The Third "B" | Russell T. Rudy Energy LLC
We are all painfully aware of the boom and bust nature of the oil and gas industry. Now, Wade Caldwell and Zach Fanucchi offer a third “B”: Bankruptcy. In an article entitled “My Producer Has Filed Bankruptcy-Now What?” posted on www.mineralrightsforum.com , the authors begin with the usual disclaimers as to how the article is not intended as a substitute for legal advice, and then go on to describe the types of bankruptcy and what the royalty owner can do to protect himself should this occur.
The three main types of Bankruptcy are covered by Chapters 7, 11 and 13 in the Bankruptcy Code. Chapter 7 is liquidation and the debtor goes out of business and the bankruptcy trustee sells off assets and pays claims, if sufficient funds remain. If your lessee files under Chapter 7, your lease will probably be sold and you may not receive all the royalties due to you.
Chapter 11 is the most common form of bankruptcy used by oil and gas companies and, unfortunately, the most complex. Typically the debtor will file a plan listing his creditors and how he intends to pay them. Debts are classified as to priority, secured, priority unsecured and general unsecured claims. Chapter 11 bankruptcies can have a variety of outcomes, and major assets, such as your lease, might be sold. Depending on the situation, the debtor might continue running the company, or the trustee might do so. Outcomes are varied and unpredictable.
Chapter 13 is generally used by individuals and is rarely employed by operators. Only small companies with a few leases would typically use this form of bankruptcy. Under Chapter 13 the debtor files a plan to repay creditors. Claims are classified as secured and unsecured with the former taking priority.
When a debtor files for bankruptcy he has to notify all creditors. Since he is seeking protection against them, he wants to make the list of those contacted as comprehensive as possible. Consequently, you might receive a bankruptcy notice from a company with which you are unfamiliar. The debtor might have not paid you royalties in quite a while, or might not be your lessee or operator. He might be another royalty owner, a working interest owner, purchaser, transporter, etc.
It is important to determine your legal relationship with the debtor. You can do this by going on-line and reviewing the bankruptcy schedules filed with the court to ascertain why you received a notice. It is important that you register on-line to receive notices and documents related to your case by e-mail. Typically this is not easy, but imperative, as bankruptcy courts have mandatory electronic filing rules.
Once you have found the bankruptcy “schedules”, read all the documents carefully and take particular note of future deadlines and events.
However, as soon as you receive the Notice of Claim from the Bankruptcy Court, start collecting the documents needed to support your claim against the debtor. These would include your lease, division order, previous royalty statements and production records. Any significant interest in the property would warrant contacting an attorney.
You will be inundated with information, but the most important thing to note is the deadline for filing your proof of claim.
According to the authors, contacting the debtor’s attorney or the court is probably an exercise in futility. When the debtor files a Bankruptcy Petition with the court, an automatic stay goes into effect. The stay prevents a creditor from taking further action against the debtor. A creditor can file a request that the stay be lifted for a specific purpose, but typically royalty owners have no right to do so.
However, if you have an unfavorable lease, and the language in the document allows you to terminate it in the event of a bankruptcy, you might be able to pursue lifting the stay on these grounds.
In Texas, royalty interest owners are considered perfected secured creditors and as such have a secured interest in the sale of oil and gas covered by the lease to secure their royalty payments. This means you have a superior claim to that of unsecured creditors.
If you think your operator is dishonest, it might be worth going through the Bankruptcy Schedules he filed with the court to determine if they contain untruthful statements, and attend the meetings of creditors.
Your lease is one of the operator’s major assets, so it is in his interest to stay current of royalty payments prior to, and during, bankruptcy. In Texas, there is a good chance that royalty owners will be paid, even during the proceedings.
Royalties that had not been paid prior to bankruptcy must be pursued through a proof of claim. However, you probably will not be able to terminate the lease due to unpaid royalties prior to the operator filing for bankruptcy. Debtors are very aware of the danger of losing a lease due to non-payment of royalties and routinely ask the Bankruptcy Court to pay royalties due before, and after, the filing in order to preserve the lease. If you want to terminate your lease due to bankruptcy, you need to get your attorney involved.
Bankruptcies, like most legal proceedings are neither fast nor straightforward. Chapter 7 liquidations typically move relatively quickly and might be resolved in 6 months. Chapter 13 reorganizations take longer, and Chapter 11 still longer. Unless the Chapter 11 bankruptcy was “pre-packaged”, it can take a year or more. With all forms of bankruptcies, objections and appeals can significantly prolong the process.
To read the article in its entirety, please go to http://www.mineralrightsforum.com/profiles/blogs/my-producer-has-filed-bankruptcy-now-what .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
