Case Document 814 Filed in TXSB on 08/09/17 Page 1 of 13

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1 Case Document 814 Filed in TXSB on 08/09/17 Page 1 of 13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: NORTHSTAR OFFSHORE GROUP, LLC, DEBTOR. Case No (Chapter 11) DEBTOR S RESPONSE IN OPPOSITION TO THE MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR LEAVE, STANDING AND AUTHORITY TO PROSECUTE CLAIMS ON THE DEBTOR S BEHALF AND FOR RELATED RELIEF (Relates to ECF No. 695) Northstar Offshore Group, LLC (the Debtor or Northstar ) files this Response in Opposition to the Motion of the Official Committee of Unsecured Creditors for Leave, Standing and Authority to Prosecute Claims on the Debtor s Behalf and for Related Relief (ECF No. 695) (the Response ) and submits the following: PRELIMINARY STATEMENT 1. The Official Committee of Unsecured Creditors (the Committee ) has prematurely sought relief in its Motion for Standing and Authority to Prosecute Claims on Behalf of the Debtor s Estate, and for Related Relief (ECF No. 695) (the Motion ). Namely, the Motion asks this Court to grant the Committee standing to bring various potential challenges, including recharacterization as equity, to the claim Eleanor Fiduciary Services, LLC ( Eleanor ) filed on behalf of the alleged junior secured creditors in this case. See ECF No. 695 at 1-3. The Committee s requested relief is premature because the economics of the Debtor s estate are still unclear. Although the Debtor recently completed a sale of substantially all its assets, there is substantial doubt about whether there will be any funds remaining for distribution to junior creditors after the payment of, among other things, DIP obligations, administrative expenses, 1

2 Case Document 814 Filed in TXSB on 08/09/17 Page 2 of 13 professional fees, and the claim of the Debtor s senior secured creditor. See Claim No. 67 (alleging a senior secured claim of $24,764, by the First National Bank of Central Texas). Because it is not yet apparent whether the Eleanor Claim will have any impact on the recovery of any other parties in this case, litigating the Motion now (let alone permitting the Committee to begin prosecuting the recharacterization claim now) would result in the expenditure of considerable attorneys fees and expenses that Committee counsel would surely seek to impose on the estate. Accordingly, the Court should deny the Motion at this time. 2. Alternatively, the Court should deny the relief that the Committee requests because this cause of action is property of the estate, and the Committee cannot overcome the general rule that it should remain with the Debtor except in narrow circumstances. The Committee s allegations of a conflict of interest are inaccurate, and it cannot show that the Debtor has unjustifiably refused to pursue a recharacterization claim against Eleanor at this time. For all these reasons, if the Court does consider this matter now, the Debtor requests that the Motion be denied. JURISDICTION AND VENUE 3. This Court has jurisdiction to consider the Motion pursuant to 28 U.S.C Consideration of the Motion is a core proceeding pursuant to 28 U.S.C. 157(b). 4. Venue of this case in this district is proper pursuant to 28 U.S.C and The statutory predicates for the relief requested herein are 105(a), 1103(c), and 1109(b) of the Bankruptcy Code. BACKGROUND 6. On August 12, 2016, Alliance Offshore, LLC, Alliance Energy Services, LLC, and Montco Oilfield Contractors, LLC filed an involuntary petition for relief against the Debtor under chapter 11 of title 11 of the United States Code (the Bankruptcy Code ). ECF No. 1. 2

3 Case Document 814 Filed in TXSB on 08/09/17 Page 3 of On December 2, 2016 (the Voluntary Petition Date ), the Debtor agreed to convert the involuntary case to a voluntary case by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code. ECF No On December 19, 2016, the U.S. Trustee filed a notice of appointment of an official committee of unsecured creditors (the Committee ). ECF No The U.S. Trustee filed an amended notice of appointment on December 22, ECF No Since the Voluntary Petition Date, the Debtor has been operating as a debtor in possession pursuant to 1107 and 1108 of the Bankruptcy Code. 10. Previously, the Debtor was an oil and gas exploration and production company. Recently, however, the Debtor completed the sale of substantially all of its assets, including all but one of the properties on which it serves as operator, to Northstar Offshore Ventures LLC. See ECF Nos. 792, 800. A. Factual Background 11. In September 2014, the Debtor was purchased by Northstar GOM Holdings Group LLC ( Holdings ), which in turn is owned by PPVA Oil and Gas LLC. PPVA Oil and Gas LLC is owned by Platinum Partners Value Arbitrage Fund LP ( PPVA ), which is controlled by Platinum Partners ( Platinum ), a New York-based investment management group. ECF No , In order to fund its acquisition of the Debtor, Holdings issued $80 million of privately placed 12% Second Priority Senior Notes due September 18, 2019 (the Second Priority Notes ) in September Id. 28. Holdings issued the Second Priority Notes pursuant to an indenture that was subsequently replaced by the Amended and Restated Fiscal Agency Agreement between Holdings, the Debtor (as guarantor), and Eleanor (as fiscal agent). Id. 72. The Debtor understands that the current holders of the $80 million Second Priority Notes are: (i) New 3

4 Case Document 814 Filed in TXSB on 08/09/17 Page 4 of 13 Mountain Finance Corporation; (ii) PPVA Oil and Gas LLC; and (iii) Platinum Partners Credit Opportunities Master Fund LP ( PPCO ). Id In August 2016, PPVA commenced voluntary liquidation proceedings in the Grand Court of the Cayman Islands. Id. 12. Involuntary liquidation proceedings were also initiated against an affiliate of PPVA. Id. 11. Furthermore, in December 2016, a receiver was appointed for certain Platinum entities, including PPCO. See S.E.C. v. Platinum Mgmt. (NY) LLC et al., No. 1:16-cv DLI-VMS, ECF No. 6 (E.D.N.Y. Dec. 19, 2016). B. Procedural Background 14. On February 27, 2017, Eleanor filed Claim No. 89 (the Eleanor Claim ), in its role as fiscal agent under the Amended and Restated Fiscal Agency Agreement, on behalf of the holders of the Second Priority Notes. See Claim No. 89 at 1; see also Attachment to Claim No. 89 at Eleanor alleges that it has a secured claim of at least $91,900, based on the outstanding principal of the Second Priority Notes and the alleged accrual of interest and expenses in connection therewith. See Claim No. 89 at 2; Attachment to Claim No. 89 at On July 19, 2017, the Committee filed the Motion. ECF No In the Motion, the Committee seeks standing to challenge the extent, validity, and/or amount of the Eleanor Claim and to recharacterize the Eleanor Claim as equity. Id. at 1-2. Specifically, the Committee alleges that [t]he payments under the Second Priority Notes were never derived from the operating income of the Debtor, but rather, were funded directly from Platinum for the benefit of its affiliates, and moreover, that [t]he interest rate and interest payments under the Second Priority Notes were illusory. Id Based on these and other allegations, the Committee argues that there is a colorable claim for recharacterization of the Eleanor Claim as equity and attaches a draft Adversary Proceeding Complaint for Recharacterization (ECF No ) (the Draft Complaint ) against Eleanor and the alleged holders of the Second Priority Notes. 4

5 Case Document 814 Filed in TXSB on 08/09/17 Page 5 of 13 ARGUMENT A. The Court Should Defer Consideration of the Motion to Avoid Wasting Estate Resources 16. In the Motion, the Committee seeks standing to raise challenges to the Eleanor Claim, including by pursuing a cause of action for recharacterization of that claim as an equity interest rather than as secured debt. See ECF No. 695 at 1-2; ECF No If successful, this recharacterization claim would simply alter the priority of the Eleanor Claim such that it would fall below that of general unsecured creditors. See ECF No at As noted above, however, Eleanor is the alleged junior secured creditor in this case. See supra 1 (citing Claim No. 67, filed by the First National Bank of Central Texas). As a result, recharacterizing the Eleanor Claim as equity will impact creditors recovery only if there are funds remaining for distribution to creditors after the payment of, among others, DIP obligations, administrative expenses, and the senior secured creditor s claim. Conversely, if these payments exhaust the estate s financial resources, then neither Eleanor nor the unsecured creditors will receive a distribution regardless of how the Eleanor Claim is characterized. 18. At this time, the Debtor is still determining what funds may ultimately be available for distribution to creditors. Currently, the Debtor has yet to even propose a plan of liquidation in this case. While it recently received an influx of cash in connection with closing the sale of substantially all of its assets to Northstar Offshore Ventures LLC (see ECF Nos. 792, 800), the Debtor is still analyzing the extent to which the proceeds of the sale will remain available for distribution to creditors after the payment of DIP obligations and administrative expenses. In addition, the Debtor is still in the process of resolving disputes with certain of its trade creditors and determining the viability of any causes of action it may possess, including under chapter 5 of the Bankruptcy Code, both of which could result in additional income for the estate depending on 5

6 Case Document 814 Filed in TXSB on 08/09/17 Page 6 of 13 their results. As a result, it is currently in doubt as to whether the Eleanor Claim, even if ultimately allowed in full, would ever receive a distribution. 19. Because of this uncertainty surrounding the economics of the estate, the Debtor requests that the Court defer consideration of the Motion until a later time. Permitting the Committee to move forward with litigation against Eleanor will likely result in the accrual of significant professional fees. For example, the May 18, 2017 letter from the Committee s counsel to the Debtor s former counsel attached to the Motion as Exhibit C indicates that the Committee was already in the process of reviewing the million plus pages of documents produced by the Debtor at that time. ECF No at 1 n.1. If merely investigating the recharacterization claim has already required the review of millions of pages of documents, there can be little doubt that litigating it would result in substantial attorneys fees. Similarly, Eleanor s filing of a 23-page brief in opposition to the Motion (ECF No. 811) reflects the high likelihood that litigating any challenges to the Eleanor Claim will be costly. 20. At this stage of the case, it is impossible to determine whether the potential benefits of that litigation would outweigh those costs. Put differently, if recharacterizing the Eleanor Claim will not affect the funds available for distribution to unsecured creditors at all, then authorizing the Committee to move forward with litigation against Eleanor would not be in the best interests of the bankruptcy estate, nor would Committee standing be necessary and beneficial to the fair and efficient resolution of the bankruptcy proceedings. In re Enron Corp., 319 B.R. 128, 131 (Bankr. S.D. Tex. 2004) (quoting In re Commodore Int l Ltd., 262 F.3d 96, (2d Cir. 2001)); see also In re McConnell, 122 B.R. 41, 44 (Bankr. S.D. Tex. 1989) (denying standing where plaintiff was not concerned with recovering assets for the benefit of all creditors ). 6

7 Case Document 814 Filed in TXSB on 08/09/17 Page 7 of On the contrary, in that scenario, allowing the Committee to challenge the Eleanor Claim could actually harm other creditors by diminishing the funds available for their recovery through the accrual of attorneys fees and other administrative expenses. As the Fourth Circuit noted in connection with a request for derivative standing to prosecute a claim on behalf of the debtor s estate, the bankruptcy court must weigh the potential impact of the litigation and its costs on the entire estate: A bankruptcy court must therefore ensure that a would-be derivative suit would not simply advance the interests of a particular plaintiff at the expense of other parties to the bankruptcy proceeding. The court s approval acts as a critical check upon creditor actions that might, for example, prejudice the estate and rival creditors, or would recover only enough to pay the lawyers. In re Baltimore Emergency Servs. II, Corp., 432 F.3d 557, 562 (4th Cir. 2005) (quoting Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 568, 575 (3d Cir. 2003) (en banc)). 22. Accordingly, the Court should deny the Motion at this time. B. The Eleanor Claim Does Not Fall Within the Narrow Circumstances Under Which Committee Standing May Be Warranted 23. Bankruptcy courts may recharacterize debts as equity as part of their general authority to allow or disallow claims under 502 of the Bankruptcy Code. In re Lothian Oil Inc., 650 F.3d 539, 542 (5th Cir. 2011). Such causes of action are property of the estate, meaning that a creditors committee should receive standing to prosecute them only in rare or extraordinary circumstances. In re Prime Motor Inns, Inc., 135 B.R. 917, (Bankr. S.D. Fla. 1992); see also, e.g., Baltimore Emergency Servs., 432 F.3d at 560 (noting that courts in some circuits grant standing to creditors committees only under certain narrow conditions ); Matter of Perkins, 902 F.2d 1254, (7th Cir. 1990) ( A trustee may be divested of this exclusive authority only in narrow circumstances. ). 7

8 Case Document 814 Filed in TXSB on 08/09/17 Page 8 of The Committee has not shown that such extraordinary circumstances exist here. In the Fifth Circuit, there are at least three relevant considerations that bankruptcy courts examine in order to determine whether to grant standing to a creditors committee: the claim must be colorable, the debtor-in-possession must have refused unjustifiably to pursue it, and the committee must be granted to leave to sue by the bankruptcy court. La. World Exposition v. Fed. Ins. Co., 858 F.2d 233, 247 (5th Cir. 1988). The Debtor does not dispute whether the Committee s alleged recharacterization claim is colorable. For multiple reasons, however, the Committee cannot show that the Debtor has unjustifiably refused to pursue it at this time. 25. First, as noted above, the Committee s attempts to prosecute a claim against Eleanor are premature, meaning that the Debtor is not unjustified in declining to pursue it at this stage of the case. To determine whether the Debtor s refusal to pursue a cause of action is unjustifiable, the court must examine the evidence and determine whether an action asserting such claim(s) is likely to benefit the estate. In re STN Enters., 779 F.2d 901, 905 (2d Cir. 1985). As part of this cost-benefit analysis, the court must consider whether the creditors requesting standing would seek to impose [attorneys ] fees on other creditors or the chapter 11 estate. Id. Before granting standing, the court must assure itself that there is a sufficient likelihood of success to justify the anticipated delay and expense to the bankruptcy estate that the initiation and continuation of litigation will likely produce. Id. at 906 (emphasis added); see also In re Sabine Oil & Gas Corp., 547 B.R. 503, 517 (Bankr. S.D.N.Y.), aff d, 562 B.R. 211 (S.D.N.Y. 2016) (quoting In re Applied Theory Corp., 493 F.3d 82, 86 (2d Cir. 2007)) ( Requiring bankruptcy court approval conditioned upon the litigation s effect on the estate helps prevent committees and individual creditors from pursuing adversary proceedings that may provide them with private benefits but result in a net loss to the entire estate. ). And by definition, if a claim would yield 8

9 Case Document 814 Filed in TXSB on 08/09/17 Page 9 of 13 insignificant benefits to the estate, then a debtor s refusal to pursue that claim is not unjustified. In re Racing Servs., Inc., 540 F.3d 892, 900 (8th Cir. 2008); see also, e.g., Cybergenics Corp., 330 F.3d at 575 (noting that the debtor should be afford[ed]... the deference normally accorded pursuant to the business judgment rule in determining whether the benefits of derivative standing outweigh the costs); In re Revco D.S., Inc., 118 B.R. 468, 476 (Bankr. N.D. Ohio 1990) ( Decisions on whether or not to commence litigation rest[] with the business judgment of the Debtors. ). 26. Here, as described above, it is still uncertain whether litigating the Eleanor Claim will yield any benefits to the estate whatsoever. The Committee s demand letter to the Debtor came well before there was any stalking horse bidder on the assets let alone before the winning bid was received and even now that the sale has closed, the Debtor is working to complete its analysis of creditors potential recovery in this case under a plan of liquidation. Thus, the potential benefits of challenging the Eleanor Claim at this time are far from clear. Conversely, it is evident that moving forward with the cause of action set forth in the Draft Complaint would result in the accumulation of costly attorneys fees. Because the benefits of litigation against Eleanor (if any) are still so uncertain, whereas the costs of such litigation would be high, the Committee cannot establish that the Debtor s refusal to pursue this cause of action at this time is unjustifiable. 27. Second, the Debtor disputes the Committee s allegations that it is hopelessly conflicted out of raising any challenge to the Eleanor Claim. ECF No. 695 at 41. The Committee alleges that the Debtor is conflicted because it is controlled by Platinum Entities and because, based on information and belief, some or all of the Debtor s board of directors are also Platinum representatives. Id. While the Debtor s equity interests are directly and indirectly owned by Holdings, PPVA, and other Platinum affiliates, none of the members of the Debtor s 9

10 Case Document 814 Filed in TXSB on 08/09/17 Page 10 of 13 Board of Managers are employees, officers, or directors of any Platinum entity. Moreover, to the extent the Debtor determined in the exercise of its sound business judgment that challenges to the Eleanor Claim were in the best interests of the estate, it would act to prosecute those challenges. See Cybergenics Corp., 330 F.3d at 575. Accordingly, the Committee s description of the Debtor s alleged conflicts is incorrect and unfounded. 28. Additionally, the Committee s assertion that the Debtor could never bring causes of action against Platinum or its affiliates is puzzling given the specific developments that have occurred in another bankruptcy case currently pending before this Court (the Black Elk Bankruptcy ). See In re Black Elk Offshore Operations, LLC, Case No Like Northstar, the debtor in the Black Elk Bankruptcy was allegedly dominated and controlled by Platinum. Schmidt v. Platinum Partners Value Arbitrage Fund LP, et al., Adv. No , ECF No. 1 4 (S.D. Tex. Oct. 26, 2016). When a plan of liquidation was confirmed in the Black Elk Bankruptcy, however, Platinum s equity interests in the debtor were cancelled. In re Black Elk Offshore Operations, LLC, Case No , ECF No at 37, Art. V.G. Since that time, the litigation trustee in that case has brought two separate adversary proceedings against Platinum affiliates alleging a variety of misconduct, including fraudulent transfers, equitable subordination, civil RICO, and common law fraud. See id ; Schmidt v. B Asset Manager LP, et al., Case No , ECF No (S.D. Tex. Aug. 3, 2017). Moreover, while the second of these two proceedings was initiated only a few days ago, the litigation trustee has already recovered up to $29.6 million in connection with the earlier proceeding. See Melissa Daniels, Black Elk Trustee Gets $29M In Platinum Partners Claims, LAW360 (May 18, 2017). 29. Similarly, the plan of liquidation that will be forthcoming in the instant case will provide for the cancellation of the equity interests in the Debtor currently held by PPVA and other 10

11 Case Document 814 Filed in TXSB on 08/09/17 Page 11 of 13 Platinum affiliates, allowing for any litigation relating to those entities to be pursued by a noninsider in accordance with a confirmed plan. Accordingly, any current ownership of the Debtor by Platinum will not render the Debtor hopelessly conflicted from challenging the Eleanor Claim at the appropriate time For all of these reasons, the Committee has not shown that the claims in the Draft Complaint fall within the limited circumstances under which a creditors committee, rather than a debtor-in-possession, should receive standing to pursue the estate s causes of action. Baltimore Emergency Servs., 432 F.3d at 560. Accordingly, the Court should deny the Motion. CONCLUSION 31. For the foregoing reasons, the Debtor requests that the Court deny the Motion and award Northstar all other relief, in law or equity, to which it is justly entitled. 1 The Committee also alleges that the Debtor previously informed the Committee that it does not intend to pursue any cause of action relating to the Eleanor Claim. ECF No While the Debtor s prior counsel may have manifested its consent to the Committee s request set forth in Exhibit C, circumstances have changed substantially since May At that time, for instance, the Debtor had yet to identify a stalking horse bidder for the sale of its assets. Since then, however, the Debtor has completed the sale of substantially all of its assets, and its financial resources have improved accordingly. Thus, the Debtor fully reserves the right to continue to evaluate whether it is appropriate to consent to the Committee s pursuit of any cause of action, including claims against Eleanor or other parties named in the Draft Complaint, in light of recent and future developments in the case. 11

12 Case Document 814 Filed in TXSB on 08/09/17 Page 12 of 13 Dated: August 9, 2017 Respectfully submitted, WINSTON & STRAWN LLP /s/ Lydia T. Protopapas Lydia T. Protopapas Texas Bar No Southern Dist. of Texas Bar No Jason W. Billeck Texas Bar No Southern Dist. of Texas Bar No Louisiana, 25 th Floor Houston, TX Telephone: (713) Facsimile: (713) Counsel for Northstar Offshore Group, LLC 12

13 Case Document 814 Filed in TXSB on 08/09/17 Page 13 of 13 CERTIFICATE OF SERVICE I, Rick Smith, hereby certify that, on August 9, 2017, all counsel of record who are deemed to have consented to electronic service were served with a copy of the Debtor s Response in Opposition to the Motion of the Official Committee of Unsecured Creditors for Leave, Standing and Authority to Prosecute Claims on the Debtor s Behalf and for Related Relief (ECF No. 695) via the Court s CM/ECF system. /s/ Rick Smith Rick Smith Paralegal 13

Case Document 671 Filed in TXSB on 03/29/18 Page 1 of 10 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Case Document 671 Filed in TXSB on 03/29/18 Page 1 of 10 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION Case 17-36709 Document 671 Filed in TXSB on 03/29/18 Page 1 of 10 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION IN RE: Chapter 11 COBALT INTERNATIONAL ENERGY, CASE NO. 17-36709