A federal judge in Houston is considering whether to take over an explosive adversary proceeding currently in U.S. Bankruptcy Judge Marvin Isgur’s court that may result in Isgur calling the U.S. Attorney’s Office on one of the parties.
The fight involves The Woodlands-based Arena Energy, Houston-based W&T Offshore and Rockwall-based 31 Group and stems from the bidding process for Arena assets before and during its Chapter 11 reorganization last year.
Judge Isgur ordered the parties to submit briefs by Feb. 16 on whether he should turn W&T in to the U.S. Attorney’s Office for corporate espionage because W&T allegedly entered Arena’s data room without signing a nondisclosure agreement.
But the problem, according to W&T, is that Isgur has that narrative wrong and that Arena hasn’t even suggested that W&T wrongfully entered the data room. W&T also says the U.S. Attorney issue is something neither party asked the judge to pursue and that he raised the issue unprompted with no evidence.
This has led W&T to file an unusual motion in U.S. District Judge Andrew Hanen’s court asking him to take the case from Isgur because, among other reasons, Isgur’s order about bringing in the feds “blurs the lines between the adversaries in the case and the bankruptcy court as the adjudicator.”
“W&T respectfully submits it is inappropriate for the parties to the adversary proceeding to be advising the bankruptcy court about its own legal duty concerning reporting certain of the parties in this case, particularly if that court is to manage the adversary proceeding pre-trial,” W&T wrote in its motion. “This puts W&T in an untenable position of having to advise the bankruptcy court as to whether or not the bankruptcy court has a duty to report W&T.”
In an order issued Wednesday, Judge Hanen asked Arena to respond to W&T’s motion by Saturday, after which he will decide if a hearing is necessary.
Lawyers for the parties either declined comment or did not return messages seeking comment.
The dispute
According to court documents, W&T was among 900 companies that Arena’s financial advisor, Evercore, contacted in May 2020 as it began the bidding process for the sale of Arena’s assets.
W&T and Arena went back and forth on a nondisclosure agreement that Arena had required all potential bidders to sign before accessing Arena’s confidential information in its virtual data room — information that Arena described as “a competitor’s dream.” However, the parties could not come to an agreement that would ban W&T from talking with Arena’s lenders, so Arena did not grant W&T access to the data room.
Meanwhile, 31 Group entered an NDA with Arena and did access the data room. It approached W&T about entering a joint bid for Arena’s assets and, after W&T accepted, sent W&T a Google Drive link that contained information 31 Group had obtained from Arena’s data room.
On July 7, 31 Group and W&T spoke with Evercore to discuss their joint bid. On the call, W&T told Evercore that 31 Group had provided W&T with information from the data room. Evercore “did not react at all” to this information and didn’t ask W&T to sign an NDA, W&T’s motion says.
“This was not necessarily alarming because the form of confidentiality agreement assigned by 31 Group (and by 19 other potential bidders) allows them to share information with a ‘representative’ as long as the representative has ‘agreed in writing prior to being given access to the confidential information to be bound by the terms of this agreement to the same extent as if they were parties hereto,’” one of Arena’s court filings says.
The NDA discussion resurfaced when Arena told W&T that it was prepared to engage W&T on its bid, the motion says. Arena and W&T again went back and forth on an NDA throughout July but could not reach an agreement because of the bidder issue.
On Aug. 20, Arena filed for bankruptcy after opting instead for a bid submitted by San Juan Offshore, a company owned by Arena’s CEO and executives, W&T’s motion says. The restructuring support agreement they reached allowed Arena the option to consider unsolicited bids, which W&T made on Aug. 27. Arena rejected it and filed a lawsuit the next day.
In its Aug. 28 lawsuit, Arena says its lawyers gave W&T and 31 Group an Aug. 24 deadline to certify in writing that they had destroyed Arena’s confidential information and ceased using it — a deadline that neither met. Arena sued on multiple claims and asked for injunctive relief, including a temporary restraining order.
The parties sorted out the TRO dispute — which involved W&T returning the confidential information — and it made an agreement with Arena that it would submit a higher bid than San Juan and agree to an NDA in return for access to the virtual data room.
“Each of these things happened: W&T complied with its return and destruction obligations; W&T submitted a super bid; and W&T and Arena entered an NDA; and W&T received access to the virtual data room,” W&T’s motion says. “Arena then rejected the final bid W&T submitted.”
Isgur’s comments
As September approached, it came time for Judge Isgur to approve Arena’s bankruptcy plan. W&T objected to the plan, and Arena filed an emergency motion to strike W&T’s objection.
According to W&T’s motion, Judge Isgur set a Sept. 21 evidentiary hearing, where he largely focused on investigating W&T’s pre-petition conduct with respect to receiving confidential information and called W&T’s conduct “abhorrent.” In a footnote, W&T questions why that was relevant to W&T’s objection to Arena’s plan confirmation. Judge Isgur confirmed Arena’s bankruptcy plan with the San Juan bid on Sept. 25.
W&T moved to dismiss the adversary proceeding and moved to withdraw the reference because it did not consent to a jury trial in bankruptcy court — in part because Arena’s tortious interference and trade secret misappropriation claims would require a showing of damages.
During a Jan. 11 status conference, W&T says Judge Isgur “raised an unprompted factual question” when he warned the parties that he was going to ask them to weigh in on whether he had reporting obligations due to an allegation made that W&T “directly invaded” the data room. W&T says in its motion that even Arena acknowledges that is not correct.
Then, the judge issued a Jan. 29 sua sponte case management order that said W&T’s alleged pre-petition conduct “may have violated federal law” and asked for guidance on whether he had a mandatory reporting duty due to the “alleged corporate espionage” in the case, which W&T says Arena has never alleged. In fact, “the phrase ‘corporate espionage’ had not been used by any party to the case prior to the bankruptcy court’s using it in the Jan. 29 order,” W&T says.
“Here, the bankruptcy court has made statements and taken actions that demonstrate its findings as stated that the bankruptcy hearing are impacting, and will continue to impact its evaluation of the ultimate merits of Arena’s tort claims and more importantly, W&T’s legal defenses — which were not presented or addressed at the bankruptcy hearing (nor had even been pleaded),” W&T argues in its motion.
In addition to this argument, W&T says Judge Hanen should take over the case because W&T does not consent to a jury trial in bankruptcy court, it would be more efficient for Judge Hanen to take it from here since the bankruptcy court has not “considered or ruled on any substantive motions in the adversary case,” and the unique history warrants the move because “the bankruptcy court has made findings at the bankruptcy hearing on factual issues for which W&T has a jury trial right as it relates to Arena’s tort claims.
“Those findings have now bled over into the bankruptcy court’s evaluation of this adversary case,” W&T says.
AZA’s John Zavitsanos is leading W&T’s representation in the adversary proceeding. The team also includes AZA’s Kelsi Stayart White, Shawn Bates and Jason McManis.
Susman Godfrey partner Geoff Harrison is leading Arena through the adversary proceeding. The team also includes Susman Godfrey’s Richard Hess and Sylvanus Polky and Jackson Walker’s Matt Cavenaugh.
Locke Lord’s Phil Eisenberg represents 31 Group.