Client Alert: Sanchez Energy Highlights Potential Tension

November 4, 2019

On July 24, 2019, Bob Gayda and Catherine LoTempio authored a Law360 article titled “Independent Director Investigations Can Benefit Creditors,” discussing the advantages of independent director investigations, and three recent cases in which these investigations were central. Since publication of that article, events in another case, Sanchez Energy, have highlighted the tension between independent directors and unsecured creditors’ committees with respect to the investigation of estate causes of action. These tensions will recur now that independent directors are part of the bankruptcy case paradigm.

Sanchez Dispute

Sanchez Energy, an oil and gas exploration and production company, established a special committee of two disinterested directors in November 2018 to investigate potential claims against related parties. Sanchez filed for chapter 11 protection on August 11, 2019.
The debtors filed an application to retain counsel for the special committee on September 6, 2019. The application stated that counsel had originally been retained prepetition (on March 27, 2019) and had performed significant work on the investigation of potential claims, which it would continue post-petition. The unsecured creditors’ committee (the “UCC”), along with an ad hoc group of unsecured noteholders, objected to the application. The UCC argued that the special committee was not truly independent because the directors were appointed by the same insiders that were the subject of the investigation, and that counsel suffered similar deficiencies because it received more than $5 million in fees prepetition from those parties. The UCC also asserted that it was the appropriate party to conduct an “objective” investigation. Accordingly, the UCC requested that the retention be limited by a budget, and that the special committee turn over its work product related to the investigation to the UCC. The ad hoc group made similar arguments, adding that it was not aware that counsel was conducting an investigation prior to the petition date, and that the investigation should be conducted by the UCC or an examiner.

The debtors replied to the objections. The reply asserted that the appointment of the disinterested directors was in line with corporate governance best practices, and characterized the UCC’s objection as a vehicle to manufacture a narrative to be used later in the bankruptcy cases (although the debtors did not specify to what end). The debtors also vehemently contested that the directors were conflicted. The special committee’s reply stated that the accusations made by the UCC and the ad hoc group were unfounded and irrelevant to counsel’s retention application. The special committee argued that contrary to the UCC’s position, a debtor in possession has full authority to determine whether and how to proceed with all estate claims.

The dispute was ultimately resolved by a stipulation between the UCC, the debtors and the special committee. The stipulation provided that in exchange for the UCC’s withdrawal of its objection, the special committee would provide the UCC with an unredacted copy of their investigation report, and would produce certain documents to the UCC, with such production being substantially completed no later than November 22. The stipulation also required the special committee to provide the UCC with notice of certain investigations, including those regarding matters not addressed by the investigation report. The ad hoc group was not party to the stipulation, but the court approved the debtor’s retention application over its objection on October 23, 2019.


While this retention dispute was resolved, it serves to highlight issues that may be at the forefront of many future bankruptcy cases – and even again in Sanchez Energy, depending on what happens with respect to the investigation. The appropriate party to investigate estate causes of action is a significant question which requires a situation-specific inquiry. We will be closely monitoring these issues as they evolve across the bankruptcy landscape.