BUFFALO — As a creditor called for greater oversight and the judge set hard deadlines, the lawyer for coalbed methane company US Realm Powder River wrote in a filing in the U.S. Bankruptcy Court for the District of Wyoming, that it would be best to just call off the company's now-15-month bankruptcy altogether.

US Realm owes Johnson County more than $20 million in unpaid natural gas production taxes through its operator Carbon Creek Energy, owes the federal government more than $8 million in overdue royalty payments and is out of compliance in surface use agreements with dozens of local landowners.

In a Feb. 15 filing, Bradley T. Hunsicker, a lawyer for US Realm, wrote that the company declared bankruptcy to protect itself in a specific situation and that the protection is no longer necessary. What's more, he added, continuing proceedings would be unnecessarily expensive. Over the past 15 months, he wrote, US Realm paid more than $1 million in legal and U.S. trustee fees.

It's unclear how much money Johnson County will ever get from US Realm, whether or not it remains in bankruptcy. 

US Realm received court permission to pay its taxes, though it never did, but it also didn't pay them before entering bankruptcy - the company's delinquent tax bills with the county date back to 2016.

County Commissioner Bill Novotny and Deputy County Attorney Barry Crago successfully spearheaded state-level legislative initiatives over the past few years designed to mitigate future local mineral tax delinquencies, and place Wyoming counties in a higher-priority position to collect on debt in any future bankruptcies. The measures can't, however, help the county to claw back the debt that US Realm has already accrued.

A January status conference reviewed the company's debt to the federal and state governments. U.S. Bankruptcy Court Judge Cathleen D. Parker gave US Realm, which had not made a royalty payment for more than a year, two weeks to file a status report on the royalty debt, some of which the company disputed. Possible remedies discussed at that conference included dismissing the case, converting it to a Chapter 7 liquidation or appointing a bankruptcy trustee who would exercise day-to-day control over US Realm’s management decisions as needed.

That report was due Jan. 27, but US Realm missed the deadline. On Feb. 10, Parker filed an order that gave the company seven days to file the report before facing either contempt of court or dismissal of the case.

On Feb. 12, lawyers for Pegasus Optimization Services, a company that provides natural gas compression and operating services for US Realm and has a $7.85 million claim in the case, asked that a trustee be appointed due to a lack of transparency.

In general, bankruptcy should provide creditors with transparency, because debtors are required to disclose financial statements. In US Realm's case, however, lawyers for Pegasus noted that more than half of the money the company pays out each month goes to Carbon Creek, US Realm's affiliate and operator. 

Carbon Creek is not bankrupt, so it's not required to disclose what happens to that money next. The filing from Pegasus detailed multiple possible conflicts of interest and questionable payments between US Realm and Carbon Creek that Pegasus believed could benefit from the oversight of a trustee. 

Throughout the bankruptcy, financial statements have shown US Realm operating at a loss.

According to statements made at a meeting of creditors, Pegasus' lawyers wrote, Craig Camozzi and Kevin Norris serve as the chief operating officer and the chief financial officer, respectively, for both US Realm and Carbon Creek, as well as Powder River Midstream, another affiliate.

They are paid through Carbon Creek, according to the filing, so their compensation is beyond the oversight of the bankruptcy court.

Camozzi, the document noted, was also involved in a personal bankruptcy case in summer 2020 and did not properly file required financial disclosures in that case either.

According to court records, in the three days leading up to the bankruptcy in October 2019, US Realm made payments to Carbon Creek of at least $5 million dollars, leaving US Realm with less than $1,500 in its checking account at the time it filed for bankruptcy.

The lack of oversight is to the “detriment of creditors,” Pegasus lawyers wrote. “If the case is dismissed there will be no party available to investigate the transactions between the Debtor and its affiliates.” 

Without a trustee, the conflicts of interest, they wrote, make reorganization “a virtual impossibility.”

In its own filing on Feb. 15, US Realm asked for the case to be dismissed altogether. Hunsicker wrote that the expense wasn't worth the protection and that creditors would be better prepared to protect their interests outside of bankruptcy.

US Realm originally filed for bankruptcy, he wrote, because the Fort Union Gas Gathering Co. threatened to shut off US Realm's access to its pipeline because US Realm had not paid its bills.

Bankruptcy offered the company protection from that retaliation, and by spring 2020, the two companies had a new payment agreement.

"At the time it was four degrees in Wyoming - CBM wells produce fresh water along with the methane gas,” Hunsicker wrote. “The threatened shut-in would have resulted in the Debtor’s gas and water infrastructure freezing, destroying the Debtor's only source of revenue and creating millions of dollars of physical damage the Debtor would be unable to satisfy.”

That would also negatively impact the state of Wyoming through well abandonment, Hunsicker wrote, and have resulted in the layoffs of 180 employees and have guaranteed that Wyoming counties would never receive the value of future natural gas sales.

The matters of both Pegasus' request to appoint a trustee and US Realm's request for dismissal of the case will be the subject of a hearing scheduled for March 16.