In re Simasko Production Co., Bankruptcy No. 84 B 3537 G.

• Court: U.S. District Court — District of Colorado
• Writing for the Court: JAY L. GUECK
• Citation: In re Simasko Production Co., 47 B.R. 444 (D. Colo. 1985)
• Decision Date: 08 March 1985
• Docket Number: Bankruptcy No. 84 B 3537 G.
• Parties: In re SIMASKO PRODUCTION COMPANY, Debtor.

47 B.R. 444 (1985)

In re SIMASKO PRODUCTION COMPANY, Debtor.

Bankruptcy No. 84 B 3537 G.

United States District Court, D. Colorado.

March 8, 1985.

Calkins, Kramer, Grimshaw & Harring by T. Edward Icenogle, Denver, Colo., for debtor.

Holme Roberts & Owen by Stephen E. Snyder, Denver, Colo., for Petrowarrier Oil & Gas, Inc.

MEMORANDUM ORDER

JAY L. GUECK, Bankruptcy Judge.

THIS MATTER is before the Court on the "Debtor's Combined Motions for Authorization to Enter Into Agreements to Obtain Credit and For Other Assistance During Reorganization and to Rescind and Cancel Business Broker Agreement." Through this motion, the debtor, Simasko Production Company (Simpco), seeks court authority to:

(1) enter into a Fee Agreement with Commodore Resources Corporation (Commodore) for management, financial and other assistance during reorganization;

(2) execute an Interim Financing Agreement with Metro National Bank and/or First Interstate Bank of Alaska (the Banks);

(3) enter into an Interim Financing Agreement with Commodore; and,

(4) rescind and cancel the Business Broker Agreement with David M. Watt.

Petrowarrior Oil & Gas, Inc. (Petrowarrior) has objected to the combined motion. After notice, a hearing was commenced February 28, 1985. The hearing concluded March 1, 1985. This order constitutes the Court's Findings of Fact and Conclusions of Law pursuant to B.R.P. 9014 and 7054.

Petrowarrier objects only to those portions of the combined motions which relate to the Fee Agreement and Interim Financing Agreement with the banks or rescission and cancellation of the Broker Agreement with Mr. Watt. The unobjected-to portions of the combined motions are discussed only as necessary to provide background for the objection of Petrowarrior.

I. Introduction

On July 25, 1984, Simpco filed a petition under Chapter 11 of Title 11. As debtor-in-possession, Simpco has continued the operation and management of its business in the exploration, development and production of oil and gas. Simpco's assets include several promising exploratory prospects. Since the inception of this Chapter 11, it has been apparent that the investment of a third party would be necessary to provide funds for drilling.

On August 7, 1874, the debtor sought approval under § 327 to employ David W. Watt. Mr. Watt was to attempt to find parties interested in investing in Simpco. The employment agreement with Mr. Watt was approved by this Court on August 14, 1984. Under the terms of the employment agreement, if Mr. Watt was successful in arranging capital to effect a plan of reorganization, the debtor would pay Mr. Watt $100,000 and convey to him a two percent overriding royalty interest in the debtor's undeveloped acreage. In the event that Mr. Watt or any of his affiliates participated in making the capital investment, the fee would be proportionately reduced.

The agreement with Mr. Watt was nonexclusive. Thus, Simpco also initiated negotiations with Banks and Commodore regarding the infusion of capital to effect a plan of reorganization. By orders dated September 20, 1984 and October 31, 1984, Simpco was authorized to borrow $400,000.00 from the Banks, on a senior basis, under § 364(d) of the Code. The Interim Financing Agreement with the Banks, which Simpco requests authority to execute represents the final loan agreement for the $400,000.00 borrowing previously authorized. This loan was the result of Simpco's own efforts.

On February 11, 1985, Simpco filed an amended plan of reorganization. The disclosure statement for this plan has been approved and the creditors are currently casting their ballots to determine acceptance or rejection of the plan. Under the terms of the present plan, Commodore will receive 100% of the common stock of the debtor. Commodore's interest would be subject to dilution by preferred stockholders, who may convert their preferred stock into common stock.

Generally, the plan requests both secured and unsecured creditors to "stand still" for a period of time. During this period, Simpco will continue its business and drilling operations with monies borrowed, post-petition, from the Banks and Commodore. Whether or not unsecured creditors receive any distribution from the Simpco estate is highly dependent on the success of drilling operations conducted during the stand-still period.

II. The Combined Motions

(A) Unobjected-to Portions

Turning to the motions at bar, there are no objections to that part of the combined motions which requests authority to execute the Interim Financing Agreement with the Banks. This Court has previously authorized this senior priority borrowing after notice and a hearing. Court authorization to execute the agreement appears only to be a formality to placate the nervous bankers. The debtor is hereby granted authority to execute the Interim Financing Agreement with the Banks.

Similarly, there are no objections to that part of the combined motions which seeks authority to rescind and cancel the agreement with David M. Watt. The Business Broker Agreement was non-exclusive. There is no indication that Mr. Watt performed any services which would entitle him to a fee. The debtor is hereby granted authority to rescind and cancel the Business Broker Agreement with David M. Watt.

(B) Fee Agreement With Commodore

The terms of the Fee Agreement have been the subject of considerable dispute between Simpco and Petrowarrior. This Agreement is between Simpco, Commodore and David M. Watt. This Court had previously approved a Business Broker Agreement, on August 14, 1984, whereby Watt would be entitled to compensation as a broker similar to the compensation now sought by Commodore under the Fee Agreement now before the Court. This Fee Agreement appears to have been entered into in approximately October, 1984, although this is not entirely clear. As I understand the Agreement, the terms are basically as follows:

Commodore has supplied and will continue to supply Simpco with management and other services prior to confirmation of a plan of reorganization. These services primarily consist of assisting Simpco in acquiring financing to support its operations in maintaining and developing its oil and gas properties. The real purpose of this assistance is to enable Simpco to develop a plan of reorganization whereby Commodore will ultimately become the 100% owner of Simpco. This is consistent with the plan presently before the Court. Simpco and Commodore have agreed in the Fee Agreement that Commodore's fee will be $100,000.00, together with a two percent overriding royalty in certain Alaskan oil and gas properties held by Simpco. However, the parties have agreed that if a plan of reorganization acceptable to Commodore (such as the plan Simpco presently has before the Court) is confirmed, Commodore will waive both the $100,000.00 fee and the overriding royalty. If a plan of reorganization not acceptable to Commodore is confirmed, Commodore is to receive its fee in full. Finally, if no plan of reorganization is approved or this case is converted to a liquidation under Chapter 7 of the Bankruptcy Code, Commodore will waive the overriding royalty interest only.

It is proposed that the $100,000.00 portion of the fee, as well as the funds which are the subject of the Interim Financing Agreement, shall be secured by a super-priority senior lien on Simpco's interest in certain leases, equipment and production. The fee previously described is deemed by virtue of the Fee Agreement to have been earned by Commodore as follows: 40 percent of the fee shall be deemed to have been earned as of September 30, 1984; 80 percent of said fee shall be deemed to have been earned as of October 31, 1984; and 100% of said fee shall be deemed to have been earned as of November 30, 1984. This matter was not presented to the Court until December 7, 1984, when the Fee Agreement was attached as an Exhibit to debtor's Combined Motions for Authorization to Enter Into Agreements.

Pursuant to a subpoena issued by Petrowarrior, Richard Langdon, the President of Commodore, produced a compilation of the costs incurred by Commodore in aiding Simpco in the reorganization process. This compilation was marked and received as creditor's Exhibit 2. This Exhibit indicates that Commodore has incurred a total cost in connection with the Simpco reorganization in the amount of $157,434.24. A portion of these costs consists of $87,000.00 in professional fees. Many of these professional fees were incurred as early as September, 1984.

Petrowarrior objects to the Commodore Fee Agreement on two grounds. First, Petrowarrior asserts that approval of the Agreement will subvert the Chapter 11 process by placing undue pressure on Simpco's creditors to accept the present plan of reorganization. Secondly, Petrowarrior asserts that the Fee Agreement is an attempt to compensate professionals without compliance with 11 U.S.C. § 330. The compensation of professionals complained of by Petrowarrior refers to those professionals already paid by Commodore.

I view the Fee Agreement as an effort to compensate Commodore, regardless of whatever fees it may have paid to its professionals, for services rendered by Commodore. I agree with Petrowarrior that Commodore's Fee Agreement should be the subject of notice and a hearing and Court approval, with the Court to set reasonable compensation for actual necessary services to be rendered. There is no doubt Commodore has made professional and management services available to Simpco during the reorganization process. Commodores activities have resulted in substantial savings and benefit to the estate. Commodore has not and does not intend to bill the estate directly for the services set forth in Exhibit 2. However, Commodore does expect these fees if a plan of reorganization not acceptable to it is confirmed by the Court. Thus, Commodores motives...