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Texas Lawyer

Only 28 days after Baseline Oil and Gas Corp. of Houston filed a voluntary Chapter 11 petition, a federal bankruptcy judge confirmed the Houston-based energy company's reorganization plan.

To enable that speedy reorganization, a team of lawyers from Thompson & Knight spent five months getting ready for the Aug. 28 prepackaged bankruptcy filing in the U.S. Bankruptcy Court for the Southern District of Texas.

"We knew that with a lot of preparation, we could cut down the amount of time we would have to actually be in the Chapter 11 and thus save the company a lot of money," says Rhett Campbell, a partner in Thompson & Knight in Houston. "We worked hard at eliminating a lot of possible objections."

Campbell says that a bankruptcy isn't a prepackaged bankruptcy unless stakeholders vote to approve the proposed reorganization plan before the bankruptcy petition is filed in federal court.

Full article in Texas Lawyer quoting Bankruptcy Attorney Rhett Campbell

"A prepack is when you actually prepare the plan, the disclosure statement, you comply with the bankruptcy solicitation rules, the SEC rules, you send it out to all the parties who are entitled to vote . . . and figure out the plan has passed. That's when you file the bankruptcy," he says.

Campbell says the Baseline bankruptcy is one of the fastest he has ever worked on. He closely follows prepacks and says he only knows of a handful of prepackaged bankruptcies that have been completed in less time. He's confident the Baseline prepack is one of the 10 fastest ever.

But Campbell has done this kind of job even more quickly: In 2006, Campbell worked on the Davis Petroleum Corp. bankruptcy, which was completed in two days. [See "Speedy Prepack Bankruptcy Fuels Davis Petroleum," Texas Lawyer, Aug. 7, 2006, page 1.]

On Nov. 18, U.S. Bankruptcy Judge Jeff Bohm of Houston approved final compensation of fees totaling $401,864 and $41,800 for expenses for Thompson & Knight from Aug. 20 through Sept. 30.

According to an affidavit Campbell filed on Aug. 28 with the firm's application to be retained as Baseline's counsel in the bankruptcy, Baseline paid the firm a $200,000 retainer in March, and paid a total of $1,263,165 from March 30 through Aug. 27, with about $145,000 of that coming out of the retainer.

Tom Kaetzer, Baseline's chief executive officer, says Thompson & Knight did a good job helping the company lay the groundwork necessary for an expeditious Chapter 11. The preparation took months, but it was worthwhile, he says.

"Our overall goal was to keep it as simple as we could," he says. "We had a very simple structure - no banks involved, no multiple debt tiers, just two bondholders that owned the majority [of the debt]."

Notes Come Due

Campbell says he started looking at Baseline's financial situation in March at the request of New York City corporate partner Matt Cohen, who has done work for Baseline for several years. Baseline, which was incorporated in 2004, is an independent oil and natural gas company with producing assets in Texas and Indiana.

Cohen did not return a telephone call seeking comment.

When announcing its bankruptcy filing in a press release on Aug. 31, Baseline said the restructuring was necessary because of its "inability" to repay some notes that were due and payable as a result of a change of control in July 2008. Also, the company noted, the impact of the nation's economic troubles on the U.S. and global credit markets, along with "steeply declining" commodity prices and results of the company's drilling program, made it difficult for the company to obtain financing to repay the notes.

As of June 30, 2009, the company's assets were $2.96 million, but its liabilities were $138.6 million, according to the release. Most of that debt was senior notes held by investment bank Jefferies & Co. of Stamford, Conn., and funds managed by hedge fund company Third Point of New York, Kaetzer wrote in a declaration filed with Baseline's petition.

In simple terms, Campbell says, the company was insolvent.

"The fair market value of the assets was far less than the value of the collateral. It had negative value, so it was insolvent," he says.

The lawyers were under the gun to come up with a way to restructure Baseline's finances, Campbell says.

"The pressure was the fact the company had no money, and the fact we were in default in regard to the . . . notes. The note-holders had the right to foreclose [on collateral] at any time. They had given us deadlines as to how long they were willing to wait," he says.

Campbell says the two large investors held more than 80 percent of the notes - secured debt - so the key to developing a plan to restructure Baseline's finances was coming to an agreement with Jefferies and Third Point.

"They got on board in principle early, but of course the devil's in the details," he says.

By May, Campbell says Baseline had an agreement worked out with Jefferies and Third Point that would restructure the debt and pay unsecured creditors in full in an effort to maintain "goodwill in the industry" so Baseline could remain an ongoing entity. Ultimately, Jefferies and Third Point put up $5 million to pay off the unsecured creditors - including vendors and royalty owners - and to provide some operating capital to keep the business going, Campbell says.

The plan created six new classes of securities, and with the Sept. 25 confirmation, Baseline became a private company largely owned by Third Point and Jefferies, Campbell says.

"We wiped out the public shareholders and issued six classes of securities and issued [them] to the senior secured lenders coming into the bankruptcy," he says.

The effective date of the move to a private company was Oct. 1.

Campbell says a "clear majority" of the equity shareholders favored the plan before it was filed, but he notes that Third Point was a large shareholder as well as a lender that owned a substantial share of the secured notes.

"If you want to talk about who was left to object, it would be a fair minority of fairly small shareholders," he says, noting that no substantive objections were filed in the bankruptcy.

On Sept. 25, Bohm confirmed the prepackaged plan of reorganization for Baseline under §1129 of the U.S. Bankruptcy Code, less than a month after Baseline filed the prepack.

"I don't think you could do it any quicker," Campbell says.

Campbell says he spent at least half of his time on the Baseline bankruptcy between March and September, but others from the firm devoted more of their hours to the project. They include bankruptcy counsel Millie Sall of Houston; New York City bankruptcy associate Demetra Liggins and partner Ira Herman; and New York City corporate counsel J. Russell Bulkeley. Others who worked on the bankruptcy include Cohen and finance partner Robert Saunders of New York City.

To date this year, Thompson & Knight lawyers spent a total of 3,014 hours on Baseline work, with most of it on the prepackaged bankruptcy, Campbell says.

Even though the preparation work took five months, Campbell says he was confident at all times that his team could find a way to successfully reorganize Baseline's debt.

"It was just working out the details. Once we had an agreement in principle from Jefferies and Third Point that they would agree to recapitalize, and No. 2, agree to put in the $5 million, we knew we could do it," he says. "We had to hurry and get it done before the company ran out of cash, but we knew we could do it."

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