IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION In re:
CASTEX ENERGY PARTNERS, L.P., ET AL.,1 DEBTOR. § § § § § §
CASE NO. 17-35835 (MI) Chapter 11
APACHE CORPORATION’S OBJECTION TO EMERGENCY MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING THE PAYMENT IN THE
ORDINARY COURSE OF (A) LEASE OPERATING EXPENSES AND COSTS, (B) JOINT INTEREST BILLINGS, AND (C) INSURANCE PAYMENTS AND
(II) GRANTING RELATED RELIEF (Relates to Dkt. No. 11)
TO THE HONORABLE MARVIN ISGUR, UNITED STATES BANKRUPTCY JUDGE: Apache Corporation (“Apache”), creditor in the above styled cases, acting through its undersigned counsel, files this Objection to the Debtors’ Emergency Motion for Entry of Interim and Final Orders (I) Authorizing the Payment in the Ordinary Course of (A) Lease Operating Expenses and Costs, (B) Joint Interest Billings, and (C) Insurance Payments and (II) Granting Related Relief (the “Objection”), and respectfully states as follows:
PRELIMINARY STATEMENT
1. Apache objects to the JIB Motion (as defined below) because the Debtors have failed to offer a legitimate basis to make payments on prepetition claims outside of a plan. Furthermore, entry of the proposed final order for the DIP Motion would give the Debtors sweeping authority to choose winners and losers amongst trade creditors, and circumvent the priorities, equal treatment, and protections provided to creditors under the Bankruptcy Code.
1
The Debtors in these jointly administered cases are: Castex Energy Partners, L.P. case with the case Castex Energy 2005, L.P. (17-35837), Castex Energy II, LLC (17-35838), Castex Energy IV, LLC (17-35839) and Castex Offshore, Inc. (17-35836). The
FACTUAL BACKGROUND A. General Background
2. On October 16, 2017 (the “Petition Date”), the Debtors filed voluntary petitions for relief under title 11 of chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Court”).
3. The Debtors are continuing in possession of their properties and are managing their businesses, as debtors in possession, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. To date, no party has requested the appointment of a trustee or examiner.
4. On October 27, 2017, the United States Trustee (the “UST”) filed its Notice of Appointment of Committee of Unsecured Creditors [Docket No. 69] and appointed the Committee.
5. On the Petition Date, the Debtors filed their restructuring support agreement (“RSA”) among the Debtors, certain of their non-Debtor affiliates, and certain pre-petition lenders (the “Lenders”) party to the Second Amended and Restated Credit Agreement dated as of July 17, 2013 (the “RBL Credit Agreement”) with Castex Energy Partners, L.P. (“CEP”), as borrower, and Capital One, National Association, as successor administrative agent (the “Agent”). See [Dkt. No. 3, Ex. 2 - Restructuring Support Agreement] The RSA contains a plan term sheet (the “Plan Term Sheet”) outlining certain key terms of a chapter 11 plan to restructure the Debtors’ existing debt and other obligations. See [Dkt. No. 3, Ex. 2 – Exhibit A to Restructuring Support Agreement].
6. The Plan Term Sheet provides the following treatment for the category of unclassified claims labeled “Trade Claims”:
payment of all undisputed third party vendor claims arising in the ordinary course of business of the Debtors as they come due, including, without limitation, continued funding of all JIB amounts by CEP for pre- and postpetition amounts and (ii) payment by COI of all undisputed amounts due either as operator or as record title non-operator owner, whether such amounts become due
pre-or postpetition.
[Dkt. No. 3, Ex. 2 – Exhibit A to Restructuring Support Agreement at p.3] (emphasis added).
7. The Debtors’ consolidated list of the thirty largest unsecured claims identifies only four disputed claims, the claims of: Apache Corporation, Marquis Resources LLC, Fieldwood Energy, LLC, and Benefit Street Partners. [Dkt. No. 1 pp.8-16] As the sole known disputed claims, these vendor claims (and only these vendor claims) appear to be excluded from the full payment proposed for “Trade Claims” in the Plan Term Sheet. These claims instead appear to be slated for a “General Unsecured Claims” class, alongside the deficiency claim of the prepetition secured lenders which, based on information currently available, may be in the hundreds of millions of dollars. The Plan Term Sheet indicates that General Unsecured Claims would share pro rata in 1% of new equity in reorganized Castex 2005, or the non-deficiency claimants may instead share pro rata in $500,000 of cash under certain contingencies which are in the secured lenders’ control. The treatment trade creditors receive as General Unsecured Creditors is patently worse than the treatment received as “Trade Creditors.”
8. On the Petition Date, the Debtors also filed a number of first day motions, including the Debtors’ Emergency Motion for Entry of Interim and Final Orders (I) Authorizing the Payment in the Ordinary Course of (A) Lease Operating Expenses and Costs, (B) Joint Interest Billings, and (C) Insurance Payments and (II) Granting Related Relief [Docket No. 11] (the “JIB Motion”).
9. The Debtors seek authority to pay prepetition claims which the Debtors classify as lease operating expenses or joint interest billings (“JIBs”) related to their oil and gas leases, wells and joint operating agreements (“JOAs”) for the Debtors as both non-operating and operating working interest owners. Specifically, the Debtors request authority to make the following categories of payments: (i) CEP requests authority to pay CEI (a non-debtor affiliate) approximately $5 million in outstanding prepetition JIBs and costs related to Onshore Leases; (ii) COI requests authority to pay approximately $3 million of COI Operating Costs; (iii) COI requests authority to pay $6 million for outstanding JIBs and costs related to Offshore Leases operated by third parties; (iv) CEP requests authority to reimburse COI approximately $6 million for third party operator JIBs and to pay COI approximately $3 million for JIBs on account of properties operated by COI; (v) COI requests authority to pay an undisclosed amount to third parties for costs incurred by COI as operator under the JOAs for the Offshore Leases; and (vi) CEP and COI request authority to pay CEI $325,000 and $1.5 million in insurance premiums, respectively.
10. Based on these amounts, and assuming there is no duplication of payment across categories, the Debtors propose to pay approximately $23 million of prepetition claims, $14 million of which would be transfers among the Debtors or to non-debtor affiliate CEI.
11. On October 18, 2017, the Court entered the Interim Order (i) Authorizing the Payment of (A) Operating Expenses, (B) Joint Interest Billings and (C) Insurance Payments, and (ii) Granting Related Relief [Docket No. 36] (the “Interim JIB Order”) granting the Motion on an interim basis.
The Debtors are authorized, but not directed, in consultation with the DIP Agent and the Prepetition Agent, to pay undisputed, prepetition and postpetition amounts due in the ordinary course of
of business) (i) by CEP under and in connection with the JOAs to which it is a party, (ii) by COI both as operator under JOAs and in its capacity as a Non-Op Working Interest Owner (without duplication to amounts authorized by the immediately succeeding clause (iii)), (iii) by CEP in connection with the Offshore Leases given its beneficial ownership interest, whether under JOAs in connection with which COI is operator or not, and (iv) under the Insurance Policies to CEI.
12. The Court also required that the Debtors add language to the Interim JIB Order regarding possible disgorgement of payments made to insiders.
13. On November 6, 2017, the Debtors filed their Notice of Filing of Amended Proposed Orders for Certain of the Debtors’ First Day Filings Set for Hearing on November 14, 2017. [Dkt. No. 82]. The amended proposed final order contains analogous language permitting the payment of undisputed prepetition vendor claims:
The Debtors are authorized, but not directed, in consultation with the DIP Agent and the Prepetition Agent, to pay undisputed,
prepetition and postpetition amounts due in the ordinary course of business (and, subject to the consent of the DIP Agent and the Prepetition Agent, amounts due other than in the ordinary course of business) (i) by CEP under and in connection with the
JOAs to which it is a party, (ii) by COI both as operator under JOAs and in its capacity as a Non-Op Working Interest Owner (without duplication to amounts authorized by the immediately succeeding clause (iii)), (iii) by CEP in connection with the Offshore Leases given its beneficial ownership interest, whether under JOAs in connection with which COI is operator or not, and (iv) under the Insurance Policies to CEI.
[Dkt. No. 82, Ex.D-1 at ¶1] (emphasis added).
14. A final hearing on the DIP Motion, JIB Motion, SSA Motion and Bond Motion is set for November 14, 2017 at 2:00 p.m. (the “Final Hearing”)
JURISDICTION AND VENUE
15. The Court has jurisdiction to consider this matter under 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(1). Venue is proper in this district under 28 U.S.C. § 1408.
16. The Court has constitutional authority to enter a final order in this matter. If it is determined that the bankruptcy judge does not have the constitutional authority to enter a final order or judgment in this matter, Oceaneering consents to the entry of a final order or judgment by this Court in this matter.
OBJECTION
A. There is No Basis For the Extraordinary Relief Sought in the JIB Motion
17. Apache objects to the JIB Motion to the extent it seeks to authorize payment of prepetition amounts. The proposed final order would give the Debtors sweeping authority to pay any prepetition claim arising in connection with the Debtors’ JOAs or offshore leases that the Debtors deem “undisputed.” The only support offered by the Debtors for the extraordinary relief requested is the flat assertion that these claims could give rise to statutory liens or would be paid as cure claims if and when the Debtors assume the related contracts. The Debtors provide little detail or information as to the identity of the third parties proposed to be paid, whether such parties have asserted liens and if such liens are in fact secured, or any other detailed information in relation to the probable, not possible, harm the Debtors will suffer if the proposed payments are not made.
18. “[T]he payment of prepetition claims prior to confirmation of a plan in a Chapter 11 case has been proscribed by the 5th Circuit in Matter of Oxford Mgmt. Inc., 4 F.3d 1329 (5th Cir. 1993).” In re Equalnet Commc’ns Corp., 258 B.R. 368, 369 (Bankr. S.D. Tex. 2000). “In
These exceptions include (1) turnover of cash collateral, (2) payment of cure amounts in the context of the assumption of an executory contract or lease, (3) payments that are “at once individually minute but collectively immense and critical to the survival of the business of the debtor” such as the redemption of prepetition retail coupons, the honoring of credit card debits, credits, and chargebacks, or the issuance of billing credits to retail customers in connection with prepetition telephone services and invoices, and (4) employee wage claims and certain tax claims that “enjoy a priority status in addition to being sometimes critical to the ongoing nature of the business.” In re CEI Roofing, Inc., 315 B.R. 50, 58 (Bankr. N.D. Tex. 2004) (quoting Equalnet at 369-70). “Except where an unsecured claim, non-payment of which could impair a debtor’s ability to operate, has been accorded priority treatment by Congress and existing senior creditors consent or are clearly provided for, bankruptcy court may order payment of unsecured prepetition claims only under the most extraordinary circumstances.” In re CoServ, L.L.C., 273 B.R. 487, 493-94 (Bankr. N.D. Tex. 2002). Here, the Debtors have not established the priority of the claims at issue, and have not yet begun to establish extraordinary circumstances that would permit payment of prepetition claims outside of a plan. Based on the Debtors’ filings in this case, there is good reason to believe that even trade claimants who could be entitled to a statutory lien will be out of the money, and to the extent any claims are expected to be paid in full via contract assumption, any such payments should be made through the contract assumption process. Accordingly, the JIB Motion should be denied.
B. The Relief Sought in the JIB Motion Could Allow the Debtors to Circumvent the Creditor Protections of the Plan Process and Upset the Priorities of the Bankruptcy Code.
19. The proposed final order would permit the Debtors to choose winners and losers amongst similarly situated creditors in a manner that could potentially render the protections provided to creditors by the plan process meaningless. The proposed order divides trade claims
into two groups—disputed claims and undisputed claims. The Plan Term Sheet provides that undisputed claims (the vast majority of trade claims) are to be paid in full. The Plan Term Sheet further provides that disputed claims, in this case four large unsecured claims that the Debtors have designated as disputed, have the privilege of being treated in the General Unsecured Claims class and sharing in 1% of new equity in reorganized Castex 2005—new equity that will likely be massively diluted by the prepetition lenders’ deficiency claims.
20. In a plan process, the holders of disputed claims could object on the grounds of improper classification—that the Debtors are impermissibly creating a “disputed claims” class,2 or that the Debtors’ division of favored trade claims and disfavored trade claims is not in furtherance of a permissible purpose under the Bankruptcy Code.3 And in the event the General Unsecured Claims class votes against a future plan following the Plan Term Sheet, the holders of disputed claims could object to being crammed down on the basis that the disparate treatment of favored and unfavored trade claims unfairly discriminates and thus violates Bankruptcy Code Section 1129(b)(1).
21. The JIB Motion, though subject to the high standards discussed above, does not provide such a process for the disputed claimants to protect their right to equal treatment under a plan. It is possible that, if a final order on the JIB Motion is entered and becomes unappealable, the disputed claimants may be foreclosed from raising such objections during the plan process.
2 See In re Congoleum Corp., 362 B.R. 198, 203 (Bankr. D.N.J. 2007) (“if disputed claims could be classified
separately on that basis alone, debtors would always put difficult creditors in a separate class to obtain the consent of the class of undisputed creditors and seek confirmation under 1129(b). The claims objection process in bankruptcy is something entirely separate from plan classification.”); In re Porcelli, 319 B.R. 8, 10-11 (Bankr. M.D. Fla. 2004) (“Since the legal status of the claim and not its disputed status is the appropriate focus of classification, the segregation of unsecured claims that are disputed is improper”); In re Paolini, 312 B.R. 295, 315 (Bankr. E.D. Va. 2004) (“There is no cognizable basis to permit separate classification of the claim of [the creditor]; the existence of the dispute over the validity of the [creditor’s] claim is not sufficient to distinguish it from the other unsecured pre-petition claims of [the debtor]”).
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Accordingly, the JIB Motion should be denied to avoid disrupting the priorities, equal treatment, and protections provided to creditors by the Bankruptcy Code.
CONCLUSION
WHEREFORE, Apache respectfully requests that this Court enter an order denying the JIB Motion in full, and any and all further relief as may be equitable and just.
Dated: November 13, 2017 Respectfully submitted, Houston, Texas
GARDERE WYNNE SEWELL, LLP /s/ John P. Melko John P. Melko (TX 13919600) Telephone: (713) 276-5727 Facsimile: (713) 276-6727 [email protected] Michael K. Riordan (TX 24070502) Telephone: (713) 276-5178 Facsimile: (713) 276-6178 [email protected]
1000 Louisiana Street, Suite 2000 Houston, TX 77002-2099
Counsel for Apache Corporation CERTIFICATE OF SERVICE
I do hereby certify that on November 13, 2017 a true and correct copy of the foregoing pleading was served via CM/ECF to all parties authorized to receive electronic notice in these cases.
/s/ John P. Melko John P. Melko
IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION In re:
CASTEX ENERGY PARTNERS, L.P., ET AL.,1 DEBTOR. § § § § § §
CASE NO. 17-35835 (MI) Chapter 11
ORDER DENYING EMERGENCY MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING THE PAYMENT IN THE ORDINARY COURSE OF (A) LEASE OPERATING EXPENSES AND COSTS,(B) JOINT INTEREST BILLINGS, AND
(C) INSURANCE PAYMENTS AND (II) GRANTING RELATED RELIEF (Relates to Dkt. No. 11)
CAME ON FOR CONSIDERATION the Debtors’ Emergency Motion for Entry of Interim and Final Orders (I) Authorizing the Payment in the Ordinary Course of (A) Lease Operating Expenses and Costs, (B) Joint Interest Billings, and (C) Insurance Payments and (II) Granting Related Relief [Docket No. 11] (the “JIB Motion”), and the Objection of Apache Corporation. The Court, finding that the objection is well founded, it is hereby:
ORDERED that JIB Motion is DENIED in its entirety.
___________________________________ HONORABLE MARVIN ISGUR
UNITED STATES BANKRUPTCY JUDGE
1
The Debtors in these jointly administered cases are: Castex Energy Partners, L.P. case with the case Castex Energy 2005, L.P. (17-35837), Castex Energy II, LLC (17-35838), Castex Energy IV, LLC (17-35839) and Castex Offshore, Inc. (17-35836). The
