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In re Sabine Oil & Gas Corp.

United States District Court, S.D. New York

February 3, 2017

IN RE SABINE OIL & GAS CORP., et al., Reorganized Debtors.
v.
SABINE OIL & GAS CORP., et al. Appellees. OFFICIAL COMMITTEE OF UNSECURED CREDITORS, et al., Appellants,

          MEMORANDUM OPINION AND ORDER

          LORETTA A. PRESKA, United States District Judge.

         Pursuant to 28 U.S.C. § 158(a) and Federal Rule of Bankruptcy Procedure 8003(a), the Official Committee of Unsecured Creditors (the "Official Committee"), the Bank of New York Melon Trust Company as the Trustee under the 2017 Notes Indenture ("BONY"), the Wilmington Savings Fund Society, FSB, as Indenture Trustee for the Forest Oil 7.25% Unsecured Notes due 2019, and Delaware Trust Company as the Indenture Trustees for the Forest Oil 7% Unsecured Notes due 2020, collectively referred to as the Appellants, have appealed the Bankruptcy Court's Confirmation Order of the Plan of Reorganization (the "Confirmation Order") for the Debtors, Sabine Oil & Gas Corporation and its related entities ("SOGC" or the "Debtors"). SOGC, as the reorganized debtors-appellees, has moved to dismiss this appeal. (Mot. Dismiss, Sept. 9, 2016, ECF No. 42). Appellants have submitted a memorandum of law in opposition to the motion to dismiss, (Opp., Nov. 3, 2016, ECF No. 62), and SOGC has replied in turn. (Reply, Nov. 14, 2016, ECF No. 63). Because the plan of reorganization has been substantially consummated and unraveling the settlement would both frustrate Debtor's emergence from bankruptcy and require unwinding complex transactions in an infeasible manner, the Court finds that the appeal of the Confirmation Order is equitably moot. Accordingly, the motion to dismiss is granted.

         I. Background

         SOGC is engaged in the acquisition, production, exploration, and development of onshore oil and natural gas properties in the United States. (Mot. Dismiss at 1). In December 2014, Sabine Oil & Gas, LLC ("Legacy Sabine") merged with Forest Oil Corporation ("Legacy Forest") to create SOGC. (Id.). A sharp slump in energy prices led SOGC to file for Chapter 11 bankruptcy in July 2015 and SOGC's Board to establish an Independent Committee to investigate potential claims arising from the merger of Legacy Sabine and Legacy Forest. (Id.).

         On June 13, 2016, the Bankruptcy Court (Chapman, J.) began a 14-day confirmation hearing on the Debtors' Second Amended Chapter 11 Joint Plan of Reorganization. (Mot. Dismiss at 2). On July 27, 2016, the Bankruptcy Court confirmed the plan in its Confirmation Order. (Id.). After extensive negotiations between the Debtors, the First Lien Lenders that had provided the Debtors with reserve-based loans ("RBL Lenders"), and certain Second Lien Lenders, the parties reached a settlement whose terms include: the RBL Lenders (1} settled their adequate protection claims, (2) settled certain lien-related disputes, (3) accepted equity in satisfaction of their adequate protection and secured claims totaling over $1 billion, (4) waived their unsecured deficiency claims, (5) provided commitments of up to $200 million in exit financing, (6) ceded over $70 million in stock and warrants to the Second Lien Lenders, and (7) ceded more than $28 million in stock and warrants to unsecured and undersecured creditors. (Id. at 2-3). In return, the Confirmation Order released RBL Lenders from estate claims and certain third-party claims against the RBL Lenders and the Legacy Forest officers and directors from the estate claims. (Id. at 3).

         The Bankruptcy Court rejected the Official Committee's objections to the settlement and releases in the Plan, finding that they were "integral and necessary part of the Plan and represent a valid exercise of the Debtors' business judgment" and that they are "in the best interests of the estates." (Confirmation Order ¶ 52, July 27, 2016, ECF No. 6 Ex. A (Florence Aff.)). During the hearing, evidence was presented that there had been an extensive investigation into the constructive fraudulent conveyance claims and that the releases in favor of the RBLs and the Forest Directors were based on a determination that the claims were not colorable or were not in the best interest of the estate to pursue. (Tr. Hearing 46-47, June 22, 2016, ECF No. 18 Ex. D (Balassa Aff.)). The releases were an essential part of the package with the RBL Lenders. (Id. at 48, 149 (June 23, 2016), 248 (June 13, 2016)).

         The Bankruptcy Court expanded on its Confirmation Order in a 205-page Memorandum Decision, explaining that the RBL releases were "an integral and important part of the success of the Debtors' reorganization" and that the RBL Lenders agreed to negotiate with the Debtors only [i]n exchange for the Settlement and inclusion of the Constructive Fraudulent Conveyance Claims, the Bad Act Claims, and the Bucket II Claims in the RBL Release." (Mem. Decision 166-67, Aug. 18, 2016, ECF No. 6 Ex. B (Florence Aff.)). The Bankruptcy Court concluded that "[t]he settlement ... is fair, reasonable, and well above the lowest point in the range of reasonableness and the plan otherwise satisfies each and every requirement for confirmation. It's not even close." (Id. at 2).

         II. Procedural History

         On July 27, 2016, the Official Committee made an oral motion for a stay of the Confirmation Order pending the appeal of that order. (Tr. Hearing 79 (July 27, 2016)). This Court also declined to stay the plan, (see Mem. Op. and Order, Aug. 5, 2016, ECF No. 29), as did the Court of Appeals on August 10, 2016. (See Mot. Dismiss at 4}.

         In addition, on March 31, 2016, the Bankruptcy Court denied the Official Committee and other unsecured lenders (the "STN appellants") standing to pursue claims on behalf of the estate. The Official Committee sought standing to bring claims against the RBLs, the Second Lien Lenders, and several directors and officers of the pre-combination entities, Forest and Sabine, First Reserve Fund, and members of the current Board of Directors of SOGC. See generally In re Sabine Oil & Gas Corp., 547 B.R. 503 (Bankr. S.D.N.Y. 2016), affd, No. 16-cv-2561 (JGK), 2016 WL 3554995 (S.D.N.Y. June 24, 2016). On April 5, 2016, the STN appellants moved for a stay pending appeal of the STN Order. On April 21, 2016, the Bankruptcy Court denied the stay. In re Sabine Oil & Gas Corp., 548 B.R. 674, 678 (Bankr. S.D.N.Y. 2016).

         On June 24, 2016, this Court affirmed the Bankruptcy Court's STN decision, concluding that the STN appellants failed to plead colorable claims for constructive fraudulent conveyance against the RBLs and Second Lien Lenders, did not plead plausible claims against the Forest and Sabine directors and officers, and failed to show that bringing a narrow set of claims against the Second Lien Lenders was in the best interest of the estate. In re Sabine Oil & Gas Corp., 2016 WL 3554995, at *8-*11. The STN appellants did not seek a stay of this Court's STN decision nor did they appeal the denial by the Bankruptcy Court of their motion for a stay of the STN Order.

         The STN appellants appealed the STN decision to the Court of Appeals. See In re Sabine Oil & Gas Corp., 16-2187 (2d Cir. June 27, 2016). The STN appellants moved to expedite the appeal. In a one-judge motion issued by Judge Livingston on July 15, 2016, the motion to expedite was denied. Id. Appellees subsequently moved to dismiss the STN appeal as constitutionally moot, which the Court of Appeals granted on November 22, 2016. See In re Sabine Oil & Gas Corp., 16-2187 (2d Cir. Nov. 22, 2016).

         The Court now turns to the Debtors' motion to dismiss the appeal of the Bankruptcy Court's Confirmation Order on the grounds of equitable mootness.

         III. ...


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