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The U.S. Supreme Court on Monday refused to reopen a high-stakes dispute over how creditors were compensated in the bankruptcy of Texas oil driller Sanchez Energy, leaving intact a Fifth Circuit ruling that overturned a controversial valuation decision by a federal judge.

High Court Lets Fifth Circuit Ruling Stand

The justices denied certiorari to a group of unsecured creditors who argued that a Texas bankruptcy judge wrongly allowed them to claim both property and value recoveries—what secured lenders called an impermissible “double dip”—when he awarded them majority control of the reorganized company.

The Fifth Circuit had reversed the ruling earlier this year, finding that U.S. Bankruptcy Judge Marvin Isgur misapplied clawback principles under the Bankruptcy Code while determining equity allocations in the restructured company, now known as Mesquite Energy.

Sanchez’s Fall and the Controversial Equity Split

Sanchez Energy, once operating 2,400 oil and gas wells, entered Chapter 11 in August 2019. In April 2020, Judge Isgur approved a restructuring plan converting debt—and $150 million in debtor-in-possession financing (DIP)—into equity in the new entity.

Under that plan:

• 20% of the equity went immediately to secured lenders in exchange for releasing DIP claims,

• The remaining equity would be distributed only after resolving an adversary action from unsecured creditors seeking to invalidate and claw back liens held by secured lenders.

Judge Isgur’s Ruling: Unsecured Creditors Take Majority

Isgur later ruled that certain liens were potentially subject to clawback, and that the value of those clawback claims had to be folded into Mesquite’s total equity valuation. That calculation gave unsecured creditors 70% of the claims—and therefore 70% of the equity.

Secured lenders countered that the liens were worthless because they had been subordinated to the released DIP claims, and therefore could not be valued as clawback assets.

Fifth Circuit Rebuke: “Value or Property, Not Both”

On May 30, a Fifth Circuit panel agreed with the secured creditors, concluding:

• The disputed liens were not subject to clawback.

• Even if they were, the bankruptcy estate had already recovered the liens, meaning the unsecured creditors could not claim both the property and its purported value.

The panel relied on Section 550(a) of the Bankruptcy Code, which allows a bankruptcy estate to recover either property or its value—but not both—rejecting Isgur’s broader interpretation.