Court Opinion

ID: 9380644
Source: CourtListenerOpinion
Date Created: 2023-03-20 19:02:39.738266+00
Date Added: 2024-06-11T17:17:25.907708
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

                                           )
IN RE RIVIERA RESOURCES, INC.              )   C.A. No. 2022-0862-JTL
                                           )

     OPINION ADDRESSING APPOINTMENT OF GUARDIAN AD LITEM
                     UNDER SECTION 280(a)(3)

                          Date Submitted: February 15, 2023
                           Date Decided: March 20, 2023

Kevin M. Gallagher, Alexander M. Krischik, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Attorneys for Petitioner Riviera Resources, Inc.

Joseph L. Christensen, CHRISTENSEN & DOUGHERTY LLP, Wilmington, Delaware;
R. Brent Blackstock, Courteney R. Sturgell, BRENT BLACKSTOCK PLC, Tulsa,
Oklahoma; Attorneys for Claimants Prosser Group Investments II, LLC and Magness
Energy, LLC.

Willie-Jay:Smith-Bey III, Los Angeles, California; Pro Se Claimant.

LASTER, V.C.
       From April 2018 until December 2020, Riviera Resources, Inc. (the “Company”)

operated an upstream petrochemicals business that involved acquiring and operating

existing oil and gas wells. The Company owned thousands of wells scattered across

Colorado, Illinois, Kansas, Michigan, Louisiana, New Mexico, Oklahoma, and Texas.

       After selling off its operating assets, the Company dissolved and elected to wind

up its affairs using the optional, court-supervised process contemplated by Sections 280

and 281(a) of the Delaware General Corporation Law (the “DGCL”). That process

involves identifying and giving notice to known claimants, accepting or rejecting claims,

and paying or establishing reserves for the accepted claims. The dissolved corporation

can petition the Court of Chancery to determine the amount of any reserves where the

form and amount of security is disputed. The dissolved corporation must petition the

Court of Chancery to determine an amount and form of security which will be reasonably

likely to be sufficient to provide compensation for unknown claims which, based on facts

known to the corporation, are likely to arise or to become known to the corporation

within five years after the date of the dissolution, or a longer time of up to ten years if

required by the court.

       The Company and its counsel have done an exemplary job sending notices to

known claimants, accepting and rejecting claims, and establishing reserves for known

claims. During a hearing on the Company’s petition, the Company’s lone remaining

officer testified credibly and forthrightly about the process. At the conclusion of the

hearing, the court adopted the Company’s proposed forms and amounts of security for all

known claims.
       The only issue that remains is the amount of security for unknown claims. The

Company seeks a determination that $10 million is reasonably likely to provide sufficient

security for unknown claims that have not yet arisen or are likely to arise or to become

known to the Company during the statutory default period of five years. Implicit in this

request is a determination that a longer period is unnecessary.

       The DGCL authorizes the court to appoint a guardian ad litem to represent the

interests of unknown claimants and to assist the court in determining whether the

petitioner’s proposed amount and form of security is sufficient. The Delaware courts

have not considered how a court should exercise its discretion in determining whether to

make an appointment. After considering related areas of the law, this decision concludes

that discretion should be exercised freely in favor of appointing a guardian, particularly

where the guardian can supplement the efforts of counsel, bring to the court’s attention

broader legal or policy implications, and assist the court in avoiding error.

       Those considerations apply in this case. The Company operated in the oil and gas

industry, so unknown environmental claims present an obvious risk. The Company did

not address that issue. When the court raised it, the executive testified that the buyers of

the Company’s assets assumed any risk of environmental claims. That is helpful, but it

does not mean that the Company does not face potential liability. The Company also

retained the risk for the non-operating wells that it did not sell.

       The executive did not know of any method of estimating the risk of environmental

claims associated with oil and gas wells, but someone must. The global petrochemical

industry involves some of the largest companies in the world and operates in a $500

                                               2
billion market. For the past forty years, the industry has faced the risk of significant

environmental liabilities. It is hard to believe that men and women with science degrees

(as opposed to JDs) have not examined the rates at which oil and gas wells leak and

developed methods for assessing the likelihood of leaks across a portfolio of wells. It is

hard to believe that accountants, actuaries, and statisticians have not developed ways of

estimating the contingent liabilities associated with those risks. Perhaps this corner of the

map of human knowledge truly remains marked with the warning, “Here Be Dragons.”

At this point, no one has attempted to scout the terrain.

       The lack of a meaningful record about environmental claims makes this case

suitable for the appointment of a guardian ad litem, who will play an important role in

supplementing the efforts of counsel. The guardian can further assist the court by

identifying broader the legal or policy implications raised by the case.

       The guardian will represent the interests of unknown claimants, with a particular

focus on potential environmental claimants. The guardian’s work will proceed in stages.

The initial task will be to contact universities with petroleum engineers, geologists, and

other people of science, speak with the department heads or other knowledgeable

individuals, and find out if there are ways of assessing this risk. The guardian also will

contact firms with expertise in accounting for contingent liabilities to explore whether it

is possible to put a number on the risk. The guardian need not search to the ends of the

earth. A reasonable inquiry will suffice.

       If the answer is “no, there are no methods,” then the guardian can report back with

that information and the court can take that into account. If it turns out that methods exist,

                                              3
then the guardian will report on what applying them would entail and the level of insight

that the methods could provide. Information is costly, and it would not make sense to

expend large amounts for little benefit. But were there a method that could provide cost-

effective support for meaningful assessment, then that would be worth pursuing.

        The Company has not carried its burden of proof on the form and amount of a

reserve for unknown claims. The Company’s request for an order approving its proposed

form and amount of security is held in abeyance. The court will implement this decision

and appoint a guardian by separate order.

                          I.      FACTUAL BACKGROUND

        Trial took place on February 15, 2023. The documentary record consists of thirty-

three exhibits. One witness testified live. The evidence supports the following findings of

fact.

A.      Linn Energy, LLC

        The Company is one of several corporate descendants of Linn Energy, LLC

(“Original Linn”). That entity had the distinction of being the first upstream

petrochemical business that issued units to the public and was treated for tax purposes as

a master limited partnership (an “MLP”). Midstream petrochemical businesses have long

made use of the MLP form, but the Company was the first upstream business to deploy it.

        Original Linn acquired and operated mature assets that were already producing oil

or natural gas. The resulting business generated consistent free cash flows and supported

quarterly distributions for unitholders.

                                            4
      As the first publicly traded upstream MLP, Original Linn experienced early

success. Over time, Original Linn assembled a geographically diverse asset base located

in oil and gas producing regions throughout the United States, including in the Hugoton

Basin, the Permian Basin, the Rockies, Oklahoma, Southern Texas, Eastern Texas,

Northern Louisiana, California, Michigan, and Illinois.

      Other operators saw the benefits of Original Linn’s business model, and twelve

other upstream MLPs emerged. As the market became crowded, competition for assets

increased. The industry suffered reversals from 2012 until 2016, when commodity prices

for oil and gas decreased significantly. By 2017, all of the publicly traded upstream

MLPs had filed for bankruptcy, including Original Linn.

B.    Original Linn’s Successors

      Original Linn and its affiliates filed for bankruptcy in May 2016. At the time,

Original Linn’s creditor profile consisted of senior secured bank debt, publicly traded

bonds, and miscellaneous trade debt. Two distressed debt funds had acquired virtually all

of the Company’s bonds. The bonds were the fulcrum security in the bankruptcy, and the

distressed debt funds spearheaded the development of Original Linn’s plan of

reorganization.

      In January 2017, the bankruptcy court approved the plan of reorganization. In

February, Original Linn emerged from bankruptcy.

      Viewed at a high level, the plan of reorganization resulted in the transfer of the

bulk of Original Linn’s operating business, free of any liabilities, to a clean, newly

formed entity called Linn Inc. The new entity ended up only existing for one year and

                                            5
functioned merely to channel assets to the Company, so this decision calls it “Transitional

Linn.”

         Based on the fact that it would own Original Linn’s assets, Transitional Linn

raised capital in the form of secured debt. The holders of Original Linn’s bonds

(primarily the distressed debt funds) exchanged those securities for bonds issued by

Transitional Linn.

         Meanwhile, Original Linn transferred its assets to Transitional Linn in two steps.

Original Linn first transferred its assets to a newly formed subsidiary, Linn Energy

Holdco II LLC (“HoldCo”). HoldCo then sold the assets to Transitional Linn in return for

$530 million in cash plus a formula-generated number of shares of stock of Transitional

Linn, but in no event more than 49.90% of Transitional Linn’s equity.

         After receiving the cash and stock from Transitional Linn, HoldCo distributed the

cash and stock to Original Linn, and Original Linn dissolved. In the resulting liquidation,

Original Linn’s senior secured creditors received the cash and stock.

         After Transitional Linn had acquired Original Linn’s assets from HoldCo, the

holders of Transitional Linn’s unsecured bonds (primarily the distressed debt funds)

converted their debt into shares of common stock. Transitional Linn emerged with a

capital structure consisting of secured debt and common stock. The distressed debt funds

who had bought up Original Linn’s unsecured debt now owned a majority of Transitional

Linn’s equity.

                                             6
       To raise additional capital, Transitional Linn sold all of its properties located in

California and Southern Texas to third parties. This seems to have happened through a

series of transactions rather than as one single transaction.

       In 2018, Transitional Linn decided to reorganize again. Transitional Linn formed

the Company, transferred all of its remaining assets to the Company, and took the

Company public through an offering of 25% of its stock. Transitional Linn then spun off

the Company by distributing the remaining 75% of the Company’s stock to Transitional

Linn’s stockholders.

       Through this process, the Company ended up owning the bulk of Original Linn’s

operating business, free of the debts and other liabilities that had burdened Original Linn.

The former creditors of Original Linn, including the distressed debt funds, owned over

75% of the shares of a publicly traded entity. The Company’s board of directors (the

“Board”) was populated with representatives of the distressed debt funds.

C.     The Board Decides To Liquidate The Company.

       Except for the transferred properties located in California and Southern Texas, the

Company operated the same business as Original Linn. Its assets were designed to

generate cash flow that could be used to support distributions to income-oriented

investors. The Company’s stockholder base, however, consisted predominantly of

Original Linn’s former creditors. The public float was relatively small, and the stock

traded poorly.

       The distressed debt funds who controlled the Board had hoped to use the public

markets as a source of liquidity. For that to happen, they needed to increase the depth of

                                              7
the public float. Various financial advisors evaluated a range of options, including (i)

moving the Company’s listing to a major exchange and completing a secondary offering,

(ii) merging with other upstream operators, and (iii) completing asset acquisitions to

increase the scale of the business.

       The Board ultimately decided not to pursue any of those options, choosing instead

to liquidate the Company’s assets and return capital to stockholders through a series of

stock repurchases and cash dividends.

       Between 2018 and 2020, the Company sold off the bulk of the Company’s assets.

By July 2020, the only assets the Company owned were properties in Northern Louisiana

and Oklahoma and a natural gas processing facility owned by a subsidiary. By August,

the Company had entered into definitive agreements to sell those remaining assets.

       By selling off substantially all of its assets, the Company generated a significant

pool of cash to distribute to its stockholders. In 2019, the Company distributed

approximately $250 million. Dkt. 1 ¶ 43. In 2020, the Company distributed

approximately $180 million to its stockholders. Id.

D.     This Proceeding

       With its assets reduced to approximately $72 million, the Board opted to dissolve

and follow the optional, court-supervised path contemplated by Sections 280 and 281(a)

of the DGCL (the “Elective Path”). On October 12, 2020, the Board approved a

resolution calling for the Company’s dissolution. That same day, the Company’s

stockholders acted by written consent to approve the dissolution.

                                            8
       At a high level, the Elective Path calls for the dissolved corporation to give notice

to known creditors so that they can present their claims by a specified date. The dissolved

corporation rejects or accepts the presented claims and either pays or offers security for

the claims it accepts. If a party’s claim is rejected, the party must file suit within a

statutorily specified period. If the party disputes the form or amount of security, then the

dissolved corporation can file a petition seeking judicial determinations of the amount

and form of security appropriate for the claim. The dissolved corporation must petition

for judicial determinations of the amount and form of security that will be reasonably

likely to be sufficient for unknown claims.

       The Company had significant known claims. Against assets of approximately $72

million, the Company identified liabilities of approximately $45 million. The Company’s

net assets were thus approximately $27 million.

       Between December 21 and December 31, 2020, the Company mailed notices to

more than 78,600 actual and potential claimants to notify them of the Company’s

dissolution and the deadline to assert a claim. On December 22, the Company published

notice of its dissolution in the News Journal, a newspaper of general circulation in the

county where the Company’s registered agent is located, and in USA Today. On

December 29, the Company published notice of its dissolution in the Houston Chronicle,

a newspaper of general circulation in the county where the Company’s principal place of

business is located.

       On September 26, 2022, the Company filed a petition seeking judicial

determinations regarding the amount and form of security reasonably likely to be

                                              9
sufficient to provide compensation for (i) claims that were the subject of a pending

action, suit, or proceeding to which the Company is a party, and (ii) other claims asserted

in response to the Company’s notices, to the extent the parties had not reached

agreement. As of the date of the filing of the petition, the Company had received 295

claim letters responding to the Company’s notice.

       As required by Section 280(c)(3), the Company also sought a judicial

determination regarding the amount of security reasonably likely to be sufficient for

claims that had not been made known to the Company, or that have not yet arisen but are

likely to arise or become known within five years after the date of dissolution of the

Company, or a longer period of not greater than ten years as determined by the Court of

Chancery. The Company proposed to reserve $10 million for unknown claims.

       Finally, the Company sought judicial approval for its reserve for the costs and

expenses necessary to complete the winding up process.

       The Company estimated that if the Court adopted its proposals, then the Company

could distribute approximately $18.8 million to its stockholders. To its credit, the

Company did not seek an interim distribution. That type of motion forces a court to make

difficult determinations regarding security on a paper record. Doing so exacerbates the

risk that the court will authorize an excessive distribution and leave claimants with

insufficient security. See In re Altaba, Inc., 241 A.3d 768, 775–78 (Del. Ch. 2020).

       The Company was able to resolve the vast majority of claims without judicial

involvement. The Company rejected numerous claims, and the holders of those claims

                                            10
did not pursue timely relief. The Company reached agreement on the amount and form of

security necessary to resolve many other claims.

E.     The Evidentiary Hearing

       The court scheduled an evidentiary hearing for February 15, 2023. By the time of

the hearing, only three issues remained.

       First, claimants Prosser Group Investments II, LLC and Magness Energy, LLC

(together, “Prosser”) opposed the Company’s proposed reserve of $300,000 for potential

liability stemming from litigation between the Company and Prosser. Dkt. 9. Prosser

requested a reserve of $1 million. Id. ¶ 36. At the hearing, the Company agreed to raise

its reserve for litigation with Prosser to $1 million, mooting Prosser’s objection.

       Second, claimant Willie-Jay:Smith-Bey III opposed the Company’s proposed

reserve of zero dollars for a claim to purported mineral rights associated with one of the

Company’s properties in Texas. Dkt. 7. He requested a reserve of $5.5 million.

       Third, the Company asked the court to determine that a reserve of $10 million was

reasonably likely to provide sufficient security for unknown claims that have not yet

arisen but are likely to arise or to become known to the Company during the statutory

default period of five years.

       The only witness who testified during the hearing was David Rottino, the

Company’s President and CEO. He is the Company’s sole remaining employee. He also

serves on the Board.

                                             11
      Rottino has over two decades of experience in the oil and gas industry. He is

plainly knowledgeable about the Company and its industry, and the court found Rottino’s

testimony credible.

      Based on the Company’s evidentiary showing, the court adopted the Company’s

proposals for the amount and form of security for all known claims and potential

liabilities attributable to identifiable claimants. The only disputed amount was Smith-

Bey’s claim, and the court agreed with the Company that an earmarked reserve for that

claim was unnecessary, effectively approving a reserve of zero. In total, the court

approved a reserve in the amount of $1 million for the known claimants. Dkt. 14.

      The court took under advisement the Company’s proposal for security for wind-up

costs and unknown claims. During the hearing, Rottino said little about unknown claims

and nothing about the possibility of environmental claims. When the court asked about

the subject, Rottino explained that the acquirers of the Company’s assets had assumed the

risk of environmental liabilities associated with those claims and committed contractually

to indemnify the Company. He did not know of any method for assessing the risk of

environmental claims.

                             II.     LEGAL ANALYSIS

      Before 1987, Delaware lacked a statutory mechanism for obtaining a judicial

determination of the form and amount of security that would be reasonably likely to be

sufficient to provide for unknown claims. Directors were responsible for establishing a

form and amount of security that would be reasonable before distributing remaining

amounts to stockholders. If the amount of security proved inadequate, then the claimants

                                           12
could attempt to recover from the directors. See In re Transamerica Airlines, Inc., 2006

WL 587846, at *7 (Del. Ch. Feb. 28, 2006). The stockholders who received distributions

also faced the risk that claimants could claw back amounts they had received. 2 David A.

Drexler et al., Delaware Corporation Law and Practice § 38.05[7], at 38-24 to 24.1

(2022).

       Historically, the absence of a procedure “was not a cause of great concern because

of the applicability of limitations periods and the relative ease of determining the

existence and extent of such claims.” Id. § 38.05[5], at 38-16. Over time, however, the

scope of corporate liability expanded, and the protection provided by statutes of

limitation became less certain. Id. The legal domains where the risk of liability increased

included environmental pollution, defective products, and other mass torts. Id.

       In 1987, the Delaware General Assembly sought to address these risks by enacting

Sections 280, 281, and 282 of the DGCL. Those sections established two paths: (i) a

default path, in which directors determine a form and amount of security without judicial

investment, and (ii) the Elective Path, under which a corporation could obtain a judicial

determination up front regarding an amount of security that was reasonably likely to be

sufficient for unknown claims. See In re RegO Co., 623 A.2d 92, 104 (Del. Ch. 1992).

The goal of the Elective Path is “to afford fair treatment to foreseeable future, yet

unknown, claimants of a dissolved corporation,” while at the same time providing

protection for directors and stockholders. Transamerica, 2006 WL 587846, at *7.

       Section 280(c)(3) states that when a dissolved corporation follows the Elective

Path, the corporation

                                            13
       shall petition the Court of Chancery to determine the amount and form of
       security which will be reasonably likely to be sufficient to provide
       compensation for claims that have not been made known to the corporation
       or that have not arisen but that, based on facts known to the corporation or
       successor entity, are likely to arise or to become known to the corporation
       or successor entity within 5 years after the date of dissolution or such
       longer period of time as the Court of Chancery may determine not to
       exceed 10 years after the date of dissolution.

8 Del. C. § 280(c)(3).

       The Delaware courts have not previously interpreted the meaning of the

“reasonably likely to be sufficient” standard in Section 280(c)(3), but the same language

appears in Section 280(c)(1). That section requires that the Court of Chancery “determine

the amount and form of security that will be reasonably likely to be sufficient to provide

compensation for any claim against the corporation which is the subject of a pending

action, suit or proceeding to which the corporation is a party . . . .” 8 Del. C. § 280(c)(1).

The court has referred to the “reasonably likely to be sufficient” standard as the

“Reasonableness Standard.” See In re Altaba, Inc., 264 A.3d 1138, 1162 (Del. Ch. 2021).

       The plain meaning of the Reasonableness Standard starts with the concept of

sufficiency. Black’s Law Dictionary defines “sufficient” to mean “[a]dequate; of such

quality, number, force, or value as is necessary for a given purpose.” Sufficient, Black’s

Law Dictionary (11th ed. 2019). The Reasonableness Standard thus looks to whether the

amount of security is adequate to provide compensation for the claimant.

       Importantly, the Reasonableness Standard does not require an amount of security

that “will be sufficient.” Cf. 8 Del. C. § 280(c)(2). The Reasonableness Standard calls for

an amount of security that is “reasonably likely to be sufficient,” thereby qualifying the

                                             14
concept of sufficiency with the adverbial phrase “reasonably likely.” Something is

“likely” to occur if it is more probable than not to occur. See, e.g., Likely, Black’s Law

Dictionary (11th ed. 2019) (“[a]pparently true or real; probable” or “[s]howing a strong

tendency; reasonably expected”). The Reasonableness Standard thus calls for an amount

of security that generally will be sufficient across a range of possible outcomes.

       The Reasonableness Standard takes the additional step of modifying the adverb

“likely” with the adverb “reasonably.” In this context, the additional adverb has two

functions. First, it emphasizes the importance of judicial judgment. See Altaba, 264 A.3d

at 1164–65. Second, the adverb makes clear that the court must make an objective

determination, as in what “a reasonable person would believe,” rather than deferring to

the good faith judgment of the liquidating agent. Id. at 1164 n.19. “Due respect for the

expertise and authority of corporate directors does not dictate deference to their judgment

on the question of what constitutes adequate protections to various competing classes of

claimants on dissolution.” RegO, 623 A.2d at 109; see Boesky v. CX P’rs, L.P., 1988 WL

42250, at *16 (Del. Ch. Apr. 28, 1988) (“[A] liquidating trustee’s judgment as to what

constitutes adequate security, even when made in good faith and advisedly is not entitled

to the powerful effects of the business judgment rule; and that in such a setting, it is

inescapably the function of the court that supervises the liquidation to make an

independent judgment of the adequacy of such security when it is challenged.”).

       The difficulties in setting an amount of security for unknown claims are manifold.

One obvious problem is that the claims are unknown. That makes it challenging to

envision what types of claims might arise.

                                             15
       A second obvious problem is that the company seeking a judicial determination

has little incentive to think hard about what types of claims might arise. This case

provides an example. A petrochemical company did not provide any briefing or

testimony on the issue of environmental risk.

       A third and equally obvious problem is that even if the court can envision the

types of claims that might arise, the court may err in setting the amount of security. One

possibility is that the court may set the reserve too low. When a corporation has dissolved

and entered the winding up process, stockholders are entitled to only “any remaining

assets” after all creditor claims are satisfied. 8 Del. C. § 278. The corporation’s statutory

obligation to use its assets to satisfy creditors before distributing “any remaining assets”

to stockholders codified the absolute priority rule, which holds that “to the extent of their

debts creditors are entitled to priority over stockholders against all the property of an

insolvent corporation.” Case v. L.A. Lumber Prods. Co., 308 U.S. 106, 116 (1939)

(quoting Kan. City Terminal Ry. Co. v. Cent. Union Tr. Co. of N.Y., 271 U.S. 445, 455

(1926)). If a reserve or other provision for payment does not prove sufficient for a

creditor’s claim, and if stockholders have received a liquidating distribution based on an

amount of security that later proves inadequate, then those stockholders have jumped the

line and received a distribution to which they were not entitled, contravening the rule of

absolute priority. Altaba, 264 A.3d at 1155.

       A less readily apparent problem is that the court may set the amount too high. If

the court overestimates the amount of security required, then excess assets that could be

used productively will be tied up unnecessarily in the winding up process. If the

                                               16
corporation has excess assets in the winding up process, then creditors would not be

harmed by distributions drawn from the excess. Society benefits from having those assets

redeployed to other uses. Id.

       When navigating between the twin risks of too much or too little security, the

policies governing the winding up of a corporation warrant erring on the side of too

much. While setting the amount of security too high risks delaying the productive use of

assets, setting the amount too low risks foreclosing the possibility of legitimate claimants

receiving compensation. That is particularly true for unknown claims, where the limits of

human cognition and the incentive structure of a dissolution proceeding make it likely

that some categories of claims will be missed.

       Erring on the side of creditors also helps prevent the opportunistic use of the

Elective Path. Directors owe duties to the corporation for the ultimate benefit of its

stockholders as residual claimants. In re Trados Inc. S’holder Litig., 73 A.3d 17, 40–41

(Del. Ch. 2013). The pull of fiduciary obligation thus calls on directors to favor the

common stockholders. See Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL

1437308, at *17–20 (Del. Ch. Apr. 14, 2017). And directors have a natural affinity for

stockholders, because that is the constituency who elects them. See Stephen M.

Banbridge, The Profit Motive: Defending Shareholder Value Maximization 73–74 (2023).

       When a company faces significant future liabilities, such as mass tort claims, the

corporation “might try to sell its operations in order to pay off current creditors, and then

distribute any residuals to shareholders. In so doing, only the contract creditors and those

tort creditors who already filed suit would have their claims satisfied.” Kevin M. Warsh,

                                             17
Corporate Spinoffs and Mass Tort Liability, 1995 Colum. Bus. L. Rev. 675, 692 (1995)

(footnotes omitted). A spinoff can be used to further insulate assets from contingent tort

claimants. See id. at 709–12; see generally John C. Heenan, Graceful Maneuvering:

Corporate Avoidance of Liability Through Bankruptcy and Corporate Law, 65 Mont. L.

Rev. 99 (2004). Through a bankruptcy liquidation or state court dissolution process, a

corporation may seek leave to make liquidating distributions to equity holders that will

limit the amount of assets available to future claimants. The fact that a court has approved

the amount of the reserves, makes it nigh impossible for a future claimant to challenge

the distribution. Altaba, 264 A.3d at 1159. The end result is that equity holders receive

distributions and externalize risks on the future claimants and society.

       The Company is the successor entity that emerged from a complex restructuring

that has involved a bankruptcy reorganization, sales of assets, a spinoff, and the

liquidation of the Company’s assets. The parties who oversaw the process are

sophisticated hedge funds who purchased distressed debt in the Company’s predecessor

for pennies on the dollar and converted their claims into equity. The Company has

already distributed $430 million to its stockholders. When it dissolved, the Company had

only $27 million in net assets, representing 6% of its pre-distribution asset value. Any

future claimants only will be able to recover from whatever reserve the court sets. At a

minimum, this fact scenario reinforces the need for the court to take care to ensure that

future claimants are protected by the security contemplated by law.

                                             18
A.    The Company’s Proposal

      The Company has the burden of establishing the form and amount of security that

will satisfy the statutory test. Altaba, 264 A.3d at 1144. The Company requests that the

court approve a reserve of $10 million for any unknown claims that may arise or become

known within five years from the date of its dissolution as required by Section 280(c)(3).

At first blush, a final reserve of $10 million for unknown claims that may arise or become

known over a period of five years seems like a big number. But it reflects only 2% the

Company’s asset value before it began making distributions to its equity holders, and the

Company did not provide the court with a metric or methodology for determining

whether the Company’s proposal is reasonably likely to provide sufficient compensation

for future claims that it might face stemming from environmental harm.

      To the Company’s credit, it erred on the side of caution during the winding up

process. For example, the Company spent over $500,000 to mail notices to 78,657

potential creditors. Dkt. 1 ¶ 29. The Company received nearly 300 claim letters, with the

Company evaluating and responding to each one. In the same vein, when Prosser

requested that the Company reserve $700,000 more than the Company’s proposal for its

claim, the Company agreed to avoid a dispute and increased its proposed reserve by the

requested amount. Dkt. 11 ¶ 4. Those steps inspire confidence.

      The Company fell short, however, by never meaningfully addressing the potential

for unknown claims. Most strikingly, the Company’s filings did not mention the

likelihood or potential cost of environmental claims. The court had to raise the subject

with Rottino during the hearing.

                                           19
       In response to the court’s questions, Rottino testified that he could not remember

any significant environmental claims in the Company’s history. Dkt. 15 at 41. He

explained that most environmental risk comes from the drilling process and that the

Company’s focus on mature assets made environmental claims less likely. Id. at 40–43.

He added that when the Company sold operating assets, the buyers assumed

responsibility for any liabilities associated with those assets under the standard sale

agreements that the Company used. Id. at 19, 40, 42. He also expressed his belief that any

non-operating wells that the Company did not sell had been plugged and should not

present a risk. Id. at 41–42.

       That was helpful, but the court heard this information for the first time at trial.

Moreover, Rottino admitted that he lacked significant knowledge in this area. For

example, when the court asked about the Company’s historical environmental liabilities,

he answered that he was “not an expert on these things,” but knew that the Company had

not spent much capital on environmental claims. Id. at 43. Rottino could only provide

anecdotal testimony that the Company had responded to a small number of requests to

plug abandoned wells in Oklahoma. Id. at 41.

       One need only perform some basic internet searches to find indications that no-

longer producing wells may pose meaningful environmental risks.1 Equally basic

       1
         E.g., Jeff Turrentine, Millions of Leaky and Abandoned Oil and Gas Wells Are
Threatening Lives and the Climate, Nat. Res. Def. Council (July 26, 2021),
https://www.nrdc.org/stories/millions-leaky-and-abandoned-oil-and-gas-wells-are-
threatening-lives-and-climate; Nichola Groom, Special Report: Millions of abandoned oil
wells are leaking methane, a climate menace, Reuters, June 26, 2020,
                                           20
searches suggest that there may be methods of estimating the risk posed by no-longer

producing wells.2 These sources focus on wells that have not been permanently sealed.

Rottino believed that the Company had plugged most of its wells, which could go a long

way towards mitigating the risk of environmental claims.

       The possibility of environmental claims is an obvious risk that the Company

should have addressed proactively. It would have been particularly helpful to hear from a

scientist or engineer who knows about the environmental problems that non-operating

wells pose and who could have modeled the risks associated with the Company’s

operations. It also would have been helpful to hear from an accountant, actuary, or

statistician who could discuss how to value contingent risks of that sort.

       The Company has not yet carried its burden to support its proposed reserve for

unknown claims.

https://www.reuters.com/article/us-usa-drilling-abandoned-specialreport/special-report-
millions-of-abandoned-oil-wells-are-leaking-methane-a-climate-menace-
idUSKBN23N1NL; Kyle Ferrar, Idle Wells are a Major Risk, FracTracker All. (Apr. 3,
2019),     https://www.fractracker.org/2019/04/idle-wells-are-a-major-risk/;    Nicholas
Kusnetz, Deteriorating Oil and Gas Wells Threaten Drinking Water Across the Country,
Sci. Am. (Apr. 4, 2011), https://www.scientificamerican.com/article/deteriorating-oil-
gas-wells-threatening-americas-drinking-water/.
       2
        E.g., Daniel Rami et al., Decommissioning Orphaned and Abandoned Oil and
Gas Wells: New Estimates and Cost Drivers, 55 Env. Sci. & Tech. 10224 (2021); Daniel
Schiffner et al., An updated look at petroleum well leaks, ineffective policies, and the
social cost of methane in Canada’s largest oil-producing province, 164 Climactic
Change 60 (2021); Patricia M.B. Saint-Vincent et al., An Analysis of Abandoned Oil Well
Characteristics Affecting Methane Emissions Estimates in the Cherokee Platform in
Eastern Oklahoma, 47 Geophysical Rsch. Letters, Nov. 23, 2020; Mary Kang et al.,
Direct measurements of methane emissions from abandoned oil and gas wells in
Pennsylvania, 111 Proc. Nat’l Acad. Scis. 18173 (2014).

                                             21
B.     The Guardian Ad Litem

       Section 280(c)(3) provides that “[t]he Court of Chancery may appoint a guardian

ad litem in respect of any such proceeding brought under this subsection. The reasonable

fees and expenses of such guardian, including all reasonable expert witness fees, shall be

paid by the petitioner in such proceeding.” 8 Del. C. § 280(c)(3). Delaware courts have

not yet addressed the standard applied when appointing a guardian under Section

280(c)(3). In prior decisions, the discussion has been limited to observing that the statute

grants the court the power to appoint a guardian.3 Clearly, the issue is a matter for the

court’s discretion, but the precedents do not provide guidance beyond that. An

examination of other related areas of law suggests that the court should exercise its

discretion freely in favor of appointing a guardian.

       The bulk of the Delaware cases involving guardians ad litem address the

appointment of an individual to represent a person lacking legal capacity, such as a

minor.4 In that setting, the principal question is whether the individual lacks the capacity

       3
          See In re Altaba, Inc., 241 A.3d 768, 776 (Del. Ch. 2020) (“Section 280
contemplates that the court will ground its estimates on a full evidentiary record, with the
benefit of expert analysis as needed and with the possibility of assistance from a guardian
ad litem to represent unknown claimants.”); RegO, 623 A.2d at 94 (noting that a guardian
ad litem “pursuant to Section 280(c)(2), was appointed . . . in this proceeding to represent
the interests of future unknown corporate claimants”).
       4
          See, e.g., In re David & Joan Traitel Fam. Tr., 2022 WL 2570793, at *2 (Del.
Ch. July 8, 2022) (finding that “it was appropriate to appoint a guardian ad litem in this
trust litigation” for individual trustee who was incapacitated); Mennen v. Wilm. Tr. Co.,
2013 WL 4083852, at *1 (Del. Ch. July 25, 2013) (noting that the court previously
“appointed a guardian ad litem to represent the interests of A.M., the minor beneficiary”);
Price v. Wilm. Tr. Co., 730 A.2d 1236, 1238 (Del. Ch. 1997) (explaining that this court
                                             22
to represent their own interests and requires representation. See, e.g., E.A. v. P.B., 2018

WL 4964335, at *8 (Del. Fam. May 29, 2018); see also Del. Lawyers’ R. Prof’l Conduct

1.14(b) (“When the lawyer reasonably believes that the client . . . cannot adequately act

in the client’s own interest, the lawyer may take reasonably necessary protective action,

including . . . seeking the appointment of a guardian ad litem, conservator or guardian.”).

If so, then the court may appoint a guardian. That consideration always applies to

unknown claimants, who by definition cannot represent themselves.

       Another area of law that provides useful guidance concerns whether to appoint or

permit a party to participate as an amicus curiae. The Delaware Supreme Court has

explained that participation as an amicus curiae has historically been allowed “upon a

demonstration that such assistance is advisable to protect the court in the consideration of

the case, i.e., ‘for the honor of a court of justice to avoid error.’” Giammalvo v. Sunshine

Mining Co., 644 A.2d 407, 408–09 (Del. 1994) (quoting The Protector v. Geering, 145

Eng. Rep. 394 (1686)). Appropriate roles for an amicus curiae include

       (1) assisting the court in a case of general public interest by providing
       adversarial presentations when neither side is represented; (2) assisting the
       court in a case of general public interest, by providing an adversarial
       presentation when only one point of view is represented; (3) assisting the
       court by supplementing the efforts of counsel, even when both sides are
       represented, in a case of general public interest; and (4) drawing the court’s
       attention to broader legal or policy implications that might otherwise escape
       its consideration in the narrow context of a specific case.

appointed a guardian ad litem to represent an executrix who was “not in perfect health”
and “suffered a stroke and was hospitalized for some time”).

                                            23
Id. at 409 (internal citations omitted). Generally speaking, a court may permit or appoint

an amicus curiae where there is “need for additional assistance in cases involving

questions of general public importance.” Id. at 410.

       With slight emendation, these considerations can inform the decision about

appointing a guardian for unknown claimants. The amendment is the need for the case or

issue to be “of general public importance.” By specifically authorizing a guardian,

Section 280(c)(3) makes clear that cases under the Elective Path warrant that type of

assistance, regardless of whether the issue is of general public importance.

       The otherwise flexible test for authorizing or appointing an amicus curiae

indicates that a court should not hesitate to appoint a guardian if the court has questions

about the reserve for unknown claimants. In a proceeding under the Elective Path, the

dissolved corporation is typically the only party advocating for an amount and form of

security, so the court is receiving a one-sided presentation. The guardian can supplement

the efforts of counsel and draw the court’s attention to broader legal or policy

implications raised by the case. Overall, the guardian can assist the court and help to

avoid error.

       Section 280(c)(3) makes the appointment of a guardian discretionary, so a

guardian need not be appointed in every case. There will be proceedings under the

Elective Path where the dissolved corporation presents a thorough record that satisfies the

court. When that has not happened, a court should exercise its discretion freely in favor

of appointing a guardian.

                                            24
       In this case, the Company did not make any presentation on the risk of claims

related to environmental pollution. The court elicited some information, but the record

remains undeveloped. Although not necessary to the appointment of a guardian under the

Elective Path, environmental pollution is a matter of general public importance, because

when environmental pollution happens, its effects can be widespread and devastating.

       The guardian will represent the interests of the unknown claimants. The guardian’s

tasks will be to (i) address the extent to which the Company’s $10 million reserve is

reasonably likely to provide sufficient security for unknown claims, and (ii) consider

whether the claims period should be extended beyond the statutory default of five years.

       The court does not expect the guardian to act in an adversarial capacity, but rather

to supplement the efforts of counsel and draw the court’s attention to broader legal or

policy implications presented by the case. The court is not giving the guardian a blank

check to explore these issues at any cost. The work will proceed in stages.

       The initial step will be for the guardian to contact scientists who have expertise in

the environmental issues presented by non-producing oil and gas wells. The guardian will

seek to determine if there are reasonable and relatively cost-effective means of assessing

the risks that non-producing oil and gas wells present. The guardian ad litem will not

immediately take on the work of securing an assessment. The guardian’s task will be to

determine if it is possible and what it would entail.

       A related task will be for the guardian to contact accountants, actuaries, or

statisticians who have expertise in valuing the risk presented by environmental issues.

                                             25
Here too, the guardian will seek to determine if there are reasonable and cost-effective

methods of quantifying the risk and what doing so would entail.

       A final task will be for the guardian to consider what other types of unknown

claims the Company may face. The court has focused on environmental claims. The

guardian will consider whether other types of unknown claims could be of concern.

       The court believes that approximately four weeks should be sufficient for these

tasks. At the end of that time period, the court will hold a status conference to hear from

the guardian. If the guardian cannot identify sound methods of assessing these issues,

then the court will take that answer into account. If the guardian determines that there are

sound methods, then the court will want to know what those methods would involve. The

guardian also will address any other types of unknown claims that could be of concern

and identify methods of assessing the risk posed by those claims.

       The Company will cooperate with the guardian’s efforts. During or after the status

conference, the court will rule on whether any further steps need to be taken and what

those steps should entail.

                                III.     CONCLUSION

       The Company’s request for a determination on the amount of security that is

reasonably sufficient for unknown claims is held in abeyance. By separate order, the

court will appoint a guardian to advise the court regarding these issues.

                                            26