LLC upon one member’s bankruptcy, if the LLC agreement is an executory contract, is almost certainly invalid in a bankruptcy case as an ipso facto provision.169
In the absence of certainty as to whether the LLC agreement is an executory contract (as opposed to just an asset),170 it is possible that continued operation (or, conversely, an attempt to terminate the LLC) by the non- bankrupt member could violate the automatic stay.171 Even more troubling, if there is a need to raise capital and make a capital call, can the non-bankrupt member initiate a capital call that has the potential to cut off or dilute the debtor’s rights as a member without violating the automatic stay? If there is any question, the non-bankrupt party should seek consent of the trustee or debtor in possession or clarification from the court to avoid violating the automatic stay.172
Another issue is whether the trustee or debtor in possession can assume and assign the debtor’s membership interest in the LLC to a third-party buyer, over the objection of the non-bankrupt member. In general, anti- assignment provisions in a contract are not enforceable,173 and section 365 will allow assumption and assignment of a contract unless there are “personal performance” aspects of the debtor’s obligations that would prevent such an assignment.174 Outright prohibitions and even rights of first refusal in LLC operating agreements have been invalidated under this provision.175 A nonconsenting non-debtor member could object to such an assignment if the debtor member has managerial responsibilities that are sufficiently specific to the debtor176 or if the proposed assignee can- not demonstrate the wherewithal to perform under the LLC and provide the “adequate assurance of future performance” necessary to assume a contract.177 If the objecting non-bankrupt member cannot convince the court that the LLC agreement is unassignable, the trustee or debtor in possession could sell the debtor’s membership interest under section 363(b). Alternatively, it is possible that the debtor could sever the management rights from the economic interest (and some states’ limited liability statutes contemplate this) and sell only the economic interests.178
Another concern in this scenario is the potentially endless waiting period while the debtor or trustee decides whether to assume or reject the agreement. Section 365(d)(2) provides that the debtor could potentially wait until confirmation of the plan to decide to assume or reject an executory contract. As mentioned above, the LLC’s operations could require the members to make a capital call, which, if not met, would dilute or cut off the bankrupt member’s rights. Section 365(d)(2) itself, however, provides a remedy: “the court, on the request of any party to such contract or lease, may order the trustee [or debtor in possession] to determine within a specified period of time whether to assume or reject such contract or lease.”179 Thus, the non-bankrupt member can bring any exigent circumstances to the court and request that the bankrupt member be compelled to decide whether to assume or reject the LLC agreement.
In a provision that seems counter to fundamental fairness, section 363(h) allows the trustee or debtor in possession to sell both the bankruptcy estate’s interests and a co-owner’s interests where the debtor has “an undivided interest as a tenant in common, joint tenant, or tenant by the entirety” if (1) partition isn’t practicable, (2) the sale of all interests would realize significantly more than a sale of the estate’s interests alone, and (3) the benefit to the estate outweighs the detriment to the co-owner.180
“Before depriving a nondebtor co-owner of property under section 363(h)(1), the court must find that the property cannot be physically or legally partitioned to permit the sale of only the debtor’s interest.”181
Section 363(h) raises two potential problems for joint venture TICs:
First, under section 363(h), the trustee could seek to sell the entire project, including the debtor’s and non-debtor’s interests, out from under the non-debtor joint venture partner. To prevent this, the non-debtor co- owner could argue that partition of the property is practicable, but arguing that partition is practicable182 could lead to an even less favorable result, which is the second problem.
Second, the trustee could reject the joint venture agreement and then seek to partition and sell only the debtor’s interest, forcing a partition of the project, which may be uneconomic, impractical, and certainly counter to the non-debtor joint venture partner’s contractual expectations. It may have invested in infrastructure or made other moves in reliance on a proven reserve larger than the remaining reserve after partition.
Section 363(i) provides some protection in that it gives the co-owner a right to match any price offered for the property.183 But this protection may be small comfort to a non-debtor co-owner who does not presently have available cash to purchase the debtor’s interest. Unfortunately, doing business as a joint venture TIC carries these risks. If one party to a joint venture is financially shaky, it may be inadvisable to structure the joint venture using a TIC.
As mentioned above, a number of legal determinations in bankruptcy are cued off of the value of a debtor’s assets. These include, most importantly, adequate protection for both post-petition financing and relief from stay purposes, and plan confirmation, both with respect to the best interest of creditors test and treatment of secured claims in a cramdown.
Commodity prices are a large component of the value of a company’s proven reserves. The downward spiral of commodity prices can hasten the need for reorganization in several ways, including: (1) restricting the debtor’s cash flow; (2) causing the debtor to default on debt for violating covenants in credit agreements that require the debtor to maintain asset- to-debt coverage ratios; and (3) during a downward slide, incentivizing management and investors to “off-load” the asset, encouraging reorganization processes. As described in this section, if commodity prices fall too far, the debtor may lose its ability to reorganize because it will not have an unsecured equity cushion to borrow on or with which to resist relief from stay and foreclosure.
As described in § 2.04[j], above, the bankruptcy court, when deciding whether to approve the debtor’s request to obtain post-petition financing on a secured priming basis, must find that (1) financing is unavailable on any other basis and (2) the existing lender(s) who will be primed are adequately protected.184 Similarly, a secured creditor can obtain relief from the automatic stay under section 362(d) of the Bankruptcy Code by showing that its interest lacks adequate protection.185 Most commonly, adequate protection for both purposes can be proven by showing that the existing secured lenders are protected by a sufficient equity cushion.186 And again, valuation is relevant to the best interest of creditors test under section 1129(a)(7), because why should a creditor accept a pittance for its claim over time if the valuation of its debtor’s assets indicates it could get paid in full if the debtor would simply liquidate?187
Valuation is one of the most fraught issues in bankruptcy.189 The bankruptcy court, charged with making a determination in many different con- texts, is charged (vaguely) in section 506 that “value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”190 A secured creditor objecting to the debtor’s attempt to prime its lien or attempting to obtain relief from stay will contend for a low valuation to show that it is not adequately protected, while the debtor claims it has a large equity cushion, which it must access through a post-petition debtor-in-possession loan and preserve from the predatory actions of its secured creditor for the benefit of unsecured creditors. The parties will contest the issue with hired experts. In general, an expert who formed his/her opinion prior to the bankruptcy issue and who can testify about the current market price (aka the com- parable sale approach) will be better able to persuade a bankruptcy court than a hired gun forming its opinion for the first time in light of the exigencies of the bankruptcy case. Fortunately, mining companies (and oil and gas companies, too) regularly perform such analyses for the benefit of U.S. Securities and Exchange Commission (SEC) disclosures, obtaining financing, asset sales, marketing, and other purposes, using industry (rather than bankruptcy) experts. These materials and experts are vital resources for obtaining post-petition credit and fending off secured creditors’ attempts to obtain relief from stay and foreclosure, among other purposes.
Valuation issues are general for all bankruptcy debtors, including mining companies and oil and gas companies. Thus, this section and its analysis apply equally to oil and gas reorganizations.191
The following sections, while oversimplifying the intricacies of oil and gas law, summarize certain aspects of oil and gas law with a focus on issues relevant to reorganizations. Like the sections describing the basics of mining law, they are meant to assist readers unfamiliar with the basic concepts to ground themselves sufficiently to understand the application of reorganization and bankruptcy concepts to the substantive law of oil and gas and are not meant as a thorough exploration of the topic.
A mineral interest in oil and gas consists of the ownership of the oil and gas in place under the surface of real property, usually, but not always, owned in fee simple, and the exclusive right to explore, drill, and produce that oil and gas from the land. “In general it can be said that the owner of a mineral interest has all the rights, powers, privileges and immunities with regard to the minerals as his predecessor in title—the fee simple owner before the severance—had before him . . . .”192 Owners of small individual mineral rights, who may lack the resources to exploit the minerals or whose stake is too small to exploit economically by itself, will lease their mineral rights to third-party oil and gas exploration or production concerns (also called an oil and gas lease) in exchange for a real property interest that entitles them to share in gross production. The retained real property right is referred to as a “landowner’s royalty interest,” while the newly created right to exploit the minerals is referred to as a “working interest.”
In most jurisdictions in the United States, both the working interest and the landowner’s royalty interest are real property rights.193 A working interest may be further divided to create an “overriding royalty interest,” which is typically created and sold or mortgaged to finance capital expenditures on exploration or operation of an oil and gas lease, including paying employees, independent contractors, and service providers. Royalty interests are purely an asset in that the holder is not obligated to pay any of the costs of exploration or production, but is consequently only entitled to receive royalty payments on the production beginning when the mineral right is actually produced.
An oil and gas operator will typically be subject to surface landowner interests, and, potentially, overriding royalty interests, other types of royalty interests, net profits interests, production payments, and other working interests. These royalty interests entitle the holders to royalty payments whenever the operator produces oil and gas from the corresponding oil and gas lease.
While oil and gas concerns, like mining operations, take on a variety of forms, since the 1990s, master limited partnerships (MLP) have become the most common corporate structure for oil and gas exploration and production (E&P) companies.194 A MLP is a limited partnership formed under state law.195 Most, if not all, MLPs are formed in Delaware under the Delaware Revised Uniform Limited Partnership Act.196 In a limited partnership, there is one general partner, which has managerial responsibilities and control of operations, and one or more limited partners, which are passive investors.197 But unlike more typical privately held limited partner- ships, the limited partnership interests (i.e., “common units”) in an MLP are registered with the SEC so that they may be sold on stock exchanges and traded publicly.198 MLPs are not taxed at the entity level, and there are significant tax advantages for the holders of the common units as well.199
A given lease, group of leases, or larger production area could be operated by a single E&P MLP or under joint operating agreements,200 which pool resources and help spread the risk of development among more players.201 To further complicate things, a wide variety of joint development agreements, including area of mutual interest agreements, joint exploration agreements, and farmouts/farm-ins, are used to spread risk, investment, and profit across an even wider swath of players.202
The filing of a bankruptcy creates a number of issues with respect to claims for royalty payments (both mining and oil and gas) and treatment of royalty interests in a chapter 11 case.203 There will almost always be a lag time of a month or longer from the time that production comes off of a lease, the production is sold, and the production and sale is properly accounted, until a royalty payment is issued. When an operator files a petition for relief under chapter 11, the royalties for this lag period could be considered unpaid pre-petition claims.
But courts generally do not treat them this way because of their unique characteristic as vested real property interests, which are generally not considered executory contracts.204 Again, because underlying substantive rights are governed by state law, not federal bankruptcy law, this can vary somewhat by state.205 Courts generally hold that neither the royalty interests nor the royalty payments are property of the estate under section 541(a)(6) of the Bankruptcy Code.206 Rather, any monies for royalty payments are, in fact, held in trust by the operator/debtor for the benefit of the royalty owner.207 This is true whether the oil and gas E&P company is handling and processing the royalty payments or whether the payments are handled by a third-party administrator.208 For this reason, too, a court cannot sell a debtor’s mineral rights or oil and gas lease free and clear under section 363(f) of the Bankruptcy Code: the royalty interests are not part of the debtor’s property.
Thus, it is customary for the debtor to seek immediate relief and authorization from the court to continue paying royalty interests in the ordinary course of business following the petition date.209 Such “claims”—or rather funds held in trust by the debtor—will have to be paid in any event, so there is no point in withholding payment during the bankruptcy process as a debtor might do with pre-petition unsecured claims.210
Chapter 11 cases of mining and oil and gas companies do not present any issues that are not found in greater or lesser degree in reorganizations of businesses in other sectors. However, some common issues in mining and oil and gas make chapter 11 plans of reorganization potentially more challenging and, thus, somewhat rarer than in other types of businesses.
There are a number of issues that must be addressed immediately upon commencement (or ideally, in advance) of the case. Most oil and gas and mining leases terminate if they are not operated or if royalties are not paid for a certain period of time. Thus, it is imperative that the debtor obtain funding (whether through use of cash collateral or post-petition financing) to pay to continue operations. Because employees, independent contractors, and utilities are often vital to continued operations, the “first- day” motions filed with the bankruptcy court should include requests for authorization to pay employees, independent contractors, and to keep the lights on. Also, certain “critical vendors” may require payment, including payment of pre-petition amounts due, or they will stop doing business with the debtor. Not all jurisdictions favor so-called critical vendor motions because they violate the principle of equal treatment of all similarly situated creditors. Nevertheless, if the vendors are truly critical to preservation of an asset of the estate, most courts will provide at least some authority to pay critical vendors current.211
Royalty interests’ legal nature as separate real property also has an important implication for asset sales. While section 363(f) can be used to sell property free and clear of many interests, including liens, judgments, and disputed claims, a debtor cannot use section 363(f) to sell an oil and gas lease or a mining claim free and clear of royalty obligations. The royalty interest is a separate real property interest that is not part of the debtor’s bankruptcy estate under section 541(a), and thus the buyer of an oil and gas lease or a mining claim from the debtor remains responsible to pay the severance royalties.212
If a debtor cannot obtain a price for its assets in excess of the liens encumbering the property, and the secured creditor(s) do not consent, the debtor probably cannot sell the assets free and clear of the liens under section 363(b) or (f).213
Another issue common to mining and oil and gas cases involves cleanup and reclamation obligations. As a rule of thumb, cleanup and reclamation obligations are neither stayed nor able to be “stripped off ” in a bankruptcy case, either from an entity or from an asset. The automatic stay in section 362(a) does not protect the debtor from an enforcement action by government environmental regulators to enforce reclamation or cleanup obligations, provided that they do not try to obtain or collect a monetary judgment.214
Abandonment of property is another issue that is affected by the debtor’s environmental obligations. Ordinarily, under section 554(a) of the Bankruptcy Code, the trustee may abandon any property that is “burdensome” to the estate.215 But in a ruling that has slowly eroded that rule, the U.S. Supreme Court in Midlantic National Bank v. New Jersey Department of Environmental Protection ruled that a trustee could not abandon property in contravention of state or local laws designed to protect public health or safety.216 The ruling in Midlantic, however, was not specific as to what constituted a “health and safety” concern sufficient to override the trustee’s abandonment power under section 554(a), and courts have adopted a wide range of interpretations leaving the question somewhat open.217
One major impediment to reorganization is that certain types of environmental obligations simply cannot be discharged in a chapter 11 bankruptcy plan. The Supreme Court, in Ohio v. Kovacs,218 held that money judgments under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA)219 in favor of the U.S. Environmental Protection Agency (EPA) for past cleanup liability were dischargeable claims.220 Similarly, EPA’s claims for future response costs under CERCLA have also been held to be dischargeable.221 But, in what seems like a distinction without a difference, the U.S. Court of Appeals for the Seventh Circuit, in United States v. Apex Oil Co.,222 held that a cleanup injunction issued under the Resource Conservation and Recovery Act of 1976 (RCRA)223 was a non-dischargeable obligation even though the debtor did not own the property upon plan confirmation and EPA had long since converted its demand to one for money for the cleanup costs.224 Subsequent to Apex Oil, EPA has increasingly brought claims for environ- mental cleanup liability under both CERCLA and RCRA to take advantage of the ruling. Accordingly, a prudent practitioner would not attempt to reorganize a debtor entity that has potential liability under RCRA (at least not with the expectation of discharging such obligation), but instead, will reorganize the assets through an asset sale or other mechanism that does not depend on discharge under a plan.
Debt structure (i.e., the secured debt load of mining and oil and gas companies) restricts available options in the absence of consent of the secured lender(s). Often, an oil and gas company’s secured lender will hold a perfected security interest in substantially all of the assets of the debtor.225 There may be other junior secured creditors, too, who may be entirely out of the money. Absent consent of the secured creditors or a credible showing that the debtor has a substantial equity cushion, the debtor will not be able to use cash collateral or obtain post-petition financing to meet expenses, or resist relief from the automatic stay. The only reason that the secured creditor might consent to use of cash collateral or post-petition financing (or, commonly, providing post-petition financing itself) is to prevent a shutdown (and shut in) of the operating assets, which could drastically reduce the value of the lender’s collateral. Furthermore, for many secured lenders, the very last thing they want is to own and operate their debtor’s collateral, which is a very real possibility if the market is such that no one is willing to purchase the assets at a reasonable price at a foreclosure sale. Thus, it is often possible to work cooperatively with secured lenders who want to avoid loss to or acquisition of their collateral.
Confirmable repayment under section 1129(b)(2)(A)(i)(II) must be at least “deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property.”226 Courts have held that this means the present value (which means an interest rate that compensates for both the discount rate and the risk) on the effective date of the plan of the stream of payments must be equal to the allowed amount of the secured claim.227 In the present environment where the risk of non-payment is high, this might not allow much room for a feasible restructuring of the debtor’s capital structure.
With respect to unsecured creditors, the class of unsecured creditors must consent to their treatment or
(i) the plan [must] provide that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property228
This means that if the class of unsecured creditors (1) does not consent or (2) is not paid in full, no equity holder can retain any interest in the debtor under the plan.
The practical effect of these limitations is that the debtor hoping to significantly reduce its debt load must work consensually with its secured and unsecured creditors to get them to consent to allow the debtor’s equity holders to retain some interest in exchange for (1) new investment value, such as a rights offering; and (2) (only with consent of all classes) continued management or operation of the debtor’s assets.
For oil and gas MLPs, institutional secured lenders might have little interest in taking over and running the debtor’s operations because it usually means paying out of pocket to hire a professional operator to assume control. The best option for all parties in that case is for the creditors to agree to convert some portion of their secured and unsecured claims into equity while leaving the existing general partner in place as operator. The common units (limited partnership interests), which do not have the general partner operator’s bargaining position, will likely be wiped out. Similarly, owner/operators in mining enterprises will have to bargain for a stake that keeps them incentivized to continue to operate the project, while passive investors will likely lose their interests in the debtor. Terms governing who controls the new entity and what stake each of the players will get are subject to negotiation. But ultimately, both sides face sufficient incentives to make compromise on consensual reorganization, effected through a bankruptcy plan so as to obtain all the benefits of a discharge and/or to free the assets of all interests under section 363(f), possible and attractive.
Reorganizing mining and oil and gas enterprises is difficult due to structural impediments such as uncompromising secured debt, non- dischargeable environmental obligations, the inability to sell free and clear of royalty and other “real property” type interests, and, of course, strong economic headwinds. In this environment, reorganizing any mining or oil and gas enterprise is a risky business. But as the need for restructure grows ever more acute, creditors and debtors will be forced to compromise their interests to salvage the most viable operations and, where there is insufficient value, to shutter operations that are not worth reorganizing. As production capacity dwindles and demand rebounds, the cycle will turn, and the recovery will begin. Those operations that have successfully reorganized before that time will then be well-positioned to take advantage of the cycle amidst reduced competition, more efficient operations, and reduced debt load.
1 See Clifford Krauss & Ian Austen, “If It Owns a Well or a Mine, It’s Probably in Trouble,” N.Y. Times (Dec. 8, 2015).
3 Id.; see also James B. Stewart, “Freeport-McMoRan Battles the Oil Slump,” N.Y. Times (Jan. 21, 2016).
4 See, e.g., In re Quicksilver Res. Inc., No. 1:15-bk-10585 (Bankr. D. Del. filed Mar. 17, 2015) ($2.1 billion debt); In re Allied Nev. Gold Corp., No. 1:15-bk-10503 (Bankr. D. Del. filed Mar. 10, 2015); In re Patriot Coal Corp., No. 3:15-bk-32450 (Bankr. E.D. Va. filed May 12, 2015); In re Midway Gold US Inc., No. 1:15-bk-16835 (Bankr. D. Colo. filed June 22, 2015); In re Molycorp Inc., No. 1:15-bk-11357 (Bankr. D. Del. filed June 25, 2015); In re Walter Energy, Inc., No. 2:15-bk-02741 (Bankr. N.D. Ala. filed July 15, 2015); In re Alpha Natural Res. Inc., No. 3:15-bk-33896 (Bankr. E.D. Va. filed Aug. 3, 2015); In re Sabine Oil & Gas Corp., No. 1:15-bk-11835 (Bankr. S.D.N.Y. filed July 15, 2015) ($2.9 billion debt); In re Santa Fe Gold Corp., No. 1:15-bk-11761 (Bankr. D. Del. filed Aug. 26, 2015); In re Samson Res. Corp., No. 1:15-bk-11934 (Bankr. D. Del. filed Sept. 16, 2015) ($4.3 billion debt); In re Atna Res. Inc., No. 1:15-bk-22848 (Bankr. D. Colo. filed Nov. 18, 2015); In re Swift Energy Co., No. 1:15-bk-12670 (Bankr. D. Del. filed Dec. 31, 2015) ($1.2 billion debt); In re Arch Coal Inc., No. 4:16-bk-40120 (Bankr. E.D. Mo. filed Jan. 11, 2016); In re Peabody Energy Corp., No. 4:16-bk-42529 (Bankr. E.D. Mo. filed Apr. 13, 2016); In re Linn Energy LLC, No. 6:16-bk-60040 (Bankr. S.D. Tex. filed May 11, 2016); In re Breitburn Energy Partners LP, No. 1:16-bk-11390 (Bankr. S.D.N.Y. filed May 15, 2016); In re SandRidge Energy Inc., No. 4:16-bk-32488 (Bankr. S.D.N.Y. filed May 16, 2016); see also David W. Houston, IV & J. Patrick Warfield, “A ‘Plug’ for Priority Claims in Oil and Gas Cases,” Am. Bankr. Inst. J. (June 2016).
5 The cost of borrowing for mining and metals companies is rising rapidly, with an average increase of more than 180%, from 6.5% yield to worst (YTW) in June 2014 to 16.5% YTW in June 2015. See JPMorgan Mining and Metals High Yield Bond Index.
6 Debtors and their management may owe duties to creditors not to cause further insolvency. See Deborah D. Williamson & Meghan E. Bishop, When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy 55–56 (2012) (Gushers).
7 See 11 U.S.C. § 548(c).
8 While the Bankruptcy Code reach back period under section 548(a) is two years, most states have enacted the UFTA provision containing a four-year reach back period.
9 In re Linn Energy LLC, No. 6:16-bk-60040 (Bankr. S.D. Tex. filed May 11, 2016).
10 See Tom Hals & Tracy Rucinski, “Linn Energy Files for Chapter 11 Bankruptcy in Oil Bust,” Reuters Business (May 11, 2016).
11 The term “merger” as used herein refers to a variety of potential corporate transactions wherein two or more entities consolidate, including asset purchases, entity acquisitions, or triangular mergers.
12 Under the Internal Revenue Code, uncollectible debt can be written off as a loss upon completion of a tender or exchange offer, which loss can be used to offset taxable income. See Treas. Reg. §§ 1.1001-1(a), .1274-2(a).
13 For example, nonperforming loans cannot be counted as “Tier 1” regulatory capital for FDIC-insured financial institutions.
14 11 U.S.C. § 1126(c).
15 The Bankruptcy Code specifically endorses pre-petition solicitation of acceptances of a chapter 11 plan. Id. § 1125(g).
16 See, e.g., Douglas v. Stamco, 363 F. App’x 100, 102 (2d Cir. 2010); Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 464–65 (3d Cir. 2006); Ruiz v. Blentech Corp., 89 F.3d 320, 325 (7th Cir. 1996). While this will not revive the secured debt that was foreclosed, unsecured creditors may be able to demand payment from the new entity.
17 E.g., Wash. Rev. Code §§ 49.52.050, .070 (imposes personal liability on officers and directors for unpaid wages and allows for punitive damages and attorneys’ fees if the violation is “willful”); see also Morgan v. Kingen, 169 P.3d 487 (Wash. Ct. App. 2007) (holding violation was willful violation because officers were in control of funds when payroll was due), aff ’d, 210 P.3d 995 (Wash. 2009).
18 See N.Y. Lab. Law § 198-a(1); People v. Milton C. Johnson Co., 337 N.Y.S.2d 477 (N.Y. Crim. Ct. 1972); cf. People v. Lustig, 420 N.Y.S.2d 624 (N.Y. App. Div. 1979) (holding that officer must have active involvement or actual authority in running company to be liable (citing N.Y. Lab. Law § 198-a)); Stafford v. Puro, 63 F.3d 1436 (7th Cir. 1995); Johnson v. W. Amusement Corp., 510 N.E.2d 991, 991–94 (Ill. App. Ct. 1987) (holding executive responsible for failing to pay union benefits after company filed bankruptcy).
19 See Int’l Union, United Auto., Aerospace & Agric. Implement Workers of Am. v. Aguirre, 410 F.3d 297, 302–03 (6th Cir. 2005).
20 29 U.S.C. §§ 2101–2109; see also 20 C.F.R. pt. 639.
21 Involuntary bankruptcy proceedings, which are commenced by a debtor’s unsecured creditors, are commenced by the creditors filing a petition under chapter 7 or chapter 11. See 11 U.S.C. § 303. Involuntary proceedings are not usually used as a reorganization strategy (at least not by the debtor) and thus are not covered herein.
22 Id. § 301(a). The other chapters or types of bankruptcy proceedings are chapter 9 (municipalities), chapter 12 (family farmers), and chapter 13 (individuals with regular income). These chapters have little application to the present subject and so are not dis- cussed herein.
23 28 U.S.C. § 1408.
24 See Stephen J. Lubben, “Flexible Venue Rules Play Important Role in Multimillion- Dollar Bankruptcy Filings,” N.Y. Times DealBook (Aug. 26, 2015).
25 For example, Washington Mutual, Inc., a Washington State corporation with head- quarters in Washington State and West Coast-heavy operations, filed the chapter 11 case of its minor Delaware-incorporated subsidiary, WMI Investment Corp., in Delaware, and then immediately filed its own case in Delaware under 28 U.S.C. § 1408(2). See In re WMI Inv. Corp., No. 1:08-bk-12228 (Bankr. D. Del. filed Sept. 26, 2008); In re Wash. Mutual Inc., No. 1:08-bk-12229 (Bankr. D. Del. filed Sept. 26, 2008).
26 28 U.S.C. § 1412; see also Fed. R. Bankr. P. 1014. The references to district courts in the jurisdictional statutes are generally understood to authorize the bankruptcy court, which is ancillary to the district court, to exercise such authority. See In re Enron Corp., 274 B.R. 327, 342 (Bankr. S.D.N.Y. 2002) (“The bankruptcy court’s authority to exercise the district court’s power to transfer a case under 28 U.S.C. § 1412 stems from the district court’s referral of the case to the bankruptcy court pursuant to 28 U.S.C. § 157(a).”).
27 Many important rights depend on whether the event occurred pre- or post-petition, and other rights are determined “as of the petition date.” For example:
28 See Office of the U.S. Trustee Region 16, “Guidelines and Requirements for Chapter 11 Debtors in Possession,” at 1 (Oct. 1, 2014) (published by each regional office).
29 11 U.S.C. § 541(a).
30 In re NextWave Personal Commc’ns Inc., 244 B.R. 253, 267 n.7 (Bankr. S.D.N.Y. 2000) (citation omitted) (citing United States v. Whiting Pools, Inc., 462 U.S. 198 (1983)).
31 11 U.S.C. §§ 1101(1), 1107(a), 1108. In chapter 7 cases, in contrast, a trustee is appointed to take possession of and administer the estate automatically after the filing of the petition. Id. § 701(a). The trustee represents the estate and may sue and be sued. Id. § 323.
32 Id. § 1107(a).
33 Thus, when the Bankruptcy Code conveys authority on the “trustee” to perform an act, a debtor in possession is authorized to perform the same act. References to the “trustee” and the “debtor in possession” throughout this chapter are, unless otherwise noted, interchangeable.
34 Id. § 1102(a)(1).
35 Id. § 1102(a)(2).
36 Id. § 1103(a).
37 Id. § 1103(c).
38 28 U.S.C. § 586.
39 11 U.S.C. § 307.
40 Id. § 362(a).
41 H.R. Rep. No. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296–97; S. Rep. No. 95-989, at 54–55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840–41.
42 See, e.g., In re Shamblin, 890 F.2d 123, 125 (9th Cir. 1989). Although most courts characterize violations of the automatic stay as void, a substantial minority consider them voidable. See In re Schwartz, 954 F.2d 569, 572 (9th Cir. 1992) (collecting authorities). The distinction is usually of little consequence, as even the courts that take the position that violations are void recognize the statutory authority of the bankruptcy court under section 362(d) to grant relief, including “terminating, annulling, [or] modifying” the automatic stay, including retroactively for cause. Id. at 573 (quoting 11 U.S.C. § 362(d)).
44 Id. § 362(d); see also Fed. R. Bankr. P. 4001(a).
45 See cases cited infra note 85.
46 11 U.S.C. § 363(e).
47 Id.; see In re Cason, 190 B.R. 917, 928 (Bankr. N.D. Ala. 1995) (“Adequate protection payments are designed to compensate a holder of a secured claim for any decline in the value of its collateral post petition and preconfirmation.” (citing Kaaran E. Thomas, “Valuation of Assets in Bankruptcy Proceedings: Emerging Issues,” 51 Mont. L. Rev. 126 (1990)).
48 11 U.S.C. § 362(d).
49 See 3 Collier on Bankruptcy ¶ 362.07[a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014) (“relief also may be granted when necessary to permit litigation to be concluded in another forum”); see also In re Bison Res., Inc., 230 B.R. 611 (Bankr. N.D. Okla. 1999); In re Apex Oil Co., 107 B.R. 189, 193 (Bankr. E.D. Mo. 1989) (“it is well-established that the bankruptcy court enjoys the discretion to modify the automatic stay ‘for cause’ including liquidation of a claim in a non-bankruptcy forum”).
50 See In re Curtis, 40 B.R. 795, 799–800 (Bankr. D. Utah 1984) (enumerating the so- called Curtis factors).
51 11 U.S.C. § 521(a); Fed. R. Bankr. P. 1007, 1008.
52 11 U.S.C. § 107.
53 Id. § 341(a); Fed. R. Bankr. P. 4001(a)(1).
54 Fed. R. Bankr. P. 2004.
55 Fed. R. Bankr. P. 2002(f).
57 11 U.S.C. § 501; Fed. R. Bankr. P. 3003(b)(3).
58 11 U.S.C. § 501; Fed. R. Bankr. P. 3002(a), 3003(b)(1).
59 11 U.S.C. § 502(a); Fed. R. Bankr. P. 4001(b)(1).
60 11 U.S.C. § 502.
61 Id. § 502(b)(1).
62 Id. § 502(b)(2).
63 Id. § 502(b)(6).
64 Id. § 502(b)(7).
65 Id. § 365(a)
68 Id. § 365(f).
69 Id. § 365(d)(2).
71 Id. § 365(b)(1).
72 See In re Stoltz, 315 F.3d 80 (2d Cir. 2002); In re Carterhouse, Inc., 94 B.R. 271, 273 (Bankr. D. Conn. 1988).
73 11 U.S.C. § 502(g).
74 See id. § 363(a) (defines cash collateral).
75 Creation and perfection of security interests, like most property rights in bankruptcy, are governed by state substantive law. See Butner v. United States, 440 U.S. 48, 55 (1979). Both debtors and creditors are well advised to review the documents creating and perfecting security interests in collateral, as their respective rights in bankruptcy are governed by them.
76 11 U.S.C. § 363(c)(2).
77 Id. § 363(e); see also discussion of “adequate protection,” infra note 85.
78 In re Club Dev. & Mgmt. Corp., 27 B.R. 610, 611–12 (9th Cir. B.A.P. 1982) (quoting 11 U.S.C. § 503(b)(1)(A)).
79 11 U.S.C. § 364(a), (b).
80 See id. § 364(c) (authorizing the court to grant a post-petition lien only “[i]f the trustee is unable to obtain unsecured credit”); see also In re Ames Dep’t Stores, Inc., 115 B.R. 34, 37 (Bankr. S.D.N.Y. 1990).
81 See In re Ctr. Wholesale, Inc., 759 F.2d 1440 (9th Cir. 1985); In re Phoenix Steel Corp., 39 B.R. 218 (D. Del. 1984); In re Aqua Assocs., 123 B.R. 192, 196 (Bankr. E.D. Pa. 1991); In re Dunes Casino Hotel, 69 B.R. 784, 794–96 (Bank. D.N.J. 1986).
82 11 U.S.C. § 364(d)(1).
83 In re DB Capital Holdings, LLC, 454 B.R. 804, 822 (Bankr. D. Colo. 2011).
84 Id. (internal quotation marks omitted) (quoting In re YL West 87th Holdings I LLC, 423 B.R. 421, 441 (Bankr. S.D.N.Y. 2010)).
85 See In re Utah 7000, L.L.C., No. 2:08-bk-21869 et al., 2008 WL 2654919, at *6 n.6 (Bankr. D. Utah July 3, 2008) (“[C]ase law almost uniformly concludes that: (1) an equity cushion of [20%] or more constitutes adequate protection; (2) an equity cushion of less than [11%] is insufficient; and (3) a range of [12%] to [20%] has divided the Courts.” (quoting In re C.B.G. Ltd., 150 B.R. 570, 573 (Bankr. M.D. Pa. 1992))); see also In re McKillips, 81 B.R. 454 (Bankr. N.D. Ill. 1987) (collecting cases).
86 See Ctr. Wholesale, 759 F.2d at 1451 n.24; see also In re Saybrook Mfg. Co., 963 F.2d 1490 (11th Cir. 1992); In re Adams Apple, Inc., 829 F.2d 1484, 1488–89 (9th Cir. 1987).
87 Cross collateralization of post-petition debt with pre-petition collateral is the more common type of cross collateralization and is generally justified as it will presumably benefit the estate. Collateralizing pre-petition debt with post-petition collateral (sometimes called a “roll up”) is viewed more suspiciously. See In re Texlon Corp., 596 F.2d 1092 (2d Cir. 1979); see also Saybrook, 963 F.2d 1490; In re FCX, Inc., 54 B.R. 833 (Bankr. E.D.N.C. 1985); In re Monarch Circuit Indus., Inc., 41 B.R. 859, 861–62 (Bankr. E.D. Pa. 1984); In re Vanguard Diversified, Inc., 31 B.R. 364, 366 (Bankr. E.D.N.Y. 1983).
88 11 U.S.C. § 548(a).
89 Id. § 547.
90 Id. § 727(a) (“The court shall grant the debtor a discharge, unless . . . the debtor is not an individual . . . .”).
91 In some states, a wind down under state law may be difficult if the entity is insolvent. Likewise, ABCs vary from state to state and are preferable in some states, but not in others.
92 See Lisa Schweitzer & Joel Moss, “US: Putting Section 363 Asset Sales to Work,” Int’l Fin. L. Rev. (June 14, 2010).
94 11 U.S.C. § 363(f).
95 In re Daufuskie Island Props., LLC, 431 B.R. 626, 642 (Bankr. D.S.C. 2010).
96 11 U.S.C. § 363(f) (emphasis added).
98 Id. § 363(m).
99 See In re Nashville Senior Living, LLC, 407 B.R. 222, 228 (6th Cir. B.A.P. 2009).
100 Id. at 231 (collecting authorities).
101 In re PW, LLC, 391 B.R. 25 (9th Cir. B.A.P. 2008).
102 See In re Robert L. Helms Constr. & Dev. Co., 110 F.3d 1470, 1475 (9th Cir. 1997), vacated on other grounds, 139 F.3d 702, 703 n.2 (9th Cir. 1998).
103 11 U.S.C. § 363(m).
104 In re Integrated Res., Inc., 147 B.R. 650, 657 (S.D.N.Y. 1992); see In re Twenver, Inc., 149 B.R. 954, 956–57 (refusing to approve $100,000 bid increment where initial purchase price was $450,000). The amount of a break-up fee must bear a reasonable correlation to the purchase price in the transaction, but a survey of the cases indicates a wide range of accept- able break-up fees depending on the circumstances. See In re Fin. News Network Inc., 980 F.2d 165, 167 (2d Cir. 1992) (approving without discussion a $8.2 million break-up fee on a $149.3 million transaction—or 5.5% of total consideration offered); In re Chateaugay Corp., 198 B.R. 848, 861 (S.D.N.Y 1996) (enforcing a $20 million “reverse break-up fee” payable to debtor on a $450 million offer—or 4.4% of total consideration), aff ’d, 108 F.3d 1369 (2d Cir. 1997) (unpublished); Integrated Res., 147 B.R. at 662 (break-up fee to compensate bidder’s out-of-pocket expenses up to 3.2% of the proposed purchase price; expert testified that outside of bankruptcy, break-up fees average 3.3%); In re Bally Total Fitness of Greater N.Y., Inc., No. 1:07-bk-12395, 2007 WL 4920320 (Bankr. S.D.N.Y. Aug. 21, 2007) (approving break-up fee of 4.3% and expense reimbursement); In re Mount Vernon Monetary Mgmt. Corp., No. 7:10-bk-23053 (Bankr. S.D.N.Y. Nov. 19, 2010) (approving break-up fees of 4% and 5% for two sales of debtors’ assets).
105 See In re America W. Airlines, Inc., 166 B.R. 908, 912 (Bankr. D. Ariz. 1994) (holding that the break-up fee was actually a liquidated damages clause and that liquidated damages could not be paid as an administrative expense “because section 503(b) only allows payment of administrative expense claims which are for ‘actual’ expenses that were incurred that were also beneficial to a Debtor’s estate”); see also In re O’Brien Envtl. Energy, Inc., 181 F.3d 527, 537 (3d Cir. 1999).
106 See In re Big Rivers Elec. Corp., 233 B.R. 726, 738 (Bankr. W.D. Ky. 1998) (so-called “no-shop” clauses are per se illegal and other clauses meant to limit ability to shop to stalking horse bid must be subjected to heavy scrutiny).
107 11 U.S.C. § 363(k).
108 Id.; see also RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2070 n.2 (2012).
109 See In re Fisker Automotive Holdings, Inc., 510 B.R. 55 (Bankr. D. Del. 2014); see also In re Phila. Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010).
110 11 U.S.C. § 1123(b)(6).
111 Small business debtors under chapter 11, however, have more stringent deadlines, which are not discussed in full here. See, e.g., id. §§ 101(51D), 1121(e), 1129(e).
112 11 U.S.C. § 1121 provides 120 days to solicit and 180 days to confirm a plan, subject to extension by the court for cause.
113 Id. § 1125(b); Fed. R. Bankr. Proc. 3016(b).
114 11 U.S.C. § 1125(e).
115 Id. § 1125(a)(1).
116 Id. § 1125(b).
117 Fed. R. Bankr. P. 3017(d) defines “creditors and security holders” as including “holders of stock, bonds, debentures, notes, and other securities of record on the date the order approving the disclosure statement is entered . . . .”
118 Fed. R. Bankr. P. 3017(d).
120 11 U.S.C. § 1126(c).
121 Id. § 1123(a)(1).
122 Id. § 1122(a).
123 Id. § 1123(a)(2)–(4).
124 Id. § 1123(a)(4).
125 Id. § 1123(a)(5).
126 Id. § 1123(a)(5)(D), (b)(4).
127 Id. § 1123(a)(5)(C).
128 Id. § 1123(a)(5)(F), (H).
129 Id. § 1123(b)(2).
130 Id. § 1123(b)(6).
131 Id. § 1124(1).
132 Id. § 1124(2).
133 Id. § 1126(f).
134 Id. § 1126(g).
135 See id. § 1128(a). But see Fed. R. Bankr. P. 3020(b)(2) (allowing the court, where no objection to confirmation has been filed timely, to determine that the plan has been pro- posed in good faith and not by any means forbidden by law without receiving any evidence on such issues).
136 11 U.S.C. § 1128(b); see also Fed. R. Bankr. P. 3020(b)(1).
137 11 U.S.C. § 1129(a)(7).
138 11 U.S.C. § 1124(1) provides that a claim is impaired unless the plan “leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.”
139 Id. § 1129(a)(8).
140 Id. § 1129(a)(9). Certain classes of claims, if such class has consented to the plan, can be paid over time but must be paid in full.
141 Id. § 1129(a)(10).
142 Id. § 1129(a)(11).
143 See In re Holly’s, Inc., 140 B.R. 643, 698 n.89 (Bankr. W.D. Mich. 1992) (“[I]n deter- mining feasibility the court considers ‘the adequacy of the capital structure, the earning power of the business, economic conditions, the ability of management, the probability of a continuation of the same management, and any other related matters which determine the prospects of a sufficiently successful operation to enable performance of the provisions of the plan.’ ” (quoting 5 Lawrence P. King, Collier on Bankruptcy ¶ 1129.02 (15th ed. 1992)).
144 11 U.S.C. § 1129(b).
145 Id. § 1129(b)(1).
146 In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y. 1986) (citing Benjamin Weintraub & Alan N. Resnick, Bankruptcy Law Manual ¶ 8.23, at 8-109 to 8-110 (rev. ed. 1986); Kenneth N. Klee, “All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code,” 53 Am. Bankr. L.J. 133, 142 (1979)).
147 11 U.S.C. § 1129(b)(2)(A)(i)(I).
148 Id. § 1129(b)(2)(A)(i)(II).
149 Id. § 1129(b)(2)(B)(i).
150 Id. § 1129(b)(2)(B)(ii).
151 See Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle Street P’ship, 526 U.S. 434, 441–42 (1999).
152 11 U.S.C. § 1126(c).
153 See § 2.04[b][i], supra; see also 11 U.S.C. § 1125(a).
154 11 U.S.C. § 1126(b), (g).
155 The 28-day notice requirement for consideration of confirmation of the plan under Fed. R. Bankr. P. 2002(b) is the only limitation on the time within which a chapter 11 case can theoretically be completed.
156 See Summary of Prepackaged Plans & Notice, In re Vertis Holdings, Inc., No. 1:08-bk- 11460 (Bankr. D. Del. Aug. 12, 2008), ECF No. 145.
157 See In re Vertis Holdings, Inc., No. 1:08-bk-11460 (Bankr. D. Del. filed July 15, 2008); In re ACG Holdings Inc., No. 1:08-bk-11467 (Bankr. D. Del. filed July 15, 2008).
158 See Findings of Fact, Conclusions of Law, & Order, In re Vertis Holdings, Inc., No. 1:08-bk-11460 (Bankr. D. Del. Aug. 26, 2008), ECF No. 181.
159 See Butner v. United States, 440 U.S. 48, 55 (1979).
160 30 U.S.C. §§ 22–47; see Multiple Use Mining Act of 1955, 30 U.S.C. §§ 601, 603, 611–615; see also 43 C.F.R. grps. 3700–3800.
161 Claims must be staked and recorded with the BLM and county land office and described as either a lode claim or a placer claim, depending on the characteristics of the discovery, and recorded accordingly.
162 43 C.F.R. pts. 3834, 3835 (subpt. D), 3836.
163 Id. pt. 3836.
164 See In re Becknell & Crace Coal Co., 761 F.2d 319, 321 (6th Cir. 1985) (holding that a transfer of an interest in coal under Kentucky law is a conveyance of an interest in real property); In re Philbeck, 145 B.R. 870, 871 (Bankr. E.D. Ky. 1992).
165 Philbeck, 145 B.R. at 871–72. In Philbeck, the bankruptcy court evaluated the terms of the coal lease and concluded it was a transfer of a real property interest. The coal lease had an original term of four years and then as long as coal was produced from the premises. It also included a covenant from the lessor to the lessee that “he is seized with a good, fee simple title to all the minable and merchantable coal embraced within this lease . . . .” Id. at 871. Further, the court reasoned, there were no unperformed obligations on the part of the defendant that would place the contract within the definition of an executory contract subject to section 365. Id. at 872.
166 See In re Am. Home Mortg. Holdings, Inc., 402 B.R. 87, 102 (Bankr. D. Del. 2009) (allowing transfer under section 363(b) despite an anti-assignment provision when the only remedy was damages (i.e., the lessee could not void the lease)); see also In re C-Power Prods., Inc., 230 B.R. 800 (Bankr. N.D. Tex. 1998) (finding authority under section 363(f)).
167 See, e.g., Form 5 LLC: Exploration, Development and Mining Limited Liability Company Model Forms (Rocky Mt. Min. L. Fdn. 2015). For a thorough comparison of Form 5 LLC with standard form agreements used in Australia and Canada, see Steve Potter, Brian E. Abraham & R. Craig Johnson, “Who’s on Top? A Comparison of Key Provisions of the Australian, Canadian, and U.S. Versions of Mining Joint Venture Agreements,” 56 Rocky Mt. Min. L. Inst. 24-1 (2010).
168 See, e.g., 15 Pa. Cons. Stat. § 8971(a)(4).
169 11 U.S.C. § 365(b)(2).
170 See In re Ehmann, 319 B.R. 200, 201 (Bankr. D. Ariz. 2005) (holding that “because the operating agreement of a limited liability company imposes no obligations on its members, it is not an executory contract. Consequently when a member who is not the manager files a Chapter 7 case, his trustee acquires all of the member’s rights and interests pursuant to Bankruptcy Code §§ 541(a) and (c)(1), and the limitations of §§ 365(c) and (e) do not apply” (footnote omitted)).
171 11 U.S.C. § 362(a).
172 But see Alan J. Brody & Ari Newman, “Consequences of the Rejection of LLC Operating Agreements and Sale of LLC Membership Interests,” Am. Bankr. Inst. J. (July 2013) (arguing that dilution rights are an equitable remedy and thus, a debtor in possession or trustee cannot sell a debtor-member’s LLC membership interest free and clear under section 363(f)(1) of the Bankruptcy Code).
173 11 U.S.C. § 365(f)(1).
174 Id. § 365(c).
175 See In re IT Grp., Inc., 302 B.R. 483, 488 (D. Del. 2003) (holding that the right of first refusal was invalid because it “would hamper the Debtors’ ability to assign the property or foreclose the estate from realizing the full value of the Debtors’ interest in [the LLC]”).
176 See id.; see also Fleming Cos., Inc. v. Thriftway Medford Lakes, Inc., 913 F. Supp. 837, 842 (D.N.J. 1995) (“Parties are generally free to contract as they desire and, absent mistake, fraud, duress, unconscionability, or illegality, parties are bound by the unambiguous terms of their contract.” (citing Brokers Title Co. v. St. Paul Fire & Marine Ins. Co., 610 F.2d 1174 (3d Cir. 1979))).
177 11 U.S.C. § 365(f)(2)(B).
178 See In re Soderstrom, 484 B.R. 874, 876 (M.D. Fla. 2013) (affirming bankruptcy court holding that (1) LLC agreement was an executory contract; (2) applicable law allows members of an LLC not to consent to a new managing member; and (3) non-debtor member did not consent to proposed purchaser as a new managing member of LLC and, therefore, under section 365, only the economic interest was available for sale); see also IT Grp., 302 B.R. at 485–87; In re Weilnau, No. 3:11-bk-30467, 2012 WL 893264, at *3 (Bankr. N.D. Ohio Mar. 14, 2012) (Holding that the following provisions were valid under Ohio law: “provisions of the LLC’s Operating Agreement that impose restrictions relating to the sale or assignment of membership units to third parties. The Operating Agreement restricts sales to the sale of the economic interest in the units only and, absent approval by the other LLC’s members, does not permit the buyer the rights and privileges of membership in the LLC, which includes the right to participate in the management of the affairs of the LLC.”).
179 11 U.S.C. § 365(d)(2).
180 Vicki R. Harding, “Bankruptcy Sales: Can LLC Interests Be Sold over a Member’s Objections?” Bankruptcy-RealEstate-Insights Blog (Apr. 12, 2013) (emphasis added) (quoting 11 U.S.C. § 363(h)).
181 In re Horob Livestock Inc., 382 B.R. 459, 492 (Bankr. D. Mont. 2007) (quoting 3 Collier on Bankruptcy ¶ 363.08 (15th ed. 2006)).
182 Courts have struggled with “impracticability.” One court held that “practicable is not a synonym for possible; nor is it a synonym for practical. Its meaning falls between the two concepts of possibility and practicality, and incorporates both ideas—something that is not only possible, but also feasible and sensible.” In re Brown, 504 B.R. 446, 450 (Bankr. E.D. Ky. 2014) (alteration omitted) (quoting 56 Associates v. DiOrio, 381 B.R. 431, 436 (D.R.I. 2008)). The trustee bears the burden of proof on each of the section 363(h) factors. See In re Kebe, 469 B.R. 778, 796 (Bankr. S.D. Ohio 2012).
183 11 U.S.C. § 363(i).
184 Id. § 364(d)(1).
185 Id. § 362(d); see In re Mellor, 734 F.2d 1396, 1400 (9th Cir. 1984) (calling an equity cushion “the classic form of protection of a secured debt justifying the restraint of lien enforcement by a bankruptcy court”).
186 See cases cited supra note 85.
187 11 U.S.C. § 1129(a)(7).
188 For a thorough treatment of valuation issues and methodologies in bankruptcy, see David Gray Carlson, “Secured Creditors and the Eely Character of Bankruptcy Valuations,” 41 Am. U. L. Rev. 63 (1991).
189 See Comm’r v. Marshall, 125 F.2d 943, 946 (2d Cir. 1942) (“The fallacy in that argument stems largely from lack of recognition of the eely character of the word ‘value.’ It is a bewitching word which, for years, has disturbed mental peace and caused numerous useless debates. Perhaps it would be better for the peace of men’s minds if the word were abolished. Reams of good paper and volumes of good ink have been wasted by those who have tried to give it a constant and precise meaning.” (footnote omitted)).
190 11 U.S.C. § 506(a)(1).
191 See Gushers, supra note 6, at 19–21 & n.70.
192 8 Patrick H. Martin & Bruce M. Kramer, Williams and Meyers, Oil & Gas Law, Manual of Oil and Gas Terms 608 (2015).
193 See Lake v. Sealy, 165 So. 399, 401 (Ala. 1936) (interest in all oil, gas, and mineral rights “classified in the nomenclature of the law of real property as incorporeal hereditaments”); Hanson v. Ware, 274 S.W.2d 359, 362 (Ark. 1955) (“it is settled in Arkansas that ‘royalties in gas or oil, until brought to the surface and reduced to possession, are interests in real estate and not personal property’ ” (quoting Arrington v. United Royalty Co., 65 S.W.2d 36, 38 (Ark. 1933))); Callahan v. Martin, 43 P.2d 788, 792 (Cal. 1935) (“the assignee of a royalty interest in oil rights . . . has an interest or estate in real property”); Colo. Rev. Stat. § 38-30-107.5(1) (“Any conveyance, reservation, or devise of a royalty interest in minerals or geothermal resources, whether of a perpetual or limited duration, contained in any instrument executed on or after July 1, 1991, creates a real property interest . . . .”); Ralston v. Thacker, 932 S.W.2d 384, 387 (Ky. Ct. App. 1996) (“an oil and gas lease is an interest in real property”); La. Code Civ. Proc. Ann. art. 3664 (“The owner of a mineral right may assert, protect, and defend his right in the same manner as the ownership or possession of other immovable property . . . .”); Jaenicke v. Davidson, 287 N.W. 472, 474 (Mich. 1939) (“a lease of oil and gas rights in a tract of land constitutes an interest in real property”); Duvall v. Stone, 213 P.2d 212, 215 (N.M. 1972) (grant of royalty rights is grant of real property); Pounds v. Jurgens, 296 S.W.3d 100, 107 (Tex. App.—Houston [14th Dist.] 2009) (right to receive royalties considered interest in real property); Dame v. Mileski, 340 P.2d 205, 209 (Wyo. 1959) (royalty interest relating to certain land “must be held to be real property and subject to the law relating thereto”).
194 See Phillip R. Clark & Peter O. Hansen, “Understanding Master Limited Partnerships: What Every Oil and Gas Lawyer Needs to Know,” 54 Rocky Mt. Min. L. Inst. 22-1, 22-3 (2008).
196 See John Goodgame, “Master Limited Partnership Governance,” 60 Bus. Law. 471, 485 & n.77 (2005).
197 Clark & Hansen, supra note 194, at 22-3.
198 Id. at 22-3 to 22-4.
199 Id. at 22-4 to 22-5.
200 Some states, like Oklahoma, have forced pooling arrangements. See Gushers, supra note 6, at 14.
202 Id. at 17.
203 See Randall E. Hubbard, “Production Royalties: Real Property, Personal Property, Incorporeal Hereditaments, Chattel Real, Profits à Prendre, or What—and Why Does It Matter?” 62 Rocky Mt. Min. L. Inst. 16-1, § 16.06 (2016).
204 See, e.g., Dauphin Island Prop. Owners Ass’n v. Callon Institutional Royalty Investors I, 519 So. 2d 948, 951 (Ala. 1988) (holding that under Alabama law a royalty interest is a vested interest); Hanson v. Ware, 274 S.W.2d 359, 362 (Ark. 1955) (holding that under Arkansas law a royalty owner has a present interest rather than a future interest); Tennant v. Dunn, 110 S.W.2d 53, 56 (Tex. Comm’n App. 1937) (holding that under Texas law conveyances made pursuant to the creation of an oil and gas lease convey a vested real property right at the time of the conveyance).
205 For example, in Ohio and to some extent in Oklahoma and Kansas, oil and gas leases are considered contractual relationships and thus are potentially subject to rejection under section 365 of the Bankruptcy Code. See In re J.H. Land & Cattle Co., 8 B.R. 237, 239 (Bankr. W.D. Okla. 1981) (holding Kansas oil and gas leases were executory contracts); In re Integrated Petroleum Co., 44 B.R. 210, 214 (Bankr. N.D. Ohio 1984) (assuming, without discussion, that oil and gas leases were executory contracts and granting relief from stay for counterparty to retake possession of wells because debtor lacked ability to perform). But see In re Wolfe, 181 B.R. 90, 91 (Bankr. D. Kan. 1995) (“Kansas recognizes an ownership- in-place concept of oil and gas. Under this theory, ownership extends to oil and gas in the ground as part of the land, similar to the ownership of hard minerals. The owner of the surface of the land also owns the minerals in place below the ground, a corporeal estate in realty in the oil and gas. He or she can create a separate corporeal estate in realty in the oil and gas apart from the rest of the land. Such a severed mineral interest is, in general, subject to the same rules as affect other corporeal interests in real property.”).
206 For a full state-by-state breakdown and case authority, see Deborah D. Williamson, “Bankruptcy Treatment of (I) Leases, (II) Joint Operating Agreements (‘JOAS’) and (III) Farmout/Farming Agreements” (Am. Bankr. Inst. 2015).
207 11 U.S.C. § 541(b) provides that:
Property of the estate does not include—
. . . .
(4) any interest of the debtor in liquid or gaseous hydrocarbons to the extent that—
(A)(i) the debtor has transferred or has agreed to transfer such interest pursuant to a farmout agreement or any written agreement directly related to a farmout agreement; and
(ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 544(a)(3) of this title; or
(B)(i) the debtor has transferred such interest pursuant to a written conveyance of a production payment to an entity that does not participate in the operation of the property from which such production payment is transferred; and
(ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 542 of this title.
208 See In re SemCrude, L.P., 418 B.R. 98, 106 (Bankr. D. Del. 2009) (holding that funds by the debtor, which used its back office to process royalty payments for Vess Oil Corp., were not property of the debtor’s estate under section 541(d), but rather, were held in trust on behalf of the royalty interest holders).
209 See, e.g., Motion of Debtors Pursuant to 11 U.S.C. §§ 105(a), 363(b), and 541 for Entry of Interim and Final Orders (I) Authorizing Payment of All Funds Relating to Royalty Interests and (II) Directing Financial Institutions to Honor and Process Checks and Transfers Related to Such Royalty Interests, In re Breitburn Energy Partners LP, No. 1:16-bk-11390 (Bankr. S.D.N.Y. May 16, 2016), ECF No. 16.
210 See also the following section discussing asset sales of oil and gas leases subject to royalty interests.
211 See In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004) (raising standards for critical vendors and disavowing the previously applied “doctrine of necessity”); see also In re CoServ, L.L.C., 273 B.R. 487, 498 (Bankr. N.D. Tex. 2002) (establishing a three-part test for critical vendor motions: (1) “it must be critical that the debtor deal with the claimant”; (2) “unless it deals with the claimant, the debtor risks the probability of harm, or, alternatively, loss of economic advantage to the estate or the debtor’s going concern value, which is disproportionate to the amount of the claimant’s prepetition claim”; and (3) “there is no practical or legal alternative by which the debtor can deal with the claimant other than by payment of the claim”); In re Mirant Corp., 296 B.R. 427 (Bankr. N.D. Tex. 2003); In re Orion Ref. Corp., 372 B.R. 688 (Bankr. D. Del. 2007) (enforcing oral post-petition agreement between debtor and critical vendor).
212 See In re Petroleum Production Mgmt., Inc., 282 B.R. 9, 11 (10th Cir. B.A.P. 2002). But see In re Pintlar Corp., 187 B.R. 680 (Bankr. D. Idaho 1995) (holding, in unusual circumstances, that trustee could convey real property free and clear of easement in favor of ASARCO for purpose of dumping mining wastes in river where such easement could not be used under current environmental laws).
213 See In re CDX Gas, LLC, No. 4:08-bk-37922, 2009 WL 1651445 (Bankr. S.D. Tex. June 9, 2009).
214 11 U.S.C. § 362(b)(4), (5); see also Kathryn R. Heidt, “The Automatic Stay in Environ- mental Bankruptcies,” 67 Am. Bankr. L.J. 69 (1993).
215 11 U.S.C. § 554(a).
216 474 U.S. 494, 507 (1986).
217 See In re Smith-Douglass, Inc., 856 F.2d 12, 15–16 (4th Cir. 1988) (interpreted Midlantic as creating a very narrow exception to the abandonment power for serious health risks); see also In re L.F. Jennings Oil Co., 4 F.3d 887 (10th Cir. 1993). But see In re Peerless Plating Co., 70 B.R. 943, 947 (Bankr. W.D. Mich. 1987) (interpreting Midlantic broadly and holding that every violation of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) demonstrates a sufficient threat to public safety to justify restricting the trustee’s abandonment power); In re St. Lawrence Corp., 248 B.R. 734, 744–45 (Bankr. D.N.J. 2000) (placing on state environmental agency the burden of demonstrating the applicability of the Midlantic exception to the trustee’s authority to abandon and holding that the state failed to meet that burden because it did not show an identified hazard that posed a risk of imminent and identifiable harm to the public health and safety).
218 469 U.S. 274 (1985).
219 42 U.S.C. §§ 9601–9675.
220 Kovacs, 469 U.S. at 283; accord In re Manville Forest Products Corp., 209 F.3d 125 (2d Cir. 2000) (holding that confirmation of reorganization plan discharged debtor from liability under pre-petition indemnification agreement for liabilities arising from remediation of site previously owned by the debtor).
221 See In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991); see also In re Reading Co., 115 F.3d 1111 (3d Cir. 1997).
222 579 F.3d 734 (7th Cir. 2009). One of the authors, Brian M. Rothschild, was counsel for Apex Oil Co. on the petition for writ of certiorari to the U.S. Supreme Court from the Seventh Circuit, which was denied.
223 42 U.S.C. §§ 6901–6987.
224 Apex Oil, 579 F.3d at 738–39; see also AM Int’l, Inc. v. Datacard Corp., 106 F.3d 1342 (7th Cir. 1997) (cleanup order issued by district court under section 7002 of RCRA was not dischargeable); In re Indus. Salvage, Inc., 196 B.R. 784 (Bankr. S.D. Ill. 1996) (state order directing closure of landfills was not a dischargeable claim).
225 See Gushers, supra note 6, at 63–64.
226 11 U.S.C. § 1129(b)(2)(A)(i)(II) (emphasis added).
227 See Till v. SCS Credit Corp., 541 U.S. 465 (2004).
228 11 U.S.C. § 1129(b)(2)(B) (emphasis added).
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