Kravitz v. Samson Energy Co. (In re Samson Res. Corp.)
| Docket Number | 15-11934 (BLS),Adv. Pro. 17-51524 (BLS) |
| Decision Date | 14 June 2023 |
| Parties | In re: SAMSON RESOURCES CORP., et al[1] Reorganized Debtors. v. SAMSON ENERGY CO., LLC, et al. Defendants. PETER KRAVITZ, as Settlement Trustee of and on behalf of the SAMSON SETTLEMENT TRUST Plaintiff, |
| Court | U.S. Bankruptcy Court — District of Delaware |
This is the Court's opinion following a three-week trial in a suit originally seeking recovery of alleged fraudulent transfers totaling approximately $7.2 billion arising out of the 2011 sale of Samson Investment Company ("SIC") by its owners, the Schusterman family, to a private equity consortium. The Plaintiff alleges that the purchasers vastly overpaid for the business, thereby enriching the Schustermans to the detriment of creditors of the company. By paying over twice what he alleges was the fair market value of the company, the Plaintiff contends that the new owners were obliged to burden the Company with more debt than it could service, giving rise to a death spiral that led ultimately and directly to the company's bankruptcy filing in 2015. For the reasons that follow, the Court finds and concludes that the Plaintiff has failed to prove that the consideration paid in connection with the 2011 acquisition of SIC did not reflect its fair market value at the time. Accordingly, judgment will be entered for the Defendants on all counts.
This is an unusual case. Bankruptcy courts have seen no shortage of litigation relating to companies that failed shortly after an acquisition. Typically, claims are brought against an acquiror who is alleged to have larded unsustainable debt upon the target company while simultaneously siphoning cash from the entity via dividends. Alternatively, the courts have seen a multitude of suits against former parent corporations, alleging that a spin-off of a subsidiary was engineered by the parent to rid itself of unproductive assets and resulted in an undercapitalized new entity destined for prompt failure.
Here, suit has been brought against the former owners of SIC to recover proceeds they received in selling the company in 2011 to a private equity consortium led by Kohlberg Kravis Roberts & Co. Plaintiff's theory of recovery of the sale proceeds, as a fraudulent transfer, rests on two propositions: First, Plaintiff has developed an expert valuation report to demonstrate that the sale process was so flawed that the price paid turned out to be more than twice the value of the company. And second, that once the sale closed, the newly-acquired company was almost immediately placed into a catastrophic death spiral on account of the debt taken on in the deal, and also as a result of mistakes and errors alleged to have been made by the investor group in putting together the post-acquisition business plan.
It is black letter law in this Circuit that the gold standard for determining the value of an asset is to sell it in an open and fair market. A thing is worth what a willing buyer will pay to a willing seller following a proper marketing process. This standard places primacy on the reliability of a transaction where parties have evaluated risk and reward and placed their own money on the line. Buyers and sellers may be right or wrong about what the future may hold, but the value is fixed and conclusively established by the price paid at closing. Under this approach, the opinion of a valuation expert, invariably influenced by hindsight, is by definition less reliable than a closed sale by market participants. As a practical matter, it is incumbent on a party challenging the value of a sold asset to demonstrate that the marketing and sale process was irretrievably tainted or deeply flawed.
As will be discussed in exhaustive detail below, the marketing and diligence process here was thorough and comprehensive, run on both sides by some of the most sophisticated investors and professionals in the world. At bottom, Plaintiff's case is premised on the proposition that the Schustermans were obliged to temper their demands and to second guess the judgment of the purchasers as to how much to pay, and how to operate the business following the closing. That is not our law. The Schustermans were entitled - and expected - to clamor and negotiate for as much consideration as the buyers would agree to deliver. The buyers, likewise, were free to push for reductions in price, to bargain and to structure the deal in whatever fashion they believed would lead to success in the years following the closing.
Obviously, it did not all work out: approximately four years after the closing, the company filed for bankruptcy relief. But that fact does not mean the sale process was flawed or the price unfair. Risk is an inescapable feature of commercial transactions. Here, the Schustermans placed a healthy, thriving business up for sale; the buyers presumably concluded that they got a good deal and could grow the business to new heights of profitability. Their failure to accomplish their goals does not mean that the Schustermans must now pay back the sale proceeds they received. Put bluntly, the Schustermans are neither the guarantor nor the insurer of the future success of the business they sold.
Samson Resources Corporation ("SRC")[3] and its affiliates filed voluntary petitions for relief under Chapter 11 in this Court on September 16, 2015. An unsecured creditors committee was duly appointed shortly after the petition date. After many months of negotiation and litigation, this Court entered an Order[4] confirming the Debtors' plan of reorganization (the "Plan") [5] on February 13, 2017.
Among other things, the confirmed Plan provided for the creation of the Samson Settlement Trust. The Trust was funded with cash in the approximate amount of $168 million and also received ownership of, and the right to prosecute, certain estate causes of action. Of particular relevance here are the causes of action arising out of the 2011 sale of the company by its founders, the Schusterman family, to a private equity consortium.[6]
On September 15, 2017, the Trustee of the Samson Settlement Trust filed his Complaint commencing this adversary proceeding. Plaintiff in this action is Mr. Peter Kravitz as Settlement Trustee (the "Trustee" or the "Plaintiff"), appointed pursuant to the Plan.[7] The Defendants consist of individual members of the Schusterman family and certain family trusts that, prior to the 2011 sale, owned or held the stock of SIC.
Under the Plan, all pre-petition claims and causes of action of the Debtors' estates against the Defendants herein were transferred to the Trust to be pursued by the Trustee on behalf of creditors holding Class 5 general unsecured claims under the Plan. The Complaint seeks recovery for alleged fraudulent transfers arising out of the acquisition of SIC by a consortium of equity sponsors led by Kohlberg Kravis Roberts & Co. ("KKR," and collectively with the other equity participants, the "Sponsors").[8] That sale, described in detail below closed on December 21, 2011 (the "Transaction").
Prior to the trial in this matter, the Defendants filed seven separate dispositive motions.[9]Following rulings by the Court on all such motions, several of the original Defendants were dismissed out of the litigation for a variety of reasons, including being released from liability under the Plan or being protected by the safe harbor provisions of 11 U.S.C. § 546(e). The Defendants remaining in this suit are collectively referred to as the "Schustermans" or the "Defendants."[10]
The Court conducted twelve days of trial beginning on September 12, 2022. At trial, the Court heard live testimony from nine witnesses. The Trustee called three expert witnesses who collectively offered their opinions regarding the proper valuation of SIC in 2011. The Plaintiffs' witnesses were: (1) Mr. Todd Filsinger of Filsinger Energy Partners, testifying on issues relating to commodity prices and commodity hedging and their relation to an appropriate stress or downside case; (2) Dr. Richard Strickland, testifying on issues relating to petroleum engineering; and (3) Mr. Scott Baxter of Berkeley Research Group, testifying on issues of solvency and valuation. Mr. Baxter provided expert testimony as to the valuation model he prepared for this trial.
In response, Defendants called witnesses who submitted both written and live testimony to the Court. The Defendants' primary witnesses were Ms. Stacy Schusterman, a fact witness describing the circumstances surrounding the negotiation and documentation of the Transaction; Ms. Suzanne Roski, a valuation expert testifying in rebuttal to the valuation report of Mr. Baxter; and Mr. Steven Almrud, an investment banker offering testimony as to the sufficiency of the sale process and related due diligence, as well as SRC's post-Transaction business plan. Importantly, the Defendants' witnesses did not prepare or offer to the Court a traditional expert valuation case to counter that presented by the Trustee. Instead, the Defendants' evidentiary case focused almost entirely on setting forth the factual record of the negotiations and due diligence efforts associated with the 2011 Transaction. Defendants' case rests largely on the proposition that the actual sale results provide a...
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