1. business and industrial
2. company
3. bankruptcy

Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 1 of 30
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
Quicksilver Resources Inc., et al., 1
Debtors.
)
)
)
)
)
)
)
)
Chapter 11
Case No. 15-10585 (LSS)
Jointly Administered
Re: Docket Nos. 16, 97 & 234
JOINT REPLY OF SECOND LIEN AGENT AND AD HOC GROUP OF SECOND
LIENHOLDERS TO THE OBJECTION OF THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS TO DEBTORS’ MOTION FOR ENTRY OF INTERIM AND
FINAL ORDERS (A) AUTHORIZING THE USE OF CASH COLLATERAL, (B)
GRANTING PREPETITION SECURED PARTIES ADEQUATE PROTECTION,
(C) SCHEDULING A FINAL HEARING, AND (D) GRANTING RELATED RELIEF
Credit Suisse AG, Cayman Islands Branch (f/k/a Credit Suisse AG), as administrative
agent for the Second Lien Lenders (as defined in the Debtors’ Motion for Entry of Interim and
Final Orders (A) Authorizing the Use of Cash Collateral, (B) Granting the Prepetition Secured
Lenders Adequate Protection, (C) Scheduling a Final Hearing, and (D) Granting Related Relief
[Docket No. 16] (the “Motion”) 2) (the “Second Lien Agent”) and the Ad Hoc Group of Second
Lienholders (collectively, the “Second Lien Secured Parties”) hereby file this reply to the
objection filed by the unsecured creditors committee (the “Committee”) [Docket No. 234] (the
“Objection) to the Motion. The Second Lien Secured Parties are in full support of the Debtors’
Reply in Further Support of Debtors Cash Collateral Motion and Response to the Official
1
The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax
identification number, are: Quicksilver Resources Inc. [6163]; Barnett Shale Operating LLC [0257]; Cowtown
Drilling, Inc. [8899]; Cowtown Gas Processing L.P. [1404]; Cowtown Pipeline Funding, Inc. [9774]; Cowtown
Pipeline L.P. [9769]; Cowtown Pipeline Management, Inc. [9771]; Makarios Resources International Holdings LLC
[1765]; Makarios Resources International Inc. [7612]; QPP Holdings LLC [0057]; QPP Parent LLC [8748];
Quicksilver Production Partners GP LLC [2701]; Quicksilver Production Partners LP [9129]; and Silver Stream
Pipeline Company LLC [9384]. The Debtors’ address is 801 Cherry Street, Suite 3700, Unit 19, Fort Worth, Texas
76102.
2
Capitalized terms used herein but not defined shall have the meanings given such terms in the Motion.
01:17011510.1
NY\6968863.16
047786-0089
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 2 of 30
Committee of Unsecured Creditors’ Objection Thereto [Docket No. 253] and file this Reply
today only to provide additional detail regarding the Second Lien Secured Parties’ views on the
issues discussed therein and in the Objection. In support of this Reply, the Second Lien Secured
Parties respectfully represent as follows:
PRELIMINARY STATEMENT
1.
The proposed Final Order reflects a vigorously negotiated, arm’s length
compromise among the Debtors and the Global Administrative Agent, the Second Lien Secured
Parties, the U.S. Lenders, the Canadian Agent, the Canadian Lenders, the Second Lien Lenders,
the Second Lien Indenture Trustee and the Second Lien Noteholders (collectively, the “Secured
Parties”).
This settlement affords the Debtors the flexibility to continue operating their
businesses during these chapter 11 cases and to access to the Debtors’ cash, whether received
prepetition or postpetition and whether or not constituting the cash collateral of the Secured
Parties. 3 Without the settlement reflected in the Final Order, the Debtors would be at risk of
having to immediately cease operations because the Debtors cannot otherwise provide the
Secured Parties with the constitutionally required adequate protection of their bargained-for
property interests as required under the Bankruptcy Code. Yet, the Committee asks this Court to
override the Debtors’ business judgment and force the Debtors to roll the dice on extensive and
complicated litigation with the Secured Parties over numerous issues otherwise settled in the
Final Order.
2.
Absent the consent reflected in the terms of the proposed Final Order, the
adequate protection provided to the Secured Parties must be sufficient to protect the Secured
Parties against the risk that the value of their interests in the Debtors’ assets will diminish during
3
Notwithstanding the Committee’s assertions to the contrary, the Debtors’ prepetition cash is subject to the
liens of the Secured Parties as noted below.
01:17011510.1
NY\6968863.16
2
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 3 of 30
the cases. The Debtors are incapable of providing such adequate protection. During these cases,
the Debtors will extract and sell the Secured Parties’ natural gas and gas liquids collateral. The
cash proceeds of these sales will be used to pay (i) operating expenses not only at the properties
subject to the liens of the Secured Parties, but also at unpledged properties, (ii) exploration and
development expenses at properties that are not subject to the liens of the Secured Parties, (iii)
selling, general and administrative expenses of the Debtors, and (iv) the costs of these chapter 11
cases, including professional fees relating thereto. The Debtors do not intend to use these
proceeds to drill additional wells on the acreage subject to the Secured Parties’ liens.
Accordingly, the Secured Parties collateral sold during the cases will not be replaced. The
Debtors project operating losses. Thus, at the end of these proceedings, the Secured Parties will
have less collateral securing their claims than on the Petition Date. Diminution in value of the
Secured Parties’ collateral is inevitable in these chapter 11 cases.
3.
Moreover, the core of the Secured Parties’ collateral - natural gas and gas
liquids - is a commodity subject to great and rapid price swings. As a result, these chapter 11
cases and the concomitant delay in the Secured Parties ability to foreclose on their collateral,
expose the Secured Parties to the material risk that the value of their diminished collateral at the
end of these cases will be materially less than it was on the Petition Date because of price
decline, further necessitating the need for adequate protection.
4.
The Bankruptcy Code is clear that, absent consent, the Debtors have the
burden to demonstrate that they will adequately protect the Secured Parties from diminution in
value in order to use such collateral during the pendency of the chapter 11 cases. The Debtors
have not, and cannot, meet this burden of proof, but instead have negotiated a consensual deal to
permit use of the Secured Parties’ collateral. Yet, the Committee seeks to reject this highly
01:17011510.1
NY\6968863.16
3
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 4 of 30
negotiated settlement, substitute its views for the Debtors’ reasoned business judgment and have
this Court force upon the Secured Parties an adequate protection package that is - as set forth in
more detail below - grossly inadequate to protect the Secured Parties against the inevitable
diminution in the value of their collateral. This request should be rejected.
5.
The settlement terms embodied in the Final Order are reasonable,
customary and should be approved by this Court. Despite the Committee’s arguments to the
contrary, the applicable standard to be applied to the Debtors negotiated use of cash collateral is
measured by its reasonable business judgment. Were this a contested use of collateral, the
Debtors would have the burden to demonstrate that the Secured Parties are adequately protected
against the risk that the value of their interests in the Debtors’ assets will decline during the
cases. Here, the Debtors are able to avoid having to bear such a burden only due to the consent
secured through the Final Order.
6.
Deference to the Debtors’ business judgment is particularly appropriate in
this instance given the complexity of the issues in these chapter 11 cases and the significant time
and resources that would be incurred in resolving such issues when all relevant stakeholders are
ready and willing to settle these claims as set forth in the Final Order. As a result, the Objection
should be overruled and the Final Order approved.
BACKGROUND
7.
On March 17, 2015, (the “Petition Date”), each of the Debtors filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in this Court. The Debtors
continue to operate their businesses and manage their properties as debtors in possession.
A. SOURCES OF CASH
8.
Upon information and belief, the Second Lien Secured Parties understand
that in the months leading up to the Petition Date, QRI sold certain collateral of the Secured
01:17011510.1
NY\6968863.16
4
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 5 of 30
Parties and used the proceeds of such dispositions to pay down the outstanding balance under the
First Lien Credit Agreement. Following this pay down, and due to the presence of the proved
reserves in the Barnett Shale, QRI had the right to re-borrow certain funds under the First Lien
Credit Agreement. QRI exercised this right, borrowing approximately $102 million and placing
those funds in certain investment accounts (the “US Revolver Funds”). Declaration of Vanessa
Gomez Lagatta in Further Support of (1) Debtors’ Motion For Entry of Interim and Final
Orders (A) Authorizing the Use of Cash Collateral, (B) Granting Prepetition Secured Parties
Adequate Protection, (C) Scheduling a Final Hearing, and (D) Granting Related Relief and (2)
Debtors’ Motion for (A) Authority to (I) Continue Using Existing Cash Management System, (II)
Honor Certain Pre-petition Obligations Related to the Use of the Cash Management System, and
(III) Maintain Existing Bank Accounts and Business Forms; and (B) an Extension of Time to
Comply With Bankruptcy Code Section 345(B) and Local Rule 4001-3 [Docket No. 250] (the
“Gomez Declaration”), ¶ 4 In addition, upon information and belief, the Second Lien Secured
Parties understand that approximately $50 million was drawn under the Canadian Credit
Agreement by Quicksilver Resources Canada Inc. (“Quicksilver Canada”), transferred to QRI
and placed into certain investment accounts (the “Canadian Revolver Funds” and together with
the US Revolver Funds, the “Revolver Funds”). Gomez Declaration, ¶ 4. It is with this cash
and cash equivalents, together with the proceeds of natural gas and gas liquids extracted postpetition that the Debtors anticipate funding these chapter 11 cases along with ongoing working
capital obligations.
9.
To be sure, the availability of the Revolver Funds to the Debtors has
permitted them to avoid an immediate need for debtor-in-possession financing - the terms of
01:17011510.1
NY\6968863.16
5
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 6 of 30
which likely would have been more onerous to the estate than the limited concessions contained
in the Final Order.
B. DIMINUTION IN VALUE
10.
The precise extent of diminution in value of the Secured Parties’ collateral
is not an issue that must be - or could be - decided at this stage of these chapter 11 cases, but it is
plainly likely, if not certain. The Secured Parties’ collateral will deplete during these cases and
the cash proceeds of its sale will not be paid to the Secured Parties. The volume of natural gas
and gas liquids collateralizing the Secured Parties claims will continue to decrease during these
cases as the Debtors extract and sell the gas collateral without developing new reserves that
would replace the gas sold during these cases. Declaration of John-Paul Hanson in Support of
Debtors’ Motion For Entry of Interim and Final Orders (A) Authorizing the Use of Cash
Collateral, (B) Granting Prepetition Secured Parties Adequate Protection, (C) Scheduling a
Final Hearing, and (D) Granting Related Relief [Docket No. 252] (the “Hanson Declaration”),
¶ 10. Furthermore, not only will the cash proceeds of the extracted gas not be used to create
reserves to replace those depleted during the cases or remitted to the Secured Parties, the Debtors
will use material amounts of the cash proceeds to (1) fund operating expenses at wells in the
Barnett Shale that are not subject to the Secured Parties’ liens, (2) fund exploration,
development, and operating expenses for the unpledged West Texas Oil Assets, (3) pay selling,
general and administrative expenses and (4) pay restructuring expenses.
11.
There is also material risk that the price available for the natural gas and
gas liquids will be less than it was at the start of the cases. The price of natural gas is highly
volatile. Hanson Declaration, ¶ 11. As a result, the price obtainable for the natural gas and gas
liquids subject to the liens of the Secured Parties that will remain unsold at the end of the cases is
subject to material risk of decline. Hanson Declaration, ¶ 10 (“Absent significant discoveries /
01:17011510.1
NY\6968863.16
6
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 7 of 30
increases in hydrocarbon volumes associated with the Debtors’ oil and gas reserves, or
significant operating cost reductions, if natural gas prices experience further declines, the value
of the Barnett Shale and the Debtors’ assets located therein will suffer a corresponding
decrease.”). As demonstrated infra, the fact that the price of natural gas can move downward
dramatically is plain, as is the law that the Secured Parties should not bear the risk of such
possibility.
12.
As a result of the foregoing, prior to the Petition Date, the Debtors and the
Secured Parties engaged in extensive, arms’ length negotiations in order to identify a
compromise that would allow the Debtors to continue operating their business through the
consensual use of the Secured Parties’ collateral, including cash collateral. The result of the
negotiations is the compromise set forth in the Final Order. For the reasons set forth below, the
Court should deny the Committee’s request to substitute its judgment of what is adequate
protection for the Debtors and to force the Secured Parties to accept adequate protection that is
inadequate by a wide margin.
ARGUMENT
I.
THE ADEQUATE PROTECTION PROVISIONS OF THE FINAL CASH
COLLATERAL ORDER ARE REASONABLE AND CUSTOMARY AND
SHOULD BE APPROVED.
A.
Absent consent, the Debtors must demonstrate adequate protection of the
Secured Parties’ interest.
13.
It is undisputed that the Secured Parties maintain security interests in the
vast majority of QRI’ Debtors’ Domestic Pledged Property, which includes the vast majority of
QRI’s domestic proved oil and gas properties and related assets. Motion,¶ 14. As noted above,
the Debtors will continue to extract and sell natural gas and gas liquids subject to the liens of the
Secured Parties.
01:17011510.1
NY\6968863.16
The cash proceeds resulting from these dispositions constitute the cash
7
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 8 of 30
collateral of the Secured Parties. See Uniform Commercial Code §§ 9-203(f); 9-315(a); 9315(c); 11 U.S.C. § 552(b). The Debtors intend to use this cash collateral in their operations.
14.
Irrespective of whether the Revolver Funds constitute the cash collateral
of the Secured Parties, in order to access this cash and continue to operate their businesses during
the pendency of these chapter 11 cases, the Debtors must either secure the Secured Parties’
consent to the use of their collateral, including this cash collateral, or demonstrate that the
Secured Parties’ interests in their collateral will be adequately protected. See 11 U.S.C. §§
363(c)(2); 363(e). The Debtors have not, and cannot, carry their burden on adequate protection,
but exercised their business judgment to enter into a settlement with the Secured Parties to obtain
their consent to use their collateral in accordance with the terms set forth in the Final Order.
15.
Adequate protection is designed to insure that a creditor receives the value
that creditor bargained for prior to the petition date. See Resolution Trust Corp. v. Swedeland
Dev. Grp. (In re Swedeland Dev. Grp.), 16 F.3d 552, 564-65 (3d Cir. 1994) (“[T]he whole
purpose of adequate protection for a creditor is to insure that the creditor receives the value for
which he bargained prebankruptcy.” (quoting MBank Dallas, N.A. v. O’Conner (In re
O’Connor), 808 F.2d 1393, 1396 (10th Cir. 1987))); In re 354 E. 66th St. Realty Corp., 177 B.R.
776, 782 (Bankr. E.D.N.Y. 1995) (“The purpose or intent of granting adequate protection
payments are to maintain the status quo for that creditor and to protect the creditor from
diminution or loss of the value of its collateral during the ongoing Chapter 11 case.”).
16.
The Objection seeks to shift the burden of demonstrating adequate
protection upon the Secured Parties, going so far as to inaccurately cites several cases to the
effect that the burden is on the Secured Parties to prove diminution in value and that such proof
is a prerequisite to any provision of adequate protection compensation. Objection, ¶ 9. The
01:17011510.1
NY\6968863.16
8
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 9 of 30
cases cited by the Committee, however, relate to requests by creditors to lift the automatic stay
under Section 362 of the Bankruptcy Code to foreclose upon collateral due to a failure of
adequate protection and not with respect to the obligation to provide adequate protection under
Section 363 of the Bankruptcy Code. Indeed, when a claim for adequate protection arises under
Section 363(e), the Bankruptcy Code expressly provides that the debtor will “have the burden of
proof on adequate protection: and the secured party’s only burden is “on the issue of validity,
priority or, extent of [its] interest.” Wilmington Trust Co. v. AMR Corp. (In re AMR Corp.), 490
B.R. 470, 477 (S.D.N.Y. 2013). For the Debtors to use the Secured Parties collateral, they must
make - but cannot make - a prima facie showing that the Secured Parties will be adequately
protected or secure the Secured Parties’ consent, as they did here. Id at 478; U.S.C. § 363(p).
B.
The Debtors’ operations deplete the volume of collateral without replacing it
and the collateral value is subject to significant price volatility.
17.
The amount of natural gas in the Debtors’ reserves is finite and cannot be
replaced. Each time natural gas is extracted from the Debtors’ reserves, the value of those
reserves is permanently reduced. Further, the extraction process depreciates the value of the
related infrastructure. Despite the Committee’s twisted logic to the contrary, the Debtors are
proposing to each day extract and sell (without replenishing) another portion of the finite
resource that the Secured Parties would otherwise be permitted to foreclose upon. They will then
use the cash collateral resulting to fund their unprofitable operations, including the unprofitable
extraction of more of the Secured Parties’ collateral, the exploration and development of
unencumber land, and Debtors general, administrative, and restructuring expenses.
These
actions unquestionably constitute depletion of the Secured Parties’ collateral during the
pendency of these chapter 11 cases.
01:17011510.1
NY\6968863.16
9
Case 15-10585-LSS
18.
Doc 258
Filed 04/23/15
Page 10 of 30
The Committee’s argument that the Debtors’ continued operation of the
wells related to the Secured Parties’ collateral is in some way beneficial to the Secured Parties is
wrong and irrelevant. As noted in the Declaration of Stan G. Page, contrary to the Committee’s
assertions in the Objection, shutting in wells is not an all or nothing proposition. The Debtors
have to date shut in a number of uneconomic wells and may shut in additional wells without
damaging the integrity of the Barnett Shale assets. Page Declaration ¶¶ 11-12. Therefore the
Debtors (or the Secured Parties following a foreclosure) could further reduce production in the
current uneconomic environment without causing the cascade of horribles presented in the
Objection.
19.
No matter how this situation is described, the Committee cannot escape
the simple truth at the heart of this issue – the Debtors are continuing to extract and sell the
Secured Parties’ collateral and are neither giving the proceeds to the Secured Parties nor
replacing the extracted gas with new reserves. While there may be benefits to continuing to
operate some of the Debtors’ wells (as opposed shutting them all in), such benefits could be
realized by the operation of the wells following foreclosure or by a receiver pending a
foreclosure. The benefits of bankruptcy are therefore largely duplicative of the benefits the
Secured Parties would enjoy pursuing state law remedies and therefore there is no benefit to the
Secured Parties’ collateral from the pendency of these cases as states by the Committee in the
Objection. Finally, the cases cited by the Committee for the proposition that a benefit to an asset
can constitute adequate protection are each inapposite. As an initial matter none of the cases are
from the Third Circuit and as such none called upon a court to consider the issue under the
binding precedent of Swedeland. Further, each case involved real property (not a diminishing
asset) and in two of the cases involved testimony from the secured creditors’ own experts that the
01:17011510.1
NY\6968863.16
10
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 11 of 30
proposed use of cash would increase the value of the asset (or at least hold the value steady
through the projection period) and in the third contained a finding that the collateral substantially
exceed the debt. In re 495 Cent. Park Ave. Corp., 136 B.R. 626,630 (Bankr. S.D.N.Y. 1992)
(lender’s appraiser testified that proposed renovations would increase the value of the building
by $800,000); In re 499 W. Warren Street Assoc., 142 B.R. 53, 57n.8 (Bankr. N.D.N.Y. 1992)
(lender’s appraiser admitted that value at end of 10 year period would be higher than the value
on the petition date); In re Salem Plaza Assoc.,135 B.R. 753, 758 (Bankr. S.D.N.Y. 1992)
(noting that representation that the value of the shopping center substantially exceed the debt was
undisputed).
20.
Because the collateral is depleting, the Debtors’ experience losses on
operations, the proceeds of the collateral are being used to fund operating expenses, exploration
expenses, and development expenses on wells and acreage not pledged to the Secured Parties
and to fund SG&A and restructuring expenses, the Secured Parties are in a far worse position
than if they were permitted to foreclose on the collateral on the Petition Date. 4
21.
Beyond the depletion of the Secured Parties’ collateral, the Secured
Parties also are subject to the risk in the volatility of natural gas prices. The market price for
natural gas has decreased approximately 40% in the last five months. Hanson Declaration, ¶
11. Since 1991, the year to year price of natural gas from March of one year to the next, has
declined by more than 10% seven times, including most recently in 2015, 2012, 2009 and in
4
The Committee’s argument that foreclosure would be a complicated and expensive process is wrong. The
Barnett Assets pledged to the Secured Parties are in four counties in Texas. Foreclosure on real property in Texas is
non-judicial, fast, safe and cheap. See Texas Property Code, Section 51.002. A sale of real property under a power
of sale conferred by a deed of trust, as is the case here, must be a public sale at auction on the first Tuesday of a
month after twenty-one days’ of notice are given by public posting on the courthouse door, filing in the office of the
relevant county clerk and serving written notice of sale by certified mail on each debtor. Id. Such a process requires
insignificant cost, as such foreclosure is non-judicial and requires only minimal delay.
01:17011510.1
NY\6968863.16
11
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 12 of 30
2002. 5 Indeed, the natural gas price has declined year to year six out of the last ten years,
including by 36% from 2014 to 2015, 42.5% from 2011 to 2012 and 57.8% from 2008 to
2009.8 This frequency and the sheer magnitude of these price changes demonstrates the
significant volatility that exists in the market place and further shows why the Additional Barnett
Interests are insufficient alone to provide the Secured Parties with adequate protection. By the
Debtors’ own admission, the projected value of the Debtors proved reserves has fallen by more
than 5% - $25 million - since March 5, 2015, and there continues to be “downward pressure
[exerted] on natural gas prices” even today. Hanson Declaration, ¶ 12, Exhibit B.
22.
Adequate protection must be provided during the pendency of these
chapter 11 cases. The valuation inquiry is not at this date alone, but rather, must extend
throughout the entirety of these cases. In re Alyucan Interstate Corp., 12 B.R. 803, (Bankr. D.
Utah 1981); Grundy Nat. Bank v. Tandem Min. Corp., 754 F.2d 1436 (4th Cir. 1985). The
Secured Parties should not be subjected to the whims of the market and ever-changing price of
natural gas during the pendency of these chapter 11 cases. In re XB-1 Associates, 27 B.R. 827,
833 (Bankr. S.D.N.Y. 1983) (granting secured creditor relief from stay to foreclose on collateral
due to lack of adequate protection since debtor “failed to deal with the central problem in [the]
case – the effect of market conditions on value.”); In re Callister, 15 B.R. 521, 533 (Bankr. D.
Utah 1981) subsequently aff'd sub nom. Ingersol-Rand Fin. Corp. v. Callister, Case No. 82-2249,
1984 WL 249787 (10th Cir. 1984) (“The property at stake and its susceptibility to market forces
are factors to be considered in determining adequate protection.”); Chemical Bank v. Am.
Kitchen Foods, Inc. (In re Am. Kitchen Foods, Inc.), 1976 Bankr. LEXIS 6, at *32 (Bankr. D.
5
Historical natural gas prices are available publicly online. The prices used for these calculations were
secured from www.capitaliq.com (last accessed, April 22, 2015).
01:17011510.1
NY\6968863.16
12
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 13 of 30
Me. 1976) (“Debtors in possession . . . should not be facilitated in their efforts to foist upon the
secured party the risk of collateral depletion or diminution, including the risk of diminution due
to declines in market value, where the collateral was retained at the instance and for the benefit
of the debtor, rather than the secured party.”). Rather, the Secured Parties must be adequately
protected for the potential downside risk should market prices fall, further scuttling the
Committee’s tenuous arguments with respect to adequate protection.
C.
The Committee’s proposal offers insufficient value, most of which is
speculative and some of which is already the Secured Parties’ collateral.
23.
The Debtors and Committee have asserted that the Debtors own certain
material assets that are not part of the collateral package of the Secured Parties (other than the
Debtors’ cash, which is rapidly depleting, and, as noted below, is subject to the liens of the
Secured Parties), including (i) certain oil and gas leases owned by QRI in Pecos County, Upton
County, Reeves County, Presidio County, Culberson County and Crockett County, Texas (the
“West Texas Oil Assets”), (ii) a small percentage of the proven hydrocarbon interests in the
Barnett Shale (the “Additional Barnett Interests”), (iii) that certain Amended and Restated
Intercompany Note, dated as of October 7, 2011, by and among QRI, Quicksilver Canada,
Cowtown Pipeline Funding, Inc., Cowtown Pipeline Management, Inc., Cowtown Pipeline L.P.,
and Cowtown Gas Processing L.P. with a face value of approximately $413 million (the
“Intercompany Note”), (iv) the remaining 35% of the equity interests of Quicksilver Canada
that are not subject to the liens of the Secured Parties (the “Canadian Unencumbered Equity
Interests”) and (v) any proceeds or property recovered in respect of any Avoidance Action
(together with the West Texas Oil Assets, the Additional Barnett Interests the Intercompany Note
and the Canadian Unencumbered Equity Interests, the “Unencumbered Property”). As the
Debtors have acknowledged, such Unencumbered Property is largely of speculative value and is
01:17011510.1
NY\6968863.16
13
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 14 of 30
not sufficient to adequately protect the Secured Parties against the inevitable and continuing
diminution in value from the Debtors’ use of their cash collateral during the pendency of these
chapter 11 cases. See Gomez Declaration, ¶¶ 6-8 (noting limitations to value of Intercompany
Note); Hanson Declaration, ¶ 10 (noting potential decreases in value of Additional Barnett
Interests); Declaration of Stan G. Page In Support of Debtors’ Motion For Entry of Interim and
Final Orders (A) Authorizing the Use of Cash Collateral, (B) Granting Prepetition Secured
Parties Adequate Protection, (C) Scheduling a Final Hearing, and (D) Granting Related Relief
[Docket No. 251] (the “Page Declaration”),, ¶ 6 (“[T]he value of West Texas as a whole and the
viability of the play remain speculative[.]”).
24.
The Committee seeks to limit the adequate protection afforded to the
Secured Parties to replacement liens on certain of the Debtors’ unencumbered assets. But
replacement liens on such assets are wholly inadequate to adequately protect the Secured Parties.
25.
The Debtors have not demonstrated that the Unencumbered Property is
sufficiently valuable to protect the Secured Parties against the inevitable and continuing
diminution in value from the Debtors’ use of their cash collateral during the pendency of these
chapter 11 cases, nor could they because the Unencumbered Property is of speculative, if any,
value.
In order to demonstrate adequate protection, such protection must be shown non-
speculative. In re Swedeland Dev. Grp., Inc., 16 F.3d 552, 567 (3d Cir. 1994) (“Congress did
not contemplate that a creditor could find its priority position eroded and, as compensation for
the erosion, be offered an opportunity to recoup dependent upon the success of a business with
inherently risky prospects. We trust that in the future bankruptcy judges in this circuit will
require that adequate protection be demonstrated more tangibly than was done in this case.”); In
re Olde Prairie Block Owner, LLC, Case No. 10-22668 (JBS), 2011 WL 1692145, at *8 (Bankr.
01:17011510.1
NY\6968863.16
14
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 15 of 30
N.D. Ill. May 3, 2011) (“speculative benefit should not be relied on for adequate protection”); In
re Jennings, Case No. 09-13097 (JMD), 2010 WL 757341, at *6-7 (Bankr. D.N.H. 2010)
(denying debtor’s proposed adequate protection in the form of additional liens because they were
“speculative and insufficient”); Matter of Lundell Farms, 86 B.R. 582, 592 (Bankr. W.D. Wis.
1988) (“bare replacement lien on future, non-existent crops is too speculative to constitute
adequate protection.”); In re Marcus Lee Assocs., 2011 U.S. Dist. LEXIS 5372 (E.D. Pa. Jan.
20, 2011).
Here, essentially all of the assets that the Committee asserts are capable of
adequately protecting the Secured Parties are either speculative, rapidly diminishing (or exposed
to material risk of rapid diminishment) or already subject to the liens of the Secured Parties.
26.
First, while the liens on the small percentage of interests in the Barnett
Shale not already subject to the liens of the Secured Parties have some value that is not
speculative, that value is subject to the same material risks as the Secured Parties’ existing
collateral. As demonstrated above, a decline in the price of natural gas of 10% or more over the
next year is far from unlikely as it has occurred 7 times in the last 25 years. The Debtors have
similarly noted the significant possibility of declining prices for the natural gas and gas liquids in
the Barnett Shale. Hanson Declaration, ¶¶ 11-12. Such a decline would, by itself, erode more
value than the interest in the 8% of the Barnett Shale properties not pledged to the Secured
Parties would add.
27.
Second, the Intercompany Note and Canadian Unencumbered Equity
Interests offer only speculative value, if any, to the Secured Parties, as Quicksilver Canada is the
obligor on the Intercompany Note and itself on the fringe of bankruptcy. As set forth in the First
Day Declaration, Quicksilver Canada and the lenders under the Combined Credit Agreements
entered into the Forbearance Agreement whereby the Canadian Lenders, among other things,
01:17011510.1
NY\6968863.16
15
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 16 of 30
agreed to forbear from exercising rights and remedies under the Canadian Credit Agreement.
First Day Declaration, ¶ 43. The Debtors themselves admit that, “[a]s a result of the Forbearance
Agreement the Non-Debtor Canadian Entities [(including Quicksilver Canada)] have not
commenced insolvency proceedings in Canada.” First Day Declaration, ¶ 43. With an obligor
under the Intercompany Note on the brink of filing insolvency proceedings, a replacement lien in
an unsecured receivable owed by such entity has minimal – if any – adequate protection value.
Further, as the Debtors admit, the obligations under the Intercompany Note could be
recharacterized as equity contributions from QRI to Quicksilver Canada. Gomez Declaration, ¶
6 (“If the Intercompany Note is recharacterized as equity contributions from QRI to [Quicksilver
Canada], I do not believe that the proposed adequate protection lien on such Intercompany Note
will provide the Prepetition Secured Parties with any increase in collateral.”). Regardless, the
value offered by replacement liens on the Intercompany Note is further minimized by the other
“potentially material unsecured claims against [Quicksilver Canada]”. Gomez Declaration, ¶ 7.
28.
Third, any value offered by the West Texas Oil Assets is entirely
speculative as they relate to properties that are entirely exploratory in nature. Page Declaration,
¶ 7 (“As a result of the costs attendant to the development of West Texas and the speculative
nature of the ultimate value of the asset, I believe that the value of the replacement lien on West
Texas remains speculative.”). Even to the extent proved reserves are located in the property
covered by the West Texas Oil Assets, it is unclear if those reserves will be able to be extracted
profitably. Indeed, the Debtors admit that they “did not recognize a material amount of proved
reserves from their West Texas assets in 2014.” Declaration of Vanessa Gomez Lagatta In
Support of First Day Pleadings [Docket No. 19] (“First Day Declaration”), ¶ 10. The Secured
01:17011510.1
NY\6968863.16
16
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 17 of 30
Parties receive no adequate protection from replacement liens on an asset that does not create
positive cash flows.
29.
Whether intentional or inadvertent, it is ironic that the Committee argues
the West Texas Oil Assets are valuable as adequate protection in its objection to entry of the
Final Order while at the same time objecting to the Debtors’ funding of costs associated with the
West Texas Oil Assets. See Objection of the Official Committee of Unsecured Creditors to
Debtors’ Motion For an Order Authorizing the Debtors to Enter Into an Agreement with ENI
Petroleum US LLC [Docket No. 232] (“ENI Objection”). In the ENI Objection, the Committee
argues that there is no information that the wells in West Texas will be profitable or will even
provide a benefit beyond new capital proposed to be contributed by the Debtors. ENI Objection,
at 2. The Committee further admits that “the New Wells are not expected to generate an
acceptable risk-adjusted rate of return[.]” ENI Objection, at 2.
30.
Fourth, the interests in proceeds or property recovered in respect of any
Avoidance Action offer, at best, speculative value which, as noted above, is not sufficient to
adequately protect the Secured Parties. Moreover, the Secured Parties already hold a valid and
properly perfected lien on substantially all of the Debtors’ material assets. As a consequence,
even if the Avoidance Actions have value and result in proceeds, much of those proceeds, except
as they relate to actions to recover preferential transfers, would inure solely to the benefit of the
Secured Parties. John Hancock Life Ins. Co. v. Jankowski (In re Hospitality Inv. Corp.), 283
B.R. 451, 455-56 (Bankr. E.D. Mich. 2002) (“If the plaintiffs had a properly perfected security
interest in the funds … their security interest continues in the funds even after they were
recovered by the trustee in an avoidance action, or by any other method.”); see also Barber v.
McCord Auto Supply (In re Pearson Indus.), 178 B.R. 753, 764 (Bankr. C.D. Ill. 1995) (“where a
01:17011510.1
NY\6968863.16
17
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 18 of 30
secured creditor has an independent claim against a third party to recover property transferred by
a debtor to the third party, that claim cannot be cut off by a trustee’s exercise of the Code’s
avoiding powers to recover the property and will have priority over a trustee’s claim to the
property arising out of the exercise of the avoiding powers.”).
31.
Finally, replacement liens in the Debtors’ cash cannot provide the Secured
Parties adequate protection. To the extent such cash is generated postpetition, the vast majority
is subject to the security interests of the Secured Parties as the Debtors themselves admit.
Further, despite the Debtors’ and Committee’s positions to the contrary, there is a bona fide
dispute as to whether the prepetition Revolver Funds are also subject to the security interests of
the Secured Parties for the reasons set forth in Section III below and therefore cannot serve as
adequate protection without engaging in expensive and unnecessary litigation over such security
interests. Moreover, the Revolver Funds are effectively of minimal value given the rate cash is
spent as part of the Debtors’ operations. The Debtors project that the balance of such funds will
be $125.0 million dollars by May 15, 2015, a decrease of over 25% in just two months. Initial
Monthly Operating Report [Docket No. 144] (the “Operating Report”). As such, replacement
liens on these funds do not provide the Secured Parties with adequate protection and, in fact, the
projected shrinking of such funds further demonstrates the impossibility of the Debtors providing
the Secured Parties with adequate protection.
II.
THE COMPROMISE STRUCK BY THE DEBTORS AND SECURED PARTIES
SHOULD BE APPROVED BY THIS COURT AS IT IS IN THE BEST INTEREST
OF ALL STAKEHOLDERS IN THE ESTATES.
32.
In light of the foregoing issues, the Debtors negotiated and agreed upon
terms, set forth in the Final Order, to obtain the consent of the Secured Parties to the Debtors’
use of their collateral during these proceedings, while simultaneously reserving many of the
contentious issues between the parties - including whether the Secured Parties have a lien on the
01:17011510.1
NY\6968863.16
18
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 19 of 30
Debtors’ prepetition cash - for resolution at a later date. The compromise between the Debtors
and the Secured Parties set forth in the Final Order permits the Debtors to continue to operate
their businesses through the consensual use of cash collateral and maximize the value available
to all creditors. Such compromises on agreed packages of adequate protection are squarely
within the province of the Debtors’ business judgment and should not be second guessed by the
Committee or nay other party in interest. In fact, courts routinely defer to a debtor’s business
judgment in determining how to finance its business in bankruptcy, whether that is through DIP
financing or the use of cash collateral. See, e.g., In re L.A. Dodgers LLC, 2011 Bankr. LEXIS
2781 (Bankr. D. Del. 2011) (“[C]ourts will almost always defer to the business judgment of a
debtor in the selection of the [DIP] lender.”); In re YL W. 87th Holdings I LLC, 423 B.R. 421, 441
(Bankr. S.D.N.Y. 2010) (“Courts have generally deferred to a debtor’s business judgment in
granting section 364 financing”); Crocker Nat’l Bank v. Am. Mariner Indus., Inc. (In re Am.
Mariner Indus., Inc.), 734 F.2d 426, 435 (9th Cir. 1984) (“Consistent with the policies behind
sections 361 and 362, the debtor should be permitted maximum flexibility in structuring a
proposal for adequate protection.”).
33.
The Committee has failed to meet its burden to substitute its judgment for
that of the Debtors, but regardless seeks to have this Court ignore the settlement agreed upon by
the Debtors and instead force upon the Secured Parties an inadequate adequate protection
package. This attempt should be rejected, and the terms of the compromise set forth in the Final
Order approved. Indeed, the terms of the compromise between the Debtors and the Secured
Parties are fair and reasonable and consistent with terms often approved in this jurisdiction.
Despite the Committee lodging complaints with respect to several components of the adequate
01:17011510.1
NY\6968863.16
19
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 20 of 30
protection negotiated by the parties, it cannot adequately demonstrate why any feature of the
package is improper in this instance.
34.
First, the Committee complains that the Debtors agreed to waive their
rights under Section 506(c) of the Bankruptcy Code. By funding these chapter 11 cases, the
Secured Parties’ collateral is effectively already being surcharged for the benefit of the Debtors’
estates. Moreover, as noted above, the proceeds of the natural gas and gas liquids subject to the
liens of the Secured Parties will be used throughout these cases to fund the Debtors’ operating
losses, operation, exploration and development of assets not subject to the liens of the Secured
Parties, restructuring expenses and selling, general and administrative expenses. Irrespective of
this, however, and contrary to the Committee’s assertions, the right to use Section 506(c) to
recover the costs of preserving or disposing of a secured creditor’s collateral is expressly limited
to a trustee or debtor-in-possession. See 11 U.S.C. § 506(c) (“The trustee may recover from
property securing an allowed secured claim the reasonable, necessary costs and expenses of
preserving, or disposing of, such property[.]”) (emphasis added); Hartford Underwriters Ins. Co.
v. Union Planters Bank, N.A., 530 U.S. 1, 6, 13 (2000) (holding that “the trustee is the only party
empowered to invoke [Section 506(c)],”). The United States Supreme Court has unequivocally
held that the only person that has any rights under section 506(c) of the Bankruptcy Code is the
debtor in possession (or the trustee). Indeed, the Supreme Court took pains to make clear that
the right of a creditors' committee to be heard on any issue arising in a bankruptcy case pursuant
to section 1109(b) of the Bankruptcy Code does not entitle it to usurp the exclusive role of the
debtor under those provisions of the Bankruptcy Code that grant the debtor such exclusive role
as section 506( c) clearly does. Nor, of course, may the Committee accomplish by veto what the
statute forbids it to do directly- namely, substitute its own judgment for that of the Debtors in
01:17011510.1
NY\6968863.16
20
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 21 of 30
determining whether to assert the debtor's rights under Section 506(c). Yet that is precisely what
the Committee attempts to do in arguing that the Section 506(c) waiver is per se improper
without its consent. It is thus within the scope of the Debtors’ business judgment to waive
potential Section 506(c) claims as part of an adequate protection compromise with its Secured
Parties and the Committee has no right to second-guess the Debtors.
35.
Section 506(c) waivers are customarily approved as a form of adequate
protection in this District, particularly so where, as here, a secured creditor agrees to permit the
use of its cash collateral to fund post-petition expenses on a current basis and to subordinate its
liens and claims to a professional fee carve-out. See, e.g., In re Trump Entertainment Resorts,
Inc., Case No. 14-12103 (KG) (Bankr. D. Del. Oct. 23, 2014); In re Source Home Entertainment,
LLC, Case No. 14-11553 (KG) (Bankr. D. Del. July 22, 2014); In re Gatehouse Media, Inc., 1312503 (MFW) (Bankr. D. Del. Oct. 23, 2013); In re Savient Pharmaceuticals, Inc., Case No. 1312680 (MFW) (Bankr. D. Del. Dec. 13, 2013); In re Orchard Supply Hardware Stores Corp.,
Case No. 13-11565 (CSS) (Bankr. D. Del. July 19, 2013) (overruling objection filed by the
creditors’ committee to section 506(c) waiver) (See Hr. Tr. 173:19-173:21, Order ¶ 10); In re
Badanco Acquisition LLC, Case No. 09-11638 (CSS) (Bankr. D. Del. June 5, 2009) (See Hr.
Tr. 69:14-69:19, Order ¶ 12); In re Fluid Routing Solutions Intermediate Holding Corp., Case
No. 09-10384 (CSS) (Bankr. D. Del. Mar. 16, 2009) (See Hr. Tr. 33:4-35:22, Order ¶ 12) (ruling
that the court will approve a section 506(c) waiver over the objection of the creditors’ committee
where the estate is administratively solvent).
36.
Second, the Committee objects to the waiver of the “equities of the case”
exception to the provisions of Section 552(b) of the Bankruptcy Code, which provides that a
perfected lien on prepetition collateral attaches to the post-petition proceeds of such collateral
01:17011510.1
NY\6968863.16
21
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 22 of 30
unless the Court orders otherwise based on the “equities of the case.” 11 U.S.C. § 552(b)(l). The
purpose of this exception is to “prevent a secured creditor from reaping the benefits from
collateral that has appreciated in value as a result of the…debtor-in-possession’s use of other
assets of the estate (which normally would go to general creditors) to cause the appreciated
value.” In re Muma Servs., 322 B.R. 541, 558-59 (Bankr. D. Del. 2005) (quoting Delbridge v.
Prod. Credit Ass’n, 104 B.R. 824, 826 (E.D. Mich. 1989)).
37.
Courts have also adopted a narrow interpretation of the “equities of the
case” exception that precludes its application where a secured party’s cash collateral is required
to preserve the value of a debtor’s assets. See, In re Muma Servs., Inc., 322 B.R. at 559 (holding
that the “equities of the case” exception did not apply where, among other things, the debtor was
only able to operate and maintain the value of its assets through the use of a lender’s cash
collateral plus additional post-petition financing). Here, the Debtors are wholly reliant on the
Secured Parties’ collateral for their operations and require the use of the Secured Parties’ cash
collateral to maintain the value of their assets (including those not subject to the liens of the
Secured Parties). Accordingly, a waiver of the “equities of the case” exception is appropriate
and should be approved.
38.
In addition, courts generally hold that a waiver of the “equities of the
case” exception is appropriate where secured parties agree to subordinate their claims to a carveout as the Secured Parties have done in these cases. See In re Blockbuster Inc., Case No. 1014997, 2010 WL 4873646, at *18 (Bankr. S.D.N.Y. Sept. 24, 2010) (Lifland, J.) (holding that,
because the debtor in possession lender and prepetition lenders had agreed that their claims were
subordinate to a carve-out, they were “entitled to all benefits of section 552(b) of the Bankruptcy
Code and the ‘equities of the case’ exception under sections 552(b)(i) and (ii) of the Bankruptcy
01:17011510.1
NY\6968863.16
22
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 23 of 30
Code [would] not apply”); In re General Growth Props., Inc., 412 B.R. 122, 127 (Bankr.
S.D.N.Y. 2009) (holding that “[i]n light of the Lenders’ agreement to subordinate their liens and
superpriority claims to the Carve-Out, the Lenders are entitled to a waiver of … any ‘equities of
the case’ claims under section 552(b) of the Bankruptcy Code[.]”).
39.
Indeed, courts in this and other Districts routinely grant a secured lender’s
request for a waiver of Section 552(b)’s “equities of the case” exception. See e.g., In re Energy
Future Holdings Corp., Case No. 14-10979 (CSS) (Bankr. D. Del. June 6, 2014); In re Source
Home Entertainment, LLC, Case No. 14-11553 (KG) (Bankr. D. Del. July 22, 2014); In re
Savient Pharmaceuticals, Inc., Case No. 13-12680 (MFW) (Bankr. D. Del. Dec. 13, 2013); In re
Gatehouse Media, Inc., 13-12503 (MFW) (Bankr. D. Del. Oct. 23, 2013).
40.
Third, extending the proposed replacement liens to the proceeds of
avoidance actions is more than appropriate.
The granting of adequate protection liens on
previously unencumbered assets (including the proceeds of avoidance actions) is a customary
form of adequate protection that is specifically contemplated by section 361(2) of the
Bankruptcy Code. 11 U.S.C. § 361(2) (“such adequate protection may be provided by . . . (2)
providing . . . an additional or replacement lien[.]”) (emphasis added).
Indeed, granting
replacement liens on assets that are already subject to the Secured Parties’ existing prepetition
liens provides little, if any, value to the Secured Parties. Courts in this District have thus, not
surprisingly, routinely approved grants of adequate protection liens on the proceeds of avoidance
actions. See, e.g., In re Windsor Petroleum Transport Corp., Case No. 14-11708 (PJW) (Bankr.
D. Del. Aug. 12, 2014); In re Brookstone Holdings Corp., Case No. 14-10752 (BLS) (Bankr. D.
Del. Apr. 25, 2014); In re Noble Logistics, Inc., Case No. 14-10442 (CSS) (Bankr. D. Del. Apr.
2, 2014); In re Coda Holdings, Inc., Case No. 13-11153 (CSS) (Bankr. D. Del. May 29, 2013);
01:17011510.1
NY\6968863.16
23
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 24 of 30
In re Conexant Sys., Inc., Case No. 13-10367 (MFW) (Bankr. D. Del. Apr. 19, 2013); In re
School Specialty, Inc., Case No. 13-10125 (KJC) (Bankr. D. Del. Feb. 26, 2013).
41.
Fourth, the proposed sixty-day challenge period set forth in the Final
Order is both sufficient and consistent with the Local Rules, and the Committee’s request for a
one hundred twenty day period should be rejected. See In re Standard Register Co., Inc., Case
No. 15-10541 (BLS) (Bankr. D. Del. Apr. 13, 2015) (Hr. Tr. Apr. 13, 2015, 82:19-83:9)
(denying Creditor Committee’s request for 120-day challenge period); In re Rotech Healthcare
Inc., Case No. 13-10747 (PJW) (Bankr. D. Del. May 14, 2013) (Hr. Tr. May 14, 2013, 107:16110:3) (denying Equity Committee’s request to extend the challenge deadline beyond 60 days
from its formation and noting that the Equity Committee could seek appropriate relief from the
Court in the future if it was running up against the deadline).
42.
Fifth, the Committee asserts that under United Savs. Ass’n of Texas v.
Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 793 F.2d
1380, 1387 (5th Cir. 1986), aff’d, 484 U.S. 365 (U.S. 1988), the Secured Parties are not entitled
to adequate protection payments (measured in their fees and interest) unless they are found to be
oversecured at this point in the cases. This assertion is simply a red herring and has been
repeatedly rejected in this District and elsewhere.
See Gonzalez Class Action Plaintiffs v.
Freedom Communs. Holdings, Inc. (In re Freedom Communs. Holdings, Inc.), Case No. 09-825
(SLR), 2009 WL 4506553, at *2 (D. Del. Dec. 4, 2009) (“[T]he bankruptcy code permits a
secured creditor, including an undersecured creditor, to receive periodic adequate protection
payments against the risk of diminution in value of the collateral.”); In re Gess, Case No. 146045, 2015 WL 1219281, at *2 (B.A.P. 8th Cir. Mar. 18, 2015) (granting stay relief to
undersecured auto lender where debtor did not make adequate protection payments and noting
01:17011510.1
NY\6968863.16
24
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 25 of 30
“because vehicles depreciate in value relatively quickly through use, cash payments . . . are
typically required to adequately protect the creditor”); In re Chardon, LLC, Case No. 13-81372
(TML), 2015 Bankr. LEXIS 140, at *8-9 (N.D. Ill. Jan. 12, 2015) (“Where a creditor is not
already protected by an equity cushion, an interest in collateral may be adequately protected by
cash payments to the creditor to the extent use of the property decreases the value of the
creditor's interest in the collateral.”).
43.
Here the proposed payments are properly structured with appropriate
protections for the Debtors and their estates to ensure that whether the Secured Parties are over
or under secured there will be no harm to the estates from the payment of the interest and fees.
While the Secured Parties do not admit that they are undersecured, and expressly reserve all
rights relating to the value of their collateral, they have agreed that, to the extent they are found
to be undersecured, an appropriate amount of the adequate protection payments they are to
receive under Final Order will be recharacterized as payments against the amount of their
allowed secured claim. 6 Given this recharacterization feature, the Secured Parties’ adequate
protection package is effectively an insurance policy whereby the estate will not lose any
valuable resources to the extent that the Secured Parties are found to be undersecured (in that
case any fees and interest paid to such parties shall reduce the parties secured claims) or to the
extent the Secured Parties’ collateral does not diminish in value (the replacement liens do not
6
The Court should take note of the Second Lien Secured Parties’ significant interest in the treatment of the
unsecured creditors in these chapter 11 cases and the strong incentives such parties have to insure that the unsecured
creditors are treated fairly. Indeed, the Committee repeatedly states that the Second Lien Secured Parties are
undersecured, which, while the Second Lien Secured Parties do not concede, would mean that they would hold a
deficiency claim and would only recover what the unsecured creditors receive. Further, the Second Lien Secured
Parties are the beneficiaries of a turnover provision in the First Supplemental Indenture6 that requires the
subordinated noteholders to turn over any cash or cash equivalents received to the Second Lien Secured Parties until
the Second Lien Secured Parties receive payment in full in cash in respect of their claims, providing the Second Lien
Secured Parties with a strong incentive to be sure that the unsecured parties do not lose out on any recovery. Thus,
despite the Committee’s intimations to the contrary, the Second Lien Secured Parties maintain a significant interest
in the treatment of the unsecured creditors and the Debtors maximizing returns to such creditors.
01:17011510.1
NY\6968863.16
25
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 26 of 30
transfer any property interest to the Secured Parties, only protection solely to the extent of
diminution in value).
III.
THE SECURED PARTIES MAINTAIN A PERFECTED SECURITY INTEREST
IN THE DEBTORS’ CASH
A.
The Secured Parties maintain a perfected security interest in the Canadian
Revolver Funds.
44.
Upon information and belief, the Second Lien Secured Parties understand
that the Canadian Revolver Funds were drawn under the Canadian Credit Agreement by
Quicksilver Canada, transferred to its parent entity, QRI, and placed by QRI in certain
investment accounts. While the Debtors have asserted that this transfer was “on account of an
intercompany payable owed by QRCI to QRI”, it is unclear what this payable was because (i) the
principal balance of the Intercompany Note does not appear to have been reduced and (ii) the
amount does not appear to relate to accrued interest as the interest rate on the Intercompany Note
is a mere 2% ($8.3 million) per annum.
45.
Absent evidence to the contrary, this transfer of the Canadian Revolver
Funds from Quicksilver Canada to QRI should be treated as a dividend to QRI. The Secured
Parties were granted a security interest in 65% of the stock of Quicksilver Canada and in the
dividends in respect of such stock. 7 Moreover, as noted by the Debtors in Paragraph 22 of the
Debtors' Reply, the value of the Intercompany Note is subject to potential recharacterization as
an equity contribution from QRI to QRCI - in which case, again, the distribution of $50 million
7
The Pledge Agreement by and among QRI, Cowtown Pipeline Management, Inc., Cowtown Pipeline
Funding, Inc., QPP Parent LLC and each of the other Pledgors (as defined therein) in favor of the Bank of New
York Mellon Trust Company, N.A., as Second Lien Agent, as Pledgee dated as of June 21, 2013 (the “Pledge
Agreement”), among other things, grants a security interest to the Second Lien Agent (as defined therein), on
behalf of the Second Lien Secured Parties, in all Pledged Securities (as defined in the Pledge Agreement) - which
includes 65% of the stock in Quicksilver Canada. See, Schedule 2, Pledge Agreement. The definition of “Pledged
Securities” includes “the Equity Interests issued by Restricted Subsidiaries…. [and] all dividends (cash, Equity
Interests or otherwise), cash, instruments, rights to subscribe… and all other rights and Property from time to time
received, receivable or otherwise distributed in respect of or in exchange for any or all of such Equity Interests.”
Pledge Agreement, Section 1.01 (emphasis supplied).
01:17011510.1
NY\6968863.16
26
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 27 of 30
from QRCI to QRI would be subject to the liens of the Secured Parties on 65% of the equity
interests in QRCI. As a result, the Secured Parties have a viable argument that they maintain a
perfected security interest in at least 65% of the Canadian Revolver Funds by virtue of their
security interest in the stock of Quicksilver Canada.
B.
The Secured Parties maintain a perfected security interest in the US
Revolver Funds.
46.
While the Court need not resolve this issue today because of the settlement
reached between the Debtors and the Secured Parties, contrary to the assertion of both the
Committee and the Debtors, the Secured Parties hold a perfected security interest in essentially
all the Debtors’ cash because it is the proceeds of the Secured Parties’ other collateral. Upon the
conversion of the Secured Parties’ non-cash collateral to cash, the Secured Parties’ security
interest attached to such proceeds and remained perfected by virtue of properly filed UCC-1
financing statements. This is equally true of the US Revolver Funds which, consistent with their
security grants, pertain to the Secured Parties’ collateral interests in both natural gas and gas
liquids and the contract rights and general intangibles relating thereto, as well as the Canadian
Revolver Funds, which appear to have been remitted to the Debtors as dividends on equity
interests, which are also the Secured Parties’ collateral. These claims and interests of the
Secured Parties with respect to the US Revolver Funds and the Canadian Revolver Funds by
themselves justify the overruling of the Objection.
IV.
THE COMMITTEE SHOULD NOT BE GRANTED STANDING TO PURSUE
ANY AND ALL CAUSES OF ACTION THAT IT DEEMS APPROPRIATE.
47.
Incredibly, the Committee – in a single half-sentence – requests that the
Final Order grant derivative standing to the Committee to pursue any and all causes of action on
behalf the Debtors. Objection, ¶ 8 (requesting that the final order provide that “the Committee
shall be granted standing now to pursue any and all causes of action that it deems
01:17011510.1
NY\6968863.16
27
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 28 of 30
appropriate”). This request should be rejected. Under certain circumstances, where a committee
requests that a chapter 11 debtor pursue causes of action and the debtor refuses, courts have the
equitable power to grant the committee standing – following a motion requesting such standing to prosecute the causes of action on behalf of the debtor’s estate. See Official Comm. of
Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 572 (3d Cir.
2003). Generally, obtaining such standing “requires a party to show three elements: ‘(1) a
colorable claim, (2) that the trustee unjustifiably refused to pursue the claim, and (3) the
permission of the bankruptcy court to initiate the action.’” Walnut Creek Mining Co. v. Cascade
Inv., LLC (In re Optim Energy, LLC), 2015 U.S. Dist. LEXIS 31005 (D. Del. Mar. 13, 2015)
(quoting In re Yes! Entm't Corp., 316 B.R. 141, 145 (D. Del. 2004)) (affirming the bankruptcy
court’s decision to deny derivative standing where the moving party failed to establish a
colorable claim); see also In re One2One Commc’ns, LLC, 2014 Bankr. LEXIS 3401 (Bankr.
D.N.J. Aug. 7, 2014) (refusing to grant derivative standing where the creditor’s motion failed to
allege facts sufficient to support a colorable claim); In re Centaur, LLC, 2010 Bankr. LEXIS
3918, at *14-15 (Bankr. D. Del. Nov. 5, 2010) (“[E]ntitlement to derivative standing requires (1)
a colorable claim; (2) that the trustee unjustifiably refused to pursue the claim, and (3)
permission of the bankruptcy court to initiate the action.”); Richardson v. Monaco (In re Summit
Metals, Inc.), 477 B.R. 484, 502 (Bankr. D. Del. 2012) (refusing to grant derivative standing
where the claimant failed to submit a request for such relief with the bankruptcy court
establishing the existence of a colorable claim and that the debtor unjustifiably refused to pursue
the claim). Here, the Committee has not even identified any causes of action, let alone filed a
motion demonstrating it has met the standards established by Cybergenics. Granting the
Committee blanket standing to pursue causes of action is wholly unjustified.
01:17011510.1
NY\6968863.16
28
Case 15-10585-LSS
48.
Doc 258
Filed 04/23/15
Page 29 of 30
The Committee does not appear to dispute that any such causes of action
are property of the Debtors’ estates. A debtor’s estate includes “all legal or equitable interests of
the debtor in property as of the commencement.” 11 U.S.C. § 541(a). Causes of action of a
debtor are considered to be legal or equitable interests of the debtor, and therefore, part of the
debtor’s estate. Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 356
(3d Cir. 2001). The Bankruptcy Code contemplates that a debtor’s estate is to be disposed of by
the debtor-in-possession or trustee, not creditors or a creditors committee. See 11 U.S.C. §§
363(b), 1107(a). Indeed, creditors lose standing to pursue claims that are property of the estate
when the debtor’s bankruptcy petition is filed. Bd. of Trs. v. Foodtown, Inc., 296 F.3d 164, 169
(3d Cir. 2002). Claims in a debtor’s estate may be brought exclusively by the debtor-inpossession or the trustee. See id. at 170 (finding that “[i]f a claim is a general one, with no
particularized injury arising from it, and if that claim could be brought by any creditor of the
debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the
outcome of the trustee’s action”) (quoting St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884
F.2d 688, 701 (2d Cir. 1989)). The Committee provides no justification for deviating, carte
blanche, from this basic tenet of the Bankruptcy Code, nor even attempts to satisfy the
requirements established by the Third Circuit. As a result, the Committee’s request for
derivative standing to pursue any cause of action it so desires should be denied.
01:17011510.1
NY\6968863.16
29
Case 15-10585-LSS
Doc 258
Filed 04/23/15
Page 30 of 30
WHEREFORE, the Second Lien Agent and the Ad Hoc Group of Second
Lienholders respectfully request that the Court (a) enter the Final Order and (b) grant such other
further relief as the Court deems appropriate.
Dated: April 23, 2015
Wilmington, Delaware
YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/
Kara Hammond Coyle
Michael R. Nestor, Esq. (No. 3526)
Kara Hammond Coyle, Esq. (No. 4652)
Rodney Square
1000 North King Street
Wilmington, Delaware 19801
Telephone: (302) 571-6600
Facsimile: (302) 571-1253
- and LATHAM & WATKINS LLP
Mitchell A. Seider, Esq.
Keith A. Simon, Esq.
David A. Hammerman, Esq.
885 Third Avenue
New York, New York 10022-4834
Telephone: (212) 906-1200
Facsimile: (212) 751-4864
ATTORNEYS FOR SECOND LIEN AGENT
- and MILBANK, TWEED, HADLEY & MCCLOY LLP
Dennis F. Dunne
Samuel A. Khalil
Brian Kinney
28 Liberty Street
New York, NY 10005
Telephone:
(212) 530-5000
Facsimile:
(212) 530-5219
ATTORNEYS FOR AD HOC GROUP OF SECURED
PARTIES
01:17011510.1
NY\6968863.16
30