IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

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1 Case Document 103 Filed in TXSB on 08/02/11 Page 1 of 12 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In Re: BAYTOWN NAVIGATION INC., et al., 1 Case No Jointly Administered Debtors. Chapter 11 OBJECTION OF THE DEBTORS TO CAPE TANKER INC.'S MOTION TO COMPEL ASSUMPTION OR REJECTION OF EXECUTORY CONTRACT (Relates to Dkt. No. 64) The above-captioned debtors and debtors-in-possession (together, the Debtors ), by and through their undersigned proposed attorneys, hereby file this objection (the Objection ) to Cape Tankers Inc.'s Motion to Compel Assumption or Rejection of Executory Contract and for Consideration on an Emergency Basis. In support thereof, the Debtors would show as follows: I. JURISDICTION 1. This Court has jurisdiction over these cases and this matter pursuant to 28 U.S.C. 157 and This is a core proceeding within the meaning of 28 U.S.C Venue is proper in this district pursuant to 28 U.S.C and II. RELEVANT PROCEDURAL AND FACTUAL BACKGROUND A. Relevant Procedural History of the Bankruptcy Case 2. On July 8, 2011 (the "Petition Date"), the Debtors filed voluntary petitions for relief under chapter 11, title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the "Court"). 1 The Debtors in these chapter 11 cases are Omega Navigation Enterprises, Inc.; Galveston Navigation Inc.; Beaumont Navigation Inc.; Carrolton Navigation Inc.; Decatur Navigation Inc.; Elgin Navigation Inc.; Fulton Navigation Inc.; Orange Navigation Inc.; Baytown Navigation Inc.; and Omega Navigation (USA) LLC. HOUSTON\

2 Case Document 103 Filed in TXSB on 08/02/11 Page 2 of 12 Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the Debtors are operating their businesses and managing their property as debtors-in-possession. These cases are being jointly administered. No trustees or examiners have been appointed in these cases. 3. On July 11, 2011, the Debtors obtained authority from the Court to maintain their existing insurance policies. (See Dkt. No. 36). 4. On August 2, 2011, the Court entered its final order approving the use of cash collateral (the "Cash Collateral Order") which enables the Debtors to fund their ongoing business operations and the payment of postpetition obligations, including any valid postpetition obligations owed to Cape Tankers Inc. ("Cape"). (See Dkt. No. 101). 5. On July 14, 2011, only six (6) days after the Petition Date, Cape filed its Combined Motion to Compel Assumption or Rejection of Executory Contract and for Consideration on an Emergency Basis [Dkt. No. 64] (the "Motion to Compel"), requesting that Fulton Navigation Inc. ("Fulton"), as debtor-in-possession, assume or reject a charter agreement with Cape on or before the date of the hearing on the Motion to Compel. 6. The Motion to Compel has been set for hearing on August 15, 2011, at 2:00 p.m. Therefore, the relief requested in the Motion to Compel is that Fulton assume or reject the Charter (as defined below) on or before August 15, 2011, less than six (6) weeks after the Petition Date. 2 B. Relevant Factual Background (1) The Debtors' Business 7. Omega is an international provider of marine transportation services focusing on seaborne transportation of refined petroleum products. Omega was founded in 2005 and its 2 The Motion to Compel requests that Fulton assume or reject the Charter by the date of the hearing on the motion. (See Motion to Compel, p.5). HOUSTON\

3 Case Document 103 Filed in TXSB on 08/02/11 Page 3 of 12 corporate headquarters is in Athens, Greece. Omega is the parent company of the Debtors and is incorporated in the Marshall Islands. 8. Together, the Debtors wholly own a fleet of eight high specification product tankers (collectively, the "Vessels"). Each wholly-owned vessel is owned by a separate Debtor entity (each a "Vessel Owner"), all of which are wholly-owned by Omega. The vessels have a combined cargo capacity of 512,358 deadweight tons (dwt). All vessels in the Omega fleet are double hull in order to meet the International Maritime Organization regulations banning all single hull tankers by 2010 or 2015, depending on the port or flag state. Omega s product tankers are designed to transport several different refined petroleum products simultaneously in segregated, coated cargo tanks. These cargoes typically include gasoline, jet fuel, kerosene, naphtha, gas oil and heating oil. 9. Omega generates revenues by employing its fleet of vessels on time charters as well as in the spot market. For all of the wholly-owned vessels, Omega provides the commercial management in-house through the wholly-owned non-debtor subsidiary Omega Management, Inc. This management includes obtaining employment for the vessels, negotiating charters, and managing relationships. HOUSTON\

4 Case Document 103 Filed in TXSB on 08/02/11 Page 4 of 12 (2) The Debtors' Relationship with Cape Tankers, Inc. 10. Prior to the Petition Date, Fulton 3 and Cape entered into a certain time charter agreement (the "Charter") whereby Cape was to hire Fulton's vessel, the Omega King. The Charter agreement was for one year ending May 9, 2011, but was extended from that date for a minimum of 120 days and a maximum of 150 days. Under the Charter, Fulton receives a day rate for the vessel of $14, (minus certain brokerage fees). Maersk Broker US brokered the Charter. 11. Clause 86 of the Charter provides that, "[i]n the event that owners file for and/or suffer insolvency or other further protection, rehabilitation, winding up, bankruptcy or any other similar or equivalent protection, the charterers have the option of cancelling this charterparty with immediate effect." 12. On July 12, 2008, Cape notified Fulton that it intended to terminate the Charter pursuant to Clause 86 in violation of the automatic stay imposed by 11 U.S.C Counsel for the Debtors subsequently contacted counsel for Cape to notify them that these actions violated the automatic stay. 13. On July 14, 2011, Cape informed the Debtors that it was withdrawing its cancellation of the Charter. On that same date, counsel for the Debtors sent a letter to Cape's counsel informing Cape that its attempt to cancel the Charter and take any action in furtherance thereof was a violation of 11 U.S.C. 362 and 365, and that the Debtors reserve all rights to seek actual costs incurred as a result. In addition, the letter to Cape's counsel informed Cape that the Debtors continue to maintain appropriate insurance on all of their vessels and the Debtors continue to pay wages and operating expenses in the ordinary course of business. 3 Fulton Navigation Inc is debtor-in-possession in case no The Debtors reserve all rights to recover damages from Cape as a result of the stay violation. HOUSTON\

5 Case Document 103 Filed in TXSB on 08/02/11 Page 5 of 12 III. OBJECTION 14. A debtor is generally entitled to wait until confirmation of a plan to decide which executory contracts to assume or reject. 11 U.S.C. 365(d)(2). Under some circumstances, the time period for a debtor to assume or reject an executory contract can be shortened upon the request of a counterparty. Id. Cape's emergency request to require Fulton to decide on or before August 15, 2011 (i.e. within six weeks of the Petition Date) whether to assume or reject the Charter should be denied for the following reasons: (A) the Debtors are entitled to a "breathing spell" during the early stages of their bankruptcy cases, and requiring Fulton to assume or reject the Charter within six weeks of the Petition Date is unreasonable and does not further the Debtors' reorganization efforts; (B) Cape is not suffering any economic losses that were caused by the Debtors as a result of the bankruptcy; (C) Cape has unclean hands because (i) Cape's postpetition attempt to terminate the Charter violated the automatic stay; (ii) Cape is in breach of the Charter and this breach is causing injury to the Debtors' estates, and (D) assumption or rejection as of August 15, 2011 is futile because the Charter is set to expire by its own terms on or around September 9, A. The Debtors are Entitled to a "Breathing Spell" 15. Cape's request to force the Debtors to assume or reject the Charter within only six (6) weeks of the Petition Date should be denied because granting such relief would be contrary to one of the most fundamental protections of the Bankruptcy Code. A chapter 11 filing entitles a debtor to a "breathing spell" from creditors. See e.g., Browning v. Navarro, 743 F.2d 1069, 1083 (5th Cir. 1984) (noting that "[t]he automatic stay is intended to give the debtor a breathing spell from his creditors.") (citations omitted). This protection applies equally to the time period in which a debtor must decide to assume or reject an executory contract because debtors are generally given until plan confirmation to make that important decision. 11 U.S.C. HOUSTON\

6 Case Document 103 Filed in TXSB on 08/02/11 Page 6 of (d)(2); In re Templeton, 154 B.R. 930 (Bankr. W.D. Tex. 1993) (giving the debtor until plan confirmation to assume or reject a contract "provides the debtor with a 'breathing spell' to determine whether the [contract] is beneficial to the estate."); see also In re El Paso Refinery, L.P., 220 B.R. 37, 44 (Bankr. W.D. Tex. 1998) (noting that "[o]rdinarily, the debtor need not commit itself to assumption or rejection of a contract until a reorganization plan is confirmed."). Therefore, granting the Motion to Compel at this early stage in the bankruptcy case would deny Fulton and the Debtors a fundamental protection afforded them under the Bankruptcy Code. 16. "Courts rarely force a debtor into assuming or rejecting a contract" prior to plan confirmation because it forces the debtor to focus its resources and attention on one contract over a multitude of contracts at a time when the debtor has not yet formulated a plan of reorganization. See In re Kmart Corp., 290 B.R. 614, 620 (Bankr. N.D. Ill. 2003). For example, in Kmart, the court denied a motion to compel the debtor to assume or reject a contract only six (6) months after the petition date. See id. (finding it unrealistic and imprudent to require the debtor to make decisions on executory contracts on a piecemeal basis prior to confirmation). In Dana Corp., the court denied a motion to compel the debtor to assume or reject a contract only seven (7) months after the petition date because the exclusivity period had not expired and the court held that the debtor should be given the full time Congress intended in order to make the crucial decisions regarding which contracts to assume or reject. See Dana Corp., 350 B.R. 144, 149 (Bankr. S.D.N.Y. 2006). Here, Cape's request to force assumption or rejection less than six (6) weeks, not months, after the Petition Date is even more unreasonable and should accordingly not be granted. HOUSTON\

7 Case Document 103 Filed in TXSB on 08/02/11 Page 7 of Although 365(d)(2) of the Bankruptcy Code permits counterparties to request that a debtor make its decision to assume or reject prior to confirmation, the interests of the debtor's estate must not yield to the convenience or advantage of merely one creditor. See In re El Paso Refinery, L.P., 220 B.R. at 44 (noting that early assumption or rejection may be requested but "the interest of the creditors collectively and the bankrupt estate as a whole will not yield easily to the convenience or advantage of one creditor out of many.") (citations omitted). Cape's request should therefore be denied because the interests of the Debtors' estates should not be required to yield to the request of only one individual creditor and counterparty. Fulton and the other Debtors need a "breathing spell" to, among other things, (i) focus on continued operations during the early stages of these chapter 11 cases; (ii) formulate plans of reorganization for the benefit of all creditors; and (iii) determine which contracts to assume or reject in light of what is in the best interest of the estates as a whole. Forcing the Debtors to make early assumption and rejection decisions "in a vacuum and on a piecemeal basis" before they have formulated a plan of reorganization that takes into account the assumption and rejection of all outstanding executory contracts is "unrealistic and imprudent." See In re Kmart, 290 B.R. at 620. Cape, the only creditor and counterparty requesting an early assumption or rejection, should not be permitted to interfere with Fulton's reorganization process by requesting that the interests of Fulton's estate yield to the convenience and advantage of Cape as an single creditor among many. Id. 18. Moreover, if the Court were to grant Cape's request, then this would likely create a mad rush to the courthouse by many other creditors and counterparties who would then also demand that the Debtors make an early decision to either assume or reject their contracts. Forcing the Debtors to reject or assume (and cure) all of these contracts at this very early stage of HOUSTON\

8 Case Document 103 Filed in TXSB on 08/02/11 Page 8 of 12 these chapter 11 cases would make a successful reorganization impossible and thereby defeat the purpose of bankruptcy. Therefore, requiring Fulton to make a decision to assume or reject the Charter at this early stage in the Debtors' cases is unreasonable and improper. See Dallas-Fort Worth Regional Airport Bd. V. Braniff Airways, Inc., 26 B.R. 628, 636 (N.D. Tex. 1982) (holding that it would be "quite unreasonable in [a] highly complex bankruptcy proceeding to have required a decision [to reject or assume an executory contract] within two months of the date the petition in bankruptcy was filed."). 5 B. Cape is Not Suffering Any Economic Losses Caused By the Debtors 19. Cape's Motion to Compel, as discussed above, should not be granted because relief under 365(d)(2) may not be for the convenience or advantage of a single creditor at the expense of the estate's interest as a whole. See In re El Paso Refinery, L.P., 220 B.R. at 44. In addition, Cape is not entitled to relief under 365(d)(2) because it is not suffering any economic losses as a result of the debtor's bankruptcy filing. See Memphis-Shelby County Airport Auth. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 783 F.2d 1283, 1285 (5th Cir. 1986) (noting that "the remedy for a party to an unexpired lease who is suffering from economic losses as a result of the bankruptcy is to move for an order compelling the bankruptcy trustee to assume or reject the lease within a certain time period pursuant to section 365(d)(2)."). To the contrary, the Debtors have complied with all of their postpetition obligations under the Charter and any losses allegedly suffered by Cape are a direct result of Cape's violation of the automatic stay and breach of the Charter. 5 In addition, Cape's request to force Fulton to amend the Charter if it is assumed is also improper. (See Motion to Compel, 11) (requesting that the assumption order provide an "agreement to amend the charter to make future hire payments in arrears and not in advance"). A debtor-in-possession may seek to assume or reject a contract as a whole, but it may not alter its terms. See Johnson v. Kurn, 95 F.2d 629, 633 (8th Cir. 1938) (holding that trustee could adopt or reject the lease as a whole but could not alter its terms). HOUSTON\

9 Case Document 103 Filed in TXSB on 08/02/11 Page 9 of The Debtors have obtained authority from this Court to use cash collateral to pay for their ongoing business expenses, including insurance payments, payments to critical vendors and expenses and fees related to Fulton's vessel, the Omega King. (See Cash Collateral Order). Therefore, not only are the Debtors current on their post-obligations under the Omega King Charter, but they also have obtained authority to use the cash necessary to remain current on their postpetition obligations. In addition, the Debtors continue to maintain all required insurance with respect to the Omega King. Accordingly, Cape's suggestion that the bankruptcy filing has impaired the Debtors' ability to perform under the Charter is unsubstantiated and not true. 21. One court has held that even where the counterparty is incurring risk and economic liability as a result of the Debtor's lack of performance under the contract, early assumption or rejection is still not warranted where the contract is not the cornerstone of the reorganization. See Kmart, 290 B.R. at 620. In the present case, the Debtors are both fully performing under the Charter and the Charter is not the cornerstone of the Debtors' bankruptcy cases. The Debtors have complied with all postpetition obligations under the Charter and Cape has not even alleged nor provided any supporting evidence to show it has suffered any non-selfinflicted economic loss by reason of the Debtors' bankruptcy filings. Accordingly, Cape has not satisfied its burden under 365(d)(2). Moreover, as discussed below, any unnecessary costs and expenses arising in connection with the Charter are a direct result of Cape's debunkering of the Omega King and resulting breach of the Charter. C. Cape Has Unclean Hands 22. In addition to the foregoing reasons, the Motion to Compel should be denied because Cape has unclean hands. While on the one hand Cape is asking this Court to accept that HOUSTON\

10 Case Document 103 Filed in TXSB on 08/02/11 Page 10 of 12 the Debtors' bankruptcy filing has caused Cape harm even though the Debtors are current on their obligations to Cape, on the other hand Cape is the party that has actually caused harm harm to the Debtors' estates resulting from Cape's violation of the automatic stay and breach of the Charter. 23. Cape's attempt to cancel the Charter violated the automatic stay by seeking to deprive Fulton of the funds that are due to it thereunder. 6 Cape's violation of the automatic stay and breach of the Charter have exposed Fulton and the Debtors to substantial harm, including but not limited to (i) potential fines; (ii) potential loss of income; (iii) potential loss of customers; and (iv) potential injury to goodwill in the maritime industry. 24. By the violating the automatic stay and breaching the Charter, Cape has caused, and continues to cause, substantial harm to the Debtors and their estates, yet at the same time, by filing the Motion to Compel, Cape is requesting relief that would, as discussed above, require the interests of the Debtors' estates to yield to the convenience or advantage of merely one creditor. Not only is the relief requested by Cape improper, but equitable considerations also support a denial of the Motion to Compel because Cape's actions have caused substantial harm to the Debtors' estates. D. Assumption or Rejection at This Point is Futile 25. Finally, the Debtors believe that forcing assumption or rejection at this point in the Charter is futile because the Charter is set to expire by its own terms on or around September 9, Requiring the Debtors to analyze the contract with only three weeks remaining and the possibility of no material unperformed obligations by both parties is a waste of resources and likely moot. 6 Cape took other actions in violation of the stay that left the Omega King stranded in port and potentially liable for fines and expenses. The Debtors reserve all rights with respect to any violation of the stay. HOUSTON\

11 Case Document 103 Filed in TXSB on 08/02/11 Page 11 of 12 WHEREFORE, premises considered, the Debtors request that this Court enter an Order (i) denying the relief requested in the Motion to Compel; and (ii) granting such other and further relief as the Court may deem just and proper. Respectfully submitted, BRACEWELL & GIULIANI LLP By: _/s/ William A. (Trey) Wood III William A. (Trey) Wood III Texas Bar No Jason G. Cohen Texas Bar No Louisiana, Suite 2300 Houston, Texas Telephone: (713) Facsimile: (713) and- Evan Flaschen Conn. Bar No Ilia M. O'Hearn Conn. Bar No Goodwin Square 225 Asylum Street, Suite 2600 Hartford, CT Telephone: (860) Facsimile: (860) PROPOSED COUNSEL FOR THE DEBTORS AND DEBTORS-IN-POSSESSION HOUSTON\

12 Case Document 103 Filed in TXSB on 08/02/11 Page 12 of 12 CERTIFICATE OF SERVICE The undersigned certifies that on August 2, 2011, a true and correct copy of this Objection was served on all parties receiving electronic notice via the Court's ECF noticing system. /s/ Jason G. Cohen Jason G. Cohen HOUSTON\