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Certain amendments to the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) became effective in all cases commenced after December 1, 2017. The amendment to Bankruptcy Rule 3002 is significant and does the following:

  • It shortens the deadline to file a proof of claim to 70 days after the bankruptcy filing; and
  • It requires secured claims in cases pending under Chapter 7, 12 or 13 to file a proof of claim.

For more details, read the entire alert here.

The Bankruptcy Code gives secured creditors certain rights and protections. For secured creditors whose collateral is worth more than the creditor’s claim, these rights may include payment of attorney’s fees and post-petition interest at a rate agreed to in the debtor’s and creditor’s prepetition agreement. A chapter 11 bankruptcy plan, however, may have provisions in it that expressly takes away a secured creditor’s right to post-petition interest. A recent memorandum opinion in the Linn Energy, LLC (“Linn”) and Berry Petroleum Company, LLC (“Berry”) bankruptcy eliminated a secured creditor’s right to post-petition interest at a default rate, because of conflicting plan provisions, one of which seemed to allow post-petition interest, while the other prohibited it.

Wells Fargo, N.A., was the administrative agent under prepetition credit facilities for Berry and Linn (“Lender”). As typical in credit agreements, the prepetition credit facilities had provisions dealing with payment of principal and interest in situations that constitute an “event of default.” Linn and Berry filed bankruptcy on May 11, 2016. The bankruptcy filing constituted an event of default under the prepetition credit facilities, and allowed the Lender to collect a “default interest.”

Linn and Berry filed their separate plans of reorganizations (the “Plans”), which were substantively similar in defining the Lender’s claims and the treatment under the Plan[1]. The Lender did not object to either the Linn Plan or the Berry Plan, and each Plan was subsequently approved by the bankruptcy court.

Prior to the Plans going effective, the Lender filed a motion, requesting the bankruptcy court to order the payment of post-petition default interest. The reorganized Berry and Linn disagreed that the Lender was entitled to post-petition default interest under the Plans.

The dispute between the reorganized entities and the Lender centered around two conflicting provisions: Article III.B.3 and Article VI.F.

Article VI.F of the Berry Plan prohibited the Lender from collecting post-petition default interest, unless some other provision in the Berry Plan or Confirmation order “specifically provides for” default interest:

No Postpetition or Default Interest on Claims.

Unless otherwise specifically provided for in the Plan or Confirmation Order, and notwithstanding any documents that govern the Berry Debtors’ prepetition funded indebtedness to the contrary, (a) postpetition and/or default interest shall not accrue or be paid on any Claims and (b) no holder of a claim shall be entitled to: (i) interest accuring on or after the Petition Date on any such Claim; or (ii) interest at the contract default rate, as applicable; provided, however, that nothing herein shall affect the payment of postpetition interest and/or adequate protection payments made to the Berry Lenders pursuant to the Cash Collateral Order.

Berry argued that Article VI.F only allowed the Lender to collect on post-petition interest at the contract rate pursuant to the Cash Collateral Order, not the default rate.

In opposition, the Lender argued that Article III.B.3 provided for the payment of default interest because the proof of claim[2] referenced in the definition of “Berry Lender Claims” contains a statement that interest continues to accrue at a “Default Rate.” Article III.B.3 provides:

Allowance: Notwithstanding any other provision of the Plan to the contrary, the Berry Lender Claims[3] are Allowed as fully Secured Claims under section 506(b) of the Bankruptcy Code, having first lien priority in the amount of approximately $898 million on account of unpaid principal, plus unpaid interest, fees, expenses, and other obligations arising under or in connection with the Berry Lender Claims, as set forth in the Berry Credit Agreement or the other Loan Documents (as defined in the Berry Credit Agreement) in each case, not subject either in whole or in part to off-set, disallowance or avoidance under chapter 5 of the Bankruptcy Code or otherwise, recharacterization, recoupment, or subordination or any equitable theory (including, without limitation, subordination, disallowance, or unjust enrichment), or otherwise, and any other claims or Causes of Action that any Person, including but not limited to the Berry Debtors and their estates may be entitled to assert against the Berry Lenders or the Berry Lender Claims.

The Court found, that “the general allowance language of Article III.B.3, its reference to the [Berry Lender’s Proof of Claim] and a single statement that the Berry and Linn Lenders continue to accrue postpetition interest is too weak a reed upon which to form a specific provision in the Plan or Confirmation Order to the contrary providing for payment of default interest.” More importantly, the Court stressed that it found troubling that a “sophisticated party for whom the Court allowed significant professional expenses to be paid remained silent and knowingly allowed the Court to make a decision on erroneous information.”

The aggregate amount of post-petition default interest that the Lender was originally entitled to was $45,519,267.22. Had the Lender objected to the Berry and Linn Plans prior to confirmation, then it may have received its post-petition default interest.

In short, focusing on a single favorable provision in a plan isn’t enough. Creditor’s attorneys need to take an extra step to ensure there is no conflicting language. In this case, it would have been worth $45,519,267.22.

The Judge’s memorandum opinion may be found here.[4]


[1] Because both plans are substantively similar, only the Berry Plan will be discussed.

[2] The Lender’s proof of claim states, in relevant part, “Additional interest continues to accrue at Default Rate as provided for in Section 2.5(d) of the Berry Credit Agreement.”

[3] “Berry Lender Claims” means any Claim against the Berry Debtors derived from or based upon the Berry Credit Agreement, including any Adequate Protection Claims of the Berry Lenders. The Berry Lender Claims are Allowed Claims as set forth in the proof of claim filed by the Berry Administrative Agent in the Amount determined pursuant to Article III.B.3.

[4] https://cases.primeclerk.com/linn/Home-DownloadPDF?id1=Nzc2NTc0&id2=0

The Bankruptcy Code provides protection to unsecured creditors by directing the United States Trustee (“UST”) to appoint a statutory committee to represent such creditors in Chapter 11 cases.  The Bankruptcy Code also says that the UST may appoint additional committees of creditors or equity security holders as the UST thinks is appropriate.  Official committees, i.e., those appointed by the UST, are entitled to hire counsel and advisors at the expense of the bankruptcy estate.  In this way, the Bankruptcy Code provides a voice to groups impacted by a bankruptcy case that might not otherwise have meaningful representation because individual creditors’ claims are too small to justify hiring lawyers and advisors to represent their interests.

But, there are other groups with an economic stake in the case that may not qualify as “creditors” as the Bankruptcy Code defines that term.  Examples are utility customers, non-unionized employees, and royalty interest owners, to name a few. The focus in this posting will be royalty interest owners, and how the Bankruptcy Code may or may not provide them with a statutory committee.

Nearly all oil and gas debtors file some garden variety Motion Authorizing Payment of All Funds Relating to Royalty Interests (“Royalty Motion”) as one of the first pleadings in the case.  Typically, a Royalty Motion will seek recognition that royalty interests[1] are not property of the estate, and will further seek permission to pay pre-petition royalty or working-interest proceeds to those holders.  This occurs when the debtor, acting as operator under a joint operating agreement, has sold all of the production from the wells together, and thus received one payment from the purchaser.  The payment represents proceeds from the debtor’s property, as well as proceeds from property owned by third party working interest holders and royalty interest holders.  Normally, these third party owners will have accounting adjustments due to them, which may not be reconciled until months after the commencement of the Chapter 11 case.

Too often, the very same debtors that first acknowledged the separate ownership of third party mineral interests, and the proceeds thereof, in the Royalty Motion, take a contrary position later in the Chapter 11 case.  The subsequent contrary position is that any such amounts subsequently reconciled represent a “claim” within the meaning of section 101(5) of the Bankruptcy Code against the debtor.  In short, such a debtor will first argue “this money is your property, not mine,” and will later change its tune regarding prior period adjustments or corrections to argue “this is my money, but you may have a claim against me.”

This change in position is problematic for both debtors and royalty interest owners.  For debtors, they may be barred from changing their position based on principles of judicial estoppel, which precludes parties in a proceeding from taking a contrary position to what they took earlier in the case.[2] For royalty interest owners, they may have to fight the debtor regarding its change in position, or commence a lawsuit, known as an adversary proceeding, against the debtor so that a bankruptcy court can determine the royalty owner’s interest in the proceeds.

Many times, thousands of royalty owners simply give up because their monthly royalty payments are only $30 to $40 dollars (and often times less).  Hiring a lawyer isn’t economical for these small royalty interest owners. Moreover, most individuals, like the one quoted below, may find the bankruptcy process difficult to navigate.

Does the Bankruptcy Code provide relief for these small mineral owners who are unable to keep track of a large bankruptcy case?  If royalty interests are considered “claims,” as some of the debtors categorize them, then the answer is yes.  As mentioned above, the Bankruptcy Code allows the appointment of additional statutory committees to represent bodies of creditors.  The so-called “claims” of royalty and working interest owners are materially different than those of unsecured bondholders or trade creditors.  So, if a debtor takes the position that reconciled amounts due to working interest or royalty owners are “claims”, then it seems appropriate for the UST to consider appointing a separate statutory committee to represent that class of creditors, at the expense of the estate.  Conversely, if proceeds of the production owned by royalty and working interest owners are not property of the estate, then these mineral owners do not have a “claim.”  But, the debtor may be compelled to turnover 100% of the disputed cash to them upon resolution of final accounting.

Royalty interest owners may have options available other than forming a statutory committee. One is forming a royalty ad hoc committee.  Ad hoc committees are formed through voluntary collaborations between similarly situated individuals with a basic objective of pursuing a common goal.  By banding together in an ad hoc committee, royalty interest owners create a unified and potent position to advocate their specific goal.  However, because their fees and expenses may have to be paid by individual owners, ad hoc committees of royalty interest holders are very uncommon.

The plight of these parties is reflected in many letters they write to the courts in oil and gas cases.  Because judges are not permitted to correspond with parties to a case, these letters are posted to the dockets by the clerks’ offices.  Here is an excerpt from a typical letter:

We are royalty and WI owners. I have no idea of the amounts of money we are owed. I do not know how to file papers to get any money due [to] us. Thank you for your help.[3]

The problem is genuine and impacts real people.  The Bankruptcy Code provides a potential solution by permitting the appointment of an official mineral owners committee.  This puts the burden elsewhere, e.g. the DIP lender, first lien lender, or debtor, who are left with the Hobson’s choice of either agreeing that proceeds of third party mineral interests owners are not property of the estate, or of shouldering an additional committee’s expenses.


[1] A royalty interest is an ownership interest in either the oil and gas produced from operations or the proceeds from the oil and gas once sold. Royalty interests are free from the operational costs needed to extract the oil and gas from the ground. When an oil and gas company extracts oil or gas from the ground, a portion of these resources or their proceeds belong to the royalty interest owner, no one else.

[2] As mentioned in one earlier blog post, the bankruptcy court in Breitburn noted the debtor’s inconsistent positions on this issue, but judicial estoppel was not raised.

[3] Excerpt from letter of royalty / working interest owner to the Bankruptcy Court in In re Samson Resources Corporation, et al., Case No. 15-11934 (CSS) (Bankr. Del. Sept. 28, 2017) (ECF No. 1419).