Title and Due Diligence in Bankruptcy Sales

Everyone is talking about bankruptcy, whether we want to or not.  Industry and financial media outlets do not go 24 hours without discussing the topic, and as we have seen recently, and unfortunately will likely continue to see for the indefinite future, the volume of bankruptcies in the US onshore oil and gas industry continues to grow.  While we hate to see this happening in the industry, bankruptcies can be a source of opportunities as well.  The bankruptcy process often begins or evolves into a sale of some or all of the debtor's assets.  This can present an opportunity for buyers to obtain wells, leases, surface sites, production and other equipment at a discount, free of encumbrances, and potentially subject to beneficial contracts that can be assigned despite contractual non-assignability provisions.   These asset sales, typically called § 363 sales, can proceed much quicker than other sales processes typical in the energy sector, and can result in eliminating successor liability.  Despite the possible benefits to a successful buyer in a § 363 bankruptcy sale, buyers should be cautious about the "quality" of the assets, specifically assets comprised of leasehold and other title interests.  Buyers will not receive a warranty of title of any degree or any other recourse for title defects or failures.  A successful purchaser in a § 363 sale is well advised to perform due diligence and utilize its own personnel, a good land services company, and/or knowledgeable title attorneys to analyze the title being acquired and assess the potential risk of loss of title (if any) to formulate an appropriate purchase price offer.  Proper planning prior to the acquisition of a debtor's assets can save the purchaser time and money in the future, by recognizing and valuing the risks and benefits of purchasing and owning the assets. 

Written by our Partners, Carly Hewett and John Childers.