IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re:
SANCHEZ ENERGY CORPORATION, et al.,1
Debtors. § § § § § § Chapter 11
Case No. 19-34508 (MI) (Jointly Administered)
THE AD HOC GROUP’S PRESENTATION FOR PHASE 2 LIEN-RELATED LITIGATION HEARING
1 The debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification
In re Sanchez Energy Corp.
Case No. 19-34508 (MI)
Plan of Reorganization
• 80% of New Common Stock reserved for a “Post-Effective
Date Equity Distribution”
• Plan governs distributions:
• DIP Lenders receive “100% of the Post-Effective Date Equity Distribution less any amount of such Post-Effective Date Equity Distribution, if any, allocated to Holders of Allowed Claims in Classes 4 and/or 5 based upon the outcome of the Lien-Related Litigation, which allocation shall be consistent with, as
applicable, the priorities set forth in sections 1129(b) and 726 of the Bankruptcy Code.” (Second Amended Plan, Dkt. No. 1205 at Art. III.C.3.b.ii., p. 16.)
• Lien-Related Litigation determines:
• DIP Claims and the Senior Secured Note Claims
• Limited to challenges to:
1. The “allowance, priority, scope or validity” of the Prepetition Secured Parties’ liens/claims
2. The “priority or scope” of the DIP Lenders’ liens/claims
Scope of Lien-Related Litigation
• The Debtors retain all Causes of Action and the exclusive right to
enforce them.
• The Creditor Representative’s standing is limited by the Lien Challenge
Complaint:
• The “Lien Challenge Complaint” only:
1. Challenges prepetition liens on 8 Challenged Leases out of 175 total leases
Scope of the Lien-Related Litigation –
Creditor Representative Standing
• The Challenged Period to assert objections to the Prepetition Liens
expired by negotiation on March 10, 2020.
• The Senior Notes were therefore “automatically and irrevocably”
secured by Prepetition Liens on the Prepetition Collateral, excepting
anything challenged.
• Paragraph 23(b) of the Final DIP Order provides: “To the extent no
such Challenge is timely and properly filed during the Challenge
Period . . . , then, automatically and irrevocably, to the extent
not subject to such Challenge:” (cont. on next slide)
• (i) the Secured Note Obligations “shall constitute and be deemed legal, valid, and binding obligations . . . not subject to defense, claim, counterclaim, recharacterization, subordination, offset or avoidance, for all
purposes[;]”
• (iii) “the Prepetition Liens on the Prepetition Collateral shall be deemed to have been, as of the Petition Date, legal, valid, binding, enforceable, and perfected
security interests and liens, not subject to avoidance, recharacterization, subordination, recovery, attack, effect, counterclaim, defense or claim
under the Bankruptcy Code or applicable non-bankruptcy law;”
• (iv) “the Secured Notes Obligations and the Prepetition Liens on the Prepetition
Collateral shall not be subject to any other or further claim or challenge by any statutory or non-statutory committee appointed or formed in the Cases or any other party in interest acting or seeking to act on behalf of the Debtors’ estates, . . . , and any defenses, claims, causes of action, counterclaims, and offsets[.]”
Unchallenged Prepetition Collateral
Unchallenged Prepetition Collateral includes: 1. 169 Oil and Gas Leases
2. 727 Oil and Gas Wells
3. All of the right, title, and interest of Sanchez Energy Corp. and each subsidiary guarantor of the 1L Notes in, to, and under the following categories of personal property: all Accounts, all Documents, all Equipment, all General
Intangibles, all Governmental Approvals, all Instruments, all Inventory, all Investment Property, and all Securities Collateral
4. All rights, claims and benefits of Sanchez Energy Corp. and each subsidiary
guarantor of the 1L Notes arising out of, relating to or in connection with Inventory
or Equipment
5. All other tangible and intangible personal property of Sanchez Energy Corp. and each subsidiary guarantor of the 1L Notes, including all cash, products, rents, revenues, issues, profits, royalties, income, benefits, commercial tort claims, letter-of-credit rights, supporting obligations, accessions to, substitutions and
replacements for any and all of the foregoing
6. All books, correspondence, credit files, records, invoices and other
Remaining Challenges to Prepetition
Collateral
The only remaining challenges to the Prepetition Collateral:
• Whether Deeds of Trust cover 6 Leases:
1. Harrison Lease (SN Catarina LLC) 2. Hausser Lease (SN Palmetto LLC) 3. Koenning Lease (SN Palmetto LLC)
4. Briscoe Ranch Lease (SN EF Maverick LLC) 5. Pilgrim Lake Lease (SN Palmetto LLC)
6. Metcalf Lease (SN EF Maverick LLC)
• Reference included – Deeds of Trust furnish property description
by reference to another existing writing
• Lease Memoranda – Real property records contain lease
memoranda for ALL Challenged Leases*
• Descriptions – ALL lease memoranda describe Challenged Leases
with sufficient means or data to identify property*
* For Metcalf and Hausser, Exhibit A refers to the lease. Also, the Metcalf Lease refers to a recorded deed, and the recording reference is off by 1 page (269 instead of 268). But page 269 is page 2 of the deed, and the data otherwise corresponds. Moreover, the property description on page 268 has sufficient means or data to identify the property.
1. Multi-county lease with 1 county listed [Harrison, Hausser & Koenning]
• Exhibit A has correct volume, page and instrument number for one county but lists to the right another county where the lease exists (1 lease has correct
instrument number for county listed).
• ALL lease memoranda otherwise correspond with Exhibit A. And evidence
shows no other similarly described lease exists.
• Exhibit A says recording references mean property records “of the county or
counties where mortgaged property exists.”
• Deed of Trust footer lists ALL counties where mortgaged property exists.
2. 1 county listed for 2-county lease [Pilgrim Lake]
• Recording reference is correct.
• Referenced lease memorandum describes property sufficiently.
• NO Texas court has held a reference must list all counties where property exists. And this lease identifies both counties in the property description.
3. Signature questioned [Briscoe Ranch]
• Recording reference is correct.
• Referenced lease memorandum describes property sufficiently.
• Creditor Representative contests signature. But NO Texas court has held a reference may not incorporate a property description in a recorded document with a contested signature. To the contrary, Texas courts have held the
referenced document “need not be valid.” Abercrombie v. Bright.
4. Page 2 of deed referenced [Metcalf]
• Recording reference is correct.
• Referenced lease refers to a recorded deed, and the recording information is off by 1 page (269 instead of 268). The Fifth Circuit disregarded a similar error in Vaughn v. Continental Royalty.
1. Smith v. Sorrelle (Tex. 1935) – land must be described with reasonable certainty
2. Vaughn v. Continental Royalty (5th Cir. 1940) – recording information reference held sufficient despite error, using extrinsic evidence
3. Maupin v. Chaney (Tex. 1942) – reference held sufficient despite error in description of other writing, using extrinsic evidence
4. Matney v. Odom (Tex. 1948) – land must be described with reasonable certainty
5. Reserve Petroleum v. Harp (Tex. 1950) – survey reference sufficient despite error
6. Gates v. Asher (Tex. 1955) – survey reference sufficient despite error
7. Morrow v. Shotwell (Tex. 1972) – land must be described with reasonable certainty
8. Westland Oil Development v. Gulf Oil (Tex. 1982) – reference to document held sufficient using parol evidence
9. Pick v. Bartel (Tex. 1983) - land must be described with reasonable certainty
10. Long Trusts v. Griffin (Tex. 2006) –contract must furnish “means or data by which [property] to be conveyed may be identified with reasonable
certainty”
11. Preston Exploration Co. v. GSF, LLC (5th Cir. 2012) – description sufficient if writing furnishes “the means or data by which the particular land to be conveyed may be
identified with reasonable certainty” and extrinsic evidence may only be used to identify property “with reasonable certainty from data in the writing”
• Maupin v. Chaney applies to determine if Exhibit A reference
suffices.
• Creditor Representative incorrectly asserts that Long Trusts
established a new standard overturning Maupin and that Long
Trusts’ standard of “reasonable certainty” should govern a reference.
• Maupin and Long Trusts are not in tension. Maupin applies to
reference errors. And Long Trusts applies to the means or data by
which a person can identify land “with reasonable certainty
.”
Contract must furnish [therein or by REFERENCE to another writing]
the MEANS OR DATA by which the land may be identified with
reasonable certainty.
Reference
identifies (with correlation to other reference information) some
other existing writing with means or data.
Means or Data
identifies (
with reasonable certainty
) the property conveyed.
• “Reasonable certainty” standard is not new. Texas Supreme Court
cases pre-dating Maupin cite the same standard.
• Creditor Representative cites no case where erroneous reference
was held insufficient based on “reasonable certainty” test.
• Long Trusts dealt with conveyance of an indeterminate portion
within a larger tract.
• Long Trusts involved no reference error.
• 1978 contracts had no recording information and nothing to identify
a specific portion of the larger tract.
• 1982 contracts had nothing attached. Court considered a gas
contract but the 2 referenced exhibits had no data or just a plat –
and the contract attached another exhibit unrelated to the gas
contract.
• Texas courts and property treatises continue to apply Maupin.
Long Trusts Neither Changed Nor
JUNE 2020 - 4 Tex. Prac., Land Titles and Title Examination § 15.38 (3d ed.) authored by A. Leopold
§ 15.38. Documents of reference as aid to land description
“. . . The Texas Supreme Court has said, “In other words, if there appears in the instrument enough to enable one by pursuing an inquiry based upon the information contained in the deed to identify the particular property to the exclusion of others, the description will be held sufficient.” Another court said,
And even though the reference to the other instrument is itself in some respects erroneous, or the instrument is otherwise misdescribed in some particular, yet such other instrument may nevertheless be looked to in ascertaining what property was intended to be conveyed if it corresponds with the reference in other respects, and extrinsic proof shows that there is no other instrument which would accord with the language used in referring to the prior
instrument. . . . Upon the principle that that is certain which can be rendered certain, the description is sufficiently certain if the deed, in noticing the property conveyed, refers to any judgment, certificate, bounty warrant, patent, deed or map, which gives sufficient data for the identification of the land. . . . The document referred to must, of course, contain a legally sufficient description; but, if a deed, it need not be valid as a conveyance of the title. . .” *Citing Maupin
Long Trusts Neither Changed Nor
In re Cornerstone E & P Co., L.P.
Mineral lien holders challenged whether the property description in a
deed of trust met the Statute of Frauds, claiming that Long Trusts
established a more stringent standard than Westland Oil applicable
to blanket liens.
Judge Houser, of the N.D. Tex. Bankruptcy Court, stated:
“The Court disagrees. . . that Long Trusts mandates a higher degree of specificity for property descriptions than previously required under the Texas Statute of Frauds. The conveyances noted by the Plaintiffs at issue
in Long Trusts were neither blanket grants of security interests nor grants of after-acquired interests, but were instead specific conveyances of properties that could not be identified with reasonable certainty because the location of the properties was described only as an indeterminate portion of a larger tract.”
In re Cornerstone E & P Co., L.P., 436 B.R. 830, 843-44 (Bankr. N.D. Tex. 2010).
Long Trusts Neither Changed Nor
Harrison Lease
• Dimmitt, La Salle, and Webb Counties listed on page 1 and footer of every page.
• Deeds of Trust to be recorded in “each county” in which the collateral listed in Exhibit A is located.
• SN Catarina, LCC 2018 Deed of Trust recorded in Webb County as well
Harrison Lease
Harrison Lease
Lessor Lessee Lease Date Recording Data
• Exhibit A lists Dimmit County next to this recording data, which relates to Deed of Trust recorded in Webb County
• Lease memorandum describes property in Dimmit, Webb and La Salle Counties
• Harrison Lease description, with correct recording data for Webb County
Hausser Lease
Lessor Lessee Lease Date Instrument No.
• Hausser Lease description, with correct instrument number for Frio County
• Recorded Lease instrument number corresponds with Exhibit A. • Recorded Lease describes property in Frio and Zavala Counties.
Koenning Lease
• Counties covered by Deed of Trust listed on first page and on footer of every page.
• SN Palmetto, LCC 2018 Deed of Trust recorded in Gonzales County.
Koenning Lease
Lessor Lessee Lease Date Recording Data
• Exhibit A lists DeWitt County next to recording data, which relates to Deed of Trust recorded in Gonzales County
• Lease memorandum describes property in Gonzales and DeWitt Counties
• Koenning Lease description, with correct recording data for Gonzales County
Maupin Summary
• Maupin governs reference errors in Harrison, Hausser, and Koenning Leases.
• Other than the erroneous information, do the lease memoranda correspond with the Deeds of Trust in other respects?
• Same lessor, lessee, lease date, and state for all leases
• Harrison recording data corresponds to Webb County recorded lease memorandum; Harrison Lease also recorded in Dimmit County
• Koenning recording data corresponds to Gonzales County recorded lease memorandum; Koenning Lease also recorded in DeWitt County
• Hausser instrument number correct for Frio County; Hausser Lease book and page information corresponds to Zavala County recorded lease
• Does extrinsic proof show there is no other instrument that would accord with the language used in referring to the other writing?
• Paul Yale testimony that book and instrument number, as listed in Exhibit A for Harrison and Koenning Leases, did not exist in Dimmit and DeWitt Counties, respectively, and no other lease is on record between lessors and lessees of the Harrison, Hausser, and Koenning Leases
• Recording information listed in Exhibit A corresponds directly with recording information for Harrison, Hausser, and Koenning Leases in one or more counties of record
• No other similarly described instruments can be located
Briscoe Ranch Lease
JX036-25;
• Correct reference to Briscoe Ranch lease memorandum
• Sufficient means or data in property description
Pilgrim Lake Lease
• Correct reference to Pilgrim Lake lease memorandum
JX043-30;
• Exhibit A correctly lists all information, as shown in the lease memorandum • Lease memorandum
contains full property
Metcalf Lease
• Correct reference to Metcalf Lease
• Exhibit A correctly lists all information, as shown in the Lease.
• Lease refers to deed recorded in Dimmit County at 122/269 in lieu of a property description.
Personal Knowledge
• “A person who has personal knowledge of facts relevant to the
correction of a recorded original instrument of conveyance may prepare
or execute a correction instrument to make a nonmaterial change that results from a clerical error . . . .” Tex. Prop. Code § 5.028(a).
• Cinco Representatives had “personal knowledge of facts relevant to the correction” and were proper individuals to file Correction Affidavits.
• Failure to comply with the Statute of Frauds renders the conveyance “void for uncertainty of description,” not voidable. Long Trusts v. Griffin, 222 S.W.3d 412, 416 (Tex. 2006)
(quoting Smith v. Sorelle, 87 S.W.2d 703, 705 (Tex. 1935)).
• Where parties failed to comply with the Statute of Conveyances, they “created a void deed
ab initio.” Sanchez v. Telles, 960 S.W.2d 762, 768 (Tex. App.—El Paso 1997).
• “If a conveyance of an interest in real property does not sufficiently describe the land to be conveyed, it is void under the statute of frauds.” Reiland v. Patrick Thomas Props.,
Inc., 213 S.W.3d 431, 437 (Tex. App.—Houston [1st Dist.] 2006); see also Sun-Key Oil Co., Inc. v. Whealy, 2006 WL 3114466, at *3 (Tex. App.—Fort Worth Nov. 2, 2006, no pet.)
(unpublished).
• “A deed that is not signed by a grantor is void ab initio and cannot pass title.” Harris v.
Watson, No. 12-09-00271-CV, 2010 WL 4274984, at *3 (Tex. App.—Tyler Oct. 29, 2010).
• “A conveyance of real property or an interest in real property or a mortgage or deed of trust is void as to a creditor or to a subsequent purchaser for a valuable
consideration without notice unless the instrument has been acknowledged, sworn to,
• This Court
approved the
“fair and
reasonable”
Adequate
Protection terms
negotiated by the
parties.
• This Court
granted Adequate
Protection “to the
extent of the
decrease” in the
Prepetition
Collateral value.
Adequate Protection for Decreased
Value
• Adequate Protection Liens
• 507(b) Claims
• “[C]ash payment equal to the amount of all accrued and unpaid
interest on the Secured Notes”
• First-Out Hedging Obligations
• The payment of professional fees
Final DIP Order, Dkt. No. 865 at ¶ 19, pp. 35-38.
• Final DIP Order Paragraph 19(c) orders cash payments on the Secured
Notes pursuant to Section 361(1):
Cash Payments on Senior Secured
Notes
• The goal of Adequate Protection is to safeguard the creditor from a
decrease in the value of its property interest during bankruptcy
proceedings. In re 495 Cent. Park Ave. Corp., 136 B.R. 626, 631
(Bankr. S.D.N.Y. 1992).
• The Prepetition Collateral’s value has diminished significantly since
the Petition Date as evidenced by, among other things: (i) the
stipulated $85 million confirmation value of the Debtors; and (ii) the
Creditor Representative’s assertions that the Secured Notes Claims
should be general unsecured claims because there is now no value to
their liens in excess of the DIP Claims.
• The Creditor Representative lacks standing.
• The Challenge Period provided in the Final DIP Order has long expired. • The Second Amended Plan limits the Creditor Representative’s standing to
bringing claims asserted in the Lien Challenge Complaint – disgorgement is not there.
• This is not the appropriate proceeding to bring a disgorgement claim.
• Such a claim would have to be asserted by Debtors against the Indenture Trustee in an adversary proceeding.
• Paragraph 19(c)’s provision that disgorgement could be sought “through appropriate proceedings” is only a reservation of rights under Section 502. • Disgorgement is not an avoidance action.
