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December 7, 2020 – The U.S. Securities and Exchange Commission (“SEC” or “Commission”) objected to the Debtors Third Amended Joint Plan of Reorganization alleging that: “[t]he Releases here are not consensual because the Plan deems consent to the Releases to be established based on silence (i.e., not returning a ballot or failing to affirmatively opt of the Release even if the party rejects or is deemed to reject the Plan)” [Docket No. 1279].
The focus of the SEC's objection is protecting public creditors and shareholders from being prohibited from filing claims against parties released under the proposed Plan. Specifically, the objection states, "As a general matter, nondebtor third-party releases contravene Section 524(e) of the Bankruptcy Code, which provides that only debts of the debtor are affected by the Chapter 11 discharge provisions. Such releases have special significance for investors because they enable nondebtors to benefit from a Debtor's bankruptcy by obtaining their own releases with respect to past misconduct, including violations of the federal securities laws or breaches of fiduciary duty under state law, which would not be dischargeable in their own bankruptcy cases. This concern is implicated here, where the Debtors are seeking to bar public creditors and shareholders from asserting claims against the released parties….
Although the Debtors may claim that the inclusion of an opt-out provision renders the releases consensual with respect to shareholders, noteholders and Section 510(b) claimants, investor silence does not constitute 'consent' to third party releases in our view."
The objection continues: “In the SEC’s view, all investors and Section 510(b) claimants should be required to affirmatively and specifically opt in to the Releases in order to be bound by them regardless of their voting status and regardless of whether they vote to accept or reject the Plan… Although the Senior Noteholders and preferred and common equity holders are entitled to vote, the equity holders are receiving at most de minimis consideration, which converts to zero in the event that senior classes or either of the equity holder classes votes to reject the Plan. But they are obligated to affirmatively opt out of the Releases to avoid being bound, even if they reject the Plan… It also appears that Section 510(b) claimants will not even receive an opt out form, but will be required to actually object to the Plan itself in order to be excluded from the Releases. Under the facts of this case, there is no circumstance under which the failure of a Section 510(b) claimant to object to confirmation of the Plan can be deemed to evidence that claimant’s consent to the Releases.
The SEC believes that true investor consent to the Releases can only be achieved by a separate and affirmative opt in to the Releases. However, if the Court is inclined to accept XOG’s position that an investor who votes in favor of the Plan has accepted the Releases, then the Court should also rule that any investor who rejects the Plan or is deemed to have rejected the Plan should be deemed to have rejected to the Releases. There is no logic nor rationale to infer consent both from a vote in favor of the Plan and from a vote against the Plan. Requiring an affirmative opt-out from the Releases is also a particularly onerous requirement to place on public investors, many of whom must rely on broker-dealer intermediaries to deliver the appropriate forms and instructions to them. Instead, only those investors who demonstrate an intent to be bound by the Releases through an opt-in should be deemed to consent to the Releases.
In addition, in the Commission’s view, the exculpation clause in the Plan constitutes an impermissible non-debtor release and discharge since it may limit the liability of various non-estate fiduciaries for conduct that occurred prior to the Chapter 11 case and, hence, falls squarely within the scope of Section 524(e). Although the definition of ‘Exculpated Parties’ appears itself to apply only to estate fiduciaries, the definition includes the Exculpated Parties’ ‘Related Parties,’ thereby potentially expanding it well beyond estate fiduciaries… While the Releases appear to be limited to claims relating to the Debtors, if the Court finds that the Releases are not consensual then that nexus alone is insufficient to grant the court the constitutional authority to approve the Releases.”
The Plan confirmation hearing is scheduled for December 21, 2020, with objections due by December 11, 2020.
About the Debtors
Denver-based Extraction Oil & Gas, Inc. is an independent energy exploration and development company focused on exploring, developing and producing crude oil, natural gas and NGLs primarily in the Wattenberg Field in the Denver-Julesburg Basin of Colorado. For further information, please visit www.extractionog.com. The Company’s common shares are listed for trading on the NASDAQ under the symbol: “XOG.”
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