Case 16-35571 Document 172 Filed in TXSB on 12/14/16 Page 1 of 5
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re
SHORELINE ENERGY LLC, et al.,1
Debtors.
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Chapter 11
Case No. 16-35571 (DRJ)
(Jointly Administered)
REPLY IN SUPPORT OF DEBTORS’ MOTION FOR ENTRY OF
(I) AN ORDER ESTABLISHING BIDDING AND SALE PROCEDURES FOR THE
SALE OF THE DEBTORS’ ASSETS, (II) AN ORDER APPROVING THE SALE OF
SUCH ASSETS AND (III) GRANTING RELATED RELIEF;
AND JOINDER TO DEBTORS’ REPLY IN SUPPORT DEBTORS’
EMERGENCY MOTION FOR ENTRY OF INTERIM AND FINAL DIP ORDERS
Morgan Stanley Energy Capital Inc. (“Morgan Stanley”), as administrative agent
under the Third Amended and Restated Credit Agreement, dated as of October 16, 2015 (the
“First Lien Credit Agreement”), among Shoreline Energy LLC, Morgan Stanley, as
administrative agent, and the lenders party thereto (the “First Lien Lenders”), submits this reply
in response to the objection (the “Objection”)2 of CRG Financial LLC (“CRG”), as purchaser of
an approximately $1.2 million claim of Eagle Energy Services, LLC (“Eagle Energy Services”),
to the Debtors’ motion for entry of (i) an order establishing bidding and sale procedures for the
sale of the Debtors’ assets, (ii) an order approving the sale of such assets and (iii) granting
1
The debtors are the following eight entities (the last four digits of their respective taxpayer identification
numbers follow in parentheses): Shoreline Energy LLC (2777); Shoreline Southeast LLC (0562); Shoreline
Offshore LLC (2882); Harvest Development LLC (2703); Shoreline GP LLC (5184); Shoreline Central
Corporation (1579); Shoreline Energy Partners, LP (5035); Shoreline EH LLC (6570) (collectively, the
“Debtors”). The address of each of the Debtors is 16801 Greenspoint Park Drive #380, Houston, Texas
77060.
2
On December 13, 2016, Archrock Partners Operating, L.L.C. filed a joinder to the Objection, restating
CRG’s objections. As such, this reply applies with equal force to the joinder of Archrock or any other
party.
Case 16-35571 Document 172 Filed in TXSB on 12/14/16 Page 2 of 5
related relief (the “Motion”).3 In support hereof, Morgan Stanley respectfully represents as
follows:
Relevant Background
1.
The Debtors face a dire situation and, without initiating a sale process,
face the likelihood of liquidation. To maximize the value of the estates, the Debtors are
proposing to continue and conduct a robust sale process “to provide an opportunity for parties to
purchase all of the Assets or a portion of the Assets thereof.” (Motion, ¶ 5). The proposed
Bidding Procedures and the Stalking Horse APA “are designed to provide the Debtors with the
flexibility necessary to allow the Debtors to maximize the value of the Assets.” (Motion, ¶ 5).
The Stalking Horse APA provides for no breakup fee or similar bid protection from the estates.
The proposed form of order approving the Bidding Procedures does not provide for the
allowance of the claims or ratification of the liens under the First Lien Credit Agreement; that
will happen through an order approving the sale to the Stalking Horse Bidder and the Final DIP
Order, which fully preserves the right of CRG to challenge such liens or claims.
2.
CRG objects to entry of the order approving the Bidding Procedures
because, it alleges without evidence or support, the liens of the First Lien Lenders are “disputed.”
(Objection, ¶ 13). CRG—which, on information and belief, purchased Eagle Energy Services’
claim at a discount to face value—now asserts, without dates, invoices or any facts, that the
vendor protection lien CRG purportedly holds is senior to the liens of the First Lien Lenders.
CRG has not filed copies of its sellers’ invoices or a proof of claim and also has not initiated an
adversary proceeding to contest the priority of the liens of the First Lien Lenders.
3
Capitalized terms not otherwise defined herein will have the meanings given to them in the Motion.
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Reply
3.
The objection should be overruled at this time for three reasons. First, the
issues raised by CRG are not ripe. Neither the Motion nor the proposed form of order approving
the Bidding Procedures seeks to allow the claims of the First Lien Lenders or addresses the
priority of such claim and related liens. Those determinations are only relevant if the First Lien
Lenders are determined to be the Successful Bidder after the Auction. Then, and only then, will
the Debtors seek approval of the credit bid portion of the Stalking Horse APA. At this juncture,
the Debtors only are seeking approval of the Bidding Procedures as a means to maximize the
value of the Debtors’ assets. Any issue relating to the priority of the liens is simply not relevant
at this time.
4.
Second, even if CRG’s objection was ripe for adjudication now—which it
is not—it is not even clear that CRG has a “statutory mineral lien” that primes “the security
interest and liens of the DIP Lenders and/or Prepetition First Lien Lenders.” (Objection, ¶ 4).
Pursuant to the relevant Louisiana state statute, the “privilege in favor of a claimant is
established and is effective as to a third person when: (1) The claimant, who is a contractor,
laborer, or employee begins rendering services at the well site.” La. Rev. Stat. § 9:4864.
Furthermore, the “privilege” or lien is not superior to “Mortgages and vendor’s privileges on the
operating interest and other property affected by such mortgages or privileges that are effective
as to a third person before the privilege is established.” La. Rev. Stat. § 9:4870.
5.
CRG has not filed a proof of claim and offers no information to support its
conclusory statement that “the inception date of its mineral liens are prior to the inception date
on the First Lien Lender and will, therefore, prime the Prepetition First Lien Lenders’ lien.”
(Objection, ¶ 12). Nor does CRG provide evidence that its liens relate to assets the Stalking
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Horse Bidder is proposing to buy. Merely stating that “a dispute exists,” (Objection, ¶ 12) does
not create a dispute. CRG can and must properly present its proof.4
6.
Even a cursory examination of the evidence indicates that the liens of the
First Lien Lenders are prior in time and therefore have priority over the purported liens of CRG.
The First Lien Credit Agreement is a restatement of the Second Amended and Restated Credit
Agreement, dated as of September 20, 2013, which is a restatement of a 2009 credit facility. The
mortgages asserted as “disputed” by CRG relate back to approximately 2009 and the First Lien
Lenders are proper assignees of those original mortgages. Thus, in order for CRG to prevail on
its challenge, it will have to prove that it has claims relating back more than seven years. CRG is
free to make its case, but it has not done so yet and cannot hold up the approval of bidding
procedures based on hypothetical claims.
7.
Third, although highly improbable, if CRG is correct that its purported
liens prime those of the First Lien Lenders, CRG’s rights are protected. CRG has the right to
challenge the liens of the First Lien Lenders under the terms of the proposed Final DIP Order,
which CRG has indicated it plans to do. (Objection, ¶ 12, n.3). If CRG were to prevail, under the
terms of the Stalking Horse APA and proposed sale order, the Stalking Horse Bidder is not
seeking to acquire the Assets free and clear of senior mineral liens; rather, the Stalking Horse
APA provides that the Stalking Horse Bidder will acquire the assets subject to any such senior
4
Even the cases cited by CRG fail to support CRG’s argument. For example, in In re Daufuskie Island
Properties LLC, 441 B.R. 60, 63 (Bankr. D. S.C. 2010), multiple parties had “filed adversary proceedings
to invalidate and/or subordinate” the credit bidder’s mortgages and claims. Here, CRG has not initiated any
adversary proceedings and is not alleging that the First Lien Lenders’ claims or liens are invalid or should
be disallowed. Instead, the “dispute” is simply CRG’s conclusory statement that there is a dispute without
any process or evidence. Even if a hearing to approve the Bidding Procedures was the correct time to raise
such an objection, CRG’s articulation of suspicions without facts to support them fails to preclude a credit
bid. See, e.g., In re Merit Grp., Inc., 464 B.R. 240, 255 (Bankr. D.S.C. 2011) (“While the Committee may
have suspicions and has offered allegations in its Objection, at this point, these allegations, together with
the facts provided in support thereof, do not convince the Court that an adequate challenge to Stonehenge’s
claim exists that rises to the level of the disputes set forth in the cited cases”).
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liens. Accordingly, even in the unlikely scenario that CRG does prevail, its purported lien
remains attached to the relevant assets, with the same priority and validity as it would otherwise
have.
Joinder
8.
Morgan Stanley also joins in the Debtors’ Reply in Support of Debtors’
Emergency Motion for Entry of Interim and Final DIP Orders [Dkt. No. 167], including its
argument that the Objections should be overruled because they are simply efforts by third parties
to either renegotiate finer isolated points of the DIP Facility to the detriment of the overall
package deal obtained by the Debtors or assert objections outside the context of post-petition
financing and should be brought in a different context or at a different time. Accordingly,
Morgan Stanley hereby joins in the arguments laid out therein.
Conclusion
WHEREFORE, Morgan Stanley respectfully request that the Court (i) overrule
the Objection, (ii) grant the relief requested in the Motion, and (iii) grant such other relief as may
be just and proper.
Dated: December 14, 2016
Respectfully submitted,
/s/ Sandeep Qusba
Sandeep Qusba (admitted pro hac vice)
Nicholas Baker (admitted pro hac vice)
SIMPSON THACHER & BARTLETT LLP
424 Lexington Avenue
New York, NY 10019
Telephone: (212) 455-2000
Counsel for
Morgan Stanley Energy Capital Inc.
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