1 UNITED STATES BANKRUPTCY COURT2 SOUTHERN DISTRICT OF NEW YORK34 In re: :
: Chapter 115 :
SABINE OIL & GAS CORPORATION : Case No. 15-118356 :
Debtors. :7 _________________________ :89 United States Bankruptcy Court
10 One Bowling Green11 New York, NY 1000412 February 2, 201613 10:10 AM - 1:19 PM1415161718192021 B E F O R E :22 HON SHELLEY C. CHAPMAN23 U.S. BANKRUPTCY JUDGE2425 ECRO OPERATOR: MICHELLE BROWN
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1 HEARING re Pre-Trial Conference
2
3 HEARING re Doc #371 Debtors’ Omnibus Motion for Entry of an
4 Order Authorizing Rejection of Certain Executory Contracts
5
6 HEARING re Doc #659 Debtors’ Motion for Entry of an Order
7 (A) Authorizing Assumption of Certain Non-Residential Real
8 Property Leases Pursuant to Section 365 of the Bankruptcy
9 Code and Bankruptcy Rule 6006 and (B) Granting Related
10 Relief
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25 Transcribed by: Sonya Ledanski Hyde
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1 A P P E A R A N C E S :23 KIRKLAND & ELLIS, LLP4 Attorneys for the Debtors5 300 North LaSalle6 Chicago, IL 6065478 BY: JONATHAN S. HENES, P.C.9 RYAN BENNETT10 GABOR BALASSA11 JONAH A. PEPPIATT1213 ROPES & GRAY14 Attorney for the Official Committee of Unsecured15 Creditors16 1211 Avenue of the Americas17 New York, NY 10036-87041819 BY: D. ROSS MARTIN20 MARK R. SOMERSTEIN21 C. THOMAS BROWN22 KEITH H. WOFFORD232425
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1 QUINN EMANUEL URQUHART & SULLIVAN, LLP2 Attorney for Frist Reserve Parties34 BY: ANDREW J. ROSSMAN5 SUSHEEL KIRPALANI6 JULIA M. BESKIN7 KATE SCHERLING89 PAUL, WEISS, RIFKIND, WHARTON & GARRISON, LLP10 Attorneys for Wilmington Trust, N.A.11 1285 Avenue of the Americas12 New York, NY 100191314 BY: MOSES SILVERMAN15 BRIAN S. HERMANN16 KYLE KIMPLER1718 KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP19 1633 Broadway20 New York, NY 100102122 BY: DANIEL A. FLIMAN23 KENNETH R. DAVID2425
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1 AKIN GUMP STRAUSS HAUER & FELD LLP2 Attorney for Sabine Indenture Trustee3 One Bryant Park4 New York, NY 10036-674556 BY: DANIEL H. GOLDEN78 BROWN RUDNICK9 Attorney for the Ad Hoc Committee of Forest Oil10 Noteholders & Forest Oil Noteholders Trustees11 7 Times Square12 New York, NY 100361314 BY: DANIEL J. SAVAL15 ROBERT J. STARK1617 CURTIS, MALLET-PREVOST, COLT & MOSIE LLP18 Attorney for David Sambrooks, Duane Radtke & John19 Yearwood2021 BY: THERESA A. FOUDY22232425
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1 BRACEWELL & GIULIANI LLP
2 Attorney for Nordheim Eagle Ford Gathering, LLC., El
3 Rucio Land and Cattle Co., Incl, San Juanito Land
4 Partnershipo, Ltd., McAllen Trust Partnership and James
5 A. McAllen
6
7 BY: ROBERG G. BURNS
8 WILLIAM A. WOOD III (pro hac vice)
9 JASON G. COHEN (pro hac vice)
10
11 SHEARMAN & STERLING, LLP
12 Attorneys for Barclays
13 559 Lexington Avenue
14 New York, NY 10022
15
16 BY: JOSEPH J. FRANK
17 FREDRIC SOSNICK
18
19 LATHAM & WATKINS LLP
20 Attorney for HPIP Gonzalez
21
22 BY: KEITH SIMON
23
24
25
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1 LINKLATERS LLP
2 Attorneys for Wells Fargo, National Associate, as Frist
3 Lien Agent
4 1345 Avenue of the Americas
5 New York, NY 10105
6
7 BY: MARGOT B. SCHONHOLTZ
8
9 ALSO PRESENT TELEPHONICALLY:
10 STEPHEN J. BLAUNER
11 TRENT BRENDON
12 JOEL BRIGHTON
13 ROBERT G. BURNS
14 CHELSEA DAL
15 DAVID M. DUNN
16 ERIC ENGLISH
17 DAVID M. EPSTEIN
18 JOSEPH FABIANI
19 ANNELYSE GIBBONS
20 STEPHANIE HARRELL
21 BRIAN HOOK
22 BRIAN KINNEY
23 AARON M. KRIEGER
24 MICHAEL MANTERIS
25 BRYAN MCDAVID
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1 PARKER MILENDER2 ARSALAN MUHAMMAD3 JEFFREY S. MUNOZ4 ISAAC PACHULSKI5 DEBRAH M. PERRY6 JEFFREY ROTHLEDER7 JASON B. SANJANA8 MARK SOMERSTEIN9 JOSEPH TAEID10 THADDEUS D. WILSON111213141516171819202122232425
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1 P R O C E E D I N G S
2 THE COURT: All right, Mr. Martin, how are you?
3 MR. MARTIN: I’m terrific this morning, Your
4 Honor.
5 THE COURT: Good.
6 MR. MARTIN: Your Honor, for the record, Ross
7 Martin, Ropes & Gray for the official creditors committee
8 and late last night we and the Debtors submitted a joint
9 letter outlining the schedule that we propose for the four
10 days of upcoming hearings commencing next Monday. And to
11 summarize that, I’ll take guidance from the Court on how
12 you’d like to work through this, but we currently anticipate
13 essentially three days and maybe a little bit more of --
14 maybe three and a half days of witnesses and then proceeding
15 to argument. And we have, for the argument we have a listed
16 order of the various STN claims, so they would proceed for
17 all parties talking about each one.
18 THE COURT: Okay. And this is consistent with the
19 scheduling order that we entered on January 27th. This is
20 the phase one.
21 MR. MARTIN: Correct
22 THE COURT: The phase one.
23 MR. MARTIN: The one thing we don’t know, Your
24 Honor, is under the existing scheduling order, the objectors
25 have until Thursday to designate additional witnesses, so we
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1 don’t have a full picture of this yet.
2 THE COURT: Okay.
3 MR. MARTIN: But in any event, one thing I would
4 like to -- that I’ve heard already from is that the -- on
5 the opening statements, the two so-called trustee joining
6 parties, the STN would also like, it’s a half an hour total.
7 Is that right?
8 MAN: Yes.
9 MR. MARTIN: Okay.
10 THE COURT: So that’s going to turn the movements
11 into 1.0.
12 MR. MARTIN: That’s correct, Your Honor.
13 THE COURT: Okay. And then the objectors, so who
14 am I going to hear from the objectors.
15 MR. MARTIN: That’s going to be Mr. Balassa. So I
16 don’t. Oh, go ahead.
17 MR. BALASSA: You’ll hear from the Debtors and the
18 other objectors that reserved time as well, so we’re going
19 to cart that off within the hour and a half that’s allocated
20 here.
21 THE COURT: Okay, all right.
22 MR. MARTIN: Mr. Balassa and I have had I think
23 pretty productive discussions over the last few days and
24 over the weekend and have worked out that in general for the
25 live witnesses, we will be calling each witness once. So
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1 the way I anticipate that works and the way I’ve seen it
2 work is for the most part we’re calling them in the first
3 instance.
4 But, you know, whichever side calls first, the
5 other side can obviously cross but also go beyond the scopes
6 of in effect cross and their direct. And then the opening
7 party comes back within the scope of that, you know, like a
8 cross, and then there’s one more chance to come back.
9 THE COURT: Right. So the most important thing
10 you’ve hit on, which is that everybody has a common
11 understanding of the scope.
12 MR. MARTIN: Right. I was thinking of it as a
13 narrowing scope like this. The first two are open and then
14 it --
15 THE COURT: But when you said -- well, let’s stick
16 with the very first thing, which is the opening statements,
17 which now are up to two and a half hours. So that suggests
18 to me that we ought to do that and then you want to have
19 your lunch break. And then we start with -- that’s bound to
20 go at least as long because I’ll ask questions, so.
21 MR. MARTIN: One thing that I may have missed
22 along the way is what hours the Court is intending to --
23 THE COURT: Well, let me put it back to you. What
24 would you like? Do you want to start at 9:30? Do you want
25 to start at 9:00? Do you want to start at 10:00? I’ll do
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1 whatever works best for the parties.
2 MR. BALASSA: Your Honor, the Debtors think
3 there’s a lot of ground to cover here. I’ll speak to that
4 some more when I get a chance and starting earlier,
5 therefore, would give us obviously greater opportunity to
6 get to the argument portion.
7 MR. MARTIN: We agree to that.
8 THE COURT: So how does everyone feel about 9:30?
9 I don’t want to street people. So should we say 9:30? All
10 right, so we’ll have a 9:30 start and then it still looks
11 like it’d be best. I really don’t like to have a witness be
12 interrupted once they start.
13 MR. MARTIN: We try to -- we’re trying our best to
14 not --
15 THE COURT: Okay. So we’ll assume that Monday
16 morning will be the openings. Then there will be a lunch
17 break and then we’ll start with Mr. Foster right after the
18 lunch break. Now, so you’ll have Foster and then you’ll
19 have Mr. Sanbrooks. And by the movements, 0.5 of direct and
20 1.0 for cross, I take it that that’s what you mean by the
21 evolving scope.
22 MR. MARTIN: That’s correct. So our initial
23 direct following him we think is actually fairly limited and
24 then the objectors ask for one and a quarter to 1.75, and
25 then since we don’t know what that’s going to involve, we
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1 ask for an hour cross on those.
2 THE COURT: Okay. And then the objectors are
3 going to coordinate among themselves so that there’s not
4 duplication. Yes?
5 MR. BALASSA: That’s the intention. Yes, Your
6 Honor.
7 THE COURT: Okay. All right. So that’s Monday.
8 MR. MARTIN: Correct.
9 THE COURT: All right. Anyone else have anything
10 to say about the proposed program for Monday? Okay. And
11 then so Tuesday?
12 MR. MARTIN: Tuesday, Your Honor, we anticipate
13 Mr. (indiscernible) live, who’s the other member of the
14 Debtors.
15 THE COURT: And, again, we’re going to start at
16 9:30.
17 MR. MARTIN: Okay. And, you know, the video we
18 have listed for those amounts, I don’t actually know whether
19 it’ll be that long. In my experience when you put it in, it
20 actually doesn’t end up that long.
21 THE COURT: So is the video for both with McDonald
22 and Fraser or just Fraser?
23 MR. MARTIN: No, it’s for McDonald and Fraser.
24 THE COURT: Okay.
25 MR. MARTIN: They were separate depositions,
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1 obviously. We had a dispute we can get to at the end about
2 how that gets formulated. But frankly the video, Your
3 Honor, is something that conceivably -- and we’ve talked
4 about this -- could move to Monday depending on how that
5 time goes. If we end up with extra time Monday, try to get
6 in what we can.
7 THE COURT: Well, let me take you up on that
8 because -- I hate to do this but I need to be on a 2:00
9 National Bankruptcy conference call on Monday the 8th. I’ll
10 excuse myself after half an hour. But maybe if there is a
11 way that we could work the lunch break around that or
12 somewhat, something of a break around that.
13 MR. MARTIN: I guess what I’m trying to think of,
14 Your Honor, if we have the openings in the morning and then
15 that would put us at -- we start it at 9:30 and it’s really
16 2.5 hours, we’re going to end up at noon.
17 THE COURT: Well.
18 MR. MARTIN: One thing I --
19 THE COURT: Yeah, let me reach out to them and
20 just tell them that once again I’ll have to miss the call.
21 It’s just I can’t do that to all of you, so it is what it
22 is.
23 MR. MARTIN: Mr. Foster is apparently only
24 available that day. That’s also part of the issue that
25 we’re --
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1 THE COURT: Okay, let’s -- I’ll solve my problem.
2 Let’s just keep going.
3 MR. MARTIN: So we may be able to move up -- I
4 never should say this but I’m sort of cautiously optimistic
5 depending on how those openings and examinations go, but in
6 any event, we would do Mr. (indiscernible) and there will be
7 a respond Tuesday. That day is, as you can see, a little
8 bit short.
9 And I guess the First Reserve folks have
10 determined that they would like to put in the first
11 (indiscernible) obviously we can still designate this
12 testimony but they propose to call Mr. (indiscernible) live
13 or have us call him live, which is fine. He is apparently
14 only available on Wednesday. And I guess that brings us to
15 maybe one of the disputes that we have that we could -- let
16 me lay the schedule out and then we can move on to disputes.
17 THE COURT: Okay.
18 MR. MARTIN: So Mr. (indiscernible) is only
19 available Wednesday. Then we have Professor Williams, who
20 as you know, the Debtors have in some respects designated I
21 gather as an expert, but also taken the position in response
22 to a prior question by the Court that he was an advisor,
23 therefore he’s a fact witness as well.
24 And so we intend to call him in our case as a fact
25 witness, and that is important to us because the Debtors
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1 have said they’re relying on his particular advice with
2 respect to one thing they did do, so that is a significant
3 part of our case.
4 So we had proposed to call him for a substantial
5 period of time and then have them cross. And then we have
6 Mr. (indiscernible) to present what Your Honor has called
7 for the question of how much can you get for all this. And
8 lastly, the Debtors have informed us that they intend to
9 have Mr. Williams submit another report in response to Mr.
10 (indiscernible), the so-called best interest question and,
11 therefore, would call him in their case on that.
12 And then finally, the Debtors want to call in
13 their case Mr. Mitchell and we have that showing on
14 Thursday. I think that’s principally because of time. So
15 that’s the schedule and then we would turn to argument.
16 THE COURT: Okay.
17 MR. MARTIN: I don’t know if there are questions,
18 objections. Maybe just on that before we get to the
19 disputes --
20 THE COURT: Why don’t I hear from Mr. Balassa and
21 then we’ll talk about disputes and talk about more detailed
22 logistical issues?
23 MR. BALASSA: Thank you, Your Honor. Gabor
24 Balassa for the Debtors. Your Honor, this schedule
25 represents something of a shift from what the Debtors had
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1 initially envisioned. We’ve got along and coordinated with
2 the committee recognizing that this is the committee’s
3 motion. But this has shifted to be more of a mini trial
4 than we had originally expected.
5 Frankly, Your Honor, we had anticipated that the
6 attorney argument would be the principal trial and that
7 during the attorney argument the parties might show
8 deposition video, might put out excerpts from deposition
9 transcripts and might show documents but it would be in the
10 context of what the legal standards are for the claimants
11 and the attorneys would argue their positions also by
12 reference to the pleadings, that is to the committee’s
13 complaint, which of course is significant. You’ll hear the
14 allegations there and testing those allegations against
15 legal standard.
16 We currently have the committee calling eight
17 witnesses and to some extent that results in some
18 escalation. They play video from some witnesses. We’re
19 reading their response brief.
20 We’ll need to play video from some other witnesses
21 and we’re fine with that. But what I do want to signal to
22 the Court is that it’s still the Debtor’s view that the
23 attorney argument portion is what really matters here and we
24 are a little concerned that that’s going to get shortchanged
25 here.
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1 THE COURT: Well, let me say one or two things.
2 They are the movants. So conducting the proceedings, I’ll
3 say their way, kind of deals with the issue of or avoids the
4 possibility that we get to the end and if their -- if they
5 don’t prevail, it won’t be because they haven’t had the
6 ability to present their case as they want to. It’s their
7 burden, right, and this is the way they’re choosing to try
8 to discharge their burden. So I hear you.
9 I always thought of it more like what this looks
10 like than what you look like. At the end of the day, I
11 don’t know how much difference it really makes. But I do
12 like the fact that the movants are putting on their case the
13 way they want to discharge their burden, so I think that’s
14 good for everybody.
15 MR. BALASSA: And, Your Honor, we heard that from
16 the Court previously. We took that to heart and that’s why
17 you’re seeing a joint letter here.
18 THE COURT: Okay. To your second point, though, I
19 don’t want to, under no circumstances are we going to short
20 trip the legal argument because I predict I’m going to have
21 a lot of questions.
22 MR. BALASSA: And, Your Honor, that was exactly my
23 point of stating (indiscernible). It wasn’t to second guess
24 the schedule that we have endorsed and jointly submitted to
25 the Court. It was really to signal that we don’t want
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1 what’s listed here as the first three days, especially to
2 the extent that it bleed into the fourth day, to preclude
3 parties, objectors and movants from making argument on Items
4 1 through 7.
5 And so while we’ve listed 1 through 7 on Thursday,
6 if that starts -- if Mr. Mitchell goes on Thursday morning,
7 that starts in the afternoon, that attorney argument is
8 certainly going to need to continue throughout the day.
9 That was really my point, Your Honor.
10 THE COURT: All right.
11 MR. BALASSA: That’s number one. Number two, let
12 me speak for a moment to Professor Williams. He is an
13 expert. He is also an advisor to the committee and, in that
14 respect, is a fact witness who will testify --
15 THE COURT: Advisor to the special committee, the
16 independent --
17 MR. BALASSA: To the independent committee, to our
18 committee, the Debtor’s independent committee where he would
19 come to court and testify about the expert advice that he
20 gave us, the independent committee. His opinions would be
21 relevant on colorability. We believe his opinions are also
22 relevant to the independent committee’s consideration of
23 best interest and he is also going to respond to the
24 creditors committee’s expert, Mr. (indiscernible). So he
25 wears multiple hats here.
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1 And we do object to him being called by the
2 creditors committee, especially being called before Mr.
3 (indiscernible), who he’s responding to. We think it would
4 be more productive for Professor Williams to be called once,
5 for him to speak to all the different issues, wearing the
6 different hats and we would propose that he be called once
7 in our case and the creditors committee can then cross
8 examine him in our case and raise what they would have had
9 they called him in their case. But the idea is not to have
10 him come to the stand multiple times and trying to parse
11 between the fact part and the expert part. He is our
12 expert. I think it’s impractical and it’s done --
13 THE COURT: So let me hear from Mr. Martin about
14 how -- why the committee wants to do it their way. Is he
15 being called the first go-round by you on the issue of --
16 well, let me ask the question.
17 MR. MARTIN: They’re actually, as between the
18 committee as the Debtor as far as I can tell, much of what
19 Mr. Williams opines to, financial aspects of some of the
20 (indiscernible)’s solvency, for example, and valuation
21 actually are not particularly in dispute.
22 THE COURT: Right.
23 MR. MARTIN: So we do intend to call him and we
24 think it is a significant part of our case to call him about
25 in his role as an advisor. And I should also say it’s not
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1 any secret. I think the Court has raised it before. There
2 will be a motion in limine with respect to him. We have
3 agreed those would be filed on Thursday, right? They might
4 hand some back at us as well.
5 THE COURT: Could I ask you to hold on for a
6 minute?
7 MR. MARTIN: Absolutely, Your Honor.
8 THE COURT: Go ahead, Mr. Martin.
9 MR. MARTIN: I first learned of the notion that
10 they wanted to call him twice yesterday and while I
11 appreciate the notion that they would like him to go after
12 Mr. (indiscernible), the -- they have Mr. (indiscernible)’s
13 report. They’re deposing Mr. (indiscernible) as we speak.
14 So taking that out of order or having him go once, if he’s
15 going to go once, having him go when we call him seems to be
16 the preferred course. But let me ask --
17 THE COURT: So he’s being put on in your case to
18 demonstrate what?
19 MR. MARTIN: To demonstrate what advice was given
20 or not given to the investigative committee and to question
21 him about that advice and questions did you consider this,
22 did you consider -- but he’s an advisor. He’s a fact
23 witness with respect to that. But let me, if I may, Your
24 Honor, just to finish on one point.
25 So when Mr. Balassa raised this with me, and we
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1 were discussing it last night, I asked. I said I would like
2 to consider the proposal of calling Mr. Williams once,
3 having him called once in their case. If I could have the
4 option and determine it then about whether we put him up
5 first or they put him up.
6 Whether I go first or second. And I was then
7 informed that, no, the Debtors not only want to call -- have
8 him called only in their case but they’d also like to
9 dictate that I can only go second. So at that point, I’m
10 trying to accommodate and -- but I really do feel like we’re
11 being dictate to about how and when we call witnesses in
12 that circumstance.
13 I’m happy to accommodate. We, frankly, started
14 the process thinking it would be our case, their case
15 because obviously we’ve been at (indiscernible) heads on a
16 lot of things here and we worked that out with respect to
17 every other witness. But if I have an important fact
18 witness I want to be able to decide once the trial gets
19 going whether I’m going to do my exam first or second if
20 it’s going to be called completely out of order. And I
21 think that’s a fair option --
22 THE COURT: So Mr. Balassa, so would your concerns
23 be addressed by having -- they do their “direct” with
24 Professor Williams, right, but he’s your witness, so it’s
25 going to be in the nature of cross, right?
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1 MR. BALASSA: That’s correct.
2 THE COURT: Okay. And then on the schedule it
3 says objectors 1.0 to 1.5 asterisk. So would your
4 efficiency concerns be addressed by then allowing Mr.
5 (indiscernible) to testify and your entire examination/cross
6 examination is reserved to after Mr. (indiscernible).
7 MR. BALASSA: Your Honor, Professor Williams’
8 testimony isn’t so deeply compartmentalized. The different
9 pieces that we discussed, they’re all overlapping. And so
10 Mr. Martin just said, well, I just want to examine him on
11 the fact part. He has also said, well, we agree with some
12 of his conclusions and he’s going to want to bring that out.
13 Professor Williams is our expert. We’re entitled
14 to present his opinions to the Court and I think what Mr.
15 Martin is calling fact, he wants to bring our portions of
16 the opinion that he likes. And while this is the movant’s
17 case, there are still fundamental considerations of fairness
18 here. We should be the ones to present Professor Williams’
19 opinions. To the extent that Mr. Martin has cross
20 examination questions for him, wants to examine on things he
21 didn’t consider or didn’t tell the independent committee,
22 he’s certainly entitled to do that on cross and he can
23 accomplish that if we call Professor Williams once in our
24 case. So that’s the fairness consideration.
25 The efficiency consideration goes in part to when
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1 --
2 THE COURT: So that does make some sense. But
3 then how do we deal with the fact that -- so if we were
4 hypothetically to strike Professor Williams at the number 7
5 slot, right, and then we had Mr. Zelin testifying first,
6 then we have simply Mr. Zelin saying what he disagrees with
7 about Professor Williams’ report and not being able to
8 comment on the testimony. Or maybe that’s not part of what
9 Mr. Zelin’s going to say.
10 MR. BALASSA: That’s right, Your Honor. Mr.
11 Zelin, he is not shooting at Professor Williams.
12 THE COURT: Okay. Well, then that supports my
13 I’ll call it becoming a suggestion that after -- is it
14 Weiner or Weiner?
15 MR. BALASSA: Weiner, I understand, Your Honor.
16 THE COURT: Weiner? Yes?
17 MR. BALASSA: Weiner, Weiner.
18 THE COURT: So after Mr. Weiner, then your
19 concerns would be addressed by the movants going right to
20 Mr. Zelin and then the objector’s case leads with Mr.
21 Williams once and then full cross by Mr. Martin.
22 MR. BALASSA: Correct, Your Honor.
23 THE COURT: There is something a little unsettling
24 about preempting the presentation of the other side’s
25 expert, Mr. Martin. So when you say --
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1 MR. MARTIN: I entirely agree with that, Your
2 Honor, and that’s why I was very clear that -- they’re the
3 ones that raised the notion, I think in response to a
4 question by the Court at some proceeding we’ve had of, you
5 know, what’s he an expert on and their response was he was
6 also an advisor. And so I’m -- but with respect to experts,
7 I completely understand that concern, so which is why I --
8 THE COURT: I think we’re really splitting hairs
9 and I certainly don’t want to go through and have to say are
10 you giving that answer as an advisor or are you giving that
11 answer as an expert? I mean, it is what it is. So I think
12 the best thing to do is to do it the way that Mr. Balassa
13 suggests and he’ll just be on the witness stand for a long
14 time.
15 MR. MARTIN: Okay.
16 THE COURT: All right?
17 MR. MARTIN: That’s fine.
18 THE COURT: So we’ll flip that and it looks like
19 Professor Williams will probably be all of Wednesday
20 afternoon.
21 MR. BALASSA: Yes, Your Honor.
22 THE COURT: All right? Okay.
23 MR. BALASSA: A couple other issues. We have some
24 disagreement around video but before addressing that I want
25 to bring to your Court’s -- the Court’s attention that there
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1 are deposition destinations that are going to be submitted
2 to the Court in hard copy. Under the scheduling order,
3 that’s going to happen on Friday along with exhibit lists.
4 And to the extent that there are disputes about exhibits, we
5 haven’t built in time to address that.
6 THE COURT: Okay. So let’s talk about that. So
7 my idea of disputes about exhibits is that there are very
8 few. So is it that you just haven’t gotten to that part of
9 your preparation and coordination or are there actually
10 going to be live -- there are going to be actual disputes
11 about exhibits?
12 MR. BALASSA: We don’t know yet.
13 MR. MARTIN: Well, late last week I think we
14 actually raised this issue and said we do not anticipate
15 raising any issues with authenticity of documents. We were
16 told that they weren’t sure yet and obviously we have a
17 whole bunch of objectors, all of whom asked for February 4
18 or whenever and 5 to raise those issues. So I don’t know.
19 As long as no one else is raising those kinds of issues, we
20 have already declared that we don’t intend to.
21 MR. BALASSA: To be accurate, Your Honor, we did
22 respond to Mr. Martin that we generally don’t expect to have
23 authenticity objections, either. We don’t think people are
24 faking documents here. But I don’t know whether they’re
25 going to have objections, for example, and hearsay on other
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1 grounds and we just haven’t exchanged objections on
2 exhibits. That’ll happen tomorrow. I just wanted to flag
3 the issue.
4 THE COURT: There’s nothing that’s going to rise
5 to the level of motions in limine?
6 MR. BALASSA: No that I’m aware of.
7 MR. MARTIN: Not that I’m presently aware of on
8 the documents, no.
9 THE COURT: Okay.
10 MR. BALASSA: I don’t know what disputes may arise
11 with respect to --
12 MR. MARTIN: Actually, I should say one thing
13 about that, Your Honor. There are some items that -- and
14 frankly, it ties in with the Williams piece. But so there
15 are a few documents that we think may have the kinds of
16 objections that Mr. Balassa mentioned, legitimate hearsay
17 kinds of objection. But we’ll get to --
18 THE COURT: Well, those generally we would take on
19 the fly if you couldn’t resolve them.
20 MR. BALASSA: Haven’t seen those yet, it’s not yet
21 their deadline for making those objections.
22 THE COURT: Okay, so let me just go back to the
23 depo designations just to be sure we’re on the same page.
24 What I generally have parties do that works best is I get a
25 very colorful copy of the deposition that has a key, that
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1 has, you know, Mr. Martin’s are in light blue and the
2 Debtor’s are in yellow and Ms. Schonholtz’s are in pink. I
3 shouldn’t have said that. That was completely accidental.
4 But you get the idea, so not multiple copies of a deposition
5 but one transcript with different colors.
6 MR. BALASSA: That’s our plan, Your Honor.
7 THE COURT: Okay, all right. So that’s good.
8 MR. BALASSA: And we don’t know the extent to
9 which there will be objections to deps that will need to be
10 addressed. My general view is in a bench trial, Your Honor
11 can read through the transcripts and will discount the
12 portions that are objectionable.
13 THE COURT: Correct. I’m not going to run through
14 a million objections on the testimony that the witness gave
15 at the deposition was hearsay or not. I’ll just -- it’s
16 just going to go into the sausage making.
17 MR. BALASSA: As we expected.
18 THE COURT: Mr. Martin?
19 MR. MARTIN: I was just going to say, Your Honor,
20 yes, and that’s enhanced by the fact that it’s STN. It’s
21 not a final determination, and so there may be arguments
22 about the weight of those things but that is part of the
23 reason that we think there should not be, except for some
24 limited specific things, there should not really be hearsay
25 objections because presumably this is a showing that this
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1 could be shown eventually (indiscernible).
2 MR. BALASSA: We agree with that, Your Honor.
3 THE COURT: All right.
4 MR. BALASSA: So we do have some dispute around
5 the video that’s going to be played in court. There’s three
6 disputes that Mr. Martin and I have identified for which we
7 do need the Court’s guidance.
8 THE COURT: Okay.
9 MR. BALASSA: So the first is whether one party’s
10 fairness for counter designations. So, for instance, the
11 Debtor’s fairness for counter designations to testimony that
12 Mr. Martin has designated will get played with the testimony
13 that Mr. Martin plays in court.
14 And so, for instance, if there’s questioning about
15 a document and then there’s a follow-up question and answer
16 about the same document, we’ve designated that for fairness,
17 completeness for testimony about that document by that
18 witness, by that examiner. And under the rules of evidence,
19 under Rule 109, we think it has to be played with Mr.
20 Martin’s designation. As a matter of equity, we don’t think
21 it’s fair --
22 THE COURT: Well, as a matter of not driving me
23 crazy I think it has to be played because the notion of
24 going through the video and playing the designations and
25 then replaying the follow-up questions, it’ll be extremely
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1 difficult for me to have a coherent view of the testimony,
2 you know.
3 MR. BALASSA: So I wasn’t to my last point, but
4 that was it, coherence and efficiency.
5 MR. MARTIN: Your Honor, if I may speak to this.
6 THE COURT: Yeah, I mean, I suppose there’s a
7 difference and this at some point might be more trouble than
8 it’s worth for all of you. I suppose there’s a difference
9 between an objection that says, so, hypothetically Mr.
10 Martin highlights one Q&A, okay, and Mr. Balassa says, no,
11 no, no, you’ve got to have two Q&As before and one Q&A
12 after, okay. That’s one thing, okay.
13 But then Mr. Martin doesn’t want to play and all
14 of that occurs between 10:00 and 1:00 in a deposition. And
15 then the last hour of the deposition, there’s a whole
16 subject in the deposition that he doesn’t want to play,
17 right? Do you -- are you saying that you would have the
18 ability to designate that and you want to play that?
19 MR. BALASSA: No, Your Honor.
20 MR. MARTIN: This is the disagreement I thought we
21 were having, which I thought was fairly limited, Your Honor.
22 The question that I asked and maybe the answer is different
23 is -- and maybe we just disagree about what fairness
24 designations are, that there’s a fairness designation that
25 is if we only put in half of the answer, obviously the
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1 Court’s not going to allow that. Then there’s the --
2 THE COURT: Context, the context.
3 MR. MARTIN: The context that you mentioned, but
4 when I pose the question, the answer I was given was, no,
5 you know, if we have, you know, eight questions or, you
6 know, a few questions that we asked on a particular document
7 and we got answers but then Mr. Balassa later in the
8 deposition when his turn came asked about it, my
9 understanding is his idea of fairness is that he can force
10 us when we’re putting on our video to put up his question.
11 And that’s not what would happen with a witness on
12 the stand. We get to ask the questions we want to ask and
13 the Court can obviously control that with I don’t quite
14 understand what you’re saying. Can you ask a different
15 question? That, you know is it three questions, five
16 questions. He has his chance on his turn to make his
17 argument.
18 THE COURT: Well, the rules in the depo presumably
19 were the same as the rules which we hear as to scope, right?
20 MR. MARTIN: That’s correct.
21 THE COURT: So you finish -- well, wait. Hold on.
22 MR. MARTIN: Oh.
23 MR. BALASSA: Your Honor?
24 THE COURT: I’m just -- I’m hearing this in real
25 time, so I’m just trying to think it through. Let’s talk
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1 about concrete example of a witness.
2 MR. BALASSA: Your Honor, I have some examples
3 that I can send up to the Court, real deposition examples,
4 but I think we’re talking about two scenarios and one is
5 where Mr. Martin has examined a witness and he gets an
6 answer that he wants to play to the Court and then he asks
7 the question a little bit later on the same document and he
8 gets an answer that he doesn’t like. And we’re saying those
9 two need to be played together. We would need to replay the
10 earlier context in Q&A in order for us to --
11 THE COURT: Well, generally speaking, context
12 should all -- the context testimony should all be together.
13 I’m trying to come up with a scenario in which there’s a
14 whole subject matter that Mr. Martin doesn’t want to play
15 and then you do.
16 MR. BALASSA: Your Honor, that is not what we’re
17 trying to put into his case. But where he’s asking
18 questions about a given document or a specific subject
19 matter and he gets some answers that he likes and wants to
20 play. He gets some answers he doesn’t like and doesn’t want
21 to play and wants us to have to play later. That would mean
22 taking that Q&A, dicing up the transcript and taking that
23 Q&A out of context on the same subject matter and that’s not
24 right.
25 THE COURT: You see, the problem that we have is
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1 that if this were a live witness, right -- okay, so let’s
2 try to channel that. If this were a live witness, Mr.
3 Martin would put the witness on, right, and then you would
4 get up and you would do a cross examination. And I would
5 have the benefit of your saying Mr. (indiscernible) who
6 testified earlier that X, is that correct, yes. And you
7 also in response to a question Mr. Martin asked said Y, is
8 that correct? And then you would come up with your actual
9 question. So you would lay a little background so that I
10 would understand the question.
11 The problem that doing it your way, Mr. Martin, is
12 that it’s going to be -- I’m going to be parachuted into an
13 answer, a Q&A and not have the benefit of the run-up in the
14 context.
15 MR. MARTIN: I don’t think so, Your Honor. I
16 think it works exactly the same way and I, frankly,
17 envisioned it working exactly the way you just posed it.
18 And to do it any other way is allowing them to entirely
19 control our presentation. And let me give a concrete
20 example, okay.
21 Let’s say there’s a witness who I asked a question
22 of on a particular document and they say I don’t recall.
23 And three hours later in the deposition Mr. Balassa asks
24 them and they can answer the question. I can’t be forced to
25 put his question on that into my presentation. He can come
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1 back up and in his he can say, oh, you remember all these
2 things about these documents but otherwise essentially I
3 have to show Mr. Balassa in advance exactly what my trial
4 presentation is going to be and he gets to inject everything
5 he wants right in between the questions. I would rather
6 have the witness live. He can’t inject his questions.
7 THE COURT: I would rather have a witness live,
8 too, but you took -- you know, that wasn’t one of the
9 options.
10 MR. BALASSA: Your Honor, the Court eluded to live
11 testimony. I’ll use that as a baseline. In live testimony,
12 Mr. Martin asks a witness a question, the witness answers
13 and they like the answer. He asks another question, the
14 witness gives an answer he doesn’t like. That’s heard by
15 the Court and by the jury in a jury trial and he has to live
16 with that.
17 The deposition, what he’s trying to do is to cut
18 off the Q&A he doesn’t like.
19 THE COURT: But here’s the thing. And I’m not --
20 we’ll solve this. We’ve already spent more than enough time
21 on it. But I would suggest to you that in your example, Mr.
22 Martin, if you have a series of questions and it’s I don’t
23 recall, I don’t recall, I don’t recall and then Mr. Balassa
24 pops up and, lo and behold, the witness recalls, it’s going
25 to be kind of annoying to me that in your case, you know,
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1 being led to believe, you know, that the sky is blue and
2 then later on in the deposition the witness says it was
3 raining.
4 So it just seems -- I’m very torn between wanting
5 to let you present it your way but also just applying some
6 common sense here in the fact that, you know, that there is
7 no jury. So, you know, I would think that most of it would
8 fall into the -- that’s easy, it’s context.
9 MR. MARTIN: I’m not so sure about that, Your
10 Honor. But it is a bench trial, Your Honor, and that makes
11 a difference.
12 THE COURT: You know, I’d like to err on the side
13 of efficiency and what I would say to you, Mr. Martin, you
14 know, that if there are any instances where you feel very
15 strongly that you think they should be presented separately,
16 we can take that up.
17 MR. MARTIN: That’s fair. That’s a fair
18 compromise, Your Honor.
19 THE COURT: All right? But for the most part I
20 would like you all to err on the side of context in a
21 cohesive (indiscernible).
22 MR. MARTIN: Okay. Thank you.
23 THE COURT: All right? That’s kind of the best I
24 can do. Okay.
25 MR. BALASSA: Your Honor, the second issue relates
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1 to the scope of the testimony that we planned. And so, for
2 instance, we know that the committee, if they want to play
3 testimony for Mr. Fraser and Mr. McDonald, after Mr.
4 Fraser’s testimony is played, we’ll presumably have some
5 portions that we would like to play and the dispute between
6 us is whether we are limited in the scope of what we play.
7 Or put another way, do we then have to play part of Mr.
8 Fraser later --
9 MR. MARTIN: (Indiscernible), Your Honor.
10 THE COURT: Okay.
11 MR. MARTIN: In light of what the Court just said,
12 these issues are interrelated to each other. I’m fine
13 trying to work this out so we have one set of video. We’re
14 going to now -- let me be clear about this.
15 THE COURT: But, again, you know, if it’s cross
16 examination then it’s limited by the scope. But if you were
17 going to affirmatively call some, you know, call someone in
18 your case, is what you’re going to play limited by the
19 scope?
20 MR. BALASSA: That’s the question, Your Honor.
21 MR. MARTIN: That’s the question.
22 THE COURT: Right.
23 MR. MARTIN: He’s saying he doesn’t want it to be
24 and what I’m saying is in light of the guidance the Court
25 had on the first question -- these questions are all
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1 interrelated, which is how does the Court see video, how
2 does it video evidence? I have a better understanding of
3 that now. I’m okay. I think we can work this out. And if
4 I think I’m being prejudiced by it, the Court has said --
5 THE COURT: Right. But again, let’s pretend it’s
6 a live testimony, right, and you put on a witness in your
7 case. The cross examination is limited to the scope. But
8 would that preclude if the Debtors wanted to affirmatively
9 call the witness in their case? Would they be limited by
10 the scope?
11 MR. MARTIN: No.
12 THE COURT: No.
13 MR. MARTIN: What this means -- this is a very --
14 there’s only one practical thing that this (indiscernible),
15 Your Honor, if I can cut to the end of it on this point.
16 Mr. Balassa’s going to ask for us to give him our video,
17 what we plan to use, some number of -- 48 hours in advance,
18 okay. He now has to tell me what he’s going to use so that
19 then I can also think about what I would put back. As long
20 as that’s the ground rules, both of us will have that
21 presentation in advance of trial and I am fine.
22 MR. BALASSA: We are fine with that, Your Honor.
23 THE COURT: Okay, great. All right. So what else
24 does that leave us with? So on exhibits, let’s talk really
25 nitty gritty here. So on exhibits what I generally like to
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1 get is, first of all, are you wring up the Courtroom?
2 MR. BALASSA: We are, Your Honor.
3 THE COURT: Okay. Are you doing real-time
4 reporting? Are you bringing a private reporter?
5 MR. BALASSA: We will, Your Honor.
6 THE COURT: Okay. So that helps us to know where,
7 you know, we’ll get that set up. Are there any ceiling
8 issues?
9 MR. MARTIN: I have no doubt there will be, Your
10 Honor, but I have no idea what they are at this point.
11 THE COURT: Wonderful.
12 MR. MARTIN: Your Honor, we’ve had deposition
13 transcripts, entire transcripts, you know, name, what’s your
14 job, declared highly confidential. So when I say that, I’m
15 not --
16 THE COURT: That’s not going to work.
17 MR. BALASSA: That’s not an issue for the Debtors,
18 Your Honor. We’ll work that out with third parties.
19 THE COURT: Okay. Because the Courtroom should be
20 open to the fullest extent possible. And to the extent that
21 there is sensitive, properly proprietary sensitive
22 information that should be shielded from the public, you
23 know, we need to have a real discussion about that so that I
24 can be assured that it’s, you know, doesn’t exceed the scope
25 of what’s proper.
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1 MR. BALASSA: Your Honor, I may have overstated
2 one issue with respect to the Debtors. There may be some
3 plan-related issues.
4 THE COURT: Plan-related issues, I doubt that,
5 right. and then we can deal with that as we discussed
6 before in one of two ways. To the extent that a witness can
7 give testimony, can see a document that contains
8 confidential information and testimony can be elicited in
9 general terms by using shorthand or, you know, I use the
10 sale context, Bidder A, Bidder B and that everybody knows
11 what we’re talking about, then we don’t have to seal. To
12 the extent that that’s impossible or impractical, then we’ll
13 have to seal the Courtroom for those limited portions. But
14 I like that that all be concentrated to the extent possible
15 so we’re not having the problem of going on the record, off
16 the record, on the record, not off the record, sealed,
17 unsealed, okay?
18 MR. BALASSA: I understand.
19 THE COURT: But Mr. Rossman’s standing behind you
20 I think on this issue.
21 MR. ROSSMAN: Yeah, Your Honor, I wanted to
22 comment.
23 THE COURT: Sure.
24 MR. ROSSMAN: I wanted to give you assurance on
25 that. I think we narrow down the sealing issues to two
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1 numbers in our submission and we had no disputes about that.
2 So I think we’re going to proceed in the same way. I wanted
3 to remind Your Honor that our (indiscernible) in the prior
4 pre-trial conference that the way we’re going to handle the
5 category that we all consider under the protective order
6 confidential as opposed to highly confidential is that we
7 want those exhibits -- they can remain stamped and treated
8 as confidential under the protective order. So they can’t
9 be used for other purposes outside the Courtroom. We’ll
10 give them to the witnesses. Counsel can use them.
11 Hopefully people won’t just start blurting out the
12 information and we can, you know, we don’t need to display
13 them to the public, obviously, if there are those issues.
14 So I think in a practical way, we’re not going to have --
15 we’ll have very little if any time where we’re going to need
16 to clear or seal the Courtroom.
17 And on that practical issue, I wanted to suggest
18 one more thing to Your Honor to make your life and our lives
19 easier. Mr. Martin makes a good point that this is an STN
20 proceeding and it has blown up unfortunately into we have a
21 mini trial on the merits. What I would suggest is that --
22 THE COURT: I’ll take that not as a criticism but
23 as an observation.
24 MR. ROSSMAN: Well, it’s certainly not a criticism
25 of the Court, Your Honor. I would suggest that I agree very
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1 much with Mr. Balassa that I would urge Your Honor to focus
2 on legal infirmities of the motion. I think the facts, you
3 know, you could almost accept 99% of the committee’s
4 complaints. Until we reach the conclusion, there’s nothing
5 of value. But they can put their case on the way they want
6 to put their case on and that’s why I said to Mr. Martin,
7 hearing your thoughts on the matter. If he wants to hear my
8 client’s, I will bring them. So that’s why Mr. Weiner is
9 being dragged away from his family time to come sit here,
10 which is fine.
11 But I just -- you know, my thought on all of these
12 evidentiary issues which are going to tangle Your Honor up
13 and us up in the pre-trial prep is you don’t need to make a
14 final call --
15 THE COURT: No, I’ve already said this. I’m not -
16 - you know, the findings are going to be findings solely in
17 the context of the STN. They’re not going to be ultimate
18 findings.
19 MR. ROSSMAN: No, what I mean particularly is on
20 evidentiary issues, rather than worry about relevance,
21 hearsay and the things that leave everyone brain damaged, we
22 can just say --
23 THE COURT: I totally agree.
24 MR. ROSSMAN: -- they can to in --
25 THE COURT: Right. Because you remember -- right,
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1 I mean, it’s just a reminder of what we’re doing. It’s not
2 -- yeah.
3 MR. ROSSMAN: We’re great on that.
4 THE COURT: Okay. So that’s great.
5 MR. MARTIN: I’d actually like to be heard on the
6 logistical issue on confidential documents that Mr. Rossman
7 raised. So we’ve proceeded as -- in committees
8 unfortunately in many Chapter 11 cases proceed now, which
9 is, you know, there’s discovery or, from this case,
10 voluntary discovery. And everyone marks everything
11 confidential, okay. This is an event about -- this is going
12 to be a court hearing about historical events that actually
13 occurred. And as the Court indicated, the Courts are
14 supposed to be open. The statute says that.
15 So I disagree with Mr. Rossman about the notion
16 that every document that’s been stamped confidential -- we
17 disagree with those characterizations because they’re not
18 legitimately confidential. They’re about historical events.
19 They’re going to be examined in the United States courtroom.
20 And let me just translate that from
21 (indiscernible) to very concretely. He said we won’t
22 display the documents. Are we going to turn off that
23 monitor and that monitor when there are, you know, the
24 people are welcome to attend court? We would actually have
25 to seal the Courtroom if we’re going to do that.
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1 THE COURT: Well, I’m not going to -- I mean, I
2 think you’re right on that. So either we’re going to have a
3 fight about this or we’re not. So my --
4 MR. MARTIN: They have our exhibit list and, as I
5 had understood it, they have our exhibit list. We were
6 asked to put it in. If there are documents that they think
7 are highly confidential, they should raise that. And if
8 they think there are documents that are legitimately
9 confidential, they should raise that. But what everybody
10 did was just blanket everything and I understand that.
11 THE COURT: Well, whenever I approve your
12 confidentiality agreements, it’s always under the
13 understanding that if you want to seal a document you have
14 to make a showing about what it takes to seal a document.
15 So I guess I nodded too readily at what Mr. Rossman was
16 saying because I thought it was indicating an agreement
17 along those lines. If you don’t agree, then I’ll deal with
18 it.
19 MR. ROSSMAN: Don’t take away your nodding just
20 yet, Your Honor. Let me talk to you about the issue that
21 I’m concerned about and that we’re going to be prejudiced
22 by, okay.
23 We cooperated voluntarily and we cooperated fully
24 and expeditiously in the committee’s investigation, never
25 mind the fact that the Debtors were conducting independent
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1 committee investigation, okay. We gave the committee what
2 they wanted. We gave them very broad scope of discovery.
3 We had people available for deposition, pre-complaint, okay,
4 and they had the benefit of that. We gave them access to
5 all this information on the assumption that we were going to
6 have a protective order that among the things that was in
7 the protective order was a use restriction that we were
8 vigorous about. We raised it the first time we were in
9 court, Your Honor. We didn’t want to turn this information
10 over so that Mr. Martin could give it to the creditors who
11 were bringing other actions against our client in other
12 courtrooms or, frankly, for their creditors to trade on,
13 okay.
14 That is not an appropriate use of the confidential
15 information and that’s the abuse that I’m very much
16 concerned about. it’s very real here, okay. We have
17 people, you know, who are sitting on the committee, actively
18 trading in this debt, okay, who are making a litigation of
19 debt. We have people who are participating in this
20 proceeding who are subject to the protective order who filed
21 their own creditor actions, okay, not estate actions, who
22 have indicated that they think they have causes of action
23 that they want to file as individual creditors.
24 For those people, they shouldn’t get a massive leg
25 up in potential claims that they want to bring against my
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1 clients for the banks or other participants to use in those
2 here, okay, by getting involved in the STN process using the
3 estate’s resources to get discovery of my client’s and other
4 clients’ files here and then turn around and use them for
5 non-estate purposes. That is how I think we’d be very much
6 prejudiced. And if we knew that they weren’t going to honor
7 the protective order, if we knew that they were going to use
8 them for other purposes, then we might have had that fight
9 at the outset and insisted on subpoenas and drew lines in
10 terms of scope rather than giving them essentially
11 everything they wanted in reliance on that one very critical
12 protection. That’s all I’m asking for, Your Honor.
13 MR. MARTIN: Your Honor, can I (indiscernible)?
14 THE COURT: Sure.
15 MR. MARTIN: First of all, the Court entered I
16 think without objection a trading order in this case for one
17 member of the creditor’s committee who has wall up in
18 accordance with practices that are filed in Chapter 11 cases
19 every day. And to have Mr. Rossman talk about that here I
20 think is, frankly, way off topic on this.
21 THE COURT: But we have a confluence of issues
22 here. We have the use restriction, right. And then we have
23 the confidentiality.
24 MR. MARTIN: Things come out in court, as Your
25 Honor said. Courtrooms are open. And when it comes time to
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1 have a hearing in a case, whether it was the STN or if this
2 was all kicked to a 9019 when frankly we wouldn’t have
3 voluntary discovery but we would have actual discovery to
4 actually compel things from Mr. Rossman’s clients, you know,
5 and I disagree of this characterization that they gave us
6 everything we wanted. We were getting documents I think
7 yesterday from his client that are still being produced.
8 But in any event, the use restriction falls into
9 two categories. One, this notion that somehow it means
10 courtrooms have to be sealed so that the public can’t get
11 information about a bankruptcy case and about historical
12 events, that the public can’t write newspapers, can do
13 anything they want with it. A hearing is a hearing and it’s
14 supposed to be open at the end of the day.
15 The second question about third-party lawsuits is
16 a completely different question. That is an issue between
17 he has contractual rights under the protective order against
18 third parties and presumably if those third parties want to,
19 under whatever the terms of it are, want to use those
20 documents at a hearing in another case in some other
21 courtroom, okay, they’ve got to go, you know, serve a new
22 subpoena and get the documents or work it out with Mr.
23 Rossman. That is a discussion, frankly, that is typically
24 had in connection with these things, okay.
25 But to seal the Courtroom about central events,
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1 about this bankruptcy case -- we’ve had very few hearings in
2 this bankruptcy case in court. And now we’re being asked to
3 seal, you know, a major hearing that this case has been
4 working towards the entire time. It’s inappropriate. The
5 use clause can be policed elsewhere. He got his rights.
6 Parties agreed to it and the document says what it says.
7 THE COURT: Mr. Rossman --
8 MR. ROSSMAN: I’m not asking to seal the
9 Courtroom.
10 THE COURT: No, but so let’s get very granular
11 here. You said had I known I would have done things
12 differently. But had you known and we said -- and it should
13 not be a surprise -- we knew where this was going. I mean,
14 they wanted a discovery because they’re making an STN motion
15 and eventually there was going to be a trial. So it’s not a
16 surprise that they want to use the documents that they
17 obtained in discovery.
18 So I would say to you that if this conversation
19 had played out then and you had expressed these concerns, I
20 would have said something like we can do it the easy way or
21 the hard way. You could just, you know, produce documents
22 and to the extent that you believe at the end of the day
23 something truly is deserving of being sealed, we’ll deal
24 with that then, right. But this whole concept of a use
25 restriction, I don’t know that it would have come out --
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1 maybe it would have come out differently.
2 But so if we don’t put the document up on the
3 monitor, right -- forget about monitors, right. Let’s not
4 have technology drive the bus, okay. So I have a document
5 binder, right, and the witness has a document binder and
6 looking at the documents, right, and there’s testimony about
7 the documents.
8 MR. ROSSMAN: If I may, Your Honor, this is
9 simple. In the old school way when we used to try cases
10 with paper, okay, witness would have a copy, you have a copy
11 --
12 THE COURT: The crowd would have a copy.
13 MR. ROSSMAN: The gallery would not have a copy.
14 THE COURT: This is true.
15 MR. ROSSMAN: Okay? The gallery should not have a
16 copy. That’s it, okay. That’s all I’m saying.
17 THE COURT: But and I don’t mean to be --
18 MR. ROSSMAN: They hear it. They hear the
19 testimony.
20 THE COURT: Right. But I don’t mean to be, you
21 know, kind of a wise guy about it, but someone in the
22 gallery might say, lean over to Mr. Henes, probably not Mr.
23 Henes but someone working with Mr. Henes would say do you
24 have some extra copies and they might hand back some extra
25 copies into the gallery.
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1 MR. ROSSMAN: Well, I would say, Your Honor, in a
2 case where there’s a protective order, which is probably
3 every case that everyone sitting around here has ever tried
4 has a protective order, has documents that were labeled
5 confidential, the way in my experience -- and people can
6 pipe up if their experience is different -- is that document
7 could be used in open court. The witness can testify as
8 long as they’re not really, you know, blabbing about
9 substance of the document. And the document could not be
10 handed out to the gallery.
11 And that’s the part that I have a real issue with
12 because, you know, Your Honor, if the result of this process
13 is that, you know, people are going to use this information
14 to trade on or use this information to bring other lawsuits,
15 then I don’t think we’re doing (indiscernible), Your Honor.
16 MR. MARTIN: We can short circuit this another
17 way, Your Honor.
18 THE COURT: I think we can short circuit it
19 because to the extent that you do it the old fashioned way,
20 right, you have Mr. Witness on the stand. Mr. Witness, I’m
21 showing you a memo from Bob to Joe, dated such and such a
22 date and there’s testimony that’s given at a 30,000 foot
23 level, right. So that’s completely open, right. No one’s
24 shown any document.
25 But hypothetical creditor who wants to bring his
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1 own lawsuit is writing down the parameters of that document
2 and then to get around the use restriction will simply then
3 in some other context file a document request.
4 MR. ROSSMAN: Get it when they get their
5 discovery, which would not mean --
6 THE COURT: Okay.
7 MR. ROSSMAN: But that’s important, Your Honor,
8 because that’s pre-complaint. It’s the difference between
9 pre-complaint discovery and there are entire statutes passed
10 about this, okay, and discovery that you get after your
11 compliant that actually passes muster. Then that’s just on
12 the --
13 THE COURT: So let’s try to get practical and move
14 this along. How much of a problem are we really talking
15 about?
16 MR. MARTIN: What we’re really talking about, Your
17 Honor, is the fact that every document essentially in the
18 case has been labeled confidential. The protective order
19 for all the provisions that Mr. Rossman says it has also
20 says that parties like the creditors committee can challenge
21 legitimate, you know, legitimate claims, okay. So if --
22 [crosstalk]
23 MR. MARTIN: If they want me to go through my
24 exhibit --
25 THE COURT: Only if what, Mr. --
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1 MR. ROSSMAN: But for use in the litigation, he
2 can’t challenge the confidentiality designation if his
3 purpose is to hand it to one of his clients to trade on or
4 his purpose is to hand it to, you know, one of the
5 indentured trustees to sue on.
6 MR. MARTIN: But my purpose can be to be able to
7 use that document openly in the United States courtroom.
8 MR. ROSSMAN: But I’m not restraining you to do
9 that. That’s the issue, Your Honor. I am not suggesting --
10 there may be one or two documents where we have a sealing
11 issue. Otherwise the Courtroom’s open.
12 THE COURT: But my concept is that -- and I don’t
13 know if I’ve draw a distinction between so-called voluntary
14 discovery or not. My concept is you can all agree among
15 yourselves about confidentiality to whatever extent you
16 want. It has nothing to do with my ability to make a
17 determination under the code as to what properly is
18 deserving of being sealed.
19 You can enforce your use restriction. You can
20 enforce your use restriction but you still have to make the
21 showing that what you’re seeking to have be sealed complies
22 with that. They’re still bound by the use restriction.
23 MR. ROSSMAN: Correct. Then that -- and that I
24 think is the answer to our problem because all I’m
25 suggesting is he can conduct his case in open court. He can
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1 ask his questions in open court. If he gets to a
2 confidential document, okay, he can’t turn around and hand
3 that document who’s not subject to the protective order,
4 okay. That seems pretty appropriate to me. And the
5 document remains subject to the use restriction. That’s all
6 I’m suggesting.
7 THE COURT: Well, I think we’ll leave it. Look,
8 the devil’s going to be in the details.
9 MR. MARTIN: That’s a little bit what I’m getting
10 at, Your Honor. We have screens here. So let me pose a
11 couple of --
12 MR. ROSSMAN: So we can take down the screens that
13 face the Courtroom. That happens all the time. The lawyer
14 would have screens, the witness have a screen, you’ll have a
15 screen. The case flows with no interruption.
16 MR. MARTIN: Let me pose another hypothetical.
17 The Debtors have had, not surprisingly, a much easier time
18 declassifying documents than we have because -- and all
19 their documents are labeled confidential, so the screens are
20 all going to be shut down when they’re doing their
21 presentation or just ours?
22 THE COURT: Let me suggest this to you, okay. At
23 the point at which I get exhibit binders for witnesses,
24 whatever, I’m going to be able to see what you’re talking
25 about. right now I can’t even see what you’re talking
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1 about. so what I think we’re going to have to do is -- and
2 if I ever was able to get to this level of nitty gritty,
3 right -- I want a master set of exhibits for each of the
4 sides. And then for each witness I want a binder of
5 exhibits, witness binders for direct and for cross, okay.
6 So once we get to that and you two can talk to
7 each other once you’re actually looking at a universe of
8 documents that Mr. Martin wants to use, let’s see what the
9 issues really are. We could spend another half an hour
10 arguing about it or we could have it come down to a couple
11 of handful of documents and we’ll deal with it then. But I
12 think the guiding principles are everything is presumptively
13 open. But I agree with you, Mr. Rossman, that a use
14 restriction ought to be enforced and we have to find some
15 way to marry those two principles.
16 MR. ROSSMAN: Thank you, Judge.
17 THE COURT: All right? What else? You’ve spoken
18 with my chamber staff and you all know which of the breakout
19 rooms that you’re taking. I think we made three rooms
20 available, so some of you will have to share. Yeah, so some
21 folks on your team have that information. You can send your
22 boxes down on Friday or you can send your boxes down early
23 in the morning. You’ll be able to leave everything in here
24 overnight. Anything else just call chambers and the folks
25 will help you out. All right? Okay.
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1 MR. MARTIN: Thank you, Your Honor.
2 THE COURT: Thank you all very much. I’m going to
3 -- we have an 11:00 calendar in the other part of the case,
4 so I’m just going to take a five-minute break and then we’ll
5 come back on that. All right? Thank you.
6 [recess]
7 THE COURT: Okay. So shall I turn to the agenda
8 for the rest of the morning? Okay.
9 MR. BENNETT: Good morning, Your Honor. Ryan
10 Bennett with Kirkland & Ellis on behalf of the Debtors. The
11 agenda we’ve got two matters. The first one is uncontested.
12 It’s going forward just with respect to the lease hold
13 interest, not with respect to the federal leases that were
14 not insured. And we did go forward and notice out all of
15 those interest holders.
16 THE COURT: Right. I remember. Okay.
17 MR. BENNETT: Per Your Honor’s suggestion.
18 THE COURT: All right. So let me ask if anyone
19 wishes to be heard with respect to the Debtor’s motion for
20 entry of an order authorizing assumption of certain non-
21 residential real property leases which was filed at Docket
22 number 659? All right. So that will be approved and
23 entered.
24 MR. BENNETT: Thank you, Your Honor. All right.
25 Next up on the agenda is a contest motion, which is the
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1 motion to reject two sets of services agreements with
2 Nordheim and HPIP or HPIP. Your Honor, these agreements
3 while pertaining to oil and gas production are in our view
4 much like any commercial services agreement. They have
5 pricing and terms, duration.
6 They also have assignment covenants, exclusivity
7 and particularly in the case of Nordheim, special quantity
8 requirements. They’re called minimum volume commitments, or
9 MVCs where if Sabine doesn’t hit a certain predesignated
10 threshold under the agreement then Sabine has to make up the
11 difference between what it produced and what the
12 predesignated commitment was and make that up in cash.
13 And like most any other service agreements the
14 Debtors into as well as financial obligations of the
15 Debtors, in the event that Sabine breaches, the
16 counterparties have the ability to sue them for damages.
17 Here, though, we filed for bankruptcy and something likely
18 not contemplated back when these agreements were entered
19 into.
20 And that breach that we’ve proposed to do is in
21 Section 365 rejection. However, unlike the non-bankrupt
22 scenario where a lawsuit for damages carries significant
23 weight, here Nordheim and HPIP are relegated to unsecured
24 claims for objection damages, claims that are likely to be
25 materially compromised under a Chapter 11 plan and that’s
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1 where the scrambling starts to occur. You know, faced with
2 this new market reality that they find themselves in where
3 the recognition that their once financially strong or stable
4 at least counterparty’s now in bankruptcy, HPIP and Nordheim
5 construct and rely on this argument that the covenants and
6 the obligations in the agreement run with the land.
7 THE COURT: So let me ask a question and I
8 appreciate that every document is unique or has its own
9 particular language. But how many other -- I just can’t
10 recall the procedural context. How many other of these type
11 of agreements/purported covenants are there?
12 MR. BENNETT: Sure. Outside the ones that are in
13 front of you right now for rejection?
14 THE COURT: Yes.
15 MR. BENNETT: So I know of two others that I’ve
16 asked the client about and I do have my CFO and CEO in the
17 Courtroom with me who can correct me. But I did look into
18 this exactly question because I could tell Your Honor may
19 ask it. And we have at least two other agreements, which do
20 have what we would call stronger language in them, speaking
21 to things like grant and convey versus, you know, what we
22 have here which is language that’s much more consistent with
23 the services agreement, language that says dedicate, commit,
24 dedicate for purposes of this agreement, dedicate for
25 purposes of performance under this agreement.
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1 So these particular agreements we view as clearly
2 services agreements, ones that the counterparties cannot
3 meet their burden, which they have under Texas law, to show
4 that the covenant runs with the land. The other two that
5 I’m thinking of, it’s a much closer call, if not one that
6 actually leans in the favor of those counterparties, which
7 is one reason why we’re not seeking to reject those in the
8 context of this motion.
9 THE COURT: All right.
10 MR. BENNETT: So this whole notion, which I can
11 tell Your Honor is already on to, is that pursuant to this
12 agreement, this commercial agreement that we entered into
13 with these two counterparties, Sabine somehow conveyed away
14 part of its real property interest and, you know, so we have
15 this minimal interest with respect to this particular oil
16 feed and -- oil and gas field. And we took part of that
17 leasehold interest that we have. As Nordheim put it, the
18 right to choose your gatherer or the right to negotiate your
19 transportation fee. So that somehow was a real property
20 interest these guys are saying that we transferred away
21 pursuant to this services agreement.
22 And we do -- we can’t blame them for making that
23 argument. I mean, you know, it’s really -- when you think
24 about the affect of it, it’s considerable. They go from
25 being, you know, an unsecured creditor looking at pennies on
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1 the dollar to non-discharagable claims, essentially that
2 passed through the bankruptcy impaired, essentially. So
3 plus each of these agreements says the covenants shall run
4 with the land, right? So it’s in front of them. I can see
5 they’re going to make an argument.
6 The problem is for them is that the running with
7 the land language in and of itself doesn’t meet the burden.
8 And Texas law disfavors running with the land covenants. It
9 looks to have free transferability, markability of title.
10 And so it placed the burden on establishing that the actual
11 running with the land language runs with -- you know, that
12 the agreement runs with the land. It places that burden on
13 the party seeking to enforce the covenant.
14 And so Texas law has a number of requirements that
15 the parties with the burden must meet. I think most notably
16 of those is that there is a conveyance, that there was a
17 transfer of this property interest that I was referencing
18 earlier, that that happened. And you look to what language
19 was used in the agreement to evidence that conveyance. Was
20 it -- you know and that goes to the verbs I was citing
21 before. Is it grant and convey, language that’s typically
22 associated with the transfer of real property title, or is
23 it dedicate, commit, you know, language that’s much more
24 tied to just a services type agreement?
25 So if you look at that Clear Lake decision out of
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1 Texas, you know, where in that scenario even though the
2 contract said running with the land, the Texas board found
3 that it did not because it was just a services agreement.
4 There was no conveyance of a property interest.
5 THE COURT: Can I ask a question? Is what you’re
6 talking about now the same or different from the horizontal
7 privity requirement?
8 MR. BENNETT: This requirement is more broad in
9 the sense that it requires -- there needs to just be privity
10 in the sense that the conveyance be made.
11 THE COURT: Because -- the cases all under Texas
12 law seem to be not crystal clear on exactly what they’re
13 talking about. And I think that the Courts, including
14 perhaps the circuit, says that this is not crystal clear.
15 What I’m trying to understand is you’re saying that
16 Nordheim, for example, created a stick and it’s saying we
17 conveyed this stick, this bundle from the stick of rights
18 that comprises --
19 MR. BENNETT: That’s what Nordheim’s saying,
20 correct.
21 THE COURT: That’s what Nordheim says, right. And
22 you’re saying essentially that’s a fake stick. It’s not a
23 real property stick and it’s not a conveyance.
24 MR. BENNETT: Think if you universalize that. I
25 mean, there would be so many sticks they’d fill this room
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1 up, right. The stick to plant vegetables on the oil field,
2 the stick to choose not to plant vegetables on the oil
3 field. I mean, there’s just -- there would be so many
4 sticks that would encumber property rights, encumber the
5 transferability of title that it would be beyond --
6 THE COURT: Well, what about a stick that would
7 give the ability to extract --
8 MR. BENNETT: That would be a leasehold stick, and
9 that is a permissible and identified stick in Texas law.
10 THE COURT: Could you create covenant running with
11 the land that was the right to extract the minerals that
12 would run with the land from conveyance to conveyance? So
13 in other words when I might sell my property to the next
14 buyer, the buyer would be taking that land subject to the
15 covenant that says that the other guy has the right to mine
16 the land, actually take something out of the dirt. That
17 would be --
18 MR. BENNETT: Yes, you could.
19 THE COURT: You could.
20 MR. BENNETT: That’s right. You convey that
21 right. and so that means there’s kind of two really
22 deficient items I think in the HPIP/Nordheim argument and
23 it’s really, number one, it’s the conveyance factor, the
24 fact that there was no conveyance. And under your
25 hypothetical, there would be because we would agree but
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1 there’s some third party that we agree, all right, look, I’m
2 going to convey to you --
3 THE COURT: But it’s the what you’re conveying.
4 MR. BENNETT: Then it’s the what. And that’s the
5 second part where I think their argument’s deficient. Here,
6 we’re conveying the leasehold right, the right to the
7 mineral rights, the right to mineral interest, which is one
8 of the five property rights that are recognized by Texas
9 law. There is no right to gather or right to choose your
10 transportation fee. So I think not only is there not a
11 conveyance but there’s not a conveyance of an actual mineral
12 interest that’s recognized under Texas and that’s kind of
13 the second.
14 THE COURT: As a real property interest.
15 MR. BENNETT: Yes, ma’am.
16 THE COURT: Okay. But so now -- and I’ll let you
17 to continue and make your argument -- but everybody talks a
18 lot about the Energy Tech case. And do you have it there?
19 MR. BENNETT: I do. I mean, at least I know it.
20 THE COURT: Okay. Well, in Energy Tech, they set
21 up a dichotomy between -- I’ll just read it because it says
22 “The alleged remarkable similarity of facts between the
23 present case,” meaning Energy Tech and the Wayne Harwell
24 case, which was a state case, “Requires equating
25 (indiscernible) to the land owner a new code to the
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1 developer. In the facts,” this is the key part, “In the
2 facts of the Texas case, no property was conveyed at the
3 time of creating the developer’s rights. Quite differently
4 here, the transportation of fee and other benefits for New
5 Co were created at the time of a conveyance of real
6 property.”
7 But I think Sabine says we’re the first scenario.
8 No property was conveyed at the time of creating the
9 developer’s rights. But here, this court seems to be saying
10 if you create the transportation fee, convey it at the time
11 of some other conveyance of real property, somehow that’s
12 different.
13 MR. BENNETT: Right. Essentially the
14 transportation fee and the property that was conveyed here
15 at the pipeline, they’re fused in a sense that for purposes
16 of the conveyance. Later they were separated into Energy
17 Tech and that’s where the dispute came about. but at the
18 time -- you know, it was the pipeline was transferred --
19 THE COURT: So that’s a different requirement,
20 right? that’s a requirement that -- they seem to be saying
21 that if you embed the covenant running with the land
22 conveyance within some other conveyance of real property,
23 that seems to be what they’re talking about with respect to
24 horizontal privity. I’m asking.
25 MR. BENNETT: I think that’s correct. I think
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1 that’s the right way to say it. I agree that the case law
2 is very patchy on horizontal privity and its application.
3 But I think the key factor with Energy Tech from our
4 perspective is that you had a conveyance in the pipeline.
5 The pipeline carried with it the transportation fee. I
6 think they likened it to a road and a toll, the right to
7 charge a toll on the road, and, therefore, that toll could
8 run with the land, could run with the pipeline, the right
9 charge of that toll was essentially a key part of what was
10 conveyed as the real property in terms of the leasehold for
11 the pipeline.
12 THE COURT: And how is that different from
13 charging the fee here?
14 MR. BENNETT: There was no conveyance with respect
15 to our mineral interests. We’re talking about our mineral
16 interests, the stuff in the ground as it’s pulled out, it’s
17 pulled out of the ground in a particular piece, parcel of
18 real property, right, and there was no conveyance. Yes,
19 Nordheim comes up in their (indiscernible) reply later and
20 they talk about a side parcel that we conveyed to them. But
21 that’s an entirely separate parcel. It’s a surface
22 interest, doesn’t even have mineral rights and that’s just
23 so they could build their facility on it. It’s just an
24 investment infrastructure like we all make with respect to
25 our customers. So there was no conveyance of our mineral
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1 interests in the field so that there was no -- nothing for
2 the transportation fee to be fused to, to use kind of just
3 the Energy Tech type of analogy.
4 THE COURT: So you’re saying no conveyance but
5 they’re also saying that the interest that’s being talked
6 about doesn’t touch and concern real property, the land?
7 MR. BENNETT: That’s an additional argument
8 (indiscernible) in the sense that what Nordheim and HPIP are
9 focused on is the -- are the minerals that are extracted
10 from the ground and those, once they’re extracted, are
11 personal property and are not real property and, therefore,
12 by admission, don’t touch --
13 THE COURT: But the Debtor still solely has the
14 right to extract.
15 MR. BENNETT: Yes.
16 THE COURT: Right?
17 MR. BENNETT: Yes, under our lease.
18 THE COURT: And Nordheim’s interest doesn’t attach
19 until you take what you’ve extracted and hand it over to
20 them, right?
21 MR. BENNETT: Yeah, that’s our contract, right.
22 we believe they don’t have an interest and we just have a
23 contractual obligation.
24 THE COURT: And I’m using interest in the sense of
25 --
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1 MR. BENNETT: Yeah, their intention, monetary
2 interest, right.
3 THE COURT: Okay. Is there anything else?
4 MR. BENNETT: Let me see. I think we covered most
5 of it. I mean, I think just conceptually it’s important and
6 we touched on this a little bit in our papers. But it’s --
7 you have -- what we have here are just -- this is another
8 pair of unsecured creditors, right, creditors who we made a
9 promise to and a commitment that we were unfortunately
10 unable to follow through on. And there are millions of
11 dollars of other parties in that same boat. And this
12 argument, well, again, I don’t blame them for raising it, is
13 really just an attempt to elevate what really is a service
14 provide, an unsecured claimant, but both --
15 THE COURT: So these contracts were entered into
16 obviously post-combination, right?
17 MR. BENNETT: They’re both pre, sorry.
18 THE COURT: They’re both pre-combination. So
19 right, of course they -- not -- pre-combination? They’re
20 pre-petition.
21 MR. BENNETT: Yes, definitely and pre-combination.
22 THE COURT: Right, and pre-combination. So how
23 does it work in terms of the security interest of the
24 lenders?
25 MR. BENNETT: Yeah, that’s another thing that’s a
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1 little confusing and maybe Ms. (indiscernible) can explain
2 it from her perspective.
3 THE COURT: Ms. Schonholtz?
4 MR. BENNETT: Ms. Schonholtz, yes, sorry. And the
5 -- I think if you were talking about a conveyance of real
6 property, right, that was subject to liens, which were
7 renewed and restate in connection with their financing that
8 happened in connection with the combination and if those
9 lenders did believe, as Ms. Schonholtz does that there were
10 blanket liens over all property rights, and if you were
11 advising -- if I was advising the party allegedly receiving
12 the conveyance, you would want a release of those liens in
13 connection with the transfer, the conveyance, just like if
14 you bought something from a party that had a mortgage or --
15 THE COURT: So if was created and the lien already
16 existed, then it’s subject to the -- it’s, you know, at best
17 would be second or -- I mean, I can’t even begin to --
18 MR. BENNETT: Yeah, the problem is that their
19 argument isn’t that, right? Their argument is that it’s not
20 collateral, that it was transferred away, presumably that
21 there is no -- there are no liens on it. And it’s outside
22 of the estate. I don’t know.
23 THE COURT: Okay, I’ll ask.
24 MR. BENNETT: But I did flag that as an issue. I
25 mean, I think it’s indicative of the fact that this really
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1 wasn’t a conveyance. But, you know, we do not think that
2 these counterparties should be allowed to jump the line,
3 Judge. It’s -- they should sit in place with the rest of
4 the unsecureds.
5 THE COURT: Well, but that -- I mean, that in and
6 of itself kind of begs the question. I mean, if it’s, you
7 know, if it’s a covenant running with the land and we got
8 around the security interest issue, you know, good for them.
9 But they managed to contract in a way that was essentially
10 bankruptcy-proofing them. So I hear you in terms of kind of
11 the equities of it but still the question remains whether or
12 not it’s a --
13 MR. BENNETT: Whether it’s property --
14 THE COURT: Yeah, whether it’s a covenant running
15 with the land. And the -- how this could be not a -- how
16 this could be other than a conveyance of the lender’s
17 collateral is -- I don’t understand, so I’m just going to
18 have to ask.
19 MR. BENNETT: Understood. And just two more
20 points, Judge, real quick, just to kind of frame up. If the
21 counterparties get what they’re asking for here -- I mean,
22 it really does render some more absurd results, in addition
23 to the fact that maybe what they’ve got in the subject of
24 these liens that would break this thing.
25 With respect to HPIP, right, they’re asserting,
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1 right, that they’ve got this exclusive right that was
2 conveyed to them upon signing the agreement in exchange for
3 their agreement to build a facility and gather our
4 (indiscernible). But they never built the facility.
5 They’ve never gathered an ounce of (indiscernible). We in
6 fact believe the agreement’s been terminated but yet HPIP’s
7 still advocating that they got a conveyance.
8 Similar to the lender collateral issue, if that is
9 a conveyance, and we don’t think it is, it was a fraudulent
10 conveyance, because we didn’t do anything on account of it.
11 And that just, again, we think highlights the kind of
12 absurdity of the contention here. I mean, they didn’t do
13 anything and yet they’re saying they got this right and they
14 still have this right, you know, of ours.
15 Similarly Nordheim, these minimum volume
16 commitments, right, that -- so we’re -- you know, we’re not
17 meeting the threshold acquirement and we’re now accruing,
18 have been since the inception of the agreement, I believe,
19 accruing these minimum volume commitments that if Nordheim
20 gets its way with respect to its ruling, we’re going to have
21 to pay those. And it’s not even subject to an admin
22 standard. It’s, again, not a problem of the estate. We’re
23 going to have to just pay that money over to Nordheim
24 because it’s, I guess, under their theory, theirs. We’re
25 talking $30 million, $40 million. That’s a significant
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1 portion of the value that would be available to unsecured
2 creditors in a plan. Again, I’m blending into the equities
3 point but it’s just highlighting kind of the absurdity of it
4 all.
5 THE COURT: Okay.
6 MR. BENNETT: So I think that’s all for now.
7 Thank you, Judge.
8 THE COURT: All right, thank you.
9 MR. SOMERSTEIN: Your Honor, Mark Somerstein,
10 Ropes & Gray for the creditors committee. Your Honor, you
11 haven’t heard from the committee on this motion. I didn’t
12 want you to think that by our silence we didn’t think that
13 this was a very serious matter. We’ve studied it. Our
14 Texas counsel studied it. We did want the record to reflect
15 that while we didn’t want to burden the Court with extra
16 pleadings and extra arguments we do agree with the Debtor’s
17 views on Texas law on this motion and support the relief
18 requested and the rejection.
19 THE COURT: All right. Thank you. Hello.
20 MR. BURNS: Good morning, Your Honor, Robert Burns
21 from Bracewell. I’m here on behalf of Nordheim Eagle Ford
22 Gathering.
23 THE COURT: Okay.
24 MR. BURNS: We are affiliated with (indiscernible)
25 Energy and the Debtors seek to reject to our gathering
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1 agreements. I want to follow up on something my good friend
2 Mr. Bennett ended with, which is he contrasted our client
3 with HPIP who he claims didn’t build anything and I don’t
4 know. What I do want to make clear, Your Honor, is that my
5 client did build something. They spent tens if not hundreds
6 of millions of dollars to create two gathering systems,
7 which the Debtors have had the benefit of. And those
8 systems were built heavily on the reliance of the various
9 agreements, which were entered, which do contain conveyances
10 and grants.
11 So I want to make very clear we have done what
12 we’re required to do and a question, not the question, but a
13 question that may come before the Court is what do those
14 conveyances mean? What does the granting language mean?
15 But Your Honor --
16 THE COURT: Isn’t that the questions that’s before
17 me right now?
18 MR. BURNS: I don’t believe so and I want to
19 explain why. Your Honor, we’re here on a motion to reject a
20 contract. Second Circuit law in the (indiscernible) case is
21 very clear. It’s a summary proceeding. It’s the Court
22 comes in and looks at the Debtor’s business judgment in
23 terms of rejecting that agreement. It is a summary
24 proceeding. (Indiscernible) is very clear that the Court --
25 it’s actually reversible error for the Court to weigh in to
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1 the substantive legal conclusions of issues that are being
2 raised.
3 So one of the things we’ve not heard -- this
4 sounds like so far a claimant’s objection. It sounds like
5 we filed a claim that we’re seeking secured status and
6 they’re trying to tell you why we’re not. We’re still --
7 THE COURT: No, I don’t think so. What I think it
8 is is that in the service of satisfying the business
9 judgment standard they’re giving me their analysis that this
10 is an unsecured claim. And if it were a hundred cent dollar
11 claim, that analysis would come out a different way. So
12 you’ve got my attention because I do not want to -- without
13 being aware that this is what you’re trying to argue, I do
14 not want to create any error in what I’m doing because you
15 seem to be telling me -- you seem to be warning me off of
16 listening to the arguments about characterizing what this
17 is. So I want to be very clear about what you’re doing and
18 what you think I’m doing.
19 MR. BURNS: Okay. Well, I can take it from the
20 top, but let me -- can I please follow up on that point?
21 THE COURT: Sure.
22 THE COURT: I think it’s perfectly appropriate for
23 both the Debtors and ourselves to inform you of what we
24 think the legal issues are because certainly as Mr. Bennett
25 points out, whether we have a secured claim subject to some
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1 priority, visa vie the Debtors or the banks or other
2 parties, or whether we have a general unsecured claim, may
3 well make the difference. I’m not in the case.
4 So it’s perfectly appropriate, I believe, for the
5 parties to educate the Court on what they think the legal
6 positions are. However if you look at (indiscernible), it’s
7 not appropriate at this point in time for the Court to
8 conclude with finality where our priorities are and that is
9 what the Debtors are asking you to do.
10 They are asking you pursuant to Section 7 of the
11 proposed form of order to rule today conclusively that
12 Nordheim has only an unsecured claim. They are asking you
13 to rule on the substantive merits of the priority of the
14 rejection damages claim that we will leave here with,
15 assuming the Court reach the objective contract.
16 THE COURT: Well, the motion is to reject the
17 contract. So the order could not contain that language.
18 Having said that though, it’s a hard -- it’s implicit that
19 in granting a motion to reject the contract, it gives rise
20 to a pre-petition --
21 MR. BURNS: Correct.
22 THE COURT: -- unsecured claim in the absence of
23 other stuff, right?
24 MR. BURNS: Right.
25 THE COURT: Like a setoff, or a deposit, or a
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1 security interest, or something else. I'm not interested in
2 deciding any of that.
3 But there is an implicit finding in a rejection
4 that the underlying agreement is subject to rejection, which
5 you say these agreements are not because they are not
6 agreements, they are covenants running with the land and,
7 therefore, cannot be rejected. So...
8 MR. BURNS: Let me put a (indiscernible).
9 THE COURT: Okay.
10 MR. BURNS: I agree with you that if this contract
11 -- if the Court orders the rejection of the contract it
12 gives rise to a pre-petition claim. It does not at this
13 point, however, determine the priority of that claim. The
14 way it has always worked in my practice, and the way I've
15 always seen it, is that when you reject a contract, the
16 party -- you know, in my case, my client, has 30 days, which
17 is what I've agreed to with Mr. (indiscernible) --
18 THE COURT: To file a Proof of Claim.
19 MR. BURNS: To file a Proof of Claim. And our
20 Proof of Claim -- I think a subset of the issues are before
21 the Court now, and you've seen them in the pleadings, but
22 they're based on discovery, based on our analysis -- our
23 Proof of Claim will contain other legal bases. So we will -
24 -
25 THE COURT: Will contain other legal bases for a
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1 100-cent dollar Claim?
2 MR. BURNS: No, just the legal basis for what our
3 claim is. And it may be that we have some claim that's
4 administrative, some of it that's secured. But that's my
5 point, Your Honor. We get the opportunity. Due process
6 allows us the opportunity to file our claim in total as the
7 Court requires us -- if we believe if it's a secured claim -
8 -
9 THE COURT: Okay, well, then maybe we can have
10 this be a short hearing because I don't disagree with any of
11 that.
12 MR. BURNS: Okay, I think we can. If we can enter
13 an order today, if the Court agrees to reject the contract
14 but we preserve the status, the legal status of our claim,
15 then I don't think we need to get into any of this argument
16 about Texas law.
17 THE COURT: I feel like I'm missing something.
18 MR. BURNS: Okay, it's simple, Your Honor.
19 THE COURT: Okay, because I feel like -- why did I
20 spend the last I don't know how many weeks, as this matter
21 has been carried, pouring over these cases and trying to
22 make a determination about whether or not I agreed with what
23 you said in your papers, which was not this -- which was
24 they can't reject the contract because it's a covenant
25 running with the land under Texas law -- sticks, bundles,
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1 all that stuff. And now what you're telling me is it's fine
2 to reject it and then we're going to fight about this later.
3 MR. BURNS: Your Honor, yeah, I don't think we
4 said they couldn't reject it. I think what we were saying
5 is that the underlying basis for our claim, they can't run
6 away from that. But if they want to reject the contract and
7 go with a third party, what doesn't happen...
8 THE COURT: It says, "Nordheim requests that the
9 Court deny the relief sought by Sabine in its motion."
10 MR. BURNS: Right, which is the rejection. And I
11 can tell you, we don't think that they've made their case
12 for rejection. And we also don't think they've made the
13 case for why they should be able to say today or ask the
14 Court to order today that we have nothing but an unsecured
15 claim.
16 THE COURT: But now -- so we're now chasing our
17 tail because in order for the Debtor to justify its decision
18 to reject the contract, it needs to explain its conclusion
19 that it's a rejectable contract giving rise to an unsecured
20 claim. So, now is the time to have that discussion. And
21 for you to say, "No, you can't reject it; it's not an
22 unsecured claim." So I agree with you that I'm not here on a
23 claims objection today, but their business judgment hinges
24 on my agreeing with their conclusion that this falls under
25 365. It can be rejected. It's not a covenant running with
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1 the land. It's a rejection damage claim.
2 MR. BURNS: Right. Well, let me separate it.
3 What we're asking today is just not to have the priority of
4 that claim determined. If you agree to allow them to reject
5 it -- they want you to say today "All you get is an
6 unsecured claim."
7 THE COURT: Okay. So, if I say I'm going to enter
8 an order that grants the motion, okay, and I'm going to give
9 you a decision and make findings that it's not a covenant
10 running with the land. That's what I've spent countless
11 hours working on, and that's what all these briefs are
12 about. The acreage -- I'm flipping to HPIP. "The acreage
13 dedications are covenants running with the land that are not
14 impacted by rejection."
15 MR. BURNS: Your Honor, I think we have -- this is
16 my -- I was going to give you my view of it. We have
17 gathering agreements, which are contracts. Within those
18 gathering agreements are grants. It is the grants
19 themselves that can't be avoided by a rejection. They can
20 decide that they don't want to use our contract for those
21 services, but they can't avoid the grants. That component
22 of the contract is not subject to them just... It's kind of
23 like if you took a homeowners association agreement that had
24 covenants that you can't --
25 THE COURT: But in the objection, which was Docket
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1 387, you say, "The key rights under the gathering agreements
2 are covenants that run with that land. The key rights under
3 the gathering agreements touching concern the land.
4 The gathering agreements relate to a thing in
5 existence or specifically and expressly bind the parties and
6 their assigns. The gathering agreements were intended to
7 run with the land." This was teed up for me to make a
8 determination as to whether or not they are covenants that
9 run with the land. And where you started was to tell me
10 that if I do that, I'll be making some kind of an error.
11 And I don't believe that that's the case. We're going to
12 stick with it until we kind of get on the same page here.
13 MR. BURNS: I think the error that I'm referring
14 to, Your Honor, is if our claim is -- if we leave here today
15 and our claim is unsecured, we don't have the ability to
16 ever bring what we think is the proper claim. I mean...
17 THE COURT: I'm not in any way seeking to limit
18 the claim that you file, but if I agree with the Debtors
19 that this involves covenants running with the land and I
20 make that finding and render that decision, it doesn't get
21 revisited in the claims process.
22 MR. BURNS: But, again, where Orion speaks to
23 that, Your Honor -- because it states -- and this is at 10,
24 excuse me, 4 F.3rd at 1099. "It is important to keep..." --
25 and I'm quoting the Court. "It is important to keep in mind
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1 that the Bankruptcy Court's business judgment, the deciding
2 motion to assume is just that: a judgment of the sort a
3 businessperson would make.
4 In no way is the decision a formal ruling on the
5 underlying disputed issues and, thus, will receive no
6 collateral estoppel effect. So, that's really the point I'm
7 driving at, is if you decide today -- if you make a ruling
8 how you think the covenants work, what I think I hear you
9 saying is that it will bind the claim.
10 THE COURT: But in a normal -- in a more
11 straightforward rejection, right, a long-term lease of real
12 property, okay?
13 MR. BURNS: Sure.
14 THE COURT: So, the Debtor's downsizing its
15 operations, it's got this long-term lease, it's going to
16 reject the lease. Business judgment is I don't have use for
17 this space. I'm going to reject it and I'm going to pay an
18 unsecured claim, right?
19 So, here what the Debtor is saying, that "I can't
20 make the minimums. I have to reject the contract. You get
21 an unsecured claim in those amounts, and that's my business
22 judgment." So how could I not determine the predicate issue,
23 which is the nature of the contract, which drives the nature
24 of the claim?
25 MR. BURNS: I apologize for interrupting, Your
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1 Honor, I think this really is what Orion says. We have both
2 briefed the issue -- both parties have briefed the issue of
3 where we believe the right answer is on the covenant. From
4 my view and from what I think Orion teaches is you can take
5 into account certainly your view of the legal merits of each
6 argument, and you can say, I think the Debtors -- you know,
7 they've taken into account various legal risks, they've
8 taken into account that it may ultimately be deemed to be
9 secured or some other priority within the scheme.
10 But they've thought about it and based on the
11 level of analysis they've proven to me that they've given,
12 they can reject the contract because they've used their good
13 business judgment in thinking through the legal risks.
14 Whereas what they're asking you to do is actually decide the
15 legal issue today.
16 THE COURT: Yeah, both sides briefed the legal
17 issue of whether or not these words constitute a covenant
18 running with the land. That's what I came out here to do
19 today. And now you're telling me "You'd better not do that
20 because I'll be making a mistake under Orion." And that's
21 the first that I'm hearing of this and I've never heard of
22 that kind of an argument before, frankly. So...
23 MR. BURNS: Your Honor, I apologize. I do think
24 we did touch on Orion in our papers. I know I've looked at
25 it before. I've come back to it so many times in this case
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1 because the Motion to Reject a Contract is a summary
2 proceeding. The issue of law they're asking you to decide
3 is certainly a bedrock principle of Texas Oil & Gas law.
4 This is something that the entirety of -- billions of
5 dollars of infrastructure built on the basis of agreements
6 like this.
7 THE COURT: But much as I rejected the Debtor's
8 argument that, you know, this would be a windfall, this
9 would be unfair, what does that have to do with anything?
10 So, it's an issue under Texas law. It could be an issue
11 under California law or Delaware law. What difference does
12 it make? Are you suggesting that somehow I shouldn't decide
13 the issue?
14 MR. BURNS: I think it just goes back to what
15 Orion says when it clearly states that it'll have no
16 collateral estoppel effect.
17 THE COURT: So, then -- I mean, look, I'm not
18 about playing games.
19 MR. BURNS: Nor am I, Your Honor.
20 THE COURT: So, I can render a decision on the
21 merits or I could just say I'll adjourn this hearing for 30
22 days, go ahead and file a claim, and the Debtors will object
23 to the claim and we'll continue the hearing, and I'll do it
24 that way. I'm just not going to... I feel that I'm being
25 gamed, and I will not -- I'm not going to do that.
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1 MR. BURNS: Your Honor, I apologize. I am not
2 trying to game the Court.
3 THE COURT: No, I don't mean --
4 MR. BURNS: I am trying to force the Debtors to go
5 through the proper process, which is first, prove that
6 you've met the burden. There's no evidence before the
7 Court. When Mr. Bennett stood up, he started in on the
8 covenant issue, he presupposed the Court thinks it's a good
9 idea to allow the contract to be rejected. What I've not
10 seen in the papers, and I'll give you two examples of where
11 I think they're lack of covenants, if you will, is
12 deficient. If they move away -- if they reject these
13 contracts... They make it sound like they can just go to
14 the next service provider and fully replicate our services.
15 That's not true, Your Honor. Based on my
16 conversations with counsel and our own analysis, much less
17 than the entirety of these fields can be served by an
18 alternative service provider. So, they're effectively
19 agreeing to shut in some significant portion of the capacity
20 that's in the ground by moving away from us. Okay, so
21 that's one economic downside.
22 THE COURT: Well, but now, respectfully, you're
23 giving me speculative evidence. Because it may be that they
24 reject this contract, and depending upon what happens to the
25 business, they come back to you and they say, "Let's
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1 renegotiate. Let's do a new contract." I have no idea.
2 But, you know, the whole notion of "We spent a lot
3 of money to put up this structure or infrastructure" -- I
4 mean, in real property leases all the time the tenants do
5 expensive buildouts and, you know, their landlord could end
6 up in bankruptcy and reject and, you know, then, as you
7 said, there's a claims process.
8 But now let's go back to normal contract
9 principles, right? If what you're telling me now is that
10 you want a chance to put on evidence -- in a contract
11 dispute you only get to go to parole if there's an
12 ambiguity, okay? So what the Debtor is saying -- read the
13 words -- there's no ambiguity. As a matter of Texas law,
14 this doesn't pass muster as a covenant running with the
15 land. And they give legal arguments.
16 So, if what you're telling me is that you think
17 that I'm somehow deciding a question of fact or that counsel
18 is giving testimony, I mean, I'll hear you on that. I think
19 what they're telling me is that as a matter of law, I look
20 at the document, and I look at the Texas law, and I look at
21 the requirements and I say, "Under Texas law, as a matter of
22 law, this is not a covenant running with the land." That's
23 what I thought I was doing here today.
24 MR. BURNS: Understood, Your Honor. I mean, I'm,
25 frankly, confused as to what I'm asking.
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1 THE COURT: I mean, I frankly thought the Orion
2 citation was just, you know, someone has to cite a case and
3 so you cite Orion, but I had no idea that there was going to
4 be this kind of collateral estoppel issue. I really haven't
5 seen it before, so...
6 MR. BURNS: Your Honor, our approach to the
7 Debtors has been simple. And let me just kind of revert
8 back up. We tried to do two things with the Debtors in the
9 intervening period -- we did try to negotiate a new
10 contract. There were several proposals and we didn't get
11 there.
12 The other thing that we said to the Debtors over
13 the course of this is if you want to reject the contract,
14 we'll stipulate to that, but we want to have our day to
15 bring the entirety of what our claim is without any
16 predisposition as to what the priority might be.
17 So, in other words, we want the opportunity to put
18 our best foot forward, to put forward to the Court all of
19 these issues. There is evidence that goes to some of these
20 points. I think (indiscernible) is one of them. There's a
21 whole discussion in their papers about which entities
22 granted what. That requires evidence I think from both
23 sides.
24 THE COURT: Well, but that's only if I decide that
25 I need to resolve that issue under Texas law in order to
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1 decide the question of whether or not it's a covenant
2 running with the land. If I don't think that that's
3 relevant or if I don't get to it -- if I don't get to it and
4 can decide the question, I don't get to it.
5 MR. BURNS: Okay. In the context of a rejection
6 or in the context of a claims proceeding? I think in a
7 claims proceeding you ultimately have to because that's when
8 we're going to be asking for a determination of the priority
9 of our claim.
10 THE COURT: I'm just getting more confused by the
11 moment.
12 MR. BENNETT: If I may -- so, I think the Orion
13 cites are -- this notion of summary proceeding. This is not
14 a summary proceeding, judge; this is a contested matter.
15 And on top of that, we filed this motion in September.
16 We've adjourned it four times.
17 We were asked and we permitted, we granted
18 Nordheim to conduct discovery. We gave them
19 interrogatories, we offered them the 30(b)(6) witness. We
20 adjourned the hearing again to accommodate weather issues.
21 We've been incredibly cooperative here to allow
22 whatever time Mr. Burns would look for in those 30 days to
23 file this claim, to allow him to have his rights adjudicated
24 here.
25 Rights -- just to remind everyone that they
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1 brought in the issue. So if you read their objection, which
2 you are doing, their first issue is that we can't even
3 reject this contract because we can't establish that our
4 business judgment -- we can't meet the business judgment
5 standard.
6 THE COURT: Well, that's what I keep -- that's why
7 I'm so confused.
8 MR. BENNETT: Yeah, because of the running with
9 the land issue.
10 THE COURT: Right.
11 MR. BENNETT: They brought it -- they brought it
12 up. They brought it in. HPIP I think didn't actually.
13 THE COURT: So you would -- so your view would be,
14 if I decide the issues in your favor, you would -- and I
15 said to you, strike that language, they can file whatever
16 claim they want. But -- and then when they file a claim and
17 it hinges on the notion that it's a covenant running with
18 the land, you would say that ship has sailed. In other
19 words, I'm going to -- you're asking me to make a ruling --
20 MR. BENNETT: Yes, correct.
21 THE COURT: -- that you can reject the contract.
22 And one of the reasons you can reject the contract is you've
23 satisfied your business judgment and because it's a covenant
24 running with the land. You want --
25 MR. BENNETT: Because it's not a covenant running
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1 with the land.
2 THE COURT: But it's not a covenant with the land.
3 MR. BENNETT: Yes, ma'am.
4 THE COURT: I misspoke. That's what you want.
5 MR. BENNETT: That's right, and that’s why it’s a
6 more fulsome order --
7 THE COURT: And that, therefore, if the claim --
8 whatever claim they file -- is filed, you will say I object
9 to this, that, or other.
10 MR. BENNETT: And I’ll just attach your order.
11 THE COURT: Well, I mean, there may be other
12 things. There may be, you know, deposits set -- I mean,
13 there are other things that have to do with a claim. So I
14 wouldn't enter an order that says it's an unsecured claim,
15 so reject the contract because this is not a cov -- because
16 it's subject to rejection under 365 inasmuch as it's not a
17 covenant running with the land in short form.
18 MR. BENNETT: I see, we would want a finding from
19 Your Honor since we did go through the briefing and the
20 discovery. We want a finding that it's not a covenant
21 (indiscernible).
22 THE COURT: Yes. I said that, yeah.
23 MR. BENNETT: No. And then you're right, they
24 could have other rights to file claims based on other
25 theories and different priority amounts.
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1 THE COURT: I don't know.
2 MR. BENNETT: You know, that don't relate to the
3 covenant running to the land issue.
4 THE COURT: Do you want to say anything about the
5 prospect that there should be some evidence or --
6 MR. BENNETT: I -- judge, we offered a witness.
7 Nordheim declined. We provided discovery which Mr. Burn
8 cited to. I don't know what else we should do.
9 THE COURT: Okay, all right. Someone else wants
10 to say something.
11 MR. BENNETT: Yes, Your Honor. Thank you, Judge.
12 MR. SIMON: Good afternoon, Your Honor.
13 THE COURT: Good afternoon.
14 MR. SIMON: Keith Simon, Latham & Watkins for
15 HPIP. We're in a little bit different situation than
16 Nordheim. We didn't challenge business judgment on terms of
17 rejection. There's not a working facility, so we didn't go
18 down the business judgment route.
19 I also read these exciting Texas cases because I
20 thought we were going to cite that with respect to HPIP. I
21 don't know about Nordheim. They have a different fact
22 pattern. But I'm happy, Your Honor, to go through the
23 points you mentioned, the questions you had from good friend
24 Mr. Bennett. I thought that was the point for at least
25 HPIP, so I'm happy to do that. I'm here.
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1 THE COURT: Okay. Well, why don't you do that?
2 MR. SIMON: Okay.
3 THE COURT: Okay?
4 MR. SIMON: So just walking through the points,
5 Your Honor, raised -- or Debtor's counsel raised. And in
6 the first point, he says that, you know, that a covenant
7 running with the land or the situation wasn't contemplated
8 at the time of signing. I don't think that's accurate.
9 I think when counterparties have these kind of
10 long-term relationships, they said -- like, HPIP, for
11 example, spent $84 million investing in pipelines and the
12 gathering system. It obviously didn't come to fruition, but
13 we spent $80 million. We already filed out proof of claim.
14 And before we spent that money, it's not a crazy thought to
15 say, what if the counterparty seeks to sell the property,
16 what if they change their mind, which is why you have these
17 covenants running with the land because we're just trying to
18 protect our interest.
19 It's not a big surprise that the counterparty
20 might decide to go a different path. That's why these
21 things are included in there.
22 And I guess the issue that is different from HPIP
23 versus what I can understand of Nordheim -- some of their
24 documents were sealed -- is our gathering agreement doesn't
25 just talk about the minerals. It actually talks about the
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1 leases. And there's not a dispute that leases under Texas
2 law, oil and gas leases are real property.
3 So our only arguments, which, you know, I'm a
4 simple guy, I think and my argument simply is the oil and
5 gas leases are real property interests -- no one debates
6 that under Texas law -- and the Debtor, with their real
7 property interests, burdened this. No different than if my
8 neighbor says I own my piece of land, you're allowed to
9 cross it. I don’t convey you any title to my land, but
10 you're entitled to cross it.
11 THE COURT: What is the lease -- tell -- what does
12 the lease give you? Describe the property interest that it
13 gives you.
14 MR. SIMON: Well, the lease is between the
15 landowner and us -- well, Forest, but now Sabine.
16 THE COURT: Right.
17 MR. SIMON: So that's their real property
18 interest, which is real property.
19 THE COURT: Right.
20 MR. SIMON: And they burdened it by giving us the
21 exclusive right to gather. And so it's not -- and when they
22 talk about like these sticks and mineral interests and
23 there's not a conveyance -- we don't -- I have -- this is
24 the first time I'm hearing about there's a lien on the
25 property. That might be the case. All we did was burden
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1 their real property interests. Just like if you say I agree
2 not to build my home higher than five stories, and you file
3 that, you record it.
4 THE COURT: But you -- you got the right -- once
5 they took their stuff out of the ground, they gave you the
6 right to transport it.
7 MR. SIMON: Well, no, we gather it from the
8 ground.
9 THE COURT: But you don't -- at that moment, you
10 don't own it, right?
11 MR. SIMON: No, of course. No, that's -- it's
12 their -- that's what I'm saying. That's where I think the
13 confusion is is that we're not saying they conveyed any type
14 of title or ownership to us, which is why the cases they
15 cite about grantor and grantee, we're not saying that at
16 all. We're simply -- this is kind of like my favorite
17 analogy from real property law in law school -- is crossing
18 the yard. It's not a conveyance of ownership at all. And
19 that's why our --
20 THE COURT: It's an easement?
21 MR. SIMON: Right, that's all we’re talking. It's
22 a covenant running with the land in terms of a burden on
23 their ownership. We've never claimed that we have title to
24 the minerals. I don't know how we could. So -- and that's
25 where -- that's where I think --
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1 THE COURT: What's the grant, what's the grant?
2 MR. SIMON: The conveyance -- I don't want to use
3 the word conveyance. The burden they gave was the right to
4 gather the minerals.
5 THE COURT: But, you see, it's tautological,
6 right?
7 MR. SIMON: Does that mean circular?
8 THE COURT: Circular, yeah. What was given was
9 the right to gather the minerals. The question is whether
10 that's a conveyance or of an interest in land, as opposed to
11 a -- just an agreement to do something.
12 MR. SIMON: Look, there -- as I -- some of the
13 cases that talk about this -- there's actually a very good
14 case from the 7th Circuit. I have a copy amongst my bag. I
15 mean, this is the thing with real property interest. They
16 have -- they have elements of contract and real property.
17 And that's why the Courts talk about is it more personal or
18 is it more real, is it more contractual or is it more real
19 property? And I think if you look at -- to go to the Texas
20 law, if you look at the intent of the parties, it talks
21 about covenants running with the land twice. We filed a
22 memorandum and recorded it.
23 THE COURT: But the Texas cases say that the fact
24 that the document says this is a covenant running with the
25 land isn't dispositive.
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1 MR. SIMON: Of course, and you have to go through
2 the factors, which we did, touches and concerns to land,
3 because remember the land is the mineral in the ground. I
4 think that's --
5 THE COURT: Is it?
6 MR. SIMON: Yeah, it's the lease. It's the real
7 property owner -- Sabine has a real property interest from
8 the leases, the minerals in the ground. They have to then
9 go get it, and they say to HPIP, go get it. And they then
10 have an ownership interest. As a mineral interest owner --
11 Sabine -- they have the right to get it. That's their right
12 that they conveyed to us exclusively. And so the reason
13 that people do these covenants running with the land is to
14 protect this exact fact, Your Honor, where we invest $80
15 million to build a pipeline system, prices do what they've
16 done, and it's not economical for anyone to develop -- we
17 get it.
18 So that's where the other concept they keep talk
19 about is unsecured creditors trying to jump the line.
20 That's not at all what we're doing. Because if you find
21 it's a covenant running with the land, all that means is if
22 they want to develop the property, they come back to us and
23 we talk, because it's not economical to do it at our price
24 level. No kidding, we get it. But that doesn't turn us
25 into a fully secured creditor. It simply means, just like
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1 with the crossing on the land, the idea that you won't build
2 your house higher than five stories. It doesn't mean that
3 somewhere like fully secured and unimpaired, it doesn't mean
4 that at all. It just means that your rejection --
5 THE COURT: But I thought your agreement was
6 terminated pre-petition.
7 MR. SIMON: Well, that's what they allege. It's
8 never been terminated. There's certainly no evidence of
9 that. There's no notice of termination. That's what they
10 say. If they want to reserve that issue, I have no problem
11 reserving it. And I'd be very surprised if they could find
12 a notice of termination, given that we have an arbitration
13 clause.
14 So, I guess, Your Honor, my point is -- here’s
15 where I -- here’s where I think I’m on it, if I could. The
16 Debtor can either assume the agreements or reject them.
17 There’s no (indiscernible) that rejection --
18 THE COURT: Well, look. If they are actually
19 terminated pre-petition, I’m going to do none of the above
20 because then I’m dealing with -- then I’m giving an advisory
21 opinion or I’m actually giving a wrong opinion because if
22 it’s terminated pre-petition there’s nothing to assume or
23 reject.
24 So, to the extent that that’s a live issue, then I
25 need to get to that first. I’m not -- I’m not going to give
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1 a hypothetical answer if there is a real issue as to whether
2 or not the contract terminated pre-petition. So --
3 MR. SIMON: That’s certainly understandable. I
4 never made that argument. That was in their papers. It’s
5 not even -- there’s obviously not a finding in your order
6 that's been terminated. So, so, Your Honor, I guess the
7 thing that I would just kind of remind myself is there’s
8 assumption and rejection. There's no debate that assumption
9 for the HPIP agreement makes them more (indiscernible).
10 We have this thing called the put price where they
11 have to poss -- it’s -- there’s no way that they would ever
12 assume this agreement. We get it. So they’re rejecting it.
13 Mazel tov. That doesn’t mean that rejection, that they
14 would rather rejection mean the covenant running with the
15 land goes away so that makes rejection better. The question
16 is should they reject or assume? There’s no question they
17 should reject.
18 Okay, then what’s the impact of rejection? No
19 question our pre-petition damage claims. We’ve already
20 filed our proof of claim. My guess is you’ll find they’re
21 going to be unsecured. But we have our damage claims,
22 great.
23 For the covenant running with the land, it still
24 sits there just like if you gave someone the right to cross
25 your land it still sits there. It burdens the property.
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1 See, that’s where our --
2 THE COURT: But they -- Sabine has leased the
3 property from the owner, right?
4 MR. SIMON: It’s a lease, but it’s considered real
5 prop -- it’s real property owner. Under Texas law they’re
6 the owner of the real property which is the minerals in the
7 ground. I know, I mean, when I was reading all these Texas
8 cases, believe me, I had to read more than one. This is --
9 THE COURT: So my question is that Sabine --
10 you’re saying that if then Sabine conveys that “lease” --
11 MR. SIMON: It burdens it.
12 THE COURT: It would convey it burdened by your
13 pipeline. So that the subsequent owner would have to hire
14 HPIP or use HPIP to gather.
15 MR. SIMON: Right. It’s an exclusive gathering
16 right and the reason for doing that is because all of our
17 costs are front loaded which is -- they were here. We
18 developed the system, $84 million down the drain and here we
19 are. And we get that we may never see that money back and
20 it’s possible that the person they want to transfer the
21 property to or to start using it themselves come to us and
22 say, “Let’s talk about your pricing, it doesn’t work. So,
23 do you want to make some money from this property or not?”
24 And that’s a discussion that won’t be pleasant,
25 but that’s a different one than saying it’s a pure
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1 contractual right and by rejecting it, that covenant goes
2 away.
3 THE COURT: Well, what happens as a practical
4 matter?
5 MR. SIMON: They --
6 THE COURT: As a practical matter, the Debtor says
7 it’s rejecting this, right?
8 MR. SIMON: And then they decide --
9 THE COURT: And they want to continue to extract.
10 MR. SIMON: They come to us and say let’s talk
11 about new pricing as opposed to what’s going on now which is
12 we don’t need to talk to you, we’re rejecting your
13 agreement.
14 THE COURT: But that doesn’t answer my -- I still
15 don’t understand what happens. The Debtors are seeking to
16 reorganize.
17 MR. SIMON: Right.
18 THE COURT: All right? And they have to build up
19 a value premise and one of them is going to have to be we’re
20 going to do X with this property and it’s going to cost us Y
21 to do that. So I don’t understand. Maybe it’s a question
22 for the Debtors. I don’t understand how it actually works
23 when there’s this real property and it’s got a pipeline on
24 it what happens.
25 MR. SIMON: In terms of our property, there would
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1 be one of two scenarios. They either would say we have an
2 agreement with HPIP to gather at this pricing or we’ve yet
3 to come to an agreement and the property will continue to be
4 idle until we have an agreement which is not good for
5 anybody.
6 The thing -- it’s not -- it’s n to --
7 THE COURT: But I’m just trying to come up with a
8 practical answer because if the practical answer is if I say
9 to the Debtor, so your view is that there’s no covenant
10 running with the land and you would then decide you want to
11 produce on this property, you're going to call up HPIP and
12 say get your pipeline out of here?
13 MR. SIMON: (Indiscernible).
14 THE COURT: I’m just ask --
15 MR. SIMON: I don’t know what the -- if the --
16 THE COURT: Well, that’s what I’m -- that’s what
17 I’m asking and this gets back to the colloquy I had with Mr.
18 Burns about the business judgment standard, right? Because
19 it’s going to cost $10 million to rip down the pipeline.
20 MR. SIMON: Well, for us it’s not business
21 judgment because we don’t debate that decisions between
22 assumption or rejection -- because we don’t have a working
23 facility, that assumption wouldn’t make any sense.
24 So I -- that’s where I dis -- for us I think our
25 motion is so much simpler, which is did we meet the Texas
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1 standards or not. That’s why we didn’t focus on bus --
2 there’s no working facility at the moment, so --
3 THE COURT: Did you meet the Texas standards for
4 what?
5 MR. SIMON: For a covenant running with the land.
6 THE COURT: But if you do then I’m not reject --
7 then I can’t reject it.
8 MR. SIMON: Sure. No, Your Honor, you can -- what
9 you can’t reject is the thing that we’ve (indiscernible) the
10 property with. That doesn’t mean that our contract
11 continues indefinitely and continues forever. That’s not --
12 we're saying something a little bit different which is we
13 simply have the right to gather.
14 And I guess I would just go back to the more
15 familiar analogy that we all know and love, the crossing of
16 the land to get to the street. It survives the ownership
17 change, or in this case a discharge. We agree. It doesn’t
18 -- the fact that rejection doesn’t do everything they want
19 to do, doesn’t mean rejection is in the best interest of the
20 estate because you compare it to what? Assumption.
21 THE COURT: But the --
22 MR. SIMON: It’s a different -- I agree, this is
23 kind of -- these are very unique issues because of I think
24 the oil and gas nature of it. It’s a lease, but it’s really
25 real property under Texas law.
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1 THE COURT: But what they gave you was a right.
2 The -- the walking across the property, right, is literally
3 the walk -- putting feet on someone’s property, right?
4 MR. SIMON: That’s one example, of course.
5 THE COURT: Okay? But here what they’ve given you
6 is the right to extract something that’s not real property,
7 it’s a mineral and a mineral is not real property.
8 MR. SIMON: That’s -- I never like to disagree
9 with the Court, but --
10 THE COURT: No, that’s okay.
11 MR. SIMON: -- okay --
12 THE COURT: We’re all in this together today.
13 MR. SIMON: It is real property in the ground.
14 When it gets --
15 THE COURT: I don’t think that’s right.
16 MR. SIMON: Under Texas law? The oil and gas
17 lease?
18 THE COURT: Can you give me a cite?
19 MR. SIMON: Yes.
20 THE COURT: Give me a cite.
21 MR. BENNETT: I can cut that off. Their agreement
22 relates to the minerals when they come out of the ground.
23 MR. SIMON: That’s not right. That’s the
24 disagreement.
25 THE COURT: See, okay now -- now we have --
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1 MR. BENNETT: He pulled it out and right now we’re
2 moving it with our own trucks.
3 THE COURT: This is a key -- but this is an
4 important distinction. If you pull it out and you just move
5 it, right, to me that’s a difference.
6 MR. SIMON: We actually admit -- that’s just where
7 the difference in the contract as (indiscernible).
8 THE COURT: Sure.
9 MR. SIMON: It’s 1C right there. It talks about
10 the leases rather than just being the oil and gas.
11 THE COURT: What I’m being shown is production,
12 gathering, treating and processing agreement and it says,
13 “Producer’s commitment of production.” Producer is the
14 Debtor, right?
15 MR. SIMON: Producer is forced --
16 THE COURT: It’s the Debtor, okay. “Subject to
17 producer’s reservations, producer hereby dedicates and
18 commits to the performance of this agreement, the leases and
19 all the producer’s owned or controlled land.”
20 So how does that answer that answer the question?
21 MR. SIMON: Because we’re -- they’re not
22 dedicating to us the oil and gas. They’re dedicating --
23 they’re giving us interest in the leases which is real
24 property.
25 THE COURT: But it doesn’t say that. It says,
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1 “Dedicates and commits to the performance of this agreement
2 the leases.”
3 MR. SIMON: Right.
4 THE COURT: Dedicates and commits to the
5 performance of this agreement, the leases. So what?
6 MR. SIMON: When you say so what --
7 THE COURT: It’s not that dedicates and commits
8 the leases and all of producer’s owned or controlled --
9 MR. SIMON: No, no, no.
10 THE COURT: Dedicates and commits to the
11 performance of this agreement. That’s not a conveyance.
12 That’s just an identification of what this relates to.
13 MR. SIMON: And the burden is that we have the
14 right to gather, which if you want to go with the five
15 steps, is the right to develop. But I don’t think we need
16 to get to that level only because all we’re saying is they
17 burdened their real property.
18 THE COURT: Well, let’s go to the gathering. It
19 says, “Gathering services.”
20 MR. SIMON: Yes.
21 THE COURT: “In accordance with the terms and
22 subject to the requirements of this agreement, gatherer”,
23 that’s you, “shall gather producer’s total production.”
24 MR. SIMON: Yes.
25 THE COURT: So what does gather mean?
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1 MR. SIMON: There’s no question that gathering is,
2 of course, a type of service. I don’t think we debate that.
3 But the issue is did they burden their ownership interests
4 in the minerals.
5 THE COURT: The issue in my mind is whether or not
6 -- you can take this back -- the issue in my mind is whether
7 or not their gathering, their taking their stuff and giving
8 it to you for gathering and whether gathering starts at the
9 point of collecting and transporting or whether gathering
10 somehow is a right to extract it out of the land.
11 Could they hire somebody else? Well --
12 MR. SIMON: Because the minerals are in the
13 ground.
14 THE COURT: The minerals are in the ground.
15 MR. SIMON: And we’re going to get them.
16 THE COURT: Is that right? Does the Debtor agree
17 with that?
18 MR. BENNETT: No. So, if you look at the --
19 wherever the definitions are in here -- of production --
20 MR. SIMON: It’s much further --
21 THE COURT: Can I ask you to pause for one second
22 because I have to have someone call my 12:30 conference call
23 and apologize.
24 So what’s confusing me is the terminology, and we
25 can stipulate to the uniqueness of a New York judge and a
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1 New York lawyer talking about this, but is the difference
2 between gather and produce, right?
3 MR. BENNETT: For sure.
4 THE COURT: And in your -- I think in your papers
5 you talk about that you’re going to gather what they produce
6 and that suggests to me that gathering is not a -- that
7 gathering starts at a non-real property level while the
8 production is the real property interest. That’s -- I don’t
9 know that any of you have written it that way, but that’s
10 the way that I’m thinking about it and you say, HPIP says,
11 we gather what the Debtor produces so the production right
12 is with the Debtor and the gathering is a service that’s
13 performed with respect to the Debtor’s production and that
14 therefore that means that it’s a services agreement, it’s
15 not a covenant running with the land because it doesn’t
16 burden the land, it’s a right to do something with the
17 Debtor’s production.
18 MR. SIMON: Can I take a minute to think?
19 THE COURT: Sure. Would you folks like a break
20 for a couple of minutes? How about we -- let me take a
21 break for a couple of minutes so that I can personally
22 apologize to the people on the conference call that I’m not
23 taking.
24 All right? We’ll come back at a quarter till
25 11:00, all right?
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1 MR. BENNETT: Quarter to 12:00.
2 THE COURT: 12:00, I’m sorry.
3 MR. BENNETT: Or 1:00.
4 (Recess)
5 THE COURT: All right, please have a seat.
6 MR. SIMON: I think I have an answer.
7 THE COURT: You have an answer in the sense of
8 that we have a resolution?
9 MR. SIMON: I wish.
10 THE COURT: Or you have an answer to a question?
11 MR. SIMON: To your -- when I asked if I can take
12 a minute.
13 THE COURT: Okay.
14 MR. SIMON: So I think, and actually, the truth
15 is, I speak for my colleague (indiscernible), who knows this
16 stuff better than me. So the -- what we’re saying is, as
17 the mineral owner for Sabine, has the right to gather,
18 produce, that’s what they have is mineral owner.
19 THE COURT: Mm hmm.
20 MR. SIMON: They then convey the exclusive right
21 to get one of their interests together to us. The fact, and
22 that, and they burdened the lease, which is the source of
23 their real property right with that dedication to us.
24 So the fact that what we do comes at a certain
25 point in time during the life of the oil and gas is not what
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1 we’re -- and I think it’s a little bit -- it makes the issue
2 more confusing, because all we’re saying is, as the mineral
3 interests owner, they’ve dedicated and committed to us the
4 exclusive right to gather, which is what they have as the
5 interests owner, just like the person who walks across the
6 land doesn’t get an ownership interest, and it’s obviously,
7 you just -- he or she is just walking across the land.
8 And the question is, did they burden the owners’
9 property? That’s all it is with the crossing of the land.
10 The same thing here. They’re the mineral interest owner.
11 They have the right to produce and to gather and do a whole
12 bunch of things. They burdened that ownership with our
13 rights. That’s all we’re saying.
14 THE COURT: As a practical matter, right now
15 they’re not producing, right?
16 MR. SIMON: Certainly not from us for sure.
17 THE COURT: Okay.
18 MR. BENNETT: We are producing now, but we are --
19 we’re using -- we’re trucking the stuff away, so we’re not
20 sending it through their non-constructed gathering system.
21 So it’s --
22 MR. SIMON: I don’t know what they’re doing. I
23 know they’re not using us.
24 THE COURT: What did -- is something constructed
25 or is it not constructed?
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1 MR. SIMON: It’s partially. And then there’s --
2 it’s not finished for sure, I mean, I -- there was -- the
3 dispute started into the construction.
4 THE COURT: So is your claim that their trucking
5 it is -- you have damages? I’m just trying to understand
6 what is going on here.
7 MR. SIMON: If they want to use the land in terms
8 of the gathering system -- we’re not claiming in this breach
9 of con -- I mean, our damages are from our construction and
10 that -- those issues. So what they --
11 THE COURT: You had a contract.
12 MR. SIMON: Yes.
13 THE COURT: You spent $80 million partially
14 building it.
15 MR. SIMON: Yes.
16 THE COURT: Right? You’re going to file a -- you
17 filed the claim. What does the claim say?
18 MR. SIMON: It says $84 million. Does it say
19 breach of contract? Yeah, because they’re not using the --
20 THE COURT: Okay.
21 MR. SIMON: -- they’re not using our system.
22 THE COURT: Okay. And that’s filed as an
23 unsecured claim?
24 MR. SIMON: Did we filed unsecured or did we put -
25 - I think we put -- I think we reserved our rights in terms
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1 of maybe setoff issues, but they’re things of that nature,
2 yeah.
3 THE COURT: They’re now producing and they’re
4 transporting what they produce by truck.
5 MR. SIMON: I don’t know.
6 THE COURT: That’s what they say. So then going
7 forward, I’m just -- I’m sorry. I’m just trying to
8 understand what actually is happening here, what the
9 practical effect of this entire situation is. In the
10 future, if Sabine or its successor wants to transport
11 product, gather, produce and transport the product on a
12 pipeline, you say they have to come to you?
13 MR. SIMON: I believe that’s what we’re saying,
14 yes. And in terms of the -- I mean, I guess the question
15 for them would be if you find it’s not a covenant with
16 (indiscernible), what they do differently, and maybe that’ll
17 be the answer. I don’t know what they’re --
18 THE COURT: But that’s what I’m trying to get at.
19 Then it gets to -- I’m just trying to understand what is
20 actually going on. Is the pipeline 10 percent built? Is it
21 50 percent built? If they wanted to go to another -- enter
22 into another gathering agreement, would you have to -- would
23 they have to -- would you have to tear down what you built?
24 MR. SIMON: The pipes clearly belong -- I don’t
25 think there’s a dispute the pipes that are there belong to
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1 us and that the contract will say that. So I don’t know.
2 THE COURT: So what --
3 MR. SIMON: I leave it up to them.
4 THE COURT: I need to understand how this would
5 work.
6 MR. SIMON: Well, I guess all I could say is from
7 my perspective, is that if the covenant is going to run with
8 the land, then they’re going to keep doing whatever it is
9 they’re doing now, because I didn’t even know that they were
10 trucking stuff off the property, then I guess they’ll
11 continue to do that. And that --
12 THE COURT: But see, the fact that they can truck
13 the product cuts against your argument because it --
14 MR. SIMON: Well, no, because --
15 THE COURT: -- then you equate the truck with the
16 pipeline and they are producing minerals, extracting -- I
17 don’t want to sound --
18 MR. SIMON: No, the verbs matter.
19 THE COURT: -- what -- I’m just trying to not use
20 the wrong word. And they’re taking it and they’re putting
21 it into a truck.
22 MR. SIMON: That’s --
23 THE COURT: Right? So --
24 MR. SIMON: Well, that’s because they are the
25 mineral interests’ owner. We’re not claiming that we own
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1 them.
2 THE COURT: Right, but they are gathering by using
3 a truck instead of a pipe, and that suggests that the
4 vessel, which transports the minerals, is transporting
5 something that’s not real property. It’s a transportation
6 services thing.
7 MR. SIMON: Yeah, yes. So sorry. The act, the
8 thing that they’re carrying might be personal property when
9 it comes out of the ground, but we’re -- once -- we’re not
10 saying that. We’re saying that they -- when they burdened
11 the lease, just there -- because as the interests owner,
12 mineral interests owner with -- when they dedicated the
13 right to gather to us, that burden simply file -- is simply
14 part of their ownership interests.
15 THE COURT: Then you should be seeking an
16 injunction, because if they dedicated the right to gather to
17 you, and they’re gathering in a truck, then you should be
18 seeking to enjoin them because they are -- they’re breaching
19 your agreement.
20 MR. SIMON: I didn’t know that until right now.
21 MR. BENNETT: But the fact is, Your Honor --
22 THE COURT: Well, I’m not -- I’m -- you know, I’m
23 taking hypothetically here.
24 MR. SIMON: No, you should.
25 THE COURT: Right? So if what you’re saying is
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1 you have the right to gather burdens the land, they’re
2 gathering, they’re just using a truck instead of a pipeline.
3 So if you -- if the burden on the land is, once extracted,
4 the minerals have to go on your pipeline, which is what
5 you’re saying, then substitute truck for pipeline and
6 they’re violating your covenant. I --
7 MR. SIMON: They might be. I didn’t -- that
8 wasn’t --
9 MR. BENNETT: We -- what we did is, we dedicated
10 production, as Your Honor rightly points out, to personal
11 property. We dedicated production for the performance of
12 this agreement, right, not to encumber the lease, but for
13 the performance of this agreement, this agreement which you
14 now seem to reject. I think that’s the distinction.
15 THE COURT: No, but what’s being said is that the
16 lease is an interest in real property. And it’s being -- I
17 don’t have the language -- but it’s being burdened with --
18 the lease is being burdened with the agreement, the lease
19 being the land and the burden being the exclusive gathering
20 right.
21 So that’s now where I’m at this funky place, this
22 technical legal term. If that’s so, then it’s violating the
23 covenant to be transporting in a truck versus a competing
24 pipeline, because to follow your argument to its extreme,
25 they gave up that stick. They gave up the gathering stick
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1 and we’ve just found out that they’re gathering in a truck.
2 MR. SIMON: That part, I didn’t know until right
3 now. So I don’t want my lack of response to mean anything
4 other than I’m just learning this, so I guess I’ll be
5 talking to (indiscernible) after this hearing.
6 THE COURT: And I’m just trying to figure out what
7 practical effect this all has, because you filed the claim
8 for construction. It is what it is.
9 MR. SIMON: Right.
10 THE COURT: But in terms of the go forward, the
11 Debtor or its successor is either going to have to decide to
12 do business with you or not. You’ve got a pipeline that
13 under your formulation is useless unless they start giving
14 you stuff --
15 MR. SIMON: They start using it.
16 THE COURT: Unless they start using it, right? So
17 it’s a -- it’s kind of a balance of towers, right? If they
18 --
19 MR. SIMON: And it does also now go to draw a line
20 in the sand because then we get no benefit from it either,
21 which is where I go back to my famous word, it is the land
22 is burdened, that’s --
23 THE COURT: Well, but not -- if they can
24 legitimately -- if they can truck the minerals that cuts
25 against the land being burdened because that shows that all
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1 you have is a transportation services agreement.
2 MR. SIMON: Well, I guess the argument, then I
3 guess we should be discussing whether or not they can be
4 doing that.
5 THE COURT: Well, I don’t want to create more
6 problems, but I’m just trying to be intellectually thorough
7 and consistent, and in that -- in analyzing the issues.
8 MR. SIMON: Okay. I guess if someone were to say
9 just going back to my walk across the land example, you’re
10 allowed to cross on this land and only you, and then I allow
11 someone -- and then, that person, so it gives me the
12 exclusive right to walk across the land. And then, they
13 give it to another neighbor, I can say, “What are you doing?
14 That’s my trail. That’s my easements. That’s my right of
15 way.”
16 I don’t think that’s controversial. The fact that
17 they then let the other neighbor cross the land hasn’t
18 changed it from a covenant running with the land.
19 THE COURT: All right, I’d like to try to wrap
20 this up, so let me give someone else an opportunity to be
21 heard. It looks like Ms. Schonholtz is going to take a stab
22 at it.
23 MR. SIMON: In terms of my (indiscernible) Your
24 Honor, I told the Debtors before that I have to actually fly
25 to Oklahoma City in like, two hours, so I have to leave at
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1 one.
2 THE COURT: Okay.
3 MR. SIMON: My actually smarter colleagues --
4 THE COURT: Okay.
5 MR. SIMON: -- he could probably (indiscernible)
6 right here.
7 THE COURT: I intend to wrap this up shortly --
8 MR. SIMON: Okay.
9 THE COURT: -- but I’m sorry that it’s gone as
10 late as it has.
11 MR. SIMON: No, I thank Your Honor for hearing me
12 on it.
13 THE COURT: Okay.
14 MR. SIMON: Do you have any questions, believe me,
15 Anne Marie is much smarter than me.
16 THE COURT: Okay, thank you.
17 MR. SIMON: Thank you, Your Honor.
18 MS. SCHONHOLTZ: Good afternoon, Your Honor,
19 Margot Schonholtz, Linklaters’ counsel to Wells Fargo RDL
20 agent. I’ll try be very, very brief.
21 THE COURT: Okay.
22 MS. SCHONHOLTZ: Your Honor has asked the question
23 of what are we doing here practically, and I’d like to try
24 and answer that question. The RBL agent has properly filed
25 perfected liens on these oil and gas leases, hydrocarbons,
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1 production, contact rights, general intangibles, and other
2 Debtor assets in the Texas counties where we have filed
3 mortgages. These properties we’ve been discussing are in
4 those counties.
5 The contracts are related to services to be
6 provided on those properties. And the RBL agent never
7 approved a conveyance of any of their interests, which are
8 very broad, and certainly did not release any lien to the
9 service providers who had had some kind of amorphous right.
10 E&P companies, like Sabine, produce wells and get
11 hydrocarbons out of the ground. And any number of producers
12 any any -- it’s a service providers in many different ways,
13 can transport and process that product, including, frankly,
14 by trucking.
15 So despite what the service providers urge here,
16 we should not set a precedent for unsecured service
17 providers to jump to the top of the heap over secured lender
18 plans and adequate protection plans here by just asserting
19 that something might run with the land.
20 We concur with the Debtor’s business judgment here
21 to reject what is clearly a rejectable service contract, and
22 that’s the right result here. I would note for the record
23 that Mr. Somerstein and I actually agreed on that here
24 today.
25 THE COURT: Okay, thank you.
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1 MS. SCHONHOLTZ: Thank you.
2 MR. BURNS: Your Honor, may I have just a few
3 brief moments?
4 THE COURT: Okay, sure.
5 MR. BURNS: Thank you. Your Honor, I just want to
6 clarify and then move quickly through what I think are
7 really --
8 THE COURT: Sure.
9 MR. BURNS: -- substantive points that the Court
10 wants to hear about.
11 We did it -- to be clear, I went back and read our
12 papers. What we are saying with regard to the ability to
13 reject is that yesterday we rejected this agreement, but as
14 to those covenants, they may not go away. So I wasn’t
15 trying to engage in games on that, but I will move --
16 THE COURT: Okay.
17 MR. BURNS: -- that to the side. When you -- you
18 asked a question earlier, what happens if these covenants
19 continue to exist, if you -- if they’re not rejectable for
20 whatever reason?
21 That really is what happened in Energy Tech. The
22 Debtor sold the property. It had the pipeline encumbrance,
23 if you will, around it. It was sold free and clear. And
24 the pipeline owner came back and said, “You can’t avoid the
25 encumbrance that’s created by my” -- whatever the agreement
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1 was called. There the Court agreed and said you can’t --
2 you must use that.
3 THE COURT: Well, but that’s my tautology, that
4 begs the question because an energy cut -- in energy tech,
5 it says that in the one case, no property was conveyed at
6 the time of creating the developers’ rights, but differently
7 here, the transportation fee and other benefits for NewCo
8 were created at the time of a conveyance of real property.
9 So this is this privity argument, right?
10 MR. BURNS: Right.
11 THE COURT: And you -- your response to that is --
12 you, or you seek to get around that, I believe, by saying,
13 “Oh look, there’s this other conveyance.”
14 MR. BURNS: No, Your Honor, it’s something
15 entirely different.
16 THE COURT: Okay.
17 MR. BURNS: That is privity. That’s a separate
18 issue to discuss. If the end result, you ask Mr. Simon,
19 well, what happens if I say you can’t reject these covenants
20 and what happens? And that’s what happened in Energy Tech
21 at the end of the day. Without getting into the Court’s
22 reasoning for why the covenant ran with the land, it decided
23 that it did with run with the land. And --
24 THE COURT: But how does -- it concluded that
25 NewCo’s rights to transportation fees and its right to
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1 consent to assignment are covenants running with he land.
2 MR. BURNS: Correct.
3 THE COURT: Right. But it says that it -- that is
4 predicated on an entire discussion where they say, “Here,
5 the transportation fee and other benefits for NewCo were
6 created at the time of a conveyance of real property.” It
7 doesn’t say “are a conveyance of real property.” They say
8 that and then they say, “We conclude that horizontal privity
9 is a requirement.” And, “We conclude that if horizontal
10 privity is a requirement, it was satisfied,” because it --
11 there was a conveyance at the same time.
12 Next it says, “The remaining question is whether
13 the interest touches and concerns real property.” There and
14 it goes on, “There, the Texas Supreme Court considered, and
15 whether an agreement to convey interests in oil and gas
16 leases ran with the land. One test considers whether the
17 covenant affected the nature, quality or value of the thing
18 demised, independently of collateral circumstances. The
19 promisor’s legal relations,” the promisor here being Sabine,
20 “legal relations in respect to the land are lessened, as the
21 legal interest as owner rendered less valuable by the
22 promise. The burden or the covenant touches or concerns the
23 lands.”
24 The Court held talking about the Westland Oil
25 case. The Court held that because the promise to convey
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1 interests in oil and gas leases burdened the land,
2 potentially rendering it less valuable, it constituted a
3 covenant run-in with the land.
4 NewCo argues, and I -- forgive me for reading, but
5 this is just the crux of it, I think. NewCo argues that,
6 “The obligation to pay transportation costs burdens the land
7 and makes it less valuable.
8 Among the reasons is that it is secured by a lien
9 on the entire pipeline. Failure to pay the fee would result
10 in loss of ownership and use of the pipeline through
11 foreclosure.” You don’t have that here.
12 NewCo contends that its right to consent to
13 assignment also affects the nature, quality and value of the
14 pipeline, and rightly constitutes a covenant. Well, maybe I
15 should turn it back, flip it around, because there’s
16 certainly other language --
17 MR. BURNS: Right, Your Honor, and that --
18 THE COURT: There’s other language in this opinion
19 that cuts the other way.
20 MR. BURNS: Right, Your Honor, and I think so much
21 of what’s in energy tech when you get to the actual, to the
22 merits, and I’m just going to go there now.
23 I look at the gathering agreements, and the
24 interests conveyed include any right title or interest in
25 land and the right to produce gas there from, et cetera.
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1 And the granted -- or excuse me -- the memoranda of
2 gathering agreements is what I’m reading from -- that were
3 filed with the DeWitt County reporters, so they’re on
4 record.
5 So that’s covenants running with land, the
6 agreement in dedication shall be a covenant running with
7 land, so that, that’s really the first element under Texas
8 law. I think we’ve -- we showed it’s -- that the scouting
9 agreements touch and concern the land because it’s
10 identified and defined in here. It relates to a thing in
11 existence. The land or the lease hold interests, ownership
12 interests -- a bundle of rights, that Sabine, and I’ll use
13 the word Sabine generically, but the bundle of rights that
14 Sabine owned at the time, they had the ability to transfer
15 (indiscernible) --
16 THE COURT: But they -- it was liened up. It was
17 liened up.
18 MR. BURNS: But isn’t that really an issue between
19 them and the bank? If they transferred security interests
20 to us in violation, haven’t they just breached their credit
21 agreement?
22 THE COURT: Well --
23 MR. BURNS: And then we have a -- and then maybe
24 there’s a dispute as between us and the bank as to the
25 priority.
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1 THE COURT: Well, but under your scenario, a
2 lender, in good faith, has a blanket lien.
3 MR. BURNS: Mm hmm.
4 THE COURT: The Debtor goes out and gives away,
5 not gives away, conveys presumably for value, but that’s
6 another question, some of the property that’s subject to the
7 blanket lien. No one thinks about the issue, okay? Who
8 wins? I mean, the lender is going to say, “Well, I win.”
9 MR. BURNS: Sure.
10 THE COURT: Right? I have a dollar good claim as
11 if the Debtor hadn’t conveyed away part of my collateral.
12 MR. BURNS: Mm hmm.
13 THE COURT: So how does that advance the ball?
14 Because in this case, I mean, just to get down to do a
15 reality check here, in this case, you know, everybody knows
16 what’s going on in this industry and that’s why we’re here.
17 So in this case, it’s not as if there’s a whole bunch of
18 excess value where we can make the secured lender whole and
19 no problems, we can make you whole as well.
20 MR. BURNS: Mm hmm.
21 THE COURT: So what do I do about that?
22 MR. BURNS: I don’t think that’s the inquiry. I
23 don’t think that’s really respectfully relevant to whether
24 or not it’s -- creates a covenant. In other words, there’s
25 nothing in the law, any of the law I’ve read that says if
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1 there’s a preexisting lien that can’t grant the
2 (indiscernible), there may be other legal issues or
3 infirmities or whatnot with it, but they signed an agreement
4 in which they covenanted to grant an -- a dedication on
5 interest, which is defined, okay? They contended to grant
6 to us --
7 THE COURT: But how did -- but how does it
8 actually work? If the lenders had foreclosed, and I don’t
9 know anything about Texas foreclosure law, but the lenders
10 foreclose, they take ownership of the property, and you
11 believe that you would have the right to enforce the
12 covenant against the lenders when it was conveyed in
13 violation of their security interests? I just --
14 MR. BURNS: I don’t have -- that is really not --
15 THE COURT: I know it’s not, but I’m --
16 MR. BURNS: It’s not the facts that, you know,
17 that I’m trying to -- you know, why couldn’t we
18 (indiscernible) just for example, they -- we made the
19 property more valuable for you, lender, by putting a
20 pipeline on there, you know, or the gathering system to put
21 on there? Why should you benefit from what we put on there,
22 what the -- you can have the real estate and all be
23 underlying interest that the Debtors owned, but we should
24 get the benefits of having constructed the system, and
25 therefore, you lender, when you want to transfer this to a
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1 third party, if you want to settle it to another pipeline
2 company or a producer, it is subject to this grant, because
3 again, our client put up value on the basis of this, too.
4 THE COURT: But people -- but that, that’s not
5 significant because people put up value all the time in
6 lease situations, and then they’re just -- they just walk
7 away from the value. So that really -- that doesn’t get me
8 there.
9 MR. BURNS: Well, I mean, I think the fact -- our
10 client spent tens or hundreds of millions of dollars to
11 build this enterprise -- this encompassing system to benefit
12 the real estate. And I’m saying, you know, the bank may
13 have an underlying lien on the real estate, but I -- again,
14 I’m not even quite sure why it’s entirely part of whether or
15 not Sabine granted anything to us, but you know, why not --
16 why could we not make the argument, we provided and added
17 value to that real estate that would not otherwise be there
18 without this gathering. So --
19 THE COURT: But it’s no different from, I take
20 vacant space and I lease it to, you know, a high end
21 restaurateur, and he, he’s got a lease and he builds it out
22 and he spends millions of dollars to build a high end
23 restaurant. And 2008 happens and all of a sudden people
24 aren’t spending $200 on dinner, and I, as the landlord, he
25 goes bankrupt.
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1 I have this wonderful high-end kitchen. He
2 doesn’t have a claim for it. And I get to lease it out to
3 somebody else. I mean, the notion of, “But we spent a lot
4 of money,” doesn’t advance the ball, because you spend a lot
5 of money because someone had a business model that you would
6 get a certain return on that money.
7 And to go back to where we were two hours ago,
8 unfortunately, that’s turned out not to be the case because
9 of what’s happened to oil and gas prices. So that doesn’t
10 do it for me, either.
11 MR. BURNS: But the difference between your
12 example and ours, we still own -- we own -- our client owns
13 --
14 THE COURT: Yes, you do.
15 MR. BURNS: -- the gathering facility.
16 THE COURT: Right.
17 MR. BURNS: The -- this is -- what you described -
18 -
19 THE COURT: Yes.
20 MR. BURNS: -- is (indiscernible) real estate and
21 nobody’s taken (indiscernible) --
22 THE COURT: And then that gets to my practical
23 issue, which is --
24 MR. BURNS: Right.
25 THE COURT: -- what’s going to happen when this
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1 turns around? And now, so now we’re back to -- and I do
2 want to wrap it up, because I have a two o’clock calendars
3 as well and you’ve been here long enough. That gets back
4 to, as a practical matter, what’s going to happen?
5 MR. BURNS: Well, I think we have a -- we may have
6 a similar (indiscernible), as you described to Mr. Simon.
7 They’re going to go out to an alternative service provider
8 and bypass our linkage to our interests. Do we not have the
9 ability to seek to enjoin that alternative service provider?
10 And that may very well be our (indiscernible).
11 THE COURT: I don’t know. I didn’t intend to
12 create a, you know, identify and open a new can of worms.
13 MR. BURNS: (indiscernible) --
14 THE COURT: But --
15 MR. BURNS: But I think that’s true, Your Honor.
16 Somewhere, the -- I always think of a flange. I used to do
17 a lot of shipping. And at some point on the flange, a right
18 transfers, okay? So we have a right. What -- whether it’s
19 while it’s still in the ground, subsurface, after surface or
20 just above the surface, we have a bundle of rights somewhere
21 in their ability to gather and produce, to the extent they
22 seek to impose a third party to do exactly what we were
23 trying to -- we have the right to do.
24 THE COURT: But the right touches -- the right
25 doesn’t touch and concern the land. The right is a right
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1 with respect to the transportation of the minerals. And
2 minerals are not real -- it’s not a real property interest.
3 It’s personal property.
4 MR. BURNS: Right, but this -- the grant, the
5 interest granted includes inlands. I’m reading from the
6 memorandum of (indiscernible) agreement.
7 THE COURT: Yeah?
8 MR. BURNS: Right title or interest inlands.
9 THE COURT: Okay. Let me give last looks to the
10 Debtor.
11 MR. BURNS: Sure.
12 THE COURT: And then, we’re going to call it a
13 day.
14 MR. BURNS: Thank you, Your Honor.
15 THE COURT: Thank you.
16 MR. BURNS: I appreciate your time.
17 THE COURT: Sure.
18 MR. BENNETT: Judge? Thank you. Ryan Bennett
19 again real quick. I think we’ve at least covered all of the
20 issues. I think for purposes of both the HPIP and Nordheim,
21 I think what we’re dealing with is a services agreement.
22 I’ll take you right back to where I started. These -- the -
23 - yes, it was an exclusive service agreement. And if not
24 for the automatic stay and our ability to reject in
25 compromise, that’s right. They could sue on it. Maybe they
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1 can -- you know, they can at least get damages and maybe
2 they can get an injunction. But here we’re in bankruptcy,
3 we can reject that agreement. We can compromise their
4 damages claim and we can go to an alternative, like we
5 already are with HPIP and we’re ready to do with Nordheim.
6 We literally are going to wrap around Nordheim’s
7 beautiful facility. My CFO calls it a Cadillac, and we’re
8 just building a Chevy because it’s all we need now. And
9 we’ve built the plans for that, and that is a significant
10 cost saver for our -- for enterprise. And maybe we do
11 renegotiate with Nordheim. Maybe we buy their gathering
12 system after this is all over. We’ll see where that goes,
13 but we do have alternatives and we’re ready to pursue those.
14 But we do need a finding from Your Honor.
15 THE COURT: Because they -- the -- and everyone’s
16 been selectively reading parts of the agreement, and that
17 the inlands part, again, it just describes the property from
18 which the gas is produced. And then, in an HP -- in -- on
19 the HPIP side, it says that HPIP was hired to perform
20 gathering services, gathering services with respect to
21 (indiscernible) the oil gas and water produced by Sabine.
22 MR. BENNETT: Personally.
23 THE COURT: So as much as you say, “But look, it
24 says it’s a covenant running with the land,” then we look at
25 the Texas cases, and they say somewhat counter-intuitively,
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1 just because it says it doesn’t mean that it is, right? And
2 then, you have to apply all of these other somewhat arcane
3 tests. So when you go to apply those tests, you run smack
4 into this other language that says that it’s going to
5 perform services with respect to oil, gas, and water
6 produced by Sabine. Those are not -- those are personal
7 property items. They are not -- it’s not real property. So
8 I’m going to reflect on all of this. I think you can
9 probably hear that I’m inclining toward a ruling that there
10 are covenants running with the land, but I --
11 MR. BENNETT: That they’re not.
12 THE COURT: That they’re not. I’m sorry.
13 MR. BENNETT: Yes --
14 THE COURT: That they’re not covenants running
15 with the land. But I need some additional time to think
16 about everything because there were a lot of interesting
17 points made here today. In the meantime, and being
18 practical is just what I do, to the extent that, you know,
19 against the backdrop of the uncertainty that the Debtors are
20 facing, it seems to me that it’s in everybody’s interests to
21 have some discussions and figure out what to do with the
22 Cadillac and the Chevy and the truck and the half built
23 Buick or whatever it is. It just makes sense to try to make
24 the best of what’s not an ideal situation for anybody. But
25 I’m going to proceed ahead. And what I might do, depending
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1 upon the (indiscernible) of other matters and the upcoming
2 trial in Sabine that we have. At some point, I may call you
3 and read a bench decision, either have you come back in or
4 I’ll just do it telephonically. Or I’ll issue a memorandum
5 decision, one or the other.
6 MR. BENNETT: Understood.
7 THE COURT: One of those three. All right? All
8 right, thank you very much. I appreciate your staying as
9 long as you have.
10 MR. BENNETT: Thank you very much, Your Honor.
11 MAN: Thank you, Your Honor.
12 CLERK: We’re off the record at two o’clock, so--
13 WOMAN: Right? Right.
14 CLERK: So you don’t have to rush back.
15 WOMAN: Okay.
16
17 (Whereupon these proceedings were concluded at
18 1:24 PM)
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1 C E R T I F I C A T I O N
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3 I, Sonya Ledanski Hyde, certified that the foregoing
4 transcript is a true and accurate record of the proceedings.
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20 Veritext Legal Solutions
21 330 Old Country Road
22 Suite 300
23 Mineola, NY 11501
24
25 Date: February 3, 2016
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