page 1 1 united states bankruptcy court 2 southern ... · 2 arsalan muhammad 3 jeffrey s. munoz 4...

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

Veritext Legal Solutions212-267-6868 www.veritext.com 516-608-2400

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


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


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


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


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


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


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


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


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


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


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


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,


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 --


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


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


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.


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


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.


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


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


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?


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


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 --


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


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


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


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


1 could be shown eventually (indiscernible).

2 MR. BALASSA: We agree with that, Your Honor.


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


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


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


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


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


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,


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


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.


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


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


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.


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


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


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,


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.


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


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


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


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,


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 --


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.


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


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. --


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


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


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.


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


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


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.


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.


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


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


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


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


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


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


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


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 --


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


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


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,


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


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


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


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


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


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


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,


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


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


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


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


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


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.


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


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.


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


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


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.


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


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.


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.


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


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.


17 MR. SIMON: So that's their real property

18 interest, which is real property.


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


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 --


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.


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


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


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.


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


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


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


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.


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 --


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,


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?


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


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?


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


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?


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


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


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


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


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


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


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


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,


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.


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


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?


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


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


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.


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.


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.


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.


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


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


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.


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.


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 --


25 THE COURT: -- what’s going to happen when this


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


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


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,


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


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)

19

20

21

22

23

24

25


1 C E R T I F I C A T I O N

2

3 I, Sonya Ledanski Hyde, certified that the foregoing

4 transcript is a true and accurate record of the proceedings.

5

6

7

8 Sonya Ledanski Hyde

9

10

11

12

13

14

15

16

17

18

19

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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[use - wilson] Page 26


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[win - ’s] Page 27


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