Marion Lender Wants 'Bad-Faith' Ch. 11 Dismissed
By Andrew Scurria
New York (November 19, 2014, 7:28 PM ET) -- A distressed investor owed $34 million by the bankrupt U.S. wing of Australia’s Marion Energy Ltd. pushed a judge on Tuesday to throw out a Chapter 11 case initiated by the debtor to prevent a forced liquidation of its sole asset, an underperforming Utah natural gas field.
Castlelake LP, the sole secured lender to Marion Energy Inc., called the bankruptcy petition a bad-faith attempt to abuse the Chapter 11 process and evade the appointment of a receiver that Marion had agreed to just weeks before.
Marion sought bankruptcy protection days before Castlelake was scheduled to install the receiver. By blocking the negotiated sale, Marion is attempting to impair Castlelake’s collateral rights to enhance the recovery of the Australian parent company, the debtor’s sole equity holder, according to the motion.
“In other words, the debtor is gambling with the value of its secured creditor’s security for the benefit of its shareholders,” Castlelake said.
Nearly all of Marion’s value is tied up in the Clear Creek Field in Utah, a natural gas site that has delivered disappointing production results since the company began exploring in 2005. Marion has blamed technical hang-ups, brutal winter weather and liquidity constraints for the problems.
Castlelake, an investment manager with $4.7 billion in assets, is pointing the finger at internal mismanagement and insufficient funding from Marion’s Australian parent.
Lagging production left Marion unable to meet the conditions of a credit facility with Castlelake, which declared a default in February when the field missed required gas production milestones, according to court records. The creditor put off taking action against Marion for nine months to give it an opportunity to refinance its facility or find a buyer for the field but refused to extend that forbearance agreement into November.
That prompted Marion to file for bankruptcy on Oct. 31 in Utah as a defensive move against a receivership and liquidation. In court papers, Marion argued that a hurried 60-day out-of-court sale process would not generate enough of a return to pay back Castlelake and a $125 million unsecured debt to the Australian parent.
Marion has pegged the value of the Clear Creek Field at $156 million based on studies of its underground reserves, a number Castlelake contends is wildly inflated.
“There is a great deal of uncertainty whether such value can be realized in the quantities or within the time frame assumed,” the motion said. “Marion’s effort to prove the value of the Clear Creek Field over the next 8 months will jeopardize the current, albeit uncertain and therefore lesser value of [Castlelake’s] security.”
Castlelake is also fighting the debtor’s bid to tap a $4.2 million bankruptcy loan from KM Custodians Pty Ltd., which holds a stake in the Australian parent and has a claim against the debtor based on a debt guaranty.
U.S. Bankruptcy Judge Joel T. Marker has scheduled a Dec. 1 hearing to consider the dismissal motion and the proposed debtor-in-possession financing. Castlelake says that KM should not be permitted to take a super-priority lien since it already has a substantial interest in the outcome of the case and doesn’t need to be induced to provide financing with enhanced collateral rights.
"Marion’s proposal to put [Castlelake’s] collateral at risk when KM is unwilling to provide junior DIP financing, despite its substantial direct and indirect interests in the field and Marion, is repugnant to the purpose and spirit of the Bankruptcy Code,” Castlelake said.
Under the proposed DIP loan, a successful sale of the field would entitle KM to one-fifth of the proceeds left over after other creditors are paid back.
Marion borrowed $25 million from Castlelake in 2013 to bring the field back on line after sitting idle for two years. At that time, Castlelake said, Marion was in far worse shape than it is now, with $88 million in negative equity and at least 18 lawsuits or judgments pending against it.
The payment-in-kind loan, which matures in 2016, also provides for a disputed make-whole premium in the event of acceleration that Castlelake estimates at $16 million, according to court records.
Castlelake is represented by Mark E. Hindley, Bria L. Mertens and David B. Levant of Stoel Rives LLP.
Marion is represented by J. Thomas Beckett and Brian M. Rothschild of Parsons Behle & Latimer.
The case is In re: Marion Energy Ltd., case number 2:14-bk-31632, in the U.S. Bankruptcy Court for the District of Utah.
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