In re Gulf Coast Oil Corp.

• Decision Date: 11 February 2009
• Docket Number: No. 08-50213.,No. 08-50215.,08-50213.,08-50215.
• Citation: 404 B.R. 407
• Parties: In re GULF COAST OIL CORPORATION and Century Resources, Inc. and New Century Energy Corp. New Century Energy Corp., Debtor(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

404 B.R. 407

In re GULF COAST OIL CORPORATION and Century Resources, Inc. and New Century Energy Corp. New Century Energy Corp., Debtor(s).

No. 08-50213.

No. 08-50215.

United States Bankruptcy Court, S.D. Texas, Houston Division.

February 11, 2009.

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Chasless L. Yancy, David A. Zdunkewicz Andrews Kurth LLP, Houston, TX, for Debtors.

Hector Duran, Office of U.S. Trustee, Houston, TX, for U.S. Trustee.

MEMORANDUM OPINION PROVIDING FINDINGS, CONCLUSIONS, AND REASONS FOR DENIAL OF MOTION TO SELL SUBSTANTIALLY ALL OF DEBTORS' ASSETS (DOC # 181)

WESLEY W. STEEN, Bankruptcy Judge.

Debtors (Gulf Coast Oil Corporation, Century Resources, Inc., and New Century Energy Corp.) are affiliated companies engaged in oil and gas exploration and production in South Texas. After six relatively contentious months as a debtor in possession in chapter 11, after it became clear that a reorganization of Debtors' business was not possible, Debtors filed a motion to sell substantially all of Debtors' assets to the sole secured lender and, in connection with that sale, to assign to the purchaser various executory contracts important to maintaining the value of those assets. For reasons set forth below, the Court concludes that Debtors have not demonstrated a substantial business reason for the § 363 sale in preference to a sale under a liquidating chapter 11 plan. Therefore, the motion was denied by separate written order previously issued.

I. FACTS

The facts that the Court considers for purposes of this decision are undisputed.¹

In June 2005, Debtors entered into an agreement with Laurus Master Fund, Ltd. ("Laurus"). The details of the transaction are reasonably complex (although not terribly unusual), but it is sufficient to note that Laurus held, and holds, a claim secured by all of the Debtors' assets. Debtors and Laurus disagree about the amount of the secured claim. Debtors contend that some of the default interest and penalty provisions are not strictly enforceable according to their terms while Laurus contends that they are. Debtors and Laurus stipulate that the Laurus claim is not less than $66 million, while Laurus contends that the claim exceeds $90 million. Debtors and Laurus have agreed that Laurus would be allowed to credit bid $75 million if the Court authorized the § 363 sale.

On July 28, 2008, Debtors filed voluntary petitions commencing these cases under chapter 11 of the Bankruptcy Code. In a declaration submitted in support of first day orders, Debtors' chief executive officer represented:

The Debtors are an (sic) independent oil and gas exploration and production company. The Debtors' major areas of operations are located onshore United States, primarily in McMullen, Matagorda, Wharton, Goliad and Jim Hogg Counties in Texas. Current 8/8ths daily production on company-operated properties is approximately 900 barrels of oil per day and 1.8 MMCFG per day. All of the Debtors' oil and gas properties are operated by Century Resources, a wholly owned subsidiary of New Century. Century Resources is a bonded oil and gas operator (operator # 141835) with the Railroad Commission of Texas.²

After consideration of the degree to which the affiliate Debtors' businesses are related, the value of Debtors' assets, the complex nature of oil and gas exploration and production, the complex nature of the legal relationships involving mineral leases and joint operating agreements, and the complexity of Debtor's business, the Court determined that the cases should be jointly administered under the Court's "complex case" procedures. The Court issued an order establishing procedures for collection of proceeds of sale of oil and gas produced by Debtors, for payment of interest owners and taxing authorities, etc.³

Debtors' bankruptcy schedules list real property valued at $30 million (mineral leases and oil and gas wells). While all valuation is complex and uncertain, valuation of oil and gas interests is especially difficult even when the world markets are less volatile than they have been in the past year.⁴ Amended schedules list approximately $120,000 of claims held by prepetition, unsecured, non-priority creditors. At the hearing on January 28, Debtors' counsel represented that there were $200 to $300 thousand of unsecured, pre-petition, non-priority claims that would not be paid if the Court authorized a sale of assets to Laurus.

Since April, 2008, Debtors have marketed their assets. Debtors have received no firm offers, and the only expressions of interest that Debtors have received are in the range of $10 to $19 million.

Approximately 2 months after the case was filed, after contested motions and entry of interim orders, Debtors and Laurus entered into a final agreement for use of cash collateral that was noticed to all creditors and parties in interest.⁵ The agreement (i) stipulates to the validity, priority, perfection, extent, and "non-avoidability" of Laurus' liens, (ii) allowed for routine use of cash to operate the business, (iii) conditionally allowed certain development expenditures, (iv) provided replacement liens, and (v) included other provisions usually found in an agreed cash collateral order. However, the agreement also required Debtor to file a chapter 11 plan "on or before" November 24, 2008. The agreement reserved Laurus' right to object to Debtors' plan and provided that Laurus was entitled to relief from the automatic stay (without further Court order) if the plan was not filed by November 24 or was not confirmed by January 18, 2009. There being no objection to the order, and considering the representations at the hearing, the Court approved the agreement and it became a court order.

The cash collateral order included a provision for payment of a percentage of routine, recurrent expenses of the Debtor's professionals, subject to a holdback. The order did not provide for payment of all administrative claims that might arise during the case.

Debtors filed a chapter 11 plan and disclosure statement on November 7, 2008. But by mid-December, with prices for oil and gas plunging on the world markets, Debtors concluded that Laurus' secured claim substantially exceeded the value of Debtors' assets. In addition, Debtors concluded that their revenues and cash flow in the foreseeable future would be inadequate to support a plan of reorganization. Laurus was unwilling to support a plan of reorganization. The Debtors negotiated with Laurus concerning how to proceed.

Debtors then abandoned their chapter 11 plan and, on December 19, 2008, Debtors filed a motion to sell all of their assets.⁶ The motion recites the preceding facts and asks for authority to sell all of the property of the estate, including all cash, oil and gas properties, fixtures, equipment, inventory, and office equipment, free and clear of all liens, claims, and encumbrances.

The motion proposes an auction to be held in the bankruptcy courtroom on January 27, 2009, and the motion sets out complex procedures for the auction, but given Debtor's experience in trying to sell the property for over 8 months, there seems to be little potential for a meaningful auction. The parties recognize that there is no material prospect that there will be any bidders except Laurus, and the Court is confident that the parties anticipate that Laurus will be the purchaser.⁷ In addition, even if a potential purchaser were located, it is not at all clear that the proposed auction procedure would allow adequate time for the purchaser to do due diligence necessary to purchase oil and gas interests. A proposed form of sale order (18 pages long) was filed on January 9, 2009.⁸ A form of asset purchase agreement (40 pages long) that would bind any potential purchaser was filed January 16, only 11 days prior to the proposed auction.⁹ Since Debtors have received no meaningful expression of interest to purchase the assets, and since there is virtually no time available for due diligence and compliance with the terms of the proposed asset purchase agreement, notwithstanding the auction procedure proposed, the Court concludes that Laurus is the only potential purchaser.

The motion asks for the property to be sold free and clear of all liens, claims and encumbrances, but implies that creditors with lien rights will be protected because their liens, claims, and encumbrances will be transferred to the sale proceeds.¹⁰ But that protection is illusory. There will be no proceeds to which the liens, claims, and encumbrances can attach. If Laurus credit bids there are no proceeds to which liens can attach. In the unlikely case that someone outbids Laurus, the proceeds of the sale will be paid to Laurus and therefore there are similarly no proceeds to which the liens can attach.¹¹

Laurus proposes to assume certain executory contracts. However, the executory contracts were not identified until January 9, 2009, only 18 days prior to the proposed auction.¹² Laurus has contacted Debtors' employees and vendors. If the Court approves the sale, Laurus will continue to employ some of the employees and will continue to do business with some vendors. Laurus represents that it has not entered into any binding commitments on either. Laurus did not disclose any further details about its intentions with respect to either.

Debtors' financial advisors (Broadpoint Capital Inc.) objected to the sale. The objection alleges that the proposed transaction does not pay all administrative expenses of the bankruptcy estate and that releases granted under the proposed sale order could impair Broadpoint's assertion of claims against Laurus. Laurus agrees with the former, but disputes the latter. It is unnecessary for purposes of this decision to determine whether Broadpoint or Laurus is correct about whether Broadpoint has claims against Laurus and about whether those claims would be within the ambit of the releases included in the proposed form of § 363(b...