ficial Comm. of Unsecured Creditors v. Sabine Oil & Gas Corp. (In re Sabine Oil & Gas Corp.)

562 B.R. 211

IN RE SABINE OIL & GAS CORPORATION, et al., Debtors.

Official Committee of Unsecured Creditors, et al., Appellants,

v.Sabine Oil & Gas Corporation, et al., Appellees.

16-cv-2561 (JGK)

United States District Court, S.D. New York.

Signed June 24, 2016

D. Ross Martin, Justin Florence, Ropes & Gray LLP, Boston, MA, Keith Howard Wofford, Mark Rodney Somerstein, Christopher Thomas Brown, Ropes & Gray LLP, New York, NY, Douglas H. Hallward-Driemeier, Ropes & Gray LLP, Washington, DC, for Appellants.

Christopher Marcus, James H.M. Sprayregen, Paul Basta, Kirkland & Ellis LLP, Margot B. Schonholtz, Robert H. Trust, Linklaters LLP, Fredric Sosnick, Joseph John Frank, Shearman & Sterling LLP, Alan W. Kornberg, Brian S. Hermann, Kyle James Kimpler, Moses Silverman, Kellie Ann Cairns, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Daniel Alexander Fliman, Kenneth R. David, Kasowitz, Benson, Torres & Friedman, LLP, Andrew J. Rossman, Quinn Emanuel Urquhart & Sullivan LLP, Kevin Arthur Meehan, Michael Joseph Moscato, Steven J. Reisman, Theresa Ann Foudy, Curtis, Mallet-Prevost, Colt & Mosle, LLP, New York, NY, Jonathan S. Henes, Kirkland & Ellis LLP, Los Angeles, CA, for Appellees.

Adrianne Katrine Jakola, Gabor Balassa, Kirkland & Ellis LLP, Chicago, IL, for Debtors.

OPINION AND ORDER

JOHN G. KOELTL, District Judge

The Official Committee of Unsecured Creditors ("the Committee"), the Bank of New York Melon as the Trustee under the 2017 Notes Indenture ("BONY"), and the Wilmington Savings Fund Society, FSB, and Delaware Trust Company as the Indenture Trustees for the Forest Notes ("Wilmington"), collectively referred to as the Appellants, appeal an order entered by the United States Bankruptcy Court for the Southern District of New York, Dkt. No. 15–11835, following an evidentiary hearing, denying the Committee, BONY, and Wilmington derivative standing to bring actions against various parties, on behalf of Sabine Oil and Gas Corporation ("SOGC") and related entities (the "Debtors"). The Bankruptcy Court concluded that two of the proposed sets of claims were not colorable claims for relief and that although a third set of proposed claims presented colorable claims, the Debtors had justifiably refused to pursue those claims.

I.

When reviewing a decision of the Bankruptcy Court, this Court reviews the Bankruptcy Court's conclusions of law de novo but accepts its findings of fact unless they are clearly erroneous. See Fed. R. Bankr. P. 8013 ; In re Halstead Energy Corp., 367 F.3d 110, 114 (2d Cir.2004). Mixed questions of law and fact are reviewed de novo, giving deference to the Bankruptcy Court's factual findings unless they are clearly erroneous. In re Vebeliunas, 332 F.3d 85, 90 (2d Cir.2003) ; In re Teligent, Inc., 326 B.R. 219, 224 (S.D.N.Y.2005) ; see also In re Ames Dep't Stores, Inc., 470 B.R. 280, 283 (S.D.N.Y.), aff'd, 506 Fed.Appx. 70 (2d Cir.2012).

"Whether a party should be granted derivative standing is a mixed question of law and fact." In re Adelphia Commc'ns Corp., 371 B.R. 660, 665 (S.D.N.Y.2007), aff'd, 544 F.3d 420 (2d Cir.2008). A ruling on derivative standing represents an "application of bankruptcy courts' equitable powers," and is reviewed for abuse of discretion. Id.(internal quotation marks and citation omitted).

The Court of Appeals for the Second Circuit has concluded that there is a "qualified right for creditors' committees to initiate suit with the approval of the bankruptcy court." In re STN Enterprises, 779 F.2d 901, 904 (2d Cir.1985) (citing 11 U.S.C. §§ 1103(c)(5) and 1109(b) ); In re Adelphia, 544 F.3d at 424. STN and other forms of derivative standing do not undermine "the debtor's central role in handling the estate's legal affairs or the court's responsibility to monitor for abuses by the parties." In re Adelphia, 544 F.3d at 424.

The STN standing inquiry requires a bankruptcy court to determine whether "the committee presents a colorable claim or claims for relief that on appropriate proof would support a recovery," and "to decide whether the debtor unjustifiably failed to bring suit so as to give the creditors' committee standing to bring an action," by "examin[ing], on affidavit and other submission, by evidentiary hearing or otherwise, whether an action asserting such claim(s) is likely to benefit the reorganization estate." STN, 779 F.2d at 905.

"The inquiry into whether claims are colorable focuses on whether the claims would survive a defendant's motion to dismiss." In re Copperfield Invs., LLC, 421 B.R. 604, 609 (Bankr.E.D.N.Y.2010). Therefore, the Court should not dismiss the claim if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id.; see also Ward v. TheLadders.com, Inc., 3 F.Supp.3d 151, 156 (S.D.N.Y.2014). The Bankruptcy Court dismissed two sets of claims because they were not colorable. That is an issue of law that is reviewed de novo. Ames Dep't Stores, 470 B.R. at 283.

The second step of the STN inquiry asks whether pursuing colorable claims would likely benefit the debtor's estate. This inquiry requires the "weighing of the probability of success and financial recovery, whether it is preferable to appoint a trustee to bring suit instead of the creditors' committee, and the ‘terms relative to attorneys' fees on which suit might be brought.’ " In re Am.'s Hobby Ctr., 223 B.R. 275, 282 (Bankr.S.D.N.Y.1998) (quoting STN, 779 F.2d at 905 ). Accordingly, the issue of whether the Bankruptcy Court properly concluded that certain claims were not in the best interests of the Debtors' estate is reviewed for abuse of discretion. See Adelphia, 371 B.R. at 665.

II.

The parties do not dispute the basic facts as set forth in the Bankruptcy Court's opinion. The following facts are taken from the Bankruptcy Court's opinion as well as from the Committee's proposed complaint for constructive fraudulent transfers and related relief filed with its motion for STN standing. See A187.¹

A.

This case is about the merger and subsequent financing of two large companies (the "Combination"), Forest Oil Corporation ("Forest" or "Legacy Forest") and Sabine Oil & Gas LLC ("Legacy Sabine" or "Sabine Parent"). Legacy Forest was a publicly traded New York corporation, with headquarters in Denver, Colorado. A17, 75. Legacy Sabine was a Delaware limited liability company, privately held by First Reserve Corporation, a private equity firm. A18, 75. Legacy Sabine was headquartered in Houston, Texas, and its subsidiaries, known as the Legacy Sabine Subsidiaries held the bulk of the enterprise's assets. A18. The Legacy Sabine Subsidiaries were also Delaware limited liability companies. A75.

The two companies, prior to the Combination, had significant outstanding liabilities. Legacy Forest had approximately $905 million in debt: (1) a reserve-based lending facility with $105 million outstanding, secured by a first priority lien on oil and gas reserves ("Forest RBL") and (2) approximately $800 million in unsecured notes due in 2019 and 2020, at an interest rate of 7.25% and 7.5%, respectively ("Forest Unsecured Notes"). A17. Legacy Sabine had approximately $1.62 billion in debt: (1) a revolving credit agreement with approximately $620 million outstanding ("Legacy Sabine RBL"), (2) $650 million in obligations under the Second Lien Credit Agreement ("Second Lien Loan"), and (3) $350 million in unsecured notes ("Legacy Sabine Notes"). A18. The Legacy Sabine Subsidiaries guaranteed Legacy Sabine's various liabilities.

B.

Legacy Forest and Legacy Sabine along with its related entities entered into an Agreement and Plan of Merger on May 5, 2014 (the "May Merger Plan"). According to the May Merger Plan, Legacy Forest would merge with Legacy Sabine, and Legacy Forest would survive as a subsidiary of a newly formed holding company. A19. The Legacy Sabine shareholders would own approximately 73.5% of the holding company while Legacy Forest shareholders would hold approximately 26.5%. The May Merger Plan would trigger change-of-control provisions in the Legacy Forest Unsecured Notes. This meant that upon closing, the Combined Company would have to make an offer to the holders of the notes to redeem their notes at 101% of the outstanding principal amount plus accrued interest. A19.

In connection with the May Merger Plan, Legacy Sabine and Legacy Forest received a commitment letter from Barclays and Wells Fargo for two loans that would be offered to the Combined Company to ensure its liquidity upon completion of the Combination. The first loan was a new reserve-based lending facility in the amount of $1 billion ("New RBL"), the proceeds of which would be used, in part, to refinance the Legacy Sabine RBL and the Legacy Forest RBL. A19. The lenders also committed to providing $850 million as an unsecured bridge loan ("Bridge Loan") to finance the redemption of the Legacy Forest Unsecured Notes. A19.

However, due to unfavorable market conditions and falling oil prices, the Combination, including the financing, as envisaged by Legacy Forest and Legacy Sabine became untenable. Adding to the Combination's complications, a group of investment firms acquired short positions on the Legacy Forest Unsecured Notes and began purchasing Forest stock in the hopes of defeating the Combination. A20. The financing structure was amended in July 2014 to extend the lenders' commitment period from November 1, 2014, to December 31,...