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1 2 3 4 In Re:

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA --oOo-Case No. SA10-16743-TA Santa Ana, California Thursday, December 1, 2011 10:00 a.m.

) ) 5 WESTCLIFF MEDICAL ) LABORATORIES, INC., ) 6 ) Debtor. ) 7 ______________________________) 8 9 10 11 12 13 14 15 APPEARANCES: 16 For Sunamerica Life Insurance: 17 18 19 20 21 For Laboratory Corp. of America/Lab West: 22 23 24

ADV. 11-01405 SUNAMERICA LIFE INSURANCE COMPANY V. LABORATORY CORPORATION OF AMERICA ET AL STATUS CONFERENCE RE: COMPLAINT FOR COMMERCIAL UNLAWFUL DETAINER TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE THEODOR ALBERT UNITED STATES BANKRUPTCY JUDGE

DONALD CRAM, ESQ. SHELDON FLEMING, ESQ. Severson & Werson One Embarcadero Center Suite 2600 San Francisco, California 94111 (415) 398-3344 MICHAEL LUBIC, ESQ. K&L Gates, LLP 10100 Santa Monica Boulevard 7th Floor Los Angeles, California 90067 (310) 552-5000

Proceedings recorded by electronic sound recording; 25 transcript produced by transcription service.

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ii 1 Court Recorder: 2 3 4 Transcriber: 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Iraida Gomez United States Bankruptcy Court 411 West Fourth Street Suite 2030 Santa Ana, California 92701 Briggs Reporting Company, Inc. 6336 Greenwich Drive, Suite B San Diego, California 92122 (310) 410-4151

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1 1 2 3 4 SANTA ANA, CALIFORNIA THURSDAY, DECEMBER 1, 2011 10:00 AM --oOo-(Call to order of the Court.) THE COURT: Fourteen, Westcliff Medical

5 Laboratories, Sunamerica versus Lab Corp of America. 6 MR. CRAM: Good morning, your Honor. Don Cram of

7 Severson and Werson on behalf of Plaintiff, Sunamerica. 8 MR. FLEMING: Sheldon Fleming on behalf of

9 Sunamerica. 10 MR. LUBIC: Good morning, your Honor. Michael

11 Lubic of K&L Gates for Laboratory Corporation of America 12 Holdings and its wholly owned subsidiary Lab West the 13 Defendants. Also with me in the courtroom is Michael Acker

14 who is a senior vice president of Lab Corp and Lab Corp's 15 senior officer in California. 16 17 18 19 20 THE COURT: MR. CRAM: MR. LUBIC: THE COURT: MR. LUBIC: You saw the tentative? Yes, your Honor. Yes, your Honor. Who would care to argue the tentative? Lab West would care to discuss this,

21 your Honor.

Lab West is entitled to the protection of the Lab West needs

22 injunctions contained in the sale order.

23 those protections because Sunamerica is trying to collect 24 from Lab West money that is not owed by Lab West, including 25 pre-petition obligations of Westcliff and post petition pre-

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2 1 closing obligations of Westcliff. 2 The big issue, however, is that Sunamerica is

3 trying to enforce against Lab West a contract, an executory 4 contract that was not assumed by Westcliff and not assigned 5 to Lab West. Let me explain what I mean by that. Sunamerica The

6 obtained titled to the premises through foreclosure.

7 lease that Lab West assumed for the premises was wiped out by 8 the foreclosure. Sunamerica -- the only basis for the

9 unlawful detainer action under the lease is that the 10 subordination non-disturbance and attornment agreement is 11 somehow binds Lab West. 12 13 contract. 14 assigned. Lab West believes that a SNDA is an executory It was not assumed by Westcliff. It was not

It is not part of the sale documentation at all.

15 Sunamerica has also argued in the alternative that the SNDA 16 because it's recorded is more like a lien or an encumbrance 17 on the property, but the sale here was free and clear of all 18 liens, claims and encumbrances. So, while we agree that

19 other issues relating to this should be resolved in state 20 court, it's not fair for Lab West to have bought something 21 relying on a sale order that enjoins people from trying to 22 enforce contracts, and then have to fight in state court 23 where Sunamerica is raising these arguments. 24 So, if Sunamerica -- I think the -- procedurally

25 it's not clear to me how to get the benefit of the

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3 1 injunction. It seems inefficient to force Lab West to

2 litigate in state court and then come back after the 3 litigation and seek damages for violation of the injunction. 4 I don't think that's what Lab West bargained for when it 5 bought these assets. As a hypothetical, what if is a

6 landlord on a lease that wasn't assumed brought an action in 7 state court to collect or what if a vendor of Westcliff 8 brought an action against Lab West as a successor? Those

9 issues are dealt with in the sale order and are properly 10 before this Court. 11 The issues with respect to the SNDA either it's an

12 executory contract and that is an issue under 365 clearly 13 arising in jurisdiction or it's a lien, claim and encumbrance 14 and we dealt with it under 363, another prong arising in 15 jurisdiction. So, before this goes back to the state court

16 we need clarity on the issue of pre-closing amounts due and 17 enforcing validity of the SNDA against Lab West. 18 THE COURT: I thought I read in the papers filed

19 by Sunamerica that they were not claiming anything having to 20 do with before 2011, and you're contradicting that. 21 saying no, this goes back to an earlier time. 22 MR. LUBIC: They did send a notice of default Last May they sent a notice of default You're

23 requesting payment.

24 requesting payment for both pre-petition and post petition 25 Westcliff amounts pulling. Their complaint is not entirely

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4 1 clear to me but in the deposition of Sunamerica's person most 2 knowledgeable, she said that she thinks these amounts are 3 still owing. So, the other problem here is we don't want to I don't want Sunamerica to

4 have death by a thousand cuts.

5 lull us into the falsehoods of security where we proceed 6 thinking they're not seeking that unlawful detainer action 7 only to have them file a state court collection action after 8 the unlawful detainer is decided. 9 been made. 10 So, it seems -THE COURT: Don't you have an estoppel now because Those threats have already

11 they've said so in the pleadings before this Court? 12 MR. LUBIC: Well, I don't think they said they I think they said

13 don't intend to ever collect the money.

14 they're not seeking them in the unlawful detainer action, and 15 they're not using a nonpayment of that money as a basis for 16 their assertion of a default. If they would represent that

17 they're never going to seek pre-petition or post petition 18 rent due by Westcliff, if they were to make representation to 19 the Court today that would be great. It would also be great

20 if they would represent that they don't intend to enforce the 21 SNDA against Lab West. 22 23 THE COURT: MR. CRAM: That would resolve all the issues. I'll hear now from Sunamerica. Thank you, your Honor. We'll state on

24 the record that Sunamerica will not seek any pre-petition 25 rent that was owing by the predecessor tenant, the Debtor or

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5 1 any rent that might have been due and owing prior to the 2 consummation of this sale. So, to make that clear and I

3 thought we were clear in our opposition or in our statement 4 that we would so stipulate. So, we're stating it again on

5 the record that Sunamerica will not seek to enforce any claim 6 for rent for those periods against these Defendants. 7 THE COURT: All right. The Court accepts the

8 representation.

That leaves the only thing left in Mr.

9 Lubic's argument as I hear it is some sort of an argument as 10 to whether or not the non-disturbance agreement is a contract 11 which had to have been assumed and assigned, or else as I 12 guess deem rejected at this point. 13 MR. CRAM: Correct, and Sunamerica disagrees that As Mr. It's like

14 this is somehow an executory contract of some sort. 15 Lubic alluded to, the SNDA is a recorded document. 16 an easement or CCR. It runs with the land.

Mr. Lubic is

17 also correct under normal circumstances a foreclosure would 18 normally eliminate any type of junior liens, including leases 19 but the subordination or the SNDA changes that result, and it 20 in essence leaves the lease in place after foreclosure. 21 So, it burdens the land and burdens my client. The lease essentially rides It

22 doesn't effect the lease.

23 through the foreclosure and that's the purpose of the SNDA. 24 It has a commercial purpose because an owner wants to make 25 sure or a tenant who leases from the owner wants to make sure

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6 1 that any foreclosure by a lender isn't going to effect his 2 ability to occupy space in the subject property. 3 THE COURT: And, you represent the lender who has

4 foreclosed and taken title, is that right? 5 6 MR. CRAM: THE COURT: That's correct. So, my concern then, Mr. Lubic, is why I mean under the

7 is this really an executory contract?

8 country man definition there has to be covenants on both 9 sides -- it sounds to me like it's rather a one way street at 10 this point. 11 MR. LUBIC: The agreement is a subordination non-

12 disturbance and attornment agreement, and as a result there 13 are promises going both ways. Westcliff promised that if

14 Sunamerica foreclosed, Westcliff would honor the lease. 15 Sunamerica promised that if Sunamerica foreclosed, Sunamerica 16 would honor the lease. There are also additional provisions

17 effecting the rights of the parties in the event of a 18 foreclosure. For example, the SNDA says that if the landlord

19 does bad things and Westcliff has a claim against the 20 landlord those claims evaporate when Sunamerica forecloses. 21 The Court -- I don't remember if this was

22 discussed extensively in Court but this happens to be a 23 property where a lot of bad things that happened. There was

24 a roof collapse with a 100 tons of water flooding Westcliff's 25 lab facilities. The roof had not been repaired when Lab West

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7 1 took possession of the property. There was subsequent water

2 damage afterwards, both before and after Sunamerica 3 foreclosed. So, it's rather complicated and it would make

4 sense I think to at least brief the issue and perhaps present 5 some expert testimony about whether this is an executory 6 contract or not. I will say that we researched the issue and

7 found no law anywhere when we researched this a couple months 8 ago. Maybe if this is an issue of first impression it would

9 maybe -10 THE COURT: Why can't I make it the superior

11 court's problem? 12 MR. LUBIC: Because Lab West is entitled to the

13 protection of the injunction, and the superior court should 14 not be deciding whether something is an executory contract or 15 not or whether it's a lien that can be sold free and clear of 16 under 363(f). That's squarely within the sale order and State court judge

17 those are both squarely bankruptcy issues.

18 does not grapple with executory contracts and assumption of 19 assignment, and doesn't grapple with sales free and clear. 20 THE COURT: Okay. Let me hear again from

21 Sunamerica.

Is that -- that issue of whether there's a free

22 and clear effect of the Court's prior order is something that 23 means only this Court can and should decide the matter. 24 MR. CRAM: We don't think so, your Honor. We

25 don't think the Court has exclusive jurisdiction over those

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8 1 types of issues and I mean there's been case law and we've 2 cited some of that in our opposition where state courts have 3 been called to, for instance, evaluate and make 4 determinations on automatic stay orders and things of that 5 nature. So, to come in here and say that this Court has

6 exclusive jurisdiction and over those types of issues I think 7 is wrong. 8 The state law issues in this case certainly

9 predominate and I think under the factors of abstention, the 10 balancing of those factors tips heavily toward the Court, 11 this Court abstaining and remanding the case to state court. 12 MR. LUBIC: Your Honor, the seal order that we all

13 relied on clearly retains jurisdiction to resolve disputes 14 about encumbrances and about purchased assets. It would be

15 much more economical and efficient, in addition to the 16 correct reading of the order, for this Court to resolve the 17 issue about the SNDA because if this Court doesn't resolve 18 the issue here is something that might happen. 19 to the state court. We could go

While we're dealing with the issue in

20 the state court, Lab Corp could bring a declaratory relief 21 action in this Court. 22 The state court could rule one way. Lab Corp --

23 say the state court rules that an SNDA is not an executory 24 contract or that -- no, say the state court rules what 25 actually was discussed at the deposition. Say the state

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9 1 court rules that the SNDA was assumed and assigned to Lab 2 West which clearly it was not, and based on that an order for 3 possession will issue. Lab West will have to move out. Lots

4 of expenses will be incurred in both the trial and the move, 5 and we'll be back in this Court seeking damages because the 6 state court made a decision that was clearly wrong and we'll 7 be saying that Sunamerica violated the clear injunction in 8 the sale order. 9 result. 10 THE COURT: And the rubric corollary to this is That just doesn't seem like a very good

11 for the Court to reserve jurisdiction on this pending your 12 motion for determination as to whether this is or is not an 13 executory contract. 14 MR. LUBIC: Is that what you're suggesting? I'm suggesting that we establish an

15 efficient procedure to resolve the issue in short order. 16 THE COURT: Well, one efficient way to do it is to

17 simply say I don't think the superior court is stupid. 18 Therefore, since most of these issues are state court issues 19 they ought to just decide it all. I don't know about the

20 possibility of these different results as quite as realistic 21 as you might propose. I am a little concerned though,

22 however, that it's my order that people are saying they 23 relied upon. It's always difficult when you're asking

24 another court to interpret what one court has ordered. 25 Well, here's what I'm going to do. I can

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10 1 guarantee you I am not going to keep all of this case. 2 you can accept that as a given. 3 should keep any of this case. So,

I am not convinced that I Under the theory that the

4 connection to the bankruptcy issues is tangential and 5 certainly the minority of questions involved. Possibly a way

6 to get the best of both worlds is to continue this for a 7 short period to allow these motions to be brought and 8 briefing on the subject to define very clearly from you what 9 you're contending is a purely bankruptcy issue that only I 10 should resolve. Even if it is my order, I can still see room

11 for the argument that another court can as easily interpret 12 what it is. 13 I think that's the best because frankly this The way it was teed up in the

14 wasn't very well briefed.

15 briefs as I first read it was about monetary damages which 16 they've know claimed on the record they're not seeking but 17 now you've put another twist on it. Now, you say well, the

18 connection to bankruptcy court is your own order and the 19 injunction under that order and the characterization of this 20 non-disturbance agreement. That wasn't framed very well, at

21 least I didn't read it very well in the papers that were 22 filed. So, I'd like to see that. You can tee it up as a

23 Rule 56 motion if you want and I'll take a shot at it. 24 Now, the real question is can I remand part of

25 this so that you can proceed in the rest of the unlawful

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11 1 detainer efforts? I imagine Sunamerica's view is time is

2 money, am I correct? 3 MR. CRAM: We're not receiving rent, your Honor if

4 that's what the Court is asking, yes. 5 MR. LUBIC: That is not true. Lab West has paid

6 $70,000 a month in rent from the closing to the present, and 7 Westcliff had paid $70,000 in rent for at least a year prior 8 to the closing. So, they may not be getting the amount of

9 rent that maybe they think they should be owed, but they're 10 getting a lot of rent and, in fact, they're getting better 11 than market rent on the property. 12 13 day. MR. FLEMING: They are short paying $1,800 every

They've been doing that since -- the purpose of the

14 unlawful detainer we started in January of this year's rent. 15 So, they've been short paying $1,800 a day. 16 to drag it out. They are trying

The lease is expiring at the end of this They are trying to drag this out to

17 coming April anyways.

18 stop the state court eviction until the lease expires and 19 then say come chase us. 20 MR. LUBIC: Your Honor, would it be helpful if I

21 talked to my client and see if my client is willing to pay 22 the contract rent for a period that allows adequate briefing 23 so that Sunamerica gets everything that it thinks it's -24 could possibly entitled to in the interim? 25 THE COURT: Will that help your view?

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12 1 2 MR. FLEMING: THE COURT: Yes, it would, your Honor. All right. Why don't you -- I'm going Why don't you go outside

3 to call the rest of the calendar. 4 and talk about that. 5 6 7 8 Honor. 9 THE COURT:

I'll recall number 14.

(Paused while the Court heard other matters.) THE COURT: MR. CRAM: Where do we stand on 14? I think we have a resolution, your

It's amazing what people can do when Tell me what the resolution is.

10 they talk to each other. 11 MR. CRAM:

Your Honor, we have agreed to

12 essentially postpone this hearing to a later date with the 13 understanding that the Defendant will tee up a motion on the 14 executory contract issue with respect to the SNDA on or 15 before January 15th, and we'll schedule a hearing some time 16 in February on that particular motion. In the interim for

17 December, January and whatever interim period for February, 18 the Defendant has agreed to make the contractual lease 19 payments to my client with the understanding that the payment 20 of the contractual rent and the acceptance of the contractual 21 rent is without any type of waiver of each party's rights 22 under CCP 1161. 23 24 THE COURT: MR. LUBIC: Do you concur, Mr. Lubic? Yes, your Honor, with the following January 15 is a Sunday. So, if we

25 slight modifications.

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13 1 could have until January 18 to file the motion that would 2 work much better because January 16 is my mom's birthday, and 3 I have promised to take her out. 4 5 MR. CRAM: MR. LUBIC: Agreed, your Honor. If we could pick a hearing date in mid

6 February now or we could just calendar it as part of the 7 process of filing the motion. 8 THE COURT: No, what I think I need to do is

9 continue the status conference and all these motions that 10 you'll file will go on their own time table. 11 inclined to do. Here's what I'm

Continue this as a status conference and the If I

12 OSC will continue along with it to March 1 at 10.

13 understand your stipulation, you're going to file something 14 by January the 16th? 15 16 MR. LUBIC: THE COURT: Eighteenth. Eighteenth excuse me. It will be

17 heard some time in February.

So, that presumes then by the

18 time March 1st rolls around we'll know an answer to these 19 questions. At that point in time, I'll decide whether I keep Is

20 any part of this case or I kick it all to superior court. 21 that a reasonable approach? 22 23 just fine. MR. LUBIC: Yes, your Honor. That should work

The one other thing I wanted to clarify on the

24 record is that the rent for the purposes of this continuance 25 period is $124,607.20 a month. 1-2-4-6-7-0.2-0. That will

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14 1 run from today, December 1 through the date of hearing. 2 will pro rate for the partial month for that final month 3 based on the number of days in that month. 4 5 6 THE COURT: MR. CRAM: THE COURT: Sounds reasonable. Agreed, your Honor. All right. Do you want to reduce this Is that agreed? We

7 to a writing or do you want to rely on the Court's notes? 8 MR. LUBIC: I think we can rely on the Court's

9 notes, your Honor.

I don't know that we need a specific We can also order a

10 order continuing the status conference. 11 transcript of the hearing if need be. 12 THE COURT: All right.

It sounds to me like it's The status

13 pretty detail -- here's what I will for today.

14 conference and the OSC to trail with it are continued to 15 March the 1st at 10:00 o'clock in this courtroom. Notice of

16 that apparently is waived, and the parties have stipulated in 17 the mean time to pay the contractual rate of rent which is 18 defined as a $124,670.20 per month including December which 19 is due now, is it? 20 MR. LUBIC: Right. We believe that the $70,000

21 has already been paid. 22 difference. 23 THE COURT:

So, we will be making up the

All right.

So, for the months of Now, which one is the

24 December, January and February. 25 partial month?

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15 1 2 MR. LUBIC: THE COURT: February will be the partial month. Because you're anticipating a hearing

3 in February? 4 5 MR. LUBIC: THE COURT: Correct. On a motion that you will file not

6 later than January 18? 7 8 MR. LUBIC: THE COURT: Correct. All right. Seems reasonable to me.

9 Gentlemen, anything further? 10 order from me. 11 hearing date.

Well, then you won't see an

You can just waive notice of the continued Good luck. I hope the business interests

12 become paramount so I don't have to decide your legal issues. 13 Good luck to you. 14 15 16 I certify that the foregoing is a correct (Proceedings concluded.)

17 transcript from the electronic sound recording of the 18 proceedings in the above-entitled matter. 19 20 /s/ Holly Martens_______ Transcriber 21 22 23 24 25 1-11-12_______________ Date

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