Delta Petroleum's $1.5 million breakup fee for Laramie OK'd by court

By Jim Witters

Wilmington, Del., June 4 - Delta Petroleum Corp. received court approval June 4 to pay a $1.5 million breakup fee to plan sponsor Laramie Energy II, LLC under certain conditions.

Judge Kevin J. Carey approved the fee over the objection of the U.S. Trustee's Office during a hearing in the U.S. Bankruptcy Court for the District of Delaware.

As previously reported, Laramie received court approval as plan sponsor on May 8.

The reorganization plan calls for the formation of a joint venture between Delta and Laramie.

In a declaration filed just before the June 4 hearing, Laramie declared it might not go forward with the proposed joint venture if the breakup fee was not approved.

Trustee objection

Tiiara N.A. Patton, representing Region 3 trustee Roberta A. DeAngelis, argued that Laramie's participation in the bidding process was evidence that the breakup fee was not needed to induce Laramie to bid.

The trustee also said the payment of a breakup fee to Laramie is "a disguised liquidated damage payment, which would be paid to Laramie if the sale fails to close because of a myriad of reasons, including, but not limited to, the conversion of these cases to cases under Chapter 7, or if an order granting relief from the automatic stay is entered with respect to the Delta assets."

The approval of a liquidated damage payment is not appropriate unless the party seeking payment of such damages establishes and meets the burden for such relief, which has not occurred in these cases, the trustee argued.

Debtor's reasoning

Delta attorney Kathryn Coleman agreed that the payment could be a liquidated damage payment. But, she said, the damages incurred should Delta breach the agreement would be capped at $1.5 million.

Without the breakup fee agreement, Laramie could recover far more money in actual damages, she said.

Laramie already has incurred $900,000 in expenses related to the proposed plan and resulting joint venture, according to court documents.

Coleman said that, if Laramie walks away from the deal, finding another plan sponsor would be "a harsh prospect," and any new sponsor likely would demand a breakup fee larger than the $1.5 million.

Judge's opinion

In granting the breakup fee, Carey acknowledged that, in most cases, seeking a breakup fee after bidding is complete would not be appropriate.

Calling the Delta case "a hybrid," Carey said that the emergence of a plan sponsor was "a really good thing" in the case.

The existence of a plan sponsor eliminates the possibility of administrative insolvency and "puts the issues to the creditors for a vote," Carey said.

The limit on damages is also a benefit to the debtor's estate, he said.

A hearing on the approval of the disclosure statement is scheduled for July 5. Coleman said the company hopes for plan confirmation in mid- to late August.

Terms of breakup fee

Laramie may receive the breakup fee only if:

• Delta terminates the contribution agreement to enter into an alternative transaction (including a plan with another sponsor) or indicates in a court filing or any other publicly available or disseminated document that it wishes to pursue, or seek the court's approval of, an alternative transaction;

• Laramie terminates the agreement because Delta has breached a covenant, representation or warranty that is not cured by the earlier of five days after notice of such breach or the closing of the transaction;

• Delta terminates the agreement and agrees that the reason for such termination gives rise to payment of the breakup fee;

• The plan is not confirmed within the timeframe set forth in the agreement;

• The plan is amended in a public filing and such amendment is materially adverse to Laramie;

• Delta fails to deliver executed counterparts of the agreement, any document contemplated by the joint venture company formation summary, or any other operative document;

• Delta's bankruptcy case is converted to a case under Chapter 7 of the bankruptcy code prior to the closing of the transaction;

• The transaction fails to close within 20 business days after the plan confirmation order has become final; or

• An order granting relief from the automatic stay is entered with respect to any of the Delta assets prior to the closing of the transaction.

Delta Petroleum, a Denver-based oil and gas exploration and development company, filed for bankruptcy on Dec. 15. Its Chapter 11 case number is 11-14006.

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