Bonding companies and debtors can learn an important lesson from the U.S. Bankruptcy Court for the Middle District of Louisiana’s recent opinion on how surety bond claims are treated once a bankruptcy plan is confirmed.
In the case, Falcon V, L.L.C. (Falcon) and its affiliated debtors filed for chapter 11 bankruptcy in May 2019. Falcon engaged in oil and gas exploration and development in Louisiana. Argonaut Insurance Company (Argonaut) issued four performance bonds to fulfill Falcon’s oil and gas lease obligations. Argonaut gave Falcon $10,575,000 in bonding, of which $3.2 million was secured by cash. The key events during the bankruptcy were:
After emerging from bankruptcy, Falcon made premium payments on two of its four bonds. Argonaut demanded that Falcon either get the bonds released or provide over $7.3 million of added collateral. Falcon said this demand violated the bankruptcy discharge injunction. Argonaut asked the bankruptcy court to order that the surety bond program was an executory contract assumed by Falcon’s confirmed plan. The court denied the motion and made several key holdings:
Lessons for Bonding Companies
Surety bond programs offer financial assurance that lease obligations will be performed. These bonds are necessary for oil and gas companies. The bonding company often requires collateral, but most of the time, it’s not up to the full amount of the bonds. Once the bond is posted, the bonding company’s obligations to the debtor are complete.
Surety bond programs are not executory contracts. To protect their interests, bonding companies should be careful of the steps taken in bankruptcy. Here, Argonaut had a secured claim for Falcon’s collateral. Argonaut filed a proof of claim stating as much. Falcon filed a plan that did not give any further security to Argonaut’s claim, and Argonaut did not object. Instead, Argonaut got exactly what it asked for in its proof of claim.
Lessons for Debtors
On the flipside, debtors should be mindful of how they describe future obligations in their disclosure statement. While the confirmed plan controls, a finding of civil contempt for violation of the plan discharge requires “no fair ground of doubt.” Falcon’s statements in the disclosure statement about continuing the surety bond program created such doubt.
Please contact Rick Shelby or any other member of Phelps’ Bankruptcy team if you have questions or need compliance advice and guidance.