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In re ) Chapter 11
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OBJECTION OF THE DEBTORS TO MOTION OF COOK INLET PIPE LINE COMPANY TO COMPEL PAYMENT OF ADMINISTRATIVE EXPENSES
The debtors and debtors in possession (together, the "Debtors") in the above-captioned
cases hereby object to the Motion to Compel Payment of Administrative Expenses (the
"Motion") filed by Cook Inlet Pipe Line Company ("CIPL"). In support of
Preliminary Statement
1. CIPL is owned by Union Oil Company of California ("Union") and
PEAH share a 50% ownership interest in CIPL, the company is controlled and operated by
Union (through an affiiate). Union previously filed a motion in this case to compel the Debtors
to pay certain administrative expenses, which the Cour denied without prejudice. The instant
i The Debtors in these cases, along with the last four digits of each Debtor's federal tax identification number, are: Pacific Energy Resources Ltd. (3442); Petrocal Acquisition Corp. (6249); Pacific Energy Alaska Holdings LLC (tax I.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); San Pedro Bay Pipeline Company (1234); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The address for all of
the Debtors is 111 W. Ocean Boulevard, Suite 1240, Long Beach, CA.
Motion, at least to the extent that it is contested by the Debtors, is a redux of that prior request, and except as set forth below, should be denied for the same reasons.
2. CIPL owns an oil pipeline (the "Pipeline") in Alaska. The Debtors utilize
the Pipeline for purposes of
Assets") operated by Pacific Energy Resources Ltd. ("PERL"). Union also utilzes the Pipeline
to transport oil production from an area around Cook Inlet, Alaska commonly referred to as
"Trading Bay." Union is the designated operator and majority working interest holder forthe
various properties at Trading Bay (the "Union Operated Assets").
3. By the Motion, CIPL seeks allowance and payment of an administrative
expense in the amount of$643,693.35 (the "CIPL Claim") that covers Pipeline charges
associated with both the PERL Operated Assets and the Union Operated Assets. The Debtors do
not dispute the portion of the CIPL Claim relating to the PERL Operated Assets, which totals
approximately $124,480.15. However, for the same reasons that the Debtors previously objected
to (and the Court disallowed without prejudice) Union's administrative claim with respect to
Trading Bay, the Debtors object to the portion of
because there has been no transaction with, and no benefit to, the estate for purposes of this
claim. It is stil unclear whether the Debtors wil be able to sell their working interests in
Trading Bay or whether they wil be forced to abandon such interests. Both a sale motion with
respect to the Debtors' interests in Alaska and an abandonment motion (filed in the alternative)
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are set for hearing on August 4. Ifno sale can be consummated and the Debtors' interests in
Trading Bay are abandoned, CIPL's administrative claim should be denied for lack of
benefit to
the estate.
5. Next, even if
administrative claim, which the Debtors hotly contest, there is no basis to direct immediate
payment of any administrative claim at this time. The Debtors have until the effective date of a
plan to satisfy allowed administrative claims and nothing here compels payment to CIPL on an
expedited basis. There are also superpriority claims and liens (senior to any administrative
benefit to the estate associated with the Union-Related Amount and, even if an administrative
claim is allowed, there is no basis for immediate payment.
Back2:round
7. On March 9, 2009 (the "Petition Date"), the Debtors commenced these
cases by each fiing a voluntary petition in this Court. The Debtors have continued in the
possession of their property and have continued to operate and manage their business as debtors
in possession pursuant to sections 1107(a) and 1108 of
acquisition, development and exploitation of oil and gas properties in the western United States.
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The Debtors' intent is to provide the operational focus necessary to their properties to exploit
their full potential, and are focused on applying their extensive engineering, operating, geologic,
and geophysical expertise to provide significant proved reserve and production growth.
B. The Debtors' Relationship With Union and CIPL
interests in Trading Bay. Pacific Energy Alaska Operating, LLC ("PEAO") has a 46.8%
working interest and Union has a 53.2% working interest in each ofthe leases that make up the
Union Operated Assets. PEAH and Union also share a 50% interest in CIPL. Union is the
operator, and party in control, of
both the Union Operated Assets and CIPL. The principal asset
10. Aside from interrptions caused by recent volcanic activity in the area,
Union, as majority working interest owner in and operator ofthe Union Operated Assets, has been producing oil from the Union Operated Assets and utilzing the Pipeline to transport such
oil to market. The Debtors are not involved in this process and have not received any proceeds
from oil generated from the Union Operated Assets on a postpetition basis, except for amounts
funded into a segregated account that is currently the subject of a separate adversary proceeding.
11. The Debtors do not dispute the amounts claimed by CIPL with respect to
the assets that the Debtors marketed with the assistance oftheir investment bankers at Lazard
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Frres & Co., LLC. Bids were solicited for the Union Operated Assets, but no qualifying bids
were received and no auction has yet been conducted. The Debtors continue to negotiate with
potential purchasers regarding the sale of
13. Union previously fied a motion in this case seeking the allowance of an
administrative claim and immediate payment of
with the Union Operated Assets (Docket No. 315). At a hearing on June 3, 2009, the Court
denied the motion without prejudice, effectively giving the Debtors additional time to decide how to proceed with the Union Operated Assets.
14. CIPL's current Motion is an extension of
administrative priority associated with the Union Operated Assets that was previously denied
without prejudice by the Court. As before, the Debtors need additional time to conclude the sale
process and, if abandonment is the only viable outcome, CIPL should not be entitled to an
administrative claim with respect to oil generated from the Union Operated Assets that Union
chose to transport via the Pipeline.
After notice and a hearing, there shall be allowed administrative expenses. . . including - (1 )(A) the actual, necessary costs and expenses of preserving the estate . . .
11 U.S.C. 503 (b)(1)(A).
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expenses included under section 503(b)(I)(A) is to provide an incentive for creditors and others
to continue or commence doing business with an insolvent entity." 4 COLLIER ON BANKRUPTCY
ir 503.05(2), at 503-21 (15th ed. 2002); see also In re Commonwealth of Pennsylvania Dep't of
Envtl. Resources, 178 F.3d 685,691 (3d. Cir. 1999) ("(T)hose who continue to transact business
with the debtor during the Chapter 11 case, and who would suffer financially as a result, are
entitled to priority over other creditors who have not affirmatively assumed such risk").
17. "For a debt to qualify as an administrative expense, it must satisfy a twoprong test: (1) it must have arisen from a transaction with the estate and (2) it must have benefited the estates in some demonstrable way." In re Insilco Tech., Inc., 309 B.R. 111, 114
(Bankr. D. DeL. 2004) (citing Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl.
Energy, Inc.), 181 F.3d 527, 532-533 (3d Cir. 1999); In re Unidigital, Inc., 262 B.R. 283, 288
(Bankr. D. DeL. 2001)).
18. The claimant carries the "heavy burden of demonstrating that the costs and
fees for which it seeks payment provided an actual benefit to the estate and that such costs and
expenses were necessary to preserve the value of
(emphasis added); see also In re Goody's Family Clothing, Inc., 401 B.R. 656,663-664 (Ban.
D. DeL. 2009).
19.
Here, for the reasons outlined below, CIPL has failed to carry its burden of
establishing either an administrative claim in these cases or cause to compel the Debtors to pay
such claim on an expedited basis.
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A. CIPL Has Not Met the Requisites for Establishing an Administrative Claim for the
Union-Related Amount Under 11 U.S.C. 503(b)
20. CIPL fails the test for allowance of an administrative expense under
section 503(b) of
the Bankrptcy Code for the amounts associated with the transport of oil
arise from a post-petition transaction with the debtor. "'It is only when the debtor-inpossession's actions themselves. . . give rise to a legal liability that the claimant is entitled to the
priority of a cost and expense of administration. ", In re Commercial Fin. Servs., Inc., 246 F.3d
1291,1294 (10th Cir. 2001) (quoting Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart,
Inc.), 536 F.2d 950, 954 (15t Cir. 1976)). "A debt is not entitled to priority simply because the
right to payment arises after the debtor in possession has begun managing the estate." In re MidAmer. Waste Sys., Inc., 228 B.R. 816, 821 (Bank. D. DeL. 1999) (quotations omitted).
22. Here, the Debtors' estates have taken no action whatsoever on a
postpetition basis to incur the claims for the Union-Related Amount that CIPL now asserts as an
administrative expense. Union, as the operator of
to utilize the Pipeline with respect to this production, and Union should pay this expense. The
Debtors had no involvement in shipping oil generated from the Union Operated Assets through
the Pipeline.
Trading Bay, CIPL also cannot establish that there has been any benefit conferred upon the
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Debtors' estates with respect to transport charges associated with oil production from the Union
Operated Assets.
24. "An incidental benefit is not enough to justify administrative priority." 2
NORTON BANKRUPTCY LAW AND PRACTICE 42: 16, at 42-94 (2d. ed. 1997); see also In re
Continental Airlines, Inc., 146 B.R. 520, 527 (Bankr. D. DeL. 1992) ("Movant must establish a
benefit to the estate to receive priority payment ahead of
The benefit to the debtor's estate must be direct and substantiaL. See In re White Motor Corp.,
831 F.2d 106, 110 (6th Cir. 1987).
25. Here, in the event of abandonment of
Bay, the Debtors wil have gained nothing from access to CIPL's Pipeline for purposes of
Union Operated Assets. Under these circumstances, CIPL's administrative claim for the UnionRelated Amount should be disallowed.
B. CIPL is Not Entitled to Immediate Payment of An Allowed Administrative Claim for the Union-Related Amount
26. CIPL seeks immediate payment from the Debtors of any allowed
administrative claim.
effectiveness of a plan, it is within the Cour's discretion to determine the timing of payment. In
re HQ Global Holdings, Inc., 282 B.R. 169, 173 (Ban. D. DeL. 2002); In re Goody's Family
Clothing, Inc., 392 B.R. 604, 614 (Ban. D. DeL. 2008), aff'd, 401 B.R. 656 (D. DeL. 2009); In
re Global Home Prods., LLC, 2006 WL 3791955 at *3-4 (Ban. D. DeL. Dec. 21, 2006).
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The determination of the timing of payment of administrative expenses is a matter within the discretion of the bankptcy court. In making this determination, one of the chief factors courts
consider is bankptcy's goal of an orderly and equal distribution
among creditors and the need to prevent a race to the debtor's assets. Thus, distributions prior to confirmation of a plan are usually disallowed when the estate may not be able to pay all administrative expenses in fulL. Other factors include the paricular needs of each administrative claimant and the length and expense of the case's administration.
282 B.R. at 173 (citations omitted).
29. "To qualify for exceptional immediate payment, a creditor must show that
there is a necessity to pay and not merely that the Debtor has the ability to pay." Global Home,
2006 WL 3791955 at *3 (quoting In re Continental Airlines, Inc., 146 B.R. 520, 531 (Bankr. D.
DeL. 1992)).
30. In the instant case, there is no compellng basis to require immediate
payment of any administrative claim asserted by CIPL. Moreover, the Debtors' lenders are
likely to assert superpriority claims and liens on the Debtors' assets senior to any CIPL
administrative claim.
Conclusion
31. For the reasons set forth above, the Debtors urge the Court to deny the
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arasch (CA Bar No. 109084) Jame . O'Neil (DE Bar No. 4042) Maxim B. Litvak (CA Bar No. 215852) 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705
Telephone: (302) 652-4100
joneil~pszjlaw.com mlitvak~pszjlaw.com
Counsel for the Debtors and Debtors in Possession
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68773-002\DOCS _ LA:205500.4
STATE OF DELAWARE )
) ss:
Debtors in the above-captioned action, and that on the 28th day of July, 2009 she caused a copy
of
the following document(s) to be served upon the paries on the attached service lists in the
maner indicated:
Objection of the Debtors to Motion of Cook Inlet Pipe Line Company to Compel Payment of Administrative Expenses
MARY E. CORCORA
NOTARY PUBLIC STATE OF DELAWARE
My commission expires Nov. 4. 20
the Debtors' federal tax identification number, are: Pacific Energy Resources Ltd. (3442); Petrocal Acquisition Corp. (6249); Pacific Energy Alaska Holdings, LLC (tax J.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); San Pedro Bay Pipeline Company (1234); Cameros the Debtors is III W. Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The mailing address for all of
Ocean Boulevard, Suite 1240, Long Beach, CA 90802.
1 The Debtors in these cases, along with the last four digits of each of
Wilmington, DE 19801
DOCS_DE: 1 5 1296. 1
12 - Hand Delivery
41 - First Class Mail 02 - FOREIGN First Class Mail
Hand Delivery (United States Attorney) Ellen W. Slights, Esq. United States Attorney's Office District of Delaware
1007 N. Orange Street, Suite 700
Wilmington, DE 19801
Hand Delivery (Counsel for Silver Point Finance) Ian S. Fredericks, Esquire Skadden Ars, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899
Hand Delivery (Counsel for J. Aron & Company) Don A. Beskrone, Esquire Amanda M. Winfree, Esquire Ashby & Geddes, P.A.
500 Delaware Avenue, 8th Floor
Counsel for Debtors) Laura Davis Jones, Esquire James E. O'Neil, Esquire Kathleen P. Makowski, Esquire Pachulski Stang Ziehl & Jones LLP 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705
Wilmington, DE 19899
Hand Delivery (Counsel for Union Oil Company of California, a California Corporation) Norman M. Monhait, Esquire Rosenthal, Monhait & Goddess, P A
Citizens Ban Center, Suite 1401
Wilmington, DE 19801
Hand Delivery (Copy Service)
Parcels, Inc.
Hand Delivery (Counsel for Oxy Long Beach Inc.) David L. Finger, Esquire
Finder, Slanina Liebesman, LLC
Creditors) David B. Stratton, Esquire James C. Carignan, Esquire Pepper Hamilton LLP
Hercules Plaza, Suite 1500
Hand Delivery (Counsel for Marathon Oil Company) Kevin J. Mangan, Esquire Womble Carlyle Sandridge & Rice, PLLC 222 Delaware Avenue, Suite 1501 Wilmington, DE 19801 Hand Delivery (Counsel for Cook Inlet Region, Inc.) Eric Lopez Schnabel, Esquire Dorsey & Whitney (Delaware) LLP
1105 North Market Street, Suite 16th Floor
Wilmington, DE 19801
Hand Delivery (Counsel for Area Energy LLC) Norman L. Pernick, Esquire Karen M. McKinley, Esquire Cole, Schotz, Meisel, Forman & Leonard, P.A. 500 Delaware Avenue, Suite 1410 Wilmington, DE 19801
District Director Internal Revenue Service 31 Hopkins Plaza, Room 1150 Baltimore, MD 21201
Washington, DC 20554
Linda Lautigar
Banptcy Coordinator
MMS / Denver Federal Center POBox 25165 Mail Stop 370B2 Denver, CO 80225
Bakersfield, CA 93311-1164
John J. Haris, Esquire Rachel M. Feiertag, Esquire Meyers, Nave, Riback, Silver & Wilson 333 South Grand Avenue, Suite 1670 Los Angeles, CA 90071
Baltimore, MD 21209
Greenwich, CT 06830
E. Kathleen Shahan, Esquire U.S. Department of Justice 1100 L Street, NW Washington, D.C. 20005
Philadelphia, P A 19103
Anchorage, AK 99501
Region
755 Parfet Street, Suite 151
Lakewood, CO 80215