KEY POINTS
For the second time in the past few months, Judge Christopher Sontchi has dashed the hopes of certain creditors in the Energy Future Holdings (“EFH”) chapter 11 case that they would be paid a make-whole premium worth over $400 million.
Once a giant of the U.S. economy, the coal industry now faces uncertain times due to lower global demand, a boom in domestic natural gas production, over- levered capital structures and stringent environmental regulations. This depressed environment has attracted the attention of certain distressed investors and alternative investment funds looking to capitalize from an eventual upswing in the coal industry.
How much stress can we expect to see for oil and gas producers and related companies as a result of the current low prices? And what special issues does this industry face when it’s time to restructure or file for bankruptcy?*
Declining oil prices
Over the past few months, the economics of the oil and gas industry have changed dramatically. As oil and gas prices have fallen, so too have profit margins and working capital. Many companies will weather this storm. A fortunate few will expand their positions and acquire additional assets, some of which will be purchased from distressed companies. In dealing with these distressed companies and their assets, landmen and other oil and gas industry professionals will need to have a working-knowledge of select bankruptcy-related laws and concepts to protect their company’s assets.
The decision of the U.S. Bankruptcy Court in Hutson v. Smithfield Packing Co. (In re National Gas Distributors, LLC)1 poses potentially serious problems for parties trading gas under the North American Energy Standards Board (NAESB) base contract. The U.S. Court of Appeals for the Fourth Circuit will soon review this case of first impression about what constitutes a “swap agreement” under the expanded definition included in the U.S. Bankruptcy Code after the 2005 amendments.
The buyer of a Chapter 11 debtor's coal supply contract was not liable for the seller's obligations to the sales agent who secured the contract for the debtor-seller, according to a recent decision by the U.S. Court of Appeals for the Sixth Circuit. Al Perry Enterprises, Inc. v. Appalachian Fuels, LLC, 2007 U.S. App. LEXIS 22808 (6th Cir. Sept. 27, 2007). As the court explained, the buyer could not be liable to the sales agent "absent an express assumption of the [debtor's prior] obligations." Id. at *17.
Background
The decision in In re SemCrude, L.P., et al. prohibiting parties from contracting around Bankruptcy Code section 553’s mutuality requirement may disrupt customary business practices, including those widely used in the energy, natural gas and crude oil markets, because it rules that contracting for cross affiliate netting does not “create” the mutuality required for setoff.
Introduction: