In re Sabine Oil & Gas Corp.

555 B.R. 180

In re: Sabine Oil & Gas Corporation, et al., Debtors.

Case No. 15-11835 SCC Jointly Administered

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

Signed August 18, 2016

KIRKLAND & ELLIS LLP, KIRKLAND & ELLIS INTERNATIONAL LLP, 601 Lexington Avenue, New York, New York 10022 By: Jonathan S. Henes, P.C., Christopher J. Marcus, P.C., 300 North LaSalle, Chicago, Illinois 60654 By: Gabor Balassa, P.C., A. Katrine Jakola, Esq., Whitney L. Becker, Esq., Counsel to the Debtors

ROPES & GRAY LLP, 1211 Avenue of the Americas, New York, New York 10036 By: Mark R. Somerstein, Esq., Gregg Galardi, Esq., Gregg Weiner, Esq., Daniel McCaughey, Esq., Counsel to the Official Committee of Unsecured Creditors

BROWN RUDNICK LLP, Seven Times Square, New York, New York 10036 By:

Robert J. Stark, Esq., Daniel J. Saval, Esq., Counsel to the Forest Notes Indenture Trustees

LINKLATERS LLP, 1345 Avenue of the Americas, New York, New York 10105 By: Margot B. Schonholtz, Esq., Robert H. Trust, Esq., Counsel to Wells Fargo, National Association, as First Lien Agent

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, 1285 Avenue of the Americas, New York, New York 10019 By: Moses Silverman, Esq., Brian S. Hermann, Esq., Kyle J. Kimpler, Esq., Counsel to Wilmington Trust, N.A. as Second Lien Agent

QUINN EMANUEL URQUHART & SULLIVAN, LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010 By: Andrew J. Rossman, Esq., Susheel Kirpalani, Esq., Julia M. Beskin, Esq., Counsel to FRC Founders Corporation, Sabine Investor Holdings LLC, First Reserve Fund XI, L.P., First Reserve GP XI, L.P., First Reserve GP XI, Inc., Alex Krueger, Brooks Shughart, Michael France, and Joshua Weiner

SHEARMAN & STERLING LLP, 599 Lexington Avenue, New York, New York 10022 By: Joseph J. Frank, Esq., Fredric Sosnick, Esq., Counsel to Barclays Bank PLC and Barclays Capital Inc.

KASOWITZ, BENSON, TORRES & FRIEDMAN LLP, 1633 Broadway, New York, NY 10019 By: Kenneth R. David, Esq., Daniel A. Fliman, Esq., Counsel to Richard J. Carty, Loren Carroll, Dod Fraser, James Lee, James Lightner, Patrick R. McDonald, Raymond Wilcox, and Victor Wind

AKIN, GUMP, STRAUSS, HAUER & FELD LLP, One Bryant Park, New York, New York 10036 By: Daniel H. Golden, Esq., Abid Qureshi, Esq., EMMET, MARVIN & MARTIN, LLP, 120 Broadway, 32nd Floor, New York, New York 10271 By: Edward P. Zujkowski, Esq., Thomas A. Pitta, Esq., Co-counsel to The Bank of New York Mellon Trust Company, N.A. as Trustee under the 2017 Notes Indenture

CURTIS, MALLET-PREVOST, COLT & MOSLE, LLP, 101 Park Avenue, New York, New York 10178 By: Steven J. Reisman, Esq., Theresa A. Foudy, Esq., Counsel to Sabine Directors Duane Radtke, David Sambrooks, and John Yearwood

MEMORANDUM DECISION CONFIRMING DEBTORS' SECOND AMENDED JOINT CHAPTER 11 PLAN OF REORGANIZATION OF SABINE OIL & GAS CORPORATION AND ITS DEBTOR AFFILIATES

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

BACKGROUND...188

I. Case and Company Background...188

II. Events Leading to the Plan and Settlement...189

III. The Plan...192

A. Summary of the Plan and the Settlement Embodied in the Plan...193

B. Voting Results...195

C. Objections to the Plan...195

IV. Estimates of Adequate Protection Claims and Potential Bucket II Claims Recoveries...197

A. Estimates of the Adequate Protection Claims...198

1. The Debtors' Estimate of the Adequate Protection Claims...202

2. The Committee's Challenges to the Debtors' Estimate of the Adequate Protection Claims...206

a. Deduction of All Indirect Costs (Whether or Not Included in COPAS Charges) from the Value of the Reserves...206

b. Reserve Adjustment Factors (RAFs)...208

c. Strip Pricing...209

d. Encumbrance Analysis...210

e. Postpetition Adequate Protection Payments and Application of Swap Payments...211

f. Postpetition Mineral Lien Payments...211

B. Estimates of Potential Bucket II Claims Recoveries...212

1. Bucket II Unencumbered Assets...213

2. Disputed Cash...213

3. Bucket II Unallocated G&A...214

4. Unitized Leases and After-Acquired Unitized Leases...215

5. Potentially Defective Recording Leases...216

6. County Leases...216

7. Personal Property Liens...216

8. RBL Lenders' Preference Claims and Second Lien Lenders' Preference Claims...217

9. Swap Payments...217

V. The Confirmation Hearing...218

A. Confirmation Testimony...219

1. Mr. David J. Sambrooks...219

2. Mr. David Cecil...222

3. Mr. James Seery...226

4. Mr. Michael Magilton...228

5. Mr. Jonathan (Joff) A. Mitchell...231

6. Mr. Christopher J. Kearns...240

7. Mr. Steven M. Zelin...242

B. Evidentiary Matters Relating to Certain Confirmation Testimony...245

1. The Committee's Motion to Exclude the Declarations and Testimony of Mr. Brandon Aebersold ...245

2. The Debtors' Motion to Exclude the Testimony of Mr. Adrian Reed...250

DISCUSSION...256

VI. Applicable Law...256

VII. The Process Undertaken by the Debtors and the Independent Directors Committee...258

VIII. The Settlement Embodied in the Plan is Fair, Reasonable, and Well Above the Lowest Point in the Range of Reasonableness...261

A. The Settlement of the Adequate Protection Claims...261

1. An “Enterprise” Valuation In Which All Indirect Costs Are Deducted from the Value of the Reserves is Not Appropriate for Purposes of Estimating Collateral Diminution and the Adequate Protection Claims...262

2. Using the Mid-RAFs and High-RAFs to Risk-Adjust the Value of the Reserves is Appropriate...268

3. The Court Must Consider the Most Recent Strip Pricing Data But May Also Consider Additional Strip Pricing Data...271

4. The Committee's Other Critiques of the Debtors' Estimate of the Adequate Protection Claims Do Not Withstand Scrutiny and Must be Rejected...274

a. Encumbrance Analysis...274

b. Postpetition Adequate Protection Payments and Application of Swap Payments...275

c. Postpetition Mineral Lien Payments...276

5. Additional Considerations Supporting the Reasonableness of the Debtors' Estimate of the Adequate Protection Claims...277

a. The Additional Haynesville Locations...277 b. Mr. Mitchell's Conservative, Committee-Favorable “Weighted Bucket II Approach”...278

B. The Settlement of the Bucket II Claims...279

1. The Two “Critical Wins”...279

2. Other Bucket II Claims...284

a. Disputed Cash...284

b. Unitized Leases and After-Acquired Unitized Leases...285

c. Potentially Defective Recording Leases...286

C. Other Settlements Embodied in the Plan...287

1. The RBL Release Satisfies Metromedia and is Justified in These Cases... 287

a. The Court Has Subject Matter Jurisdiction to Approve the RBL Release...289

b. The RBL Release Satisfies Metromedia and its Progeny...290

D. The Iridium Factors Weigh Decisively in Favor of Approval of the Settlement...294

1. The Uncontested Iridium Factors...295

a. Factor #5: The Competency and Experience of Counsel Supporting, and the Experience and Knowledge of the Judge Reviewing, the Settlement...295

b. Factor #7: The Extent to Which the Settlement is the Product of Arm's Length Bargaining...295

2. The Contested Iridium Factors...296

a. Factor #1: The Balance Between the Litigation's Possibility of Success and the Settlement's Future Benefits...296

b. Factor #2: The Likelihood of Complex and Protracted Litigation, with its Attendant Expense, Inconvenience, and Delay...306

c. Factor #3: The Paramount Interests of Creditors...307

d. Factor #4: Whether Other Parties in Interest Support the Settlement...308

e. Factor #6: The Nature and Breadth of Releases to be Obtained by Officers and Directors...308

IX. The Plan Complies with Sections 1129(a) and (b) of the Bankruptcy Code and Other Confirmation Standards...310

A. Section 1129(a)(1)...310

B. Section 1129(a)(2)...311

C. Section 1129(a)(3)...312

D. Section 1129(a)(4)...313

E. Section 1129(a)(5)...313

F. Section 1129(a)(6)...314

G. Section 1129(a)(7)...314

H. Sections 1129(a)(8)–(13)...316

I. Section 1129(b)...316

J. The Plan Does Not Effect a De Facto Substantive Consolidation...317CONCLUSION...318

“It's not even close.” So said Sabine's Chief Restructuring Officer when asked his opinion during the confirmation hearing as to the reasonableness of the settlement embodied in the Debtors' plan of reorganization.

Just six months ago, the Debtors in these chapter 11 cases engaged in a lengthy evidentiary hearing in this Court to determine whether or not the Official Committee of Unsecured Creditors should be granted so-called STN standing to pursue a sweeping set of claims against the Debtors' lenders as well as the Debtors' current and former officers and directors. Nine days of live testimony, hundreds of exhibits, and five days of closing argument later, the Court denied the Committee's request for STN standing. The proceedings took an enormous toll on the Debtors: tens of millions of dollars in litigation costs were incurred and key members of senior management had no choice but to attend every day of the hearing rather than focus on maintaining the stability of the business and the morale of their employees.

Undaunted, the Debtors filed a plan of reorganization, dated April 29, 2016, and commenced a confirmation hearing on Monday, June 13, 2016—just thirty-six hours after arguing before the District Court on the Committee's appeal of this Court's STN decision. In the two months between the STN decision and the commencement of the confirmation hearing, the parties once again engaged in weeks of depositions, discovery, and pre-trial skirmishes. Five days into the hearing, the District Court issued its decision in favor of the Debtors on the STN appeal. Ten days of live testimony, hundreds of exhibits, and ten hours of closing argument later, it is eminently clear that the plan should be confirmed. The proceedings again took an enormous financial toll on the Debtors and visited further human capital costs on members of senior management and the Debtors' employees.

What makes this case unique is not that it was litigious and expensive and exhausting for all involved. Rather, it is the enormous extent to which it was unnecessarily litigious and expensive. Notwithstanding the complexities of certain of the issues implicated by...