Extraction Oil & Gas, Inc. – US Trustee Objects to Debtors’ Plan Citing Affirmative Third Party Release Opt-Out Mechanism and the Unwarranted Payment of Stakeholder Fees

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December 10, 2020 – U.S. Trustee assigned to the Debtors' cases objected to the Debtors’ Third Amended Joint Plan of Reorganization finding fault with (i) the Plan's affirmative opt-out requirements in respect of third party releases and (ii) the proposed payment of the fees in respect of stakeholders who have not "made a substantial contribution in these cases" (these being the fees and expenses of certain senior noteholders and an indenture trustee) [Docket No. 1303].

The objection will be considered at a December 21st hearing.

The objection reads: “The Debtors have proposed a plan whereby certain general unsecured creditors and the public shareholders will receive a less than full, if not a negligible, recovery under the plan based on certain factors. On the other hand, certain equity holders will receive nothing under the Plan, are deemed to reject the Plan and have no right to vote on the Plan. Despite such treatment, the Debtors seek to have these parties consent to providing third party releases to non-debtor parties unless such creditors and equity holders return a ballot or form opting out of such releases. A similar situation was address by the Court in In re Emerge Energy Services LP, 19-11563 (KBO), 2019 WL 7634308 (Bankr. D. Del. Dec. 5, 2019) [where]…the Court ruled that consent cannot be inferred by the failure of a creditor or equity holder to return a ballot or opt-out form. The Court clarified that an ‘opt out mechanism is not sufficient to support the third party releases…particularly with respect to parties who do not return a ballot (or are not entitled to vote in the first place). Failing to return a ballot is not a sufficient manifestation of consent to a third party release.’

Requiring affirmative consent from the general unsecured creditors, the public common shareholders and other equity holders in these cases is important for several reasons. First, the Class 6 general unsecured creditors and the public shareholders are receiving a difficult to determine Plan distribution based upon certain events and outcomes. Therefore, there appears to be little, if any, consideration for giving any releases let alone the releases being sought here. By virtue of the opt-out mechanism, consent could be assumed by silence or some other form of manufactured consent, which could be caused by factors such as the opt-out notice being incorrectly addressed or misdelivered, or other mail failures or delays. Any risk of mail errors should be borne by the beneficiaries of the releases, not by the Debtors’ creditors, public shareholders, or other equity holders. 

That is especially true here where the Debtor’s common stock is likely held in a street name, and therefore the Debtors may not even effectively mail the ballots and opt-out forms directly to beneficial stockholders

The U.S. Trustee further objects to the confirmation of the Third Amended Plan because it improperly provides for the payment of certain fees and expenses with[out] complying with applicable law [these (i) are pre- and post-petition fees and expenses of certain Senior Noteholders that are signatories to the RSA and (ii) the fees of the indenture trustee] . Although the U.S. Trustee recognizes the efforts of the Debtors and other parties in interest in working towards a consensual resolution of certain issues related to these cases, the parties cannot seek the payment of fees and expenses that contravenes the Bankruptcy Code and applicable law…That section requires the court to find that the creditor made a substantial contribution to the case and that the fees and expenses are reasonable and to do so only after notice and a hearing. In this case, the parties seeking the payment of such fees and expenses have not shown that they made a substantial contribution in these cases and seek to have these fees and expenses paid without review…Simply put, a debtor cannot ignore or modify the Code’s requirements for payment of substantial contribution claims and ask a Court to approve such an arrangement which essentially modifies the Code. The Third Amended Plan suffers other problems such as (i) the exculpation provisions are overextended and too far-reaching; (ii) the plan cannot act as a settlement and confer a discharge; and (iii) there is a disparity between similarly situated creditors.”

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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