The general aid master cases under case number 22-90341,
Core Scientific Inc. As always, if you make sure you record your
electronic appearance, it's a quick trip to the website.
You can do that at any time prior to the conclusion of the hearing.
First time that you step up to the lectern, be it the real one or the virtual one,
if you please state your name and who you represent, that really serves as a good point
of reference in the event that a transcript request is made.
And as always, we are recording using court speak.
We'll have the audio up on the docket shortly after the conclusion of the hearing.
We do have a number of folks who are on the line.
I'm going to activate the hand raising feature just so folks aren't interrupted.
If you know you're going to be speaking, if you go ahead and give me a five star on your telephone.
Conference muted.
All right, terrific. Who is taking the lead this morning?
Oh, Mr. Schrock.
Good morning, Your Honor. Ray Schrock, Wild Gouchel and Manges,
proposed council for the debtors.
Right, thank you.
Your Honor, my partner, Winniette Berkovich and my colleague, Alex Cohen,
are going to be taking you through where we are precisely on our new proposed dip.
But I thought it was worth just a general update to the court parties about where we are in the cases
and give you a little bit of context for, you know, where we are in these cases.
Love to hear it.
Okay, so obviously since we filed, we've seen a pretty dramatic change in the price of Bitcoin.
Bitcoin was, you know, depending on the time of day you were talking around the petition day,
right around 16,500, 16,800, you know, as of this morning, somebody will correct me,
but I believe it's, you know, it's been hovering around 23,000,
which, you know, depending on your math, you know, 35 to 40% increase in the price from the petition day.
I think that it's been quite evident that, you know, this has had, you know, a dramatic
impact on the debtors' prospects.
You know, essentially the company is, you know, in many respects a levered Bitcoin option.
So our cash flow is substantially better than when, you know, we had forecasted under the initial dip budget.
And we did have a very robust post-petition dip marketing process consistent with our fiduciary obligations.
And so we have the unusual circumstance of presenting to your honor today a replacement
debtor in possession financing facility.
A few notes about that. One, it was a good faith process. It was run open, fairly, and, you know,
we're presenting evidence to that effect. And it's with our partner, B. Riley.
Just a couple of notes on the company's relationship with B. Riley.
So B. Riley was running an at-the-market, you know, type of equity raise,
you know, pre-petition. We also had a loan that was outstanding to them.
We had significant negotiations with B. Riley leading up to the petition date about an out-of-court
transaction, as we, you know, highlighted in some of our pleadings.
Ultimately, we didn't get there. And I wouldn't always say that, listen, it was contentious,
you know, between the parties. But good faith, but spirited. I mean, we had a lot of
pre-petitions. You know, Mr. Riley, as firm, then went on to the creditors' committee.
They're the chair of the creditors' committee. They were not, they didn't, you know, get serious.
They were not the alternative dip financing provider. I think the convertible note holders
pleading that they filed this morning referenced they were the alternative. They were the
alternative dip financing provider. They were the alternative dip financing provider.
I think the convertible note holders pleading that they filed this morning referenced they were the alternative.
That's not correct. They were not that alternative dip financing provider.
But given that B. Riley was on the creditors' committee, I think the committee's done a good job.
They made sure that B. Riley was recused, you know, kind of walled off from any dip financing discussions.
And Wilkie Farr, who was counsel to B. Riley pre-petition, they're the creditors' committee
counsel now. Riley brought in Choate as their dip financing counsel.
And assuming your honor approves the financing, you know, my understanding is they'd be stepping off
the creditors' committee at that point. So I note all of that just to make sure that, you know,
I don't ever want you to think that we're not being anything other than open and transparent.
There was a relationship here, but we have been completely down the middle and above board about
the process and how we're running this today. Number one, I know I appreciate transparency.
The pleadings have told the story from day one. And for those folks who haven't read all the
pleadings, I think what you've done this morning is just perfect. I think anyone who has an interest
in the case could not participate and not know that there's a relationship there. So I very much
appreciate what you're telling me. So let me ask, because at least as I read the pleadings,
the replacement dip issue is really just down to the termination fee, right? Or are there other
issues? I think there's a couple of issues, Judge, that may be open. I think between the debtors
and B. Riley and the convertible note holders, I think we've resolved all of the issues. I think
the unscored creditors committee and the ad hoc equity committee have raised concerns around the
termination fee that Your Honor would have to hear this morning. Also, just a note that in
conjunction with this, prior to closing the financing, we would be terminating the pre-petition
RSA with the convertible note holders. That's simply because, listen, the company is not under
any misimpression that we're going to be working with the convertible note holders. We are still
firmly of the view, the special committee is firmly of the view, we need a substantial deleveraging
as part of any kind of exit from Chapter 11. That being said, when you have this kind of change in
value from the petition date and just given the splits that we saw under that existing RSA,
our judgment was it's appropriate to sit down, reset. And so I want to make clear that the
company still will and intends to have a good working relationship with the convertible note
holders throughout these cases. We want to get to a consensual transaction, ensure the company's
emergence from Chapter 11. It's in the best interest of all stakeholders. And likewise,
we recognize there's been a change in circumstances since we initially filed these cases. So
I just wanted to give that context and that assurance to the stakeholders that we're here
and we're still calling balls and strikes. I got it. This is just the modern digital
Sarko case, right? We watched, you know, we were in the money, out of the money based on the price
of copper. And this is just a different commodity. It's a different commodity. I agree with that
analogy, Your Honor. Let me ask you with, and again, not prejudicing anyone's case,
but prejudicing anyone's right to get up and make whatever argument. So have you done
worst case, best case analysis of what the dip looks like with different outcomes on the termination
fee? Your Honor, I'm going to have to defer to Ms. Berkovich on that particular question.
But I think that, you know, our position on the termination fee is essentially, listen, we had a
deal with the converts. The converts, it's part of an initial order. We approved, the court approved
it. And in our view, it's a deal's a deal. And, you know, we're here, we're standing behind that.
Right. So let me tell everyone this, and maybe it causes a change in how people are acting
today, how, you know, how they're, what they're thinking about and how they're thinking about it,
is no question in my mind that I approved the termination fee that was priced in. And it was,
you know, and I complained about the cost, or I did it nicely, but I complained about the cost.
But I also recognize the circumstances. What I, excuse me, what I haven't thought all the way
through, and I've spent the past three days up in your neck of the woods, you know, 18 days a day,
I just hadn't had time to work my way through this, is if there are changed circumstances,
what discretion do I have to move the termination fee? The answer may be none. It may be that I have
discretion. And then it becomes a question of do I do anything or not? Because I do operate from the
premise that I assume that people rely on orders that I enter. And if it becomes a habit that I
don't really mean what I say, then the process doesn't work. And I got all of that. That being
said is I thought it made some sense to tell everyone that I do believe that there's a
termination fee that's part of the financing that I approve. Is it somewhere between, you know,
zero and the max fee that was under the financing? You know, I have my own feeling about that,
but I'm certainly willing to, I'm certainly willing to hear that argument if folks wanted to,
if folks wanted to do that. Also a firm believer, you know, when I stood where you're standing,
I like to control my own destiny. I didn't like the guy who knew the least about the case,
but who would make the decision making the result unless I just couldn't get there. And so,
as I was thinking through it, again, my thought was I would tell everyone that I do believe
that there's a termination fee involved in this. You know, whether it's something less than the 15%,
I hadn't thought through it. I'm not going to take away anybody's right to make those arguments.
And what I was really trying to sort out is that's something that folks want to say, you know,
didn't think that Jones was going to do that. We want to talk about, think about,
have different arguments on a different day, or do we all want to make the argument today,
and, you know, we'll just see where it goes. I will go either way. I'm just trying to be fair
to everybody because not everyone knows exactly how I'm thinking about it. And I'm talking to you,
but obviously I'm talking to everyone. So I'm more than happy to do, I'm more than happy to do that.
I'm more than happy. I mean, I think the first ish, or the first item that's on today's doc
is just easy and non-controversial. I didn't know if it made sense just to get that out of the way.
So, you know, if there are pending deals, those people can know that those are going to get inked
and get consummated and we can move on past that because it wouldn't sort of move the case kind of
money. I know it's real and I know it's a lot of money, but it's not really moving the case money.
Yeah, I think we had always, all of our forecasts are assuming that it is payable. I think our new
better proposed DIP lender is prepared to, you know, to make sure that it's paid. I think that
your question, and parties will get up, one, I think we should decide it today. We'll say that,
and I think we should deal with it. I do think that the court always has discretion what to put
in an order. Here in this order, you know, you said that listen, all the obligations and you feel
fees that are paid or payable are approved. And then I think parties may look to, you know,
I imagine some parties will say, well, listen, under 364, the code, once you make, you know,
if we're making loans on that basis and reliance on that, that, you know, we would ask the court to
uphold that. I imagine that'll be some of the argument and others may say, listen, we think
you have discretion, but I think that's where it's going to come down to is probably the statutory
reliance. I'm telling everyone, I mean, I can, when I enter an order, I expect people to abide by it
until it's reversed. I want people to rely on the orders that I enter. I also recognize, I mean,
let me pick something that won't apply, but it's an example of what exists in the code. I mean,
you've got a standard under 328 that I can approve a fee, not as this is a fee, but I can approve
a fee in advance. And if there are things that I conclude that I couldn't reasonably have
anticipated at the time, then I can change it. That's written into this action. And so again,
not trying to take away anyone's right to make any argument that they want to make, you know,
tell everyone, I do believe that there's a termination fee that's factored into the cost
of the dip. You know, Hanson's a good lawyer. He's gonna listen to me and I don't know if he
wants to step out and see if there's a small gift to give certainty or if he wants to roll the dice
and see what I'll do. I mean, that's his choice. I'm just trying to give him information to the
extent that I can. But happy to do that. But I understand that that's really the only issue.
The only other, sorry to interrupt you, Judge, just the only other issue I believe that's out
there is that shortly before we came to court, there was still an outstanding issue on the 506C
waiver and the 552B waiver to the convertible note holders. We have language that basically what we,
the debtors have agreed to do as part of this order is that so long as there's a consensual use
of cash collateral up through the termination date of cash collateral, that we would give a 506C
waiver during that time, the logic of it being, you know, that if we were going to have a surcharge,
it would be, you know, someone could say, well, listen, if that's under an approved budget,
it would be roughly equal to, you know, that use of cash collateral at that time. And so that would
be a fair exchange of, for the consensual use of cash collateral. I think the other side of it is
just, you know, how does that interact with any 507B claim that could be later asserted? And, you
know, we see those as separate issues. We actually had the pleasure of litigating this in Sears up
through the Second Circuit. And so we have some intimate familiarity with it. I hope we never
get there because that would be a bad outcome for the case if we're arguing over 507B claims. But
we did resolve that. And I think the committee and the Addock-Sherowish group still have an issue
around that particular issue, my understanding. But they can tell you if there's anything else
outstanding. We've been trying to play the middle. I'll tell everyone. My view of that is
those are debtor rights. And I know that sometimes debtors don't really have a choice, and that's
when I pay a lot more attention to it. But when debtors are freely exercising their business
judgment because they have the big view of the case, they, you know, we're, they're not, you're
not just fighting issues. You've got to play the long game and you've got to figure out how to get
to an end result as efficiently and as quickly and with minimum risk as you can. And, you know,
if that's the evidence that I'm going to hear, I'm just going to tell everyone. Again, I had
someone make the argument to me that this is not a debtor right. It's a creditor right. And it was
a long hearing and they lost me from the very beginning. You know, it's one thing to say that
it's a debtor right, but the debtors can't exercise it because of, pick your issue. That I get,
and I know that that exists because I've been exactly where you are. And I've been told that
if you want this, you don't have any discretion. And I know that goes on. But when I've got a
debtor in a position where they've done, look, we've made, we've thought through this, we've
been down all the branches of the decision tree and this is how we think our right ought to be
used or not used. I'm going to pay an awful lot of attention to that. So again, I'm sort of talking
to everybody on that. Fair enough. Thanks very much, Your Honor. So, you know, with that, I
propose to turn the podium over to my partner, Ms. Berkvich, and give you some more of the specifics.
Absolutely. I want to give everyone else a chance to make opening comments. And part of those comments
could be, you know, we'd like five minutes to think about what you've said. And I'm certainly,
I would certainly entertain that if it's, you know, we knew you were going to say that one
form or another we're ready to proceed. And, you know, terrific because, you know, my News and
Action only going to last so long. You gave me a cold during my mediation. But all is fine.
Let me ask, anyone else want to make opening comments?
Okay. Oh, you know what I didn't do? Anyone on GoToMeeting wish to make comments? Yes, Ms. Hardy,
come on up. That one's actually turned on their video camera, so I'm going to assume that everyone's
just watching. Thank you, Your Honor. Jennifer Hardy at Wilkie, Farr & Gallagher as proposed
counsel of the Unsecured Creditors Committee. I just wanted to introduce some of my colleagues
in the courtroom because this is the first time we've appeared as counsel to the Creditors
Committee. We have Brad Miller, who I believe you know from previous matters, and Jim Dugan,
Todd Gorin as well. And as Mr. Schrock mentioned, and as the court knows, B. Riley was a former
client of Wilkie Farr. So that's why we have Mr. Bruckner of Gray Reed as conflicts and efficiency
counsel in the courtroom as well. Always good to see you. Thank you, Your Honor. All right.
Thank you. All right. There are no other comments? Yes, ma'am. If you want to come up.
Very briefly, Noel Reed for the Abhoc Group of End-Wear Holders. Yes, ma'am. Just wanted to
introduce ourselves. We anticipate we'll be filing a motion for appointment by the official committee
within maybe the next 24 hours. With me is my partner, Long Weisler, and one of our associates,
Ms. Belks, and Mr. Panagopoulos, Mayor MacCabean. Got it. I hadn't seen him yet, but obviously I know
him and I welcome his participation. What I would ask that you do, if you decide that you're going
to, that you're going to seek official recognition, talk to everybody, because I assume that's not a
30-minute hearing. Talk to everybody and then reach out to Mr. Alonso and get a setting that
as much as it can works for everybody. I assume that that will probably be an in-person hearing,
but just have that conversation with everybody. Certainly will. And just for your record,
we did file an objection to your original and of course that's moving forward. Thank you.
All right, no other takers. Good morning. Good morning, Your Honor. For the record,
Ronit Berkovich from Weill-Gotshal, proposed council of speed debtors. We need to find a way to lower
that screen, don't we? Lower the... I was just... No, no, no. That's my fault.
I do have another option. So it's really helpful. Now I have to tell you a story. So every year
around Christmas time, I have a Cub Scout group come in and they're learning about the law. And of
course, to a bunch of nine and 10 year olds, the law is the marshals come down and they tase one
another. And so they think that's super cool. And I don't get them until after they do that.
So I bring them in and obviously this is a bankruptcy court and that's an impossible
abstract thought. So we have a criminal case and it's always a Santa Claus related thing.
And someone stole cookies and Santa's accused of committing a crime. And so I have a little
small person's robe. And so we have a judge and then I get a couple of lawyers and they
tell people what to say and they have an argument. And I have to put a box of copy
paper right there for folks to stand on, which is what made me think of that. And I had one
advocate get so excited that he fell off the box. It was a message to this. So please be careful.
I'm wearing flats. Next time I'll wear my orange shields.
I'm going to... I just hadn't noticed that before. I'll figure out a way to deal with that. I'll move
it to the side or figure out how to lower it. Thank you, Your Honor. I think we have an interim
solution. Joining me today in the courtroom is John Singh from PJT Partners, the proposed banker
to the debtors. Rodie Block from Alex Partners, the proposed financial advisor to the debtors.
And Russell Cann, who's the head of mining and executive vice president of the debtors.
Also joining us today... Find a way to put him on the screen.
I knew you'd like that. You mentioned it from the very beginning, Your Honor, but unfortunately,
as I'll get to... Unlikely to need Mr. Cann's testimony today. Also joining us online via Zoom
is Michael Broz, the senior vice president of capital markets and acquisitions, of course,
scientific, who is our first-day declarant. And we have a few other of our colleagues from
Weill Goshell. We have my partner, Ted Sekarides, and my colleagues, Jeremy Kane and Alex Cohen.
Good morning to the entire team. And if she left you out, she didn't mean it.
It did not mean it. Your Honor, we filed a revised agenda, Docket 426, today. We are very happy to
be in front of you seeking approval for the proposed replacement interim dip order and the
terms for the consensual use of cash collateral to provide maximum notice of our change in
circumstances. The second we had a deal, we filed the proposed order in the wee hours of Monday,
January 30th, at Docket 378. And we attached a red line of the interim order that was entered by
this court on December 23rd, which had been Docket number 130, as well as the term sheet.
V. Riley is funding under a term sheet, given the speed with which we needed to reach a deal with
them. We subsequently filed our motion to approve the order at Docket number 385. And while we had
coordinated with both the ad hoc group of secured note holders and the creditors committee prior to
filing the initial order, we continued to work with those groups, as well as our dip lenders and
our equipment lenders, around the clock to make changes to the proposed order to get the consensus
among all the parties. Just about an hour before the hearing, we were able to reach a fully
consensual deal between the debtors, the ad hoc group, and the dip lenders. So again, we have
consensual use of cash collateral. I believe, based on email discussions, that the equipment lenders
are also not objecting to the interim dip order. They're reserving their rights with respect to the
final order. As a result of those changes that we made in the version that we filed, and we have
some extra copies of the black line in the courtroom in case people were not able to access it,
given the late filing, we're not 100% sure, as Mr. Schrock said, whether any of the last-minute,
second changes would be acceptable to the creditors committee. And the revised order was filed this
morning at ECF 424. My colleague, Alex Cullen, will walk the court through the relevant changes.
So before I summarize for the court the benefits in terms of our replacement dip order, I would
like to move the court to enter into evidence two of the three declarations that we filed on January
31st in support of our motion. First is the declaration of John Singh at ECF number 390,
and second is the declaration of Rodie Block at ECF 391. As I mentioned, they're both in the
courtroom today and available for cross-examination. All right, thank you. Anyone have an objection,
again, for purposes of today's hearing only, Mr. Singh's declaration at CME-CF number 390,
Mr. Block's declaration at 391? Any objection? All right, they're admitted.
Anyone wish to cross-examine either one of those two gentlemen?
You okay? All right, thank you folks. Oh, Mr. Hanson, sorry, I just didn't see you.
No, it's all right, Your Honor. So Chris Hanson with Paul Hayes Things on behalf of the ad hoc
group and the existing DIP lenders, Your Honor. We would just reserve, to the extent that you
permit the committee to put their witnesses on with respect to comps, et cetera, regarding the fee,
we would like to cross the debtors' witnesses because obviously they were declarants in
connection with the original DIP. So if we're going to get the time machine and go back to when we
were here originally, we need to have them on the stand to walk the court back through their
original testimony. And of course, we would like to elicit further testimony from them about the
circumstances at the time of the original DIP. I don't see a reason to cross them now, but I
wanted to make sure that you understood that if the committee does, if you allow the committee to
call its witnesses, which we think you shouldn't, but if you do, then our position is that we may
have questions with those witnesses. Got it. It seems an efficient way to proceed. Any objections?
Your Honor, Brett Miller, Wilkie Farr and Gallagher propose counsel to the creditors' committee.
We have no objection to that. We would just like to be subject to the same reservation in case we do
go forward on, I'll call it a contested hearing with witnesses, because Mr. Singh did have some
testimony regarding, in deposition, regarding what ex-cuse might be reasonable. Sure. And at some point,
I don't want this to be, I don't want this to be in any shape or form a surprise. I'm going to,
I'm going to ask you the question, I assume it's unreasonable. Tell me why it is. I, because I have
to put the process first, tell me why it is, having done what I did, even if you convince me
that it's unreasonable. And it wouldn't take a lot. Why should I change it? You want me to start now?
If you, if you would like to, you're only going to get to do it once, so would you like to hear
everything that's said and then make the argument, or want to make the argument now? I'll let Wile
make their case and then. Fair enough. All right. Thank you. And you have the same reservation.
Thank you. Yes, sir.
We did file a third declaration in support of the dip motion from Russell Cann. That's a docket 392.
But as I mentioned earlier, we will not be putting that evidence in today, given the equipment
lenders, I believe their agreement to not to object. Do you need, you said given your belief,
do you need to get confirmation of that or? There were many of them. We just filed the final order.
If any of them were to, I see Mr. Lohan, who's been sort of an informal leader for the group.
I don't know if he has the views of everybody, but. Mr. Lohan, do you have your line unmuted?
I believe I do, Your Honor. Can you hear me? Absolutely.
Good morning, Your Honor. For the record, Brian Lohan on behalf of Baring.
Mr. Perkovich is correct. We did file a limit objection, docket number 291. Several other
equipment lenders joined that objection, but we think it makes sense, given the positive
developments in the case, to just reserve our right to the final hearing and really streamline
the issues that need to be decided at interim, at this interim hearing. Right. And we support entry
if that does the order and are not pressing for an objection. All right. Thank you for the announcement.
Your Honor, if I may, Dennis Tumey, can you hear me okay? Mr. Tumey, absolutely. Thank you, sir.
Thank you, Your Honor. Good morning, and Dennis Tumey with Sidley Austin on behalf of 98 ABL LLC.
Just confirming what Mr. Perkovich said, we also are not signing an objecting today,
but do reserve our rights for the final hearing. We do believe we have an agreement we've spent
a lot of time in, and thanks to Ms. Perkovich and her team, over the last several weeks,
we do think we have a resolution and expect that we'll be, a motion will be filed here in the next
day or two on that. And in the meantime, we're not going to be objecting today. And hopefully,
our resolution will ultimately get finalized and approved, and we won't be objecting to the final
hearing. But in the meantime, we do ask that we be permitted to reserve our rights for that final
hearing. Mr. Tumey, thank you for the announcement, and absolutely. Thank you, Your Honor.
All right. Ms. Perkovich. All right. Your Honor, on the first day hearing, I told you, Mr. Schrock
told you that we would be seeking replacement dip financing, and that's what we've been doing for
the last month plus, and working tirelessly to find financing that would eliminate the rollup,
eliminate the linkage to the RSA and related milestones, remove the restrictions on selling
assets to improve our liquidity, and provide overall better terms. When we entered into
bankruptcy, the debtor's liquidity was in dire condition. And I can say that the original dip
lenders, the ad hoc group, saved this company by being the only party at that time willing to provide
financing. At the same time, some of the terms of that dip, and it's been very well in our papers,
really, were not the most favorable to the debtors. So we were looking for a replacement dip
facility that could provide greater value to all stakeholders than that of the original dip credit
agreement. We understand that the debtor's constituents, other than the pre-petition
secured note holders, are thrilled with our new dip. We've received no objections to it.
We know that the creditors' committee is supportive. They filed their statement at ECF 397.
The ad hoc committee of equity holders has told us they are supportive, and same thing with the
equipment lenders. Our marketing process for this dip was very robust, and the Singh declaration
provides a great deal of detail about the negotiations with the various lenders we were
talking to over the last week. But at the end of the day, the proposal that we were able to negotiate
with B. Riley, our largest unsecured creditor, was the superior proposal. We kept all of our
stakeholders informed throughout the process. The major groups were not surprised when we reached
a deal. We sent all of our dip proposals to the UCC and the ad hoc group, and we were in touch
throughout with the equipment lenders as well. We did ask the ad hoc group whether it was willing
to provide a dip more in line with the terms of the B. Riley dip, and while they were potentially
amenable to improving some of the terms, they were not willing to go all the way through.
So unless your honor has any questions about the process, I would like to summarize the key terms
of the dip. It's actually a very simple dip, one of the things we like about it. It's a 70 million
dollar multiple draw term loan facility. Today we're seeking interim approval for a draw of
35 million of that facility. We will use those funds, along with cash on hand, to repay the
original dip facility and for general operating purposes. And we did have a budget attached to
the proposed interim dip order. The maturity is 12 months with a three month extension. That compares
to the six months with three month extension we had under the original dip. The interest rate is
the same, 10 percent paid in kind. The exit treatment is, total payment at exit is 105 percent
of the then outstanding debt as compared to the 115 percent under the original debt facility.
We are permitted to use the net proceeds of any asset sale to to conduct asset sales and to use
the net proceeds of any asset sales to pay down the dip, whereas that permission was very restricted
in the original dip facility. No roll-up, no RSA link, no real milestones except for final dip order.
And your honor, the one I guess negative of this new dip is that we do have to pay the termination
fee. And I'll get to a little more about our views of that in the end, but you did ask the question
about how that impacts our liquidity. And I was passed a note by our financial advisor,
the takeaway that the termination fee does not impact our cash or liquidity forecast.
And also that the new dip is still superior to the old dip, even when taking into account
that we have to pay these termination fees. Also these termination fees would have been payable
at any time anyway for the refinancing of that dip, whether it's now or later.
As noted in the block declaration, this replacement dip facility will provide the debtors with the
liquidity necessary to pay off the original dip facility, fund payroll, and satisfy other working
capital and general corporate purposes. And it is the debtor's business judgment that we
have to pay off the old dip facility. As noted, we reached agreement with the ad hoc group over the
terms for the consensual use of cash collateral. Their adequate protection package is for the most
part similar to what we had included in the original interim order, replacement liens,
507B claims, and the payment of professional fees. There were some complicated issues relating to
the different lien priorities by different parties over the last few years. And we have
some complicated issues relating to the different lien priorities by different parties over different
assets and how that would all work by layering the dip in there. The dip is non-priming as to
the existing liens, but taking a first lien and unencumbered asset. But we are grateful again to
all the parties, the dip lenders, the equipment lenders, and the ad hoc group for working through
these issues to get to a final resolution. We do have an exhibit five to the proposed order
that provides an illustrative chart of how the lien priorities work with respect to different
assets. There's up to six different liens that are applied to each different group of assets.
And unless your honor has any questions before turning the podium over to Mr. Cohen,
I want to reiterate the debtor's position on the termination payment. We do not agree with
the committee's position. Those fees were properly disclosed to the court and all parties in interest
in both our written and oral submissions to the court and were approved in the interim order.
We also believe they were reasonable under the circumstances as part of the overall package of
terms in the original dip facility, which at the time was the only financing facility,
financing option available to the debtors. This was supported in the Singh declaration at
Docket 98. Your honor mentioned changed circumstances. There were no changed circumstances.
We were in front of you like 40 days ago saying we want to find a replacement dip. If we find
that dip in four weeks, these are the fees that will be paid. That's exactly what happened.
And one more point, you know, I mostly represent debtors or firm debtors. And, you know, I
personally worry about the chilling effect to the ability of a company in distress to be able to
get a dip loan if the dip lenders have to worry that what they negotiate with the debtor and
get approved by the court is later subsequent to the challenge. So those are our views.
Those are our views. Your honor, have any questions? I do. So I just, I think what I heard you say,
and I just want to confirm it, is you're telling me that the debtors exercised their business judgment
in deciding to go forward with this, believing they were going to have to pay the termination fee.
Yes, your honor. Okay, I got it.
Anything else? Nothing else. Thank you, your honor. Thank you.
All right.
Good morning, your honor. Alex Cohen, Wild Gosh, and the managers for the debtors.
Yes, sir. Thank you. Good morning.
Morning. First, I want to say that next time you do the Boy Scout trip, I would suggest that
the Santa Obtains Replacement dip financing could be a good topic. I'd be more than happy to write
a problem for you. I'm going to keep that in mind. Thank you, your honor. And second, I always,
whenever people walk through these orders, I think it kind of gets a bit tedious to go through every
single change. So I think what's probably more useful for the court, and please correct me if
you disagree, is to highlight some of the high-level changes. So I think I started reading,
and then I stopped. What I'd like to do, and you'll just have to take a deep breath,
because you'll know this far better than I do, is let me get 424-2 up. And then as you walk me
through, if you could give me a page reference using 424-2, that would be helpful. And so I have
it up. Okay. Where would you like to start? So I think first, I'll note that it looks a lot
blue, and more blue, and more red than the changes actually are. A lot of the changes
are clarifying to make sure that some of them are defined term fixes, some of them are
just technical corrections. But I think the place that we should start is
on page 15 of the red line. Okay. So I can go 15 of 101. That's right. Should be able to, yep.
It's, this is the top, it says cash collateral. Is that what Yorick did it shows? No. Different
page numbers. It's a, you want to see what I'm looking at? There we go. If you scroll down to
the next page, yep, down more, 15 at the bottom. I'm sorry, I'm referring to page numbers at the
bottom. There we go. 15 at the top. So this clarifies, there we go, the definition of cash
collateral. Just clarifying the definition of cash collateral after discussions with the ad hoc
group. All parties agree with this definition. Just minor changes to ensure the proper scope.
Okay. Next is a page 19 at the bottom. It stills with approval of the budget. So the ad hoc group
has consent rights over the budget as well as the replacement of lenders. However, there's a
disagreement between the two parties. So if somebody says yes, somebody says no to approving
the budget, then the provision at the bottom and then the top of page 20 clarifies that in
the event of a conflict, the judgment of the replacement tip lender would govern. However,
the ad hoc group has the right to come back to court on an emergency basis to dispute any issues
and your honor can hear them in a budget resolution event. All right. The next page I go to is 21,
the last paragraph of page 21. This is the 506C, 552B and marshaling waivers. Here's a couple
places throughout, but this is the first place and at Mr. Schrock previewed, the 506 and 552B
waivers are granted, but to the extent that there's a cash collateral termination event,
those would burn off and there's a paragraph at the end of the order to that effect.
Make sure you reference that for me if you would. Yes, your honor.
And then the rest of the changes on page 22 reflect that change as well.
Okay. The next place I go, it's page 28 of the red line at the bottom.
This is clarifying that the debtors will pay all of the reasonable documented fees of both the ad
hoc group and the replacement dip lenders regardless of when they arose related to the
dip financing. Okay. Next place is top of page 30. This paragraph relates to any modifications
or amendments or changes to dip loan documents. Effectively, this limits the ability of the
debtors and replacement dip lenders from making modifications without asking the ad hoc group and
in certain cases getting consent or if they can't get consent coming to court and asking you for
material modifications. Okay. The next place is the footnote at the bottom of page 36.
Now, because of the timing of how this all sequences, the refinancing will happen no
later than five business days after your honor enters the order. So there's a small gap period
in which we have to pay off the pre-petition secured parties and this provision clarifies that
during that gap period, there are certain things that the debtors can't do.
Basically preserving the status quo under the original dip order.
Okay. And then next place is middle of page 38 of the red line.
This is another reference to the pay down and the refinancing within five business days of the entry
of the order. Again, this is all to protect the status quo in this gap period and also making
sure that it's clear that adequate protection rights continue. Bottom of 38, top of 38,
excuse me, top of 39. This is the same, similar provision, except for to the extent that we're
selling, the debtors are selling pre-petition secured parties collateral. There are certain
procedures we have to follow and making sure that they don't consent that we have to come to your
honor or otherwise follow the provisions of this interim order. So a lot of these provisions
throughout, you'll see we can't sell their collateral outside of the provisions of the
order. There are certain guardrails baked in and you're seeing that throughout a lot of these
paragraphs. The next is bottom of page 40. It also relates to the budget consent rights. The
spillover middle of page 41 says that notwithstanding anything in here that dip
professional fees, notwithstanding anything that professional fees will get paid, even if there's
an issue with the budget and also that the replacement dip obligations and dip professional
fees are not included in variance testing of the approved budget. And then finally that the
repayment, the payment of replacement dip obligations is not in and of itself a cash
collateral termination event. This is again protecting against an issue of a dispute with the budget.
Next is a middle of page 43. You'll also see a lot of these provisions throughout and I won't
highlight it everywhere, but this effectively what we did in the order is preserve the current
waterfall as Ms. Berkovich mentioned, but layer in the addition of the dip liens and the dip
obligations. So that's a lot of these changes. Page 13, or excuse me, page 48 paragraph 13.
Again, this is the mechanics of the refinancing. You'll see a reference in the order of a to a
payoff letter and that's in process. It's almost done. There's only a couple terms that are being
discussed at this point. So we intend to file a revised form of order with that attached as an
exhibit. Right now we just have a slip page, but the parties are all working together on that payoff
letter. Page 58 at the bottom says paragraph 20. Diaz and Bravo 58. Oh, this is more clarifying
changes regarding the refinancing. Yep. And then the 58. There we go. So another thing that we did
to compromise and come to an agreement here is to allow that the ad hoc group, the pre-petition
secured parties have certain rights in the event of default or similar type provisions in this
agreement. We spell it out in a couple of paragraphs and effectively if there's a cash
collateral termination event, then it triggers a similar remedies notice period to a dip. And
it's also the two Southern District rules regarding coming in and trying to seek to lift the stay.
And you'll see that in pages 60 through 63. That's all that blue.
Okay. Thank you. Okay. Next page 73. We skip a lot of pages here.
Page 73 and then it spills over into the next couple of pages. This is all related to the
challenge and everyone's right to challenge and making sure that it's clear who can challenge
what and when. Effectively, everyone has the right to challenge everybody else's liens, claims,
obligations, basically just preserving parity for all parties to have similar rights to challenge.
You'll see that a lot of the challenge provisions that we initially baked into the dip order have
not changed. This is mostly clarifying who can challenge what and when.
Okay. Next is a page 80. This is again the 506C, 552B equity to the case and then the marshalling
provisions. This is similar to what we discussed earlier, just flagging again that it's here.
And then paragraph 28, 80 and 81 pages are respect to credit bid rights of the parties.
Clarifying everybody has the right to credit bid with respect to the
obligations that are set in this order. Okay. Next is page 83.
Another protection against material amendments or modifications to the order or any documents.
Again, if there's any dispute or disagreement, everything is set out here in pretty granular
detail. Okay. I think there's only a couple left. The next is page 95, paragraph 43.
This is the technology that Mr. Schrock was referencing when we spoke about earlier that
in the event of a cash collateral termination event that the equities of the case and the
506C waivers burn off. And this last set of blue that you'll see, paragraph 44, it's a lot
meatier and longer than it actually is. It effectively preserves intercreditor rights
with respect to certain rights, obligations, liens, et cetera. Everything that Ms. Berkovich
and I have spoken about regarding the status quo, but layering in the dip obligations to make sure
it's clear what happens to whom and who has rights over what in the event of any occasion that could
occur. So we tried to take those protections in and preserve the status quo. And then the final
portion of the order is just setting a date for the final hearing. And we have a proposed date in
mind, but I don't know if you prefer that we reach out to your chambers and schedule or if you just
want to do it live. What date were you looking for? February 27th is what we were targeting. It's on
Monday. Do you have a time in mind? Afternoon works better.
So I would have 2 27 at 3 p.m. Central available if that works. I'm assuming that we get to the end
today. That sounds good, Your Honor. We'll put it in this order whenever we submit the revised.
All right. And nothing further. Thank you, Your Honor.
All right. Thank you. All right. Yes, sir. Hello, Your Honor. My name is John Ventola from
Chote Hall and Stort, counsel to B. Riley in their capacity as a proposed replacement dip lender.
I really just wanted to introduce myself to the court, Your Honor. And of course, if you have
questions, happy to answer anything we can. My firm is new to this. We only got involved
about eight days ago. That seems longer, candidly. But we've been working very cooperatively with the
parties in interest to get to where we are today. And again, if you have any questions, Your Honor,
please let me know. Number one, welcome to the dance. Thank you very much.
I don't at present. And I just want to confirm Mr. Chirac mentioned in his opening remarks
B. Riley's intention is, in fact, to resign from the committee if this is approved. That's kind of
a given to me. So I appreciate you saying that for everyone. All right.
Mr. Hanson. Yes, Your Honor. Chris Hanson and Paul Hayes-Dings on behalf of the ad hoc group
and the existing dip lenders. Your Honor, did you want to hear on the affirmative side or did you
want to hear from the committee first from an argument perspective? I want to deal, I want to
understand the evidentiary presentation. You'll certainly have time to come back on argument.
And I want to understand what the committee is proposing to do and given where the record is
now, where they think whatever it is that they want to present is going to be persuasive. So let
me do that and then we'll circle back around. Yeah, fair enough, Your Honor. And obviously,
we reserve because our view is we don't think they should be. I have it in sound, but I'll come back.
I'm going to get this on the table because I want to understand it. All right. Mr. Miller.
Thank you, Your Honor. Brett Miller, Wilkie Farr and Gallagher, proposed counsel to the
creditors committee. Your Honor, as you know more than most people, it's your order. And
having spent the last three years in a case across the hall with Judge Isger, the Sanchez case, we've
been fighting over a dip order that is long since approved and have had multiple hearings,
multiple mediation sessions. And at least here, we're only five weeks later. We're not three years
later. And Judge Isger said something during the multiple hearings that he wants to get it right.
And there were a lot of words in the dip order there and a lot of people interpreting the words
how as favorably as they can for their party. Here, I think we have a little bit of a different
scenario. Both sides seem to focus on 30D of the dip order and whether the termination payment
the termination payment is actually part of the package that I'm sure Mr. Hanson will say
was part of the pricing of the dip. Because I disagree with the statement in the ad hoc group's
pleading filed this morning that a finding that if we open up the termination payment provision,
and the committee does not dispute a termination payment can be paid here. It's a question of the
reasonableness. And that's so using the replacement dip as a basis and I think Ms. Berkowitz said a
105 percent, I'll call it a 5 percent termination fee, that's about $2 million. Whereas the interim
order included a 15 percent payment or $6 million. So we're talking about a $4 million delta here.
And if you look at the comps that are in the various in the declaration submitted by the committee,
15 percent is out of whack, 5 percent is around normal. And I believe if we actually went forward
and put our witness on the stand it would be hard to find otherwise. And I think if Mr. Singh was
put on the stand and cross-examined he would find the same because we've seen a dip comparison chart
that he's prepared. So to your point the 15 percent fee is unreasonable. And the question now turns
back to how can we, should we, be determining whether an interim order that approved a termination
fee on 24 hours notice without a committee being formed satisfies the requirements of
Bankruptcy Rule 4001C2, Section 364, and perhaps most importantly 30D of the interim order.
Because 30D says two things, well it says multiple things, but two things that are highlighted,
one by the ad hoc committee and one by us. And I don't know if we can put that on the screen.
You can actually I think use the version that Mr. Cohen was just going through because I think
30D stayed the same. Sure I can do it either way. I can give your person control. I can put back up
what we were just looking at. I think why don't we why don't we put back up what was just on.
No change.
30D I think page 86 a really long order.
So the the ad hoc group in its statement focuses on too little i. The validity or
enforceability of any obligation indebtedness or liability incurred under this interim order or
the replacement dip loan documents etc. Question was or is the termination payment incurred at the
outset as opposed to the other fees that the committee doesn't challenge. There were the
upfront fees that have been paid that no one is seeking to discourage. We are simply looking at
the termination payment and as I said it's approximately a four million dollar delta from
what we think is reasonable versus what is being requested. But when you look at four little i
it talks about or the payment of any fees costs expenses or other amounts to the replacement dip
secured parties blah blah blah in the case prior to the actual receipt of the written notice of any
replacement dip agent or the pre-petition agent on if as of the effective date of such reversal
stay or modification or they could tour. I really have to question whether the payment these fees
were not payable at the interim hearing. They are contingent payments that could might may become
payable later and quite simply we believe that's the purpose of having an interim order and a final
order two weeks four weeks five weeks later. That's what is intended by the bankruptcy rules that is
intended by the bankruptcy code and where the ad hoc group thinks this is going to turn dip
financing on its head. I actually think it's the reverse because how if this is approved now and
the committee is basically neutered in any future discussions regarding reasonable reasonableness
of fees then the next lender might as well throw in a hundred percent termination fee
because the debtor has no choice. I think what uh Mr. Barkovitz said was that the the fee
was reasonable under the circumstances. Well and yes the circumstances changed and we understand
that the debtor made the deal. We don't dispute that the debtor cut this deal. They cut the best
deal they could do but they ran to court with a deal that upon scrutiny by a creditors committee
upon if we were to put on witnesses they'd show it is unreasonable by approximately four million
dollars. Then what is the purpose of a whole bunch of sections of the bankruptcy code and
laws and rules regarding finding things reasonable before you use estate funds because the use that
the approval of this will deprive unsecured creditors other stakeholders other secured
creditors of four million dollars because that's what this comes down to. It is a I'll call it a
upfront smash and grab of four million dollars here above what's reasonable and what will happen
I think is the next lender is going to do the same and then after that the same and before we
know it the chart that that our witness and Mr. Singh would put up of comps it's going to be littered
with 15 percent across the board and that's going to become the new mean and median for
dip termination fees and it really really shouldn't be because today should be the day
that it stops and just like Judge Isger you should say I want to get it right and right is to limit
the termination payment to what is reasonable and we would put on evidence if asked that something
in the neighborhood of a two million dollar payment is reasonable and with that I'll rest
and I'll say your honor if I think we need to decide on the order first and if you completely
disagree with me which is your order again then we will not put on any evidence if this has opened
the door for putting on evidence or for Mr. Hanson and I going in the hall room and in the hallway
and having a conversation then we're happy to do that because this can be litigated it can be
settled but but we we defer to your honor it's your order again and I just do think for the sake of
the bankruptcy code and this case we should get it right thank you thank you all right Mr. Hanson
thank you your honor
again your honor Chris Hanson I'm Paul Hastings on behalf of the ad hoc group and the existing
translators um Donald start where Mr. Miller left off it was not a smash and grab the concept
of that ignores the reality of how the debtor came to this courtroom when it filed for bankruptcy
if you look at 401c2 you have to determine whether the debtor is going to be the subject of immediate
irreparable harm and you have that from an evidentiary showing both in the brose declaration
and in the sing declaration you also had it based on the presentation provided by the debtors council
the council pointed out at that point in time that there was a single dip lender that was prepared
to lend to this company and if we look at that moment in time that the debtor filed the price
of bitcoin and and you actually your honor step back for a second you complimented the debtors
on the first day on the persuasiveness of the first day declaration and it was a great read
because it explained the debtor's business in pretty easy to understand terms and these are not
the easiest businesses to understand many of them have filed for bankruptcy they do different things
but they are connected across the i won't say i won't use it they're they're connected by their
digital currencies so the point being your honor that at the moment that the debtor found itself
here bitcoin was somewhere in the range of sixteen thousand dollars and this business as mr brose's
declaration pointed out is singularly tied to the volatility of that underlying currency
i don't want to address the cops in the sense that i would like to cross examine the witness if that
happens and we'll go through them comp by comp but it's obvious that none of them are a digital
currency business none of them are so singularly tied to the underlying volatility associated with
the currency here so the debtors went out they ran a process mr sing pointed out his declaration
that there were 24 parties that they approached they had nine confidentiality agreements
executed they had two indications of interest and they had one party prepared to lend i think as you
can also divine from the motion that was filed to approve the dip financing even the dip lenders
the members of the ad hoc group they weren't all in on the dip if you recall when we were here at
the interim hearing there was going to be a syndication process run between the interim
hearing and the final hearing to try to find more the debtors had asked for a higher commitment
amount and the members of the ad hoc group didn't get there initially and the reason they didn't get
there was the volatility associated with this company it's pretty scary dip and so what you
also have is endless testimony about the arms length negotiation and the good faith nature of
those negotiations there was nothing there to demonstrate that there was a smash and grab or
there was some type of untoward influence exercised over the debtor you heard miss burkovich just say
it the interim dip saved this company without that interim dip financing again go to the
declarations there were the debtors said they had four million dollars of liquidity as they entered
bankruptcy we can ask the debtor if we get to that if that number might have even been lower as of the
day that it was here in the court before it was able to get authorization to borrow on the interim
dip and it borrowed right away on the interim dip that money helped to save the business so that it
could ride to where it is now and really what's happened is the debtors have exercised their
business judgment twice they exercise their business judgment soundly and reasonably at the
beginning to enter into the first dip and now given where bitcoin prices are today and no one
right there is no forward curve for bitcoin it's not like the power curve we don't get to look off
into the future we wake up every day and wish there were one right yeah we wake up seriously we wake
up every day and and these prices are up or down and we really don't know where they're going and
sometimes we really don't even know what they're driven by and so your honor the debtor is making
another business judgment call and that business judgment call is i'm going to enter into a new dip
and i am going to repay the old dip which takes us back to where i was going to start your honor
which is there's an agreed upon deal that deal was set forth before the court and candidly even
your honor said i'm aware this is expensive but i'm also aware of the volatility associated with
this business and i get it and you said to the folks in the courtroom most notably b riley's
attorney i hope you come back with a less expensive dip so uh or a less onerous dip you know what those
were circumstances that all were foreseen at the time that you approved the initial dip and so the
dip lenders on my side they made their commitment they said we will advance out of the dip and
they said we will advance our funds based upon the documents that we've negotiated and the order
that your honor will enter that protects the promise that they made to advance those funds
to the debtor the debtor took those funds moved forward saved their business and allowed them to
come before the court with the motions they asked the court to prove today and beyond the multitude
you know mr miller likes to focus on 30 d and says let's singularly look at that it's really
important and i'm going to come back to that in a second but the entirety of the order when you go
through there are only certain sections that say subject to entry of the final order right those
are things like the roll-up those were things like the 506c waiver and the waiver on 552b equities
of the case things like that say subject to entry of the final order but the the other and it's far
too long all these dip wars far too long at this point but the rest of the dip order itself is
replete with provisions that say all of the dip documents are approved the obligations that are
created there under are approved the debtors are authorized to enter into those this is an
encyclopedic document which approves the dip deal that the debtors entered into but most importantly
those are also protected by the concept of good faith and when you look at section 364e it's there
for a reason and your honor knows that and you've incorporated it into this order in multiple places
it protects the super priority administrative expense claims it protects the priority of the
liens and it protects the underlying aspects of the dip financing in toto and so when you look at
364e parties have to rely on that and to just put this one to bed the order says whether it's
overturned on appeal or otherwise and the or otherwise would be a collateral attack your
honor we would go so far as to say that this order having been entered candidly based on all of the
findings that were before it is a lot of the case at this point in time too and to overturn that order
i i guess you'd have to prove that somebody defrauded the court or that somebody defrauded
the debtors the standard can't really be that well today because the underlying currency that
dictates the value of this business is 30 or 40 higher than it was on the day we filed we should
go back and tear up and rewrite the promises upon which everybody relied when they entered the court
in good faith your honor i would also point out that if you think about it again the circumstances
that the debtors entered weren't just the lack of liquidity in those declarations you can look and
see they defaulted on their equipment loan debt pre-petition they weren't paying anybody they
issued a press release the way that the ad hoc committee was organized was they woke up to find
a press release by the debtors saying that they were no longer in a position to be able to pay
their equipment lenders and that they were they might not be able to survive as a going concern
so the ad hoc group quickly organized to engage in negotiations at the request of the debtor and
they did but during that time the debtors were not paying the equipment lenders and one of the
equipment lenders actually accelerated and then crossed the fault of the convertible notes on top
of that the debtors had as reported in their declarations an endless amount of unpaid loans
on all of their construction facilities which resulted in mechanics liens so this wasn't like
a debtor that the ad hoc committee had over a barrel and i think i pointed out at the first day
to your honor the members of the ad hoc committee are the original purchasers of these notes this is
nor this is not a situation where you know a sophisticated distressed community is trying to
take advantage of a debtor these convertible note holders were hoping that they would be able to
they would be able to convert their notes into equity at some point and ride the wave of great
returns associated with those notes so when again your honor putting things in the context that we
have to look at them which is where were we when you approved the dip and we entered this courtroom
the circumstances may be different today but that doesn't allow us to overturn the order that you
entered based upon all the factors that everyone foresaw at that time and again when i come back
to the point that this is not the business judgment of the convertible note holders that's
being imposed on the debtors the debtors it was their business judgment to enter into the dip and
it's now their business judgment to eliminate the rsa and to move into this current dip
we don't from an ad hoc committee perspective we're a little bit nervous about that we now have no
way out of this case we're all going to sit down and we're going to negotiate and see if we can
get there but bitcoin can go down just as much as it can go up and the ad hoc committee is fearful
that as the largest secured creditor and you know depending upon where abilities are maybe a very
large unsecured creditor as well that we're going to suffer the risk of that volatility
more than most and so from our perspective we understand we chose not to fight with the
debtors today we said fine if you'd like to refinance us honor your obligations we'll
negotiate an order with you moving forward from a cash collateral perspective and let's get to it
let's try to find a way to get out of this bankruptcy case pretty quickly so at a reasonableness
level the ad hoc committee and the existing dip lenders have been about as reasonable as they
possibly can be they extended credit they saved the company they allowed the company to get to
where they are now they've stepped out of the way to allow b riley to come in they've negotiated a
good order and we're prepared to move forward none of that is a record where this court should
revisit its initial decision to put the dip in place and that dip should be honored and from a
policy perspective i couldn't disagree more with mr miller your honor if the sanctity of an order
is to be relied on which is what we're all talking about here it needs to be relied on that's not
going to turn around and let predatory lenders suddenly say to a debtor who might be an extremist
aha i can charge whatever fee i want and as long as i get it approved on an interim basis i'm good
because the reality is there should be a competitive process that results in the dip that's being
presented to the court and you your honor if somebody walked in and said i want 100% fee might
say you know what creditors might be better off if this company liquidates than if it takes your dip
financing and that's within your discretion to determine at the time and your discretion
at the time that this dip was presented to you was to approve this dip with its termination fee
and when we go to the provision that mr miller looks at in the dip order just for for good purpose
of going to that on paragraph 30 you go to d and it says in roman at one i'm sorry roman at two the
validity and forcibility of any obligation incurred under the interim dip order or the loan dip loan
documents the obligation which is a fee associated with the repayment of something that's borrowed
occurs at the time that you enter into the contract that provides for it so that obligation was
incurred as of the time of entry and obviously there's the whole point about the payments which
are protected by the good faith standard too when they're made so your honor on that record which
was the record before the court at the interim hearing and the arguments that are presented
and the arguments that are presented today we ask that the court continue to enforce the interim order
let the debtors go where they need to go next and stop what's happening here and and let everybody
rely on the sanctity of the order that you entered and we'll see where we can get hopefully get the
case out quickly we don't believe that evidence should be taken because we think putting in
evidence would open up the evidentiary record associated with the interim order which was closed
and we would have to revisit that but again your honor we reserve our rights to the extent that
evidence would be taken not only to cross examine the committee's witnesses and call the debtors
witnesses but potentially to call our own thank you your honor yes sir
good morning or morning honor good afternoon at this point uh true enough i'm tempted to take
miss burkovich's binder so i can get it a little taller over here your honor uh brown meisler of
scadden arps on behalf of the ad hoc group of equity holders representing approximately 70
million shares or nearly 20 percent of the outstanding amount of shares including insider
shares your honor we're going to be brief and that's going to be consistent with with what
we're seeking generally in these chapter 11 cases your honor we support the creditors committee's
view uh we heard what you said the fee is unreasonable 544 percent irr is unreasonable
maybe it's punitive uh one thing's for sure it's an unfortunate use of money um and we recognize
it's not material to the overall liquidity of the business but we're trying to stay focused is it a
good use of money probably not your honor we think that there's two maybe three issues one due process
fundamentally it due process they got it approved on december 22nd the day after the petitions were
filed i wasn't here your honor that my the clients that i represent they didn't have counsel to
represent them it's a due process issue maybe it's binding on the debtors maybe it's binding on other
people that that appeared in these cases but your honor we do think it's a it's a due process issue
um your honor with respect to business judgment um that that's a that's a fair point one that we
acknowledge but let's remember judge wiles decision in pacific drilling in september 2018
no one objected to the fees associated with the rights offering nonetheless judge wiles took the
position that the fees were excessive and therefore he denied the request um the other thing your honor
quite candidly business judgment did the special committee know specifically about the termination
fee and what it would cost and the return to the lenders if the dip was replaced 40 days later i
don't know but if they didn't i don't really know how they could have exercised business judgment
with respect to that punitive fee your honor the the other issue is i think as you have suggested
at the beginning thoughtful consideration of this issue including whether such an incredibly high
rate of interest is enforceable under applicable law i think for that reason it's worth taking
that break parties should brief it we on behalf of the ad hoc group we would coordinate with the
creditors committee because if there's no reason for us to brief it we won't so again i i know you
don't know me your colleague does when when i suggest taking a break i measure that in terms
of minutes not days understood your honor if the minutes are sufficient for parties to brief it
that would be great if they're insufficient your honor of course this group defers to your judgment
and with that your honor those are my comments and thoughts thank you thank you all right let
me do this and number one i very much appreciate the arguments i appreciate great lawyers doing
great things and it quite frankly makes my job a lot easier when i don't have to round off the
edges this is actually relatively simple for me there are a number of competing concerns that
that drive everything i do number one the process comes first and if parties can't rely on the
process then given how fragile the process is and the responsibilities that you all have then it
doesn't work this is not like being in district court with a defendant it's just very very different
you've also got a huge number of involuntary participants who don't understand the process
who try and make sense of it along the way and again my orders have to mean something
i'm aware of what judge ischor said in the sanchez case i've i think i've mediated it twice
i understand the issues i understand what he meant when he said i just want to get it right and that's
because he's interpreting various provisions that he put his name on and i i know which provisions
there are and this is so far afield of that that it's not really a an appropriate analogy of course
we all want to get it right there's no other reason that we sit here other than to get it right
um i also want to make it clear about business judgment business judgment doesn't mean that i
decide what i would have done that's not the definition of business judgment at all business
judgment is a party being well informed recognizing the obligations that they owe making a thoughtful
considered decision you can exercise proper business judgment and be flat out wrong it's
the process that you go through that is the business judgment evaluation and i agree with
i agree with the comment uh that was made i think it was by mr hansen is that business judgment has
been exercised twice once when faced with a set of circumstances the debtor exercises business
judgment and says if i want to see tomorrow here's what i'm going to do it got that opportunity it's
now seen tomorrow and it's rosier than perhaps it thought it was going to be obviously there could be
a sunset today and a new day tomorrow and there could be a further exercise of business judgment
uh that calls into question the decisions that got made previously that's the whole concept of
business judgment it's the process it's the thoughtfulness it's the being aware it's the
being educated it's making sure that you understand not only the issues that run in your favor but
those that run against you there's also another fundamental tenant that i just believe in just
to my core and that's for for every action there has to be a consequence sometimes those consequences
are positive sometimes they're negative the fact that the debtor has exercised its business judgment
and i believe in a proper fashion there's a consequence to having exercised that business
judgment and it's the payment of that fee um again do i wish that i had questioned it more i mean i
i didn't like the deal when i got it i thought it was incredibly expensive and i was just looking
at it from sort of an outsider's viewpoint called wow is this really where we are um and i i spent
a lot of time talking to my intern about how you actually view these things uh and how you have to
really make a decision whether it's right or wrong and i think i said it on the record i said i also
think i said you know i'm somewhat amazed about how folks are able to quantify risk given at least
what i knew at the time but i wouldn't know where to begin given where the market was when i put
that together again it's parties have to be have to rely on my on my orders if my orders are always
subject to somebody coming in and saying something different in an effort to get me to change it then
the process just fails if i got it wrong then i'll do a better job next time of trying to provide more
avenues i'll encourage the u.s trustee to add this to the list of things that they look at when they
look at these in our orders because that's the voice at that point in time that's speaking for
those parties that aren't here um i just again that i got it that it's six million dollars but
the process is far more important than six million dollars your ability to go out and say i have this
order and jones signed it and it's final is far more important than six million dollars if six
million dollars turns out to be the price of success versus failure in this particular case
and it's failure then i'm prepared to live with that because the process has to be bigger
than any particular case so i am based upon a record that i've got based upon just looking at this
i i endorsed the debtors business judgment it's made the decisions that it thought was appropriate
under the circumstances that it now faces um again i appreciate being walked through the red line
this is just a it's a better deal it's a more commercial deal and that is going to pay the
consequence of not having been able to get it the first time around which i think that we would all
acknowledge it wasn't available so i'm again and i appreciate the committee bringing it to my
attention it's a learning experience for me i have no doubt it will be a learning experience
and on the list of those things that the u.s trustee looks at on first day pleadings but i'm
going to overrule the objection i'm going to approve the refinancing the new dip you've got
your hearing date i understand that there were a few more tweaks that needed to be made i assume
that you will circulate them to all the parties that want to see them and then you'll let mr
alonzo know once that order has been uploaded that's correct yes your honor uh you're back
on back on my binder uh that is that is correct um we will submit a revised order for the process
that your honor mentioned um so let me in again just i know that you probably need that today
today yes so i wanted to i feel awful i've got one more hearing and then i see a nap in my future
somewhere in the courthouse so if you would just make sure you coordinate with mr alonzo i'll take
my computer home i'll do it from wherever i am but you need to make sure you talk to him because
i'm not going to look for it yes your honor and we we understand the process and we will coordinate
with mr alonzo and um with the honest feeling well just two quick uh quick points first i want
to make it clear for the record that just because we've terminated the rsa and we're um we're not
going to keep our eye off the ball here which is to try to get this company out of chapter 11 but
we're going to try to do so with a good process and with input from all of our stakeholders so
that's our next next task at hand here until we got to look it's the it's the respect that i have
of for the entire you're all going to do exactly what you're what you do better than anybody else
i mean everybody's got a role to play everybody's got a position and it's those flashing positions
that give me confidence that the right result will come out of that whatever that is i i took
mr hanson at face value he doesn't like where he is i i got that but i also know that given his
skill set he'll figure out a way to maximize whatever it is he has and i know that your team
will be the same i know that the committee is going to fight hard for those folks who are probably
currently out of the money or not not much in the money and i again i've known i i don't know
miss reid's colleague but i do know this really she's one of the finest lawyers i've ever seen
in the courtroom they're going to advocate for equity that's exactly what should happen and
i'll make the calls based upon the record that i get hopefully the results that we get at the end
of the day honors the bankruptcy code it recognizes the economics both inside the company as well as
industry in the nation whatever those happen to do and the process will work it'll be transparent
and people may not like the result no one says you have to like it you just have to be able to
understand it to see through it that's that's the goal agree your honor and there is one last item
on the agenda we'll keep it brief and my colleague mr cain will handle that motion perfect
okay
good afternoon your honor good afternoon jeremy cain of wild goshel and mangy's
proposed counsel for the debtors yes sir i'll be brief and i will not use the stuff
i don't want you to be brief i want to see your a-game i don't know
your honor the debtors have moved for authorization to sell all of their bitmain coupons free and clear
of all encumbrances pursuant to section 363 after the bankruptcy code that motion is at docket number
346 in support of the motion the debtors have submitted the declaration of mr russell can
at docket number 393 this motion has been unopposed and we think that it's non-controversial
for at least three reasons first the debtors do not plan to use these coupons which are only valid
for a specific model of bitcoin miners from bitmain second if no action is taken all these
coupons will expire worthless in the next two to three months with the vast majority expiring on
march 22nd the the third reason is that if the motion is granted the debtors will have an
opportunity to sell these coupons on the market if they move quickly and they've made the business
judgment that it is prudent to do so at this time we move to admit the declaration of russell can
in support of this motion docket number 393 and mr can is available here today is available in
case the court or other parties have questions all right anyone have an objection to the
mr kanz declaration found that it's doctor number 393
all right then it's admitted anyone wish to cross-examine mr i have such an inclination to call it
but i would i take it no one else is going to either all right then with that i'll accept
mr kanz tech declaration i have read the declaration at 393 i appreciate the argument
you said exactly what you needed to say in the last sentence this is practical applications
business judgment if we do nothing it's worth nothing if we do something then we maximize value
all right anyone else wish to be heard all right again i find the request to relief just makes a
good practical sense we all wish you could get more but i understand that uh the market is what
the market is for these things i think it's a good decision i'll grant the motion i want to make sure
i got did we have revised form of orders or was it just the original order that was submitted with
the motion it was just the original form of order that was submitted i will get that signed and on
the docket i've got a noon which i need to deal with but i'll get that done early afternoon thank
you your honor all right thank you anything else we need to address nothing else your honor thank
you very much for your time thank you let's just one thing committee see things coming down the
pipe that we need to plan for or you're still investigative planning talking i just want to
make sure you have access uh your honor brett miller will committee uh because the ad hoc group is
not the dip lender therefore the immediate challenge deadlines have been removed from the
new quarter so there will be time to look at some of the things that we outlined in our initial
objection so there's nothing timely other than getting up to speed and hopefully watching bitcoin
go up to 100 000 that would be great um and i assume that you everyone's working together on
exchanging documents and making sure that committee has access to those things that it is
having spent the better part of 30 years working opposite while and members of this team as well as
mr ansen and his team for a long time everything has gone very smoothly very professionally and
there's been no complaints over that terrific gareth you need me and again miss reed just to
reiterate when you folks are ready just coordinate with the major constituents reach out to mr
lanzo get your hearing date and we'll take that up just as soon as you're ready okay all right
then everyone i've got a new hearing so i'm not going to step down uh please as expeditiously as
a way that you can gather up