In re Sanchez Energy Corp.
| Docket Number | 19-34508 |
| Decision Date | 03 August 2023 |
| Parties | IN RE: SANCHEZ ENERGY CORPORATION, et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Following hard-fought litigation between sophisticated parties, the Lien-Related Litigation is at an end. In Phase 3 of the Lien-Related Litigation, the Secured Ad Hoc Group (consisting of prepetition secured creditors who became DIP lenders) and the Creditor Representative (representing unsecured creditors) jockeyed for ownership of Mesquite Energy Inc.-the reorganized Sanchez Energy Corporation.
Under the confirmed Plan, the pivotal issue respecting the allocation of ownership is the value of the Creditor Representative's Causes of Action. The Secured Ad Hoc Group argues that the Creditor Representative's Causes of Action are worthless, and the Court should allocate all the remaining allocable Mesquite stock to it. The Creditor Representative argues that its Causes of Action are worth approximately $210 million, and the Court should allocate most of Mesquite's stock to it.
Upon review of the relevant facts, the testimony of expert witnesses, and Sanchez's Plan, the Creditor Representative prevails. The Court allocates 69.73% of Mesquite's stock to the holders of Allowed Class 4 and Allowed Class 5 Claims (and their successors and assigns) and 30.27% of Mesquite's stock to the holders of Allowed Class 3 Claims (and their successors and assigns).
Sanchez Energy Corporation was an exploration and production company focused on acquiring and developing onshore oil and natural gas resources. (ECF No. 1 at 5). Sanchez and its affiliated debtors filed for bankruptcy after years of volatile oil prices. (ECF Nos. 1; 1124 at 10).
Before filing for bankruptcy, Sanchez incurred secured and unsecured debt. Sanchez had unsecured obligations of: (i) $600 million of 7.75% Senior Unsecured Notes due June 2021 (the "7.75% Unsecured Notes"); and (ii) $1.150 billion of 6.125% Senior Unsecured Notes due January 2023 (the "6.125% Unsecured Notes"). (ECF No. 2672 at 2). In secured debt, Sanchez had: (i) a $25 million Credit Facility with Royal Bank of Canada ("RBC") as administrative agent and lender (the "Credit Facility"); and (ii) $500 million of 7.25% Senior Secured Notes due 2023 (the "Senior Secured Notes"). (ECF No. 2672 at 3). Sanchez and various of its subsidiaries[1] guaranteed these obligations (collectively, the "Guarantors").
Only the documents pertaining to the Senior Secured Notes are relevant to the Lien-Related Litigation. The principal documents are: (i) the 7.25% Senior Secured First Lien Notes Due 2023 Indenture (the "Indenture"); (ii) the Collateral Trust Agreement; (iii) the Second Amended and Restated Security and Pledge Agreement with Sanchez and the Other Debtors (the "Security Agreement"); and (iv) 18 Deeds of Trust. (ECF Nos. 1703-4; 1705; 1705-2; 1709).
Delaware Trust Company served as the original Indenture Trustee for the Senior Secured Notes. (ECF No. 2672 at 10). Wilmington Savings Fund Society, FSB ("WSFS") succeeded Delaware Trust Company as Indenture Trustee. (ECF No. 2672 at 10). Under the Collateral Trust Agreement, RBC was the original Collateral Trustee and the Controlling Priority Lien Representative. (ECF No. 2672 at 3). Under the Successor Collateral Trustee Agreement, (i) WSFS succeeded RBC as the Successor Controlling Priority Lien Representative; and (ii) Wilmington Trust, National Association succeeded RBC as Collateral Trustee of the Senior Secured Notes. (ECF No 2540-1 at 3).
Sanchez and the Senior Secured Noteholders intended to secure the obligations under the Credit Facility and Senior Secured Notes through liens on substantially all of the Guarantors' assets. Eighteen Deeds of Trusts, including Deeds of Trust on the Hausser, Harrison, and Koenning oil and gas leases (the "HHK Leases"), were intended to grant the Senior Secured Noteholders real property liens over the oil and gas leases in which the Guarantors had interests. (ECF No. 2501 at 1; Adv. Pro. No. 20-03057, ECF No. 1 at 9-10). Each Deed of Trust states that it is an "Amended and Restated Mortgage, Deed of Trust, Security Agreement Financing Statement, and Assignment of Production." (ECF No. 1703-4 at 1). The granting clause of each Deed of Trust states that the Sanchez affiliate:
has MORTGAGED, GRANTED, BARGAINED, SOLD, PLEDGED, ASSIGNED, CONVEYED, TRANSFERRED and SET OVER and by these presents does hereby MORTGAGE, GRANT, BARGAIN, SELL, PLEDGE, ASSIGN, CONVEY, TRANSFER and SET OVER unto Trustee and Trustee's substitutes or successors, and his and their assigns, for the benefit of the Mortgagee, all of Grantor's right, title and interest in and to the following items of real and personal property and interests, whether now owned or hereafter acquired by Grantor under applicable Law (as defined below) or in equity (collectively, the "Mortgaged Property"), the inclusion of certain specific types and items of property and interests in one or more of the following paragraphs is not intended in any way to limit the effect of the more general descriptions:
(ECF No. 1703-4 at 3) (emphasis added). All of Sanchez's property, both real and personal, was designated as "Mortgaged Property." Immediately following this granting clause is Paragraph A, which states:
All those certain oil, gas and mineral leases and the estates created thereby, royalty interests, overriding royalty interests, production payments, net profits interests, fee interests, carried interests, reversionary interests and all other rights, titles, interests or estates described on Exhibit A attached hereto and made a part hereof, whether such rights, titles, interests or estates are completely and accurately described therein or not (all of which rights, titles, interests and estates described in this Paragraph A are hereinafter, together with the rights, title, interests and estates described in the following Paragraph B, collectively referred to as the "Subject Interests"). The terms "oil, gas and mineral leases" and "leases", as used in this instrument and in Exhibit A, each includes, in addition to oil, gas and mineral leases, oil and gas leases, oil, gas and sulphur leases, other mineral leases, co-lessor's agreements and extensions, amendments, ratifications and subleases of all or any of the foregoing, all as may be appropriate.
(ECF No. 1703-4 at 3-4) (emphasis added). Paragraph A applies to oil, gas, and mineral leases, and it explains that each Deed of Trust creates a lien on property described in Exhibit A. Paragraph B pertains to present and future unitization and pooling agreements "which include, belong or appertain to the Subject Interests." (ECF No. 1703-4 at 4). "Subject Interests" are rights, titles, interests, and estates described in Paragraphs A and B. Thus, Subject Interests are rights, titles, interests, and estates in: (i) oil, gas, and mineral leases; and (ii) unitization and pooling agreements. Of the remaining granting paragraphs, Paragraphs C and E are relevant. Paragraph C concerns hydrocarbons:
All present and future oil, gas, casinghead gas, condensate, drip gasoline, natural gasoline, distillate, all other liquid or gaseous hydrocarbons produced or to be produced in conjunction with the Subject Interests, all products, by-products and all other substances derived therefrom or the processing thereof; and all other similar minerals now or hereafter accruing to, attributable to, or produced from, the Subject Interests or to which Grantor now or hereafter maybe entitled as a result of, or by virtue of, Grantor's ownership of the Subject Interests (collectively, "Hydrocarbons").
(ECF No. 1703-4 at 4) (emphasis added). Paragraph E concerns personal property and fixtures, including wells:
All present and future oil and gas wells, disposal and injection wells, rigs, platforms, improvements, fixtures, machinery, pipe and other equipment, inventory and articles of personal property, now owned or hereafter acquired by Grantor found in, on, or under any of the Subject Interests, including, without limitation, connection apparatus and flow lines from wells to tanks, wells, pipelines, gathering lines, flow lines, compressor, dehydration and pumping equipment, pumping plants, gas plants, processing plants, pumps, dehydration units, separators, heater treaters, valves, gauges, meters, derricks, rig substructures, buildings, tanks, reservoirs, tubing, rods, liquid extractors, engines, boilers, tools, appliances, cables, wires, tubular goods, machinery, supplies and any and all other equipment, inventory and articles of personal property of any kind or character whatsoever appurtenant to, or used or held for use in connection with, the production of Hydrocarbons or Other Minerals from the Subject Interests, or now or hereafter located on any of the lands (the "Lands") encumbered by any of the Subject Interests, or used on or about the Lands in connection with the operations thereon, together with all present and future improvements or products of; accessions, attachments and other additions to, tools, parts and equipment used in connection with, and substitutes and replacements for, all or any part of the foregoing (all of the types or items of property and interests described in this Paragraph E are hereinafter collectively referred to as the "Personal Property and Fixtures").
(ECF No. 1703-4 at 4-5) (emphasis added). Following the final granting paragraph, the Deed of Trust purports to grant a:
[F]irst and prior security interest in and to all of the Grantor's right, title, and interest in and to the following types and items of property and interests (all of which are included with the term "...
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