Dore Law - September 2020

Dore Law - September 2020

THE D or É R eport

D ore L aw . com

SEPTEMBER 2020

‘SMOKESCREEN’ WORDS USED IN BANKRUPTCY FILINGS TRAPS TO THE UNWARY TRADE CREDITOR

If you are on our Bankruptcy Alert distribution list, you are already aware of the fallout in the oil and gas industry. These alerts are specifically prepared to give you a timely initial review of each new case, with information for immediate use in your risk analysis. But there is a trend that seems to be developing and is worthy of this entire front-page update. Pull up a chair; keep this article on your desk. You might want to refer to it very soon. The Historical Pre-Pack Case: In previous downturn cycles, everyone felt somewhat comfortable when their good customer filed a pre- packaged Chapter 11 reorganization (“pre-pack”). Nearly every one of these cases included a Motion to Pay Trade Creditors. The name of the motion might change, but the intent was the same — to pay its trade creditors what they were owed pre-petition. The initial filings of these pre-packs would be accompanied by a pre-negotiated Plan of Reorganization and a Disclosure Statement. Examples of these were Swift Energy and Magnum Hunter in 2015, Bonanza Creek in 2017, and McDermott in January 2020. While the pre-pack would not necessarily guarantee that the company would survive and emerge, there was always an understanding that the mix of oil and gas well assets required on-site operations to maintain the production and the asset values, and there was a need to continue payments to service providers to maintain these values. The New Trend: In recent months, we have seen a disturbing trend that lacks transparency and is likely to create a false sense of security. The trend is for debtor attorneys to use language that may be clear to the judge but is ambiguous to the trade creditor who expects to be paid for its good work. This trend appears to be accelerating, likely because of its apparent success in creating a (misleading) belief that trade creditors will be favorably treated. 1. The Concept: On the first day of the Chapter 11 filing, the debtor will file a series of motions to allow it to continue in business. These are referred to as the First Day Motions. Typically, these motions are important and unobjectionable. Examples of First Day Motions are to pay insurance premiums, to pay wages to employees, to use bank accounts, to continue normal operations,

to provide a budget, etc. Our emphasis in this article is on the Motion to Pay Trade Creditors.

2. The Timing: The trend is for the debtor’s lawyers to file the bankruptcy over the weekend and set a hearing on all First Day Motions for the Monday or Tuesday of that next week. This trend allows little time to identify objectionable items. There may be up to 15 of these motions, all set for immediate hearing on an emergency basis. Although courts may have their own questions to the debtors on the first day, usually the requested relief is granted. 3. The Interim Language: The proper course of the debtor is to request the bankruptcy court for interim relief to pay the trade creditors. Most judges will agree with budgeting a fixed amount for these payments. In previous downturns, we would see a motion to pay certain critical vendors, including an explanation of why they were so important, together with an opportunity for anyone to object. Today, the proposed interim order will more likely look like this: The debtors are authorized in their reasonable discretion to pay pre-petition Specified Trade Claims

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‘SMOKESCREEN’ WORDS TO TRAP THE UNWARY TRADE CREDITOR

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on an interim basis as they become due and payable in the ordinary course of business.

Following the entry of these Orders is the next phase of proposed Vender Trade Agreement negotiations. While you are negotiating with the debtor on the terms of the Trade Agreement, this is what happens in the background: 1. Your service company elects not to seek a position on the Unsecured Creditors Committee. Why? Because you don’t want to aggravate your good customer who tells you how important your services are to their business plans. And then, when the short window to join the UCC closes ... 2. The debtor calls you to offer to pay 50%–80% of your pre-petition invoices. To get this discounted amount, your company is forced to agree to (i) do future work, with no change in continued terms, (ii) no waiver of potential preference claims, and (iii) no ability to file liens on the discounted balance. The point of raising this issue is for you to be aware of what is behind the smokescreen of these legal words, and why they might not really mean what you think they mean. This shows how important it is to diligently monitor the first few moves a debtor makes upon filing for bankruptcy — even when the debtor is your good customer. And now you know. … the general who wins a battle makes many calculations in his temple 'ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus, do many calculations lead to victory, and few calculations to defeat … It is by attention to this point that I can foresee who is likely to win or lose. –Sun Tzu, “The Art of War” (500–320, B.C.)

4. The Final Order Language: Once an interim order is obtained, the court will set a hearing on a final order for the debtor to pay the vender-creditors. This is where our world gets even more fuzzy. The language in these Final Orders can vary significantly, like this: a. Conditions: The debtors are authorized to require that, as a condition to receiving any payment under this Final Order, a payee maintain or apply, as applicable, terms during the pendency of these Chapter 11 cases that are at least as favorable as those terms existing as of the Petition Date or Customary Terms. b. Pre-Petition Payments: The debtors are authorized, but not directed , to pay pre-petition oil and gas obligations in the ordinary course of business, up to the aggregate of [a certain dollar amount]. c. Plus, this language: The debtors are authorized, but not directed, to require that, as a condition to receiving any payment under this Final Order, a payee maintain or apply, as applicable, terms during the pendency of these Chapter 11 cases that are at least as favorable as those terms existing as of the Petition Date or otherwise satisfactory to the debtors (“Customary Terms”). Bottom Line: So, what is your takeaway? Why the concern to justify this issue on this space? If you’ve read this far, your eyes are likely glazing over.

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AS THE O&G INDUSTRY CHARTS ITS PATH FORWARD, EXPERIENCED COUNSEL CAN HELP YOUR BUSINESS AVOID THE PITFALLS THAT LIE AHEAD.

We are proud to represent clients like yourself across the industry. Doré Rothberg McKay focuses on helping oilfield services and equipment companies get paid for their work. Our lawyers are at the top of their profession when it comes to the legal issues that oilfield services companies routinely face.

Don’t hesitate to reach out to Doré Rotherberg McKay with any issue you might see on the horizon. Feel free to contact any of our attorneys whom you work with or our managing shareholder, Carl Doré.

BALSAMIC MARINATED FLANK STEAK Inspired by FoodAndWine.com

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INGREDIENTS •

2 garlic cloves, sliced

1 cup extra-virgin olive oil, plus more for grilling

•

1 tbsp fresh rosemary leaves

• • • •

1 tbsp dried oregano

1 3-lb flank steak Kosher salt, to taste

• • •

2 tbsp whole-grain mustard 1/2 cup balsamic vinegar

Freshly ground pepper, to taste

DIRECTIONS 1. Combine garlic, rosemary, oregano, mustard, and vinegar in a blender. Purée until garlic is minced. 2. Add oil and continue blending until creamy, then season with salt and pepper to taste. Reserve 1/4 cup. 3. Place steak in a ceramic or glass baking dish and cover steak with the remaining marinade. Turn to coat the other side, cover, and let marinate in the fridge for at least 4 hours. 4. Remove steak from marinade and let excess marinade drip off. Sprinkle the steak lightly with salt and pepper. 5. Light grill and oil grates with olive oil. 6. Grill steak over moderate heat for 10–12 minutes, turning halfway through, until steak is lightly charred and the internal temperature reaches 125 F. 7. Let the steak rest for 5 minutes. Thinly slice, drizzle reserved sauce, and serve.

ASTER

EDUCATION

LIBRA

AUTUMN

FOOTBALL

SAPPHIRE

CHILLY

HARVEST

SEPTEMBER

COLORFUL

LABOR

SQUASH

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‘Smoke Screen’ Words to Trap the Unwary Trade Creditor

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Balsamic Marinated Flank Steak

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How to Enact Effective Change

CHANGE CAN BE EASY PAM MARMON’S OUTLINE FOR EFFECTIVE POST-PANDEMIC TRANSFORMATION

Pam Marmon understands what it means to adapt. After growing up in Bulgaria, Marmon had to modify her way of living when she emigrated to the U.S. Today, she’s a CEO, entrepreneur, wife, and mother who believes that change doesn’t have to be difficult. In fact, she’s mastered it. Marmon has even established a company, Marmon Consulting, that helps other companies develop strategies for executing transformation. In Marmon’s book, “No One’s Listening and It’s Your Fault: Get Your Message Heard During Organizational Transformations,”

and the next step in finding post-pandemic success. Marmon’s book is the perfect guide for business leaders who recognize the need for tangible change and want to execute it as effectively as possible. The key, Marmon explains, is to identify your company’s culture and cater your plan’s language to suit what will resonate with your employees the most. This will establish a sense of alignment with your business’s vision and direction, which can be one of the biggest hurdles to overcome. You cannot achieve success in a period of change if your team is doubtful and unwilling. With your company united toward your vision, you can begin to enact real change. However, this is only the beginning. Marmon’s book also outlines how to connect with fellow leaders in your company to develop a framework for growth. By creating a stable foundation and inspiring change, you’ll find this time of major transition to be much smoother than you may have anticipated. As a result, your company will come out on top at the end of the COVID-19 era. Marmon’s mantra is inspiring: “With the proper process, change is not hard.” And with her book, “No One’s Listening and It’s Your Fault,” business leaders can see just how simple change can be.

she outlines her proven methods for effective communication in any company setting, from a major corporation to a family business. Released on March 24, 2020, Marmon’s advice is timely in a period when many business owners are searching for proactive solutions

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