The U.S. Supreme Court on Monday said it will not hear arguments on whether a Texas bankruptcy judge allowed unsecured creditors to double-dip on their recoveries when he handed them control of bankrupt oil driller Sanchez Energy.

The High Court denied certiorari to unsecured creditors in their appeal of the Fifth Circuit's reversal of a valuation decision by U.S. Bankruptcy Judge Marvin Isgur that shifted the balance of the shares in the reorganized Sanchez Energy from secured to unsecured creditors.

Texas-based Sanchez, which operated about 2,400 oil and gas wells, filed for bankruptcy in August 2019, and in April 2020, Judge Isgur approved a plan to swap the debt plus $150 million in debtor-in-possession financing debt for equity in a reorganized company, now known as Mesquite Energy.

Under the terms of the plan, 20% of the equity was immediately distributed to the secured lenders, who had also provided the DIP, in exchange for releasing their DIP claims. The distribution of the remainder would wait until the resolution of an adversary action on behalf of unsecured creditors seeking to invalidate and claw back certain liens held by the secured creditors.

Judge Isgur subsequently ruled the liens were potentially subject to clawback and the value of the clawback claims should be included in Mesquite's equity value. This meant the unsecured creditors held 70% of the claims in the case and were entitled to 70% of Mesquite's equity.

The secured lenders argued the liens were valueless because they were subordinated to the released DIP claims, and on May 30 a three-judge panel of the Fifth Circuit agreed, reversing Judge Isgur's decision.

The panel found both that Judge Isgur's finding that the liens were subject to clawback was incorrect and that the Sanchez bankruptcy estate had already recovered the liens. The judges said Section 550(a) of the Bankruptcy Code allows the clawback of property or the value of property, not both.

The unsecured creditors appealed to the Supreme Court, arguing that other circuits have ruled a bankruptcy estate can recover both if the property has lost value since the transfer.

"In that situation, Section 550(a) permits a bankruptcy court both to order the return of the property to the estate and to provide a monetary award to compensate for the property's loss in value since the transfer," they said.

The unsecured creditors are represented by Benjamin I. Finestone, John Shaffer, John F. Bash, Matthew R. Scheck, Nicholas J. Caluda and Jacob M. Bliss of Quinn Emanuel Urquhart & Sullivan LLP.

The secured creditors are represented by Mark T. Stancil and Donald Burke of Willkie Farr & Gallagher LLP and Noel J. Francisco, Christopher DiPompeo, Jeffrey R. Johnson, Henry J. Dickman and David Wreesman of Jones Day.

The case is Delaware Trust Company v. Ad Hoc Group of Senior Secured Noteholders et al., case number 25-208, in the Supreme Court of the United States.