CHAPTER 2 TINKERBELLE, THE CRUDE PEOPLE AND THE BANKRUPTCY CODE

• Jurisdiction: United States

Financial Distress in the Oil & Gas Industry
(Feb 2010)
CHAPTER 2
TINKERBELLE, THE CRUDE PEOPLE AND THE BANKRUPTCY CODE
Robin E. Phelan
Charles A. Beckham, Jr.
John Penn
Mark X. Mullin
Frances A. Smith
Mark Elmore
Abigail Ottmers
Jarom Yates
Haynes & Boone LLP
Dallas, Texas

Robin E. Phelan's practice is exclusively devoted to insolvency, reorganization and related areas, including extensive litigation in the bankruptcy court and other federal courts. He works with other Haynes and Boone attorneys to analyze the effect of bankruptcy on corporate and financial transactions. Robin is a frequent speaker on panels and programs throughout the United States and internationally regarding developments in bankruptcy and insolvency law and is the author of numerous publications, several relating to tax, governmental and environmental claims. He is a contributor to several major treatises on bankruptcy and has testified before both the Congressional Bankruptcy Review Commission and the United States Congress on insolvency matters. He has recently participated in a program sponsored by the United States Department of State and the United Nations to develop model cross border insolvency provisions and participated in a White House program to improve the United States bankruptcy system.

Charles A. Beckham, Jr. is with the firm of Haynes & Boone L.L.P. in Houston and has more than twenty-five years experience helping a broad spectrum of clients with bankruptcy and insolvency problems. He has worked on a variety of transactions and represented secured lenders, unsecured creditors, debtors and trustees in a variety of industries including numerous oil and gas, power and energy related bankruptcies. He has also represented numerous debtors and creditors with cross-border bankruptcy and insolvency problems in Mexico. Mr. Beckham is recognized by Chambers USA as one of the leading practitioners in Texas for bankruptcy, 2005-2009, and as one of the Best Lawyers in America - Bankruptcy & Creditor/Debtor Rights (Woodward / White, Inc., 2010). He has been listed in The Best Lawyers in America for more than 10 years. He has also been recognized as a Top 100 Texas Super Lawyer and Top 100 Houston Super Lawyer - Bankruptcy & Creditor/Debtor Rights, 2003-2009. He has lectured in various forums on, among other, derivative exposure and counterparty insolvency and financial market protections under United States Bankruptcy Code Amendments.

TABLE OF CONTENTS

I. BANKRUPTCY COURTS; JURISDICTION AND AUTHORITY

II. THE BANKRUPTCY CODE

III. COMMENCEMENT OF A BANKRUPTCY CASE

A. Eligibility for Relief

B. Voluntary Cases

C. Involuntary Cases

1. Generally

2. Requirements for Involuntary Relief

3. Partnerships

IV. PARTIES TO A BANKRUPTCY CASE

A. Debtor/Debtor-in-Possession

B. Trustee

C. Official Committee(s)

D. Ad Hoc Committees

E. Professionals

F. United States Trustee

G. Creditors/Equityholders

H. Examiner

I. Trade Creditors

J. Unions

V. EFFECTS OF A BANKRUPTCY PETITION

A. Property of the Estate

B. The Automatic Stay

1. Effect of The Automatic Stay

2. Statutory Exceptions to Automatic Stay

3. Co-Debtors

4. Relief from the Automatic Stay

VI. ESTABLISHING A CLAIM IN A BANKRUPTCY CASE

A. Debtor's Scheduling of Assets and Liabilities

B. Proofs of Claim

1. Allowed Claims

2. Filing a Proof of Claim

3. Types of Claims

C. Setoff

1. Prepetition Claims

2. Mutuality

VII. THE CLAIMS RESOLUTION PROCESS IN BANKRUPTCY

VIII. DISCHARGE / DISCHARGEABILITY

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A. Differences Between an Objection to Discharge and Dischargeability of a Debt

B. Discharge under Chapter 11

1. Discharge Generally

2. Exceptions to Discharge

IX. AVOIDABLE PREFERENCES UNDER THE BANKRUPTCY CODE

A. Definition of a Preference

B. Procedure for Recovering a Preference

C. Preference Elements

1. A transfer of an interest of the debtor in property

2. The transfer must be to or for the benefit of a creditor

3. The transfer must be for or on account of an antecedent debt

4. The transfer must be made while the debtor is insolvent

5. The time of the transfer was within 90 days before the filing of the bankruptcy petition (or one year if to an insider)

6. Transfer enables the creditor to receive more than it would in a chapter 7 liquidation had the transfer not been made

D. Defenses to a Preference Action

1. Contemporaneous Exchange For New Value (11 U.S.C. § 547(c)(1))

2. Payments Made in the Ordinary Course of Business (11 U.S.C. § 547(c)(2))

3. The Subsequent New Value Defense (11 U.S.C. § 547(c)(4))

4. Transfers that are Purchase Money Security Interests (11 U.S.C. § 547(c)(3))

5. Security Interest in Inventory or Accounts Receivable (11 U.S.C. § 547(c)(5))

6. Valid Statutory Lien (11 U.S.C. § 547(c)(6))

X. FRAUDULENT CONVEYANCES UNDER THE BANKRUPTCY CODE

A. Fraudulent Transfer Law

1. Statutes

2. Intentionally Fraudulent Transfers

3. Constructively Fraudulent Transfers

4. Defenses Under the Bankruptcy Code

B. The Recovery

C. Safe Harbors

1. 11 U.S.C. § 546

2. 11 U.S.C. § 548(d)(2)

D. FRAUDULENT TRANSFERS AND TOUSA

XI. EXECUTORY CONTRACTS AND UNEXPIRED LEASES

A. Executory Contracts

1. Assumption

2. Rejection

XII. IPSO FACTO PROVISIONS

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XIII. 363 SALES

A. Sales Within The Ordinary Course Of Business

B. Sales Other Than in the Ordinary Course of Business

1. Business Justification

2. Notice

3. Private Or Public Auction

4. Adequate Protection

5. Value of Assets

6. Sales Free and Clear

7. Credit Bidding

XIV. CHAPTER 11

A. First Day Orders

1. Motion for use of cash collateral/motion to obtain DIP financing

2. Motion to pay critical vendors

3. Motion to pay possessory lien holders

4. Motion to establish reclamation/Section 503(b)(9) procedures

5. Motion to sell assets or approve "pre-packaged" plan of reorganization

6. Motion to assume or reject certain executory contracts and leases

7. Motion for permission to pay pre-petition employees' wages

8. Motion to deal with utilities

B. Cash collateral and DIP financing

1. Cash Collateral

2. DIP Financing

XV. THE PLAN AND DISCLOSURE STATEMENT

A. Contents of the Plan

B. Plan Provisions

1. Exclusivity

C. POTHOLES IN THE ROAD TO CONFIRMATION

1. Improper Classification Schemes

2. Good Faith

3. Best Interest of Creditors Test

4. Accepting Impaired Class

5. Feasibility of the Plan

D. The Disclosure Statement

1. Overview

2. Issues

XVI. CRAMDOWN

A. Unfair Discrimination

B. Fair and Equitable

1. Secured Creditor Cramdown - 11 U.S.C. § 1129(b)(2)(A)

2. Deferred Cash Payments - U.S.C. § 1129(b)(2)(A)(i); Value of Claim including discount rates and interest rates

3. Figuring the Rate of Return

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4. Unsecured Creditor Cramdown - 11 U.S.C. § 1129(b)(2)(B)

5. Interest Holders - U.S.C. § 1129(b)(2)(C)

C. Absolute Priority Rule

XVII. CONFIRMATION OF THE PLAN

XVIII. UNRECORDED ASSIGNMENTS

A. The Strong Arm Clause

B. § 541(d)

C. The Strong Arm Clause v. § 541(d)

XIX. FARMOUT AGREEMENTS

XX. PRODUCTION PAYMENTS

XXI. LIENS AGAINST MINERAL PROPERTY

A. OPERATORS' LIENS

B. MINERAL CONTRACTOR AND SUBCONTRACTOR LIENS

XXII. PRODUCERS LIENS

A. PRODUCERS' LIENS AND SEMCRUDE

XXIII. THE ENERGY INDUSTRY AND EXECUTORY CONTRACTS

A. OIL AND GAS LEASES AS EXECUTORY CONTRACTS

B. OPERATING AGREEMENTS AS EXECUTORY CONTRACTS

XXIV. FINANCIAL CONTRACTS

XXV. SETOFF AND RECOUPMENT

XXVI. RECLAIMATION AND ADMINISTRATIVE PRIORITY

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I. BANKRUPTCY COURTS; JURISDICTION AND AUTHORITY

Bankruptcy courts derive their subject matter jurisdiction only through specific federal statutory authority in the United States Code.¹ The source of bankruptcy jurisdiction emanates from 28 U.S.C. § 1334, which provides for two categories of bankruptcy jurisdiction. First, § 1334 grants federal district courts with "original and exclusive jurisdiction of all cases under title 11."² The Bankruptcy Code does not define the word "case," but the term is universally understood to mean the series of proceedings initiated by the filing of a bankruptcy petition.³ Second, § 1334 grants federal district courts with "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to a case under title 11."⁴ In the context of § 1334(b), the term "proceeding" is broadly defined to include "anything that occurs within a case," as well as certain matters occurring after the case is closed.⁵

Bankruptcy jurisdiction is funneled down from the federal district courts to the bankruptcy courts through operation of 28 U.S.C. § 157. Under that statute, the federal district courts have the authority to refer bankruptcy cases and proceedings to the bankruptcy judges in that particular district.⁶ On referral, bankruptcy courts can hear and enter final judgments in "all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11."⁷ Bankruptcy courts can also hear non-core proceedings that are related to a case under title 11, but cannot enter final judgments in such proceedings absent the consent of all the parties.⁸

Courts continue to wrestle with disputes over this Rube Goldberg⁹ jurisdictional system which is the result of political disagreements regarding the appropriate Constitutional authority to give to bankruptcy Judges.¹⁰

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II. THE BANKRUPTCY CODE

The Bankruptcy Code is set out in title 11 of the United States Code, and was enacted in 1978. The prior bankruptcy law was the Bankruptcy Act of 1898. The Bankruptcy Code has been amended a number of times, particularly by the Chandler Act of 1938, and Congress is constantly considering additional changes. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") represents...