Your honor, may it please the court, Blake Cleary
of Potter Anderson and Caroon on behalf of NECA
Corp and its affiliated debtors and debtors in
possession. Your honor, first of all, thank you
for scheduling confirmation today. We do much
appreciate it. It's an important day in the life
of this company and the natural progression and
next step. With that, we did file a couple of
pleadings at the end of yesterday. So we have
an amended agenda and hopefully those have. excuse
me, made their way to you. They relate to a plan
supplement, an amendment to the witness and exhibit
list, as well as a notation of the withdrawal
of Mr. Milton's objection to confirmation, Your
Honor. Yes. Thank you. With that, I wanted to
make, you know, I'm here with my colleagues from
Potter Anderson, as well as Josh Morris and his
colleagues from Hillsbury. He's going to make
further introductions, but I wanted to just...
Set that up for your honor. And again, thank
you. And I will turn it over to my co -counsel.
Thank you, Mr. Cleary. Good morning, Mr. Morse.
Good to see you. Good morning, your honor. Very
wonderful to see you on this Friday afternoon.
Yes. For the record, Joshua Morse from Pillsbury
Winthrop Shop, Hitman LOP, Council to the Debtors.
We have some new and some... not -so -new faces
here today with me, and I want to make sure to
introduce members of my team as well as the witnesses.
For my team, we have Rachman Connolly, my partner,
and Ari Berman, my partner Swell, as well as
my colleagues Andrew Alfano and Chas Berman.
Chas Coleman, sorry. Yes. I'm familiar with his
work. A lot going on in my head right now. The
declarants, we have three. One appearing remotely,
and that's Emily Young, who is the director at
Epic Corporate Restructuring LLC, the debtor's
claims and noticing agent. She'll be in a moment
submitting the ballot tabulation declaration,
which appears at docket number 952. This just
confirms the debtor's compliance with solicitation
procedures order. providing a tabulation summary
and a report of excluded balance, as well as
a report of the opt -outs. We also have, who's
appearing in the courtroom today, Ryan Rowan,
a managing director at M3, advisory partners.
Good morning. LP, the debtor's financial advisor.
He submitted a confirmation brief declaration
that appears at docket number 958 that provided
an updated liquidation analysis. which was attached
as exhibit one to his declaration. It was also
attached as an exhibit to the second amended
plan, which we filed on Tuesday. He had provided
some testimony regarding feasibility of the plan
as rebuttal evidence to the Milton confirmation
objection, which appeared at 910, which has now
been withdrawn as Mr. Cleary indicated. Also
in the courtroom is Britton Worthen Chief legal
officer of debtor Nikola corporation. He submitted
a number of Declarations some of which May be
pertinent today some which may may not be just
want to run through those to give your honor
some context First the confirmation brief declaration,
which is dr. Number nine fifty seven provides
the evidentiary support for not only our confirmation
brief but provides the 90 -19 support for the
SEC resolution, which I'm going to walk through
in a moment, the settlement of the derivative
actions, which we'll be seeking final approval
of today, support for the appointment of the
liquidating trustee, and then provide some limited
rebuttal evidence to the Milton Equitable Support
Nation objection, which that appears at docket
number 911. He also has provided four other declarations,
which will be seeking to move into evidence.
The SEC classification memo declaration, which
appears at docket number 796 -1, that provides
the evidentiary support for the relief request
in the SEC classification memo, docket number
796. That's now been rendered moot by virtue
of the SEC resolution. as well as the Reyes Action
Classification Memo Declaration, which appears
at docket number 804 -1. That provides the evidentiary
support for the relief requested in the Reyes
Classification Memo, which is docket number 804.
That is not contested. No objections were filed
to that one. As well as the Milton Claim Classification
Memo Declaration, that's docket number 808 -1.
that provides the evidentiary support for the
relief requested in the Milton claim classification
memo. That's docket number 808. In that one,
there is also a counterparty to that docket that
is unsealed. There'll be some discussion about
that that we'll need to deal with in a little
while. And finally, the shareholder securities
claim classification memo declaration. which
is docket 820 -1 that provides the evidentiary
support for the relief requested in our shareholder
securities claim classification memo that's docket
820. Now as you are well aware we are here today
seeking entry of the confirmation order which
we initially filed at docket number 964 and then
we had some additional cleanup changes between
Tuesday late last night and we filed a notice
of revised order as well as a black line at docket
number 999. That order seeks to approve the disclosure
statement that you entered back in July on a
final basis and confirms the second amended plan
which appears at 955. I do want to note that
as I spoke about in the beginning of the presentation
that we did file a black line on Tuesday against
the solicitation version of the plan. That was
docket number 744, and that black line appears
at docket number 956. Now the plan is a fairly
straightforward liquidating plan. Does a few
things, establishes liquidating trust to pursue
and monetize. remaining assets, including preserved
estate claims. Paves the way for the settlement
of the derivative actions, which I'm happy to
report. We found out yesterday that the Chancellor
McCormick has scheduled for November 22nd. Wines
down the remaining operations, which are very,
very limited at this point, the debtors estates.
And after paying administrative claims and priority
claims in cash in full on the affected date,
set forth in the liquidation analysis, it estimates
that Class 3 general unsecured claim recoveries
are going to be between 20 .7 % and 75 .3%. As
discussed in the Young Declaration, the debtors
complied with all the solicitation procedure
order requirements regarding service of the required
notices, as well as the solicitation packages.
and appropriate certificates of service are filed
on the docket. The Young Declaration also confirms
that the debtors received near unanimous approval
in favor of the plan. 99 .98%, if my math is
correct, representing 148 .1 million in amount
and 97 .4 representing 68 out of 70 in number.
from class three, the only impaired class under
the plan, entitled to vote in favor of the plan.
In anticipation of today's hearing, the debtors
have also been working diligently to reach consensual
resolution of various objections. As indicated
on Tuesday night, the second amended plan, which
is filed at docket number 955, addresses certain
of these. resolutions, including the SEC objection,
which is docket number 935, the Mitsubishi objection,
which is docket number 937, and then also a few
informal objections that we received prior to
the filing of that plan, including objections
raised by the Texas Comptroller of Public Accounts
and the U .S. Department of Justice. And I want
to walk through I want to walk through and give
the court just a brief update on each of those
resolutions. Most importantly, the SEC objection.
And Mr. Baddeley and Ms. Shurer, I'm sure I butchered
the pronunciation of her name, even though I've
had at least 100 phone calls with her, so I apologize,
are here in court. And they've been great partners
with us throughout this case. to try and work
this out. But the SEC objection, which appears
at docket number 935, again, the debtors and
the SEC were able to reach agreement on a consensual
resolution of the debtors' purported subordination
of the SEC claim under the plan for the reasons
that are explained in the SEC claim memorandum
that we filed at docket number 796. and then
as they objected to. And under this defined term
that's in the plan, the SEC claim resolution,
it's contemplated to be approved by the confirmation
order. The debtors in the SEC have agreed that
the SEC claim, which is claim number 10420, which
the SEC filed recently in excess of $83 million,
and that amended the SEC's scheduled claim. in
the amount of $80 .2 million will be allowed
and treated under the plan in three different
ways. First, the SEC has voluntarily agreed that
$40 million of that $83 .052 million is going
to be classified and treated junior in priority
to the general unsecured claims. and therefore
the SEC junior claim, as we've defined it under
the plan, is going to be allowed and treated
in class seven of the plan. And then second,
the debtors have agreed to classify the residual
$43 ,052 ,974 .90 of the SEC claim as a general
unsecured claim in class three, provided, however,
that The sole distribution on account of that
SEC unsecured claim is going to be a $4 million
cash payment to the SEC on the effective date.
And the SEC has agreed to forego any further
distributions on account of the SEC unsecured
claim under Class 3 of the plan. And then finally,
there is an agreement that the debtors, the estates,
liquidating trust, and their successors and signs
will release all causes of action that each of
them may have against the SEC. And with that,
I would just ask Mr. Baddeley and or Ms. Shearer
to confirm that their understanding of the resolution
has articulated. Good morning, Mr. Baddeley.
It's good to see you. Good morning, Your Honor.
You as well. David Baddeley for the SEC with
Trey Scheuer. Mr. Morris's description of the
compromise is correct and it's set forth in Article
4J of the plan. Yes, thank you very much. I also
want to point out that the committee works hand
in glove with the debtors on this resolution
as confirmed in the committee statement. that
appears at docket number 965. The committee helped
develop the SEC claim resolution and supports
that fully. And if Mr. Mantle is willing to confirm
that on the record? For the record, Doug Mantle.
Good morning, Mr. Mayor. Good morning, Your Honor.
Confirmed. Mr. Morse, the committee is fully
supportive of the SEC resolution. Thank you,
Mr. Mantle. Okay, moving on to the Mitsubishi
resolution. Mitsubishi filed an objection that
appears in document number 937 that has agreed
to add language to the proposed confirmation
order that we understand resolves that objection.
With that, I'd ask counsel to Mr., excuse me,
to Mitsubishi, which I believe today is Mr. Detweiler,
to confirm on the record that the resolution,
the Mitsubishi objection. Good to see you, Mr.
Detweiler. Welcome. Good to see you, Your Honor.
May it please the Court, Don Detweiler, on behalf
of Mitsubishi HC Capital. Mitsubishi's objection
has been resolved by the inclusion of the language.
Thank you, Mr. Detweiler. Thank you, Your Honor.
Thank you, Council. I'd also mentioned a few
informal objections. The Texas Comptroller. had
a few issues that we were able to address through
agreed provisions to the confirmation order.
I'm unclear as to whether anyone from the Texas
Comptroller is either here in the courtroom or
at the period of the hearing. However, we have
email communications that confirm that the informal
communications, or excuse me, the informal objection
has been resolved with the changes agreed. Okay,
let me just pause and see if anybody from the
Texas Controller is on the line and would like
to be heard. Okay, I hear no response. Thank
you. Similarly, with the U .S. Department of
Justice, we've had active dialogue with counsel
to the U .S. Department of Justice in various
capacities, but with respect to... informal objections
and comments we addressed those concerns through
the changes to the confirmation order and I believe
if counsel has appeared or would like to confirm
that on the record we're happy to step aside
and have that happen as well. Okay would the
Department of Justice like to be heard? Good
morning Mr. Prevan, welcome. Good morning Your
Honor. Dr. Vaughan on behalf of the United States,
we'd just like to confirm that we have worked
with the Debtors' Council and all of our issues
have been resolved. Thank you. And then one more
that I didn't mention and that's the Milton confirmation
objection at Docket Number 910. That one took
issue with the feasibility of the plan. We found
out during a meet and confer call yesterday afternoon
that that objection was going to be withdrawn.
and I believe the notice of withdrawal was filed
yesterday afternoon. Yes, I saw that. So that
leaves just a handful of unresolved issues. First
of all, the certain components of the... Oh,
I do want to mention the United States trustee
objection that appears at docket number 908 take
an issue with the opt -out releases and then
the injunction. I did confirm to Mr. Fox that
the objection to the Bankruptcy Rule 30 -20 waiver,
that we've resolved that issue. I'll walk through
that during my presentation. Also unresolved
is the Milton Equitable Subordination Objection
that appears at docket number 911, taking issue
with the plan's classification treatment of the
Milton claim in... class eight. And then there's
two others that I will talk about in a moment.
I did want to raise one thing that we also learned
during our meeting conferred with Milton's counsel
yesterday afternoon. We found out for the first
time yesterday that Mr. Milton intends to cross
-examine Mr. Worthen. on various topics to support
a brand new legal theory, which isn't reflected
in the equitable subordination objection, this
is document number 911, that somehow Nikola's
relative conduct should alleviate the Milton
claim from being equitably subordinated. We don't
believe there's any legal or factual support
that's been offered. in the record or for us
to be able to respond to, other than potentially
on the fly. And so we may need some guidance
from you later today as to how to proceed as
this morning develops. Okay, we'll get there.
We'll get there. Just previewing some information.
One other preview issue. We also understand that
Mr. Milton is here today. to attempt to substantiate,
apparently, his proof of claim. This is claim
number 54. And by way of background, you may
have seen some of this percolate a little bit
when we were here during the relief from stay
proceedings, as well as you saw some of it in
the papers. And exhibit C to that claim includes
a listing of... 19 professional firms and dollar
amounts that are alleged to have been paid to
such firms as of April 1st, 2025. As detailed
at paragraph 139 of our memorandum, back on July
8th, I requested proof of payment, confirmation
of how much had already been paid, because we
believe as set forth in other pleadings that
Nearly $40 million of that had already been advanced.
And then also to provide copies of all the invoices
subordinating that proof of claim. Nothing was
provided to the debtors. And then in the Milton
Equitable Subordination Objection, that's, again,
docket number 911. At page 10, footnote three,
there's an allegation that we didn't request
the information. quote until quite recently and
Milton will supply the information once the compilation
is complete. We inquired yesterday whether the
during a series of meet and confers when the
compilation was going to be complete and we're
still awaiting an answer. This may be a question
for Mr. Milton's counsel. Mr. Milton has not
identified any exhibits to be admitted today.
And Mr. Cousins, good morning. It's good to have
you here. If the fees that have been paid to
professionals are properly at issue today, and
I think that's an issue that I'm sure we would
get to, the only evidence of those would be the
invoices. testimony regarding what they might
say clearly would not be admissible. Good morning,
Your Honor. Scott Cousins and Sean Bronecki on
behalf of Trevor Milton, who is in the courtroom,
Your Honor. It's identified on the debtor's exhibit
list. We had a meet and confirm. We tried to
agree to avoid bringing Mr. Milton in, but we
just couldn't reach an agreement. He will testify
that the fees are paid. They're entitled to cross
-examine him. We believe that satisfies prima
facie evidence that has to get rebutted. The
court can rule on it as appropriate, but it is
identified as, I think it's the debtor's last
exhibit. And we just couldn't come to an agreement
about admissibility. And I will add, his testimony
is going to be limited to just what's in the
proof of claim, and the debtors in the committee
can cross -examine him. Thank you very much.
Thank you. We're previewing this issue now to
avoid this circus of Mr. Milton going to come
up and try and substantiate more than 70 million
dollars of alleged professional fees that have
been paid. He shouldn't be allowed to show up
today and offer testimony to attempt to do so
without... supporting documentation, we believe
it's wholly inappropriate and prejudicial. The
one thing that they have provided thus far, just
to give you a sense of the games that are going
on, are to the committee, they provided pages
of the Cahill invoices. As you may have seen
from the exhibit C, Cahill is owed quite a bit
of money, allegedly. And it's pages and pages
and pages, however, Every single time entry is
completely redacted as to render the the provision
of these invoices wholly irrelevant to the ability
to do anything with them and so again to ask
us to on the fly Be able to comprehend what he's
going to tell us to not be able to take in, to
not be able to analyze, especially when this
request has been pending for two months and we
show up at trial, it seems like something else
is going on here. We'll cross that bridge when
we come to it. Two other objections are also
unresolved. The lead securities class action
plaintiff Objection, docket number 909. That
takes issue with the plans classification treatment
of their claim in class seven. And then the individual
shareholder objections, including a number of
informal objections that were listed on the initial
agenda. I don't have the updated docket number,
I apologize. The initial one was docket 969 as
responses and objections. Items, Romanet three.
through Romanet 9, and then also the Scudder
objection, which is docket number 904, taking
issue with various planned confirmation issues.
Turning to the first order of, I guess, real
business, is to move into evidence the declarations
that are gonna be providing the evidentiary support
for today's hearing. The first declaration. that
we'd like to move into evidence is the Young
Declaration, Your Honor. That appears at docket
number 952. And again, we appreciate the accommodation
of allowing Ms. Young to appear remotely at today's
hearing. We ask that that declaration be moved
into evidence. Okay, does anybody object to the
admission of Ms. Young's declaration in support
of confirmation? Okay, I hear no response. The
declaration is admitted. Is there anybody who
wishes to cross -examine Ms. Young? Okay, once
again, I hear no response. Ms. Young, thank you
for appearing this morning. I appreciate it.
Thank you so much, Your Honor. Good morning,
Mr. Fides. Good morning, Your Honor. May it please
the Court, Tim Fox on behalf of the United States
Trustee. Just to preview issues with respect
to the unresolved items in the U .S. Trustee
objection, I did identify that my office would
like to move into evidence on Nicola Corporation's
bankruptcy schedules at Docket Item 203. I just
wanted to preview that we'll be using information
from Docket Item 203 in connection with some
of Ms. Young's testimony, so I thought this was
an appropriate time to identify that item for
the Court. Okay. Thank you. And Your Honor, just
so you know, we will not have any objection to
doing that. We understand what the purpose of
that is going to be. Okay. Thank you, Mr. Morrison.
The next declaration, Your Honor, is the Rowan
confirmation declaration, which appears in docket
number 958. Mr. Rowan is in the courtroom today
and available for cross -examination. If none,
we'd ask to move to admit that declaration into
evidence. Does anybody object to the admission
of Mr. Rowan's declaration and support a plain
confirmation? Okay, I hear no response. It is
admitted. Does anybody wish to cross -examine
Mr. Rowan? Okay, I hear no response. Thank you,
Roaner. This is going to be a bit tedious, but
I'd like to do Mr. Worthen's declaration just
one by one. I think that makes sense. I apologize.
First, the SEC classification memo declaration.
which appears at docket number 796 -1. As I indicated,
Mr. Worthen is available for cross -examination.
If none, we seek to move that into evidence.
Okay, does anybody object to the admission of
Mr. Worthen's declaration that appears at docket
number 796 -1? Okay, I hear no response. It is
admitted. Next is the Reyes Action Classification
Memo Declaration. from Mr. Worthen, docket number
804 -1. Again, he's available for cross -examination.
If no objection or cross -examination, we'd like
to move that into evidence. Does anybody object
to the admission of Mr. Worthen's declaration
that appears at docket number 804 -1? I hear
no response. It is admitted. Next is the Worthen
Shareholder Securities Claim Classification Memo
Declaration, which appears at 820 -1. If no objections,
I'd like to move that into evidence. Does anybody
object to the admission of Mr. Worthen's declaration
that appears at docket number 820 -1? I hear
no response. It is admitted. Thank you, Your
Honor. Next is the Worthen confirmation brief
declaration, which appears at 957. If no objections,
I request to move that into evidence. Does anybody
object to the admission of Mr. Worthen's declaration
that appears at docket number 957? Okay, I hear
no response it is admitted. Thank you, your honor
and finally the Wurthen -Milton claim classification
memo declaration which appears at docket number
808 -1. Okay subject to the ability to cross
-examine does anybody object to the admission
of Mr. Wurthen's declaration that appears at
docket number 808 -1. Mr. Cousins. Good morning
again your honor, Scott Cousins on behalf of
Trevor Milton. We don't object to the admission
but we do want to cross -examine. Okay, very
good. Thank you. And Your Honor, one thing, we
are going to offer Mr. Worthen for some supplemental
direct examination. I propose that we do that
first and then allow Mr. Cousins to do cross
-examination so that he could listen to the testimony
and then cross on that plus anything else he'd
like to cross on with respect to the declaration.
Okay, very good. It seems like a more efficient
way to do everything. I agree. I agree. And with
that, I'll invite Mr. Connolly to come up to
the podium and call Britton Worthen to the stand.
Okay, very good. Mr. Connolly, it's a pleasure
to have you here. One thing that I'm forgetting
is before we have the witness on the stand, we'd
like to... Just go ahead and move our exhibits,
certain of our exhibits, into evidence. Move
in exhibits 1 through 37 and 39 through 52. Okay.
Does anybody object to the admission of debtors
exhibits 1 through 37 and 39 through 52 in support
of claim confirmation? Mr. Cousins. Your Honor,
I'm sorry to stand up no objection. I guess I
could have shouted that from the table. No, that's
fine. That's fine. It's good to have you at my
podium. Good to see you. Thank you. Those exhibits
are admitted. Thank you, Your Honor. Appreciate
it. Mr. Connolly. Good morning, your honor. Good
morning. Pleasure to be here. Yes. Pleasure to
have you. For the record, Rachman Connolly, Pillsbury,
for the debtors. As Mr. Morse mentioned, we are
calling Mr. Worthen up for supplemental direct
testimony. Okay. Mr. Worthen, could you remain
standing, please? Thank you. Good morning. Would
you please raise your right hand? Do you affirm
that you will tell the truth, the whole truth
and nothing but the truth to the best of your
knowledge and ability? Yes. Would you please
state your full name and spell your last name
for the record? Thank you, you may be seated.
Okay, Mr. Connelly. Good morning, Mr. Worthen.
You stated your name for the record. Could you
please state your current position? Yes, I'm
currently serving as the chief legal officer
of Nicola Corporation. How long have you served
as the chief legal officer? About 10 years. What
are your primary responsibilities as chief legal
officer? As chief legal officer, I'm generally
responsible for all legal matters at the company.
So would that include staying apprised and keeping
up to speed on legal matters involving the company,
so pending proceedings? Yes. And as part of your
responsibilities, did you have any role in the
engagement of outside counsel? Yes, I did. And
did you generally review invoices from outside
counsel? Yes, I did. Are you familiar with the
claim filed by Trevor Milton in these Chapter
11 cases? I am. And are you aware if the debtors
are seeking to equitably subordinate that claim?
That is my understanding, yes. Who was Trevor
Milton in relation to Nikola? Trevor Milton was
the founder, largest shareholder and CEO, and
then changed to the executive chairman when the
company went public. And are you aware if Mr.
Milton was alleged to have made any false or
misleading statements to investors or the public
about Nikola? Yes, I believe there were allegations
related to statements made by Mr. Milton and
the veracity of those statements. So I don't
want to get into the content of those statements,
but I want to talk about the fallout of those
allegations. So Mr. Worthen, are you familiar
with a Hindenburg research report involving Nikola?
I am. And can we talk about that, I guess, just
starting from the basic question of who's Hindenburg
Research? Hindenburg Research is a short -seller
report that at various times targets different
companies. It was led by an individual named
Nate Anderson. We came to find out he'd published
a report about NECLAB in September of 2020 time
period. And can you describe from a very high
level the nature of that report? The general
headline of the report is that Nicola was a fraud,
but the contents of the report went on to make
certain allegations related to various public
statements that Mr. Milton made in his social
media account and other things. And so following
the report, did any regulators, the SEC or the
DOJ, take any actions with respect to Mr. Milton
or with respect to Nicola? Following the report,
Nikola actually engaged counsel to receive advice
on how to actually deal with this. They thought
it was best that we actually reach out to the
SEC and the DOJ to tell them that we were doing
our own internal investigation. At the time that
they had reached out our counsel was told that
the SEC had already begun an investigation on
the company related to some of Mr. Milton's social
media. And then shortly thereafter, we received
subpoenas from the Department of Justice and
the SEC and an investigation ensued. Okay, and
do you recall who your outside counsel was for
that matter? That's Brooklyn and Ellis. So let's
start with the SEC. So the SEC served you with
the subpoena, you said, right? They did. And
do you recall the nature, what is your understanding
of the nature of the SEC's inquiry? The major
of the SEC's inquiry was to determine whether
or not any of the allegations that were leveled
in the Hindenburg report were accurate, whether
or not Nikola was in fact a fraud and whether
or not there was truth or not truth to some of
the statements that had been made by the company's
executive chairman at the time. And did the investigation
culminate in any formal proceeding or enforcement
action? It did. The company ended up settling
with the SEC. I believe in December of 21. Do
you recall the settlement amount? It was about
$125 million. And as of the bankruptcy petition
date, do you recall how much of that had been
paid? I believe approximately $45 million had
been paid. So if my math is correct, that would
mean $80 million or so remained unpaid. Is that
correct? That's correct. Did Nikola face any
litigation from shareholders or investors or
other stakeholders? Yes, shortly after the company
had received the subpoenas from the SEC and the
DOJ, and those were made public, we received
service of lawsuits as it related to securities
class action and derivative actions based basically
on the same allegations that had been raised
in the Hindenburg report related to statements
made by Mr. Milton. And do you recall, did Nikola
hire outside counsel in connection with those
lawsuits as well? We did. Who was your outside
counsel for that? I would say counsel for both
the derivative and class action eventually landed
at Paul Weiss. We originally had Kirkland helping
on that and then we transitioned to Paul Weiss.
And then you mentioned also a Department of Justice
investigation. Can you just describe your understanding
from a high level of the nature of that investigation?
Yes, it would have been the same as the SEC's
investigation. So the DOJ and the SEC were working
in tandem. They weren't really two separate investigations.
When there were witness interviews, both the
SEC and the DOJ would attend. And so the nature
of the DOJ's investigation was the same as the
SEC's. They were looking into allegations of
fraud and misrepresentation at the company. And
did you hire separate outside legal counsel for
that investigation? We did not. It was the same
counsel. Kirkland and Ellis represented the company.
in both investigations from the SEC and the DOJ.
So in your role as chief legal officer, you received
invoices, I assume, from Kirkland and Ellis and
Paul Weiss. Is that right? That's correct. And
Nikola incurred, would it be a fair characterization
to say significant legal fees in connection with
those proceedings? Yes. Do you recall the amount?
Yes, I think the amount... was quantified as
part of an arbitration proceeding that was eventually
adjudicated in 2022 and then confirmed by a federal
district court in Arizona. That amount is about
$46 million. Moving on, are you aware of any
arbitration proceedings between Nicola and Mr.
Milton? Yes, there were two. One I just mentioned,
which was brought by the company at the direction
of the company's board against Mr. Milton for
breach of fiduciary duty. and the other was a
fee arbitration as there was a dispute as it
related to the advancement of fees and the reasonableness
of those fees that were being incurred as part
of Mr. Milton's defense. Okay, so there were
two arbitrations. I want to focus for now on
the breach of fiduciary duty arbitration. You
said Nicola brought claims in an arbitration
proceeding against Mr. Milton. Can you describe
from a high level the basis of those breach of
fiduciary duty claims? Sure. The gist of the
claim was that Mr. Milton's conduct related to
certain things he was saying in social media
via his own social media account or whether it
be on a podcast were not in the best interest
of the company. In fact, were made in bad faith
and were a breach of his duty of loyalty and
care to the company. And do you recall how the
arbitration panel ruled on those claims? Yes.
The three -judge arbitration panel ruled in favor
of the company, finding that Mr. Milton was 97
% responsible for the harm that he had caused
as a result of his breach of fiduciary duty.
And did the arbitration panel grant Nikola any
monetary remedy? Yes. The arbitration panel granted
total award of $167 million dollars, broken down.
to 46 million of that being approximate from
fees and costs incurred related to professionals
that the company had to engage as fallout from
Mr. Milton's conduct, as well as the $125 million
settlement that the company had entered into.
Both of those numbers at a 97 % amount. Just
to keep the record clear, the $125 million settlement
was with the SEC, right? That's correct. So in
connection with the breach of fiduciary duty
arbitration proceeding, did Nikola hire outside
legal counsel? We did. And do you recall who
outside counsel was for that matter? Yes, it
was Kasowitz, Benson and Torres. And do you recall
approximately the amount of fees that Kasowitz
incurred? Yeah, the arbitration proceeding that
was handled by Kasowitz cost the company about
$11 million. Do you recall when the SEC and DOJ
investigations became public? Yeah, I believe
it was shortly after the company had received
the subpoenas, which would have been, you know,
October time period of 2020, the company had
an obligation to, as a publicly traded company,
to report all material matters that a reasonable
investor would want to know, and the disclosure
was made. So does that mean that you would have
had to have filed an SEC filing disclosing...
the outstanding investigations, is that fair?
Yeah, either, and I can't remember exactly, it
either would have been a standalone filing, or
it would have been as part of an upcoming 10Q
that was filed with the company, because it would
have been right around third quarter. And around
that time, or following that public disclosure,
how did Nicholas stock perform? Not well. Yeah,
the stock took a significant hit, not only as
a result of the disclosure of the SEC and the
DOJ investigation, but... continuing activities
and conduct continue to put a downward pressure
on the stock price. And based on your recollection,
did these events, you know, the public disclosure
of the SEC and DOJ investigations and then the
dip in the stock price, did those events have
any impact on Nicolas' operations? Yes. As a
result of the DOJ and the SEC investigations
and the continual News about Mr. Milton's indictment
and eventual conviction. The company faced significant
headwinds. The company lost partners. The company
lost professionals. The company's ability to
raise capital was significantly hindered. Cost
of capital went up. Insurance costs went up.
There were significant, significant problems.
Various parties that we'd entered into term sheets
with that had stepped away from those agreements
because of concerns about the allegations So
we're not expound a little bit on that. You talked
about partners Do you have any specific examples
in mind? Sure, the company had publicly disclosed
a deal that it had entered into with General
Motors where it was going to jointly Develop
fuel cells or buy fuel cells from GM batteries
GM was gonna take a significant stake in the
company. It was a several billion dollar transaction.
That was announced before. All of this came out.
Then after the ICC and the DOJ investigation,
GM stepped away from that deal. Sorry, let me,
please finish. Don't mean to cut you off, sorry
about that. No, you're good. I was gonna move
on to a separate one if you're gonna ask me about
that. In your recollection, with the partnership
with GM, was that expected to be valuable for
the company? Oh, for sure. I mean, GM is a household
name, and their investment in Nikola and partnering
with them on technology would have allowed us
to build trucks at a cheaper cost. We could have
gotten the scale faster. So it was a significant
partnership that the company was excited about
that evaporated as a result of these investigations.
And do you think that partnering with a household
name, as you put it, would be good for brand
value for Nikola? Absolutely. For sure. Okay,
so we talked about GM. Do you have any other
specific examples in mind? Yes, we'd entered
into an agreement also with Republic Services
to work on a refuse truck. Similarly, as a result
of the DOJ and SEC investigation, they had backed
away from that. Not publicly disclosed. At the
time, we had been having conversations with BP
about doing a partnership related to energy and
producing hydrogen and hydrogen filling stations.
Those conversations evaporated. We also had been
in very lengthy and deep conversations with Amazon
about truck purchases. Once this hit, those went
away. And we tried repeatedly to get them back
to the table to have a conversation. They would
never talk to us again, despite repeated efforts.
And just to clarify the record, is BP, does that
mean British Petroleum? Yes, thank you. And like
the GM relationships, were these potential partnerships
expected to be valuable for the company? Absolutely,
otherwise we wouldn't have been pursuing them.
So you talked also about other relationships.
I think you said with advisors. Can you elaborate
on that a little bit? Sure. I mean, we had been
using Morgan Stanley as our investment banker.
They had helped us through the public IPO process.
Because the IPO had gone so well, we were in
discussions with Morgan Stanley to go back out
the market to raise more money. Raised money
as the lifeblood of the company. We weren't producing
vehicles yet. We didn't have any revenue yet.
So we were depending on additional Proceeds either
equity or debt to kind of help the company along
and continue and finish out its development of
the products And so what the plan was to go back
to market immediately This hit DOJ and ICC investigation.
There's no there's no raising money while that's
pending. Nobody will talk to you We had been
working with Morgan Stanley. They said that they
could still potentially help us out, but eventually
they told us that their committee would not approve
working with Nikola going forward. So we lost
our investment banker as a result of this. We
lost our bank. Our bankers even told us they
wanted us to move their money. And we had, frankly,
hundreds of millions of dollars parked from the
IPO with the bank. Bank said, get out, go find
another bank. So in your capital raising efforts,
would you normally have relied heavily on an
investment banker like Morgan Stanley? Absolutely,
I mean they have the relationships with the potential
investors and they're significant and who you
hire as a banker You're relying on them to be
able to generate the interest in what you're
trying to do from a money raise able to communicate
You know the company's value And so having the
right investment banker is a critical piece Morgan
Stanley has a very good name particularly in
the vehicle Investment making space losing them
as a partner was difficult. So would you say
that losing an investment banker? precluded you
from raising additional capital? I don't know
if that's a fair statement. I mean, you can always
go and try to get with other investment bankers,
and we did eventually, but what you're left with,
particularly after the negative publicity that
Nikola had borne was raising capital in less
than ideal circumstances. The company needed
money to continue to operate, and so then at
that point, you're having conversations with...
very expensive money partners that put terms
to you that are less than ideal because you need
the money to keep the company afloat, to keep
people employed, to keep development going, and
it's a tough cycle. So I want to talk about the
final item that you mentioned, which is insurance
premiums. Can you elaborate on that? You said
that your insurance premiums went up, I believe,
right? They did. I mean, D &O coverage, any other
coverage for the company given the history of
the company, it got expensive. DNO coverage during
that time was already expensive. They were already
seeing historical highs, but when we went to
re -up policies, it was millions more. So, all
right, I appreciate that. To wrap it all up,
so the SEC and DOJ investigations were linked,
as you testified, to statements Mr. Milton made
to the public. Is that a fair characterization?
Yeah, I think that's fair. I mean, it was born
out of the Hindenburg report that came public,
and then there was a direct inquiry by the SEC
and the DOJ. Like I said before, though, when
we had come to the SEC, because the goal, when
you're under investigation, or when something
like this happens, at least this is what I learned
from counsel, the goal is to get to the SEC and
DOJ first, kind of self -report, say we're going
to do an investigation, we're going to get to
the bottom of this. When we went to the SEC and
said, hey, you know, we're coming to you hat
in hand. We're going to get to the bottom of
this and figure out if there's any truth to any
of these allegations in the Hinnibor report.
The SEC said, not so fast. We're not going to
give you credit because you're already under
investigation. You just didn't know it. We've
been following you guys for a while based on
statements that Mr. Milton had been making in
the public. OK. And just to wrap it up, we talked
about penalties and fees. Is it fair to say that
the SEC investigation, the DOJ investigation,
were bad for the company's balance sheet? Absolutely,
I don't know how they could be good. They were
devastating. We talked about $45 million out
the door to pay the ICC fine, right? Yes, that
was what has been paid, at least as the filing
of the bankruptcy of the $125 million. And I
think you mentioned a similar amount, about $46
million for advisor fees in connection with those
proceedings? Yeah, I mean that was up until the
date of the arbitration award. But we continue
to incur costs as it relates to... At least we
did, prior to bankruptcy, the class action litigation,
the derivative litigation. And then you also
mentioned fees payable or paid to Kasowitz, about
$11 million, right? That's right, to bring the
arbitration, to try to recover from Mr. Milton.
So if my math is right, that you add those numbers
up, the amount paid to the SEC, the amount paid
to Kirkland and Ellis, the amount paid to Kasowitz,
brings you over $100 million about, right? I
think that's about right, yeah. No further questions,
but like the reserve for a redirect. Yes. Mr.
Breneke. Good morning and welcome. Good morning,
Your Honor. Thank you for allowing me to come
in this morning. Sean Brenek, Lewis Bresboy,
representing Trevor Milton. Yes please do. Good
morning. Good morning. You testified on direct
that some of your responsibilities as the chief
legal officer were to generally oversee all the
legal matters for the company. Do I have that
generally correct? Yeah, I believe that's what
I testified. And does that include making sure
that public statements are complete and accurate?
To the extent that I was aware of those statements,
yes. We would always want to make sure that anything
that was said by the company was complete and
accurate. And you're aware that both Delaware
law and federal securities law require companies
to have a level of controls in place at the board
level to make sure that information is correct
and accurate, right? Sure, yes. testified a bit
about Mr. Milton's proof of claim in the case
here. And are you aware or are you not that the
debtor is arguing that Mr. Milton is not entitled
to indemnification? Is that correct? I believe
that's one of the arguments that's been made,
yes. And that is in part because the indemnification
issue had already been determined. Yes, I believe
you're referencing the arbitration award by the
three -judge panel that was confirmed by the
federal court. We're in both documents. The federal
court and the panel determined that, based on
Minister Milton's conduct, that indemnification
was not warranted. Do you have the two exhibit
binders up? I don't. The debtors council brought
up two notebooks. Oh certainly. I'm going to
ask you to turn to exhibit 10. Is that tab 10?
Tab 10, yes, I believe. The debtor's memorandum
of law in support of the debtor's chapter 11
liquidating plan regarding proper classification
of the Milton claim pursuant to section 510c,
bankruptcy code, and objection to the Milton
claim. Yes, I see that. Thank you. And I will
note that exhibit 10, tab 10 here, has been filed
under seal. So I will ask you the questions I
will ask you. I'm going to try to avoid having
you testify as to anything that was redacted
and put in the public record. But I'm sure my
colleagues here will correct me if I go over
that line and tell me that I'm going too far
afield. Do you recognize this document, sir?
I do. Did you have any involvement in putting
this together? Not really. Council did that.
I had an opportunity to review it and provide
comment, but given the fact that it was a legal
memorandum, it was handled mostly by Council.
I apologize for interrupting. No, you're fine.
And you submitted a declaration of testing to
the accuracy of... the information in here, is
that correct? Yes, correct. And I believe that's
Exhibit 11. Yes. Bear with me for a second here,
I want to make sure that I have the redacted
version of this as well, and that's Exhibit 20,
the redacted public. I'm going to ask you if
you can put both of those side by side. Thank
you. Am I correct here that on page 30 in paragraph
101 at the last line there, this is where the
debtor is talking about the indemnification amounts
have already been found to be unreasonable and
should therefore be disallowed. Is that correct?
You're referring to page 30, paragraph 105? 101,
I'm sorry, it starts on page 29. That'll be my
first question. For simplicity, I'll strike that
and I will ask you about paragraph 105. Just
read that. My question's simply going to be,
in this paragraph, the debtor is saying, confirming
what you had just testified to, that the claim
for indemnification is precluded because of the
arbitration award that was issued. Is that right?
Collies, are you referring to paragraph 101 or
105? 105. Okay. Nothing on 101? Nothing on 101.
Okay. Yes, it references the determination in
the arbitration proceeding that talks about their
ruling that Mr. Milton is not entitled to identification.
I believe that's what the award says, yes. Footnote
6 on page 29. This has a redacted portion. So
I will do my best to only ask you a question
about the unredacted portion. Yes. So if the
arbitration provision, if the arbitration award
had precluded a claim for indemnification, but
isn't that contradicted by footnote six, which
says that Nikola's request in the Nikola breach
of duty arbitration proceeding to recover and
it was redacted out. was denied without prejudice
for resolution of such issues in the Milton fee
arbitration following resolution of the federal
conviction. So doesn't it doesn't it stand to
reason that the issue was actually pushed down
the line until after the resolution of the federal
conviction process? I don't believe so. The arbitration
award clearly says that there is no indemnification.
That's a clear statement in there. My interpretation
of what the panel was trying to do was to set
aside the separate advancement issue on the Cahill
fees that had already been advanced and they
were letting that be and therefore not bringing
that in. So advancement is my interpretation
of what I thought the panel was trying to do
was there was a difference between advancement
in that instance and kind of indemnification.
going forward. And you understand that the basis
for Mr. Milton's proof of claim here is his right
to indemnification, right? Yes, I believe that
is the underlying basis for his proof of claim.
So you had mentioned what your interpretation
of the arbitration award is. I'd like to turn
to see what the actual award says. And this is
another situation where we have a document that
was filed confidentially and then a redacted
version. The confidential version is exhibit
15 and the redacted is exhibit 25. You could
pull both of those. of those. Turning to page
79 onto 80 and I'll ask you sir to look at the
un -redacted exhibit 15. My questions will be
general so as not to reveal any of them. Did
the arbitration panel reach any decisions about
Mr. Milton's right to indemnification. It would
be a yes or no, I believe. You'd have to disclose
what's in the confidential information in order
to, one way or the other. Yeah, sorry, what's
the question you wanted to answer? The arbitration
panel here, render any decisions about Mr. Milton's...
right to indemnification. This is not it I'm
not trying to get out what his understanding
is your honor trying to get out what the panel
actually came out with. Yeah, I I guess and I
invite your response on this if it's a matter
of what the arbitration ruling says That's her
thing. That's for me to read. I don't know that
mr. Worthen's Take on what it says would be instructive
And you had testified earlier that there were
two arbitrations pending. The first was a breach
of fiduciary duty arbitration that Nikola brought.
And there was a second, but I think counsel would
only focus on the breach of fiduciary duty arbitration.
I'd like to ask you about the other arbitration.
What is your understanding of that? Yes, that
arbitration actually was originally brought by
Mr. Milton against Nikola because there was a
dispute about the reasonableness of Cahill's
fees. And so there was repeated conversations
between myself and Mr. Milton's attorney Brad
Bondi at Cahill about the size of the legal bills
that we were getting. And under the indemnification
agreement, I believe the company did have an
obligation to advance fees, but it said specifically
that the company had an obligation to advance
reasonable fees. And so the company was taking
issue with the reasonableness of Cahill's fees.
And so while we were disputing that, there were
several months that bills went unpaid to Cahill.
Cahill filed the arbitration to request payment.
The issue was never about whether or not, at
least from Nicholas' position, whether or not
Mr. Milton was entitled to advancement. That
was in the agreement, and we had said that. The
issue was always about the reasonableness of
the fees that were being incurred by Cahill,
literally millions and millions of dollars a
month. And so we had an arbitration proceeding
that was in Arizona under the AAA, three -judge
panel. We had argued that... 18 million dollars
of the fees were unreasonable and I think the
panel came back and said that 17 .2 million of
the fees were found to be unreasonable. They
basically found in our favor on the unreasonableness.
So what is the status of that arbitration by
the way? I mean nothing has happened in that
arbitration for multiple years. Stayed? Is that
correct? I don't know about stayed. We had a
ruling. The parties can go back at any time to
the extent I believe that there is still any
issues with bills. No, no bills have ever been
put back in front of that panel for years The
arbitration is still pending it's just like I
said before I don't know if if that's accurate
I think it's The panel had reached out at one
point to determine whether or not it could be
closed and I think the parties potentially said
you can leave it open to the extent that anybody
is going to be bills, but nobody has brought
any bills or any issues before that panel for
a couple of years. Do you understand that the
reason for that is the automatic stay imposed
by the filing of the bankruptcy? The reason for
what? The reason for the stay or the lag in the
first arbitration proceeding. I am generally
aware of the automatic stay, but I don't believe
that's the reason why nothing has been put in
front of that panel in a couple years. Could
I ask you to turn to exhibit 28, please? And
this is the second amended combined disclosure
statement in Chapter 11 plan of liquidation of
Nicola Corporation and its debtor affiliates.
Have you seen this document? I believe I have.
There's been a lot of filings in this case. I
actually make an effort to review everything,
so I'm sure at one point I did review this document.
All right. If you have any questions, you can
turn to Exhibit 30, which is a declaration. The
title says it's in support of this. Does that
help you with whether you reviewed this? Yes,
like I said, I believe I had reviewed it. In
exhibit 28, you could turn to page 34. I'm going
to direct your attention to the bottom of page.
last paragraph? You see that? I do. And doesn't
this say that it's the Milton fee arbitration,
which do you understand that to mean that that's
the arbitration that Mr. Milton filed that we've
been talking about as the first arbitration?
Yes, I believe that's right. and that that state
remains stalled and subject to the automatic
state, right? I'm not disputing that. I thought
your previous question was, you know, the reason
why there hasn't been anything put in front of
that court for the last few years was because
of the automatic state that was recently issued
by this court. I guess my testimony was trying
to clarify that that's not my understanding of
the reason why nothing has been done in that
arbitration proceeding for years. testified a
bit about the SEC investigation and specifically
the investigation that it had started into Nikola.
Do you remember that? I think your testimony
was that the nature of that inquiry was whether
the allegations in the Hindenburg report were
accurate and fraud and truth of the statements
that Mr. Milton made. Is that correct? It was
a high -level generalization, but I think that's
generally accurate, yeah. I'd ask you to turn
to Exhibit 7. I'm there. So if we turn to page
two, step back. Do you recognize this document?
I do. This is the titled order instituting cease
and desist proceedings pursuant to section 8A
of the Securities Act 1933 and section 21C of
the Securities Exchange Act 1934, making findings
and imposing remedial sanctions and a cease and
desist order. this the document that Nikola entered
into to resolve the SEC investigation? Yes. And
you've reviewed this document? I have. If we
turn to page two, paragraphs one, two, and three,
isn't it true that the inquiry that at the SEC
was investigating in the subject this order was
not limited to the truth of statements that Mr.
Milton had made, but also included Nicholas violations
of federal securities rules pertaining to the
implementation and the maintenance of controls
and procedures. Yes, I would agree that the document
includes not only allegations about Like it says
in paragraph to that Nikola primarily misled
investor through scores and misrepresentations
by its CEO and later executive chairman Trevor
Milton There is other allegations in here as
it relates to company conduct, but I would also
add one that you're given this document by the
SEC and not given any opportunity to make any
revisions to it. It's a take it or leave it document,
given that they tell you it's on a no admit or
deny basis. Two, while the company disagreed
specifically with specific things related to
things that the SEC took issue with in the company's
filings, the company has never restated, never
changed, never had to correct. a financial statement
based upon its disclosures. I guess the answer
to my question then was that the SEC investigation
wasn't just limited to the truth of statements
that Mr. Milton had made, right? Yeah, that's
correct. And I don't believe I testified previously
that that's the only thing that it was about.
If we turn to page five, paragraph 19, the SEC
here finds that Nikola did not have a process
in place to ensure that information published
by Milton was communicated to management. As
the general counsel, wouldn't that have been
within your scope of responsibility to make sure
that that was in place? Yes, I would agree with
that and I would disagree with this statement
by the SEC. We did have a process in place. We
had asked Mr. Milton to have his social media
reviewed. He had refused. The only time that
Trevor came to me and asked me to review pieces
of his social media was when I had to do something
related to the SPAC filing or something related
to our public offering, which... Frankly, none
of those were ever considered inaccurate or were
the subject of the investigation against Mr.
Milton. If it had to do with anything about vehicle
technology, the advancement of our fueling, any
of those other things, Trevor never would have,
nor did he ever come to me about those types
of things in his social media. He was considered
the expert on those, not me. And despite our
requests, not only from me, but also from the
CEO at the time, Mark Russell and Ken Brady,
the CFO at the time. We couldn't get Mr. Milton
to comply with that. He was posting things on
social media. We had asked the media team to
alert us to any issues that they were aware of.
Occasionally they did, and when they did, I would
raise those issues with Mr. Milton. But as we
came to find out in the Hylenberg report, there
were a whole bunch of things that we were never
aware of, and that apparently the media department
didn't know were issues. the SEC includes in
this cease and desist order that don't pertain
to things about Mr. Milton, including misleading
pictures and statements about refueling capabilities,
hydrogen stations, the ability to produce electricity.
All of those things are included in here, correct,
without involving statements pertaining to Mr.
Milton. As you heard just briefly, this goes
back to my issue with this whole sojourn into
these questions. We made a point to tee up today's
proceedings what I would characterize as the
right way. We filed our plan. We filed our disclosure
statement and approval of that. We filed our
memorandum of law seeking to equitably subordinate
Mr. Milton's claim on July 29th, 2025. The objection
that we got back did not take issue with or raise
this comparable faults theory that is trying
to be manufactured in front of our eyes, which
we don't understand the basis for in the law,
and believe is quite a waste of the court's time.
We continue to object, and we've been very patient
with the witness this time, who traveled here
from Arizona to support confirmation, but...
I think enough is enough, and we'd like to close
this portion of the proceeding and move forward
with the rest of our confirmation hearing. Mr.
Browning? I can certainly appreciate their desire
to close this portion. I would suggest, though,
that, Your Honor, that they are seeking to subordinate
this claim on equitable basis, and they have
painted a picture throughout the course here
of these proceedings as to all of these actions
that Mr. Milton had taken and how he did all
of this and actually on direct it was all testimony
about how Mr. Milton's actions caused all this
harm and how he had done all of this. What we're
doing, Your Honor, is in an equitable position.
Your Honor needs to consider all the factors,
everything that's going on. Okay, this might
be a good time to talk about what I think the
relevant evidence may be regarding the equitable
subordination issue. The argument for equitable
subordination is based upon the conviction for
which Mr. Milton subsequently was pardoned by
President Trump. And it's also based upon the
orbital rulings that were affirmed and made an
order of the district court. It just seems to
me as a... as a matter of issue of preclusion,
I can't and won't revisit what the court found
and what the jury found in the criminal proceeding,
nor the findings that were affirmed by the district
court in Arizona. As a general matter, I think
I understand where you're going. But also, you're
raising issues that could have been raised in
the two plan objections and wasn't raised there.
And I'm struggling to determine why they aren't.
Any new objections haven't been waived. On the
plan objection point, Your Honor, may I have
a moment to consult my colleague? Oh, of course.
Please do. Please take a moment. Thank you for
your patience. Yes, Mr. Frank, certainly. I'll
refer to my colleague about the inclusion of
the objections. Your Honor, this is not a part
in the objection. It's under Rule 510C, and it's
asking the Court to consider all of the relevant
factors, and the witness had testified to one
of the arbitrations and got into some detail
about that. partially exploring that. And then
there was a mention of the second arbitration,
but nothing there. And that is the basis or one
of the bases for the equitable subordination
and then to some extent also the claim disallowance.
So we would ask Your Honor to allow us to continue
this to show what actually was going on in that
arbitration, exploring the testimony and discussing
the arbitration that wasn't covered. Mr. Morris.
Your Honor, the other side appears to be attempting
to craft an argument about comparable faults.
The main arbitration panel, as you are well aware,
after many witnesses, I think the proceedings
went on for nine or ten days, found that... Mr.
Milton was 97 percent at fault and what we're
gonna litigate that and talk about the SEC order
and things like that Yeah, that was my question.
That was the question I was going to pose it
seems to me that the arbitral finding was that
There there was three percent fault of the company
and that's an issue or it's a fact that is Is
before the court and I am bound by so I appreciate
the point that you're trying to get to, but I
think it's already been established and nothing
that Mr. Worthing could testify to would cause
me to take the improper step of revisiting issues
that I'm precluded from revisiting. fee arbitration,
as you recall, this is the same fee arbitration
that they attempted to obtain relief from the
automatic stay in order to restart after had
been long dormance. Our position, and this is
more argument for later, is that once the arbitration
panel had ruled that Mr. Milton was not entitled
to indemnification, and then the district court
affirmed that on page four of exhibit 50, which
Mr. Worthen also confirmed through his testimony,
that of course nothing happened because Mr. Milton
knew that he wasn't entitled to any indemnification,
notwithstanding, apparently, that he had paid
40 -something million dollars. If he was entitled
to this indemnification, you know... that if
I'm coming out of pocket $40 million, that I'm
going absolutely back to that panel every month
as I'm stroking checks and I'm going back to
the company if I think that I have a right. I
mean, actions speak louder than words. Your Honor,
I think Council was correct when he started that
that's for argument. That's certainly an argument
here. But I think he missed one point in that
He's presuming there was a decision on the right
to indemnification. I'm going to submit that
wasn't the case under the arbitration award.
Right, and that's something that I can read the
documents and interpret. There's no map of outside
extrinsic evidence that would inform my reading
of the arbitral ruling. So, you know, where does
that leave us? I don't think that the, you know,
what I agree is a line of questioning that seems
to be going at the relative fault of Nicola as
opposed to Mr. Milton is at issue because it's
already been determined. So, I don't know that
it's... necessary or really relevant to pursue
further line of questioning going to that issue
because again I think it's it's your preclusion
I'm bound by it there's nothing nothing new that
I can learn okay thank you mr. Brennan just a
few more questions And this goes to your testimony.
You had talked about the agreement with General
Motors. Yes. Right. And I think your testimony
was that that was harmed as a result of the SEC
investigations. Yes. That was... That was also
There were other aspects to the General Motors
issue right not just those investigations You
had also testified that the other shareholder
suits were also borne out of the statements by
Mr. Milton, right? Yes. Like we had discussed
earlier, there were also other bases for those
suits, right? Yeah. They've brought other allegations
in those class action and derivative actions,
yes. One more moment, Rob. Yeah, certainly. Mr.
Detweiler. May it please the court, Donald Detweiler
on behalf of Mitsubishi H .C. Capital. Your Honor,
I have another matter and it has to be excused.
I thought you were rising to ask to be excused.
My counsel is on as well. We both ask to be excused.
Certainly. Okay. Have a good weekend, Mr. Detweiler.
Yes, thank you, Your Honor. You too. Thank you.
Your Honor, I have no further questions. Okay.
Thank you, Mr. Brennan. Thank you, sir. Mr. Connolly,
any redirect? I have good news, which is that
pretty much everything I had for redirect has
been addressed. There's just one point, one single
question that I want to clarify. On direct, we
talked about the Miltonian Arbitration Award.
Do you recall that? Yes. That hasn't been collected
yet, right? That's correct. It's not been collected.
No further questions. Okay, thank you. Based
upon that question, any more recross, Mr. Brennan?
No. Okay, is there anybody else who wishes to
question the witness? Okay, I hear no response.
Mr. Worthing, you are excused, sir. Thank you,
Your Honor. Thank you. Benches can jump out at
you. Your Honor, I just wanted to make a quick
statement. I hope it's an obvious point, but
there was some testimony both on direct and cross
examination about certain statements that members
of the SEC staff may have made. We are not a
party to this dispute, so we are not raising
evidentiary objections. I just wanted to point
out for the record that we consider that hearsay
and that our silence should not be interpreted
as any sort of agreement or endorsement with
that testimony. I certainly understand. Thank
you. Thank you, sir. Mr. Morris. Thank you, Your
Honor. For the record, Joshua Morris for the
debtors. I think that moves us to... The main
fireworks, I guess. Plan confirmation. Our confirmation
brief file that docket number 959 goes through
exhaustively, I believe, all applicable requirements.
And we appreciate you extending our page limit.
We tried to put everything into a single document
so that it would be perhaps more streamlined,
I guess. But... We believe that all applicable
requirements to not only approve the disclosure
statement on a final basis, but find compliance
with the solicitation procedures order, and finally
confirm the plan are set forth in that brief.
Confirmation brief also addresses the reasons
the debtors believe each of the remaining objections
that haven't been resolved as I've walked through
should be overruled. Debtors also believe we've
met all relevant final disclosure statement approvals,
solicitation and confirmation requirements have
been met, and the plan satisfies all of the debtor's
obligations under the solicitation procedures
order and sections, among others 1125, 1126,
1129 of the bankruptcy code for efficiency purposes
and to save everyone in the audience from falling
asleep. I propose that we dispose of the recitation
of all the individual confirmation standards,
and we just sort of move straight into arguments
regarding the remaining objections, and I'd like
to first start with the United States Trustee
objection. Then I'll move into the Milton Equitable
Sport Nation objection. I'm gonna handle both
of those, and then we'll do the lead securities
class action plaintiff objection and the individual...
shareholder objection and my colleague Mr. Alfano
is going to handle both of those. Okay. Now at
some point I believe that Mr. Cousins and Mr.
Breinecker are going to want to put on evidence
in support of their objection to confirmation.
Am I correct about that? Good morning, Your Honor.
Scott Cousins. Good morning. We're not objecting
to confirmation, but to the reply. Well, yeah.
Insofar as the plan would equitably subordinate
Mr. Milton's claim. So on that issue, you do
intend to put on evidence in support of your
objection. Yes. Okay. Okay. Why don't you think
about timing and whether it would make sense
at some point in the next while to... stop for
lunch and if there's going to be additional witness
testimony whether we might do that after if you
feel that an opportunity to have a bite. What
if we were to perhaps do the U .S. trustee objection
and then I sit down and let Mr. Alfano jump up
and we do the other two and then we do the equitable
coordination after the break? I think that's
fine. Thank you. So the United States trustee
has objected at documents, excuse me, a docket
number 908, let's take issue with the opt out
releases. And we were in front of your honor
for the initial approval of the disclosure statement
and solicitation procedures back on July 21st.
We were exceedingly careful to determine a release
approach. using an opt -out voting process for
class three that we believe that was sound. That
process ensured to provide members of class three
with clear and conspicuous notice of the releases
and a meaningful opportunity to opt out of granting
them to the debtors. It also provided each of
those members of that class an opportunity to
object to the granting of those releases. That...
ability to opt out and to object, of course,
was separate and apart from their opportunity
to vote on the plan. The release provisions in
the plan are also structured as very limited
opt -out consensual releases that apply only
to the creditors who are entitled to vote on
the plan. So it's only the holders of general
unsecured claims in class three that receive
notice of the plan and its releases. and that
affirmatively elected not to opt out or didn't
otherwise object to granting the releases in
the plan. We didn't come up with this approach
out of thin air. It's consistent with the approach
to granting releases in many other Chapter 11
cases in this district, including the Indianapolis
Downs case, Spansion, Arsenal Intermediate Holdings,
and Mallancourt, to name a few. And we've cited
all these in our brief for your honor. We also...
Now, you cite Arsenal, of course. That was a
Judge Goldblatt decision, and I think it's fair
to say he's reconsidered his views. Perhaps.
Yes, I understand, Your Honor. We also intentionally
styled it after what Your Honor ultimately approved
in the Fisker case. And the goal was to provide
detailed and transparent notice regarding the
effect of third -party releases to the affected
parties. and an opportunity to opt out or to
object. The reply brief goes through the multiple
avenues that Class 3 had to opt out and showed,
Your Honor, what the form of ballot looked like,
and we also did that in our disclosure statement
reply. So what did the results yield? And this
is what Mr. Fox is going to stand up and take
issue with. But as set forth in the Young Declaration,
and that's Docket Number 952, Class 3 did take
advantage of the ability to opt out of granting
releases. 42 of the 70 Class 3 holders that voted
for the plan opted out of granting the releases.
And that's Young Declaration Exhibit C. In addition,
16 other holders who didn't vote on the plan,
they submitted opt -outs. And that's Young Declaration,
paragraph 12. We believe that this is evidence
that the opt -out approach that we implemented
actually worked. Our memorandum also cited, you
know, Chapter 11 cases around the country that
implemented kind of similar opt -out mechanisms
in a post -Purdue world. And I'm not gonna go
through the chapter and verse of all those because
it's gonna put everyone to sleep. And I know
you're very familiar with these cases. But recent
Delaware cases have continued to reject similar
arguments made by Mr. Fox's office, which I know
you're also well aware of. And the debtor's solicitation
process satisfies factors that are found in all
of those recent cases, including among other
things, transparent and prominent notice, overwhelming
credit or support, and... limited release provisions
as well. Based on that, we believe that the third
party releases here are consensual and appropriate
and should be approved. The U .S. trustee makes
two other arguments. Number one, that there's
no legal basis for the injunction barring the
claims against the non -debtors. We understand
that Judge Stickles ruled in the 99 cents store
case. in a very similar context that the injunction
provisions that are included in Article 12D of
the plan just merely implement the release and
exfiltration provisions. We believe it's appropriate
here and the objection should be overruled. The
U .S. Trustee also took issue with a waiver of
the Bankruptcy Rule 3020 -FAY, given the timing
between confirmation and the effective date.
which can occur until we have the final hearing
in the Chancery Court, which isn't going to happen
until November 20th. We've just simply agreed
to remove that and have informed Mr. Fox of that.
And with that, I will pass the podium to Mr.
Fox and reserve additional comments. Certainly.
Good morning, Mr. Fox. Good morning, Your Honor.
May it please the Court, Tim Fox on behalf of
the United States Trustee. So your honor, I appreciate
Mr. Morse's comments, and again, note the 30
-20 issue has been mooted by the time here, so
we appreciate that. I want to start similarly
to where Mr. Morse did, and that's, your honor,
our papers reflect the U .S. Trustee's position
on this issue. I know your honor has ruled on
this in the past, so I'm not gonna try to belabor.
the points of law, but to the extent your honor
has any questions about the briefing or anything
with respect to those arguments as applied to
the facts here, of course, I'm at your disposal
to respond to those queries. What Mr. Morse in
his argument outlined is that, and consistent
with my earlier request to admit the bankruptcy
schedules for Nicola Corporation at Dock at item
203. Mr. Morse touted that you had 70 parties
that voted on the plan, as well as an additional
16 that acted on the opt -out. And, Your Honor,
the reason the U .S. trustee moved into evidence
the debtor's schedule, and this is at Nicola
Corporation, the main operating debtor of these
Chapter 11 debtors, is that in docket item 203
for schedule E slash F, which is at page 155,
according to the ECF stamp at the top of that
document. Nicola Corporation scheduled 526 general
unsecured creditors with respect to what was
in its books and records as the schedules were
prepared. If you compare that to the parties
acting on the plan and the opt -out here in this
case, that... results in about a 16 % level of
engagement with the scheduled creditors of Nicola
Corporation as it relates to that opt -out. And
so, Your Honor, the U .S. Trustee, as noted in
our papers, contends that that level of participation
doesn't reflect consent among the creditors sought
to be bound by these third -party releases, but
rather reflects a default position as being forced
to act on the opt -out as opposed to affirmatively
agree to relinquish rights against non -debtor
third parties. One of the common elements my
office has stressed is that when talking about
the third party release relief that is being
sought, you have a non -debtor on the one hand
in the form of the creditor or other party that
the plan intends to bind, and another non -debtor
on the part of the beneficiaries of the third
party release. And again, the U .S. trustee contends
that there's no provision of the Bankruptcy Code
that requires non -debtor creditors or voting
parties to act to avoid an impairment of the
rights to non -debtor third party release beneficiaries.
It's not the same as rejection of a contract
or anything else under the code that would put
a party's rights at risk of default if they don't
appear and voice opposition to that relief. So
Your Honor, again, There's low participation
rate. I know that that exists in many cases with
respect to voting on plans as a primary principle,
but when it relates to the rights against third
parties, again, the U .S. Trustee views that
as not a sufficient manifestation of consent
in light of the Supreme Court's guidance in Purdue
to have those parties relinquish those rights.
So, Your Honor, if you have any questions, again,
happy to address them and would otherwise just
rely on our papers with respect to the issue.
I understand the argument and its application
to the facts of this case, and I do thank you
and your office for the outstanding briefing
on an issue that certainly remains somewhat contentious,
and I understand the importance of it to your
office. So I thank you for the presentation.
Thank you, Your Honor. Thank you. Your honor,
I don't have any comments in response, so I think
we'll just rest on our papers and argument on
that point and turn the podium over to Mr. Alfano.
Good morning, Mr. Alfano. For the record, Andrew
Alfano from Pillsbury for the debtors. I believe
I might be the last act before lunch, so I will...
trying to keep it brief, but also give the objections
the thoroughness, particularly the pro se objections,
the thoroughness that they deserve. So I'll be
handling two different kinds of objections to
the plan. The first is the objection by the lead
class plaintiffs. That's Roman at 13 on the agenda.
And then also the several formal and informal
objections by class five equity holders. And
those are listed at Roman at three through nine,
11 and 16. Now with respect to the objection,
the limited objection by the class action plaintiffs
to subordination under the plan for the sake
of the record, the debtors filed their brief
in support of subordination. on August 1st at
docket number 820. That was about 19 days before
objections to the plan were due and over a month
before the debtor's brief in support of confirmation
was due and I'll talk a little bit more about
why that's relevant later. The class action plaintiffs
filed their limited objection with respect to
subordination pursuant to the plan on August
20th at docket number 909. And the debtors filed
their reply to the limited objection and brief
in support of confirmation and subordination
at docket number 959 on September 2nd. Now, before
I get into the objection, if I may set the stage,
as Your Honor, I'm sure is aware from your view
of the plan, Class 7 of the plan seeks to subordinate
certain claims pursuant to Section 510B of the
Bankruptcy Code. And Section 510B requires subordination
of any claims that are based on the purchase
or sale of securities. And while the court I'm
sure is familiar with this provision of the code,
I understand we may or may not have some new
clerks in the room. And so, you know, for everyone's
benefit, Section 510B is to essentially prevent
equity holders who took the higher risk of an
equity investment. to elevate that equity interest
into a claim by alleging, for example, damages
resulting from the purchase or sale of securities.
And so the debtor's brief sets forth their arguments
with respect to subordination. First, the class
action plaintiffs filed a $13 million claim against
debtor Nikola Corporation, and that's on the
claims register as proof of claim number 10257.
That claim is based on a pre -petition term sheet
between Nikola and the class action plaintiffs
that would have settled a reported class action
pending in the United States District Court for
the District of Arizona. titled Vortino v. Nikola
Corporation. And that action essentially asserts
securities law violations based on false and
misleading statements and omissions by Nikola
regarding its business plan and its business
prospect in press releases and SEC filings and
the like. And I quote from the complaint, as
a result of those misrepresentations and omissions,
Nikola shareholders who purchased or otherwise
acquired shares of Nikola Securities did so at
artificially inflated prices and then the subsequent
decline in the value of those securities once
those things came to light is the damages that
they suffered. And that is that paragraph 884
of the class action plaintiff's complaint which
we attached as exhibit B. to our brief in support
of subordination. Now there are multiple other
instances in the class action plaintiff's complaint
where they say in no unclear terms that the claims
they assert arise from the purchase and sale
of securities and that's at paragraph number
is 416 and 886 of the class action plaintiff's
complaint that is again attached to the brief
in support of subordination. We also cite cases,
including from this district, that show the law
requires but for causation when analyzing whether
a claim arises from the purchase or sale of securities.
In other words, the fact that the B -class plaintiffs
may assert a claim based on breach of contract,
if the term sheet even was a contract. does not
elevate it to a general, unsecured claim. We
still believe it's subordinated. In response
to our brief, which was filed on August 1st,
the class action plaintiffs filed their limited
objection on August 20th with respect to subordination.
And the objection takes issue with the process
that the debtors undertook. The class action
plaintiffs assert that Bankruptcy Rule 3007 a
claim objection is the proper procedural mechanism
for the debtors to seek subordination. They also
claim that a claim objection under Bankruptcy
Rule 3007 would constitute proper notice and
a hearing under the Bankruptcy Code and not subordination
pursuant to the plan. And as we stated in our
reply, Your Honor, we believe the Bankruptcy
Rules say the precise opposite under Bankruptcy
Rule 7001 -H. It actually requires an adversary
proceeding to subordinate a claim, except when
subordination is provided in a Chapter 11 plan.
And although we believe Rule 7001H is enough
on its own, we believe our request to subordinate
their claim through the plan has provided more
than appropriate notice and a hearing under these
circumstances. Our brief in support of confirmation
was not due until September 2nd. We filed our
brief in support of confirmation with respect
to subordination on August 1st. And so they had,
you know, approximately 19 days until their objection
deadline to respond to that. And we filed our
reply in support of subordination on September
2nd. And now, you know, we're here today before
Your Honor to argue the issue after it's been
fully briefed. And therefore, for those reasons,
Your Honor, we ask that you overrule the class
action plaintiff's objection to subordination.
Okay. Well, let me hear from the elite class
plaintiffs, please. Mr. Barcelona, great to have
you here. Good morning. Good morning, Your Honor.
For the record, Joe Barcelona from Paschman Steinwalder
and Hayden on behalf of the class plaintiffs.
Your Honor, we did file a limited objection.
I think this is a very simple argument. It is
procedural, but it's also legal in a bit. Can
a plan object to a claim? Your Honor, the code
and the rules do not contemplate that a plan
is the proper procedural vehicle to object to
a claim. Isn't clean objection objection and
subordination two different concepts correct
correct your honor Yes, but they can make a ruling
on subordination But they didn't take the steps
to give us our day in court to talk about the
underlying guts of the claim itself I mean you're
seeing in this hearing right now. Mr. Milton
is prosecuting his claim That's because the code
doesn't contemplate putting claim objections
into a plan confirmation There are other components
of the plan that can survive and continue. But
still, it must be bifurcated. We must get our
day in court because we're not just filing a
proof of claim and saying this is our damages.
There was a negotiated document with the debtors
pre -petitioned their restructuring council based
on a settlement and representations made to the
class about what we would get. And then a signed
written agreement, an executory contract was
made. and we came into court believing the debtors
would prosecute all the agreements that they
committed to previously. In fact, they even listed
under penalty of perjury on their top creditors
list with the petition, our claim is the, I think
the fifth largest gut claim at the time. So again,
I'm not here to litigate that claim and the code
contemplates that no one should have to litigate
their claim in connection with confirmation.
I am arguing the fact, Your Honor, that 503A,
1123, none of these provisions provide for a
plan to object to a claim. And honestly, if the
debtors had reached out and said, well, extricate
your claim, I wouldn't be standing here today.
However, now it's wrapped up into this concept
of the plan. And we have to think about appellate
rights. I'm glad the 3020. waiver is now gone.
There are other issues that we need to think
about and deal with. And council can't state
that they didn't think about filing proofs, objections
to claims earlier because their first omnibus
objection at 861 was to other equitable proofs
of interest to subordinate them. They could have
done the same thing with us. They could have
filed a motion to reject. our executory contract,
the settlement agreement, and then we could have
dealt with all the subordination issues there.
They did not. They wanted to consolidate it into
this one plan to prosecute it with the momentum
of confirmation, which I completely appreciate.
But we should have our separate day in court,
and the code gives us that right. What if they
never object to the claim? If it's subordinated
as a practical matter, why would anybody object
to the claim, unless... the returns were into
the estate were so large that you'd be dealing
with a very good problem at that point. But I
guess I just view the, I'm struggling to understand
why subordination under 510B, which is specifically
provided for under the code, should be viewed
as an objection to a claim when it's really just
seeking certain treatment of what presently is
an allowed claim against the debtor's estates.
Because Your Honor, the plan contemplates termination,
disallowance, other rights and destruction of
that claim through the plan, through the confirmation
order. It is supposed to be a bifurcated claim.
They should have taken the extra step. to bring
us into court maybe they didn't want to deal
with that issue because again there are a lot
of thorny issues related to the facts of how
we came to that settlement agreement and sat
on our rights as we allowed the case to proceed.
So again I'm not here to litigate the claim I'm
here just on the legal argument that a plan cannot
include an objection to that claim and that should
be bifurcated and we should have our separate
day in court. Okay thank you very much Mr. Barcelona.
Thank you Ron. Mr. Alfano, any response to Mr.
Barcelona's comments? Yes, Your Honor. I'll try
and keep it brief. I think Your Honor understands
well that we're not objecting to allowance of
the claim at this point through the plan. We
are seeking to subordinate the claim. Bankruptcy
Rule 7001H clearly allows us to do so pursuant
to the plan. simply if if we get subordination
of the claim as your honor pointed out we don't
intend to object to allowance it would it would
be a waste of estate dollars and you know any
concerns about us you know not wanting to use
you know confirmation or not giving them their
day in court it's sort of relied by the fact
that you know we we filed this brief in subordination
in support of subordination frankly earlier than
we may have otherwise had to, I mean, under the
solicitation procedures orders. In all, Your
Honor, I'm just struggling to see how they square
their position about a claim objection in light
of the plain language of Rule 7001H. I have no
further questions. Okay, great. Thank you, Your
Honor. And with that, I will move on to the individual
shareholder objections. The debtors received
several formal and informal objections from Class
V holders of equity interests under the plan.
Those include the objections by Lisa Scudder,
Lucas Niparko who filed their objections to the
plan and some portions of those objections actually
are more so disclosure objections to the disclosure
statement and the formal objections will file
at that docket numbers 904 and 922 on August
19th and August 23rd respectively. The informal
objections we've We've listed, they're not on
the docket, but we've listed them on the agenda,
and they're at Romanettes 3 through 9. The individual
equity holders share some common themes among
them, which we addressed in our reply brief.
First, the objections alleged that debtors did
not provide any detail on the valuation of assets
or the methodology. At the same time, they also
alleged that the debtors have not performed an
independent evaluation of assets, or that there
was no valuation of assets done at all. The debtors
respectfully disagree. I think it would be difficult
to find other cases where there were as many
market checks on value of the debtor's assets
as there were in this one. You know, there were
multiple pre -petition marketing processes which
are detailed in Article 3B2A of the plan, including
by Citibank, BTIG, and Goldman Sachs. Before
the petition date, around the same time that,
you know, Pillsbury came onto the scene, there
was a marketing process conducted by Hulahan
Loki. to sell the business as a going concern.
And then there were subsequent marketing processes
by Hillco, STX Commodities, and Gordon Brothers.
All these marketing processes are detailed in
sections three, B2, and four E of the plan. And
then attached as exhibit two to the Ryan Rowan
declaration filed at docket number 958. shows
the methodology and the assumptions used in the
liquidation analysis and essentially the water
flow, waterfall and distribution of estate proceeds
which we believe show conclusively that that
holders of equity interests are not entitled
to any distribution under the plan. Next, the
holders of equity interests allege that the debtors
have failed to perform a meaningful investigation.
Unfortunately, this company has been under some
form of an investigation in one way or another
since the fall of 2020 essentially. There were
multiple investigations conducted by governmental
authorities. internally by the company pre -petition,
which Mr. Worthen spoke to earlier, and then
most recently post -petition by the UCC, who
takes their fiduciary role very seriously. The
UCC ultimately agreed to support the derivative
settlement and the narrower releases and exculpations
in the plan for officers and directors. and therefore
we believe that more than adequate investigation
has been performed. Next, the holders of the
equity interests argue a lack of meaningful participation
in the bankruptcy process. The Young Declaration
at docket number 952 shows that all holders were
provided with notice of interim approval of the
disclosure statement and of the planned confirmation
hearing. The debtors took in all the informal
and the formal objections that were filed, irrespective
of when, and we are now addressing them here
before Your Honor. Bankruptcy Code Section 1126
-G, we believe, shows clearly, and that's consistent
with Your Honor's ruling upon this solicitation
procedures order that class five equity holders,
because they're not entitled to anything under
the plan, they are deemed to reject and simply
not entitled to vote. And so we think that under
these circumstances, holders of equity interests
have had all the meaningful participation that
they're entitled to in these cases. Just the
last point that I will address is that Class
5 equity holders argue unfair treatment. And
while I do sympathize with them, unfortunately,
under the absolute priority rule, under Section
1129, B2B, Romanet 2. Senior classes must be
paid in full before junior classes can receive
any distributions under a Chapter 11 plan. And
the liquidation analysis and the market test
that we've conducted over the course of these
cases prove conclusively that they simply are
not entitled to any distribution on account of
their equity. With that, Your Honor, I'd ask
that you overrule the Class 5 equity holder objections.
I did just want to note that at some point I
saw one of the informal objectors pop up on Zoom,
and I will leave it at that. Okay. Let me start
by asking if the objectors who filed formal objections
would like to be heard. So I'd first invite Ms.
Scudder if she's on the line to offer her comments.
Ms. Scudder, are you there? Okay, I hear no response.
And then Mr. Niparko, are you on the line, sir?
Okay, again, for the record, I've paused, waited
for a response, and I've heard no response from
either Ms. Scudder or Mr. Naparco. Are there
any others on the line who are equity holders
who wish to be heard? Okay, the record should
show that I paused about ten seconds and have
heard no response. Thank you. Okay Okay, mr.
Morris I believe that leaves the Milton equitable
subordination objection, which I think we talked
earlier We maybe take a break and then come back
given that it is Friday afternoon Still with
great weather outside. I'd propose that we take
a very accelerated break and conclude today's
proceedings as promptly as possible. Yeah, I
agree. Also not to put your staff at any inconvenience
as well. Yeah. Now, I'd like to come back on
the record at 1 .15. And, you know, I think we
should think conceptually about what it is that's
before us with regard to equitable coordination
that gives everybody a chance to... refine their
presentations for the afternoon. I think I've
hinted at some of it. It seems that the analysis
for me is that, again, I have President Trump's
pardon, I have the conviction, and I have the
orbital award that was confirmed by the district
court. in Arizona, and those are sort of the
issues that have been put in play in addition
to remarks that President Trump has represented
in the papers to have made following the granting
of the pardon. As I've indicated earlier, it
seems to me that there is an issue, well, there's
a matter of issue preclusion, and that I have
the fact of the conviction. I have the fact of
the orbital award. And I can't revisit any of
the findings made there. So we've had argument
about the effect of the pardon. I'll offer an
opportunity for parties to address this issue
following lunch. But given... Well, let me start
with this. Is there any question that the pardon
that was attached as an objection to Mr. Milton's
objection is the pardon that President Trump
granted? We don't believe so, Your Honor. We've
indicated it's not an innocence pardon. It's
the normal regular way pardon that... There's
no my question is there's no dispute about there's
not gonna be any objection to them. It's authenticity
or anything like that. Okay, okay, so again Have
an opportunity to address this point. I want
to offer you the chance to think about it The
You know my presumption of course is that is
that like any president president Trump speaks
with absolute clarity when he issues a pardon.
And the pardon says what it says. Any comments
that may have made outside of the pardon would
strike me as likely being inadmissible as extrinsic
evidence to interpret what I think is a fairly
straightforward and robust statement about the
nature of the pardon. So I'm not making any decisions
about admissibility of evidence, but I do want
to offer you the opportunity to consider that
as you prepare for the afternoon. So I think
that the way I'm conceptualizing it, and I've
spent a great deal of time. thinking about this,
that the analysis requires looking at the findings
of the courts and the arbitration panel that
was confirmed by a court. What is the effect
of those? Whether issue of preclusion applies
and assuming for the sake of argument that the
pardon would carry with it a determination of
innocence, whether that's supportable under applicable
law and whether in fact that occurred. So I think
it could, I think with those comments, which
I hope are helpful, I think it can inform the
evidentiary presentation. for the afternoon,
but it strikes me as, you know, if I go, if I
make a determination that equitable subordination
is appropriate, then I don't need to get to the
alternative relief that was requested, which
was disallowing the claim. If on the other hand,
I determine that equitable subordination is not
warranted, then there is a claim objection and
there's... there is an issue that we have to
determine there. So it may be that we deal with
equitable subordination first, and after I've
had an opportunity to consider everything before
me, if we need to get to the claim allowance
thing, that we can deal with that. But I think
a step -by -step approach might be more efficient
for everybody. I agree, Your Honor, and we'd
be happy to proceed in that manner. Okay. Since
I'm talking about Mr. Milton's issues, let me
just hear from Mr. Cousins or Mr. Brannick if
that conceptual approach to how to deal with
the afternoon's proceedings makes sense to you.
Good afternoon, Your Honor. Scott Cousins on
behalf of Trevor Milton. Mr. Morris and I did
have a discussion about... it's not really bifurcated,
it's the gating issue. And then bifurcation,
whether it goes back to the second arbitration
panel or the court determines indemnification
rights and reasonableness of fees. So I agree
with the approach, I hear you loud and clear
on both the criminal versus the civil, as the
court knows, everybody knows, pardon doesn't
get you out of civil liability, just related
to the... conviction and we'll be prepared to
address that. I'm going to defer to the court.
Mr. Milton would not need to testify on the gating
if the court determines the gating issue then
we wouldn't need testimony about the claim because
you would have subordinated it but I guess to
create the record I think I have to put Mr. Milton
on to talk about that and then whether court
gives that any weight in bifurcates or whether
the court knocks it out under 510c would come
into play. Well I think what might be most efficient
would be for us to view them as sort of two separate
proceedings because if the equitable subordination
issue turns out to be dispositive then there
would be no need for Mr. Milton's testimony on
the allowance and reasonableness of the fee issue.
And so I tend to think that efficiency would
ask us to actually bifurcate those proceedings.
I mean, all in this afternoon, but that's where
I'm going with that. The debtors are happy to
proceed in that fashion, Your Honor. That makes
a lot of sense to us. Does that make it... Does
that prejudice in any way your ability to argue
the equitable subordination issue? I take not
because I think you've acknowledged that that's
not an issue that requires testimony. That's
correct, Your Honor. And I think that does make
sense. And Mr. Morrison actually and I just yesterday
talked about, you know, is there a way to make
it more efficient for the court. Well, as Mr.
Morris pointed out, it's a Friday. The weather
is beautiful. No, but the important thing is
that it matters a great deal to me that Mr. Morris
has the opportunity to make all his arguments.
And my client came in for a long way, so I want
to make sure that if the court says, yeah, I
want to hear that, that he has an opportunity
to testify. Oh, he will. Yeah, absolutely. I
appreciate him coming, and that's why we're here
today. Thank you. Okay, so we'll come back at
1 .15. We're in recess. Okay, Mr. Morris. Good
afternoon, Your Honor. David Badley. We don't
want to interrupt the proceedings later. I think
Ms. Shoyer and I may need to depart in about
an hour. I've run it by Mr. Morris. I don't think
he has any reason why we need to stay. I just
wanted to make sure Your Honor would be okay
if we were to excuse ourselves. Certainly. Thank
you for coming up today. Okay. Thank you. Joshua
Morse for the debtors. I think based on our pre
-break order of operations, we're gonna do the
Milton Equitable Sport Nation objection and then
see where that takes us. And then if we need
to do the claim disallowance, we would do that
secondarily, but we would focus now on the equitable
sport nation. So that brings us to the equitable
coordination objection, which appears at docket
number 911, which takes issue with the debtor's
proposed classification and treatment of the
Milton claim into class number eight, as detailed
in our Milton claim memo, which appears at docket
number 808, which was filed back on July 29th.
debtors seek to equitably subordinate the proof
of claim number 54, which appears as exhibit
number 38. Just for the record, it has not been
admitted. It's just here today or in the alternative
to disallow the Milton claim in its entirety,
but we hope not to need to even get to that.
The class eight of the plan consists of equitably
subordinated claims. The only one that's at issue
is Mr. Milton's claim. and the Milton claim is
classified under the plan as Class 8 pursuant
to Section 510C of the Bankruptcy Code and the
principles of equitable subordination. There
are three elements directionally to a request
for equitable subordination. Number one, there
has to be inequitable conduct. Number two, there
has to be injury to the debtor or its creditors.
And number three, Equitably subordinating claim
can't be inconsistent with the bankruptcy code.
As set forth in our confirmation, our brief and
supported confirmation, we believe all three
of those elements are more than satisfied here.
Turning to the first element, which is the inequitable
conduct, as the court is well aware, Milton was
an insider of the debtors. He served as the debtor's
CEO and executive chairman until September of
2020. and he dominated the debtor's communications
with the public. There's evidence of that in
exhibit number 13, which is the indictment at
page 12. Milton, quote, I wanted to be in control.
I wanted to be in communication with the public
about what we are. As an insider, Milton's conduct
demands closer scrutiny under the case law, and
Milton must rebut the debtor's material evidence
of unfair conduct by proving the fairness of
his transactions with the debtor. That's from
the Mid -American Waste Systems case, which we're
going to be referring to a lot during my argument
today. That's at 284 BR 53, page 69, bankruptcy
decision from the District of Delaware here in
2002. Milton used his insider power to control
the debtors and ultimately breached his fiduciary
duties of loyalty and good faith to Nicola. and
was ultimately convicted of securities and wire
fraud. But as we've talked about earlier, we're
not here to rehash or retry or do any of that
with respect to that conduct because you have
more than enough evidence in front of you about
that. And let's just go through just very briefly
what that evidence is. The contours of that behavior
have been litigated ad nauseam. by both the Milton
Award arbitration panel and SDNY. The parties
to the breach of duty arbitration proceeding
conducted months of extensive discovery before
holding the eight -day hearing before the three
-member arbitration panel that resulted in the
Milton Award. The Milton Award conclusively found,
as you've seen, that, quote, Milton violated
his fiduciary duties of loyalty and good faith
to Nikola through a pattern of false and misleading
public statements. about Nikola's products and
the state of their development and by subordinating
the company's interest to his own by refusing
to all efforts to review and approve his public
statements in advance. That's at exhibit 25 of
the redacted Milton Award at page 53. The Milton
arbitration panel also held, quote, we could
not conclude Milton acted in good faith and in
a manner that Milton reasonably believed to be
in or not opposed to the best interests of Nikola.
Accordingly, there's no basis for Milton to receive
indemnification. That's exhibit 25, the redacted
Milton Award at 59, under this indemnification
agreement. That forms the basis for his claim
number 54. And Milton is precluded, as we've
talked about, from re -litigating the Milton
Award before this court. The fact that the Milton
Award is on appeal in the Ninth Circuit, which
is something that I would have expected them
to argue, but they didn't, is of no consequence.
And I just want to give you comfort of that.
The pendency of an appeal does not mitigate the
preclusive effect of an otherwise valid judgment.
And this is from the U .S. versus five unlabeled
boxes case. 572 F3rd 169 at page 175. That's
a third circuit case from 2009. And then upon
confirmation of the Milton Award by the District
Court in Arizona, the Milton Award became a valid
and final judgment entitled to the same force
and effect as a judgment in any other action.
That's from the Teamsters Local 177 versus UPS
case, found at 966 F3rd 245. at page 251, also
a third circuit case from 2020. Milton's revisionist
history with respect to this Milton pardon also
lacks merit. In the first instance, this statement
by President Trump is inadmissible hearsay, not
only under federal rule of evidence 801C, but
under cases that include US versus Salins. that
we cited, 993, F2nd, 344, at page 346, which
is a Third Circuit case from 1993. There's also,
as we indicated in our papers, no indication
that Milton received a quote -unquote, innocence
-based pardon. We explain that in our memo at
pages 53 and 54. Now, a pardon for actual innocence
must state on its face that it was based on actual
innocence. as indicated in the, I'm gonna mess
up the pronunciation, Bultby versus U .S. 2024
Westlaw 322 -0261 at star eight, that's a federal
CL June 27th, 2024 case. Like the Benton pardon
that we cited in our papers, Milton's pardon
is silent on its face. as to Milton's innocence
or rehabilitation. Rendering their arguments,
which Mr. Cousins appeared to move away from
right before we left for lunch, totally moved.
We attached a copy of that Benton pardon, or
excuse me, it's admitted as exhibit number 34.
So you can compare that pardon with Mr. Milton's
pardon and see they're exactly the same. And
that case is US versus Benton, 98 F4 1119. It's
a DC circuit case from 2024. With that, we believe
that the inequitable conduct element has been
established. Element two is injury to the debtor
or its creditors. We've submitted a mountain
of evidence on the injury. and also had Mr. Worthen
supplement that evidence this morning during
his supplemental testimony. Milton's inequitable
conduct directly injured not only Nicola, but
its creditors as well. Following the issuance
of the Hindenburg Report, which publicized multiple
false and misleading statements made by Milton,
Nicola's stock price dropped approximately 43%,
resulting in substantial losses to not only Nikola's
investors, but substantial harm to the debtors
as well. That's found at exhibit number 13, which
is the indictment at page 43. Thousands of retail
investors targeted by Milton's inequitable conduct
suffered substantial losses, in some cases totaling
tens of hundreds of thousands of dollars, compromising
their financial security and retirement savings.
same exhibit at the same page, 43. Milton's false
and misleading statements caused an onslaught
of litigation against the debtors. We heard about
that this morning. Not only the SEC investigation
that resulted in the $125 million civil penalty,
of which approximately $45 million was paid as
of the petition date, but there's another $4
million that's going to be paid to the SEC under
our plan. Nicola incurred substantial additional
legal fees defending against the SEC investigation
and various class actions stemming from Milton's
conduct related to Mr. Milton's conduct. As Mr.
Worthen testified this morning, certain of those
costs were quantified in the arbitration in the
amount of about $46 million, but those also did
not include the $11 million. that were paid to
casualists to conduct the arbitration. Mr. Worthen
also testified this morning about increased cost
of capital, increased cost of D &O insurance,
loss of customer opportunities, including General
Motors and others, as well as lost relationships,
some with investment banks, Morgan Stanley, and
things like that. The debtors were ultimately
unable to ever recover from the reputational
damage. civil penalties and amassing legal fees
caused by Milton's misconduct, which is a substantial
factor for why we stand here before Your Honor
today. Under the Mid -American case that I mentioned
in the beginning of my presentation, Milton's
burden is to rebut all of this harm that we have
brought before Your Honor, and that's found at
284 BR, pages 76 and 77. there's no evidence
that's been submitted to rebut any of that harm.
As a result, we believe element number two has
also been established. Element number three is
that the equitable subordination that the debtors
have requested is consistent with the goal of
the bankruptcy code. We believe that Milton's
conduct here skewed the prospect for distributions
in this case on an equitable basis. and subordination
of his claim corrects this. What do I mean by
this? So if the court does not subordinate or
disallow his claim, he's presumably going to
be permitted to share pro rata in class three
with the other general unsecured creditors. Part
of the trust assets that are going to be used
to satisfy general unsecured claims are going
to be collections from the Milton Arbitration
Award, which is currently $96 .8 million, plus
we're going to lop on interest, plus the $4 million
that's going to be paid to the SEC. This would
obviously include proceeds under the Arbitration
Award from 97 % or his 97 % share or fault from
the SEC fine, among other things. He should not
be able to share rateably with other general
unsecured creditors on account of claims held
by debtors against him because of his wrongful
conduct. All other arguments and issues aside,
that would in and of itself be an inequitable
result here. And accordingly, subordinating his
claim is not inconsistent with the bankruptcy
code. It essentially writes the wrong. and we
submit that subordinating his claim on an equitable
basis under 510C as we've requested under the
plan is more than appropriate. Okay, thank you
Mr. Morse. I'll reserve for any comments. Okay,
let me hear from Mr. Hiltonstein please. Mr.
Cousins. Good afternoon, Your Honor. Good afternoon.
Mr. Cousins on behalf of Trevor Hilton. We agree
with Mr. Morse. Mr. Milton needs an opportunity
to rebut, and he's here to testify. What we're
seeing, Your Honor, is loosely nomenclature a
double penalty. The 97 % and the 3 % that we've
been talking about. But then an effort to wipe
out, subordinate, whatever the term is, his claims.
Now that wouldn't be an unsecured claim because...
classical netting set -off recoupment scenario
when A owes B and B owes A, that's netted, and
he needs an opportunity to rebut the claims of
inequitable conduct and ultimately prove up his
claim. Otherwise, he's suffering effectively
a double penalty, the 97 % and the vacation,
for lack of a better verb, of his potential counterclaims.
We're prepared to put him on the stand. We're
prepared to talk about it. But we do need an
opportunity. We would request the court an opportunity
before the court just subordinates without the
bifurcated process that we're talking about.
Let me ask you this. What type of evidence could
I consider by way of rebuttal when, you know,
as I signaled earlier, I believe that just on
the grounds of issue preclusion, there are facts
that have been established judicially that are
binding upon binding upon this court so how could
we possibly rebut any of that when you know if
you look at the the arbitration ruling you know
I read it and I dozens of pages of findings regarding
that the tribunal found to give rise to liability
and the effects of that conduct. I think that's
all been established in such a way that there's
just there's no further evidence on that I can
consider because it's already been done. Well
what I'm talking about is his ability whether
we cited the some cases on this front to assert
recoupment netting set off. A claim that if the
court equitably subordinates his claim, that
set off, that recoupment is gone, it's vacated,
and he has no ability to mitigate his 97 % responsibility,
and it's effectively akin to a default. we certainly
believe that under principles of equitable subordination,
the court needs to look at all factors, including
his potential claims, which he's prepared to
talk about and testify about, and address, I
do want to address the testimony that Mr. Worthen
went into and asked the court. to take a look
at the unsealed, or I'm sorry, the sealed version
of the exhibit that we walked through, pages
79 to 81, where we have an instance where the
debtors are asserting that he has no right to
indemnification and he has no right to advancement
of fees. But that's not what, I want to be careful,
that's not what the, that's what the, That's
not what the sealed version of that says. And
there's a separate arbitration panel, and I highlighted
it this morning before lunch, excuse me, that
is prepared to address that, the reasonableness
of the fees, the rights to advancement, the right
to indemnification, or this court could do it
in a, I don't know, a mini trial, an estimation
proceeding, and determine whether the fees that
Mr. Worthen testified he reviewed and objected
to the Cahill -Gordon fees are reasonable. And
that's all I'm asking for is the court address
the bifurcation issue. Don't subordinate now.
Let us address the counterclaim, the recoupment,
et cetera. And in particular, I think when you
look at the solicitation, for example, that's...
the liquidating plan talks about Milton's breach
of fiduciary duties eliminated his entitlement
to indemnification. Well, that's not true, Your
Honor. They solicited based on that. And when
the court looks at the sealed version of the
award, you'll see they didn't even agree to that.
Certainly the panel didn't. And again, this is
a threshold matter, he's not entitled to a demarcation.
His bold -faced attempt to further delay the
administration, it's all over their pleadings,
in particular the plan, the confirmation brief.
And the committee even goes and adopts that and
says... He was not entitled to indemnification
for the failure to act in good faith in a manner.
And they're not citing one of the two arbitration
decisions, which is up on appeal in the Ninth
Circuit. But it's ignoring the second one. And
court order recall, we were here for the court
seeking relief from the automatic stay in order
to go back to what we're calling the second arbitration,
but Mr. Milton commenced it first. And I would
just encourage the court to see that, that this
is so one -sided, it amounts to a double penalty.
He doesn't get to liquidate his claims and set
off those claims against the 97 % that we've
been talking about. With respect to the pardon,
yes, he was indicted. Yes, he was convicted.
Yes, he was sentenced to four years. But yes,
he was pardoned. But this isn't... the general
pardon, for example, the Carter administration
in the... I'll find it in a second. In the Noonan?
Yeah, and that was just a general draft. I don't
mean the pejorative, but it was essentially a
pardon, a general pardon that wasn't specific,
and there wasn't a specific finding of innocence.
take it what it's worth, but you know, President
Trump did say that Mr. Milton did nothing wrong.
It's a specific pardon, and I'm willing to stipulate,
Your Honor, that for purposes of the criminal
piece, and we respect the pardon, and it's Hornbeck
Law, that it doesn't address state law claims,
it only addresses the federal law claims, and
he specifically found that - Norton was found
innocent. I read the pardon, he didn't say that.
We know of instances where the President is reported
to grant a pardon based upon his belief that
the person convicted was innocent. So we know
that that a president knows how to say that in
a pardon. President Trump, he just didn't say
it. It's been represented to me and I believe
that I read the passage in your objection where
he said he did nothing wrong. Aren't I in the
first instance required to look at the pardon
and Determine if it's clear on its face and only
if I can't decipher it At that point might I
look to extrinsic evidence to interpret it, but
I do believe that our president Speaks with great
clarity and and did so in this instance when
he granted the pardon And I don't I don't know
Why I would look beyond his own words in that
part and to try to interpret its meaning well,
I will Suggest politely your honor This to my
knowledge is an issue of first impression where
bankruptcy courts asked to weigh The impact of
a pardon in connection with 510. I believe it
is And and not to suggest that I understand the
court, but I also understand that you don't have
to address the criminal piece when, if you look
at the civil piece, that gets back to the double
penalty, as it were, is that he has to have a
right to assert his claims to mitigate the 97
% that we've been talking about. The Supreme
Court cases, there's some very old cases, the
Garland case, for example, talks about... blot
out the existence of guilt. I think it's far
simpler for the court to look just at the civil
piece as opposed to the criminal piece. And I
look for guidance from bankruptcy courts. It's
not there. I understand the court's point about,
it's not parole evidence, but secondary evidence
to indicate what President Trump meant in connection
with the pardon. But we certainly believe that
You don't have to get there you can just look
at the civil peace with respect to civil peace
this is a court of equity and under 510 C and
the court is required to weigh the principles
of equity and We believe that Mr. Milton and
Mr. Morse agrees that we must be able to rebut
the claims of inequitable conduct, the injury
to creditors and not being inconsistent with
provisions of the bankruptcy code. Wasn't the
opportunity to do that at the arbitration? And
then in the subsequent proceedings in the district
court in Arizona and then ultimately in the appeal.
This isn't the place to determine the extent
of this liability or to the extent to which it
might have been mitigated by activities that
would be imputed to the company because it's
already been done. Other than there's a proof
of claim that is in this court that the court
seeking is being asked to subordinate. And I
think that's an independent basis, I understand.
And again, I'm not asking this court to revisit,
I'm not sure if it's full faith and credit or
racist. It's issued preclusion. Yeah, issued
preclusion or whatever. Yeah, why would this
court second guess a finding by a tribunal? Well,
it's not why would I. I can't. I literally don't
have that authority. There's nothing I can do
with that. That's the concern that I want to
tease out and get an opportunity to hear about,
because I don't think that I quite literally
have that authority. Fair enough. But Mr. Milton's
here. He's entitled to rebut. What we'd ask is
that he be allowed to take the stand. and talk
about his conduct, the company's conduct, and
the $69 million in attorney fees. For example,
Well, the 69 million dollars in attorney's fees
only becomes relevant if we make it past the
five Tennessee Exactly the dating and we've been
quiet. I agree without your honor I will note
that mr. Milton did not get a chance in the arbitration
to testify because he was Invoking his fifth
amendment privilege. Well, it's not even you
have a chance. He made he made probably the right
decision But it was a decision that he was able
to make for himself. Your Honor, you and I are
in agreement. I might be using the wrong words,
but yes, that's right. He invoked that privilege.
Yes, he could have testified. He could have potentially
risked that exposure. He doesn't have that exposure
as a result of the pardon. And I believe it's
important for the court to weigh both... The
conduct that he's been accused of. That he's
been found liable for. Well. It's different.
It's different. Not in the SEC. For example,
the SEC hasn't made a finding. Well, the arbitration.
The arbitration. And in the criminal case. And
an opportunity to either prove up his claims,
rights on demification, advancement, and reimbursement.
either here or before the second arbitration
panel. And Your Honor, I'm trying to stay away
from that because you already denied that and
I'm not trying to re -litigate that. But I just,
at some point that needs to be liquidated and
what I suggest, respectfully, is save the subordination
piece. Let's go to the bifurcation piece, address
that claim. It's a secured claim, it's not a
class three claim. and see if he can net off,
net set what set off, et cetera, his claims.
And he's certainly here to testify if the court
would be willing to hear from him. Well, should
we turn back to that issue about set off and
recruitment? Because I thought that was an interesting
issue. You cite one case. You cite the Kaiser
case, which is a Judge Walrath case. and that
in turn cited a Third Circuit case. I think Lee
versus Schweiker? I did read those cases and
in neither of those cases was subordination of
a claim at issue. Look, I know your work well.
If you had found that case that addressed it
in the context of... equitable subordination,
you would have cited it. But in reading the two
opinions, Judge Walratt's opinion and the Third
Circuit opinion, I kind of struggle to sync it
up with the considerations when determining whether
equitable subordination is warranted under Phi
Tennessee. So maybe you could address that more
directly. That's fair. The way I've been thinking
about it, and we did not cite this case, it's
Jersey Medical Third Circuit decision, is what
it talks about as a recoupment is a common law
right. It's not in 553, whatever the set off
provision, it's not a back door way of calculating
secured claim, but it's a common law right. So
he has a right to prove up that claim. And if
that right mitigates the 97, loosely saying the
97%, he should have an opportunity to do that.
And that's just consistent with due process.
So Jersey Medical, if I recall, had to do with
Medicare recoupments. But it talks about the
common law right of recoupment that's not statutory.
And that's the way I've always looked at it.
And Your Honor, we did not cite that, but it's
just... the way I viewed it now that this has
developed. We are not trying to re -litigate
the arbitration. I understand very clear we have
an appellate right. The court is respectfully
or as the court points out not allowed to collaterally
attack that or address it. But what I'm talking
about is the bifurcation process is that it would
be inequitable. It would be a double penalty
if the court today equitably subordinated his
claim and didn't give him the opportunity to
prove up the other pieces of his claim. I understand
the argument, Mr. Cousins. Thank you. Mr. Morse,
do you have any response? Just a few pieces to
make you a little more comfortable with some
things that Mr. Cousins said, perhaps. One thing
he did indicate incorrectly. that we solicited
on the basis of Mr. Milton's claim being fully
subordinated. That's incorrect. If you look at
one of my favorite documents in this case, as
Mr. Cousins knows, is our liquidation analysis,
which he did not read. No, I did review the liquidation
analysis. I understand the point. No, but exhibit
B to docket Number 774, that's the solicitation
version. And if you look at page 113 of 115,
these are the global notes. This talk about,
you know, various, the notes to the liquidation
analysis. So in note 14, the bottom of that page,
It talks about the estimated general unsecured
claims. The low case, and I'm quoting here, the
low case assumes a scenario where claim number
54 filed by Trevor Milton is equitably subordinated
and or disallowed in full. The high case scenario
assumes a scenario where claim number 54 filed
by Trevor Milton is allowed as a general unsecured
claim in the amount of 32 .91 million, which
represents the difference between the filed claim
amount, which is the 69 .8 million that we've
been talking about, and the aggregate amount.
aggregate amount of indemnity, I mean, going
to the next page, expenses Nicola has already
advanced and paid to Trevor Milton, the 36 .844
million pursuant to orders entered in the Milton
fee arbitration and otherwise. This ties back
to in the Milton claim memo, this is the paragraph
that Mr. Cousins partner, inadvertently started
talking about with Mr. Worthen on the stand that
confirmed that we've already advanced a substantial
portion of this $69 .8 million, number one, and
that we believe the fee arbitration panel has
already found that another large portion, the
17 .2 of Cahill's fees has already been found
to be unreasonable. I believe this is why that
they haven't responded to my request for confirmation
of how much is still outstanding because 69 .8
million isn't outstanding. It's more like 14
or 15 or something like that because we've already
paid 36. The arbitration panel, the fee arbitration
panel has already found 17 to be unreasonable.
And these other 18 or 19 firms, if you look at
the indemnification award and his indemnification
agreement, which is my next point, are probably...
not going to be able to fall within the appropriate
indemnifiable expenses under that agreement.
Now going back to this whole point of under the
indemnification agreement, indemnification award,
and trying to trap Mr. Worthen into saying this,
that, and the other, the whole point of that
is two. And I'm going to just clarify this for
your honor. So when you go back and read this,
it's going to be very clear. On page 59, And
I'm going to just use page numbers because some
of these are redacted provisions. So on page
59, the panel found, just directionally, that
he was not entitled to indemnification because
he breached his fiduciary duties. And this goes
back to his indemnification agreement, which
is exhibit A to his proof of claim. This is not
admitted because there was an attempt last night
to have us agree to admit this that we thought
was perhaps for an improper reason and so that's
why we didn't move to agree to admit this and
we didn't want to get tricked into anything.
But this indemnification agreement is talked
about ad nauseam in the arbitration award. You
can read it yourself. but it's paragraph 2c at
the top of page three, and it talks about that
essentially he's only entitled to indemnification
if indemnity acted in good faith and in a manner
indemnity reasonably believed to be in or not
opposed to the best interest of the company.
Under relevant case law, when you are convicted
of fraud and wire, all the things that we're
convicted of, that the pardon does not strip
away. It strips away the penalty associated with
that, but doesn't strip away the underlying conviction.
You are not acting in the good faith, which is
why the panel found, we believe, or we assert,
that he's not entitled to indemnification. You
can read for yourself why the panel thought that.
This other reference on page 79 is talking about
something wholly different altogether. It's talking
about the $36 .8 million and whether the arbitration
panel can award those damages to the company
as part of the award. Those are the monies that
we had already advanced to Mr. Milton by the
separate fee arbitration panel. And this arbitration
panel, it's more of like a jurisdictional issue.
They are saying, again, our interpretation, that
we don't want to mess with that panel. If you
believe that you're entitled to go and do that
clawback, then you go to that panel and you go
force Mr. Melton to give that money back to you
with that panel. That was our interpretation
of this. That's that footnote that they tried,
the gotcha footnote that they tried to have Mr.
Worthen admit to earlier, and that's what this
whole thing is about. But importantly, if you
look at the district court decision, affirming
the arbitration, panel award. That's exhibit
50. If you look at page four, line 18 through
21, and I'll quote, talking about what the panel
found, it then settled that there was no basis
for Milton to receive indemnification under the
indemnification agreement, but that he was entitled
to contribution from Nicola based on the contribution
provision. Okay, so he may be entitled to something
else, but he is not entitled to This indemnification
and so if he's seeking indemnification That's
what he's asserting under this claim. We've we've
paid Most of it to him. We've asked for the documents
him getting up on the stand and saying That we've
paid it with this with that that is not going
to do anything today other than cause more of
a circus than we've already had before, Your
Honor. The other thing... It's the world's most
boring circus. Yeah, it's the world's most boring
circus, to be sure. No, it hasn't been a circus.
No, but also it's irrelevant. If you find that
the claim is... whatever it is... which doesn't
matter right now, is equitably subordinated.
It may matter at some point down the road if
the claim is $1, if it's $69, or if it's the
$300 million that they asserted in two pleadings
signed by their lawyers in previous situations.
It doesn't matter because that only matters down
the road. if we somehow collect millions and
millions and millions and millions of dollars,
as a litigation trustee does. But today, equitable
subordination, we've proven it up. It was their
time to come and at least make an attempt to
show why it wasn't appropriate. And that time,
and that... That process is not to have Mr. Milton
get up on the stand and say that I paid those
expenses, or let me explain who consulting for
$983 ,000 .33 is. Okay. Mr. Cousins. Thank you,
Your Honor. Mr. Worthing testified to the payment
of Kirkland's fees. We should be entitled to
the same testimony. Mr. Morris can cross Mr.
Milton as to the basis for the claim and his
theories and this and that and the other thing.
We just request an opportunity for him to testify,
not rule on the gating item, the gating issue,
the equitable subordination, and then address,
perhaps address that after Mr. Well think about
gating issues so that they come first. I'm not
being smart. That's kind of the definition of
it. It has to come first. And I understand and
that's why I'm saying that absent hearing from
Mr. Milton, it's a double penalty. His claim
is vacated and we all can agree that equity,
a subordinated claim, is never going to receive
a dime in this case. So to say that, oh, maybe
one day under 502J I can reconsider and have
his claim allowed, equity's not going to, or
subordinate a claim, would not get a recovery.
I understand. Thank you. Thank you, Mr. Cousins.
Did anybody else wish to be heard before? Conclude.
Your Honor. Doug Mantle Morrison for us on behalf
of the official committee your honor We submitted
a statement in support of confirmation the chapter
11 plan and it's one of these rare instances
where I couldn't agree more with my colleague,
Mr. Morse Doesn't happen that often but I think
he's identified all the key issues and I think
we have a dating item Before us before we need
to hear any further evidence. Thank you. Okay.
Thank you Look, I've given this issue a great
deal of consideration and I found the argument
today to be very well presented. It doesn't change
the analysis that I arrived at as of this morning.
So I'm just going to give my ruling on the equitable
subordination issue. I am going to overrule the
objection. The debtors are seeking to subordinate
Mr. Milton's claims under 510C1 and that section
allows for subordination of a claim under principles
of equitable subordination. This court has enumerated
a number of times over the principles of equitable
subordination and the proper method for determining
whether a claim should be equitably subordinated.
in rating mid -American waste systems is a significant
case on this point. And in that case, this court
explained that the essential purpose of equitable
subordination is to undo any inequality in the
claim position of a creditor that will produce
injustice or unfairness to other creditors in
terms of distribution of the estate. we identified
the three -pronged test that Mr. Morse pointed
to, which are that the claimant must have been
engaged in some type of inequitable conduct,
that the misconduct must have resulted in injury
to other creditors, or conferred an unfair advantage
on the claimant, and that equitable subordination
of the claim must not be inconsistent with the
bankruptcy code. We know that from Mid -American
and a number of other opinions, including my
own opinion in AmeriFirst Financial, that claims,
when asserted by an insider or a fiduciary, require
a higher level of scrutiny. And when a claimant
is an insider, there are three categories in
misconduct that constitute inequitable conduct.
which goes to the first prong of the test. And
those are fraud, illegality, and breach of fiduciary
duties, under -capitalization, or the claimant's
use of the creditor as an alter ego or mere instrumentality.
In support of the request for equitable subordination,
the debtors first assert that Mr. Milton is an
insider. I think we can all agree that he was
an insider. He was the founder, CEO, at the time
of the misconduct, and plainly, he was an insider
for purposes of the first prong of that three
prong test. And when we get to that first prong,
to look at inequitable conduct, as I've signaled
throughout today's hearing, I do find that it's
already been established in other proceedings
that... Mr. Milton committed misconduct in the
form of fraud, illegality, and breach of fiduciary
duties. And his criminal conviction and the arbitration
finding evidence this. And it's not something
that is subject to challenge. I find the principle
of collateral estoppel applies here or issue
preclusion. for that reason, there is no evidence
that I could hear that would anyway tend to mitigate
the damage or otherwise affect the analysis on
equitable subordination. And that's why I don't
need nor do I think it's appropriate to hear
any other evidence in support of the equitable
subordination issue. In the, what's been referred
to as the Milton Award, the arbitral finding,
the panel found that Mr. Milton violated his
fiduciary duties of loyalty and good faith through
a pattern of false and misleading public statements
about Nicholas' products and the state of their
development, and by subordinating the company's
interest to his own by refusing all efforts to
review and approve his public statements in advance,
which goes to some of the testimony that we heard
this morning. Thus, it was established in the
arbitration that Mr. Milton at an minimum breached
his fiduciary duties, which is inequitable conduct
as we understand it when assessing whether equitable
subordination is appropriate. The criminal conviction
also evidences the commission of fraud and other
illegality. And the argument that Mr. Milton
has made is that his criminal conduct can't constitute
evidence to support equitable subordination because
his contention is that the president made a determination
of innocence and pardoned Mr. Milton on the basis
of that innocence. And I disagree with this argument
for several reasons. First, the pardon power.
does not extend to the authority to determine
innocence. And the Supreme Court and the Third
Circuit have reviewed the President's pardon
power multiple times. We talked about Inray Garland
from 159 years ago. There's been a lot of case
law in the interim which shows how the Supreme
Court has evolved in its thinking on what it
means to receive a pardon. And the third circuit
in the Noonan opinion engaged in a really deep
dive of what a pardon is. Where does the power
come from? I mean, it's a great discussion of
how the founders would have understood the pardon
power based upon the English common law and goes
back hundreds of years in its analysis. So we
have guidance. The ex parte Garland case did
say that a presidential pardon blots out of existence
the guilt of the convicted. However, there is
that subsequent jurisprudence. One could look
at the Nixon versus United States opinion from
the Supreme Court where they said that the granting
of a pardon is in no sense an overturning of
a judgmental conviction by some other tribunal.
And the Supreme Court in Noonan and there were,
I spent Leroy Dayweek in reading pardon cases.
My fault is very interesting, but I really wanted
to understand this because I think it's a very,
you know, it's an important issue. And the courts
have very widely recognized that Garland, the
dictum in Garland is not, it's not good law.
It's not the standard that the Supreme Court
applies. And the Nixon opinion is pretty explicit
in that regard as well as in earlier cases, in
a bunch of cases since. The Noonan opinion, which
of course is a Third Circuit opinion and therefore
binds me, offers particularly helpful guidance
for this matter, I thought. And although that
case is about whether a pardon can cause a court
to expunge the pardoned person's criminal record,
as I noted, it offers a fulsome detailing of
pardon law, an analysis of the pardon's effects
and the extent of a president's power when issuing
a pardon. And one of the things about the Newtonian
opinion that is most interesting and it... it
again, their analysis I do believe to be binding
on me, is that they looked at the interaction
between the presidential pardon power and the
judicial power. So it emphasized that there's
a separation of powers and under Article 2, Section
2 of the Constitution, the president has the
power to grant recieves and pardons for offenses
against the United States. That power is unquestioned.
And it's certainly not an issue here. Mr. Milton
received a pardon. But Article 3 of the Constitution
establishes that the judicial power of the United
States is vested in one Supreme Court and in
such inferior courts as the Congress may from
time to time ordain and establish. And based
on the Third Circuit's analysis, of those sections
of the Constitution, the Third Circuit concluded
that the authority to maintain judicial records,
in the case of expungement, was an inherent judicial
power that the Constitution delegated to the
judicial branch. And because of that delegation
to the judicial branch, the pardon power, which
was delegated to the President in Article 2,
couldn't interfere with the judicial power. So...
In other words, as I understand Noonan, the teaching
of that case is that the president is without
power to adjudicate a person to be innocent,
such that records could be expunged, or that
I think would apply in this case, that I could
find that there was a finding of innocence such
as to erase the existence of the criminal case
and the findings and the verdict in that case.
Because just as the authority to maintain judicial
records is an inherent judicial power, the authority
to determine criminal liability is an inherent
judicial power. And it's one of the most important
powers that judiciary has. So it's when we're
determining if somebody is criminally liable
or innocent, the judiciary has to make that determination.
The presidential power has been described in
various ways as a prerogative of mercy or an
act that the president can make to serve the
public good. But the Supreme Court, you know,
stated A pardon is an act of grace and it's proceeding
from the power entrusted with the execution of
laws which exempts the individual by whom it
is bestowed from the punishment the law inflicts
for a crime he has committed. So the president
did bestow this act of grace on Mr. Milton, but
it doesn't rewrite history or erase the facts
that were determined at his criminal trial. Even
if the pardon power did extend to determine innocence,
you know, I'm left with the point that I made
repeatedly that the pardon is clear on its face
and there was no finding of innocence. And I
assume that the president speaks with complete
clarity and he did so when issuing an official
grant of clemency pursuant to that constitutional
pardon power. And because the pardon is unambiguous
and clear in its face, I don't need to look to,
nor can I look to extrinsic evidence or the president's
other statements to interpret or supplement the
official pardon. So I'm not going to consider
any out of court statements that the president
made when his words were perfectly direct. and
clear and stated exactly what his intentions
were when issuing the pardon. And even if I couldn't
consider the criminal conviction, I do have the
arbitration panel's findings of the misconduct.
And they provide more than adequate evidence,
an overwhelming amount of evidence. to fulfill
the first prong of the equitable subordination
test. In this forum, we can't relitigate the
issues in the arbitration. We can't relitigate
whether he preached his fiduciary duties. Those
findings were made, and the award was upheld
by the District Court in the District of Arizona.
the re -litigating would be contrary to the principle
of issue -proclusion, which I've raised a number
of times, and it applies when there's been a
final determination on the merits, and that's
what you have in the arbitration. So, because
there has been a final determination on the merits
in that arbitration, and as affirmed by the,
and ordered by the district court, Mr. Milton
would be precluded from denying that there was
any breach of his fiduciary duties. So, settled
on that first prong. But I'll go over the other
prongs. The second prong requires that the claimant's
misconduct result in an injury to other creditors
or conferred an unfair advantage on the claimant.
There's certainly overwhelming evidence of that
first prompt, the injury to other creditors,
have extensive unrebutted evidence on that fact.
The evidence before me is that the fraudulent
statements and breaches of fiduciary duty resulted
in an injury to creditors, to shareholders, and
to the company itself. And that damage caused...
millions and millions and millions, hundreds
of millions of dollars in losses. These actions
largely led to Nicola's inability to pay a lot
of its debt, the fall of its stock price, and
ultimately its insolvency. So there's ample evidence
in the record about the harm to the debtors that
was caused by the misconduct. Finally, that third
prong examines whether equitable subordination
or requires that it not be inconsistent with
other provisions of the bankruptcy code. And
there are no other provisions of the bankruptcy
code that anybody has pointed to or that I could
find that would make a finding of equitable subordination
inconsistent with the code. And on the set off
issue, I've looked at the cases that that Mr.
Milton cites and I simply don't find them applicable
to the analysis of equitable subordination. So
I didn't find them of an awful lot of help in
determining these issues. So because the debtor
has met all three prongs for equitable subordination
and because the pardon argument of innocence
fails. I'm overruling the objection to equitable
subordination of Mr. Milton's claim number 54.
I have a few other objections that I need to
address. And the first one that I heard was the
United States Trustee's objection. And again,
I thank Mr. Fox and his office for... a very
thoughtful argument in the thoroughness of the
briefs. As Mr. Fox knows, and as others in the
courtroom are aware, on other instances, I've
found that in opt -out, post -purdue can be an
appropriate mechanism of determining that consent
was given. the United States Trustee's argument
addresses in part sort of a philosophical view
or a doctrinal difference in how this should
be approached with one being a sort of a due
process argument, which is what I've adopted
on other occasions. And on the other hand, this
contract theory that my colleague and friend
Judge Goldblatt applied in the Smallhold case.
I think the due process argument is an appropriate
argument. And in this case, the third party releases
or the opt -out had applied to one class of creditors.
This is not an instance where I've seen in other
places where, for instance, shareholders are
being required to execute an opt -out. This only
went to a fairly small class of creditors. And
it's hard to attach much weight to how many creditors
opted out because there is a creditor apathy
problem. We're all familiar with that. The math
that was recited to me was that we had about
16 % response rate on votes. In my experience,
that's not a bad number. It's actually a pretty
good response. But ultimately, I don't know if
that's... All that germane to the analysis because
my determination is based on that due process
analysis that I think the majority of courts
have employed over a period of many, many years.
There was an opportunity for creditors in class
three to tell us whether they've consented or
not by opting out. It was the ballot and the
papers were clear on their face that if they
wish to opt out of the third -party releases
that they could simply return a ballot and strike
the opt -out box and stake their ground out.
And a number of creditors did it, a number, a
significant number I thought who didn't vote
opted out. So... I do find that the opt -out
mechanism used here was appropriate. On the injunction
issue, I'll suffice it to say that I agree with
the analysis of my colleague, Judge Stickles,
and do find that the injunction here is appropriately
tailored and drafted and similar to what we've
seen in a number of other cases where it's been
approved. And of course, the rule... 30 -20 issue
is no longer in play. But based on all that,
I'm going to overrule the objection by the Office
of the United States Trustee and again, express
my thanks to Mr. Fox and the attorneys of that
program for their excellent work in connection
with this issue that I know is very important
to them. The lead class play is also objected
to the plan. Again, I've given the arguments
a great deal of consideration, and 510B requires
subordination of claims that arise from damages,
arising from the purchase or sale of securities,
and that's precisely what we have here. I don't
agree that subordination must be pursued through
a claim objection under rule 3007, I could find
no authority that, to my satisfaction, would
support that that's the rule. It would be, in
my view, inconsistent with the structure of the
bankruptcy code and also with implicitly rule
7001 -8, which implicitly provides that you can
do it through a contested matter. And again,
as I've described with the structure of the code
that could be done in connection with plan confirmation.
The lead class plaintiffs certainly received
notice and opportunity for a hearing that that
hearing has happened. I've considered the arguments
very carefully, but I am going to overrule them.
I do frankly just view it as a fairly garden
variety if I can be... subordination arising
out of the damages from the purchase or claim
of securities. So that objection is also overruled.
As for the equity holder objections, we had two
written objections and we had several informal
objections. I read the formal objections and
Today was the date that all parties had noticed
of as a date where we would have a hearing on
confirmation of the plan. I invited each of the
formal objectors to be heard today and neither
one of them appeared to have attended the hearing
by Zoom, which was the opportunity that they
had. And similarly, there were no people who
spoke up when I asked for any informal objectors
to be heard. So I would view those objections
as abandoned, but I will address in substance
the arguments that they made. There is an objection
based upon disclosure, and I... I don't find
that argument to be credible. There was a liquidation
analysis that came accompanied with a great deal
of explanation as to how the liquidation analysis
operated the assumptions and how it worked. And
there is Mr. Rowan's declaration that gets into
detail on that. Mr. Rowan was subject to cross
-examination today. and nobody took the opportunity
to cross -examine him and test his testimony
regarding the liquidation analysis. There was
also a contention that there had been no meaningful
investigation. I think to say the least, the
notion that Nicola hasn't been adequately investigated
is a difficult one to support. We know that the
Department of Justice and the Securities and
Exchange Commission expended an enormous amount
of time and resources in their investigations.
The evidence before me is also that there was
an internal investigation and the committee has
reported that it's done its own investigation.
So I think it's fair to say that The bushes have
been more than soundly thrashed and beaten in
pursuit of causes of action that might be pursued
on behalf of the estate. There is also an objection
common to the two written objections that there's
been a lack of opportunity for meaningful participation.
The fact that... they receive notice and have
the opportunity to respond. We tend to undermine
that argument in my view and in addition I noted
that today was the day to speak directly to me
and nobody took that opportunity. Class five
is a class that was deemed to reject and for
that reason as is universally the case. doesn't
get to vote. That's what the bankruptcy code
requires. So there is no requirement here that
equity holders be given the opportunity to vote
on the plan because they are presumed to reject
because equity is being canceled under this plan.
And then finally, there is the argument that
they're being unfairly treated, but under section
1129 B2B, we have the absolute priority rule
and it dictates the result that I'm proving today
because there is frankly no prospect of recovery
to equity and there is simply there's just no
path to recovery unfortunately. It's always sad
when retail investors lose in these cases and
it's particularly regrettable when the losses
may have been attributable or were found to be
attributable to bad acts. But this is the result
that the Bankruptcy Code mandates. So with all
that I'm overruling the objections to the plan
and I also find on a final basis that the disclosure
statement satisfies the requirements of Section
1125, so it's approved on a final basis. And
the plan likewise meets all the requirements
for confirmation under 1129 and the related provisions
of the bankruptcy code that Section 1129 incorporates.
So for those reasons, I am confirming the plan
today. Thank you very much, Your Honor. Very
much appreciate the well -reasoned words. I think
you've seen the revised form of confirmation
order. Yes, I reviewed it this morning. Perfect.
I think what we'd like to do... We have a couple,
you know, sort of conforming nits to the plan
that will be submitted as exhibit to that confirmation
order. What we'd like to do is just submit that
under certification of council following hearing.
Yes. So that everything is buttoned up. And we'll
do that. And I don't think we have anything else
for your honor. Thank you and your chambers for
all the help and assistance today. Thank you,
and I want to express my gratitude for the really,
really fine work that all the attorneys who appeared
before me today rendered in furtherance of this
case. It was outstanding work all around, and
you have my gratitude for that. There were really
important issues, and it was very well presented.
It makes it a pleasure to do my job when I have
the aid of such an effective counsel. Thank you.
Okay. All right. Well, I wish everybody a good.