Investors Near $600 Million Windfall in Texas Bankruptcy Case

A group of investment firms is a step closer to getting a potential $600 million return on a $5.6 million funding deal in a lawsuit tied to the bankruptcy of Sanchez Energy Corp.

The four firms, led by Benefit Street Partners, funded a group of unsecured creditors suing over the 2019 bankruptcy. They notched a win on Tuesday when a federal judge in Houston dismissed a claim in a challenge to their funding deal, which gives the firms 90% of any proceeds.

Delaware Trust Co., acting as a representative of unsecured creditors, last year won a court battle for 70% control of the energy company, now known as Mesquite Energy Inc. after emerging from bankruptcy. Their claims were backed by Benefit Street, as well as Brigade Capital, Avenue Capital, and Taconic Capital.

A group of unsecured creditors who were not part of the deal, led by Lake Whillans and Clear Harbor, filed suit last year. They said the agreement, which could bring the investors a $600 million windfall, improperly altered Sanchez’s reorganization plan.

Delaware Trust “secretly conspired with some of the largest unsecured claimholders to promise away 90% of the equity recovered for all unsecured claimholders—now worth many hundreds of millions of dollars,” the creditors argued in their lawsuit.

On Tuesday, Judge Marvin Isgur of the US Bankruptcy Court for the Southern District of Texas dismissed one of the claims in the suit. He also said Lake Whillans and Clear Harbor could amend their suit to pursue certain claims.

The case is Lake Whillans Fund I LP v. Delaware Trust Company, Bankr. S.D. Tex., 23-03151, 4/30/24