Case Document 545 Filed in TXSB on 04/15/16 Page 1 of 9

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1 Case Document 545 Filed in TXSB on 04/15/16 Page 1 of 9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS CORPUS CHRISTI DIVISION In re: Chapter 11 SHERWIN ALUMINA COMPANY, LLC, et al., 1 Case No Debtors. (Jointly Administered) David R. Jones LIMITED OBJECTION OF GREGORY POWER PARTNERS LLC TO DEBTORS PROPOSED ASSUMPTION AND ASSIGNMENT AND SALE OF ASSETS Gregory Power Partners LLC ( GPP ), a party in interest in the above-captioned bankruptcy case, files this limited objection (the Limited Objection ) (i) to the Debtors proposed assignment to the Successful Bidder and the ability of the Successful Bidder to provide adequate assurance of future performance under 365(f)(2)(B) and (ii) to the Debtors proposed sale to the extent that the Debtors seek to sell assets free and clear of GPP s easements and section 365(h) rights, and respectfully states as follows: BACKGROUND 1. GPP provides the steam and electricity necessary for Sherwin Alumina Company, LLC ( Sherwin and with Sherwin Pipeline Inc., the Debtors ) to produce alumina at Sherwin s alumina plant in Gregory, Texas under a long-term take-or-pay Energy Supply Agreement and integrated Master Easement Agreement, both of which are dated June 30, 1998 (collectively, as amended, modified, or supplemented, the GPP Agreements ). 2. On March 16, 2016, the Court entered its Order (A) Approving Bidding 1 The debtors in these chapter 11 cases, along with the last four digits of each debtor s federal tax identification number, are: Sherwin Alumina Company, LLC (2376) and Sherwin Pipeline, Inc. (9047). The debtors service address is: 4633 Highway 361, Gregory, Texas

2 Case Document 545 Filed in TXSB on 04/15/16 Page 2 of 9 Procedures, (B) Approving Contract Assignment Procedures, (C) Approving Bid Protections, (D) Scheduling Bid Deadlines and an Auction, and (E) Approving the Form and Matter of Notice Thereof (the Contract Assignment Procedures Order ) [Dkt. No. 433], pursuant to which the Debtors filed the Notice to Contract Parties to Potentially Assumed Executory Contracts and Unexpired Leases (the Contract Assignment Notice ) [Dkt. No. 458]. Under the Contract Assignment Notice, contract counterparties have until April 15, 2016 to file an objection if they (i) do not agree with the proposed Cure Amount, (ii) object to a proposed assignment to the Successful Bidder of any Executory Contract or Unexpired Lease, or (iii) object to the ability of the Successful Bidder to provide adequate assurance of future performance with respect to any Executory Contract or Unexpired Lease. 3. As part of the Contract Assignment Procedures Order, the Court approved the Notice of Auction for the Sale of the Debtors Assets Free and Clear of Any and All Claims, Interest, and Encumbrances (the Auction Notice ). Under the Auction Notice, objections to a proposed Sale must be filed with the Court prior to Tuesday, April 19, This Limited Objection addresses GPP s objections to both the Contract Assignment Notice and the Auction Notice. THE DEBTORS HAVE FAILED TO PROVIDE ADEQUATE ASSURANCE OF FUTURE PERFORMANCE. 5. While GPP supports the Debtors efforts to preserve jobs and maintain the Debtors alumina production facility, GPP objects to the Debtors proposed assumption by the Debtor or proposed assignment of the GPP Agreements to any yet-to-be-determined assignee. The failure to identify the proposed assignee precludes the Debtors from showing, and GPP from determining, whether the proposed assignee can provide the necessary adequate assurance of future performance required under section 365(f)(2)(B) of the Bankruptcy Code. 2

3 Case Document 545 Filed in TXSB on 04/15/16 Page 3 of 9 6. Section 365(f)(2)(B) requires adequate assurance of future performance be provided before the trustee can assign an executory contract or lease. 11 U.S.C. 365(f)(2)(B). This requirement provides needed protection to the non-debtor party because the assignment relieves the trustee and the bankruptcy estate from liability for breaches arising after the assignment. Cinicola v. Scharffenberger, 248 F.3d 110, 120 (3d. Cir. 2001); 11 U.S.C. 365(k). After all, an assignment is intended to change only who performs an obligation, not the obligation to be performed, and, accordingly, the rights of the non-debtor party to receive the benefit of its bargain must be respected. Medtronic AVE, Inc. v. Advanced Cardiovascular Sys., Inc., 247 F.3d 44, 60 (3d Cir. 2001). Thus, the counterparty to a proposed assigned contract is entitled to notice of the identity of the assignee and of the proposed adequate assurance. 3 COLLIER ON BANKRUPTCY [1] (16th ed. 2013). 7. The Debtors have failed to show that any proposed assignee can provide the necessary adequate assurance of future performance required under section 365(f)(2)(B). First, the Debtors have failed to identify who the proposed assignee of the GPP Agreements will be, without which it is impossible for the Debtors to show, and GPP to assess, whether adequate assurance of future performance can be provided. In fact, the Debtors have not even selected a stalking horse bidder for the proposed auction the Debtors did not file with the Court a notice identifying the proposed stalking horse bidder by the April 4, 2016 deadline as contemplated in the Contract Assignment Procedures Order. See Contract Assignment Procedures Order, at Second, the Debtors have failed to show that any party, whether the Debtor or a proposed assignee, can actually provide GPP with adequate assurance of future performance. In executing the GPP Agreements with Sherwin, GPP contracted with a counterparty that required substantial amounts of steam each year for multiple years and that had the financial wherewithal 3

4 Case Document 545 Filed in TXSB on 04/15/16 Page 4 of 9 to pay for it. As such, the Debtors will be required to show that any proposed assignee of the GPP Agreements can not only provide adequate assurance of future performance of the GPP Agreements multi-million dollar financial obligation, but separately and aside from this financial assurance, a proposed assignee s ability to actually take and use the steam in its operations. In addition to demonstrating a sufficient level of financial capability and creditworthiness, any counterparty must also show that it can meet its performance obligations under the GPP Agreements that GPP relies upon in order to run its power generation business. Specifically, any counterparty must demonstrate that (i) it has control over all systems and resources (i.e., piping, water contracts, other third party agreements, and permits), (ii) it possesses the same level of technical/operational expertise regarding the systems/resources, and (iii) any partial sale of assets preserved Sherwin s ability to perform all of the customer obligations under the GPP Agreements. After all, an assignment is intended to change only who performs an obligation, not the obligation to be performed. Medtronic AVE, 247 F.3d at 60. Without specifying the proposed assignee (or at least a list of possible assignees), a showing of the necessary adequate assurance of future performance required under section 365(f)(2)(B) is impossible. This concern that the Debtors have failed to show adequate assurance of future performance applies equally in the case where the Debtors opt solely to assume the GPP Agreements, rather than assume and assign the GPP Agreements to the Successful Bidder. In neither case have the Debtors satisfied their burden of establishing adequate assurance of future performance. 9. Even if the Debtors clarify the identity of the proposed assignee of the GPP Agreements, GPP objects to the aggressive proposed schedule provided for in the Contract Assignment Procedures Order to the extent the Debtors are incapable of providing evidence of 4

5 Case Document 545 Filed in TXSB on 04/15/16 Page 5 of 9 adequate assurance of future performance that indisputably satisfies the requirements of section 365(f)(2)(B). With such a condensed timeline, any objections that cannot be resolved quickly threatens the Debtors ability to remain on the current timeline. If the Debtors are to have any chance at keeping to their compressed timeline, then the Debtors should be prepared to put forward exceptionally strong evidence of proposed adequate assurance (e.g., letter of credit), and should also be prepared to accommodate any discovery requests on an expedited time frame. DEBTORS MAY NOT SELL THEIR ASSETS FREE AND CLEAR OF GPP S EASEMENTS AND SECTION 365(h) RIGHTS. 10. GPP also objects to any proposed sale of the Debtors assets free and clear of GPP s section 365(h) rights. Section 365(h)(1)(A)(ii) provides that if the trustee rejects an unexpired lease of real property under which the debtor is the lessor and if the term of such lease has commenced, the lessee may retain its rights under such lease for the balance of the term of such lease and for any renewal or extension of such rights to the extent such rights are enforceable under applicable nonbankruptcy law. 11 U.S.C. 365(h)(1)(A)(ii). A number of courts have ruled that the provisions of section 365(h) are the exclusive remedies of a debtorlessor, and the debtor cannot avail itself of the provisions of section 363 to sell property and extinguish a tenant s leasehold interest. See, e.g., In re Haskell, 321 B.R. 1 (Bankr. D. Mass. 2005); In re Churchill Props. III, L.P., 197 B.R. 283 (Bankr. N.D. Ill. 1996); In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996); In re LHD Realty Corp., 20 B.R. 717 (Bankr. S.D. Ind. 1982); but see Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003). 11. In consideration for the steam and electricity GPP provides to Sherwin, the GPP Agreements granted GPP, among other things, a leasehold interest and certain easements on Sherwin s property. Section of the Energy Services Agreement granted GPP lease rights to all of Sherwin s (as successor to Reynolds) right, title, and interest in and to the Site (as 5

6 Case Document 545 Filed in TXSB on 04/15/16 Page 6 of 9 defined in the GPP Agreements). Section of the Energy Services Agreement granted GPP the aforementioned lease rights for a term of 35 years after the Commercial Operations Date. Since the Lease Rights (as defined in the GPP Agreements) have already commenced and will not expire until after the year 2032, if the Debtors choose to reject the GPP Agreements, section 365(h)(1)(A)(ii) of the Bankruptcy Code provides GPP the right to retain its rights under the lease until the expiration of the lease term. Section 363(f) does not extinguish these rights. See In re Haskell, 321 B.R. 1 (Bankr. D. Mass. 2005); In re Churchill Props. III, L.P., 197 B.R. 283 (Bankr. N.D. Ill. 1996); In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996); In re LHD Realty Corp., 20 B.R. 717 (Bankr. S.D. Ind. 1982). Accordingly, to the extent the Debtors seek to reject the GPP Agreements and then sell its assets free and clear of GPP s section 365(h) rights, GPP objects. 12. Finally, GPP objects to any proposed sale of the Debtors assets free and clear of GPP s easements. The Master Easement Agreement granted GPP numerous easements appurtenant to GPP s Cogeneration Plant, including easements for drainage, waste disposal, vehicular access to the Cogeneration Plant, for Electric Power, and for Steam and Spray Water. These easements were, and are still, necessary for GPP s operations, regardless of whether the GPP Agreements are assumed or rejected. 13. The Debtors cannot satisfy the requirements of section 363(f) to sell their assets free and clear of GPP s easements. First, nothing under Texas law would allow the sale of the Debtors real property free and clear of GPP s easements without GPP s consent, thereby precluding the application of section 363(f)(1). Second, GPP does not consent to the sale of the Debtors real property free and clear of GPP s easements, making section 363(f)(2) inapplicable. Third, section 363(f)(3) does not apply because the interest at issue here is not a lien, it is an 6

7 Case Document 545 Filed in TXSB on 04/15/16 Page 7 of 9 easement that runs with the land. Fourth, the easements were expressly granted under the Master Easement Agreement; thus, the easements are not subject to a bona fide dispute under section 363(f)(4). Finally, the easements are non-monetary property interests no amount of money or sale proceeds can compensate GPP for these easements which precludes application of section 363(f)(5). 14. Furthermore, the easements are covenants running with the land, which cannot be extinguished under section 363(f). See Master Easement Agreement, section 2.7; see also Selected Lands Corp. v. Speich, 702 S.W.2d 197, 199 (Tex. App. 1985) (discussing requirements for a covenant to run with the land under Texas law). As the Court in Silverman v. Ankari (In re Oyster Bay Cove, Ltd.), 196 B.R. 251, (E.D.N.Y. 1996) noted: [A] sale free and clear of liens and other interests has no impact on restrictions of record that run with the land.... the order to sell free and clear has no affect (sic) on the dedication of the road and the storm drain, which are easements that run with the land. Clearly, 11 U.S.C.A. 363(f) and Bankruptcy Rule 6004, which refer to the sale of land free and clear from these interests, are not intended to sever easements and other nonmonetary property interests that are created by substantive State law. Indeed, absent the consent of the owner of the easement or the easement being in bona fide dispute, the Bankruptcy Code does not even allow the Bankruptcy Court to authorize a sale of the property free and clear of an easement. (emphasis added). Because the GPP easements are not subject to a bona fide dispute and GPP does not consent to a sale free and clear of GPP s easements, the Debtors may not sell their assets free and clear of GPP s easements. See id. RESERVATION OF RIGHTS 15. GPP reserves the right to modify and supplement this Objection and reservation of rights as appropriate. 7

8 Case Document 545 Filed in TXSB on 04/15/16 Page 8 of 9 Dated: April 15, 2016 BAKER BOTTS L.L.P. /s/ C. Luckey McDowell C. Luckey McDowell (TX Bar ) Patrick Tatum (TX Bar ) 2001 Ross Avenue Dallas, Texas Telephone: (214) luckey.mcdowell@bakerbotts.com patrick.tatum@bakerbotts.com Counsel for Gregory Power Partners, LLC 8

9 Case Document 545 Filed in TXSB on 04/15/16 Page 9 of 9 CERTIFICATE OF SERVICE I hereby certify that on April 15, 2016 at approximately 9:45 a.m., a true and correct copy of the foregoing has been served on all parties entitled to service via this Court s electronic filing system ( ECF ) and to the below parties via . Gregory F. Pesce Kirkland & Ellis LLP 300 North LaSalle Chicago, IL gregory.pesce@kirkland.com Attorneys for the Debtors Steven J. Reisman Curtis, Mallet-Prevost, Colt & Mosle LLP 101 Park Avenue New York, NY sreisman@curtis.com Attorneys for Commodity Funding, LLC Ashley Gargour, Timothy S. Mcconn, Robin Russell Andrews Kurth LLP 600 Travis, Suite 4200 Houston, TX ashleygargour@andrewskurth.com; timmcconn@andrewskurth.com; rrussell@andrewskurth.com Attorneys for the Official Creditors Committee Stephen Statham United States Trustee Region North Carancahua Street, Suite 1107 Corpus Christi, TX stephen.statham@usdoj.gov /s/ Patrick Tatum One of Counsel Active