Mahalo Energy's unsecured creditors object to reorganization plan

By Lisa Kerner

Charlotte, N.C., Jan. 26 - Mahalo Energy (USA) Inc.'s official committee of unsecured creditors object to the debtor's Dec. 4 plan of reorganization, according to a Monday filing with the U.S. Bankruptcy Court for the Eastern District of Oklahoma.

In the filing, the committee said the plan is a "cleverly crafted mechanism through which the officers and directors of the debtor and the debtor's parent indirectly release themselves from substantially liability [sic]" and in essence facilitates "a sale of the debtor to Ableco Finance LLC," the filing said.

While the plan proposes to fund a liquidating trust for the benefit of all unsecured creditors, the trust lacks "assets that would normally be made available to unsecured creditors in a bankruptcy case -namely, all avoidance actions and any and all actions against the officers and directors of the debtor or its parent."

The committee is asking the court to deny confirmation of the plan because "it has been proposed for an improper purpose, in bad faith and without consideration of the best interests of the creditors" and does not comply with section 1129 of the Bankruptcy Code.

Creditor treatment

As previously reported, under the plan Mahalo filed in October, treatment of creditors would include:

• Holders of U.S. Trustee fee claims, cure payment claims, professional fee claims, O&G Royalty trust claims and pre-bankruptcy administrative goods claims will be paid in full in cash;

• Priority tax claims will either be reinstated or holders will be paid in full in cash;

• The company's Wells Fargo Foothill and Ableco loans will be restructured, and holders of Wells Fargo Foothill secured claims and Ableco claims will be paid in full over time.

The Wells Fargo loan would be restructured into a three-year term loan that will bear interest at Libor plus 600 basis points, with 400 bps to be paid in cash and 200 bps in kind. The Ableco loan will be restructured into a $25.5 million term loan due immediately after the Wells Fargo loan that will bear interest at Libor plus 1,300 bps, to be paid in kind;

• Holders of Williams claims will receive $500,000 in four equal quarterly installments if they choose a compromise option. Also under this option, the company will waive its rights to payment by Williams on account of up to $600,000 of Oklahoma drilling credits, Williams' administrative claims will be satisfied and the company will enter into joint operating agreements with Williams regarding wells in which they jointly hold working interests.

If these creditors choose a non-compromise option, they will receive payment in full over a period of four to seven years and the collateral securing the claim;

• Holders of compromised O&G mechanics/materialmen claims will recover 7.5% on their claims unless they choose to opt out of this treatment, in which case they would be treated as non-compromised lien/trust claimants;

• Holders of non-compromised lien/trust claims will be paid in full over four to seven years and/or receive the collateral securing their claims;

• Secured tax claims and priority claims will either be reinstated, paid in full in cash or be satisfied with a promissory note in the amount of the claim plus interest at the Prime rate;

• Holders of general unsecured claims will receive interests in the net proceeds of a liquidating trust, which will receive either interests in undeveloped oil and gas leaseholds and $50,000 or $300,000;

• Holders of small claims will recover 30% in cash;

• Holders of subordinated claims will receive funds generated by the liquidating trust only if holders of general unsecured claims are paid in full; and

• Interest holders will receive no distribution.

Mahalo's disclosure statement was approved on Dec. 10.

According to a prior filing, the court extended Mahalo's exclusive period to solicit votes on the plan to March 25 from Dec. 18.

Mahalo Energy (USA) is a Tulsa, Okla.-based subsidiary of Calgary, Alta.-based junior unconventional natural gas producer Mahalo Energy Ltd. The subsidiary filed for bankruptcy on May 21, 2009, and its Chapter 11 case number is 09-80795.

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