IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION In re:
LILIS ENERGY, INC., et al.,
Debtors.1
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Case No. 20-33274 (MI) (Chapter 11)
(Jointly Administered) Re: Docket No. 471
DEBTORS’ MEMORANDUM OF LAW IN SUPPORT OF CONFIRMATION OF THE DEBTORS’ FIRST AMENDED JOINT LIQUIDATING CHAPTER 11 PLAN Harry A. Perrin (TX 15796800)
Michael A. Garza (admitted pro hac vice) 1001 Fannin Street, Suite 2500
Houston, TX 77002-6760
David S. Meyer (admitted pro hac vice) George R. Howard (admitted pro hac vice) Steven Zundell (admitted pro hac vice) 1114 Avenue of the Americas, 32nd Floor New York, NY 10036
VINSON & ELKINS LLP
ATTORNEYS FOR THE DEBTORS AND DEBTORS IN POSSESSION
Dated: November 16, 2020
1 The Debtors in these chapter 11 cases and the last four digits of their respective federal tax identification numbers are: Brushy Resources, Inc. (4053); Hurricane Resources LLC (5207); IMPETRO OPERATING LLC (9730); ImPetro Resources, LLC (9608); Lilis Energy, Inc. (1613); and Lilis Operating Company, LLC (3908). The location of the Debtors’ U.S. corporate headquarters and the Debtors’ service address is: 1600 West 7th Street, Suite 400, Fort Worth, Texas 76102.
i
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ... 1
OVERVIEW OF OBJECTIONS AND RESPONSES ... 3
BACKGROUND ... 4
I. The Debtors’ Prepetition Capital Structure ... 5
A. RBL Facility... 5
B. Preferred Stock... 5
C. Common Stock... 6
D. Events Leading to the Chapter 11 Cases... 6
II. Restructuring Support Agreement Negotiations with RBL Lenders and Värde ... 8
III. The Chapter 11 Cases ... 9
A. The First Fifty Days ... 9
B. The Sales Process ... 10
1. Disputes with Värde ... 10
C. Disputes with SCM and ARM ... 13
D. The Marketing and Sales Process ... 13
E. The Plan and Disclosure Statement ... 14
F. The Solicitation Process, Voting Classes, and Voting Results ... 15
1. Voting Classes ... 15
2. Non-Voting Classes ... 16
G. Voting Report... 17
H. Supplemental Notices Requested by the Court ... 18
I. Plan Supplement and Modifications ... 19
1. Plan Supplement ... 19
2. Plan Modifications ... 19
ARGUMENT ... 20
IV. The Plan Satisfies the Bankruptcy Code’s Confirmation Requirements and Should Be Approved ... 20
A. The Plan Complies with the Applicable Provisions of the Bankruptcy Code (Section 1129(a)(1)). ... 21
1. The Plan Satisfies the Classification Requirements of Section 1122 of the Bankruptcy Code. ... 21
2. The Plan Properly Classifies Mechanics’ Lien Claimants as General Unsecured Creditors ... 23
ii
i. All Mechanics’ Liens are Junior in Priority in All Respects to the RBL Liens and Mortgages Because the RBL Liens and Mortgages were Perfected Prior to the Inception of All
Mechanics’ Liens. ... 27 ii. The RBL Mortgages and Liens Are Properly Perfected and
Relate Back to at Least May 1, 2017 ... 28 iii. All Mechanics’ Liens are Junior in Priority to the RBL
Liens and Claims... 30 iv. The Value of Such Holders’ Interest In Their Collateral Is
Zero. ... 31 3. The Plan Satisfies the Mandatory Requirements of Section 1123 of
the Bankruptcy Code... 33 4. The Plan Satisfies the Discretionary Requirements of Section 1123
of the Bankruptcy Code. ... 36 B. The Debtors Have Complied with the Applicable Provisions of the
Bankruptcy Code (Section 1129(a)(2)). ... 37 C. The Plan Has Been Proposed in Good Faith and Not By Any Means
Forbidden By Law (Section 1129(a)(3))... 37 D. The Plan Provides for Court Approval of Certain Administrative Payments
(Section 1129(a)(4)). ... 39 E. Disclosure of the Liquidation Trustee and Compliance with Public Policy
(Section 1129(a)(5)). ... 40 F. The Plan Does Not Require Governmental Approval of Rate Changes
(Section 1129(a)(6)). ... 41 G. The Plan Is In the Best Interests of Creditors and Interest Holders
(Section 1129(a)(7)). ... 42 H. The Plan Can Be Confirmed Notwithstanding the Requirements of
Section 1129(a)(8). ... 44 I. The Plan Complies with Statutorily Mandated Treatment of
Administrative and Priority Tax Claims (Section 1129(a)(9)). ... 45 J. At Least One Impaired Class of Claims Has Accepted the Plan,
(Section 1129(a)(10)). ... 47 K. The Plan is Feasible (Section 1129(a)(11)). ... 47 L. The Plan Provides for the Payment of All Fees Under 28 U.S.C. § 1930
(Section 1129(a)(12)). ... 49 M. The Remaining Requirements of Section 1129(a) are Inapplicable
(Sections 1129(a)(13)-(16)). ... 50 N. The Plan is the Only Plan Currently on File (Section 1129(c)). ... 50 O. The Principal Purpose of the Plan is Not Avoidance of Taxes or Section 5
of the Securities Act (Section 1129(d)). ... 50
iii
P. Section 1129(e) Does Not Apply to the Plan. ... 51
Q. The Plan Satisfies the “Cramdown” Requirements of Section 1129(b) of the Bankruptcy Code... 51
1. The Plan Does Not Unfairly Discriminate with Respect to Impaired Classes that Have Not Voted to Accept the Plan (Section 1129(b)(1))... 52
2. The Plan Is Fair and Equitable with Respect to the Rejecting Classes (Section 1129(b)(2))... 53
V. The Other Discretionary Elements of the Plan are Appropriate ... 54
A. The Plan Satisfies the Discretionary Requirements of § 1123(b). ... 54
1. The Plan Releases are an Appropriate Settlement of Claims Under § 1123(b). ... 54
i. The Debtor Releases are Appropriate and Should Be Approved... 54
ii. The Consensual Third-Party Releases Are Appropriate. ... 58
2. The Exculpation Provision Is Appropriate. ... 63
3. The Injunction Provision Is Appropriate. ... 66
B. The Plan Complies with Section 1123(b)(2) of the Bankruptcy Code. ... 67
VI. Reply to Objections in The Chapter 11 Cases ... 68
A. Mechanics’ Lien Claimants Objections. ... 68
B. Shareholder Objection. ... 71
CONCLUSION ... 74
iv
TABLE OF AUTHORITIES
Page(s) Cases
Aetna Cas. & Sur. Co. v. Clerk of U.S. Bankr. Court (In re Chateaugay Corp.),
89 F.3d 942 (2d Cir. 1996) ... 22 Bank of Am. Nat’l Trust and Sav. Ass’n v. 203 N. LaSalle St. P’ship (In re 203 N. LaSalle
St. P’ship),
526 U.S. 434 (1999) ... 42, 43, 53, 67 Bank of New York Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pacific
Lumber Co.),
584 F.3d 229 (5th Cir. 2009) ... 22, 55, 59, 67 Brite v. Sun Country Dev., Inc. (In re Sun Country Dev., Inc.),
764 F.2d 406 (5th Cir. 1985) ... 37 Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P’ship (In re T-H New Orleans Ltd.
P’ship),
116 F.3d 790 (5th Cir. 1997) ... 37, 48, 49 FOM Puerto Rico S.E. v. Dr. Barnes Eyecenter Inc,
255 Fed. Appx. 909 (5th Cir. 2007) ... 60, 62 Grogan v. Garner,
498 U.S. 279 (1991) ... 20 Heartland Fed. Sav. & Loan Assoc. v. Briscoe Enters., Ltd. II (In re Briscoe Enters., Ltd.
II),
994 F.2d 1160 (5th Cir. 1993) ... 20, 48 Hernandez v. Larry Miller Roofing, Inc.,
628 Fed. App’x 281 (5th Cir. 2016) ... 60 In re Age Refining, Inc.,
801 F.3d 530 (5th Cir. 2015) ... 56 In re Allied Props., LLC,
No. 06-33754, 2007 WL 1849017 (Bankr. S.D. Tex. June 25, 2007) ... 56 In re Alta Mesa Res., Inc.,
No. 19-35133 (MI) (Bankr. S.D. Tex. May 27, 2020) ... 62, 66 In re Am. Solar King Corp.,
90 B.R. 808 (Bankr. W.D. Tex. 1988) ... 20 In re Aztec Co.,
107 B.R. 585 (Bankr. M.D. Tenn. 1989) ... 52 In re Bigler,
442 B.R. 537 (Bankr. S.D. Tex. 2010) ... 55, 59 In re Block Shim Dev. Co.-Irving,
939 F.2d 289 (5th Cir. 1991) ... 38
v In re Bristow Group Inc.,
Case No 19-32713 (DRJ) (Bankr. S.D. Tex. Oct. 8, 2019) ... 62 In re Brotby,
303 B.R. 177 (B.A.P. 9th Cir. 2003) ... 48 In re Cajun Elec. Power Coop.,
119 F.3d 349 (5th Cir. 1997) ... 56 In re Camp Arrowhead, Ltd.,
451 B.R. 678 (Bankr. W.D. Tex. 2011) ... 59, 67 In re Carbo Ceramics Inc.,
No. 20-31973 (MI) (Bankr. S.D. Tex. June 18, 2020) ... 62, 66 In re Chapel Gate Apartments, Ltd.,
64 B.R. 569 (Bankr. N.D. Tex. 1986) ... 39 In re Chemtura Corp.,
439 B.R. 561 (Bankr. S.D.N.Y. 2010) ... 65 In re Colo. 2002B Ltd. P’ship,
No. 16-33743, 2017 WL 2270012 (Bankr. N.D. Tex. May 23, 2017) ... 61 In re Coram Healthcare Corp.,
315 B.R. 321 (Bankr. D. Del. 2004) ... 22 In re Cornerstone E & P Co., L.P.,
436 B.R. 830 (Bankr. N.D. Tex.), supplemented, 436 B.R. 865 (Bankr. N.D. Tex.
2010) ... 27 In re Cypresswood Land Partners, I,
409 B.R. 396 (Bankr. S.D. Tex. 2009) ... passim In re Drexel Burnham Lambert Grp., Inc.,
960 F.2d 285 (2d Cir. 1992) ... 67 In re Eagle Bus Mfg., Inc.,
134 B.R. 584 (Bankr. S.D. Tex. 1991), aff'd, 158 B.R. 421 (S.D. Tex. 1993) ... 52 In re EP Energy Corp.,
No. 19-35654 (MI) (Bankr. S.D. Tex. Mar. 12, 2020) ... 62 In re Exide Techs,
303 B.R. 48 (D. Del. 2003) ... 53 In re Freymiller Trucking, Inc.,
190 B.R. 913 (Bankr. W.D. Okla. 1996) ... 52 In re Future Energy Corp.,
83 B.R. 470 (Bankr. S.D. Ohio 1988) ... 39 In re Gen. Homes Corp. FGMC,
134 B.R. 853 (Bankr. S.D. Tex. 1991) ... 56 In re Genesis Health Ventures, Inc.,
266 B.R. 591 (Bankr. D. Del. 2001) ... 53
vi In re GenOn Energy, Inc.,
No. 17-33695 (DRJ) (Bankr. S.D. Tex. Dec. 12, 2017) ... 66 In re Goodrich Petroleum Corp.,
No. 16-31975 (MI) (Bankr. S.D. Tex. Sept. 28, 2016) ... 66 In re Heritage Org., L.L.C.,
375 B.R. 230, 311 (N.D. Tex. 2007) ... 48 In re Hingham Campus, LLC,
2011 WL 3679057 (Bankr. N.D. Tex. Aug. 23, 2011) ... 66 In re Idearc Inc.,
423 B.R. 138 (Bankr. N.D. Tex. 2009), aff'd, 662 F.3d 315 (5th Cir. 2011) ... 22, 56, 66 In re iHeartMedia, Inc.,
Case No 18-31274 (MI) (Bankr. S.D. Tex. Jan. 22, 2019) ... 62 In re J T Thorpe Co.,
308 B.R. 782 (Bankr. S.D. Tex. 2003) ... 20, 21 In re Jackson Brewing Co.,
624 F.2d 599 (5th Cir. 1980) ... 56 In re Jones Energy, Inc.,
No. 19-32112 (DRJ) (Bankr. S.D. Tex. May 6, 2019) ... 66 In re Lakeside Global II, Ltd.,
116 B.R. 499 (Bankr. S.D. Tex. 1989) ... 48 In re Landing Assocs., Ltd.,
157 B.R. 791 (Bankr. W.D. Tex. 1993) ... 40 In re Lason, Inc.,
300 B.R. 227 (Bankr. D. Del. 2003) ... 42 In re Legacy Reserves Inc.,
No. 19-33395 (MI) (Bankr. S.D. Tex. Nov. 15, 2019) ... 62 In re Lewis Energy Corp.,
36 B.R. 205 (Bankr. D. Colo. 1983) ... 27 In re Lisanti Foods, Inc.,
329 B.R. 491 (D.N.J. 2005); aff'd, 241 F. App'x 1 (3d Cir. 2007) ... 39 In re McDermott Int’l Inc.,
No. 20-31973 (MI) (Bankr. S.D. Tex. June 18, 2020) ... 62 In re MCorp Fin., Inc.,
137 B.R. 219 (Bankr. S.D. Tex. 1992) ... 53 In re Mirant Corp.,
348 B.R. 725 (Bankr. N.D. Tex. 2006) ... 53, 67 In re Neff,
60 B.R. 448 (Bankr. N.D. Tex. 1985), aff’d, 785 F.2d 1033 (5th Cir. 1986) ... 42 In re Nextwave Personal Communications, Inc.,
200 F.3d 43 (2d Cir.1999) ... 32
vii In re Ondova Limited Company,
No. 09-34784-SGJ-11, 2012 WL 5879147 (Bankr. N.D. Tex. Nov. 21, 2012) ... 56 In re Parker Drilling Co.,
No. 18-36958 (MI) (Bankr. S.D. Tex. March 7, 2019) ... 66 In re Pilgrim’s Pride Corp.,
No. 08-45664, 2010 WL 200000 (Bankr. N.D. Tex. Jan. 14, 2010) ... 59, 67 In re Pioneer Energy Servs. Corp.,
No. 20-31425 (DRJ) (Bankr. S.D. Tex. May 11, 2020) ... 66 In re Pisces Energy LLC,
No. 09-36591, 2009 WL 7227880 (Bankr. S.D. Tex. Dec. 21, 2009) ... 22 In re Presto,
376 B.R. 554 (Bankr. S.D. Tex. 2007) ... 32 In re PWS Holding Corp.,
228 F.3d 224 (3d Cir. 2000) ... 64 In re RAAM Glob. Energy Co.,
No. 15-35615 (MI) (Bankr. S.D. Tex. Jan. 28, 2016) ... 60 In re Roqumore,
393 B.R. 474 (Banrk. S.D. Tex. 2008) ... 56 In re Sandy Ridge Dev. Corp.,
881 F.2d 1346 (5th Cir. 1989) ... 48 In re Save Our Springs (S.O.S.) Alliance, Inc.,
632 F.3d 168 (5th Cir. 2011) ... 21, 48 In re Sears Methodist Ret. Sys., Inc.,
No. 14-32821-11, 2015 WL 1066882 (Bankr. N.D. Tex. Mar. 6, 2015) ... 65 In re Sentry Operating Co. of Tex., Inc.,
264 B.R. 850 (Bankr. S.D. Tex. 2001) ... 51, 52 In re Southcross Holdings, LP,
No. 16-20111 (Bankr. S.D. Tex. Apr. 11, 2016) ... 60 In re Star Ambulance Serv., LLC,
540 B.R. 251 (Bankr. S.D. Tex. 2015) ... 21, 37 In re Texas Extrusion Corp.,
844 F.2d 1142 (5th Cir. 1988) ... 42 In re Treyson Dev., Inc.,
No. 14-70256, 2016 WL 1604347 (Bankr. S.D. Tex. Apr. 19, 2016) ... 60 In re Ultra Petroleum Corp.,
No. 16-32202 (MI) (Bankr. S.D. Tex. March 14, 2017) ... 66 In re Village at Camp Bowie I, L.P.,
710 F.3d 239 (5th Cir. 2013) ... 38 In re Warren Res., Inc.,
No. 16-32760 (MI) (Bankr. S.D. Tex. Sept. 14, 2016) ... 60
viii In re Wash. Mut., Inc.,
442 B.R. 314 (Bankr. D. Del. 2011) ... 64 In re Waterford Wedgwood USA, Inc.,
500 B.R. 371 (Bankr. S.D.N.Y. 2013) ... 32 In re Weatherford Int’l PLC,
No. 19-33694 (DRJ) (Bankr. S.D. Tex. Sept. 11, 2019) ... 62 In re Western Real Estate Fund, Inc.,
75 B.R. 580 (Bankr. E.D. Okla. 1987) ... 48 In re Wool Growers Cent. Storage Co.,
371 B.R. 768 (Bankr. N.D. Tex. 2007) ... 59, 60 In re Zale Corp.,
62 F.3d 746 (5th Cir. 1995) ... 60 In re Zenith Elecs. Corp.,
241 B.R. 92 (Bankr. D. Del. 1999) ... 51 Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.),
843 F.2d 636 (2d Cir. 1988) ... 48, 52 Mabey v. Sw. Elec. Power Co. (In re Cajun Elec. Power Coop.),
150 F.3d 503 (5th Cir. 1998) ... 37, 38, 39 Mercury Capital Corp. v. Milford Conn. Assocs., L.P.,
354 B.R. 1 (D. Conn. 2006), remanded, 2008 WL 687266 (Bankr. D. Conn. Mar. 10,
2008) ... 48 Peltz v. Hatten,
279 B.R. 710 (D. Del. 2002) ... 32 Phoenix Mutual Life Insurance Co. v. Greystone III Joint Venture (In re Greystone III
Joint Venture),
995 F.2d 1274 (5th Cir. 1991) ... 22 Republic Supply Co. v. Shoaf,
815 F.2d 1046 (5th Cir. 1987) ... 59, 60 Statutes
11 U.S.C. § 1122 ... 21, 23, 68 11 U.S.C. § 1122(a) ... 21, 22 11 U.S.C. § 1123 ... 21, 68 11 U.S.C. § 1123(a) ... 33, 35 11 U.S.C. § 1123(a)(1) ... 33 11 U.S.C. § 1123(a)(2) ... 33 11 U.S.C. § 1123(a)(3) ... 33 11 U.S.C. § 1123(a)(4) ... 34, 52 11 U.S.C. § 1123(a)(5) ... 34
ix
11 U.S.C. § 1123(a)(6) ... 35
11 U.S.C. § 1123(a)(7) ... 35
11 U.S.C. § 1123(b) ... 36, 55 11 U.S.C. § 1123(b)(1)-(3) ... 36
11 U.S.C. § 1123(b)(2) ... 67
11 U.S.C. § 1123(b)(6) ... 36
11 U.S.C. § 1123(d) ... 36
11 U.S.C. § 1125 ... 21, 37 11 U.S.C. § 1125(e) ... 64, 65 11 U.S.C. § 1126 ... 1, 21, 37, 44 11 U.S.C. § 1126(c) ... 44
11 U.S.C. § 1127(a) ... 19
11 U.S.C. § 1129 ... 1, 4, 20, 21 11 U.S.C. § 1129(a) ... 20, 51, 71 11 U.S.C. § 1129(a)(1) ... 21, 68 11 U.S.C. § 1129(a)(10) ... 47
11 U.S.C. § 1129(a)(11) ... 47, 48, 49 11 U.S.C. § 1129(a)(12) ... 49, 50 11 U.S.C. § 1129(a)(13) ... 50
11 U.S.C. § 1129(a)(14) ... 50
11 U.S.C. § 1129(a)(15) ... 50
11 U.S.C. § 1129(a)(16) ... 50
11 U.S.C. § 1129(a)(2) ... 37
11 U.S.C. § 1129(a)(3) ... 37, 38, 64 11 U.S.C. § 1129(a)(4) ... 39, 40 11 U.S.C. § 1129(a)(5) ... 40, 41 11 U.S.C. § 1129(a)(5)(A)(i) ... 40, 41 11 U.S.C. § 1129(a)(5)(A)(ii) ... 40
11 U.S.C. § 1129(a)(6) ... 41
11 U.S.C. § 1129(a)(7) ... 42, 44 11 U.S.C. § 1129(a)(7)(A) ... 42
11 U.S.C. § 1129(a)(8) ... 44, 45, 51 11 U.S.C. § 1129(a)(9) ... 45, 47, 72 11 U.S.C. § 1129(a)(9)(B) ... 47
x
11 U.S.C. § 1129(a)(9)(C) ... 47
11 U.S.C. § 1129(b) ... passim 11 U.S.C. § 1129(b)(1) ... 51
11 U.S.C. § 1129(b)(2)(B)(i) ... 53
11 U.S.C. § 1129(b)(2)(B)(ii) ... 53
11 U.S.C. § 1129(b)(2)(C)(ii) ... 53
11 U.S.C. § 1129(c) ... 50
11 U.S.C. § 1129(d) ... 50, 51 11 U.S.C. § 1129(e) ... 51
11 U.S.C. § 330 ... 39
11 U.S.C. § 331 ... 39
11 U.S.C. § 363(f) ... 13
11 U.S.C. § 503(b) ... 45
11 U.S.C. § 503(b)(2) ... 39
11 U.S.C. § 503(b)(3) ... 39
11 U.S.C. § 503(b)(4) ... 39
11 U.S.C. § 503(b)(5) ... 39
11 U.S.C. § 506(a) ... passim 11 U.S.C. § 506(a)(1) ... 23, 24 11 U.S.C. § 507(a) ... 46
11 U.S.C. § 507(a)(2) ... 45
11 U.S.C. § 546(b) ... 32
11 U.S.C. §§ 101-1532 ... 1
11 U.S.C. §§ 1123(a)(1)–(7) ... 33
15 U.S.C. § 5 ... 50
28 U.S.C. § 1930 ... 49
N.M. Stat. Ann. § 70-4-1 ... 27, 28 Tex. Prop. Code § 56.002 ... 27
Tex. Prop. Code § 56.003 ... 28
Rules Fed. R. Bankr. P. 2002(g) ... 16
Fed. R. Bankr. P. 3012 ... 23, 24, 25 Fed. R. Bankr. P. 3019(a) ... 20
Fed. R. Bankr. P. 9017 ... 4
xi
Fed. R. Evid. 201(c) ... 4 Other Authorities
H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 412 (1977) ... 21, 37 Lilis Energy Inc. News Release (Jun. 30, 2020) ... 6 OTCMarkets.com, (Nov. 15, 2020) ... 6 S. Rep. No. 95-989, 95th Cong., 2d Sess. 126 (1978) ... 21, 37
1
The above-captioned debtors and debtors in possession (collectively, the “Debtors”) respectfully submit this memorandum of law (the “Memorandum”) in support of confirmation of the Debtors’ First Amended Joint Liquidating Chapter 11 Plan [Docket No. 471] (including all exhibits and schedules attached thereto, and as may be amended, supplemented, or modified from time to time, the “Plan”) pursuant to sections 1126, and 1129, of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”).2 In support of confirmation of the Plan, the Debtors respectfully submit the following:3
PRELIMINARY STATEMENT
1. The Plan is the result of extensive, arms’ length, and good faith negotiations between the Debtors, the DIP Facility Secured Parties, the RBL Agent, the Non-Affiliated RBL Lenders, the Värde Parties, and the Committee (each, as defined below). The Debtors now seek confirmation of the Plan with the support of all of their major economic stakeholders. This overwhelming support of the Plan is further demonstrated by the fact that all Voting Classes voted to accept the Plan, as set forth below:4
2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Plan.
3 Also in support of confirmation of the Plan, contemporaneously herewith the Debtors filed the Declaration of Joseph C. Daches in Support of Plan Confirmation (the “Daches Confirmation Declaration”); and the Declaration of David Baggett in Support of Plan Confirmation (the “Baggett Confirmation Declaration”
and, together with the Daches Confirmation Declaration, the “Confirmation Declarations”).
4 See Declaration of Angela Tsai of Stretto Regarding Solicitation of Votes and Tabulation of Ballots Cast on the Debtors’ First Amended Joint Liquidating Chapter 11 Plan (the “Voting Report”) filed contemporaneously herewith.
2 Plan Class Class Description
Number Voted to Accept (as % of Total Number Voted)
Amount Voted to Accept (as % of Total Amount Voted)
3A Non-Affiliated RBL Claims 100% 100%
3B Affiliated RBL Claims 100% 100%
4 Unsecured Claims 88.9% 94.7%
2. The Plan, among other things, distributes the proceeds from the sale of substantially all of the Debtors’ Assets (the “Sale”) and effectuates a global settlement agreement (the “Global Settlement Agreement,” and such settlement thereunder, the “Global Settlement”) reached
between the Debtors, the DIP Facility Lenders, the Non-Affiliated RBL Lenders, Värde, and the Committee (collectively, the “Settlement Parties”) after extensive, arms’ length, and good faith negotiations. The Plan, among other things, implements and effectuates the terms of the Global Settlement Agreement by memorializing certain contributions and distributions that were agreed to by the Settlement Parties in exchange for, among other things, the releases of certain Claims, and further implements the terms of the Värde Settlement (as defined below), which was previously approved by the Court pursuant to the Order (I) Approving the Terms of, and Authorizing the Debtors to Enter Into and Perform Under, the Settlement Agreement and (II) Granting Related Relief [Docket No. 529] (the “9019 Order”).
3. The entry of the 9019 Order and the approval of the settlement with the Värde Parties set forth in and approved by the 9019 Order (the “Värde Settlement”) paved the way for the value-maximizing Sale of substantially all the Debtors’ Assets to Ameredev for a cash purchase price of $46.6 million.5 As a result of the Sale and pursuant to the terms of the Global Settlement,
5 Order (I) Approving (A) The Sale of the Debtors Assets Free and Clear of All Liens, Claims, Interests, and Encumbrances and (B) The Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (II) Granting Related Relief [Docket No. 613] (the “Sale Order”).
3
Holders of Unsecured Claims will receive a cash recovery under the Plan of $786,750, as well as the contribution of certain claims and causes of action that may be pursued for the benefit of Holders of Unsecured Claims. Without the Global Settlement, no distribution at all would be available to unsecured creditors given that substantially all of the Debtors’ assets are subject to first priority priming liens of the DIP Lenders, as well as first priority liens securing $75.5 million of debt outstanding under the Prepetition RBL Facility.6 Moreover, recoveries for unsecured creditors are substantially increased as a result of the Global Settlement Agreement because both the Non-Affiliated RBL Lenders and the Affiliated RBL Lenders agreed to waive any recovery on account of their substantial unsecured deficiency claims.
4. The Debtors received 6 timely formal objections to confirmation of the Plan, of which, 4 have been consensually resolved. The Debtors will continue to work with parties to consensually resolve outstanding objections prior to the Hearing where possible. To the extent not consensually resolved, the Debtors submit that these objections should be overruled and that the Plan should be confirmed.
OVERVIEW OF OBJECTIONS AND RESPONSES
5. The deadline for parties in interest to file objections to the confirmation of the Plan was November 13, 2020, at 5:00 p.m. (prevailing Central Time). The Debtors received 6 formal and 3 informal objections and comments to the Plan from certain parties in interest and worked to address and resolve as many objections and comments as possible. A chart summarizing all such objections and comments and the Debtors’ responses is attached hereto as Exhibit A (the
6 The amounts that remain outstanding under the Prepetition RBL Facility after the roll-up of $15 million that was included as part of the DIP Facility include a senior tranche of $49.2 million owed to the Non-Affiliated RBL Lenders, and a junior tranche of $26.3 million owed to the Affiliated RBL Lenders. See Declaration of Joseph C. Daches in Support of Chapter 11 Petitions and First Day Pleadings [Docket No. 30] (the “First Day Declaration”).
4
“Summary of Objections and Responses”). The Debtors will continue working to resolve outstanding objections, where possible, in advance of the hearing on confirmation of the Plan scheduled for November 17, 2020 at 9:00 a.m. (prevailing Central Time) (the “Confirmation Hearing”).
6. As set forth more fully in this Memorandum, and as the Debtors will establish at the Confirmation Hearing, the Plan satisfies each applicable requirement under section 1129 and all other applicable provisions of the Bankruptcy Code. The Debtors therefore respectfully request that the Bankruptcy Court confirm the Plan by entering the proposed confirmation order (the
“Proposed Confirmation Order”) filed contemporaneously herewith.
BACKGROUND
1. The facts relevant to confirmation of the Plan are set forth in the Disclosure Statement, the Plan, the Confirmation Declarations, the Voting Report, and any evidence presented or testimony that may be adduced at the Confirmation Hearing, all of which are incorporated herein by reference.
2. Further, the Debtors respectfully request, pursuant to Federal Rule of Evidence 201(c),7 incorporated into these proceedings pursuant to Bankruptcy Rule 9017,8 that the Court take judicial notice of the entire docket of the Debtors' Chapter 11 Cases maintained by the Clerk of the Court and/or its duly appointed agent, and all pleadings and other documents filed, all orders entered, and evidence and arguments made, proffered or adduced at, the hearings held before the Court during the pendency of the Chapter 11 Cases.
7 Federal Rule of Evidence 201(c) provides that “[a] court may take judicial notice, whether requested or not.”
Fed. R. Evid. 201(c).
8 Bankruptcy Rule 9017 provides that “[t]he Federal Rules of Evidence . . . apply in cases under the Code.”
Fed. R. Bankr. P. 9017.
5
3. In addition, for the benefit of the Court, a short, summary recitation of certain material background information relevant to confirmation of the Plan is set forth below.
I. The Debtors’ Prepetition Capital Structure
4. As set forth in detail in the First Day Declaration, the Debtors commenced these Chapter 11 Cases on June 28, 2020 (the “Petition Date”) in order to, among other things, address the Debtors’ liquidity issues arising from the Debtors’ prepetition capital structure.
A. RBL Facility
5. As of the Petition Date, the Debtors’ funded debt liabilities total approximately
$89.9 million. On October 10, 2018, Lilis entered into the RBL Credit Agreement among Lilis, as borrower (the “Borrower”) and the subsidiary Debtors party thereto, BMO Harris Bank N.A., as administrative agent (the “RBL Agent”), and the lenders party thereto (the “RBL Lenders”).9 The Debtors’ obligations under the RBL Credit Agreement are secured by first priority liens (the
“RBL Liens”) on substantially all of the Debtors’ assets (the “RBL Collateral”) and are unconditionally guaranteed by each of the Subsidiary Debtors.10
B. Preferred Stock
6. Throughout 2018 and 2019, the Debtors executed a series of transactions with Värde Partners Inc. and its affiliated entities (collectively, “Värde”) pursuant to which Värde acquired Preferred Stock with a total aggregate stated value of approximately $280 million. As of the Petition Date, Värde held all of the Debtors’ preferred stock. Ultimately, the Värde transactions
9 On April 21, 2020, certain private funds affiliated with Värde became RBL Lenders (in such capacity, the
“Affiliated RBL Lenders,” and all other RBL Lenders, the “Non-Affiliated RBL Lenders”) by acquiring loans and commitments in the principal amount of approximately $25.7 million from a prior Non-Affiliated RBL Lender. The loans and commitments acquired by the Affiliated RBL Lenders are subject to certain subordination provisions set forth in the RBL Credit Agreement.
10 “Subsidiary Debtors” means collectively Brushy Resources, Inc., Hurricane Resources LLC, IMPETRO OPERATING LLC, ImPetro Resources, LLC, and Lilis Operating Company, LLC.
6
resulted in the conversion and full satisfaction of a second lien term loan, and relieved the Debtors of quarterly interest obligations and simplified their funded debt obligations.
C. Common Stock
7. Lilis Energy Inc. (“Lilis”) was traded on the NYSE American, LLC (“NYSE American”) under the symbol “LLEX,” which had 95,122,430 shares of common stock
outstanding, trading at $0.26 as of the Petition Date. On June 30, 2020, NYSE American Notified Lilis that its common stock was suspended from trading and that NYSE American had initiated delisting proceedings.11 Since NYSE suspended Lilis’ common stock from trading, it began trading on OTC Pink marketplace on June 30, 2020 under the symbol “LLEXQ.” Lilis’s common stock was subsequently was de-listed from the NYSE American on July 17, 2020. As of November 13, 2020, Lilis’ common stock last traded at $0.0068.12
D. Events Leading to the Chapter 11 Cases
8. The Debtors faced significant pressures which ultimately resulted in a strain on their available liquidity. Beginning in late 2014, declines in crude oil and natural gas prices led to a significant overall contraction in crude oil and natural gas drilling activities and capital spending by exploration and production companies. This downward trend continued until 2020, when crude oil prices recently fell precipitously to record low levels as a result of the COVID-19 pandemic and failed OPEC negotiations.
9. On January 17, 2020, the a borrowing base redetermination occurred under the Debtors’ RBL Facility, which reduced the Debtors’ borrowing base from $115 million to $90 million. The reduction in borrowing base resulted in a borrowing base deficiency of approximately
11 See Lilis Energy Inc. News Release (Jun. 30, 2020), https://investors.lilisenergy.com/news-releases/news- release-details/lilis-energy-receives-delisting-notice-nyse-american-transitions.
12 See OTCMarkets.com, (Nov. 15, 2020), https://www.otcmarkets.com/stock/LLEXQ/overview.
7
$25 million. The RBL Credit Agreement was subsequently amended to accommodate this borrowing base deficiency, but required that the Debtors repay the $25 million borrowing base deficiency in four equal monthly installments. The RBL Credit Agreement also required that the Debtors comply with specific financial ratio covenants such as the ratio of Total Debt to EBITDAX (each as defined in the RBL Credit Agreement) and a ratio of Current Assets to Current Liabilities (each as defined in the RBL Credit Agreement). The Debtors were not in compliance with these financial ration covenants prior to entering into the Limited Forbearance Agreement to RBL Credit Agreement (the “Forbearance Agreement”) on June 5, 2020. Under the Forbearance Agreement, the RBL Agent, and the majority of RBL Lenders agreed to refrain from exercising certain of their rights and remedies under the RBL Credit Agreement.
10. The Debtors also faced significant uncertainty as a consequence of a significant dispute with a major midstream contract counterparty, which resulted in litigation in Texas state court law suit (the “State Court Suit”) that was commenced prior to the Petition Date. The State Court Suit involved the alleged breach of a gathering agreement with Salt Creek Midstream, LLC (“SCM”) and a corresponding sales contract with ARM Energy Management, LLC (“ARM”).13 The State Court Suit alleged, among other things, that (i) Lilis wrongfully terminated the gathering agreement with SCM and (ii) Lilis failed to provide adequate assurance of the firm sales contract with ARM. On May 13, 2020, SCM filed a verified application for a temporary restraining order and temporary injunction. On May 28, 2020, the state court denied SCM’s request for temporary injunctive relief, finding that SCM had failed to demonstrate the lack of an adequate remedy at law. However, on June 9, 2020, SCM filed a motion to reconsider its application for a temporary
13 ARM operates as a producer services firm, and provides midstream solutions, as well as physical marketing and financial hedging services—essentially it purchases crude oil from producers. SCM is a full-service midstream provider primarily comprised of cryogenic processing facilities, gas and gathering pipelines, compression and treating facilities, and water-gathering and disposal services, and is a joint venture of ARM.
8
injunction. The hearing to consider that application was scheduled for June 29, 2020, but never occurred because of the commencement of these Chapter 11 Cases on the Petition Date.
II. Restructuring Support Agreement Negotiations with RBL Lenders and Värde 11. Prior to the Petition Date, the Debtors and their restructuring, financial, and legal advisors explored potential strategic deleveraging transactions to address their deepening liquidity constraints. The Debtors, the Non-Affiliated RBL Lenders, and Värde engaged in extensive arm’s- length negotiations in an effort to achieve a consensual restructuring transaction best suited to address the Debtors’ needs, including obtaining financing to fund the Chapter 11 Cases. These negotiations were facilitated, in part, by the Prepetition Bridge Loan from the Non-Affiliated RBL Lenders, which provided the Debtors with a short extended liquidity runway for continued negotiations with stakeholders prior to the filing of the Chapter 11 Cases. Ultimately, the parties reached consensus on the terms of a restructuring support agreement (“RSA”).
12. The RSA provided the roadmap for a dual track chapter 11 process. The preferred path was a Värde sponsored chapter 11 plan of reorganization (the “Plan Process”) with an alternative path of a sale of substantially all of the Debtors’ assets (the “Sales Process”) if the Plan Process proved unachievable.
13. Under the RSA, the Non-Affiliated RBL Lenders agreed to provide the Debtors with $5 million of new money DIP financing to fund the first fifty days of the Chapter 11 Cases.
The Plan Process, was to be funded through a $55 million new money investment from Värde (the
“Värde Equity Investment”), which would have allowed the Debtors to repay the initial DIP financing from the Non-Affiliated RBL Lenders and fund certain distributions to creditors under a chapter 11 plan of reorganization and preserve the Debtors’ business as a going concern. The RSA also imposed a deadline, which required that Värde commit to funding the Värde Equity Investment by August 17, 2020. In the event that Värde did not commit to funding the
9
reorganization, the RSA required that the Debtors instead pursue a sale of substantially all their assets through the Chapter 11 Cases (the “Sales Process”), and included pre-agreed bidding procedures for such a Sales Process.
14. With the support of all key economic stakeholders, as memorized by the RSA, the Debtors filed for chapter 11 on June 28, 2020 to implement the dual-track RSA.
III. The Chapter 11 Cases A. The First Fifty Days
15. Pursuant to the RSA, the Non-Affiliated RBL Lenders agreed to provide the Debtors with a debtor in possession financing Facility (the “DIP Facility”), which, among other things, provided the Company the runway and necessary interim funding for the first approximately 50 days of the Chapter 11 Cases to allow the Debtors to try to reach agreement around the definitive terms of the Värde Sponsored Plan. On June 29, 2020, the Court entered an interim order, which authorized the Company’s entry into the DIP Facility on an interim basis.14
16. The Debtors vigorously pursued the Värde-sponsored chapter 11 plan throughout the first two months of the chapter 11 cases. However, as required by the RSA, on July 13, 2020, the Debtors filed a motion with the Bankruptcy Court, seeking approval for the process for the auction and sale of the Debtors Assets (the “Bidding Procedures”) to be prepared in the event the Plan Process was not achievable.15
14 Amended Interim Order (I) Authorizing the Debtors to (A) Obtain Senior Secured Superpriority Postpetition Financing and (B) Utilize Cash Collateral of the Prepetition RBL Secured Parties, (II) Granting Adequate Protection to the Prepetition RBL Secured Parties, (III) Modifying the Automatic Stay, (IV) Scheduling a Final Hearing, and (V) Granting Related Relief [Docket No. 60] (the “Initial DIP Order”).
15 Motion of Debtors for Entry of Orders (A)(I) Approving Bidding Procedures, (II) Approving Stalking Horse Bid Protections, (III) Approving Contract Assumption and Assignment Procedures, (IV) Approving the Form and Manner of Notice Thereof, (V) Scheduling the Auction, (VI) Scheduling a Hearing and Objection Deadline with Respect to the Sale, and (VII) Granting Related Relief; and (B)(I) Approving the Sale of the Assets Free and Clear of All Liens, Claims, Interests, and Encumbrances, (II) Approving Assumption and Assignment of Executory Contracts and Unexpired Leases; and (C) Granting Related Relief [Docket No.
151].
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17. Notwithstanding the substantial efforts of the Debtors, the Non-Affiliated RBL Lenders and Värde, on August 14, 2020, Värde notified the Debtors of its intention to not provide the Värde Equity Investment. Therefore, in accordance with the RSA and the dual-track process established thereunder, the Debtors quickly pivoted all of their efforts to focus on achieving a value-maximizing sale of substantially all of their assets through the Sale Process.
B. The Sales Process
18. On August 21, 2020, the Bankruptcy Court approved the Debtors’ Bidding Procedures, which authorized the process for the auction and sale of the Debtors Assets including, the process by which parties may become qualified bidders and submit bids for the Debtors’ assets.
The Bidding Procedures were supported by all of the Debtors’ major economic stakeholders, including the Non-Affiliated RBL Lenders, Värde, and the Committee.
19. Both before and since the pivot to the Sales Process, the Debtors and their advisors engaged in an marketing and sales process with the goal of maximizing the value of the Debtors’
estates for the benefit of their stakeholders. The Debtors’ efforts in this regard are set forth in substantial detail in the Declaration of Gideon Lapson in Support of the Debtors' Proposed Sale of Substantially All of Their Assets to Ameredev Texas, LLC [Docket No. 605] (the “Lapson Sale Declaration”).
1. Disputes with Värde
20. While the Debtors were marketing their assets during the Sales Process, bidders expressed substantial concern regarding the Debtors’ ability to sell the Debtors’ ownership interest in certain valuable oil and gas properties located in Winkler and Loving Counties, Texas and Lea County, New Mexico that were subject to an overriding royalty interest sold to Värde pursuant to certain agreements with affiliates of Värde (the “Winkler Lea Agreements”). The Debtors and Värde each disputed the Debtors’ ability in each case, to sell these oil and gas properties free and
11
clear of certain purported covenants running with the land and other interests (the “Värde Covenants”) that arise under the Winkler Lea Agreements. Ultimately, the Debtors elected to file
the Emergency Motion of Debtors for Entry of an Order (I) Clarifying that Pursuant to the Bidding Procedures and Sales Process the Debtors Can Sell Certain Assets Free and Clear of Junior Interests; and (II) Granting Related Relief [Docket No. 324] (the “Motion to Clarify”).
21. However, prior to the hearing on the Motion to Clarify, on October 12, 2020, after extensive, arms’ length, and good faith negotiations, the Debtors, the Non-Affiliated RBL Lenders, the Värde Parties, and the Committee reached an agreement regarding the terms of the Global Settlement Agreement, which resolved the various complex and contentious actual and potential disputes between the parties, including the issues raised by the Motion to Clarify, which agreement was embodied in the Global Settlement Agreement.
22. The Global Settlement consists of three components: (i) a settlement of certain disputes regarding the Värde Agreements (as defined in the Settlement Motion); (ii) a settlement of certain potential alleged causes of action against the Värde Parties; and (iii) a settlement of certain potential issues regarding the validity of the RBL Liens and Claims. Given the critical importance of resolving the disputes with Varde to maximizing value as part of the Sales Process, the Debtors’ sought approval of the Varde Settlement (i.e., items (i) and (ii) in the previous sentence) by motion filed on October 12, 2020. The reasons and justifications for the approval of the Varde Settlement were set forth in detail in the Emergency Motion for Entry of an Order (I) Approving The Terms Of And Authorizing The Debtors To Enter Into And Perform Under, The Settlement Agreement And (II) Granting Related Relief [Docket No. 462], the Declaration of Gideon Lapson in Support of the Debtors’ Emergency Motion for Entry of an Order (I) Approving The Terms Of And Authorizing The Debtors To Enter Into And Perform Under, The Settlement
12
Agreement And (II) Granting Related Relief [Docket No. 478], and the Declaration of Joseph C.
Daches in Support of the Debtors’ Emergency Motion for Entry of an Order (I) Approving The Terms Of And Authorizing The Debtors To Enter Into And Perform Under, The Settlement Agreement And (II) Granting Related Relief [Docket No. 518].
23. On October 22, 2020, the Bankruptcy Court entered the Order (I) Approving The Terms Of And Authorizing The Debtors To Enter Into And Perform Under, The Settlement Agreement And (II) Granting Related Relief [Docket No. 537] (the “9019 Order”), which approved the terms of the Värde Settlement. The remaining components of the Global Settlement Agreement, including the resolution of certain potential disputes regarding the validity and priority of the RBL Liens, are integral components of, and are embodied in, the Plan. Pursuant to the terms of the Global Settlement and the Plan: (i) all potential claims and causes of action regarding the validity and priority of the RBL Liens are released, and (ii) in exchange, Holders of Unsecured Claims are receiving a fixed $300,000 cash payment from the cash collateral of the Non-Affiliated RBL Lenders, plus an additional (i) 0.375% of the gross proceeds from the Sale, which is equal to
$174,750 as a result of the $46.6 million sale to the Winning Bidder and (ii) 15% of the WLWI Variable Settlement Amount (as defined in the Global Settlement Agreement), which is equal to
$12,000. Therefore, pursuant to the terms of the Global Settlement, a cash payment equal to
$786,750 will be established as the Unsecured Claims Pool under the terms of the Plan for the exclusive benefit of Holders of Unsecured Claims, along with certain Designated Retained Causes of Action. The contribution of this value is contingent upon the Court’s approval of the Global Settlement in connection with confirmation of the Plan, including the release of all claims and causes of action against the RBL Secured Parties. Therefore, confirmation of the Plan and
13
approval of the releases contained therein is a critical step in enacting the remainder of the Global Settlement Agreement for the benefit of all parties in the Chapter 11 Cases.
C. Disputes with SCM and ARM
24. As discussed earlier, the ongoing disputes with SCM around the terms of the Debtors’ midstream contracts, including the disputes that were raised in the State Court Suit prior to the Petition Date, also materially impacted the Sales Process.
25. Given this dynamic, on September 16, 2020, the Debtors filed the Joinder to Emergency Motion of Debtors for Entry of an Order (I) Clarifying That Pursuant to the Bidding Procedures and Sales Process the Debtors Can Sell Certain Assets Free and Clear of Junior Interests; and (II) Granting Related Relief [Docket No. 325] (the “Joinder to the Motion to Clarify”), which sought a determination that the Debtors’ could sell their assets free and clear of
SCM’s interests pursuant to section 363(f) of the Bankruptcy Code. Ultimately, the Debtors’
disputes with SCM were resolved by consensual agreement among the parties in the Sale Order, in which it was agreed that certain SCM agreements would be assumed and assigned in the connection with the Sale of the Debtors’ Assets in exchange for a cure payment of up to $3.25 million to SCM and certain other terms and conditions as set forth in the Sale Order.
D. The Marketing and Sales Process
26. The Sales Process was robust, extensive, and value-maximizing. Substantial evidence in support of the Sale was submitted to the Court in connection with the approval of the Sale on November 13, 2020, including declarations in support of the approval of the Sale from the Debtors’ investment banker and chief executive officer.16
16 See the Lapson Sale Declaration; see also the Declaration of Joseph C. Daches in Support of the Debtors' Proposed Sale of Substantially All of Their Assets to Ameredev Texas, LLC [Docket No. 606].
14
27. On November 13, 2020, the Bankruptcy Court conducted an evidentiary hearing on the merits of the Debtors’ Sale Motion and the proposed sale of substantially all of the Debtors’
Assets to Ameredev Texas, LLC (“Ameredev”) for a cash purchase price of $46,600,000. At the conclusion of the hearing, the Bankruptcy Court entered the Sale Order.17
E. The Plan and Disclosure Statement
28. On September 3, 2020, the Debtors filed the Plan,18 the Disclosure Statement,19 and the Disclosure Statement Motion.20 On October 13, 2020, the Debtors filed amended versions of the Plan21 and Disclosure Statement22 prior to the hearing on the Disclosure Statement Motion.
An amended version of the Plan reflecting certain technical modifications and adjustments was filed on November 16, 2020. The Plan constitutes a separate plan of liquidation proposed by each Debtor, and contemplates, among other things, (i) the distribution of the cash proceeds from the Sale in accordance with the terms of the Plan, (ii) the contribution of cash and any assets not sold in connection with the Sale to the Liquidation Trust, (iii) the establishment of certain reserves to ensure the proper and timely payment of priority tax claims, postpetition royalties, postpetition trade claims, and Professional Claims; (iv) the wind down of the Debtors’ operations and dissolution of their corporate existence, and (v) the preservation of certain Retained Causes of Action for the Liquidation Trust.
17 The Bankruptcy Court has stayed the closing of the Sale until November 18, 2020 at 11:59 a.m. (Central Time).
18 [Docket No. 305].
19 [Docket No. 306].
20 See Motion for Entry of an Order (I) Approving the Adequacy of the Disclosure Statement; (II) Approving the Procedures for Solicitation and Tabulation of Votes to Accept or Reject the Debtors’ Joint Liquidating Chapter 11 Plan; (III) Approving the Form of Ballots and Notices in Connection Therewith; (IV) Scheduling Certain Dates with Resect Thereto; and (V) Granting Related Relief [Docket No. 307] (the “Disclosure Statement Motion”).
21 [Docket No. 471].
22 [Docket No. 472].
15
29. On October 15, 2020, the Bankruptcy Court approved: (i) the Disclosure Statement, (ii) the Solicitation and Tabulation Procedures, (iii) the form and distribution of Solicitation Packages and Notice of Non-Voting Status, (iv) the form of Publication Notice, and (v) the Plan Supplement Notice as part of the Disclosure Statement Order.23 The form of Ballots, Notice of Non-Voting Status, Confirmation Hearing Notice, and Opt-Out Form provided clear and conspicuous language regarding the Debtors’ approach to the Third-Party Releases (as defined below) and no party objected to the sufficiency of the form of Ballots and/or Notice of Non-Voting Status, or Opt-Out Form.
30. On October 15, 2020, the Debtors filed the solicitation version of the Disclosure Statement and Plan.24
F. The Solicitation Process, Voting Classes, and Voting Results 1. Voting Classes
31. On October 14, 2020, the Debtors caused their claims, noticing, solicitation, and voting agent, Stretto25 (“Stretto” or the “Voting Agent”), to transmit solicitation packages (the
“Solicitation Packages”) containing: (i) the Disclosure Statement Order; (ii) the Disclosure Statement; (iii) the solicitation and tabulation procedures; (iv) the applicable ballot with voting instructions (the “Ballots”); (v) a cover letter describing the contents of the Solicitation Packages;
(vi) a notice of the confirmation hearing regarding the Plan (the “Confirmation Hearing Notice”);
and (vii) a pre-addressed return envelope to the eligible Holders of Claims in the Classes of Claims
23 See Order (I) Approving the Adequacy of the Disclosure Statement; (II) Approving the Procedures for Solicitation and Tabulation of Votes to Accept or Reject the Debtors’ Joint Liquidating Chapter 11 Plan;
(III) Approving the Form of Ballots and Notices in Connection Therewith; (IV) Scheduling Certain Dates with Resect Thereto; and (V) Granting Related Relief [Docket No. 482] (the “Disclosure Statement Order”).
24 See Notice of Filing of Solicitation Versions of the Disclosure Statement and Joint Liquidating Chapter 11 Plan. [Docket No. 488].
25 Stretto is the trade name of Bankruptcy Solutions Inc.
16
entitled to vote to accept or reject the Plan (the “Voting Classes”) as of October 14, 2020 (the
“Voting Record Date”). 26 The Voting Agent also caused the Hearing Notice to be published on October 20, 2020 in in USA Today (national edition) [Docket No. 544] and the Houston Chronicle [Docket No. 543] (together, the “Publication Notice”). The Confirmation Hearing Notice and the Ballots included detailed instructions on how parties could opt-out of providing the releases set forth in Article VIII of the Plan. The Voting Agent transmitted and served the Solicitation Packages on the Voting Classes via first-class mail.27
32. The Disclosure Statement and the Ballots directed the Holders of Claims in the Voting Classes to cast votes to accept or reject the Plan by following the instructions contained in the applicable Ballot. These instructions provided that the Holders of Claims in the Voting Classes could return their applicable Ballot by any of the following means: (i) first class mail;
(ii) overnight delivery or hand delivery; or (iii) electronically (via the E-Balloting voting platform on Stretto’s website), in each case, so as to be received by the Voting Agent on or before November 13, 2020 at 5:00 p.m. (Prevailing Central Time) (the “Voting Deadline”).
2. Non-Voting Classes
33. The Voting Agent also transmitted, or caused to be transmitted, notice of non- voting status to Holders of Claims that were not entitled to vote because they are either Unimpaired and presumed to accept the Plan or Impaired and deemed to reject the Plan at the address to which notices are required to be sent pursuant to Bankruptcy Rule 2002(g) (the “Notices of Non-Voting Status”) .28 The Notice of Non-Voting Status set forth: (a) the Non-Voting Classes; (b) the
26 The Plan and Disclosure Statement were also made publicly available on the Debtors’ case website:
https://cases.stretto.com/LilisEnergy.
27 See Affidavit of Service of Solicitation Materials [Docket No. 280-5] (the “Solicitation Affidavit”).
28 Class 1 (Senior Priority Lien Claims), Class 2 (Other Priority Claims) (collectively, the “Unimpaired Classes”) and Class 5 (Intercompany Claims), Class 6 (Section 510(b) Claims), Class 7 (Existing Preferred
17
deadline for filing objections to confirmation of the Plan; (c) the date, time, and procedures to attend the Confirmation Hearing; (d) instructions for where Holders of Claims and/or Interests in the Non-Voting Classes can obtain copies of the Plan, Disclosure Statement, and related exhibits;
and (e) the full text of the release, exculpation, and injunction provisions set forth in Article VIII of the Plan and notice that Holders of Claims and/or Interests in the Non-Voting Classes would be deemed to have consented to the release provisions in Article VIII.C of the Plan unless they timely and properly choose to opt-out;. The Notice of Non-Voting Status also included a form (the “Opt- Out Form”) that Holders of Claims and/or Interests in the Non-Voting Classes could use to opt-out
of granting the Third-Party Releases set forth in Article VIII.C of the Plan and instructions for completing and returning the Opt-Out Form.
G. Voting Report
34. The voting results are reflected in the Voting Report filed contemporaneously herewith. The only Classes entitled to vote on the Plan were Class 3A (Non-Affiliated RBL Claims), Class 3B (Affiliated RBL Claims), and Class 4 (Unsecured Claims) (collectively, the
“Voting Classes”). As set forth in the Voting Report, the Voting Classes voted overwhelmingly in favor of the Plan:
Plan
Class Class Description
Accept Reject
Result Number
(% of Total Number
Voted)
Amount (% of Total
Amount Voted)
Number (% of Total
Number Voted)
Amount (% of Total
Amount Voted) 3A Non-Affiliated RBL
Claims 100% 100% 0% 0% Accept
3B Affiliated RBL Claims 100% 100% 0% 0% Accept
Equity Interests), Class 8 (Existing Common Interests), Class 9 (Intercompany Interests) (collectively, the
“Impaired Classes” together with the Unimpaired Claims, the “Non-Voting Classes”).
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4 Unsecured Claims 88.9% 11.1% 94.7% 5.3% Accept
35. Accordingly, Holders of more than one-half in number and two-thirds in dollar amount of Claims in each of the Voting Classes voted to accept the Plan.
H. Supplemental Notices Requested by the Court
36. On October 14, 2020, the Bankruptcy Court conducted a hearing regarding the adequacy of the Debtors’ Disclosure Statement and approval of the Solicitation Procedures and other relief requested in the Debtors’ Disclosure Statement Motion. The Bankruptcy Court requested that the Debtors provide notice to the Voting Classes regarding the results of the Sale, provide them with a revised liquidation analysis incorporating the results of the Sale, and the Voting Deadline.
37. The Debtors complied with this request and on November 10, 2020, filed the Notice of Estimated Recoveries, which provided notice to interested parties that Ameridev was selected as the Winning Bidder with a cash purchase price of $46.6 million for the Debtors Assets.29 The Notice of Estimated Recoveries also provided detailed tables that described the impact of the Sale and the Global Settlement Agreement on creditor recoveries, and also included additional notice of the hearing to approve the Sale of the Debtors’ Assets to Ameredev and corresponding objection deadline, the Plan Objection Deadline, and the Confirmation Hearing. In coordination with Stretto, the Debtors ensured that the Notice of Estimated Recoveries was served on all Voting Classes.30
29 See Notice of (I)Approval of Settlement; (II) Winning Bidder for the Sale of Substantially All of the Debtors’
Assets; and (III) estimated Likely Impact on Expected Recoveries for Holders of Certain Claims [Docket No. 595] (the “Notice of Estimated Recoveries”).
30 See Certificate of Service of Notice of (I)Approval of Settlement; (II) Winning Bidder for the Sale of Substantially All of the Debtors’ Assets; and (III) estimated Likely Impact on Expected Recoveries for Holders of Certain Claims [Docket No. 599].
19 I. Plan Supplement and Modifications
1. Plan Supplement
38. On November 6, 2020, the Debtors filed the Plan Supplement, consisting of:
Exhibit A – Schedule of Retained Causes of Action; and
Exhibit B – Liquidation Trust Agreement.31
39. On November 16, 2020, the Debtors filed the Amended Plan Supplement, amending certain previously filed exhibits and including an additional exhibit:
Exhibit B – Amended Liquidation Trust Agreement;
Exhibit B-1 – Blackline of Liquidation Trust Agreement;
Exhibit B-2 – Identity of the Liquidation Trustee; and
Exhibit C – Wind Down Budget.32 2. Plan Modifications
40. The Debtors, (with the consent of the Non-Affiliated RBL Lenders, and the Committee) have made certain technical modifications to the Plan to resolve certain objections or concerns raised by various parties or to correct formatting/typographical errors, in accordance with section 1127(a) of the Bankruptcy Code. In particular, the modifications include: revisions to account for the Sale, clarification that the Plan does not provide a discharge to the Debtors;
clarifying that the Holders of certain claims may agree to different treatment under the Plan; and amending definitions and cross-references within the Plan. The Debtors have filed the modified Plan reflecting these resolutions contemporaneously with this Memorandum. The modifications
31 See Notice of Filing of Plan Supplement [Docket No. 583] (the “Plan Supplement”).
32 See Notice of Filing Amended Plan Supplement [Docket No. 628] (the “Amended Plan Supplement” and together with the First Plan Supplement, the “Plan Supplement”). In accordance with the terms of the Plan, the Debtors reserve all rights to amend, supplement, or file additional Plan Supplement exhibits through the Plan Effective Date.
20
to the Plan do not alter the treatment of those Classes of Claims which voted to accept the Plan.
Accordingly, such modifications do not require the Debtors to re-solicit acceptances for the Plan.33 ARGUMENT
41. The Debtors submit that this Memorandum provides sufficient evidence to support confirmation of the Plan. Section I demonstrates the satisfaction of each of the requirements for confirmation of the Plan under section 1129 of the Bankruptcy Code. Section II addresses the other discretionary elements of the Plan, including the settlement, release, exculpation, and injunction provisions of the Plan, as well as why the Global Settlement Agreement is fair, reasonable, and in the best interests of the Debtors and their stakeholders. Section III replies to the objections filed against the Plan that were not otherwise resolved prior to the date hereof. In addition, a chart summarizing each of the confirmation requirements in section 1129 of the Bankruptcy Code and the Plan's compliance with those requirements (the “Confirmation Standards Chart”) is attached hereto as Exhibit B and incorporated herein by reference.
IV. The Plan Satisfies the Bankruptcy Code’s Confirmation Requirements and Should Be Approved
42. To achieve confirmation of a plan, a debtor must demonstrate by a preponderance of the evidence that such plan satisfies section 1129(a) of the Bankruptcy Code.34 Here, the Plan
33 See Fed. R. Bankr. P. 3019(a); In re Am. Solar King Corp., 90 B.R. 808, 826 (Bankr. W.D. Tex. 1988) (“[I]f a modification does not ‘materially’ impact a claimant’s treatment, the change is not adverse and the court may deem that prior acceptances apply to the amended plan as well.”).
34 See Heartland Fed. Sav. & Loan Assoc. v. Briscoe Enters., Ltd. II (In re Briscoe Enters., Ltd. II), 994 F.2d 1160, 1165 (5th Cir. 1993) (holding “that preponderance of the evidence is the debtor’s appropriate standard of proof both under § 1129(a) and in a cramdown”); In re Briscoe Enters., Ltd. II, 994 F.2d 1160, 1165 (5th Cir. 1993) (“The combination of legislative silence, Supreme Court holdings, and the structure of the [Bankruptcy] Code leads this Court to conclude that preponderance of the evidence is the debtor’s appropriate standard of proof under both § 1129(a) and in a cramdown.”); In re Cypresswood Land Partners, I, 409 B.R.
396, 422 (Bankr. S.D. Tex. 2009); In re J T Thorpe Co., 308 B.R. 782, 785 (Bankr. S.D. Tex. 2003).
Preponderance of the evidence has been described as just enough evidence to make it more likely than not that the fact the claimant seeks to prove is true. See Grogan v. Garner, 498 U.S. 279, 286 (1991) (“The preponderance-of-the-evidence standard results in roughly equal allocation of the risk of error between litigants.”) (citations omitted).
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satisfies all provisions of section 1129 of the Bankruptcy Code and complies with all other applicable sections of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, and any applicable non-bankruptcy law.
A. The Plan Complies with the Applicable Provisions of the Bankruptcy Code (Section 1129(a)(1)).
43. The Plan should be confirmed because it complies with the applicable provisions of the Bankruptcy Code as required by section 1129(a)(1) of the Bankruptcy Code.35 Congressional legislative history indicates that section 1129(a)(1) of the Bankruptcy Code requires that a chapter 11 plan satisfy the provisions of sections 1122 and 1123 of the Bankruptcy Code, which govern classification of claims and interests and the contents of the plan, respectively.36 As set forth herein, the Plan fully complies with all relevant sections of the Bankruptcy Code—
including sections 1122 and 1123 of the Bankruptcy Code, as well as sections 1125, 1126, and 1129 of the Bankruptcy Code—the Bankruptcy Rules, and applicable non-bankruptcy law.37
1. The Plan Satisfies the Classification Requirements of Section 1122 of the Bankruptcy Code.
44. The Plan properly classifies Claims in accordance with section 1122 of the Bankruptcy Code, which provides that claims may be combined into a single class only if each claim “is substantially similar to the other claims or interests of such class.”38 The Fifth Circuit
35 See 11 U.S.C. § 1129(a)(1).
36 See S. Rep. No. 95-989, 95th Cong., 2d Sess. 126 (1978); H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 412 (1977); see also In re Star Ambulance Serv., LLC, 540 B.R. 251, 260 (Bankr. S.D. Tex. 2015) (“Courts interpret [section 1129(a)(1)] to mean that a plan must meet the requirements of Bankruptcy Code Sections 1122 and 1123.”) (citing, inter alia, In re Save Our Springs (S.O.S.) Alliance, Inc., 632 F.3d 168, 174 (5th Cir. 2011)); In re J T Thorpe Co., 308 B.R. 782, 785 (Bankr. S.D. Tex. 2003) (“The Plan complies with the applicable provisions of the Bankruptcy Code, including the requirements of Sections 1122 and 1123(a) and (b) of the Bankruptcy Code, thereby satisfying Section 1129(a)(1) of the Bankruptcy Code.”); H.R. Rep. No.
95–595, at 412 (1977).
37 See Daches Confirmation Declaration, at ¶ 7.
38 See 11 U.S.C. § 1122(a).
