In re Pearl Res. LLC

622 B.R. 236

IN RE: PEARL RESOURCES LLC, et al, Pearl Resources Operating Co. LLC, Debtors.

Case No: 20-31585

Case No: 20-31586

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed September 30, 2020

Walter J. Cicack, Hawash Cicack & Gaston LLP, Beverly Wallace Joe, Ferguson Braswell et al., Houston, TX, Dean W. Ferguson, Attorney at Law, Kingwood, TX, Jeremy M. Masten, Masten Law Firm PLLC, Belton, TX, Daniel C. Miller, McElroy Sullivan et al., Austin, TX, for Debtors.

MEMORANDUM OPINION

Eduardo V. Rodriguez, United States Bankruptcy Judge

Effective February 19, 2020, the Small Business Reorganization Act of 2019 ("SBRA ") added new subchapter V provisions ( 11 U.S.C. §§ 1181 – 1195 ) designed to streamline the reorganization process for small business debtors. While the definition of a small business debtor under § 101(51D) has some conforming changes, the aggregate debt limit of $2,725,625 does not change. However, the Coronavirus Aid, Relief, and Economic Security Act has temporarily raised the aggregate debt limit to $7,500,000, effective March 25, 2020 and which sunsets on March 25, 2021. Thus, under the SBRA, a § 101(51D) "small business debtor" that files Chapter 11 has two options: (1) proceed as a subchapter V case by electing subchapter V, or (2) proceed as a BAPCPA "small business case" by not electing subchapter V. Pearl Resources LLC and Pearl Resources Operating Co. LLC both elected to proceed under subchapter V of Title 11 of the United States Bankruptcy Code.

As a matter of first impression, the Court conducted a contested confirmation hearing on the jointly administered subchapter V Debtors' plan of reorganization on August 13, 2020. At the conclusion, the Court ordered that a modified plan consistent with the Court's oral ruling be filed no later than August 20, 2020, took the matter under advisement and ordered briefing. All briefs have now been submitted and the matter is ripe for determination. For the reasons set forth below, Debtors' jointly administered subchapter V Plan dated August 21, 2020 is confirmed pursuant to 11 U.S.C. § 1191(b).

I. FINDINGS OF FACT

This Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, which is made applicable to contested matters pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014. To the extent that any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of law constitutes a finding of fact, it is adopted as such. This Court made certain oral findings and conclusions on the record. This Memorandum Opinion supplements those findings and conclusions. If there is an inconsistency, this Memorandum Opinion controls.

A. Procedural History

On March 3, 2020, Pearl Resources LLC ("Pearl Resources ") and Pearl Resources Operating Co. LLC ("Pearl Operating ") (each a "Debtor "; collectively "Debtors ") each filed their separate Chapter 11 petitions under Title 11, Chapter 11, subchapter V of the United States Bankruptcy Code.¹ On March 10, 2020, the Court granted Debtors' motion to jointly administer the two cases.² On April 13, 2020, a status conference concerning the jointly administered Debtors was held at which time the Court entered an order which provisioned, inter alia, that a plan of reorganization be filed no later than June 1, 2020.³ On April 14, 2020, the First Meeting of Creditors was held, both Debtors appeared, by and through its managing member Dr. Dria, and the meeting was concluded.⁴ By order of the Court, the bar date for non-governmental interests and proofs of claim in these cases was May 1, 2020.⁵ On May 22, 2020, Debtors filed an emergency motion to extend the time to file a plan.⁶ On May 28, 2020, the Court held a hearing on the emergency motion and after considering the pleadings on file and evidence taken at the hearing, the motion was granted providing Debtors until July 1, 2020, to file a plan of reorganization.⁷

On July 1, 2020, Debtors timely filed their subchapter V plan of reorganization.⁸ On July 2, 2020, the Court (i) fixed the time for filing acceptances or rejections of the Plan; (ii) fixed the time for filing objections to confirmation of the Plan; and (iii) scheduled a hearing to consider confirmation of the Plan for August 13, 2020.⁹ On July 8, 2020, Debtors served on all creditors, parties-in-interest, and others requesting notice, the Plan Solicitation Package that included: (i) the Debtors' plan;¹⁰ (ii) the Court's Order fixing deadlines for voting and objections; and (iii) the approved Ballot for Accepting or Rejecting Debtors' Plan.¹¹

On August 6, 2020, the following creditors timely filed their objections to confirmation of Debtors' Plan: Pilot Thomas Logistics, LLC ("Pilot Thomas ");¹² TransCon Capital, LLC ("TransCon ");¹³ Nabors Drilling Technologies USA, Inc. ("Nabors ");¹⁴ and Terrell CAD, Harris County, Pecos County ("Terrell CAD ").¹⁵ The Terrell CAD objection was subsequently withdrawn, leaving only Pilot Thomas, TransCon, and Nabors (collectively "Objecting Creditors "). On August 10, 2020, Debtors filed Docket No. 210 evidencing the ballot tabulation in which four Classes of claims held by non-insiders (three of which are impaired) voted to accept the Plan and three impaired Classes of claims held by non-insiders voted not to accept the Plan.¹⁶ Thereafter, on August 12, 2020, Debtors uploaded a proposed order confirming Debtors' plan that included language purporting to modify language contained in the plan as it pertained to treatment of the Objecting Creditors' claims.¹⁷ However, pursuant to the Court's order at the August 13, 2020 hearing, Debtors filed a modified plan on August 21, 2020, which is currently the live pleading before the Court ("Plan ").¹⁸

II. CONCLUSIONS OF LAW

A. Jurisdiction, Venue, and the Court's Constitutional Authority to Enter a Final Order

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334 and now exercises its jurisdiction in accordance with Southern District of Texas General Order 2012–6.¹⁹ Confirmation of a plan of reorganization constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A) & (L). Therefore, the Court holds constitutional authority to enter a final order and judgment.²⁰ Finally, venue is governed by 28 U.S.C. §§ 1408, 1409. Venue is proper because Debtors' principal place of business has been in the Southern District of Texas for the 180 days immediately preceding the Petition Date. The Court will next turn its attention to the statutorily required contents of a subchapter V plan of reorganization.

B. Requisite Contents of a Subchapter V Plan of Reorganization

Section 1125 of the Bankruptcy Code normally requires a disclosure statement that provides adequate information regarding the debtor's plan of reorganization and implementation of the plan of reorganization.²¹ However, subchapter V includes several features designed to facilitate the efficient and economical administration of the case and the prompt confirmation of a plan. These features include elimination of, inter alia, a separate disclosure statement unless the court orders otherwise.²²

Although no disclosure statement is required, the subchapter V plan must, at a minimum, contain the following: (a) a brief history of the subchapter V debtor's business operations;²³ (b) a liquidation analysis;²⁴ (c) projections with respect to the ability of the subchapter V debtor to make payments under the proposed plan;²⁵ (d) the submission of all or a portion of the subchapter V debtor's post-petition income from future earnings or (other future income) to the supervision and control of the trustee "as is necessary for the execution of the plan";²⁶ and (e) in a nonconsensual subchapter V plan, such as the case here, appropriate remedies that may include liquidation of nonexempt assets to protect the holders of claims or interests in the event plan payments are not made.²⁷ Apart from the mandatory provisions, a subchapter V debtor's plan may contain any additional provisions that are consistent with the Bankruptcy Code but which are not applicable in the instant case.²⁸ The Court will take each one in turn.

1. Debtors' Plan of Reorganization

a. History of Debtors' Business Operations

Section 1190(1)(A) requires that a debtor include in its plan "a brief history of the business operations of the debtor." Here, Debtors included the following business history in their Plan filed on August 21, 2020.²⁹ Debtors are Texas limited liability companies with their corporate offices in Houston, Texas. Debtors have outsourced to third parties all of the operational aspects of their business, except for their finance and administrative functions. Myra A. Dria ("Dr. Dria ") manages Debtors' finances, administrative functions, and directs operations of their third-party contractors. The primary asset of Debtors are oil and gas leases located in Pecos County, Texas. Dr. Dria is the founder and Managing Member of Pearl Resources and through Pearl Resources, the Managing Member of Pearl Operating. Dr. Dria graduated from the University of Texas with a Ph.D. in Petroleum Engineering with Honors in 1988.

Debtors have under lease 2,240 acres in Pecos County, Texas. In addition, Debtors are in a dispute concerning an additional 320 acres located in the south half of Section 22. Adjacent operators are Jagged Peak Energy Inc. and Parsley Energy LLC, both publicly owned entities. Debtors' primary business has been to develop, design and build infrastructure to support drilling operations, and drill and manage new oil and gas wells with production batteries on their lease acreage in Pecos County. Debtors also operate two wells located in Pecos County: Brandenburg Well No.1 and the Garnet State No. 3.

i. Description of Debtors' Main Assets

The Garnet State Lease legal description/location is H&GN RR Survey, Pecos County Block 8 Section S/2 20 (320 acres) and Debtors hold this S/2 of Section 20 under a...