Wednesday, March 11, 2015

As Oil Prices Fall, Oil & Gas Bankruptcies Rise

While a new report from the Administrative Office of the U.S. Courts shows a 46% decline in chapter 11 filings from 2010 to 2014, there appears to be an uptick in energy related filings, especially by Texas-based companies.

The report from the Administrative Office shows that chapter 11 filings decreased from 14,191 in fiscal year 2010 to 7,658 in fiscal year 2014, a decline of 46% in just four years.    A separate report from the U.S. Energy Information Administration shows the price of West Texas Intermediate Crude dropping from over $100 per barrel in July 2014 to just over $50 per barrel in January 2015.  While bankruptcy is typically a lagging indicator in the economy, oil and gas related bankruptcy filings appear to be on the rise with at least three publicly traded companies filing this month.   

I was able to locate eleven energy-related filings with aggregate debt of $4.9 billion in the past few months.   While all of the American debtors were Texas-based, they included filings in Delaware, Utah and the Southern and Western Districts of Texas.   Calgary, Canada has also received two filings, including one which resulted in a Chapter 15 in the Western District of Texas.

Case #
Case Name
Endeavour Operating Corporation (Houston, TX)
Marion Energy, Inc. (McKinney, TX)
KiOR, Inc. (Pasadena, TX)
Alberta, Canada
Gasfrac Energy Services, Inc. (Calgary)
$88.7M CDN + $10M USD
WBH Energy, LP (Austin, TX)
Ch. 15
Gasfrac Energy Services, Inc.(Calgary)
$88.7M CDN + $10M USD
Royalty Partners, LLC  (Houston, TX)
Alberta, Canada
Ivanhoe Energy Inc. (Calgary)
$103M CDN
Cal Dive International, Inc. (Houston, TX)
Dune Energy, Inc. (Houston, TX)
BPZ Resources, Inc. (Houston, TX)
Quicksilver Resources, Inc. (Fort Worth, TX)

Monday, March 09, 2015

Fifth Circuit Report: February 2015

February's bankruptcy opinions revolve around the common theme of not doing things right.   There is the case of an attorney who didn't pay a sanctions order and incurred more liability, an assignee from a bankruptcy debtor who wasn't in existence at the time and a buyer who didn't read his title commitment.    They did not find any satisfaction at the Court of Appeals.

Garrett v. Coventry II DDR/Trademark Montgomery Farm, LP (Matter of White-Robinson), No. 14-10525 (5th Cir. 2/6/15).   This case involved a bankruptcy court which sanctioned a law firm and then imposed a contempt order against them when they did not pay the sanction.   The District Court and the Fifth Circuit both affirmed the contempt order.   Attorney Garrett represented Nina White-Robinson in her bankruptcy.    She represented the Debtor in a suit against DDR.   The Bankruptcy Court ordered that Garrett and her firm pay sanctions totaling $25,000 for discovery abuse and for filing a frivolous motion for contempt.   Garrett appealed the sanctions orders and lost.  Garrett did not obtain a stay pending appeal nor did she pay the sanctions.   As a result, DDR brought a motion for contempt against Garrett and her firm.   The Bankruptcy Court ordered Garrett to pay an additional $6,454.50 in expenses to DDR and ordered that they pay an additional $100.00 per day for each additional day that they did not pay the sanctions.   (There is an irony here in that the attorneys started the ball rolling with a motion for contempt only to have one granted against themselves.).

The Fifth Circuit found that the Bankruptcy Court had authority to issue the civil contempt order.  It found that it was a core proceeding for the Bankruptcy Court to enforce its own orders and that the pending appeal did not deprive the court of jurisdiction.   The Fifth Circuit also rejected the argument that the Contempt Order improperly allowed imprisonment for failure to pay a debt.    However, the Contempt Order did not provide for imprisonment.   Rather, it just increased the amount of money she owed.   The Fifth Circuit also rejected the argument that the contempt order was an abuse of discretion.  

The first moral here is that when appealing an order for payment of money, you should always request a stay pending appeal.   The second one is that if you don't get a stay pending appeal, you should be prepared to get your checkbook out.   Bankruptcy Courts don't like it when their orders are ignored.

Superior MRI Services, Inc. v. Alliance Healthcare Services, Inc., No. 14-60087 (5th Cir. 2/18/15). This case involves rights supposedly acquired from a debtor that filed bankruptcy.     We start with P & L Incorporated.   It filed chapter 7 bankruptcy on January 19, 2012.   In its statement of financial affairs, it referenced an assignment of MRI service agreements to Superior MRI Services.   However, Superior was not incorporated with the State of Mississippi until November 28, 2011.   Superior then sued Alliance Healthcare Services for allegedly interfering with the MRI service agreements it acquired from the Debtor.   Each of the incidents happened prior to Superior's incorporation.    Alliance moved to dismiss for lack of prudential standing.  It provided public records showing that Superior was not incorporated at the time of the alleged assignment.   Furthermore, Superior was not able to provide evidence of the alleged assignment other than the statement in P & L's statement of financial affairs.    The District Court dismissed the complaint.   The District Court rejected the argument that P & L and Superior had merged and that Superior had ratified the assignment after it was incorporated.   The Fifth Circuit affirmed.    

The principal bankruptcy interest here is what doesn't appear in the record.    Apparently Alliance also argued that any cause of action belonged to the bankruptcy trustee since the alleged wrongs occurred prior to bankruptcy.   Superior sought leave to join the trustee as a party but the court dismissed the case before that could happen.    There is certainly a hint here that P & L sought to transfer assets to a third party on the eve of bankruptcy to keep them out of the estate.   If that was the case, the plan failed due to the fact that the assignee didn't exist at the time and no evidence of the assignments was ever produced.    Assuming that there ever was a valid cause of action, it should have been pursued by the bankruptcy trustee.    However, we don't know what the chapter 7 trustee thought about the case or whether he ever knew it existed.   If this were a Sherlock Holmes mystery, it would be the case of the trustee who didn't bark.    
Baker v. Baker (In re Baker), No. 14-10569 (5th Cir. 2/20/15)(unpublished).    This is the case of Joe, Joan and John and the missing mineral interest.   Joe and Joan were married.   When they got divorced, Joan was supposed to convey all of her interest in a property known as Poppies to Joe.  However, when she signed the deed, it contained an exclusion for her mineral interest in the property.   At some point Joe sued Joan in state court to compel her to convey the mineral interest to him.    Joe filed chapter 12.  Under his plan, he sold all of the estate's interest in Poppies to John.   The sale order provided for John to receive all of the estate's interest, both mineral and surface to the Poppies property.   John received a title commitment showing a reservation for the mineral interests and accepted a deed with this reservation as well.   Eight months later, he filed a motion to compel, seeking to force the bankruptcy estate to convey the mineral interest to him.   Finding that the estate had already conveyed all of the interest that it had, the Bankruptcy Court denied the motion.   On appeal, John contended that the Bankruptcy Court exceeded its jurisdiction by determining the extent of the estate's interest.   Apparently John was afraid that the Bankruptcy Court's order could be interpreted to foreclose Joe's suit against Joan to get the mineral interests back.   The Fifth Circuit said that yes, the Bankruptcy Court had authority to interpret its own orders and that no, the Bankruptcy Court did not rule upon the state law issue between Joe and Joan.   

Friday, February 27, 2015

Energy Resources Remains Viable for Allocation of Tax Payments

Twenty-five years ago, the Supreme Court held that a Bankruptcy Court had the authority to order the IRS to allocate payments made "voluntarily" by a Debtor when necessary to effectuate a successful reorganization.    United States v. Energy Resources Co., 495 U.S. 545 (1990).   Left to its own devices, the IRS will generally allocate payments to the oldest taxes first, or, in the case of payroll taxes, to non-trust funds taxes first.   If the Debtor can require the IRS to allocate payments differently, it can greatly impact the overall amount the Debtor will be required to pay.   A recent decision out of Fort Worth illustrates how Energy Resources continues to provide a valuable tool for Debtors with tax obligations.    In re Fielding, 522 B.R. 888 (Bankr. N.D. Tex. 2014).  

Fielding was a chapter 13 case where the Debtors owed $539,885.26 to the IRS.    The debt was secured by a lien against all of the Debtors' real and personal property.    The Debtors filed a motion to sell their homestead.   After paying superior obligations, there was approximately $128,000 available to pay on the IRS claim.    The Debtors sought to apply the payment to the base tax amounts but not to interest or penalty.    The IRS, on the other hand, wanted to apply the payments to the oldest taxes first, including penalties and interest.    This could have resulted in paying priority and unsecured claims prior to secured claims.   

The IRS argued that it could not be compelled to allocate the proceeds and that payments from a bankruptcy sale were not "voluntary" payments which could be designated by the taxpayer.    The Court held that Energy Resources could be applied in a chapter 13 case.    In doing so, it noted that other courts and commentators had been hesitant to limit the case to its facts.    (One of the authorities it cited was a law review article that I wrote).    

However, having found that the designation doctrine could be applied to a chapter 13 case, the Court raised the issue of whether it could be done in the absence of a confirmed plan.   The Court noted that:
(J)ust as a debtor in a chapter 11 case must make payments in accordance with its chapter 11 plan upon confirmation, a chapter 13 debtor must make payments in accordance with its proposed plan even prior to confirmation.
Opinion at *15.   Based on this distinction between chapter 11 and chapter 13, the court found that payments could be designated in chapter 13 even prior to confirmation.

Next, the court found that the designation was necessary to effectuate the reorganization.   The Court stated:
In the case at bar, to achieve success through the reorganization, Debtors must be capable of complying with Amended Plan provisions.   To do so, Debtors rely on the sale of assets to reduce the debt owed to the IRS.   If the IRS is permitted to apply the Proceeds to unsecured or priority portions of the debt as requested, then the lien held by the IRS for the secured claim would continue to attach to Debtors' property.   thus, any reduction in the IRS secured claim would not sufficiently correspond with the assets being sold.  Debtors would also continue to incur the interest and penalties on the unpaid, secured portion of the debt, further decreasing the plan's feasibility.
Opinion, at *18.

 Finally, the Court rejected the IRS's argument that payments made in bankruptcy proceedings could never be considered to be voluntary.   It noted that the Supreme Court rejected this position in Energy Resources and there was no basis for limiting the case to its facts.   The Court found that chapter 13 itself was a voluntary process and that the case involved the voluntary sale of exempt property.   As a result, the Court found that the payment was voluntary and could be designated by the Debtors.

The Court's 28-page opinion is very thorough which makes at times for difficult reading.  It has a lot of good discussion of bankruptcy policy in general and chapter 13 in particular.  The main lessons that I picked up are that:   1) it is possible to use chapter 13 creatively and 2) it pays to dust off old precedents you haven't thought about in a while.