Case KJC Doc 10 Filed 08/13/15 Page 1 of 30 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case KJC Doc 10 Filed 08/13/15 Page 1 of 30 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: ) Chapter 11 ) HERCULES OFFSHORE, INC., et al. ) Case No ( ) ) Debtors. 1 ) Joint Administration Requested ) MOTION OF HERCULES OFFSHORE, INC., ET AL., FOR ENTRY OF INTERIM AND FINAL ORDERS (A) AUTHORIZING THE DEBTORS TO (I) CONTINUE TO OPERATE THEIR CASH MANAGEMENT SYSTEM, (II) HONOR CERTAIN PREPETITION OBLIGATIONS RELATED THERETO, (III) MAINTAIN EXISTING BUSINESS FORMS, AND (IV) CONTINUE TO PERFORM INTERCOMPANY TRANSACTIONS, (B) AUTHORIZING AND DIRECTING THE DEBTORS BANKS TO HONOR ALL RELATED PAYMENT REQUESTS, (C) WAIVING THE DEBTORS COMPLIANCE WITH INVESTMENT GUIDELINES SET FORTH IN SECTION 345(B) OF THE BANKRUPTCY CODE AND (D) GRANTING RELATED RELIEF Hercules Offshore, Inc. and its debtor affiliates, as debtors and debtors-in-possession in the above-captioned chapter 11 cases (collectively, the Debtors ) file this motion (this Motion ) for entry of an order, substantially in the form attached hereto as Exhibit A (the Order ), (a) authorizing the Debtors to (i) continue to operate the Cash Management System (as defined below), (ii) honor certain prepetition obligations related thereto, (iii) in the ordinary course of business, maintain existing business forms, and (iv) continue to perform the Intercompany Transactions (as defined below) consistent with historical practice, (b) authorizing and directing the Debtors banks to honor all related payment requests, (c) waiving the Debtors compliance with investment guidelines set forth in section 345(b) of the Bankruptcy Code, and (d) granting related relief. In support of this Motion, the Debtors incorporate by reference the 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Cliffs Drilling Company (8934); Cliffs Drilling Trinidad L.L.C. (5205); FDT LLC (7581); FDT Holdings LLC (4277); Hercules Drilling Company, LLC (2771); Hercules Liftboat Company, LLC (0791); Hercules Offshore, Inc. (2838); Hercules Offshore Services LLC (1670); Hercules Offshore Liftboat Company LLC (5303); HERO Holdings, Inc. (5475); SD Drilling LLC (8190); THE Offshore Drilling Company (4465); THE Onshore Drilling Company (1072); TODCO Americas Inc. (0289); and TODCO International Inc. (6326).

2 Case KJC Doc 10 Filed 08/13/15 Page 2 of 30 Declaration of Troy L. Carson in Support of First Day Motions, dated August 13, 2015 (the First Day Declaration ) 2 and respectfully represent as follows: JURISDICTION AND VENUE 1. The United States Bankruptcy Court for the District of Delaware (the Court ) has jurisdiction over this matter pursuant to 28 U.S.C. 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware, dated February 29, This matter is a core proceeding within the meaning of 28 U.S.C. 157(b)(2), and the Debtors confirm their consent pursuant to Rule 9013-l(f) of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (the Local Rules ) to the entry of a final order by the Court in connection with this Motion to the extent that it is later determined that the Court, absent consent of the parties, cannot enter final orders or judgments in connection herewith consistent with Article III of the United States Constitution. 2. Venue is proper in this district pursuant to 28 U.S.C and The statutory bases for the relief requested herein are sections 105, 345, and 363 of title 11 of the United States Code, 11 U.S.C (the Bankruptcy Code ), Rules 6003 and 6004 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), and Local Rule PROCEDURAL BACKGROUND 4. On August 13, 2015 (the Petition Date ), the Debtors filed voluntary petitions for relief in this Court under chapter 11 of the Bankruptcy Code. 2 Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the First Day Declaration. 2

3 Case KJC Doc 10 Filed 08/13/15 Page 3 of The Debtors remain in possession of their property and are operating their business as debtors-in-possession, pursuant to sections 1107 and 1108 of the Bankruptcy Code. No trustee, examiner, or statutory committee has been requested or appointed in these chapter 11 cases. 6. On the Petition Date, the Debtors filed the Debtors Joint Prepackaged Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the Plan ) and the related Solicitation and Disclosure Statement, dated July 13, 2015 (the Disclosure Statement ). BACKGROUND 7. A detailed description of the Debtors business, capital structure, and the events leading to these chapter 11 cases is fully set forth in the First Day Declaration and is incorporated herein by reference. 8. The Debtors and their Non-Debtor Subsidiaries (collectively, Hercules or the Company ) are leading providers of shallow-water drilling and marine services to the oil and natural gas exploration and production industry globally. Hercules operates a fleet of 27 selfelevating, mobile drilling units, or jackup rigs, including one rig under construction, and 24 self-elevating, self-propelled liftboat vessels. This diverse fleet is capable of providing services such as oil and gas exploration and development drilling, well service, platform inspection, maintenance and decommissioning operations. 9. Largely driven by the recent decline in the price of crude oil, Hercules, like other companies in the offshore drilling market, has faced challenges as demand for jackup rigs remains weak, while the market is scheduled to deliver a significant number of newbuild rigs in the next several years. In early 2015, faced with a heavy debt burden, including approximately $1.2 billion in outstanding unsecured Senior Notes, and declining revenues, Hercules hired 3

4 Case KJC Doc 10 Filed 08/13/15 Page 4 of 30 financial and legal advisors to evaluate a wide range of options to improve Hercules financial position in the event of a prolonged market downturn. As part of its consideration of several possible alternatives, Hercules and an ad hoc group of holders of Senior Notes which would ultimately become the Steering Group entered into negotiations regarding a potential restructuring transaction that would allow Hercules to substantially reduce its debt burden and secure additional liquidity to help Hercules navigate the current down cycle. 10. On June 17, 2015, after many weeks of intensive negotiations, the Debtors and the Steering Group, who together hold in excess of two-thirds of the aggregate principal amounts outstanding under the Senior Notes, entered into the Restructuring Support Agreement (as may be amended from time to time, the Restructuring Support Agreement ). The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment to and obligations of, on the one hand, the Debtors, and on the other hand, the Steering Group members in connection with a restructuring of the Debtors Senior Notes, which is to be implemented through the Plan. 11. The restructuring transactions contemplated by the Plan will significantly deleverage the Debtors balance sheet, eliminating the Debtors funded debt obligations by converting the entire $1.2 billion in principal amount of its Senior Notes into 96.9% of the New HERO Common Stock. Despite the fact that the amount of the Debtors liabilities significantly exceeds the Debtors enterprise value--by more than $500 million--and thus, the existing equity holders are substantially out of the money, the Plan provides that the other 3.1% of the New HERO Common Stock and 100% of the New HERO Warrants, which provide holders the opportunity to purchase their pro rata share of up to an additional 20.0% of the New HERO Common Stock at a price per share price based upon a $1.55 billion total enterprise value, will 4

5 Case KJC Doc 10 Filed 08/13/15 Page 5 of 30 be allocated to existing equity holders in exchange for cancellation of their existing stock and their agreement to grant the voluntary third-party releases set forth in the Plan. Importantly, holders of Allowed General Unsecured Claims will be paid in the ordinary course of business in accordance with ordinary course terms under the Plan subject to any rights or defenses the Debtors may have to all or any portion of such Claims. Effectively, the Plan will reinstate those General Unsecured Claims and leave them unimpaired. The Debtors have also received commitments from certain members of the Steering Group for a new $450 million term loan exit facility to provide liquidity for the continuation of operations following the Effective Date. THE CASH MANAGEMENT SYSTEM I. Overview. 12. The Debtors and their Non-Debtor Subsidiaries (collectively, Hercules or the Company ) maintain an integrated cash management system (as described herein, the Cash Management System ), which is comprised of 62 bank accounts, including investment accounts, (the Bank Accounts ), which Bank Accounts are set forth on Exhibit C hereto, located at the financial institutions (collectively, the Banks ) listed on Exhibit C. The Cash Management System is comparable to the centralized cash management system used by similarly situated companies to manage the cash of operating units in a cost-effective, efficient manner. The Debtors use the Cash Management System in the ordinary course of their business to collect, transfer, and disburse funds generated from their operations and to facilitate cash monitoring, forecasting, and reporting. The Debtors treasury department maintains daily oversight over the Cash Management System and implements cash management controls for entering, processing, and releasing funds, including in connection with Intercompany Transactions. Additionally, the Debtors corporate accounting department regularly reconciles the Debtors books and records to ensure that all transfers are accounted for properly. On average, approximately $10.9 million in 5

6 Case KJC Doc 10 Filed 08/13/15 Page 6 of 30 receipts and $12.8 million in disbursements flows through the Cash Management System on a weekly basis to service cash received and costs incurred in connection with the Debtors business operations. 13. The Debtors receive funds from customers and pay funds to creditors by wire, ACH transfer, and other similar means, as well as by check. The Debtors also utilize a credit card account through Capital One to pay for travel and other business expenses of its executive and management level employees. The Debtors and Non-Debtor Subsidiaries also conduct transactions between and among themselves through wires, cash transfers and automated debits and credits. 14. Hercules generates revenue primarily by leasing and operating its mobile offshore rig and liftboat vessels and performing related services. The funds generated from these operations are deposited into Bank Accounts associated with the Debtor or Non-Debtor Subsidiary entity that is party to the applicable customer contract. The majority of the Bank Accounts, and the central locus of the Hercules cash management activities, reside at Amegy Bank of Texas, N.A. ( Amegy ). The Amegy Bank Accounts ultimately concentrate into one of the three master operating accounts associated with the domestic or international regional segment of Hercules operations. Funds from these three master operating accounts are then paid directly or transferred back to entity-level Bank Accounts to be disbursed to pay vendors, employees, and other costs associated with the business. The diagram attached hereto as Exhibit D and incorporated herein by reference provides an overview of the Amegy Bank Accounts. 15. Although the Bank Accounts at Amegy handle the primary in-flows and out-flows of funds associated with the Debtors operations, Hercules maintains twenty-nine (29) other 6

7 Case KJC Doc 10 Filed 08/13/15 Page 7 of 30 Bank Accounts of various types and for various purposes at other banking institutions in the United States and abroad. The Bank Accounts are generally segregated by operating region, such that, to the extent a Bank Account of a Non-Debtor requires additional funds from elsewhere within Hercules, those funds are transferred from another Non-Debtor and funds of a Debtor entity are not transferred to a Non-Debtor Subsidiary, except in certain unusual circumstances, as discussed further below. II. Bank Accounts. A. Amegy Accounts 16. The Bank Accounts at Amegy fall under three separate master operating accounts: the master operating account held by Debtor Hercules Drilling Company LLC (the Domestic Master Account ); the master operating account held by Non-Debtor Hercules Oilfield Services Ltd. (the HOSL Master Account ) and the master operating account held by Non-Debtor Hercules Offshore Middle East Ltd. (the HOME Master Account, and together with the Domestic Master Account and the HOSL Master Account, the Master Accounts ). The Master Accounts concentrate and distribute funds to certain associated accounts (the Sub-Accounts ). The Domestic Master Account concentrates funds from numerous Sub-Accounts associated with the Debtors domestic operations while the HOSL Master Account and the HOME Master Account each concentrate funds from Sub-Accounts associated with a separate sector of the Non-Debtor Subsidiaries international operations. 17. Each of the Master Accounts is, for the most part, self-sustaining, in that it receives sufficient funds from its Sub-Accounts to cover outgoing payments from the Master Accounts and its Sub-Accounts. However, in certain unusual circumstances, a Master Account may run low on funds and require additional funds from elsewhere within the overall Hercules enterprise. If this occurs in either the HOME Master Account or HOSL Master Account, funds 7

8 Case KJC Doc 10 Filed 08/13/15 Page 8 of 30 from the other will be transferred, such that no Debtor funds will be transferred to a Non-Debtor Subsidiary Bank Account. If the HOME Master Account or the HOSL Master Account does not have sufficient funds to meet the need, the Domestic Master Account will make the appropriate transfer. However, such Debtor to Non-Debtor Subsidiary transfers are rare and not only have no such transfers occurred since approximately October 2013, no such transfers are expected or forecasted during the time in which the Debtors contemplate being in chapter 11. Similarly, there are rarely, if ever, Non-Debtor to Debtor account transfers. 1. Domestic Amegy Accounts 18. The Domestic Master Account is the central operating account associated with the Hercules domestic operations. The Domestic Master Account collects funds from and disburses funds to ten (10) other Bank Accounts at Amegy (together with the Domestic Master Account, the Domestic Amegy Accounts ) that are held in the name of Debtor entities. Eight (8) of these Bank Accounts are zero balance accounts that sweep all funds remaining in the account at the end of each day into the Domestic Master Account. These zero balance accounts receive funds generated from domestic operations, including funds paid to the Debtors in connection with customer contracts, and disburse funds to satisfy domestic payables. One such account is a payroll account in the name of Hercules Offshore Services LLC, the domestic Debtor entity that employs the Debtors domestic employees. The remaining Domestic Amegy Accounts consist of a controlled disbursement accounts payable account and a self-direct investment account, both in the name of Hercules Drilling Company, LLC. Periodic payments of interest on the Senior Notes are made directly from the Domestic Master Account. 8

9 Case KJC Doc 10 Filed 08/13/15 Page 9 of HOSL Amegy Accounts 19. The HOSL Master Account is the central operating account in the name of Hercules Oilfield Services Ltd., a Non-Debtor Subsidiary, associated with the Hercules international operations (other than drilling operations in Saudi Arabia, domestically-owned liftboats that operate internationally and international operations of Debtor Cliffs Drilling Company). The HOSL Master Account collects funds from and disburses funds to eleven (11) Sub-Accounts at Amegy (together with the HOSL Master Account, the HOSL Amegy Accounts ) held in the name of certain Non-Debtor Subsidiaries. Ten (10) of these Bank Accounts are zero balance accounts that sweep remaining funds at the end of each day into the HOSL Master Account. These zero balance accounts receive funds generated from international operations, including funds paid to the applicable Non-Debtor Subsidiary in connection with customer contracts, and disburse funds to satisfy payables of such Non-Debtor Subsidiary. One such Bank Account is a payroll account in the name of Hercules International Offshore Ltd. that is used to pay certain of the Non-Debtor Subsidiaries international employees. The remaining HOSL Amegy Account consists of a self-directed investment account held in the name of Hercules Oilfield Services Ltd. 3. HOME Amegy Accounts 20. The HOME Master Account is the central operating account in the name of Hercules Offshore Middle East Ltd., a Non-Debtor Subsidiary, associated with Hercules drilling operations in Saudi Arabia. The HOME Master Account collects funds from and disburses funds to two (2) other Sub-Accounts at Amegy: (1) a deposit account in the name of Non-Debtor Subsidiary Hercules Offshore Arabia, Ltd. that receives funds generated from Saudi operations, including funds paid to Hercules Offshore Arabia Ltd. in connection with customer contracts, 9

10 Case KJC Doc 10 Filed 08/13/15 Page 10 of 30 and disburses funds to satisfy payables related to its operations and (2) a self-directed investment account held in the name of Hercules Offshore Middle East Ltd. B. Non-Amegy Bank Accounts 21. Collateral Accounts: HERO maintains a United States-based savings account at HSBC for use in providing cash collateral for letters of credit. Hercules Drilling Company, LLC maintains a separate restricted cash collateral account at Morgan Stanley Smith Barney in New York. Historically, this account was used in providing cash collateral for bonds provided in connection with contract bids. It is currently dormant and is in the process of being closed. 22. Foreign Local Operating Accounts: Hercules has a number of operating accounts in foreign locations in order to enable it to conduct its business locally. Hercules maintains ten (10) local operating accounts with HSBC in the United Kingdom, the United Arab Emirates, Malaysia, India and Saudi Arabia. With the exception of an Indian account, which is in the name of Debtor Cliffs Drilling Company, these accounts are in the name of Non-Debtor Subsidiaries. Hercules maintains three (3) accounts with Citibank located in Trinidad. Two of these accounts are in the name of Cliffs Drilling Company, a Debtor entity, and one is in the name of TODCO Trinidad Ltd, a Non-Debtor Subsidiary. The accounts were used to fund local operations in Trinidad, but are now dormant and in the process of being closed Hercules maintains (2) current checking accounts with ING Bank in Luxembourg. These accounts are in the name of Non-Debtor Subsidiaries Discovery Offshore, S.A. and Discovery Offshore (Gibraltar) Ltd. Hercules maintains (2) local deposit accounts with Standard Chartered Bank. One account is located in Singapore in the name of Hercules Offshore, Inc. - Singapore branch. The other is in the name of Non-Debtor Subsidiary Hercules International Drilling, Ltd. and is based in Cameroon. Non-Debtor Subsidiary Hercules Offshore (Nigeria) Limited maintains (3) deposit accounts with United Bank of Africa in Nigeria. These are used to conduct operations in West Africa and are in the name of a Non-Debtor Subsidiary. Non-Debtor Subsidiary Discovery Offshore (Gibraltar) Ltd. maintains an operating account with the State Bank of India for use in local operations. Debtor TODCO Americas, Inc. maintains a deposit account at Bancolombia in Colombia for use in local operations. 10

11 Case KJC Doc 10 Filed 08/13/15 Page 11 of 30 C. Bank Fees 23. The Debtors pay approximately $20,000 per month in bank fees incurred in connection with the Bank Accounts (the Bank Fees ). The Debtors pay the Bank Fees as they come due on a rolling basis over the course of each month, typically by direct debit. The Debtors estimate that they owe approximately one month in Bank Fees, or $20,000, as of the Petition Date. III. Hercules Investment Practices. 24. In the ordinary course of business, Hercules engages in certain investment practices to preserve principal and maintain sufficient liquidity to meet operational objectives, contractual obligations, and debt requirements, while seeking to maximize investment yield, consistent with a strict internal investment policy (collectively, the Investment Practices ). As part of its Investment Practices and utilizing the Cash Management System, Hercules invests, on an overnight basis, excess funds in the Amegy Master Accounts (i.e., funds that have not otherwise been transferred to other Bank Accounts). It does so by sweeping such excess funds into three (3) investment accounts at Amegy (the Overnight Investment Accounts ), one associated with each Amegy Master Account. The principal investments within the Overnight Investment Accounts are in money market mutual funds, obligations issued by the U.S. Treasury, obligations of a U.S. Federal Agency or U.S. Government sponsored enterprise, auction rate certificates, auction preferred stock, certificates of deposit, commercial paper, municipal securities, corporate debt, repurchase transactions, variable rate demand obligations, and Eurodollar time deposits. The funds in each Overnight Investment Account are then swept back into each respective Amegy Master Account the following morning. 25. Additionally, Hercules maintains three (3) investment accounts with Capital One Bank in Houston, each of which is associated with one of the Amegy Master Accounts. 11

12 Case KJC Doc 10 Filed 08/13/15 Page 12 of 30 Hercules also maintains (2) investment accounts with Comerica Bank in Houston, one in the name of HERO and one in the name of Non-Debtor Subsidiary Hercules Oilfield Services Ltd. Hercules Oilfield Services Ltd. also maintains an investment account at DNB Bank ASA in New York. Finally, Hercules maintains two additional investment accounts at Amegy that are not currently in use. IV. Business Forms. 26. As part of the Cash Management System, the Debtors utilize numerous preprinted business forms (the Business Forms ) in the ordinary course of their business. The Debtors also maintain books and records to document, among other things, their profits and expenses. To minimize expenses to their estates and avoid confusion on the part of employees, customers, vendors, and suppliers during the pendency of these chapter 11 cases, the Debtors request that the Court authorize their continued use of all correspondence and business forms (including, without limitation, letterhead, purchase orders, invoices, and preprinted checks) as such forms were in existence immediately before the Petition Date and thereafter, without reference to the Debtors status as debtors in possession, rather than requiring the Debtors to incur the expense and delay of ordering entirely new business forms as required under the U.S. Trustee Guidelines. V. Intercompany Transactions. 27. The Debtors and the Non-Debtor Subsidiaries maintain business relationships and engage in transactions with each other resulting in intercompany loans, receivables, and payables in the ordinary course of business (the Intercompany Transactions and claims arising from such Intercompany Transactions, the Intercompany Claims ). The Debtors and Non-Debtor Subsidiaries track all fund transfers in their respective accounting systems and can ascertain, trace, and account for all Intercompany Transactions. 12

13 Case KJC Doc 10 Filed 08/13/15 Page 13 of Such Intercompany Transactions are frequently conducted, (a) among the Debtors, and (b) among the Non-Debtor Subsidiaries. Normally, the Debtors do not transfer funds from their Bank Accounts to the Bank Accounts of Non-Debtor Subsidiaries (such transfers, Non-Debtor Subsidiary Transfers ). However, Hercules monitors the cash balances of the Master Accounts daily, in light of anticipated cash receipts and payment obligations. If the funds in one of the Master Accounts is determined to be insufficient to meet anticipated payment obligations, Hercules will, in consultation with its tax team, make a transfer from the another Master Account that it deems appropriate. Generally, if either of the HOME Master Account or the HOSL Master Account requires additional funds, a transfer will be made from the other, such that no funds of a Debtor will flow to a Non-Debtor Subsidiary. However, on certain rare occasions, including if an event occurs that gives rise to a significant capital expenditure, the funds in the HOME Master Account and the HOSL Master Account may be insufficient to cover their combined payment obligations. In such instances, funds from the Domestic Master Account may be transferred to the HOME Master Account or the HOSL Master Account. Although such Non-Debtor Subsidiary Transfers are rare, they are integral to the Hercules enterprise and consistent with Hercules historical, ordinary-course business practices. While the Debtors do not anticipate that any transfers from the Domestic Master Account to either of the HOME Master Account or HOSL Master Account, or any other Non-Debtor Subsidiary Transfers, will be necessary during the chapter 11 cases, it requests that such Non-Debtor Subsidiary Transfers be authorized out of an abundance of caution, provided the Debtors will only make such Non-Debtor Subsidiary Transfers with the consent of the Steering Group. 3 3 Prior to or in connection with requesting consent of the Steering Committee to make such a transfer, the Debtors will provide the Steering Group with any and all information requested by the Steering Group in order to allow the Steering Group to make an informed decision. 13

14 Case KJC Doc 10 Filed 08/13/15 Page 14 of In connection with the daily operation of the Cash Management System, as funds are disbursed throughout the Cash Management System and as business is transacted between the Debtors and between the Non-Debtor Subsidiaries, at any given time there may be Intercompany Claims owing by one Debtor to another Debtor, one Non-Debtor Subsidiary to another Non-Debtor Subsidiary or between a Debtor and a Non-Debtor Subsidiary. Certain Intercompany Claims are settled in cash while most are reflected as journal entry receivables and payables, as applicable, in the respective Debtors accounting systems. Under the Plan, Intercompany Claims will be reinstated and paid in the ordinary course. If Intercompany Transactions were to be discontinued, the Cash Management System and the Debtors and Non- Debtor Subsidiaries operations would be disrupted unnecessarily to the detriment of the Debtors, their creditors, and other stakeholders. RELIEF REQUESTED 30. The Debtors seek entry of an interim order (the Interim Order ), pending the entry of a final order or the Interim Order becoming a final order (the Final Order ), authorizing, but not directing, the Debtors to continue to operate the Cash Management System in the day-to-day operation of their businesses, and to honor certain prepetition obligations in accordance with the operation of the Cash Management System. Specifically, the Debtors request authority to: (a) continue to use, with the same account numbers, each of the Bank Accounts; (b) treat the Bank Accounts for all purposes as accounts of the Debtors as debtors in possession; and (c) conduct banking transactions by all usual means and debit the Bank Accounts on account of all usual items and payment instructions. 31. Additionally, the Debtors seek authority to: (a) use, in their present form, all business forms (including check stock, letterhead, purchase orders, and invoices) and other correspondence and documents related to the Bank Accounts, without reference to the Debtors 14

15 Case KJC Doc 10 Filed 08/13/15 Page 15 of 30 status as debtors in possession; and (b) continue the Intercompany Transactions between and among the Debtors and the Non-Debtor Subsidiaries in the ordinary course of business and in accordance with historical practices. 4 The Debtors further request authority for the Banks to: (i) continue to maintain, service, and administer the Bank Accounts; (ii) debit the Bank Accounts in the ordinary course of business on account of (a) all checks drawn on the Bank Accounts that are cashed at the Banks or exchanged for cashier's checks by the payees thereof prior to the Petition Date, (b) all checks or other items deposited in one of the Bank Accounts at the Banks prior to the Petition Date that have been dishonored or returned unpaid for any reason, together with any fees and costs in connection therewith, and (c) all undisputed prepetition amounts outstanding as of the date hereof, if any, owed to any Bank as fees or service charges for the maintenance of any aspect of the applicable Cash Management System. Finally, the Debtors seek to continue their existing Investment Practices and request that the Court waive the Debtors compliance with investment guidelines set forth in section 345(b) of the Bankruptcy Code. The Debtors also request that, upon entry of the Interim Order, the Court schedule a final hearing (the Final Hearing ) on the Motion to consider the relief requested herein on a final basis. BASIS FOR RELIEF I. Maintaining the Existing Cash Management System Is Essential to the Debtors Ongoing Operations and Restructuring Efforts. 32. The Operating Guidelines and Reporting Requirements of the United States Trustee for Chapter 11 Debtors in Possession and Chapter 11 Trustees, dated February 5, 2015 (the U.S. Trustee Guidelines ) require debtors in possession to, among other things: 4 Because the Debtors engage in Intercompany Transactions on a regular basis and such transactions are common among similar enterprises, the Debtors believe the lntercompany Transactions are ordinary course transactions within the meaning of section 363(c)( l ) of the Bankruptcy Code and, therefore, do not require the Court s approval. Nonetheless, out of an abundance of caution, the Debtors are seeking express authority to engage in such transactions on a postpetition basis. The continued performance of the ordinary course lntercompany Transactions is necessary to ensure the Debtors ability to operate their business during these chapter 11 cases. 15

16 Case KJC Doc 10 Filed 08/13/15 Page 16 of 30 a. establish one debtor in possession bank account for all estate monies required for the payment of taxes, including payroll taxes; b. close all existing bank accounts and open new debtor in possession accounts; c. maintain a separate debtor in possession account for cash collateral; and d. obtain checks that bear the designation debtor in possession and reference the bankruptcy case number and type of account on such checks. 33. These requirements are designed to provide a clear line of demarcation between prepetition and postpetition claims and payments and help protect against the inadvertent payment of prepetition claims by preventing banks from honoring checks drawn before the Petition Date. Considering, however, that the Debtors business and financial affairs are complex and require the collection, disbursement, and movement of funds through their Bank Accounts, enforcement of this provision of the U.S. Trustee Guidelines during these chapter 11 cases would severely disrupt, if not cripple, the Debtors operations. Moreover, the Debtors are, through the Plan, seeking to reinstate the vast majority of claims against them, such that the distinction between prepetition and postpetition claims and payments have less significance than in most bankruptcy cases. Accordingly, the Debtors respectfully request that the Court allow them to operate each of their Bank Accounts listed on Exhibit C attached hereto as such were maintained in the ordinary course of business before the Petition Date. 34. Continuation of the Cash Management System is permitted pursuant to section 363(c)(l) of the Bankruptcy Code, which authorizes the debtor in possession to use property of the estate in the ordinary course of business without notice or a hearing. Additionally, courts in this and other districts have recognized that an integrated cash management system allows efficient utilization of cash resources and recognizes the impracticalities of maintaining separate 16

17 Case KJC Doc 10 Filed 08/13/15 Page 17 of 30 cash accounts for the many different purposes that require cash. In re Columbia Gas Sys., Inc., 136 B.R. 930, 934 (Bankr. D. Del. 1992), aff d in part and rev d inpart, 997 F.2d 1039 (3d Cir. 1993). The United States Court of Appeals for the Third Circuit has agreed, emphasizing that requiring a debtor to maintain separate accounts would be a huge administrative burden and economically inefficient. Columbia Gas, 997 F.2d at 1061; see also In re Southmark Corp., 49 F.3d 1111, 1114 (5th Cir. 1995) (finding cash management system allows a debtor to administer more efficiently and effectively its financial operations and assets ). 35. Bankruptcy courts treat requests for authority to continue utilizing existing cash management systems as a relatively simple matter. In re Baldwin-United Corp., 79 B.R. 321, 327 (Bankr. S.D. Ohio 1987). In In re Charter Co., 778 F.2d 617 (11th Cir. 1985), for example, the bankruptcy court entered an order authorizing the debtor and 43 of its subsidiaries to continue to consolidate the management of their cash as has been usual and customary in the past, and to transfer monies from affiliated entity to entity, including operating entities that are not debtors. Id. at 620 (emphasis added). The Eleventh Circuit Court of Appeals then affirmed a subsequent district court decision denying a creditor s motion for leave to appeal the bankruptcy court s cash management order, holding that authorizing the debtors to utilize their prepetition routine cash management system was entirely consistent with applicable provisions of the Bankruptcy Code. Id. at Indeed, in large chapter 11 cases, bankruptcy courts in this district routinely grant chapter 11 debtors similar authority to continue using existing cash management systems. In re Brookstone Holdings Corp, No (BLS) (Bankr. D. Del. Apr. 4, 2014) (authorizing debtors continued use of cash management system and bank accounts); In re Dolan Co., No (BLS) (Bankr. D. Del. Mar. 25, 2014) (same); In re F & H Acquisition Corp., No

18 Case KJC Doc 10 Filed 08/13/15 Page 18 of (KG) (Bankr. D. Del. Dec. 17, 2013) (same); In re Overseas Shipholding Group, Inc., No (PJW) (Bankr. D. Del. Jan. 24, 2013) (same); In re Vertis Holdings, Inc., No (CSS) (Bankr. D. Del. Nov. 1, 2012) (same); In re THQ Inc., No (MFW) (Bankr. D. Del. Dec. 20, 2012) (same); In re Delta Petroleum Corp., No (KJC) (Bankr. D. Del. Dec. 16, 2011) (same) Here, Hercules has utilized the Cash Management System in its current form for years as part of its ordinary and usual business practices, and as such, the Debtors believe the continued use of the Cash Management System falls within the purview of ordinary course transactions permitted under section 363(c)(1) of the Bankruptcy Code. Moreover, appropriate circumstances exist for the Court to authorize the Debtors continued use of the Cash Management System under sections 363(b)(1) and section 105(a) of the Bankruptcy Code. 38. Because the Debtors Plan provides for reinstatement of unsecured claims (other than the Senior Notes) and their payment in the ordinary course of business, there is minimal risk posed by continuation of the Cash Management System. More significantly, the relief requested in this Motion will help minimize any disruption in Hercules business operations during the period between the Petition Date and confirmation of the Plan, and preserve the value of the Debtor s estate. Indeed, any disruptions in the Cash Management System could lead to delays in satisfying Hercules obligations to its vendors and suppliers and meeting the demands of its various customers. In order to avoid the potential erosion of value that could ensue from any such interruptions in Hercules ordinary course business operations, the Debtor believes it is imperative that it be authorized to continue the Cash Management System consistent with Hercules historical practice. 5 Because of the voluminous nature of the orders cited herein, such orders have not been attached to this Motion. Copies of these orders are available upon request to the Debtors proposed counsel. 18

19 Case KJC Doc 10 Filed 08/13/15 Page 19 of Moreover, requiring the Debtors to maintain separate accounts now would decentralize Hercules Cash Management System because, given Hercules complex corporate and financial structure, it would be difficult to establish an entirely new cash management system for the Debtors. Indeed, strict adherence to the U.S. Trustee Guidelines would prove to be exceedingly burdensome to the Debtors and their management, reduce efficiencies, and cause unnecessary expense. The delays that would result from opening the new accounts, revising cash management procedures, and instructing customers to redirect payments would disrupt Hercules business operations at this critical time, have little or no benefit to the Debtors estates, and erode the value of the Debtors enterprise to the detriment of all stakeholders. Accordingly, the Debtors should be allowed to continue using the Cash Management System consistent with its historical practice. II. Authorizing the Debtors to Continue Using Debit, Wire, Credit Card, and ACH Payments Is Warranted. 40. The Debtors request that the Court grant further relief from the U.S. Trustee Guidelines to the extent they require the Debtors to make all disbursements by check. In particular, the U.S. Trustee Guidelines require that all receipts and all disbursements of estate funds must be made by check with a notation representing the reason for the disbursement. As discussed above, in the ordinary course of business, the Debtors conduct transactions through ACH transfers and other similar methods. In addition, a large percentage of the Debtors customer receipts are received through wire transfer payments. The Debtors also utilize a credit card account to pay for travel and other business expenses of its executive and management level employees. If the Debtors ability to conduct transactions by debit, wire, ACH transfer, credit card or other similar methods is impaired, the Debtors may be unable to perform under certain 19

20 Case KJC Doc 10 Filed 08/13/15 Page 20 of 30 contracts, their business operations may be unnecessarily disrupted, and their estates will incur additional costs. III. Authorizing the Banks to Continue to Maintain, Service, and Administer the Bank Accounts in the Ordinary Course of Business Is Warranted. 41. The Debtors respectfully request that the Court authorize the banks to continue to maintain, service, and administer their Bank Accounts as accounts of the Debtors as debtors in possession, without interruption and in the ordinary course of business. In this regard, the banks should be authorized to receive, process, honor, and pay any and all checks, ACH transfers and other instructions, and drafts payable through, drawn, or directed on such Bank Accounts after the Petition Date by holders, makers, or other parties entitled to issue instructions with respect thereto; provided, however, any check, draft, or other notification that the Debtors advise the banks to have been drawn, issued, or otherwise presented before the Petition Date may be honored by the banks only to the extent authorized by order of the Court. 42. The Debtors further request that the Court authorize the Banks to accept and honor all representations from the Debtors as to which checks, drafts, wires, or ACH transfers should be honored or dishonored consistent with any order of the Court and governing law, whether such checks, drafts, wires, or ACH transfers are dated before or subsequent to the Petition Date. The Debtors also request that, to the extent a Bank honors a prepetition check or other item drawn on any account either: (a) at the direction of the Debtors; or (b) in a good-faith belief that the Court has authorized such prepetition check or item to be honored, such Bank will not be deemed to be liable to the Debtors or to their estates on account of such prepetition check or other item honored postpetition. The Debtors respectfully submit that such relief is reasonable and appropriate because the Banks are not in a position to independently verify or audit whether a particular item may be paid in accordance with a Court order or otherwise. Moreover, the 20

21 Case KJC Doc 10 Filed 08/13/15 Page 21 of 30 Debtors request that the Court authorize the Banks to (a) continue to charge the Debtors regular and ordinary course Bank Fees, as applicable, and (b) charge-back returned items to the Bank Accounts, whether such items are dated before, on, or subsequent to the Petition Date, in the ordinary course of business. 43. Courts in this district, in similar large chapter 11 cases, have regularly waived the U.S. Trustee Guidelines on the grounds that they are impractical and potentially detrimental to a debtor s postpetition business operations and restructuring efforts. See, e.g., In re GSE Envtl., Inc., No (Bankr. D. Del. May 6, 2014) (authorizing debtors continued use of cash management system and bank accounts); In re Dolan Co., No (BLS) (Bankr. D. Del. Mar. 25, 2014) (same); In re FAH Liquidating Corp. f/k/a Fisker Auto Holdings, Inc., No (KG) (Bankr. D. Del. Dec. 13, 2013) (same); In re Physiotherapy Holdings, Inc., No (KG) (Bankr. D. Del. Nov. 14, 2013) (same) In re Dex One Corp., No (KG) (Bankr. D. Del. Mar. 19, 2013) (same). IV. The Court Should Authorize the Debtors to Continue Using Their Existing Business Forms. 44. To avoid disruption of the Cash Management System and unnecessary expense, pursuant to Local Rule (a), the Debtors request that they be authorized to continue to use their business forms substantially in the form existing immediately before the Petition Date, without reference to their status as debtors in possession. The Debtors submit that parties in interest will not be prejudiced if the Debtors are authorized to continue to use their business forms substantially in the forms existing immediately before the Petition Date. Parties doing business with the Debtors undoubtedly will be aware of their status as debtors in possession and, thus, changing business forms is unnecessary and would be unduly burdensome. 21

22 Case KJC Doc 10 Filed 08/13/15 Page 22 of In similar chapter 11 cases, courts in this district have allowed debtors to use their prepetition business forms without the debtor in possession label. See, e.g., In re GSE Envtl., Inc., No (Bankr. D. Del. May 6, 2014) (authorizing continued use of business forms); In re Dolan Co., No (BLS) (Bankr. D. Del. Mar. 25, 2014) (same); In re Sorenson Commc ns, Inc., No (BLS) (Bankr. D. Del. Mar. 4, 2014) (same); In re FAH Liquidating Corp. frk/a Fisker Auto. Holdings, Inc., No (KG) (Bankr. D. Del. Dec. 13, 2013) (same); In re Physiotherapy Holdings, Inc., No (KG) (Bankr. D. Del. Nov. 14, 2013) (same). V. The Court Should Authorize the Debtors to Continue Conducting Intercompany Transactions in the Ordinary Course. 46. The Debtors funds move through the Cash Management System as described above. At any given time, there may be Intercompany Claims owing by one Debtor to another or between a Debtor and a Non-Debtor Subsidiary. Intercompany Transactions are made between and among Debtors and Non-Debtor Subsidiaries in the ordinary course as part of the Cash Management System. 6 The Debtors track all fund transfers in their accounting system and can ascertain, trace, and account for all Intercompany Transactions previously described. The Debtors, moreover, will continue to maintain records of such Intercompany Transactions and provide, upon request, such records to the advisors to the Steering Group. 47. As set forth in the First Day Declaration and discussed above, the Debtors have filed the Plan contemporaneously with this Motion, supported by an overwhelming majority of its creditors, that contemplates the satisfaction of all unsecured claims (other than the Senior Notes) against the Debtors in full. As such, any risk that trade creditors may be harmed by the 6 As set forth above, the Debtors submit the Intercompany Transactions are ordinary course transactions within the meaning of section 363(c)(l ) of the Bankruptcy Code and, thus, do not require the Court s approval. Nonetheless, out of an abundance of caution, the Debtors are seeking express authority to engage in such transactions on a postpetition basis. 22

23 Case KJC Doc 10 Filed 08/13/15 Page 23 of 30 requested authorization for the Debtors to direct amounts (in the unexpected event such transfers may be needed) to its Non-Debtor Subsidiaries to satisfy operating expenses is de minimis, at most. Moreover, the Debtors have agreed to seek the Steering Group s consent for any transfers made by Debtors to Non-Debtors. 48. If the Intercompany Transactions were to be discontinued, the Cash Management System and related administrative controls would be disrupted to the Debtors and their estates detriment. This is especially so given that, under the Plan, Intercompany Claims are reinstated in full. Accordingly, the Debtors respectfully submit that the continued performance of the Intercompany Transactions is in the best interest of the Debtors estates and creditors, and, therefore, the Debtors should be permitted to continue such performance. Since these transactions represent extensions of intercompany credit made in the ordinary course of business, the Debtors respectfully request the authority to continue conducting the Intercompany Transactions in the ordinary course of business without need for further Court order. 49. Similar relief has been granted in other comparable multi-debtor chapter 11 cases in this jurisdiction. See, e.g., In re GSE Envtl., Inc., No (Bankr. D. Del. May 6, 2014); In re Physiotherapy Holdings, Inc., No (KG) (Bankr. D. Del. Nov. 14, 2013); In re Maxcom Telecomunicaciones, S.A.B. de C. V, No (PJW) (Bankr. D. Del. July 25, 2013); In re Conexant Systems, Inc., No (MFW) (Bankr. D. Del. Apr. 11, 2013); In re Appleseed s Intermediate Holdings LLC, No (KG) (Bankr. D. Del. Jan. 20, 2011); see also In re AMF Bowling Worldwide, Inc., No (KRH) (Bankr. E.D. Va. Nov. 14, 2012). 23

24 Case KJC Doc 10 Filed 08/13/15 Page 24 of 30 VI. Cause Exists for Waiving the Investment and Deposit Guidelines of Section 345 of Bankruptcy Code 50. Section 345(a) of the Bankruptcy Code authorizes deposit or investment of money of estates, such as cash, as will yield the maximum reasonable net return on such money, taking into account the safety of such deposit or investment. 11 U.S.C. 345(a). While section 345(b) of the Bankruptcy Code generally requires that, with respect to investments other than investments insured or guaranteed by the United States or by a department, agency or instrumentality of the United States or backed by the full faith and credit of the United States, the estate must require a bond in favor of the United States secured by the undertaking of a U.S. Trustee-approved corporate surety, it allows the court to dispense with this limitation for cause. 11 U.S.C. 345(b)(2). 51. It is within the Court s discretion to waive or modify the investment guidelines of section 345(b) of the Bankruptcy Code for cause. See 11 U.S.C. 345(b); In re Serv. Merch. Co., 240 B.R. 894, (Bankr. M.D. Tenn. 1999) (concluding that cause existed to waive requirements of section 345 because debtors were large, sophisticated [companies] with a complex cash management system, and the benefit of waiving the requirements of section 345(b) far outweighed any potential harm to the estate, and would needlessly handcuff [the] debtors reorganization efforts. ); see also 140 Cong. Rec. H (Oct. 4, 1994) (noting that section 345(b) investment guidelines may be wise in the case of a smaller debtor with limited funds that cannot afford a risky investment to be lost, [but] can work to needlessly handcuff larger, more sophisticated debtors ). 52. In determining whether the for cause standard has been satisfied, the Court should consider a totality of the circumstances, utilizing the following factors: (a) the sophistication of the debtor s business; 24

25 Case KJC Doc 10 Filed 08/13/15 Page 25 of 30 (b) the size of the debtor s business operations; (c) the amount of the investments involved; (d) the bank ratings (Moody s and S&P) of the financial institutions where the debtor in possession funds are held; (e) the complexity of the case; (f) the safeguards in place within the debtor s own business of insuring the safety of the funds; (g) the debtor s ability to reorganize in the face of a failure of one or more of the financial institutions; (h) the benefit to the debtor; (i) the harm, if any, to the estate and (j) the reasonableness of the debtor s request for relief from section 345(b) requirements in light of the overall circumstances of the case. In re Serv. Merch. Co., 240 B.R. at Here, cause exists to waive the requirements of section 345(b) of the Bankruptcy Code. Requiring Hercules to change its Bank Accounts, Investment Practices and other components of the Cash Management System would be a significant disruption to Hercules, which relies on the Cash Management System for its business operations. Under the circumstances, where the Debtors have the required support to confirm the Plan and emerge from chapter 11 on an expedited timeline, the Debtors should be permitted to continue their Investment Practices and the Cash Management System. 54. Furthermore, the Debtors investment of excess funds in Overnight Investment Accounts is limited to investments in money market mutual funds, obligations issued by the U.S. Treasury, obligations of a U.S. Federal Agency or U.S. Government sponsored enterprise, auction rate certificates, auction preferred stock, certificates of deposit, commercial paper, municipal securities, corporate debt, repurchase transactions, variable rate demand obligations, and Eurodollar time deposits. If the Debtors are limited to direct investments in U.S. government securities, they would need to (i) completely overhaul their existing investment 25