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

I’ve not been a fan of several notable oil & gas opinions from courts in the 2d and 3d Circuits. A long ago transplanted Yankee myself, this has nothing to do with provincial rivalries. I just think that some very good courts in those cases fundamentally got the law wrong when it came to Texas mineral law. So I was pleased to read Judge Bernstein’s Good Friday 2017 Memorandum Opinion Granting in Part and Denying in Part Motion by LL&E Royalty Trust for Relief from the Automatic Stay in the Breitburn Energy Partners LP jointly administered cases.

The facts are a bit convoluted, but in a nutshell, Breitburn and several non-debtor affiliates (collectively, “Breitburn”), pre-petition, filed a Declaratory Judgment action in Texas state court against LL&E seeking a determination that amounts paid to LL&E under rights held by LL&E under a document styled “Conveyance of Overriding Royalty Interests” (the “Conveyance Agreement”) were correct. Disputes had arisen over the calculation of those payments by Breitburn to LL&E under the Conveyance Agreement. LL&E, also pre-petition, filed an 8 count counterclaim. While the minerals giving rise to the disputed payments are in Florida, the Conveyance Agreement provides that it is governed by Texas law, except to the extent that Florida law “mandatorily” applies. In court, the parties agreed that Florida law was not materially different than Texas law. Breitburn filed for Chapter 11 relief in the SDNY, and the state court put the entire matter on hold, even as to non-debtor counterclaimants, pending stay relief by the bankruptcy court.

As part of its suite of first day motions, Breitburn included a Motion of Debtors Pursuant to 11 U.S.C. §§ 105(a), 363(b), and 541 for Entry of Interim and Final Orders (I) Authorizing Payment of All Funds Relating to Royalty Interests and (II) Directing Financial Institutions to Honor and Process Checks and Transfers Related to Such Royalty Interests. These motions have become standard operating procedure in O&G chapter 11 cases, and are virtually always uncontested. These motions recognize that under the law of most states, and certainly Texas, working interests and royalty interests are not property of the estate, and in situations where the debtors act as seller for oil & gas produced from the leases, the proceeds attributable to those other holders’ portion are proceeds of the non-debtors’ interests, and thus not property of the estate. This position is entirely consistent with Bankruptcy Code sections 541 (b) (4) and 101 (21A). Just as ubiquitous, however, is the position taken by most O&G debtors shortly after the approval of first day motions, that cash held by the debtors representing disputed royalty payments are not property of the estate, but rather a “claim” within the meaning of 101 (5), and that position was taken later on by Breitburn.

LL&E filed a stay relief motion just about 2 months after the petition date, to which the Debtors objected, in part, making the “claim” argument. The bankruptcy court quickly noted the inconsistency between the Debtors’ first day motion and its response, but the judicial estoppel argument had not been raised. The bankruptcy court also quickly recognized that the “royalty” payments in dispute looked like net profits interests, due to the calculations needed to derive the amount payable under the conveyance Agreement.

After a survey of Texas case law and secondary sources, in the part of the Memorandum Decision dealing with nature of the mineral interests in dispute, the bankruptcy court held that whether a “royalty” included net profits interests, as well as the precise nature of royalties was not entirely clear under Texas law, and permitted those counts of the Declaratory Judgment case, and the related counterclaim, along with certain other counts, to proceed to trial in the Texas state court:

In addition…, the question of whether LL&E holds a property right or a mere unsecured contract claim in the amount of unpaid net profits is unsettled under Texas law, and the determination of the Texas courts will assist this Court and ultimately contribute to a resolution of the dispute [citation omitted].

While some might quibble with the court’s reluctance about net profits interests, allowing a state court in another jurisdiction to adjudicate the nature of property interests under that state’s laws is the right call.

Judge Bernstein’s Memorandum Decision can be found here.