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Legal Quick HitMay 2010

Your Energy Counterparty Went Bankrupt – Now What?!Mark D. Sherrill

DAY 1

1. Get in touch with commercial and credit departments. They’ll need to start running numbers almost immediately.

A. What is your exposure under each contract with the debtor? B. On a net basis, are you in-the-money or out-of-the-money? C. Is there a compelling reason why you want to continue trading with this debtor? D. Get a report of physical deliveries made to the debtor –

within 20 days before the petition date, AND within 45 days before the petition date.

2. Have lawyers begin analyzing all contracts and confirmations with the debtor.

A. Do you qualify for safe-harbor protections? Are you a forward contract merchant, swap participant or other protected party? Which of your contracts qualify as forward contracts, swap agreements or other protected contracts?

B. In the trading context, safe-harbor protections often apply. If so, then you may exercise contractual rights to liquidate, terminate or accelerate – which would be prohibited for other types of creditors and counterparties. Ensure that the right to terminate because of a bankruptcy filing exists in the contracts. Decide whether to terminate.

C. Prepare termination notices in accordance with contractual specifications. Not essential that termination goes out on Day 1 – but time is of the essence, because case law indicates that

you lose the right after some period of time.D. If contracts do not contain termination rights tied to bankruptcy, analyze alternative triggers (e.g., adequate

assurances, payment defaults). E. Analyze contractual setoff rights.

Will affect liquidation of safe-harbor contracts. Broad setoff rights are helpful, but the recent Lehman Brothers opinion calls into question some aspects of broad setoff rights.

Cross-product netting should be safe. Cross-affiliate netting is now questionable.

3. Send reclamation requests (for debtors that took physical delivery).

A. Bankruptcy Code allows for reclamation of identifiable goods received by the debtor while insolvent, and within 45 days before the petition date.

B. Statute allows a longer period of time for sending requests, but the best practice is to do so ASAP – before goods are resold.

C. Belt and suspenders: send to the debtor and file notice on the bankruptcy docket.D. In the energy context, “identifiable” may be challenging, but not impossible.

4. Prepare traders to get market quotations.

A. To liquidate contracts, many contracts require market quotations for forward positions. Call brokers to ask for a commercially reasonable amount that the third parties would pay to, or receive from, a third party in a replacement transaction.

B. You do not need to enter into an actual transaction just to get the quote.C. Generally, quotations should be as of the date that termination became effective.D. Trader preparation may include detailing acceptable brokers to contact, determining a means of communication, and

preparing work sheets for them to complete to create a record. Stress good faith and commercially reasonable efforts.E. Traders should not mention the bankruptcy or the purpose of the quote.

DAY 2 AND BEYOND

1. 503(b)(9) claims (again, for debtors that took physical delivery)

A. Section 503(b)(9) provides for an administrative expense claim for the “value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”

B. No legal requirement to getting a claim filed in the near term, but courts sometimes impose additional requirements. It is potentially beneficial to have a claim on file first.

C. Expect resistance on a variety of issues; e.g., the meaning of value, goods, and ordinary course.D. Nevertheless, a significant benefit to jumping through these hoops is 100 cents on the dollar.

2. Send calculations for settlement payments

A. Analyze contracts for the period of time in which calculations must be sent – often just within a commercially reasonable amount of time.

B. Follow the contractual requirements for the methodology of calculations.C. Note that interest may begin accruing on payables from the date that calculations are sent.

3. Trader motions

A. If the debtor seeks to continue its trading business, it might craft incentives for counterparties to continue trading. B. For these procedures to work, the debtor will generally need to make contact before it files the bankruptcy petition

(and counterparties begin terminating).

4. Critical vendor/supplier motions.

A. Under narrow circumstances, a court might approve a debtor’s proposal to pay “critical vendors” or “critical suppliers” 100% immediately in exchange for their continued business.

B. As with trader motions, debtors will usually contact those parties that qualify. C. Read the details carefully – not always worth the quid pro quo.

5. Utility motions

A. Utilities cannot alter, refuse or discontinue service during the initial 20 days of bankruptcy – and cannot do so thereafter if the debtor provides assurance of payments.

B. What is a utility? Debtors are often aggressive in labeling any energy company as a utility, which would strip away termination rights.

C. Often can be resolved consensually – but need to be vigilant.

6. Filing claims

A. No set deadline in Chapter 11 cases. Instead, watch for the court to set a claims bar date. There may be a separate bar date for administrative expense claims, including 503(b)(9) claims.

B. If you could conceivably have any claim, get something on file before the bar date – preferably with broad language and reservations of rights. You can often amend the claim after the bar date, but you’ll be fighting an uphill battle if you miss the deadline.

SUTHERL AND A SB ILL & BRENNAN LLP www. su the r l and . com

Mark D. Sherrill Counsel 202.383.0360 mark.sherrill@sutherland.com Mark Sherrill is a member of Sutherland’s Energy and Environmental Practice Group, where he focuses his practice on counseling debtors and creditors in financial restructurings, litigation and workouts, and on providing advice on derivatives to energy companies, hedge funds and broker-dealers.

Mark’s experience includes representing debtors, creditors and energy trading counterparties in energy bankruptcy cases including Enron, SemCrude, National Energy & Gas Transmission, Mirant, Calpine, Androscoggin and En Re; serving as counsel to commodities trading entities in connection with bankruptcy cases such as Lehman Brothers, Horsehead Industries, American Smelting and Refining Company (ASARCO), United Air Lines and Refco; counseling post-confirmation liquidation trusts for NEGT Energy Trading, Empire Funding Corp. and Drypers Corp.; and representing debtors and creditors in bankruptcy-related litigation and appeals, in fields ranging from the airline industry to time-share resorts.

Mark is a member of both the American Bankruptcy Institute and the International Swaps and Derivatives Association. He also frequently publishes articles and speaks on bankruptcy issues.

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