The New Normal For Distressed Energy Companies

Part One — Vendors at the Gates

1. Introduction

   As sub-$30 oil prices continue to place mounting pressure on struggling energy companies, we are seeing a steady uptick in claims by unpaid vendors and suppliers. Creditors that historically may have been amenable to extended payment terms for preferred customers — and would have never thought twice about the possibility of suing a customer — are becoming increasingly more aggressive. Some have started to turn to litigation for recourse.

   These claims can take a variety of forms and, in Texas, are typified by three primary causes of action: (1) suit on sworn account, (2) breach of contract and (3) quantum meruit. In addition, especially aggressive creditors, under the right circumstances, can seek to force a debtor into involuntary bankruptcy under Section 303 of the U.S. Bankruptcy Code (the "Code").

   This article is intended to be the first in a series of topics relevant to distressed energy companies in the current economic climate. The following focuses on debt collection actions brought under Rule185 of the Texas Rules of Civil Procedure, frequently called a "suit on sworn account." This type of claim may not be as well-known as a typical breach of contract or an equitable "quantum meruit" claim. However, what is significant about these types of claims is not only the higher pleading standard required to both file and answer these claims, but also the expedited litigation process for such claims. The following provides a brief overview of the law, as well as practical considerations.

2. Overview of Rule 185 Claims

   Rule 185 is a procedural tool that limits the evidence necessary to establish a prima facie right to recovery on certain types of accounts. Williams v. Unifund CCR Partners Assignee of Citibank, 264 S.W.3d 231, 234 (Tex. App. — Houston [1st Dist.] 2008, no pet.). However, this procedure is not available for all types of claims. Specifically, Rule 185 applies only to (1) transactions between persons, (2) where there is a sale on one side and a purchase on the other, (3) whereby title to personal property has passed from one person to the other, and (4) where the relation of the debtor and creditor is created by a general course of dealing. Id.

   1. Plaintiff's Elements

      To prevail on a suit on sworn account, a plaintiff must show three elements: (1) that there was a sale and delivery of the merchandise or performance of the services; (2) that the amount of the account is just (i.e., prices were charged in accordance with the agreement or, in the absence of an agreement, are usual, customary and reasonable prices for the merchandise or services); and (3) that...