CHAPTER 7 PURCHASING OIL AND GAS AND MINING PROPERTIES FROM DISTRESSED PARTIES
| Jurisdiction | United States |
(May 1986)
PURCHASING OIL AND GAS AND MINING PROPERTIES FROM DISTRESSED PARTIES
Attorneys with Drexler & Wald, A Professional Corporation
Denver, Colorado
Introduction
In view of the recent downturn in the natural resources industry, it is not difficult to name several mining and oil and gas companies that can be classified as economically distressed. The recent drop in natural resources commodity prices has drastically changed the economic parameters of mining and oil and gas projects and has caused many companies to reconsider certain projects, and in some instances to reconsider their participation in the industry.
Several companies while not necessarily economically distressed, have recently simply gone out of the business or abandoned a region. This creates "orphaned" properties. Many of these orphaned properties are good projects that have strong economic potential, but are orphaned for reasons not related to the property itself.
Such distressed companies and owners of orphaned properties are no longer able or are no longer interested in operating their properties and in many instances such natural resources properties are for sale. While this phenomenon presents some very difficult times for the natural resources industry it also presents many outstanding opportunities.
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The natural resources industry has always been cyclical. There's no reason to expect that this cycle has been broken. Without much imagination, we can assume that conditions will change in the future that will generate another rush back into the industry. As in the past, these changes may be a result of increased commodity prices, significant new discoveries, or newly-developed technologies which will either lower production costs or increase the value of previously useless or low-valued products. The natural resources industry is one of the few generators of original wealth and will continue to be a viable endeavor as long as our economic, social and governmental systems remain intact.
The obvious opportunity or advantage to purchasing a property from a distressed party or to purchasing an orphaned property, is that properties with significant economic potential may be obtained at relatively low costs. When the natural resources industry is in its boom cycle, good properties are first, hard to find for sale, and second, very expensive. An economic downturn liberates a significant number of good properties that can be purchased at a reasonable cost.
When purchasing an orphaned property or a property from a distressed party, the purchaser's evaluation of the property and his dealings with the seller will be significantly different than when involved in a regular purchase of a natural resources property. This paper will discuss various negotiation strategies,
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considerations and protections from the point of view of the purchaser.
Buyer/Seller Relationship
A purchaser of an orphaned property, or of a property from a distressed party must recognize that in such purchasing process, there will be significant differences in its interaction with the seller from the traditional purchaser/seller relationship. In the natural resources industry traditionally the seller of a property will retain some type of economic interest. The form of such economic interest is limited only by the participant's imagination. However, it usually is a retained overriding royalty, a retained net profits interest or a retained ownership interest through a joint venture, partnership, or corporate entity.
This retained economic interest motivates the seller to maintain its interest in and commitment to the property and to ensure that the property is given every opportunity to be an economic success. This means that the seller will assist in transferring information concerning governmental regulation activities, technical or geological data, and any other type of information or data that is available to the seller. The seller realizes that economic success of the property for the purchaser also means economic success for the seller.
When purchasing a property from a distressed party or an orphaned property, the seller's interest and commitment is not
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present. Often times the selling party has significant problems not related to its properties and simply wants to extricate itself from its projects and any operational problems that may be generated by such projects. With respect to orphaned properties, the seller has probably decided to get out of the business or to no longer work in that particular region. This creates an attitude and desire to eliminate all potential concerns, problems and efforts concerning the orphaned property.
The purchaser of properties from a distressed party or orphaned properties must recognize that the traditional spirit of cooperation in selling natural resources properties is simply not present. The seller will not be a resource with respect to historical actions and events that have been taken and occurred concerning governmental agencies, neighboring land owners or contract service entities. Data of all types including geological, engineering, political and social will be difficult to obtain. Data and information not obtained in the purchasing process may have to be reacquired by the purchaser.
In this paper two types of distressed parties will be considered: 1) a party under the protection of the Bankruptcy Code of 1978 (a debtor), and 2) a party on the verge of declaring bankruptcy. This paper will address purchase of orphaned properties and purchase of properties from a distressed party from the purchaser's perspective. The paper will not consider problems
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that may be associated with purchase of a property that is not economically viable in its own right.
Purchase of Properties from a Debtor
1. Section 363. Section 363 of the Bankruptcy Code of 1978,1 as amended, (hereinafter referred to as "Bankruptcy Code"), provides the authority and method under which the property of the bankruptcy estate may be sold, used or leased. The Trustee2 , after notice and a hearing, may use, sell or lease, other than the ordinary course of business, property of the bankruptcy estate.3 According to Section 102 of the Bankruptcy Code, "after notice and a hearing" means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances.4 The phrase "after notice and a hearing" authorizes an act to take place without an actual hearing if the notice is given properly and if: (i) such a hearing is not requested timely by a party in interest; or (ii) there is insufficient time for a hearing to be commenced before such act must be done, and the court authorizes such act.5
2. Requirement for a Hearing. The Trustee must give notice of any proposed sale of any property in the bankruptcy estate not in the ordinary course of business.6 Such notice provides an opportunity for objection and a hearing which must be held if there are any timely objections. Rules 6004 and 2002 of Bankruptcy Procedure (hereinafter referred to as Rules) require
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that not less than 20 days' notice by mail of a sale pursuant to Section 363 shall be given to the debtor, all creditors, indenture trustees and any committee appointed pursuant to the Bankruptcy Code. The notice shall include the time and place of any public sale, the terms and conditions of any private sale and the time fixed for filing of objections. The notice for sale of property is sufficient if it generally describes the property.7 An objection to the sale must be filed and served not less than five days before the date of the proposed sale or within a time fixed by court8 . If a timely objection is made, the Court must hold a hearing on the merits of the objection. At such hearing, the Court will consider the propriety of the sale in light of the objection. The Court can overrule the objection and order the sale to go forward or sustain the objection and vacate the sale.
As previously discussed, under Section 102 of the Bankruptcy Code, the Trustee may be authorized to sell property from the bankruptcy estate without an actual hearing, if notice is given properly and if an objection or counter offer is not timely made by a party in interest9 . For many purchasers relying on a sale without a Court order may leave some doubt with respect to adequacy of title. While a purchaser or his financer may insist on a Court order authorizing the sale, the Bankruptcy Court for the District of Massachusetts, in one case, has refused to issue such an order.10 The Court strongly suggested that rather than clogging Court dockets with requests for "comfort orders" purchasers
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should simply obtain from the Bankruptcy Clerk a certificate that no objections or requests for hearing were filed and then record that certificate with the proper clerk and recorder. The Court assures us that such a procedure will give adequate title protection to the purchaser.
Section 363(c) of the Bankruptcy Code allows the Trustee to sell property from the bankruptcy estate without a notice or hearing if such sale is the ordinary course of the business of the debtor. It is difficult to imagine many situations where the sale of a mining or oil and gas property would be in the ordinary course of the business. If the property is small or not significant in comparison to all of the other properties of the debtor and if the debtor is ordinarily in the business of buying and selling natural resources properties Section 363(c) may very well apply. However for the most part, a natural resources property will be a significant portion of the debtors assets and was owned for purposes of operation and not sale; therefore it is advisable to assume that the disposition...
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