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Lessons from Sabine

In March, Bankruptcy Judge Shelley Chapman held that Sabine Oil & Gas Corp. satisfied the standards for rejection of several gathering and handling agreements between Sabine and its midstream counter-parties, Nordheim Eagle Ford Gathering, LLC and HPIP Gonzales Holdings, LLC.  While the Court held that Sabine exercised reasonable business judgment in rejecting the agreements, the Court declined to decide "in a binding way the underlying legal dispute with respect to whether the covenants at issue run with the land," and instead offered a "non-binding" analysis to determine the reasonableness of Sabine's rejection.

On May 3, 2016, approximately six weeks after the initial decision, Judge Chapman reached a final "binding" ruling on this open issue – holding that the contracts do not constitute (or include) covenants running with the land, and can be rejected in full. The Court largely reiterated its prior analysis – and even attached the prior opinion to the new opinion. The Court also noted for the first time that, if the contracts had contained covenants affecting the value and use of the real property, they likely would have defaulted the Debtors' credit facility.

See below for our analysis on this case, the non-binding and binding decisions, and recent developments.  

Burst Pipeline? Bankruptcy Court Rules Sabine Can Reject Midstream Contracts
By Douglas Mintz and Raniero D'Aversa

In this first of two blog post on Sabine, we present background on the case, the two main arguments and an analysis of potential implications this case may have, particularly on midstream counter-parties who may have thought they were protected from upstream credit risk. Read more.

Burst Again: Sabine Bankruptcy Court Issues Binding Ruling Finding No Covenants Running with Land
By Douglas Mintz, Jonathan Ayre, Darrell Thomas, Raniero D'Aversa and Monica Perrigino

In our second blog post on Sabine, we take a closer look at the potential consequences of this binding decision, noting that midstream parties will need to closely review their counterparty risk and upstream parties will likely rely on these rulings to renegotiate their midstream contracts in or out of bankruptcy. Read more.

Additional U.S. Case Updates and Analysis

Not So Fast—Supreme Court Holds Prepetition Fraudulent Transfer Precludes Post-Petition Discharge in Husky International
By: Raniero D'Aversa, Douglas Mintz, Robert Loeb, Kelsi Corkran, Amy Pasacreta, and Monica Perrigino

One of the goals of the Bankruptcy Code is to provide a debtor with a fresh start.  The discharge of prepetition debts at the conclusion of a bankruptcy case is one of the most important ways to attain this fresh start.  On May 16, 2016, the Supreme Court made it harder for debtors to obtain a fresh start by broadening an exception to discharge.

Section 523(a)(2)(A) of the Bankruptcy Code provides that an individual debtor is not discharged from any debt "for money, property [or] services … to the extent obtained by false pretenses, a false representation, or actual fraud[.]"  Circuits split as to whether actual fraud under Section 523(a)(2)(A) requires an affirmative misrepresentation; the Fifth Circuit had held that this was a necessary element to prevent discharge, but the Seventh Circuit had held that "actual fraud" encompassed a broader range of behaviors. 

The Supreme Court resolved this split, rejecting the Fifth Circuit's narrow interpretation and finding that the term "actual fraud" does not need to include an affirmative misrepresentation by the debtor.  With this broader reading, debtors will be unable to discharge prepetition debts where there is evidence that they inappropriately siphoned of their assets prior to filing for bankruptcy.  Husky Int'l Elecs., Inc. v. Ritz, No. 15-145, 2016 WL 2842452 (U.S. May 16, 2016).  Read more.

Litigation Finance: A Brief History of a Growing Industry
By Laura MetzgerMatt Fechik and Amy Pasacreta

Litigation costs money.

Litigation finance can provide the cash a plaintiff needs to prevail in court. Plaintiffs holding valid—and potentially quite valuable—claims sometimes do not have the resources to initiate a lawsuit or to see one through to a favorable resolution. Rules of professional ethics generally prohibit lawyers from providing clients with financial assistance. A contingency fee arrangement with a lawyer can help reduce a plaintiff's out-of-pocket legal costs, but such arrangements are not always feasible. Even when they are, the lawyer may not have enough cash available to fully fund the costs of litigation.

Litigation financing (also known as professional funding, settlement funding, third-party funding, or legal funding) is the process by which plaintiffs can finance their litigation or other legal costs through a third party. This third party provides a nonrecourse cash advance to the plaintiff in exchange for a percentage share of the judgment or settlement. Litigation finance is used to fund all types of cases, including commercial litigation, intellectual property disputes, personal injury cases, class actions, whistleblower suits, and even high-profile divorce cases. And funders invest in early stage cases, cases pending appeal, and even finished cases.

Many investors, including big banks, participate in this sector. There are also firms dedicated solely to investment in litigations. These firms now invest about $1 billion a year, and the industry seems to be growing. Topping $1 Billion Mark, Big Litigation Funder Gets Bigger, Julie Triedman, The Am Law Daily, January 6, 2016. The industry's largest investor, Chicago-based Gerchen Keller, was formed in 2013 with $100 million in capital and now has more than $1.4 billion in assets under management. In many ways, the firm operates like a typical hedge fund. It maintains several separate funds that invest private capital in portfolios of assets selected by the firms' managers. The major difference between it and more traditional hedge funds is that Gerchen Keller invests only in this new asset class—namely, interests in lawsuits. In addition to investments by big banks and funds, accredited investors with as little as $2,500 to invest can get a piece of the action. Specifically, LexShares, a crowdsourcing website, matches third-party funders meeting certain qualifications with litigants in need of funding.

The foregoing demonstrates that lawsuit investment is a new and burgeoning asset class. In spite of this, there is no uniform regulation. Congress and state legislatures are looking to change this situation. Read more.

Oil & Gas Bankruptcy Issues: Video Series
By Raniero D'Aversa and  Douglas Mintz

Part 4: Liens in Bankruptcy Cases
In this fourth of five videos on the oil & gas industry, Orrick Restructuring Chair Ron D'Aversa and Restructuring Partner Doug Mintz go over the often complicated process of securing liens for oil & gas operations, explaining what RBL liens typically attach to and how the liens compete with others invested parties.

Part 5: Bankruptcy Issues for Secured Creditors
In the final installment of this series on the oil & gas industry, Ron and Doug survey the bankruptcy landscape for the oil & gas industry in the current low-price climate, outlining strategic reasons for bankruptcies, how unencumbered assets make for an atypical bankruptcy case, and how valuation and new borrower options could ultimately lead to adversarial cases.
 

Recent Orrick Developments

Orrick Advises Ocean Rig in Succsesful Bid for Deepwater Drillship

Orrick client, Ocean Rig UDW Inc., recently announced the successful bid by one of its subsidiaries of the 6th generation ultra deepwater drillship Cerrado, being sold through an auction, for a purchase price of $65 million. See the full press release from Ocean Rig here.

Ocean Rig is an international offshore drilling contractor providing oilfield services for offshore oil and gas exploration, development and production drilling, and specializing in the ultra deepwater and harsh environment segment of the offshore drilling industry.

Bill Haft, Ron D'Aversa, Peter Rooney and Julie Eum comprised the cross-practice, New York-based Orrick team that advised Ocean Rig on the successful bid.

Wilmington Trust Prevails in the Ninth Circuit

Our client Wilmington Trust, acting as agent for a lender group in the November 2005 Land Investors, LLC (aka North Las Vegas) bankruptcy case, recently prevailed in the Ninth Circuit on an appeal from a comprehensive summary judgment we obtained from the Las Vegas Bankruptcy Court. The judgment concerned the proper value of a creditor's disputed interest in the proceeds from the recent sale of a property and whether or not the creditor had a right to recover its funds.

The Bankruptcy Court agreed with Orrick and ruled that the property could be sold free and clear of the competing creditor's rights in the property and that Wilmington Trust was entitled to the full amount of the proceeds of the sale of the debtors' property. On appeal, the District Court agreed. On February 29, the Ninth Circuit affirmed, rejecting the theories of the appellant that bankruptcy law enhanced the rights of the creditor, and accepting the legal theories advanced by Orrick that the creditor was entitled to nothing under the applicable contract and that bankruptcy law does not change that result.

Crucial to the decision was the Ninth Circuit's interpretation of Section 363(f) of the Bankruptcy Code, which authorizes such free and clear sales of any property interest of entities other than the estate only if it is either a disputed interest or if the entity could be compelled to accept a money satisfaction of the interest. While the creditor argued that the Conditional Repayment and Funding Agreement (CRFA) – a contract signed between the parties that established repayment terms – entitled it to certain funds, the Ninth Circuit held that, under Section 363(f), the CRFA lost all legal effect upon the sale of the property. Under this reading, the court agreed with Orrick's argument that the CRFA only created a contingent interest in the property and, because it had expired, retained no value.

Ron D'Aversa, Jonathan Guy and Jeff Hermann handled the litigation before the Bankruptcy Court and the appeals to the District Court and the Ninth Circuit. The full team included: Ron, Jonathan, Jeff, Laura Metzger, Kelsi Corkran, Mary Wallace, Kathleen Orr, Debra Felder, Dennis Bent, Brian Goldman, Scott Pearsall and John Farmer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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