Ann: US Federal Bankruptcy Court Update, page-4

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
In re:
MARION ENERGY INC,
Debtor.
Case No. 14-31632
Chapter 11
Honorable Joel T. Marker
TCS’S OBJECTION TO DEBTOR’S EMERGENCY MOTION FOR
RECONSIDERATION OF DENIAL OF DEBTOR’S MOTION
TO OBTAIN POST-PETITION FINANCING ON A SENIOR
SECURED BASIS UNDER 11 U.S.C. § 364(d)
TCS II Funding Solutions, LLC and Castlelake, L.P. hereby object to the Debtor’s
Motion for Reconsideration of the Court’s December 5, 2014 Order Denying Debtor’s Motion to
Obtain Post-Petition Financing. (the “Motion for Reconsideration”).
Marion1 asks the Court to reverse its December 5 decision for two reasons: (i) “mistake”
or “surprise” with respect to certain stipulations made with respect to Marion’s DIP Financing
Motion and (ii) Marion’s inability to obtain DIP financing on terms that it deems acceptable.
1 Terms defined in TCS’s prior briefing in this case have the same meaning in this Objection.
The Court should reject both of Marion’s arguments and refuse to reconsider its
December 5 decision for at least three reasons: First, the Court made no “mistake” with respect
to the parties’ stipulations and there was no “surprise” of the type required for reconsideration.
Second, the relief ordered by the Court was not conditioned on Marion obtaining DIP Financing,
and there certainly was no requirement that TCS provide financing to the Debtor. Third, to the
extent relevant, TCS has offered DIP financing to Marion on reasonable terms. Each of these
matters is considered in turn below.
I. THE COURT’S ORDER WAS NOT A RESULT OF MISTAKE OR SURPRISE
Rule 60(b) of the Federal Rules of Civil Procedure, which is made applicable to
bankruptcy cases by FRBP 9024, provides that a court may relieve a party from a final judgment,
order or proceeding for various reasons, including “(1) mistake, inadvertence surprise, or
excusable neglect[.]” In this case, Marion argues “mistake” by the Court with respect to the
parties’ stipulations relating to the MHA Report and KM Custodians’ unwillingness to extend
DIP financing without a priming lien, and “surprise” by the Debtor “by the fact that the
(stipulated) elements of 11 U.S.C. § 362(d) were on trial.” Motion for Reconsideration at 12.
There was no “mistake” or “surprise” in this case.
For purposes of Rule 60(b)(1), “mistake” means either (1) a party has made an excusable
litigation mistake or an attorney in the litigation has acted without authority from a party; or
(2) the court has made a substantive mistake of law or fact in the final judgment or order. Yapp v.
Excel Corp., 186 F.3d 1222, 1231 (10th Cir. 1999). Marion clearly is asserting the second form
of mistake—i.e., mistake by the Court—in its Motion for Reconsideration.
In the case of possible mistakes of law made by the court, Rule 60(b)(1) only provides an
avenue for relief when there are “obvious legal errors, apparent on the record.” Van Skiver v.
United States, 952 F.2d 1241, 1244 (10th Cir. 1991); Sec. Mut. Cas. Co. v. Century Cas. Co.,
621 F.2d 1062, 1067 (10th Cir. 1980) (a district court judge misread an appellate mandate in
rendering its opinion); Chick Kam Choo v. Exxon Corp., 699 F.2d 693, 695 (5th Cir. 1983)
(judicial error warranting Rule 60(b)(1) relief must involve a fundamental misconception of the
law and not a merely erroneous ruling).
The Court made no “mistake” of this sort in denying the Debtor’s DIP Financing Motion.
The Court was very clearly aware of both (i) the parties’ stipulation regarding the MHA Report
and (ii) the stipulated and agreed to (or not disputed) fact that KM Custodians would not make
the DIP Loan unless it received a priming lien. The Court’s oral ruling made both of these points
clear, and during the hearings on the parties’ competing Motions the Court sustained objections
by Marion’s counsel when it perceived that TCS was encroaching on the stipulation relating to
the MHA Report. There is simply no basis for asserting that the Court was mistaken with respect
to the two stipulations.
To the contrary, the record is clear that the Court properly considered the parties’
stipulations and reached a reasoned judgment well within the scope of its discretion under
Section 364(d)(1). Indeed, the Court noted that the stipulation regarding the MHA report
“doesn’t account for everything and the statute is drafted as indicating that this is a discretionary
decision for the court to make.” The Court’s exercise of its discretion, given to it by statute, is
not “mistake.”
There also was no “surprise” in this case of the sort contemplated by Rule 60(b)(1). Of
the four bases for relief under Rule 60(b)(1), “surprise” arguably receives the least judicial ink. It
is most often framed in the context of surprise caused by excusable neglect, and has been
described as an “equitable matter that requires consideration of the Pioneer factors.” Norris v.
Salazar, 277 F.R.D. 22, 25 (D.D.C. 2001) (citing Pioneer Inv. Servs. v. Brunswick Assocs. Ltd.
P’ship, 507 U.S. 380, 395-97 (1993).
No such surprise occurred here. Marion suggests that it “was certainly (and unfairly)
‘surprised’ by the fact that the (stipulated) elements of 11 U.S.C. § 362(d) were on trial,” Motion
for Reconsideration at 12, but the Joint Prehearing Order approved by Marion’s counsel plainly
stated TCS’s factual contentions:
1. The Debtor failed to conduct a meaningful search for DIP
financing on terms less onerous than those proposed in the DIP Financing Motion
and failed to meet its burden under section 364(d)(1) of the Bankruptcy Code with
respect to the DIP Financing Motion.
2. The value of the Clear Creek Field is highly speculative and the
Debtor’s claim that it has over $100 million of net equity is grossly misleading.
3. Even assuming for purposes of the Hearings that, using a 10%
discount rate, the net present value of the proved gas reserves in the Clear Creek
Field is $156,264,000, the market value of the Clear Creek Field is much lower
than $156,264,000, and the $156,264,000 figure does in any way take into
account the risks (execution, variability of production outcomes, timing of
production, commodity price changes and ability to exit the investment) of
bringing the Clear Creek Field into full production, or the risk that production
might not be achievable, among other things.
4. The proposed 8-month DIP Financing would put the value of
TCS’s security at risk, and cause TCS to lack adequate protection, even though
TCS believes that it is fully secured at this time.
Joint Prehearing Order (Dkt. 47) at 12.
Moreover, the “surprise” claimed by Marion related to section 362(d), see supra, but the
Court generally denied TCS relief from stay. Instead, Marion’s primary grievance is with the
Court’s ruling under section 364(d), refusing to approve the DIP Financing Motion. See Motion
for Reconsideration at 17 (“Prayer for Relief”). The Court’s ruling against the DIP Financing
Motion was entirely consistent with TCS’s first factual contention set forth above. Thus, there is
no “surprise” in this case.
II. MARION’S FAILURE TO OBTAIN FINANCING IS NOT CAUSE FOR RELIEF
Although not clearly articulated, Marion appears to argue that its failure to obtain DIP
financing itself constitutes “any other reason that justifies relief” under Rule 60(b)(6). See
Motion for Reconsideration at 12. This argument is misplaced. The relief ordered by the Court
was in no way conditioned on Marion obtaining DIP financing, and there certainly was no
requirement that TCS provide DIP financing to the Debtor. In fact, just the opposite is true. The
Court was well aware—by the Debtor’s own witnesses—of KM Custodians’ position that it
would not provide DIP financing on a non-priming basis, and that the Debtor had been
unsuccessful in its attempts to find better financing terms prior to the December Hearing. In
other words, when the Court issued its ruling, it fully understood and appreciated the possibility
that the Debtor might not find financing. That same fact, then, certainly cannot constitute a
justification to reconsider its previous ruling.
If anything, the Debtor’s inability to find non-priming DIP financing justifies the Court’s
original decision rather than providing a basis to rescind it. In its decision, the Court explained:
I want the debtor’s equity in this case to step up. If the asset is worth $156
million, then somebody should be willing to lend, on a second priority basis. The
debtor and its largest equity holder cannot simply pass all the rest to TCS, should
the attempt to reorganize fail.
Unfortunately, the Debtor’s equity holders have failed to step-up, either hoping that TCS will be
forced to shoulder all of the risk, or simply unwilling to take the risk themselves.
III. TCS HAS OFFERED REASONABLE DIP FINANCING TERMS
Marion also suggests that TCS’s refusal to fund a $2,500,000 guaranteed fee to support a
sale process is cause for relief. There is no basis for this argument.
First, as noted above, the Court’s December 5 ruling did not in any way obligate TCS to
provide DIP financing or fund a sale process. To the contrary, the Court expressly left it to the
Debtor to try to “negotiate better terms with TCS who . . . at least indicated at least a willingness
to fund.” The Court in no way conditioned its order on TCS providing funding, or doing so on
terms that Marion might find appealing.
Second, to the extent relevant, TCS has in fact offered DIP financing to Marion on
entirely reasonable terms. As Luke Beltnick explains in this Declaration, he has had multiple
conversations with principals of the Debtor since the Court’s decision on December 5 regarding
the parameters of a sale process and potential DIP financing. And on December 10, TCS sent to
the Debtor’s attorneys a draft Stipulation regarding the proposed DIP financing by TCS. The
draft Stipulation outlined rough terms for a sale process and potential TCS DIP financing. The
Debtor has failed to comment on the draft or attempt any negotiation, choosing instead to file its
present Motion.
The terms proposed by TCS for the Sale Process and TCS DIP Financing can be
summarized as follows:
• Funding for reasonable operating expenses throughout the term of the Sale
Process, based on 30-day budgets to be provided by Marion to TCS.
• Engagement of a banker or other third party to implement the Sale Process.
• Funding of a six-figure retainer plus expenses for the banker or third party,
with final payment in the form of a success fee payable upon the conclusion of
a sale to a third party buyer.
See Declaration of Luke Beltnick in Support of TCS’s Objection to Debtor’s Emergency Motion
for Reconsideration at 2, ¶ 4.
When TCS first learned of the commercially unreasonable $2,500,000 guaranteed fee that
Marion was demanding that TCS fund, TCS offered at least two different alternatives. First,
TCS suggested a sales process run by Marion itself with the assistance of a neutral third-party
(Gil Miller) to assess indications of interest. See id. at 3, ¶ 13. Second, TCS suggested that 333
Capital (which the Debtor itself had suggested run a sales process beginning in June 2014) run
the sales process. See id. at 4, ¶ 14. Marion has rejected both proposals.
TCS remains ready, willing and able to assist Marion with the Sale Process and to
provide the DIP financing, or cooperate with a refinancing by Marion, but TCS will not agree to
the commercially unreasonable terms that Marion insists on, such as guaranteeing a $2,500,000
fee without any assurance that such a fee will result in a successful sale.
CONCLUSION
The Court properly exercised its discretion under section 364(d) in refusing to approve
the DIP Financing Motion. The Court made no “mistake,” and there was no “surprise” to
Marion, in connection with its ruling. There is no other “cause” for relief from the Court’s
December 5 ruling, and accordingly TCS respectfully requests that the Court deny the Motion
for Reconsideration.
DATED this 17th day of December, 2014.
STOEL RIVES LLP
/s/ Mark E. Hindley_________
Mark E. Hindley, Utah Bar No. 7222
Bria L. Mertens, Utah Bar No. 14236
David B. Levant (admitted pro hac vice)