shl Doc 11 Filed 12/13/12 Entered 12/13/12 17:22:42 Main Document Pg 1 of 33

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1 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 1 of 33 HEARING DATE AND TIME January 16, 2013, at 11 a.m. (Eastern Time) OBJECTION DEADLINE January 2, 2013 at 12 p.m. (Eastern Time) GIBSON, DUNN & CRUTCHER LLP Michael A. Rosenthal (MR-7006) Craig H. Millet (admitted pro hac vice) Matthew K. Kelsey (MK-3137) 200 Park Avenue New York, New York Telephone (212) Facsimile (212) Attorneys for Debtors in Possession and Defendant FALCON GAS STORAGE COMPANY, INC. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re ARCAPITA BANK B.S.C.(c), et al. Debtors. JOHN M. HOPPER, et al., v. Plaintiff, FALCON GAS STORAGE COMPANY, INC., Defendant x Chapter 11 Case No (SHL) Jointly Administered Adv. Proc. No (SHL) NOTICE OF FALCON S MOTION FOR LEAVE TO FILE COUNTERCLAIM AND THIRD PARTY CLAIMS PLEASE TAKE NOTICE that on December 13, 2012, Falcon Gas Storage Company, Inc. (the Falcon ) filed the attached Falcon s Motion For Leave To File Counterclaim And Third Party Claims (the Motion ). PLEASE TAKE FURTHER NOTICE that a hearing (the Hearing ) to consider the Motion will take place before the Honorable Sean H. Lane, United States Bankruptcy Judge, in

2 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 2 of 33 Room 701 of the United States Bankruptcy Court, One Bowling Green, New York, New York (the Bankruptcy Court ) on January 16, 2013 at 1100 a.m. (prevailing U.S. Eastern Time), or as soon thereafter as counsel may be heard. PLEASE TAKE FURTHER NOTICE that any and all objections to the Motion (the Objections ) shall be filed electronically with the Court on the docket of Arcapita Bank B.S.C.(c), et al., Ch. 11 Case No (SHL) (the Docket ), pursuant to the Case Management Procedures approved by this Court and the Court s General Order M-399 (available at http//nysb.uscourts.gov/orders/orders2.html), by registered users of the Court s case filing system and by all other parties in interest on a 3.5 inch disk, preferably in portable document format, Microsoft Word, or any other Windows-based word processing format (with a hard copy delivered directly to Chambers), in accordance with the customary practices of the Bankruptcy Court and General Order M-399, to the extent applicable, and served in accordance with General Order M-399 on (i) counsel for Falcon, Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York, New York, (Attn Michael A. Rosenthal, Esq., Craig H. Millet, Esq., and Matthew K. Kelsey, Esq.) (ii) the Office of the United States Trustee for the Southern District of New York, 33 Whitehall Street, 21st Floor, New York, New York (Attn Richard Morrissey, Esq.); (iii) the Hopper Parties, Andrews Kurth LLP, 450 Lexington Ave, 15th Floor, New York, New York (Attn Jonathan I. Levine, Esq.) and Andrews Kurth LLP, 600 Travis, Ste 4200, Houston, Texas (Attn. David A. Zdunkewicz); (iv) HSBC Bank USA, N.A., 1800 Tysons Boulevard, Mc Lean, Virginia (Attn CEO or other Officer), HSBC Bank USA, N.A. 8 East 40th St., New York, New York (Attn Ignazio Tamburello) and Hogan Lovells US LLP, 875 Third Ave., New York, New York (Attn Daniel J. Lanigan, Esq.); (v) Tide, Bracewell & Giuliani LLP, 711 Louisiana St., Houston, Texas (Attn Trey 2

3 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 3 of 33 Wood, Esq.), so as to be received no later than January 2, 2013 at 1200 p.m. (prevailing U.S. Eastern Time) (the Objection Deadline ). PLEASE TAKE FURTHER NOTICE that if no Objections are timely filed and served with respect to the Motion, Falcon may, on or after the Objection Deadline, submit to the Bankruptcy Court an order substantially in the form of the proposed order attached to the Motion, which order may be entered with no further notice or opportunity to be heard. Dated New York, New York December 13, 2012 Respectfully submitted, /s/ Craig H. Millet Michael A. Rosenthal (MR-7006) Craig H. Millet (admitted pro hac vice) Matthew K. Kelsey (MK-3137) GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, New York Telephone (212) Facsimile (212) Attorneys for Debtors in Possession and Defendant FALCON GAS STORAGE COMPANY, INC. 3

4 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 4 of 33 HEARING DATE AND TIME January 16, 2013, at 11 a.m. (Eastern Time) OBJECTION DEADLINE January 2, 2013 at 12 p.m. (Eastern Time) GIBSON, DUNN & CRUTCHER LLP Michael A. Rosenthal (MR-7006) Craig H. Millet (admitted pro hac vice) Matthew K. Kelsey (MK-3137) 200 Park Avenue New York, New York Telephone (212) Facsimile (212) Attorneys for Debtors in Possession and Defendant FALCON GAS STORAGE COMPANY, INC. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re ARCAPITA BANK B.S.C.(c), et al. Debtors. JOHN M. HOPPER, et al., v. Plaintiffs, FALCON GAS STORAGE COMPANY, INC., Defendant x Chapter 11 Case No (SHL) Jointly Administered Adv. Proc. No (SHL) FALCON S MOTION FOR LEAVE TO FILE COUNTERCLAIM AND THIRD PARTY CLAIMS Defendant and Debtor in Possession Falcon Gas Storage Company, Inc. ( Falcon ) by this Motion (the Motion ) hereby requests the entry of an order (the Proposed Order ), substantially in the form attached hereto as Exhibit A, granting Falcon leave to file a counterclaim against Plaintiffs (the Hopper Parties ) and to assert related third party claims against Tide Natural Gas Storage I, LP and Tide Natural Gas Storage II, LP (together, Tide )

5 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 5 of 33 and HSBC Bank USA, National Association ( HSBC ) in the form attached hereto as Exhibit B (the Proposed Counterclaim and Third Party Claims ). The joinder of Tide and HSBC is required because they are parties necessary to the adjudication of the issues raised in this adversary proceeding ( Adversary Proceeding ) as provided in Rules 19 and 20 of the Federal Rules of Civil Procedure ( Federal Rules ). This Motion is made pursuant to section 105(a) of title 11 of the United States Code (the Bankruptcy Code ) and Rules 13, 14, 15, 19 and 20 of the Federal Rules, made applicable to this Adversary Proceeding by Rules 7013, 7014, 7015, 7019 and 7020, of the Federal Rules of Bankruptcy Procedure ( Bankruptcy Rules ). PRELIMINARY STATEMENT The Hopper Parties, Tide, HSBC and Falcon each claim title to the very same property in excess of $70 million held in escrow by HSBC. Despite the competing claims to the same property at issue in the Adversary Proceeding, Tide and HSBC are not named as parties and there is no other proceeding pending within the bankruptcy case of Arcapita Bank B.S.C.(c) ( Arcapita Bank ) or of its affiliated debtors, or in any other court, in which all parties are named as to the issues raised in the Adversary Proceeding. Falcon has consistently maintained that the Escrowed Money (defined below) is property of its bankruptcy estate and, in the interest of judicial economy, Falcon now seeks to resolve the core issues as to the extent of the property of Falcon s estate and all competing interests in the Escrowed Money through this Adversary Proceeding. Tide and HSBC are necessary and indispensable parties to that determination. Falcon also seeks a determination of the related issue, that any claim Tide may have against Falcon is subordinated to all other claims against the Falcon estate pursuant to section 510(b). 2

6 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 6 of 33 Falcon requests leave of Court to file the Proposed Counterclaim and Third Party Claims attached hereto seeking (i) a declaratory judgment against the Hopper Parties, Tide and HSBC that the Escrowed Money is property of Falcon s estate; (ii) turnover of the Escrowed Money against HSBC pursuant to section 542 of the Bankruptcy Code; and (iii) subordination of Tide s claim pursuant to section 510(b) of the Bankruptcy Code. JURISDICTION 1. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. 157 and This Motion is a core proceeding within the meaning of 28 U.S.C. 157(b)(2). Venue is proper pursuant to 28 U.S.C and BACKGROUND AND HISTORY A. The Hopper Litigation 2. As of July 2005, the stock of Falcon was 80% owned by Arcapita Bank affiliate GA Storage Funding Inc. and 20% owned by the Hopper Parties. 3. As of early 2010, Falcon s primary asset was the stock of NorTex Gas Storage Company, LLC ( NorTex ), a company that owns and operates two large underground natural gas storage facilities and associated equipment near Fort Worth, Texas. On March 15, 2010, Falcon entered into a purchase agreement (the Purchase Agreement ) to sell 100% of its stock in NorTex (the NorTex Sale ) to Tide for $515 million. 4. Prior to closing the NorTex Sale, the Hopper Parties filed actions in state court in Texas against Tide, Falcon, certain of its directors and NorTex, seeking damages and to enjoin the NorTex Sale to Tide (collectively, the Hopper Litigation ) because Falcon s board of directors had allegedly breached their fiduciary duties by agreeing to a sales price for the NorTex stock purportedly below fair value. 3

7 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 7 of The Texas Courts refused to enjoin the NorTex Sale; however, as a result of the pending Hopper Texas Litigation and as a condition to closing imposed by Tide, Falcon agreed to (1) indemnify Tide for any liability Tide might suffer as a result of the Hopper Litigation, and (2) place approximately $70 million of the total sales proceeds from the NorTex sale in escrow (the Escrowed Money ) with HSBC Bank USA, National Association ( HSBC ) to be available to satisfy those specific indemnification obligations. 6. After the NorTex Sale closed, on July 27, 2010, Falcon and the Hopper Parties settled the Hopper Litigation in exchange for (1) an immediate cash payment of $6.5 million and (2) the agreement that, when the Escrowed Money were released to Falcon, Falcon would then pay the Hopper Parties an additional $8.25 million. Because the settlement of the Hopper Litigation fully resolved the contingent indemnification obligations of Falcon to Tide, the dismissal of the Hopper Litigation resulted in the occurrence of an Escrow Breakage Trigger under the terms of the Purchase Agreement and Escrow Agreement. B. Tide s Action Against Falcon 7. Despite the occurrence of an Escrow Breakage Trigger, Tide refused to provide release instructions to HSBC and claimed that it was excused from providing the release instructions due to Falcon s alleged fraud and claimed that Tide still held title to the full amount of the Escrowed Money. Tide then filed an action in the Southern District of New York against Falcon, Arcapita Bank and Arcapita Inc., alleging fraud in the inducement and intentional misrepresentations in connection with the purchase and sale of securities, among other things. Tide Natural Gas Storage I, L.P. v. Falcon Gas Storage Co., Inc., Case No. 10-cv KMW (S.D.N.Y.) (the District Court Action ). The District Court Action has been stayed by Arcapita Bank s and Falcon s bankruptcy filings. 4

8 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 8 of The District Court Action is a complicated, multi-million dollar suit that is factdependent and turns on byzantine analyses relating to, inter alia, volumetric calculations and measurements that were performed to estimate the quantities and values of pad gas located in the NorTex natural gas storage facilities, the source of compressor fuel and associated operating expense and the source of hydrocarbons produced during NGL extraction facility operations. If post-hoc forensics demonstrate that any of the intricate analyses and calculations performed by NorTex relating to the foregoing led to unreliable or inaccurate estimates, the District Court Action also involves an inquiry into whether this was something that Falcon s and/or Arcapita s management knew or should have known about. C. Arcapita and Falcon File for Bankruptcy Protection 9. On March 19, 2012 Arcapita Bank and certain of its affiliates commenced cases under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court ). On March 21, 2012, Arcapita Bank filed a Suggestion of Bankruptcy in the District Court Action, notifying the court of the bankruptcy filing and that the District Court Action was stayed as to Arcapita Bank under the Bankruptcy Code. 10. On April 12, 2012, the Hopper Parties filed a Motion to Intervene in the District Court Action based on their asserted interest in a portion of the Escrowed Money. On April 26, 2012, Tide opposed the Hopper Parties motion, arguing that the Hopper Parties lack a direct interest in the subject matter of the District Court Action. Tide also filed a Motion to Sever, seeking to sever its claims as against Arcapita Bank so that those claims could remain stayed while Tide s claims as against the other defendants moved forward. 11. On April 30, 2012, Falcon commenced its case under chapter 11 the Bankruptcy Code, and its bankruptcy case was ordered administratively consolidated with the other six 5

9 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 9 of 33 related bankruptcy cases. On May 1, 2012, Falcon filed a Suggestion of Bankruptcy in the District Court Action, notifying the court of the filing and that the District Court Action was stayed as to Falcon under the Bankruptcy Code. 12. On May 16, 2012, the District Court entered a Stipulation and Order that provided that (i) Tide s Motion to Sever was withdrawn without prejudice and (ii) the District Court Action is stayed in its entirety pursuant to 362(a) of the Bankruptcy Code, unless or until otherwise ordered by the Bankruptcy Court. D. The Hopper Adversary Proceeding and Other Post-Petition Events 13. On May 21, 2012, the Hopper Parties initiated this Adversary Proceeding against Falcon, seeking a declaratory judgment that (i) Falcon held all rights title and interest in the Escrowed Money before it filed its bankruptcy petition, (ii) Falcon irrevocably transferred and assigned all of its right, title and interest in and to $8.25 million of the Escrowed Money to the Hopper Parties, (iii) $8.25 million of the Escrowed money is not property of the Falcon Estate and (iv) the Hopper Parties own and are entitled to immediate payment of $8.25 million of the Escrowed Money. Despite their competing claims to title to the Escrowed Money, neither Tide nor HSBC were named as parties in this Adversary Proceeding. 14. Falcon contends that the Escrowed Money is property of Falcon s bankruptcy estate pursuant to section 541 of the Bankruptcy Code and that the Hopper Parties and Tide do not hold a secured interest in, or any other special or exclusive right to, all or any of the Escrowed Money. Further, Falcon contends that HSBC has no interest in the Escrowed Money except to the extent provided by its contractual rights and allowed under the Bankruptcy Code. 15. On June 25, 2012, Tide filed a motion in the Bankruptcy Court to lift the automatic stay (the Lift Stay Motion ) to allow the District Court Action against Falcon and Arcapita Bank to move forward. The Debtors opposed the Lift Stay Motion, and the Official 6

10 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 10 of 33 Committee of Unsecured Creditors (the Committee ) joined the Debtors opposition. The Hopper Parties also opposed the Lift Stay Motion. The Lift Stay Motion was adjourned and set for a status conference on December 18, 2102 to allow the parties to first mediate the dispute. 16. On December 4, 2012, a mediation took place between the Debtors, the Hopper Parties and Tide before Judge John S. Martin (Ret) (the Mediation ). Despite the Debtors good faith efforts, the parties were unable to resolve the dispute through the Mediation. E. Tide and HSBC Assert an Interest in the Escrowed Money 17. On August 29, 2012, Tide filed proofs of claims in the Falcon bankruptcy case asserting a secured claim in the Escrowed Money in the amount of $70,000,000 plus interest, and it asserted an unsecured claim in the amount of $50,000,000. In its proofs of claims, Tide states that the Escrowed Money remain[s] property of Tide. 18. On August 29, 2012, HSBC filed a proof of claim in Falcon s bankruptcy case, asserting a secured claim in the amount of $39, for fees, costs and expenses allegedly due to HSBC (plus accruing fees, costs and expenses) pursuant to Sections 5 and 6 of the Escrow Agreement. THE JOINDER OF TIDE AND HSBC IS NECESSARY TO RESOLVE THE ISSUES RAISED IN THE ADVERSARY PROCEEDING 19. Through the Mediation and from the proofs of claims of Tide filed in August, it has become clear that the parties are at an impasse due to conflicting views as to (i) whether the Escrowed Money is property of the Falcon estate and also (ii) whether any claim of Tide against Falcon for damages in the purchase of the securities of Falcon affiliate NorTex is subordinated to other claims, including the claims of the Hoper Parties, pursuant to section 510(b) of the Bankruptcy Code. The resolution of these threshold core issues is necessary before any resolution on the merits can proceed or the priority of a distribution scheme in Falcon s plan of 7

11 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 11 of 33 reorganization can be confirmed. The Counterclaim and Third Party Claims proposed by Falcon will bring all parties before this Court in one proceeding that is already pending before this Court. 20. Because (i) both the Hopper Parties and Tide claim title to the same Escrowed Money, and HSBC is actually holding the Escrowed Money, and (ii) and any adjudication in favor of the Hopper Parties necessarily requires a finding adverse to Tide, Tide and HSBC are necessary parties to the adjudication of the Adversary Proceeding as provided in Rules 19 and 20 of the Federal Rules. Further, the alleged rights of Tide and the Hopper Parties to the Escrowed Money, if any, all arise under the same facts and circumstances. 21. Tide and HSBC are required parties because the court cannot accord complete relief among existing parties by entering a declaratory judgment while Tide and HSBC assert claims to the Escrowed Money. See Fed. R. Civ. P. 19(a)(1)(A); see also J. Williams Co. v. Fort Belknap Housing Authority, 92 F.R.D. 17, 20 (D. Mont. 1981) ( [A] court must protect the interests of the parties not before it to avoid possible prejudicial effect; failure of a court to protect those interests by joinder may amount to a violation of due process. ) (emphasis added). 22. Tide and HSBC were not joined as defendants in the Hopper Parties Adversary Proceeding and the Hopper Parties are not joined in the District Court Action. Therefore, there is no other proceeding currently pending in which all indispensable parties Tide, HSBC, the Hopper Parties and Falcon are joined such that their respective interests in the Escrowed Money can be determined. Even if such a proceeding existed outside of this Court, Falcon s rights in the Escrowed Money and the relative priority of Tide s and Hopper s claims are now governed by the Bankruptcy Code, and the determination of whether the Escrowed Money is 8

12 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 12 of 33 property of Falcon s bankruptcy estate and the proper priority of Tide s claim are core bankruptcy issues inextricably tied to the effective administration of Falcon s estate and the treatment of the claims against it. 23. HSBC has possession of the Escrowed Money, and it asserts that it holds a claim against Falcon secured by the Escrowed Money to the extent of fees and costs HSBC claims it is due. Depending on the ruling of this Court in the Adversary Proceeding, HSBC should be ordered to turn over the Escrowed Money to Falcon to be used to pay administrative expenses and claims subject to the control and supervision of this Court, the Committee and the JPL s. Hence, HSBC is also a necessary party in the Adversary Proceeding. 24. No Party will be prejudiced if Falcon amends its Answer to file the Proposed Counterclaim and Third Party Claims. In its Answer filed on June 6, 2012, Falcon initially raised the lack of joinder of Tide and HSBC as indispensable parties to the adjudication of Hopper Parties claims. However, the importance of resolving all competing claims to the Escrowed Money only became clear after Tide and HSBC filed proofs of claims on August 29, 2012 and also through the Mediation. 25. If the Adversary Action were to proceed as presently plead, and Falcon were to defend and prevail on procedural grounds, the overall issues as to Tide s claim to the Escrowed Money would not be resolved and little would be accomplished. On the other hand, it would be inefficient to initiate new proceedings against Tide and HSBC relating to their alleged interests in the Escrowed Money given that the Hopper Adversary Proceeding will necessarily require the Court to consider substantially the same issues. No party can legitimately claim prejudice from being joined in the Adversary Proceeding and instead all parties will benefit because they will 9

13 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 13 of 33 have their rights in the Escrowed Money determined through an orderly, consolidated proceeding as opposed to resorting to piecemeal litigation. 26. Although the Hopper Parties did not include Tide and HSBC in the Complaint, this can be remedied by allowing Falcon to file the Proposed Counterclaim and Third Party Claims, in which they are need as parties. See Associated Dry Goods Corp. v. Towers Fin l Corp., 920 F.2d 1121, 1126 (2d Cir. 1990) (the appropriate course of action is for a defendant to join a third party through a counterclaim to obtain full relief ). Amendment to pleadings are liberally granted and joinder of all parties to resolve all issues in one proceeding is favored especially as to the threshold core issues here. See United Artists Corp. v. Masterpiece Prods., Inc., 221 F.2d 213, 217 (2d Cir. 1955) ( A liberal attitude toward the inclusion of parties is a necessary concomitant to the liberalized third-party practice authorized by the Federal Rules of Civil Procedure. ). 27. Falcon, therefore, requests that the Court enter an order authorizing Falcon, to the extent necessary, to amend its Answer pursuant to Federal Rule 15(a)(2) to allow it to file the Proposed Counterclaim and Third Party Claims such that all parties alleged claims and rights as to the Escrowed Money may be adjudicated in one proceeding. 28. There are various procedural mechanisms though which Falcon may seek leave of Court and then assert claims against the Hopper Parties, Tide and HSBC within the Adversary Proceeding a. Falcon may be granted leave to amend its Answer to assert the Proposed Counterclaim and Third Party Claims against the Hopper Parties, Tide and HSBC pursuant to Federal Rule 15(a)(2) and Federals Rules 13(h), 19 and

14 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 14 of 33 b. Tide and HSBC may be joined in the Adversary Proceeding, and Falcon may be granted leave to file the proposed Third Party Claims against Tide and HSBC pursuant to Federal Rule 21 and Federal Rule 13(g). c. Falcon may be granted leave to file the proposed Third Party Claims against Tide and HSBC pursuant to Rule 14(a). 29. Under any or a combination of the above rules, Falcon should be granted leave to file its Proposed Counterclaim and Third Party Claims. NOTICE 30. Falcon has provided notice of filing of the Motion by electronic mail, facsimile and/or overnight mail to (i) the Office of the United States Trustee for the Southern District of New York, 33 Whitehall Street, 21st Floor, New York, New York (Attn Richard Morrissey, Esq.); (ii) the Hopper Parties, Andrews Kurth LLP, 450 Lexington Ave, 15th Floor, New York, New York (Attn Jonathan I. Levine, Esq.) and Andrews Kurth LLP, 600 Travis, Ste 4200, Houston, Texas (Attn. David A. Zdunkewicz); (iii) HSBC Bank USA, N.A., 1800 Tysons Boulevard, Mc Lean, Virginia (Attn CEO or other Officer), HSBC Bank USA, N.A. 8 East 40th St., New York, New York (Attn Ignazio Tamburello) and Hogan Lovells US LLP, 875 Third Ave., New York, New York (Attn Daniel J. Lanigan, Esq.); (iv) Tide, Bracewell & Giuliani LLP, 711 Louisiana St., Houston, Texas (Attn Trey Wood, Esq.). NO PRIOR REQUEST 31. No prior motion for the relief sought in this Motion has been made to this or any other court. 11

15 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 15 of 33 WHEREFORE, the Debtors respectfully request that the Court grant the relief requested herein and such other and further relief as the Court may deem just and proper. Dated New York, New York December 13, 2012 Respectfully submitted, /s/ Craig H. Millet Michael A. Rosenthal (MR-7006) Craig H. Millet (admitted pro hac vice) Matthew K. Kelsey (MK-3137) GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, New York Telephone (212) Facsimile (212) Attorneys for Defendant FALCON GAS STORAGE COMPANY, INC. 12

16 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 16 of 33 EXHIBIT A PROPOSED ORDER

17 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 17 of 33 GIBSON, DUNN & CRUTCHER LLP Michael A. Rosenthal (MR-7006) Craig H. Millet (admitted pro hac vice) Matthew K. Kelsey (MK-3137) 200 Park Avenue New York, New York Telephone (212) Facsimile (212) Attorneys for Debtors in Possession and Defendant FALCON GAS STORAGE COMPANY, INC. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re ARCAPITA BANK B.S.C.(c), et al. Debtors. JOHN M. HOPPER, et al., v. Plaintiffs, FALCON GAS STORAGE COMPANY, INC., Defendant x Chapter 11 Case No (SHL) Jointly Administered Adv. Proc. No (SHL) ORDER GRANTING FALCON LEAVE TO FILE COUNTERCLAIM AND THIRD PARTY CLAIMS Upon consideration the motion (the Motion ) 1 of Falcon Gas Storage Company, Inc. ( Falcon ), for entry of an order authorizing Falcon to file a counterclaim and third party claims (the Counterclaim and Third Party Claims ) against the Hopper Parties and against Tide and HSBC; and the Court having found (i) that the issues raised in the Motion are core issues and 1 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion.

18 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 18 of 33 that it has jurisdiction to consider the Motion pursuant to 28 U.S.C. 157 and 1334; (ii) that venue of this proceeding and the Motion in this district is proper pursuant to 28 U.S.C 1408 and 1409; (iii) that Tide and HSBC are necessary to the determination of the issues raised in the Adversary Proceeding and, therefore, the relief requested in the Motion is in the best interests of all parties in interest; (iv) that no other or further notice is necessary except as provided herein; and the Court having determined that the legal and factual bases set forth in the Motion establish just cause for the relief granted herein; IT IS HEREBY ORDERED 1. The Motion is granted to the extent provided herein. 2. Falcon is authorized to file the Counterclaim and Third Party Claims and seek the relief contained therein against the Hopper Parties, Tide and HSBC, and the Clerk of the United States Bankruptcy Court is authorized to issue summons thereon. 3. Service of the Counterclaim and Third Party Claims on Tide and the Hopper Parties may be accomplished by serving their counsel who have appeared in the Arcapita bankruptcy cases. 4. Service of summons on HSBC shall be accomplished as provided in Rule The Hopper Parties, Tide and HSBC may file responsive pleadings or motions as provided by the Federal Rules of Civil Procedure and Federal Rules of Bankruptcy Procedure. IT IS SO ORDERED. Dated December, 2012 New York, New York THE HONORABLE SEAN H. LANE UNITED STATES BANKRUPTCY JUDGE 2

19 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 19 of 33 EXHIBIT B PROPOSED COUNTERCLAIM AND THIRD PARTY CLAIMS

20 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 20 of 33 GIBSON, DUNN & CRUTCHER LLP Michael A. Rosenthal (MR-7006) Craig H. Millet (admitted pro hac vice) Matthew K. Kelsey (MK-3137) 200 Park Avenue New York, New York Telephone (212) Facsimile (212) Attorneys for Defendant, Counterclaimant and Third Party Plaintiff FALCON GAS STORAGE COMPANY, INC. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re ARCAPITA BANK B.S.C.(c), et al. Debtors. JOHN M. HOPPER, et al., Plaintiff, v. FALCON GAS STORAGE COMPANY, INC., Defendant. FALCON GAS STORAGE COMPANY, INC., Counterclaimant, v. JOHN M. HOPPER, et al. Counterdefendants. Chapter 11 Case No (SHL) Jointly Administered Adv. Proc. No (SHL)

21 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 21 of 33 FALCON GAS STORAGE COMPANY, INC., Third Party Plaintiff, v. TIDE NATURAL GAS STORAGE I, LP; TIDE NATURAL GAS STORAGE II, LP; HSBC BANK USA, N.A., Third Party Defendants x COUNTERCLAIM AND THIRD PARTY CLAIM FOR DECLARATORY RELIEF AND TURNOVER AND SUBORDINATION PURSUANT TO 11 U.S.C. 510(B) Third Party Plaintiff, Counterclaimant and Defendant Falcon Gas Storage Company, Inc. ( Falcon ), for its claims against Tide Natural Gas Storage I, LP, Tide Natural Gas Storage II, LP (together, Tide ) HSBC Bank USA, National Association ( HSBC ) and the Hopper Parties (defined below) alleges as follows I. INTRODUCTION 1. On May 21, 2012, John M. Hopper and the other plaintiffs in the above-captioned case (the Hopper Parties ) initiated this adversary proceeding (the Adversary Proceeding ) by filing a complaint (the Complaint ) against Falcon, seeking a declaratory judgment that (i) Falcon, before it filed its bankruptcy petition, irrevocably transferred and assigned all of its right, title and interest in and to $8.25 million of the Escrowed Money (defined below) now in the possession of HSBC to the Hopper Parties; (ii) the rights, title and interests to the $8.25 million is vested in and with Falcon but was assigned and/or transferred, pre-bankruptcy petition to the Hopper Parties; and (iii) the Hopper Parties own and are entitled to immediate payment of $8.25 million of the Escrowed Money. 2

22 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 22 of Falcon is informed and believes and thereupon alleges that, through proofs of claims filed by Tide in the Falcon chapter 11 case on August 29, 2012, Tide claims exclusive title to the same $8.25 million of the Escrowed Money as claimed by the Hopper Parties in this Adversary Proceeding. Also on August 29, 2012, HSBC filed a proof of claim asserting a secured claim in the Escrowed Money. Tide and HSBC are, therefore, required parties as defined by Federal Rule of Civil Procedure ( Rule ) 19(a)(1)(A) & (B), made applicable to this Adversary Proceeding by Federal Rule of Bankruptcy Procedure ( Bankruptcy Rule ) 7019, because they have competing claims to the Escrowed Money. 3. The Hopper Parties failed to join Tide and HSBC in their Complaint. Therefore, Falcon hereby joins Tide and HSBC in the third party claims alleged herein (the Counterclaim ) pursuant to Rule 13(h), which is made applicable to this Adversary Proceeding by Bankruptcy Rule 7013, and Rule 14, which is made applicable to this Adversary Proceeding by Bankruptcy Rule II. PARTIES 4. Falcon is a Delaware corporation with its principal place of business at 75 14th Street, 24th Floor, Atlanta, Georgia Falcon is informed and believes and thereupon alleges that Tide Natural Gas Storage I, LP was formerly known as Alinda Natural Gas Storage I, LP and is a limited partnership organized under the laws of the State of Delaware. 6. Falcon is informed and believes and thereupon alleges that Tide Natural Gas Storage II, LP was formerly known as Alinda Natural Gas Storage II, LP and is a limited partnership organized under the laws of the State of Delaware. 3

23 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 23 of Falcon is informed and believes and thereupon alleges that HSBC is a nationallychartered bank, with its headquarters located at 1800 Tysons Boulevard, McLean, Virginia III. CORE JURISDICTION AND VENUE 8. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 157 and The counterclaims and third party claims alleged herein are each core proceedings in which the Bankruptcy Court may enter final orders and judgments as provided in 28 U.S.C. 157(b). 10. Each Counterdefendant and Third Party Defendant has filed a proof of claim in the Falcon Bankruptcy case and/or has otherwise each submitted to the jurisdiction of the Bankruptcy Court. 11. Venue in this district is proper pursuant to 28 U.S.C. 1409(a) as Falcon s case under chapter 11 of title 11 of the United States Code (the Bankruptcy Code ) is pending in this district under lead Case No (SHL). 12. Declaratory relief is appropriate pursuant to Federal Rule of Bankruptcy Procedure 7001(1), (2) & (9) and 28 U.S.C because an actual controversy exists as to whether certain funds are property of Falcon s estate. IV. BACKGROUND AND HISTORY A. The Hopper Litigation 13. Falcon previously owned the majority of the stock of NorTex Gas Storage Company, LLC ( NorTex ), a company that owns and operates two large underground natural gas storage facilities and associated equipment near Fort Worth, Texas. 4

24 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 24 of Prior to July 2005, Falcon was owned by the Hopper Parties. In July 2005, Arcapita Bank B.S.C.(c) ( Arcapita Bank ), through an affiliate, acquired an 80% equity interest in Falcon; the Hopper Parties remained minority shareholders of Falcon. 15. On March 15, 2010, Falcon and Tide entered into a purchase agreement (the Purchase Agreement ), pursuant to which Falcon agreed to sell 100% of the equity in NorTex to Tide (the NorTex Sale ) for $515 million (the Purchase Price ). Pursuant to the Purchase Agreement, the NorTex Sale was set to close on March 31, On March 29, 2010, two days before the NorTex Sale closed, the Hopper Parties filed actions against Falcon, certain of its directors and NorTex in Harris County and Eastland County, Texas, seeking to enjoin the NorTex Sale (the Hopper Litigation ). The Hopper Parties alleged that Falcon s board of directors had breached their fiduciary duties by agreeing to a sales price for NorTex below fair market value. The Hopper Parties filed notices of lis pendens in Eastland and Jack counties, where the NorTex gas storage facilities were located, and sought a temporary restraining order in Harris County in an effort to block the NorTex Sale from closing. The Harris County court denied the request for a temporary restraining order. 17. As a result of the pending Hopper Litigation, and as a condition of Tide to proceed with a closing of the NorTex Sale, Tide and Falcon agreed to modify the Purchase Agreement to provide that Falcon would (i) indemnify Tide for any liability Tide might suffer as a result of the Hopper Texas Litigation and (ii) place $70 million of the Purchase Price in escrow (the Escrowed Money ) to be available to satisfy the agreed indemnification obligations, in the event they arose (the Purchase Amendment ). 18. The sole purpose of the Escrowed Money was to protect Tide against potential liable resulting from the Hopper Litigation and nothing else. 5

25 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 25 of Pursuant to the terms of the Purchase Amendment, Falcon and Tide executed an escrow agreement (the Escrow Agreement ), that provided for the deposit of the Escrowed Money in an account with HSBC (the Escrow Account ). 20. Pursuant to the terms of the Purchase Amendment and the Escrow Agreement, at all relevant times, Falcon was deemed to be the beneficial owner of the Escrowed Money. 21. According to Section 3.7 of the Purchase Amendment, Tide and Falcon agreed that the Escrowed Money should be released upon the occurrence of one of the following events (an Escrow Breakage Trigger ) (i) a final non-appealable order of each court of competent jurisdiction with respect to the Hopper Claim or (ii) (A) an agreed dismissal with prejudice of the Hopper Claim with respect to the Company and its Subsidiaries, (B) a complete release by all of the Participants under the Hopper Claim of the Company and its Subsidiaries and each Purchaser and each Purchasers respective Affiliates of the Hopper Claim and (C) the final non-appealable release or expungement of the Lis Pendens Upon occurrence of an Escrow Breakage Trigger, Falcon and Tide agreed to deliver instructions to HSBC to disburse the Escrowed Money. 23. The NorTex Sale closed on April 1, On July 27, 2010, Falcon and the Hopper Parties entered into a written settlement agreement (the Hopper Settlement Agreement ), that fully resolved the Hopper Litigation. The Hopper Settlement Agreement provided in part for an immediate cash payment of $6.5 million. Additionally, the Hopper Settlement Agreement states The Second Payment shall be for $8.25 million and shall be made no later than contemporaneously with the distribution of the amounts held in escrow (the Escrow Account ) by HSBC Bank USA, National Association ( HSBC ) pursuant to an agreement between HSBC, Alinda Natural Gas Storage I, L.P., Alinda Natural Gas Storage II, L.P., and Falcon Gas Storage Company, Inc. dated April 1, 2010 (the Escrow Agreement ). The Second Payment shall be paid in full either contemporaneously with or before the Falcon Defendants receive any funds from the Escrow Account and shall constitute the first money paid to 6

26 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 26 of 33 Falcon out of the Escrow Account (i.e., after Pre-Breakage Losses have been paid out of the Escrow Account, if any). 25. The same day, on July 27, 2010, the Hopper Parties dismissed the actions with prejudice by filing a Notice of Nonsuit with Prejudice and Motion for Entry of Order on the Same in the Harris County and Eastland County courts (the Dismissals ), where the Hopper Litigation was pending. 26. The Dismissals filed in the Hopper Litigation actions are final and nonappealable. 27. On July 29, 2010, the court in Eastland County entered an order expunging both notices of lis pendens. 28. The order expunging the notices of lis pendens is final and nonappealable. 29. No Party has filed any pleadings in either case that would extend the plenary power of the Harris County or the Eastland County courts. No party has filed a notice of appeal. 30. All conditions precedent to the Escrow Breakage Trigger have occurred. 31. Upon the occurrence of the Escrow Breakage Trigger, Falcon s possessory right in the Escrowed Money became fully vested without the further actions of Tide. B. Tide s Action Against Falcon 32. On July 28, 2010, the day after the Dismissals were filed, Falcon informed Tide that the Hopper Litigation had been finally dismissed and that the Escrowed Money should be immediately released. 33. Despite the satisfaction of all conditions set forth in the Purchase Agreement, Purchase Amendment and Escrow Agreement between Tide and Falcon, including the occurrence of the Escrow Breakage Trigger, Tide refused to instruct HSBC to release the Escrowed Money. Instead, on August 2, 2010, Tide filed an action in the Southern District of New York against Falcon, Arcapita Bank and non-debtor Arcapita Inc., alleging fraud in the 7

27 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 27 of 33 inducement and intentional misrepresentations in connection with the purchase and sale of securities, among other things (the District Court Action ). Tide Natural Gas Storage I, L.P. v. Falcon Gas Storage Co., Inc., Case No. 10-cv KMW (S.D.N.Y.). 34. Also on August 2, 2010, Tide faxed a letter to HSBC, stating that the Tide entities dispute the Seller s rights to any and all funds deposited in the Escrow Account and oppose any distributions from the Escrow Account except pursuant to the Expense notice referenced in Section 3.7 of the Purchase Agreement. 35. Tide s August 2, 2010 letter to HSBC did not contend that the Escrow Breakage Trigger had not occurred. 36. On August 6, 2010, Falcon sent a letter to HSBC advising it that [t]he Escrow Breakage Trigger referenced in paragraph 3.7 of the Purchase Agreement has been met and the funds held in escrow should be distributed to the Sellers. 37. On August 6, 2010, Falcon also sent a letter to Tide, advising it that Falcon had satisfied the Escrow Breakage Trigger under the First Amended Purchase Agreement... by securing final orders from both courts in which the Hopper Claim was pending. 38. The same day, August 6, 2010, Tide responded with a letter to HSBC, refusing to consent to the release of the funds and stating, Purchasers... dispute the Seller s rights to any and all funds deposited in the Escrow Account and oppose any distributions from the Escrow Account.... In particular, under no circumstances can Mr. McCabe s letter or any other communication from the Seller be construed as the joint instruction to disburse any funds from the Escrow Account as required by Section 3 of the Escrow Agreement and Section 3.7 of the Purchase Agreement. 8

28 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 28 of On September 24, 2010, Falcon moved for partial summary judgment seeking a declaratory judgment in favor of Falcon as to Tide s claims in the District Court Action. 40. On October 1, 2010, Tide opposed Falcon s motion and moved to attach the Escrowed Money. 41. On October 27, 2010, Falcon moved for judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil Procedure as to Tide s fraud and warranty claims. 42. On September 29, 2011, the District Court issued a decision denying all parties motions in the District Court Action. C. Arcapita s and Falcon s Bankruptcy Filings and Other Post-Petition Filings. 43. On March 19, 2012 defendant Arcapita Bank and certain of its affiliates commenced cases under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. On March 21, 2012, Arcapita Bank filed a Suggestion of Bankruptcy in the District Court Action, notifying the court of the bankruptcy filing and that the District Court Action was stayed as to Arcapita Bank. 44. On April 12, 2012, the Hopper Parties filed a Motion to Intervene in the District Court Action on the basis of their alleged interest in a portion of the Escrowed Money. On April 26, 2012, Tide opposed the Hopper Parties motion, arguing that the Hopper Parties lack a direct interest in the subject matter of the District Court Action. Tide also filed a Motion to Sever, seeking to sever its claims as against Arcapita Bank so that those claims could remain stayed while Tide s claims as against the other defendant, including Falcon, moved forward. 45. On April 30, 2012, Falcon commenced a case under chapter 11 the Bankruptcy Code, and its bankruptcy case was ordered administratively consolidated with the other six related Arcapita bankruptcy cases. On May 1, 2012, Falcon filed a Suggestion of Bankruptcy in 9

29 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 29 of 33 the District Court Action, notifying the court of the chapter 11 filing by Falcon and that the District Court Action was stayed as to Falcon as well. 46. On May 16, 2012, the District Court entered its order pursuant to the stipulation of the parties providing that (i) Tide s Motion to Sever was withdrawn without prejudice and (ii) the District Court Action is stayed in its entirety pursuant to 362(a) of the Bankruptcy Code, unless or until otherwise ordered by the Bankruptcy Court. 47. On May 21, 2012, the Hopper Parties filed their Complaint solely against Falcon thereby initiating this Adversary Proceeding against Falcon, in which the Hopper Parties requested a declaratory judgment that the Hopper Parties own all rights, title and interest to the $8.25 million that Falcon agreed as part of Falcon s agreement to pay the Hopper Parties when the Escrowed Money was released. Based thereon, the Hopper Parties alleged that $8.25 million of the Escrowed Money is not property of the Falcon estate. Falcon filed its Answer on June 21, On June 25, 2012, Tide filed a motion in the Bankruptcy Court to lift the automatic stay (the Lift Stay Motion ) to allow the District Court Action against Falcon and Arcapita Bank to move forward. Falcon and Arcapita Bank (together, with the other affiliates that filed bankruptcy petitions, the Debtors ) opposed the Lift Stay Motion, and the Official Committee of Unsecured Creditors (the Committee ) joined the Debtors opposition. The Hopper Parties also opposed the Lift Stay Motion. The Lift Stay Motion was adjourned to allow the parties to first mediate the dispute. 49. On December 4, 2012, a mediation took place between the Debtors, the Hopper Parties and Tide before Judge John S. Martin (Ret) (the Mediation ). Despite the Debtors good faith efforts, the parties were unable to resolve the dispute at the Mediation. 10

30 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 30 of 33 D. Tide and HSBC Assert an Interest in the Escrowed Money 50. On August 29, 2012, Tide filed proofs of claims in the Falcon bankruptcy case asserting a secured claim in the Escrowed Money in the amount of $70,000,000 plus interest, and it asserted an unsecured claim in the amount of $50,000, In the proofs of claims filed by Tide, they state that the Escrowed Money remain property of Tide. 52. On August 29, 2012, HSBC filed a proof of claim in Falcon s bankruptcy case, asserting a secured claim in the amount of $39, for fees, costs and expenses allegedly due to HSBC (plus accruing fees, costs and expenses) pursuant to Sections 5 and 6 of the Escrow Agreement. forth herein. FIRST COUNTERCLAIM AND THIRD PARTY CLAIM (Against all Counter-Defendants and Third Party Defendants) (Declaratory Relief 11 U.S.C. 541) 53. Falcon incorporates paragraphs 1 through 52 by reference, as though fully set 54. An actual controversy has arisen and now exists between (i) Falcon, (ii) Tide and HSBC, and (iii) the Hopper Parties concerning their respective rights as to the Escrowed Money and whether the Escrowed Money is property of the Falcon estate pursuant to section 541 of the Bankruptcy Code. Falcon is informed and believes and thereupon alleges that the Hopper Parties, Tide and HSBC each claim that all or a portion of the Escrowed Money is not property of the Falcon estate and may not be used to satisfy administrative expense claims against Falcon or any other claims. 55. Falcon contends that pursuant to (1) the express terms of the Purchase Amendment and the Escrow Agreement and (2) the occurrence of the Escrow Breakage Trigger, 11

31 shl Doc 11 Filed 12/13/12 Entered 12/13/ Main Document Pg 31 of 33 the Escrowed Money is property of the Falcon estate pursuant to section 541 of the Bankruptcy Code and, to the extent the Hopper Parties and/or Tide hold claims against the Falcon estate, they do not hold a secured interest in, or any other special or exclusive right to, all or any of the Escrowed Money. Further, Falcon contends that HSBC has no interest in the Escrowed Money except to the extent otherwise provided for in the Purchase Amendment and Escrow Agreement and otherwise allowed under the Bankruptcy Code. 56. The determination of the core issue as to whether the Escrowed Money is property of the Falcon estate is separate and discrete from the determination of the merits of the substantive issues alleged in the proofs of claims filed by Tide, HSBC and the Hopper Parities and is a threshold issue that must be determined before proceeding with confirmation of Falcon s plan of reorganization or the determination of the merits of the substantive issues set forth in the proofs of claims. 57. The facts material to the determination of whether the Escrowed Money is property of the Falcon estate are admitted and/or undisputed and a ruling by this Court as to the legal effect of the undisputed material facts is necessary and appropriate at this time. 58. Falcon requests that the Court enter a declaratory judgment adjudicating the rights and duties of all parties as to the Escrowed Money and specifically finding that the Escrowed Money is property of the Falcon estate. forth herein. SECOND THIRD PARTY CLAIM (Against Third Party Defendant HSBC) (Turnover 11 U.S.C. 542) 59. Falcon incorporates paragraphs 1 through 58 by reference, as though fully set 60. HSBC is in possession of the Escrowed Money. 12