“New York City?? Get a Rope!” Considering Chapter 11 Venues for Distressed Oil and Gas Companies

For distressed mid-sized E&P and oil field service companies in Louisiana, the thought of filing a petition for chapter 11 bankruptcy relief in New York or Delaware may leave as bad a taste in the mouth as that poor cowboy who got a jar of salsa made in New York City*—and for good reason.

As oil prices remain low, we read regular reports of new chapter 11 filings in New York and Delaware, the majority of those qualifying as “mega” cases, that is, cases involving $100 million or more in assets and 1000 or more creditors. For those companies, filing in Delaware, particularly, makes sense, as often they are organized in Delaware or have affiliates organized in Delaware.  Debtors perceive advantages to filing in New York and Delaware, as it allows them access to a sophisticated bench and bar accustomed to handling the complexity of “mega” cases, and secured lenders drive the decision to file in those venues as they perceive those venues to be favorable on topics such as debtor-in-possession financing terms.

But for small to mid-sized E&P and service companies, with, say, anywhere from $10 to $100 million in assets (or more), but with a fraction of the creditors required for a “mega” case, does it still make sense to file in New York or Delaware? The applicable venue provision of the United States Code, 28 U.S.C. § 1408, generally allows a person or entity to file for chapter 11 bankruptcy relief (1) in the district in which the debtor has its domicile, residence, principal place of business, or principal assets for 180 days immediately preceding the filing or (2) in the district in which an affiliate or partner of the debtor has filed.  For a company, the term “domicile” has been interpreted by courts to mean the place of incorporation or organization.  So even if a debtor is incorporated or organized under Delaware law, it is eligible to file for chapter 11 protection in any district in which its principal place of business or its principal assets have been located within 180 days of filing.

Although the locations of a debtor’s principal place of business and its principal assets are questions of fact, if an E&P or service company can show that either is located in a district in Louisiana, then it will be able to file for chapter 11 relief in that Louisiana district. Depending on the debtor’s circumstances, filing in Louisiana may be the better option to filing in New York, Delaware—and perhaps even Texas.  The first obvious advantage to filing in Louisiana is the cost savings.  While there is no question that New York and Delaware are premiere venues for “mega” chapter 11 reorganization cases, it is common knowledge that the transactional costs associated with “mega” cases—for everything from legal and noticing services, financial advisor and accounting services, and even transportation and lodging for court appearances—are comparatively astronomical against the costs incurred with a filing in Louisiana.  A distressed mid-sized company with its principal place of business or its principal assets in Louisiana can take advantage of significant cost-savings by filing close to home.

The second advantage to filing in Louisiana is that it allows the trade creditors, state and federal government regulators, and employees to more easily participate in the chapter 11 proceedings. When a debtor files out of state, employees’ and local trade creditors’ meaningful participation in and monitoring of the proceedings is impeded.  To file pleadings in the case, a local employee or trade creditor would be required to hire counsel in the state in which the case is filed, which is typically a more expensive proposition than hiring a local attorney in Louisiana.  Even to monitor out-of-state court proceedings in person can be cost-prohibitive and overly time-consuming for local employees and trade creditors.  Our experience at Gordon Arata, having long-standing relationships with many E&P and service companies operating in Louisiana, tells us that those companies not only desire to maintain operations in Louisiana, despite a downturn in the industry, but understand the importance of involving local constituencies in the process of reorganization and protecting relationships with trade creditors, government regulators, and employees.

A third advantage to filing in Louisiana rests with the bankruptcy bench and bar. Many determinations in chapter 11 regarding, for example, the nature of property interests in oil and gas leases and whether they are subject to treatment under § 365 of the Bankruptcy Code (which allows a debtor to assume or reject executory contracts and unexpired leases), as well as whether certain prepetition contracts, such as gathering agreements, can be rejected under § 365, are dependent upon applicable state law.  If a debtor’s contracts and other prepetition transactions are subject to Louisiana law, a debtor (and its creditors) may decide that it is preferable to have issues surrounding those transactions decided by Louisiana courts, with full debate and discourse among Louisiana attorneys steeped in Louisiana oil and gas law.

A debtor having its principal place of business or its principal assets in Louisiana that chooses to file for chapter 11 relief in the proper district in Louisiana is always subject to venue challenges by its creditors. Pursuant to 28 U.S.C. § 1412 and Bankruptcy Rule 1014, a court will grant a motion to transfer venue upon notice and hearing only if it determines that the transfer is “in the interest of justice or for the convenience of the parties.”  But the creditor seeking the transfer bears the burden of proof and must carry that burden by a preponderance of the evidence, see In re Peachtree Lane Assocs., Ltd., 150 F. 3d 788, 793 (7th Cir. 1998), and “a debtor’s choice of forum is entitled to great weight if . . . venue is proper,” In re Enron Corp., 284 B.R. 376, 386 (Bankr. S.D.N.Y. 2002).

The bankruptcy court will consider several factors to determine whether to allow a change in venue of a case already filed in a proper district, see In re K5 Global, Inc., No. 11-20393, 2012 WL 1986531, at *1 (W.D. La. June 1, 2012) (citing In re Enron Corp., 274 B.R. at 343), but important to remember is that “[w]here a transfer would merely shift the inconvenience from one party to the other, or where after balancing all the factors, the equities leaned by slightly in favor of the movant, the [debtor’s] choice of forum should not be disturbed,” In re DDMD Trucking, Inc., No. 14-12511, 2015 WL 381299, at *4 (Bankr. D.N.M. Jan. 28, 2015) (quoting In re Garden Manor Assocs., L.P., 99 B.R. 551, 555 (Banrk. S.D.N.Y. 1988)).

A distressed mid-sized E&P or service company has many factors to consider in determining whether it can benefit from chapter 11. But should it decide to go that route, the take-home message is that most debtors have choices regarding where to file, and  choosing a venue in which to file the chapter 11 petition will have both immediate and potentially far-reaching consequences.

*“Pick Up the Pace!”  This ad campaign was fondly, but permanently, etched into my mind in the early nineties:

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