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Full title: Response/Objection Filed by RLI Insurance Company. (Related document(s):205 Amended Chapter 11 Plan) (Attachments: # 1 Exhibit Bonds # 2 Exhibit Indemnity Agreements)(Ord, Jonathan) (Entered: 05/20/2021)

Document posted on May 19, 2021 in the bankruptcy, 9 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

Second, the Plan does not provide a clear means for the procurement of surety bonds for 1 The “Debtors” in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, as applicable, are: Castex Energy 2005 Holdco, LLC (6832); Castex Energy 2005, LLC (6832); Castex Energy Partners, LLC (6832); and Castex Offshore, Inc. (8432).In the ordinary course of business, certain Debtors are required to provide surety bonds to certain third parties to secure the performance of certain obligations relating to, inter alia, (i) oil and natural gas drilling and exploration operations; (ii) plugging and abandonment obligations; (iii) rights-of-way; (iv) rights-of-use; and (v) purchase and sale agreements, among other obligations.As a result of such payment(s), RLI may become subrogated to the rights of the obligees or other parties against the Debtors with respect to such payments, and RLI may have the right to be reimbursed and indemnified pursuant to contract and/or under the law by the Debtors with respect to such payments.RLI has issued a bond on behalf of Debtors in favor of a regulatory agency, BOEM, and is entitled by law to be subrogated to BOEM’s rights to the extent RLI satisfies Debtors’ obligations to BOEM.RLI further expressly reserves all rights, including, without limitation, all of its rights, claims, defenses, and remedies with respect to the Debtors (or other parties) and all matters in their cases, including but not limited to RLI’s rights to assert any claims, rights of setoff, or rights of recoupment under relevant agreements, applicable law, or otherwise.

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ) In re: ) Chapter 11 ) CASTEX ENERGY 2005 HOLDCO, LLC, et al., ) Case No. 21-30710 (MI) ) ) (Jointly Administered) Debtors.1 ) ) RLI INSURANCE COMPANY’S OBJECTION TO DEBTORS’ PLAN OF REORGANIZATION AND OPT-OUT OF CONSENSUAL RELEASES [Relates to R. Doc. 205] RLI Insurance Company (“RLI”), by and through undersigned counsel, hereby offers this Objection (the “Objection”) to the Second Amended Plan of Reorganization (“Plan”) [R. Doc. 205] filed by Debtors,2 and respectfully states as follows: I. SUMMARY OF OBJECTION 1. RLI objects to the Plan on four bases. First, the Plan does not provide for how Debtors will actually fund the “Funded” Statutory P&A Obligations, given the limited cash on hand and the uncertainty as to the availability of the Excess Escrowed Talos Shares. Second, the Plan does not provide a clear means for the procurement of surety bonds for 1 The “Debtors” in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, as applicable, are: Castex Energy 2005 Holdco, LLC (6832); Castex Energy 2005, LLC (6832); Castex Energy Partners, LLC (6832); and Castex Offshore, Inc. (8432). The Debtors’ mailing address is One Memorial City Plaza, 800 Gessner Rd., Suite 925, Houston, Texas 77024. 2 Capitalized terms not otherwise defined herein have the same meanings ascribed to them in Debtors’ Motion.

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continued operations and wind down of the leases. To the extent Debtors rely on RLI’s surety bonds, RLI objects to any assumption or assignment because bonds are unassumable financial accommodations. Third, the Plan impermissibly seeks to impair RLI’s subrogation rights with regard to the Statutory P&A Obligations. Fourth, the Plan contemplates the abandonment of certain properties in contravention of federal and state regulations designed to protect public health and safety. II. FACTUAL BACKGROUND 2. Debtors are engaged in the exploration, development, production and acquisition of oil and natural gas properties located in the Gulf of Mexico, state waters of Louisiana, onshore Louisiana, and onshore Texas. 3. In the ordinary course of business, certain Debtors are required to provide surety bonds to certain third parties to secure the performance of certain obligations relating to, inter alia, (i) oil and natural gas drilling and exploration operations; (ii) plugging and abandonment obligations; (iii) rights-of-way; (iv) rights-of-use; and (v) purchase and sale agreements, among other obligations. 4. RLI issued Bond No. RLB0002656 dated November 29, 2000 to Hunt Petroleum Corporation for leases in the Lapeyrouse and Caillou Island Fields on behalf of principal Castex Energy 1995, LP. By Rider dated June 4, 2004, the penal sum was reduced to $166,471.18. By Rider dated August 7, 2008, the principal was amended to Castex Energy Partners, LP, a predecessor of debtor Castex Energy Partners, LLC. 5. RLI also issued Bond No. RLB0010678 to the Minerals Management Service (now “BOEM”) for leases in the Gulf of Mexico area on behalf of principal Castex

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Offshore, LLC, in the penal amount of $300,000. By Rider dated November 3, 2008, the principal was amended to Castex Offshore, Inc. 6. RLI Bond No. RLB0002656 and Bond No. RLB0010678 (collectively, the “Bonds”) are attached in Exhibit A.3 7. RLI may be required to make payments under one or more of the Bonds to satisfy debts for which Debtors are obligated. As a result of such payment(s), RLI may become subrogated to the rights of the obligees or other parties against the Debtors with respect to such payments, and RLI may have the right to be reimbursed and indemnified pursuant to contract and/or under the law by the Debtors with respect to such payments. 8. Debtors, or a subsidiary, parent, affiliate, or division of Debtors have executed and delivered the Indemnity Agreements included in Exhibit B, pursuant to which they may be required to pay all premiums, provide collateral, indemnify and exonerate RLI, and hold RLI harmless from and against any and all liability, damage, loss, cost, and expense that RLI has incurred or will incur in connection with (1) the furnishing of the Bonds or (2) the enforcement of the Indemnity Agreements. III. PLAN OBJECTIONS A. The Plan Does Not Provide For A Means To Fund Decommissioning and Satisfy BOEM Bonding Requirements for the Operated Properties 9. The Plan provides that Post-Effective Date Debtors will emerge under the sole management of the Liquidating Trustee for the purpose of winding down and 3 Exhibit A may contain Bonds as to which liability has been extinguished by the obligees, by the terms of the Bond, or by operation of law.

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liquidating certain of Debtors’ oil and gas interests, including satisfying decommissioning obligations for Operated Properties. See Plan at p. 23 [R. Doc. 205]. 10. Exhibit B of the Plan provides that, through the Liquidating Trustee, one or more Post-Effective Date Debtors will continue to operate the Operated Properties, consisting of twelve federal oil and gas leases in the Gulf of Mexico subject to regulatory oversight by BOEM. 11. The Plan provides that Debtors intend to satisfy Funded Statutory P&A Obligations relating to the Operated Properties, and further provides a process for estimating Regulatory P&A Claims to the extent those obligations are not met at the effective date. However, the Plan fails to explain how and when Debtors intend to actually fund the “Funded” Statutory P&A Obligations given the limited cash on hand and uncertainty regarding the availability of the Excess Escrowed Talos Shares. The Plan’s failure to address this central issue raises serious concerns regarding its viability. 12. The Plan also fails to provide for a means to procure the surety bonding that would be required by federal regulations to continue to operate and wind down the leases, which again raises serious concerns regarding the viability of a Plan that contemplates operating federal oil and gas leases after the Effective Date. 13. RLI objects to the Plan to the extent the Post-Effective Date Debtors intend to continue relying on any RLI Bonds and associated surety credit to continue operations and satisfy BOEM surety bonding requirements. To the extent the Bonds issued by RLI are considered executory contracts that are property of the estate, the Bonds and the associated agreements would be financial accommodations and thus not subject to

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assumption or assignment pursuant to 11 U.S.C. § 365(c)(2). See Matter of Edwards Mobile Home Sales, Inc., 119 B.R. 857, 859 (Bankr. M.D. Fla. 1990); In re Wegner Farms Co., 49 B.R. 440, 446 (Bankr. N.D. Iowa 1985); In re Thomas B. Hamilton Co., Inc., 969 F.2d 1013, 1019-20 (11th Cir. 1992). B. Debtors’ Plan Improperly Impairs RLI’s Subrogation Rights for Statutory P&A Claims 14. The Plan provides for priority treatment of Statutory P&A Claims, which are defined as “any P&A Claim payable to a Regulatory Agency arising from or related to the Debtors’ failure or inability to satisfy a Funded Statutory P&A Obligation.” Plan at p. 12 [R. Doc. 205]. 15. The Plan further provides that “Statutory P&A Claims shall not be assignable or payable, under any theory, including subrogation, to any party other than a Regulatory Agency.” Plan at p. 21 [R. Doc. 205]. 16. RLI has issued a bond on behalf of Debtors in favor of a regulatory agency, BOEM, and is entitled by law to be subrogated to BOEM’s rights to the extent RLI satisfies Debtors’ obligations to BOEM. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136–37 (1962) (“there are few doctrines better established than that a surety who pays the debt of another is entitled to all the rights of the person he paid to enforce his right to be reimbursed”); In re Tri-Union Dev. Corp., 03-44908, 2015 WL 5730745, at *9 (Bankr. S.D. Tex. Sept. 28, 2015) (“Equitable subrogation applies ‘in every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable and

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which in equity should have been paid by the latter.’”)(quoting Frymire Eng'g Co. ex rel. Lib. Mut. Ins. Co. v. Jomar Int'l, Ltd., 259 S.W.3d 140, 142 (Tex. 2008)). 17. RLI thus objects to the Plan to the extent it impairs or precludes any rights of subrogation that RLI may be entitled to in the event it satisfies any of Debtors’ obligations to BOEM or any other regulatory agency. C. Debtors’ Plan to Abandon Numerous Oil and Gas Leases Is In Contravention of Laws and Regulations Designed to Protect Public Health and Safety 18. Debtors also seek to abandon certain properties under Section 554(a) of the Bankruptcy Code, including a number of leases used to conduct oil and gas operations in the Gulf of Mexico, Louisiana, and Texas. On information and belief, the proposed Properties to be Abandoned are subject to millions of dollars in decommissioning costs pursuant to Federal and State regulations. 19. The Plan fails to make any provisions to fund the Debtors’ decommissioning obligations associated with the properties to be abandoned, and instead simply leaves those obligations to regulatory authorities, co-working interest owners, predecessors, and sureties. 20. A debtor cannot abandon property in contravention of statutes or regulations that are “reasonably designed to protect the public health or safety from identified hazards.” Midlantic Nat’l Bank v. N.J. Dept. of Envtl. Prot., 474 U.S. 494, 106 S. Ct. 755, 88 L. Ed. 2d 859 (1986); see also Matter of H.L.S. Energy Co., Inc., 151 F.3d 434, 438 (5th Cir. 1998) (“a bankruptcy trustee may not abandon property in contravention of a state law reasonably designed to protect public health or safety.”); In re American Coastal Energy,

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Inc., 399 B.R. 805, 813 (Bankr. S.D. Tex. 2009) (“This Court need not make a determination whether the environmental hazard presents an imminent or identifiable harm. It is enough that the claim arises from a state law designed to protect the public from an identified hazard”). 21. Federal and State regulations regarding decommissioning of oil and gas leases are reasonably designed to protect the public health or safety from identifiable harm. See, e.g., American Coastal Energy, 399 B.R. at 813 (“the applicable provisions of the Texas Natural Resources Code [requiring the plugging and remediation of wells] are reasonably designed to protect the public health and safety.”); Matter of H.L.S. Energy Co., Inc., 151 F.3d 434, 438 (5th Cir. 1998) (“there is no question that under Texas law, the owner of an operating interest is required to plug wells that have remained unproductive for a year . . . Thus, a combination of Texas and federal law placed on the trustee an inescapable obligation to plug the unproductive wells”). 22. As such, Debtors should not be allowed to abandon these properties without providing a means to satisfy the remaining decommissioning obligations, and thus the Plan should not be confirmed. IV. OPT-OUT OF CONSENSUAL RELEASES 23. RLI hereby opts-out and does not consent to all third-party releases in the Plan. V. ADOPTION AND RESERVATIONS 24. RLI hereby adopts the arguments raised in the objection filed by US Specialty Insurance Company on May 20, 2021 [R. Doc. ____] to the extent those

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arguments are consistent with RLI’s position herein. RLI further expressly reserves all rights, including, without limitation, all of its rights, claims, defenses, and remedies with respect to the Debtors (or other parties) and all matters in their cases, including but not limited to RLI’s rights to assert any claims, rights of setoff, or rights of recoupment under relevant agreements, applicable law, or otherwise. Nothing in this Objection is intended to be, or should be construed as, a waiver by RLI of any of its rights. WHEREFORE, RLI Insurance Company respectfully request that the Court enter an order that (i) sustains this Objection; and (ii) grants to RLI such other and further relief as this Court deems just and proper. Respectfully submitted, KREBS FARLEY & DRY, PLLC Ryan D. Dry – (TX Bar No. 24050532) (SDTX Bar No. 618363) 909 18th Street Plano, TX 75074 Telephone: (972) 737-2530 Facsimile: (972) 737-2543 rdry@krebsfarley.com and /s/ Jonathan S. Ord KREBS FARLEY & DRY, PLLC Elliot Scharfenberg (pro hac vice) (LA Bar No. 35304) Jonathan S. Ord (pro hac vice) (LA Bar No. 35274) 400 Poydras Street, Suite 2500 New Orleans, LA 70130 Telephone: (504) 299-3570 Facsimile: (504) 299-3582 escharfenberg@krebsfarley.com jord@krebsfarley.com Counsel for RLI Insurance Company

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CERTIFICATE OF SERVICE I hereby certify that on this 20th day of May 2021, a true and correct copy of the foregoing Objection of RLI Insurance Company was sent via ECF Noticing to all parties registered to receive CM/ECF Notices in these Chapter 11 cases. /s/ Jonathan S. Ord Jonathan S. Ord

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