1.  Bankruptcy in the Oil Patch OCAPL, Monday, Nov. 2, 2015 Melissa R. Gardner Attorney Phillips Murrah, PC mrgardner@phillipsmurrah.com

2. Types of Bankruptcy Chapter 7Chapter 11 Trustee appointed to replace management in order to liquidate property Debtor remains in possession of company and management stays in place (debtor-in-possession) Business ceases Preserving value of business Court supervision of distribution of proceeds and liquidation of assets Court supervised reorganization of on-going business No restructuring obligation Once Court approves plan, a company emerges Formula for payment distribution Forum for negotiation, no formula 120 days to establish plan

3. Automatic Stay  Automatic at the time of the filing  Prohibits some business activities  Demanding payment  Acceleration of debt  Enforcement of dilution or squeeze out remedies  Filing or continuing litigation  Foreclosing on property  Possessing collateral  Doesn’t prevent actions against guarantors  Can be lifted on motion of the Court  There are some exceptions to the stay, but not many that would apply to oil and gas companies.

4. Automatic Stay and OGLs  Courts have generally found that an automatic stay will not preclude the termination of an OGL upon its own terms.  Royalty owners are unsecured creditors. However, the Court will often allow royalty payment to maintain the OGL, as a valued asset.

5. Process  In Chapter 7 proceedings, the Court sets a date, all claims must be filed before then.  In Chapter 11 proceedings, the debtor creates a schedule of their debt, it is a creditor’s obligation to make sure that its debt is correctly represented there. Correct claims DO NOT guarantee recovery, but recovery is traditionally impossible without a claim.  Claims are allowed unless objected to.  In the event of an objection, claims don’t move forward until there is a resolution.  Traditionally recover a pro rata distribution.

6. Process  Debtor formulates its plan to exist after the process.  Creditors and interest holders may vote on the plan.  Court must confirm. Often only considers the Debtor’s plan.

7. Claims  Secured claims  Limited to the value of collateral securing the claim  Must be perfected prior to the petition  Administrative claims  Reasonable and necessary to preserve the bankruptcy estate  Unsecured claims  Amount can be negotiated

8. Filing a Claim  Filing  Chapter 7 – Creditor must file  Chapter 11 – Doesn’t have to file, if on schedule, but might be best to as it serves as proof of claim  Timing  Chapter 7 – Within 90 days of creditor meeting  Chapter 11 – Fixed by the Court

9. Critical Vendor Payments  You can avoid the stay in limited cases, under the necessity of payment doctrine.  It’s critical to continued business  Debtor will be harmed if payment not made  There is no practical alternative  Rare to grant this exception.

10. Reclamation Rights  Trustee can call back business activity that has occurred prior to the filing of the petition.  Goods delivered within 45 days may be reclaimed by a written demand. If no letter, the vendor is granted an administrative claim.  Reclamation goods are subject to priority treatment.

11. Contested Matters  Within the bankruptcy case  Often involves discovery and testimony  Examples  Motions to lift automatic stay  Claim objections  Motions addressing executory contracts  Motions to sell property  Confirmation of a Plan of Reorganization

12. Adversary Proceedings  Rule 7001  Recovery of money or property  Determining the validity of a lien  Approval of property  Challenging a discharge  Revoking a confirmation order  Determining the dischargeability of debt  Obtaining an injunction  Subordinating any allowed claim  Obtaining a declaratory judgment  Determining a removed claim or cause of action

13. Preference  Enables trustee or debtor in possession to pull back property and redistribute it to other creditors according to the statutory priority.  To prevent race to the courthouse.  Preferences can be voided if they are 1) a transfer 2) of an interest in the debtor’s property 3) on account of an antecedent debt 4) made within the preference period 5) while the debtor was insolvent 6) to or for the benefit of the creditor 7) that permits the creditor to receive more than it would under chapter 7 had the transfer not been made.

14. Fraudulent Transfer  Within and outside of bankruptcy law.  Three types:  Actual Fraud  Constructive Fraud  Partnership Transfers

15. Actual Fraud  Must prove intent to avoid payments and interfere with normal collection processes.  Evidence  The inadequacy or absence of consideration  Relationship between parties  Use of property  Financial condition of parties  Pattern

16. Constructive Fraud  Must prove that less than value; the company was insolvent or nearly so.  Transferring to insiders qualifies

17. Oil and Gas Specifics  Joint Operating Agreements  Executory contracts – not enforceable against bankrupting party  Operator usually agrees to plan  Non-Operators often reject the plan  Eliminate non-consent penalties  Reduce threshold for Operator’s negligence  Allow for a more favorable JOA  Non-bankruptcy parties still have to perform their obligations

18. Oil and Gas Specifics  Farm-Out Agreements  Interest in liquid or gaseous hydrocarbons that the debtor has agreed to transfer are excluded from bankruptcy party’s property.  Production Payments  Considered an interest in real property.  Plugging obligations  Up to the state to determine if they are still enforceable on a case by case basis.

19. Oil and Gas Specifics  Contracts  Cannot generally be terminated if value to bankrupting party can be proven.  Title Standards – Chapter 7  Prior to Oct. 1, 1979 and bankruptcy property is sold, the Order Approving the Trustee should be filed of record. You must also have the petition to sell, notice to creditors, affidavit of notice, Order to Sell, Report of Sale, and an Order Confirming Sale.  After Oct. 1, 1979 and bankruptcy property is sold, you must have the Petition and Order; schedule of real property; qualifications of Trustee; Order Approving; and the Conveyance, which should be filed of record.

20. Oil and Gas Specifics  Title Standards – Chapter 11  The confirmed Plan and the approved Disclosure Agreements must be provided.

21. How to avoid being cut out  Obtain pre-payment whenever possible.  Obtain deposits.  Have financial relationships guaranteed by a third party.  Avoid changing payment terms.  Become active in the Unsecured Creditors’ Committee.

22. Questions?  Please limit these to questions wherein my answers will sound intelligent. These include:  Oklahoma State Football  Thunder Basketball  Rowing  Title  Bankruptcy