IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Transcription

1 Case Document 52 Filed in TXSB on 08/20/12 Page 1 of 17 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION IN RE: ATP OIL & GAS CORPORATION, DEBTOR. CASE NO CHAPTER 11 OBJECTIONS OF CITICORP NORTH AMERICA, INC. AND MC VPP LLC TO CERTAIN FIRST DAY MOTIONS FILED BY THE DEBTOR (Relates to Dkt. Nos. 4, 8, 15 and 21) TO THE HONORABLE MARVIN ISGUR, UNITED STATES BANKRUPTCY JUDGE: Citicorp North America, Inc. ( CNA ) and MC VPP LLC ( MC, and together with CNA, Citi ), parties-in-interest in the above-captioned case, file this objection to certain first day motions filed by the Debtor (the Objection ). 1 In support of this Objection, Citi respectfully represents as follows: I. SUMMARY OF OBJECTIONS 1. Citi owns certain overriding royalty interests that were conveyed to them by the Debtor pre-petition. These pre-petition conveyances constituted absolute conveyances of vested real property interests, and therefore the overriding royalties and the proceeds therefrom are the property of Citi. The Debtor acts an agent for Citi in delivering all funds belonging to Citi as a result of their ownership of the overriding royalty interests. The Debtor has knowingly and intentionally withheld and converted, and continues to intentionally withhold and convert, more than $58, of Citi s property. 1 A list of the motions to which this Objection relates is attached hereto as Exhibit A. #

2 Case Document 52 Filed in TXSB on 08/20/12 Page 2 of Citi objects to certain of the Debtor s first day motions on the following grounds: 2 (a) (b) (c) (d) (e) The Debtor should be required to provide notice to all holders of Overriding Royalty Interests; The Debtor should recognize all of Citi s interests; The Debtor should be required to turn over all pre- and post-petition royalties and segregate all pre- and post-petition royalties in a separate account until they are turned over; The order regarding the payment of royalties should clarify that no party may seek disgorgement of the Overrides (as defined in the Royalty Motion); and The Court should not grant any liens on Citi s property to secure the Debtor s post-petition financing, and the rights of Citi under the lenders subordination agreements should be preserved. II. RELEVANT FACTUAL BACKGROUND A. The Bankruptcy Filing 3. On August 17, 2012 (the Petition Date ), ATP Oil & Gas Corporation (the Debtor ) filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (the Bankruptcy Code ) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the Court ). Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the Debtor is operating its business and managing its property as a debtor in possession. No trustee or examiner has been appointed in this case. 4. On the Petition Date, the Debtor filed various First Day Motions, including (1) a motion requesting to implement certain notice procedures [Dkt. No. 4] (the Notice Procedures Motion ); (2) a motion requesting authority to maintain pre-petition bank accounts and cash management system [Dkt. No. 8] (the Cash Management Motion ); (3) a motion requesting authority to pay post-petition royalties [Dkt. No. 15] (the Royalty Motion ); and (4) a motion 2 Citi reserves all of its rights to assert any and all other and further objections to any of the relief requested by the Debtor in this case. #

3 Case Document 52 Filed in TXSB on 08/20/12 Page 3 of 17 requesting approval of post-petition financing and authority to use cash collateral [Dkt. No. 21] (the DIP Motion ). 9:00 a.m. 5. A hearing on the First Day Motions is currently scheduled for August 21, 2012 at B. The Debtor Conveyed to CNA and MC Overriding Royalty Interests in Certain Oil and Gas Production 6. Prior to the Petition Date on or about January 5, 2010, the Debtor, CNA, MC and several other parties entered into a purchase and sale agreement (the PSA ) for among other things, CNA s purchase of a term overriding royalty interest, and MC s purchase of a perpetual overriding royalty interest, in certain offshore oil and gas leases in the Gulf of Mexico in which the Debtor has drilling and production rights. CNA purchased its term overriding royalty interest for $26,550,000.00, and MC purchased its perpetual overriding royalty interest for $450, A true and correct copy of the PSA is attached hereto as Exhibit B. (1) Conveyance of a Term Overriding Royalty Interest to CNA 7. In conjunction with the PSA, the Debtor and CNA entered into the Conveyance of Term Overriding Royalty Interests, dated January 5, 2010 and effective October 1, 2009, conveying to CNA the term overriding royalty interest purchased under the PSA (the CNA ORRI Conveyance ). A true and correct copy of the CNA ORRI Conveyance is attached hereto as Exhibit C. 8. The PSA and CNA ORRI Conveyance transferred to CNA a term overriding royalty interest (the CNA ORRI ). (See CNA ORRI Conveyance 1.1). The CNA ORRI Conveyance provides that the conveyance of the CNA ORRI is an absolute conveyance of a real/immovable property interest. (See CNA ORRI Conveyance 4.1). #

4 Case Document 52 Filed in TXSB on 08/20/12 Page 4 of The CNA ORRI entitles CNA to receive a royalty percentage of oil and gas production from the leases identified in the CNA ORRI Conveyance. 3 Accordingly, the Debtor is required to remit monthly royalty payments (the CNA Royalty Payments ) to CNA as provided in the CNA ORRI Conveyance. (See CNA ORRI Conveyance 3.1). 10. Pursuant to that certain Act of Subordination of Lien effective October 1, 2009 (the Subordination of Lien ), the CNA ORRI Conveyance and the rights of CNA thereunder are expressly superior to the liens, security interests and other rights under the Act of Mortgage (or in Texas, Deed of Trust), Security Agreement, Financing Statement, Fixture Filing and Assignment of Production dated as of June 27, 2008 from the Debtor to Credit Suisse, as collateral agent. A true and correct copy of the Subordination of Lien, without exhibits, is attached hereto as Exhibit D. (2) Conveyance of a Perpetual Overriding Royalty Interest to MC 11. In conjunction with the PSA, the Debtor and MC entered into the Conveyance of Perpetual Overriding Royalty Interests, dated January 5, 2010 and effective October 1, 2009, conveying to MC the perpetual overriding royalty interest purchased under the PSA (the MC ORRI Conveyance ). A true and correct copy of the MC ORRI Conveyance is attached hereto as Exhibit E. 12. The PSA and MC ORRI Conveyance transferred to MC a perpetual overriding royalty interest (the MC ORRI ). (See MC ORRI Conveyance 1.1). The MC ORRI Conveyance provides that the conveyance of the MC ORRI is an absolute conveyance of a real/immovable property interest. (See MC ORRI Conveyance 4.1). 3 Under the CNA ORRI Conveyance, the Debtor is required to deliver to Citi the Applicable Ownership Percentage (as defined in the CNA ORRI Conveyance) of the Royalty Payment (as defined in the CNA ORRI Conveyance) for each month. This Objection refers to that monthly distribution as the CNA Royalty Payments. #

5 Case Document 52 Filed in TXSB on 08/20/12 Page 5 of The MC ORRI entitles MC to receive a royalty percentage of oil and gas production from the leases identified in the MC ORRI Conveyance. 4 Accordingly, the Debtor is required to remit monthly royalty payments (the MC Royalty Payments ) to MC as provided in the MC ORRI Conveyance. (See MC ORRI Conveyance 3.1) (2) The Debtor Has Failed to Deliver to CNA and MC the Royalty Payments Owned by CNA and MC 14. The conveyances of the CNA ORRI and MC ORRI (the Overriding Royalty Interests ) constitute absolute, present, unequivocal conveyances of vested real property interests, and therefore the CNA Royalty Payments and MC Royalty Payments (collectively, the Royalty Payments ) are the property of CNA and MC, respectively, as opposed to being a claim for payment of a debt owed by the Debtor under the parties agreements. As a result, the Debtor acts as the agent of Citi in delivering to Citi all Royalty Payments from the Overriding Royalty Interests. 15. The Debtor has failed to deliver to CNA on July 31, 2012 (the most recent payment date) a total of $43, in CNA Royalty Payments. The CNA Royalty Payments owed to CNA by the Debtor will continue to accrue on a monthly basis. 16. The Debtor has failed to deliver to MC on July 31, 2012 (the most recent payment date) a total of $15, in MC Royalty Payments. The MC Royalty Payments owed to MC by the Debtor will continue to accrue on a monthly basis. 4 Under the MC ORRI Conveyance, the Debtor is required to deliver to MC the Applicable Ownership Percentage (as defined in the MC ORRI Conveyance) of the Royalty Payment (as defined in the MC ORRI Conveyance) for each month. This Objection refers to that monthly distribution as the MC Royalty Payments. #

6 Case Document 52 Filed in TXSB on 08/20/12 Page 6 of 17 III. THE ROYALTY INTERESTS OWNED BY CNA AND MC ARE NOT PROPERTY OF THE ESTATE AND ARE NOT INTERESTS THAT THE DEBTOR MAY REJECT 5 A. The CNA ORRI and MC ORRI are Real Property Interests Owned by CNA and MC, Respectively 17. Property of the estate is property in which the debtor held an interest at the time of the commencement of the bankruptcy case, as determined by non-bankruptcy law. Endeavour GP, LLC v. Endeavour Highrise, L.P. (In re Endeavour Highrise, L.P.), 432 B.R. 583 (Bankr. S.D. Tex. 2010); In re Kalil Mktg., 2008 Bankr. LEXIS 5030, *3 (Bankr. S.D. Tex. July 22, 2008) (noting that [w]hen the petition was filed, all property in which [the] Debtor held an interest became property of the estate ). The Overriding Royalty Interests and Royalty Payments are not property of the Debtor s estate because, as discussed below, the Overriding Royalty Interests are real property interests that were conveyed pre-petition by the Debtor to Citi. 18. The Overriding Royalty Interests relate to operations conducted on certain Outer Continental Shelf leases (the OCS Leases ) located in federal waters in the Gulf of Mexico off the coast of, and adjacent to, Louisiana. The law of the adjacent state, here Louisiana, therefore applies to the OCS Leases. See 43 U.S.C. 1333(a)(2)(A); Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F.2d 1043, 1050 (5th Cir. 1990) ( We find it beyond any doubt that OCSLA is itself a Congressionally mandated choice of law provision requiring that the substantive law of the adjacent state is to apply even in the presence of a choice of law provision in the contract to the contrary. ); Cutting Underwater Technologies USA, Inc. v. Eni U.S. Operating Co., 671 F.3d 512, 517 (5th Cir. 2012) ( Congress declared that [t]o the extent that they are applicable and not inconsistent with [federal law], the laws of the adjacent states are the law[s] of the United States on the OCS. ) (citing 43 U.S.C. 1333(a)(2)(A)). 5 CNA and MC reserve all of their rights with respect to how their interests are characterized. #

7 Case Document 52 Filed in TXSB on 08/20/12 Page 7 of The state adjacent to the OCS Leases is Louisiana, however Citi has cited both Louisiana and Texas law to the extent the Court applies Texas law rather than Louisiana law Both Texas and Louisiana law recognize that royalty interests and overriding royalty interests are real property interests. See e.g., HECI Exploration Co. v. Neel, 982 S.W.2d 881, 890 (Tex. 1998) ( A royalty interest is an interest in real property. ); Angichiodo v. Cerami, 28 F. Supp. 720 (W.D. La. 1939) ( [A] royalty interest is an interest in real property. ); Destec Props., Ltd. P ship v. Freestone Cent. Appraisal Dist., 6 S.W.3d 601, 611 (Tex, App. Waco 1999, pet. denied) ( An overriding royalty interest is an interest in land ); Duncan v. Paragon Resources, Inc., 417 So. 2d 850, 854 (La. App. 1982) ( Overriding royalty interests are classified as real rights and incorporeal immovable property under Louisiana law); Terry v. Terry, 565 So. 2d 997, 1000 (La. Ct. App. 1990) (same); see also La. Rev. Stat. Ann. 31:16 (2012), Comment (noting that a production payment carved from the landowner s interest in minerals should be characterized as real right under present law ); La. Rev. Stat. Ann (2012) (defining mineral rights as a real right governed by Title 31 of the Louisiana Revised Statutes of 1950, including overriding royalties [and] production payments. ). 21. Accordingly, under Texas and Louisiana law, the Debtor s pre-petition conveyances of the Overriding Royalty Interests were conveyances of a real property interests to Citi. Furthermore, the CNA ORRI Conveyance and the MC ORRI Conveyance (collectively, the ORRI Conveyances ) clearly provide that the interests assigned to Citi are more than mere economic interests. (See ORRI Conveyances 1.1) ( Working interest owner hereby conveys an interest in and to the Subject Interests ). In addition, the ORRI Conveyances specifically identify the conveyances of the Overriding Royalty Interests as absolute 6 Citi reserves all rights as to which law should apply. #

8 Case Document 52 Filed in TXSB on 08/20/12 Page 8 of 17 conveyances of a real property interests. (See ORRI Conveyances 4.1) ( This Conveyance is an absolute conveyance of a real/immovable property interest ). 22. As a result of the Debtor s conveyance of the Overriding Royalty Interests to Citi effective October 1, 2009, the Debtor did not own the Overriding Royalty Interests on the Petition Date. Therefore, the Overriding Royalty Interests and the proceeds therefrom (i.e. the Royalty Payments) are not property of the Debtor s bankruptcy estate. B. The Overriding Royalty Interests Cannot Be Rejected by the Debtor under 11 U.S.C The Overriding Royalty Interests cannot be rejected by the Debtor because they are property of Citi, and the instruments conveying those interests, the ORRI Conveyances, are not executory contracts under 365(a) of the Bankruptcy Code. See Foothills Texas, Inc. v. MTGLQ Investors, L.P. (In re Foothills Texas, Inc.), 2012 Bankr. LEXIS 3322 (Bankr. D. Del. July 20, 2012) (holding that instrument conveying an overriding royalty interest was not an executory contract subject to rejection under 365(a)). 24. Section 365(a) only permits a debtor to reject executory contracts. 11 U.S.C. 365(a). The Bankruptcy Code does not define executory contract, but the relevant inquiry is whether performance remains due to some extent on both sides of the agreement. See Phoenix Exploration v. Yaquinto (In re Murexco Petroleum), 15 F.3d 60, 62 (5th Cir. 1994); In re Mirant Corp., 378 F.3d 511, 518 n.3 (5th Cir. 2004) ( the legislative history of section [365(a)] indicates that the term [executory contract] means a contract on which performance is due to some extent on both sides ) (citations omitted). Courts applying 365(a) have also indicated that an agreement is executory if at the time of the bankruptcy filing, the failure of either party to complete performance would constitute a material breach of the contract, thereby excusing the performance of the other party. See In re Murexco Petroleum, 15 F.3d at 62. #

9 Case Document 52 Filed in TXSB on 08/20/12 Page 9 of The ORRI Conveyances are not executory contracts because Citi does not owe any remaining performance obligations under the ORRI Conveyances. The ORRI Conveyances unambiguously conveyed overriding royalty interests to Citi. (See ORRI Conveyances 1.1). Although there are continuing obligations and covenants owed by the Debtor to Citi, there are no unperformed obligations owed by Citi to the Debtor. Accordingly, the ORRI Conveyances are not executory contracts. See In re Murexco Petroleum, 15 F.3d at 62; In re Foothills Texas, Inc., 2012 Bankr. LEXIS 3322 at *26-27 (instrument conveying overriding royalty interest was not an executory contract that could be rejected where both parties to the agreement did not owe continued performance obligations). 26. Moreover, even if the ORRI Conveyances were executory, which they are not, the Debtor may not undo the conveyances of the Overriding Royalty Interests because title to those interests has already passed to Citi. See, e.g. Rudaw/Empirical Software Products Ltd. v. Elgar Electronics Corp. (In re Rudaw/Empirical Software Products Ltd.), 83 B.R. 241, 245 (Bankr. S.D.N.Y. 1988) (noting that rejection does not give the debtor the right to recover property sold and transferred to the other party and the debtor cannot undo an executed sale of property where title has passed. Such property does not revert to the debtor as a result of the debtor's rejection of the executory contract ); In re Executive Tech. Data Sys., 79 B.R. 276, 282 (Bankr. E.D. Mich. 1987) ( Section 365 addresses only future performance obligations of the parties. It does not have any impact upon the executed portions of a contract ). #

10 Case Document 52 Filed in TXSB on 08/20/12 Page 10 of 17 C. The CNA ORRI and CNA Royalty Payments are Not Property of the Debtor s Estate Under 11 U.S.C. 541(b)(4)(B) To the extent the Debtor asserts that the CNA ORRI (and the proceeds therefrom (i.e. the CNA Royalty Payments) are property of the estate by virtue of 365 or 542 of the Bankruptcy Code, which they are not, then those interests are nonetheless expressly excluded from property of the estate pursuant to 541(b)(4)(B) of the Bankruptcy Code. 28. Section 541(b)(4)(B) of the Bankruptcy Code excludes from property of the debtor s estate: 11 U.S.C. 541(b)(4). any interest of the debtor in liquid or gaseous hydrocarbons to the extent that (i) the debtor has transferred such interest pursuant to a written conveyance of a production payment to an entity that does not participate in the operation of the property from which such production payment is transferred; and (ii) but for the operation of this paragraph, the estate could include the interest referred to only by virtue of section 365 or 542 of this title. 29. As admitted by the Debtor (see, e.g. Royalty Motion, 18, 19), the CNA ORRI conveyed by the Debtor to CNA is an interest covered by 541(b)(4)(B)(i). First, the conveyance to CNA is an interest in hydrocarbons. (See CNA ORRI Conveyance 1.1) ( Working Interest Owner conveys a term overriding royalty interest in and to the Subject Interests. ). Second, the Debtor conveyed the interest in writing. (See CNA ORRI Conveyance). Third, the Debtor conveyed a production payment as defined in 11 U.S.C. 101(42A) because (a) the CNA ORRI Conveyance expressly provides that the interest conveyed constitutes a production payment as defined in 101(42A) of the Bankruptcy Code (CNA ORRI Conveyance 4.1); and (b) the CNA ORRI Conveyance gives CNA an interest in 7 CNA and MC reserve all of their rights with respect to their interests, including but not limited to the right to assert that all of their interests are excluded from property of the estate under 11 U.S.C. 541(b)(1)(4)(A) or (B). #

11 Case Document 52 Filed in TXSB on 08/20/12 Page 11 of 17 hydrocarbons (CNA ORRI Conveyance 1.1) that entitles CNA to the value of a share of production (CNA ORRI Conveyance 1.1, 3.1) for a term limited by value realized (CNA ORRI Conveyance, 1.3, 2.1), which is satisfiable in cash (CNA ORRI Conveyance 2.1, 3.1), is contingent on the production of hydrocarbons (CNA ORRI Conveyance 3.6), is from a specified value of the hydrocarbons produced (CNA ORRI Conveyance 1.2, 2.1), and is without regard to production costs (CNA ORRI Conveyance 3.3). Finally, CNA does not participate in the operation of the property. (CNA ORRI Conveyance 3.3, 4.1). 30. Accordingly, the CNA ORRI and CNA Royalty Payments are expressly excluded from property of the estate pursuant to 541(b)(4)(B) of the Bankruptcy Code. IV. OBJECTION TO NOTICE PROCEDURES MOTION 31. The Debtor is proposing to limit notice of certain pleadings to certain parties who the Debtor will include on a Master Service List. (See Notice Procedures Motion, 15). The Debtor proposes to include all holders of Overriding Royalty Interests on the Master Service List. Id. However, the Debtor s proposed initial Master Service List attached to the Notice Procedures Motion as Exhibit A does not include CNA or MC, and the list also does not appear to include any other holders of overriding royalty interests. Citi requests that the Debtor provide notice of all pleadings to all holders of overriding royalty interests. 32. Specifically, with respect to Citi, Citi requests that the Debtor provide notice to them at the following address: Kyoung (Kane) Park 390 Greenwich Street, 7 th Floor New York, New York Telephone: Facsimile: Kane.j.park@citi.com #

12 Case Document 52 Filed in TXSB on 08/20/12 Page 12 of 17 V. OBJECTION TO ROYALTY MOTION A. The Debtor Should Recognize all Royalty Interests 33. Upon information and belief, the Debtor has not included the MC ORRI Conveyance (a perpetual override) as part of the relief requested in the Royalty Motion because the MC ORRI Conveyance is neither a term overriding royalty or net profits interest conveyance and therefore the Debtor intends to pay all MC Royalty Payments in the ordinary course of business with all other overriding royalty interests. In any event, Citi requests that the order clarify that the Debtor is authorized to make payments due under the MC ORRI Conveyance and that such payments are not subject to disgorgement. B. The Debtor Should Be Required to Segregate and Turn Over all Pre- and Post- Petition Royalty Payments 34. As discussed above, the Overriding Royalty Interests and the Royalty Payments are property of Citi. The Debtor is therefore merely acting as an agent in delivering all of these funds to Citi. The Debtor has converted Citi s property by intentionally and wrongfully withholding pre-petition Royalty Payments. 8 The Debtor should be required to turn over all prepetition and post-petition Royalty Payments to Citi. 35. The Debtor is requesting authority to turnover post-petition Royalty Payments because those funds are not property of the estate. (See Royalty Motion, 12). However, the pre-petition Royalty Payments are also not property of the estate and failure to remit those funds to Citi would constitute a continued conversion of Citi s property. Notably, although the Debtor has not requested authority to turnover any pre-petition royalties, the Debtor provides no argument or supporting authority that those pre-petition funds are anything but property of the royalty owners to whom those interests were conveyed. Therefore, the Debtor should be 8 Citi reserves all of their rights to seek legal action against the Debtor with respect to the pre-petition conversion of their property. #

13 Case Document 52 Filed in TXSB on 08/20/12 Page 13 of 17 required to turn over all pre-petition Royalty Payments in addition to the post-petition Royalty Payments. 36. In addition to the turn-over of all pre- and post-petition Royalty Payments, the Debtor should be required to segregate all pre- and post-petition royalties (including the Royalty Payments) in a separate account until they have been turned over to their respective royalty owners (including CNA and MC). Segregation of the Royalty Payments is necessary to prevent commingling of funds and preserve Citi s right to trace the pre-petition Royalty Payments. 9 Furthermore, as admitted by the Debtor, segregation of royalties is required by the Southern District of Texas Procedures for Complex Chapter 11 Bankruptcy Cases. See Southern District of Texas Bankruptcy General Order No (making the Procedures for Complex Cases applicable); see United States Bankruptcy Court for the Southern District of Texas Procedures for Complex Chapter 11 Bankruptcy Cases, 7(B) (with respect to debtors engaged in drilling, exploration, development and/or operation of oil, gas or mineral properties all funds received after the petition date that are attributable to an overriding royalty, working interest owner and third party funds shall be maintained by the debtor in a segregated account so designated ) (emphasis added) C. The Order Approving the Royalty Motion Should Clarify that No Party May Seek Disgorgement of the Overrides (as defined in the Royalty Motion) 37. As set forth above, all of the Overriding Royalty Interests are property of Citi and are not property of the Debtor s estate. Moreover, the Debtor has not cited to any authority to 9 Citi believes that, if necessary, it will ultimately be able to trace the pre-petition Royalty Payments under the applicable lowest intermediate balance test because, upon information and belief, the Debtor s account balance in which the Royalty Payments were transferred never dropped below the $58, in pre-petition Royalty Payments. See e.g., In re Beveridge, 416 B.R. at 572 ( Courts have held that the lowest intermediate balance test is a suitable method for tracing trust funds that have been comingled with other funds. Under the lowest intermediate balance test, if the amount on deposit in the commingled fund has at all times equaled or exceeded the amount of the trust, the trust's funds will be returned in their full amount. In other words, the lowest intermediate balance test creates a legal fiction that when funds are withdrawn from a trust account, non-trust funds are withdrawn first. #

14 Case Document 52 Filed in TXSB on 08/20/12 Page 14 of 17 the contrary. The Debtor has also admitted that the interests held by the holders of Overrides (as defined in the Royalty Motion) are not property of the estate and are clear[ly] expressly excluded from property of the estate pursuant to 11 U.S.C. 541(b)(4)(B). (See Royalty Motion, 15, 18, 19). However, the Debtor s proposed order granting the Royalty Motion would permit parties to seek disgorgement of the Overrides even though the Debtor admits that these are clearly not property of the estate. 38. None of the Overriding Royalty Interests should be subject to disgorgement because they are all property of Citi and are not property of the Debtor s estate. However, to the extent the Court permits parties with proper standing to preserve their rights, if any, to seek disgorgement of any royalties, the right to seek disgorgement should not apply to the Overrides because the Debtor has admitted that those interests are clearly not property of the estate. 39. Citi reserves, and any order approving the Royalty Motion should expressly reserve, all of Citi s rights, claims and defenses with respect to any right of a party to seek disgorgement of payments to Citi. VI. OBJECTION TO CASH MANAGEMENT MOTION 40. As discussed above, the Debtor should be required to segregate all pre- and postpetition Royalty Payments in a separate account pending turnover to Citi. Accordingly, Citi objects to the Cash Management Motion to the extent the Debtor is requesting to maintain its existing accounts and thereby commingle royalties with other operating funds. VII. OBJECTION TO DIP MOTION A. No Lien Should Attach to Citi s Property to Secure the Debtor s Financing 41. The Debtor has no authority to obtain, and the Court should not authorize, any post-petition financing that places liens on Citi s property. The Debtor is requesting authority to #

15 Case Document 52 Filed in TXSB on 08/20/12 Page 15 of 17 obtain post-petition financing under 364 of the Bankruptcy Code, however, with respect to secured financing, 364 only authorizes financing that is secured by liens on property of the estate, not on property owned by third parties. See 364(c) ( [T]he court, after notice and a hearing, may authorize the obtaining of credit secured by a lien on property of the estate that is not otherwise subject to a lien; or secured by a junior lien on property of the estate that is subject to a lien. ) (emphasis added); see also 364(d) ( [T]he court, after notice and a hearing, may authorize the obtaining of credit secured by a senior or equal lien on property of the estate that is subject to a lien. ) (emphasis added). 42. In addition, the adequate protection liens requested by the Debtor should not attach to Citi s property because adequate protection liens under 361(2) are limited to estate property. See Graham v. Huntington Nat l Bank (In re MedCorp, Inc.), 2012 Bankr. LEXIS 1404, *15 (Bankr. N.D. Ohio Mar. 30, 2012) ( a court may, as a means of affording a creditor adequate protection of its interest in a debtor s property, grant a creditor a replacement lien in estate property ) (emphasis added); In re First City Mortg. Co., 69 B.R. 765, 769 (Bankr. N.D. Tex. 1986) (noting that the court granted the secured creditor a replacement lien on property of the estate as adequate protection ) (emphasis added). 43. Therefore, the Debtor is not entitled to obtain financing that is secured by liens on, or grant adequate protection liens on, the Overriding Royalty Interests or Royalty Payments because they are not property of the estate. Accordingly, to the extent the Court authorizes the Debtor to obtain post-petition financing and/or use cash collateral, the order approving such financing or use of cash collateral should expressly provide that no lien shall attach to the Overriding Royalty Interests or Royalty Payments. #

16 Case Document 52 Filed in TXSB on 08/20/12 Page 16 of 17 B. Citi Rights Under the Lenders Subordination of Lien Documents Should Be Preserved 44. As discussed above, certain of the Debtor s pre-petition lenders executed an Act of Subordination of Lien whereby the pre-petition lenders subordinated their liens and claims to the interests of Citi. Any order approving the DIP Motion should preserve Citi s rights under the Act of Subordination of Lien. WHEREFORE, CNA and MC respectfully request that the Court limit the Debtor s request for relief as set forth herein and grant CNA and MC such other and further relief as the Court deems just and proper. Dated: August 20, 2012 Respectfully submitted, BRACEWELL & GIULIANI LLP By: _/s/ William A. (Trey) Wood, III William A. (Trey) Wood, III Texas Bar No Trey.Wood@bgllp.com Chris S. Tillmanns Texas Bar No Chris.Tillmanns@bgllp.com Bracewell & Giuliani LLP 711 Louisiana, Suite 2300 Houston, Texas Telephone: (713) Facsimile: (713) ATTORNEYS FOR CITICORP NORTH AMERICA, INC. AND MC VPP LLC #

17 Case Document 52 Filed in TXSB on 08/20/12 Page 17 of 17 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the above and foregoing Objection has been served on the parties registered to receive electronic notification via the Court s ECF noticing system on this 20th day of August, By: _/s/ William A. (Trey) Wood, III William A. (Trey) Wood, III #

18 Case Document 52-1 Filed in TXSB on 08/20/12 Page 1 of 1 EXHIBIT A Motions to which the Objection Relates 1. DEBTOR S EMERGENCY MOTION PURSUANT TO SECTION 105(a) OF THE BANKRUPTCY CODE AND BANKRUPTCY RULES 105(c) AND 9007 SEEKING AUTHORITY TO IMPLEMENT CERTAIN NOTICE PROCEDURES [Dkt. No. 4]. 2. DEBTOR S EMERGENCY MOTION FOR AN ORDER AUTHORIZING (1) MAINTENANCE OF PRE-PETITION BANK ACCOUNTS AND CASH MANAGEMENT SYSTEM AND (2) CONTINUATION OF CURRENT INVESTMENT PRACTICES PURSUANT TO SECTIONS 105(a), 345(b) AND 363(c) OF THE BANKRUPTCY CODE [Dkt. No. 8]. 3. DEBTOR S EMERGENCY MOTION FOR AN ORDER AUTHORIZING(1) PAYMENT OF FUNDS ATTRIBUTABLE TO OVERRIDING ROYALTY INTERESTS IN THE ORDINARY COURSE OF BUSINESS AND(2) PAYMENT OF FUNDS ATTRIBUTABLE TO NET PROFITS INTERESTS SUBJECT TO FURTHER ORDER OF THE COURT REQUIRING DISGORGEMENT THEREOF PURSUANT TO (A) SECTIONS 105(a), 363(b) AND 541(a) OF THE BANKRUPTCY CODE AND (B) THE PROCEDURES FOR COMPLEX CHAPTER 11 BANKRUPTCY CASES FOR THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS [Dkt. No. 15]. 4. DEBTOR S EMERGENCY MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS PURSUANT TO BANKRUPTCY CODE SECTIONS 105, 107(B), 361, 362, 363,364 AND 507 (1) APPROVING POSTPETITION FINANCING, (2) AUTHORIZING USE OF CASH COLLATERAL, (3) GRANTING LIENS AND PROVIDING SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS, (4) GRANTING ADEQUATE PROTECTION, (5) MODIFYING AUTOMATIC STAY, (6) AUTHORIZING DEBTOR TO FILE THE FEE LETTER UNDER SEAL AND (7) SCHEDULING A FINAL HEARING [Dkt. No. 21]. #

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217 Case Document 52-5 Filed in TXSB on 08/20/12 Page 1 of 48 EXHIBIT C

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265 Case Document 52-6 Filed in TXSB on 08/20/12 Page 1 of 5 EXHIBIT D

266 Case Document 52-6 Filed in TXSB on 08/20/12 Page 2 of 5 ACT OF SUBORDINATION OF LIEN STATE OF NEW YORK COUNTY OF NEW YORK BE IT KNOWN, that on this 4th day of January, 2010, before the undersigned Notary Public, duly commissioned and qualified in and for the State of New York, and in the presence of the undersigned competent witnesses, personally came and appeared CREDIT SUISSE AG, a banking association, formerly known as Credit Suisse, having a mailing address of Eleven Madison Avenue, New York, New York 10010, appearing herein through its undersigned officers, duly authorized hereunto, acting herein as Collateral Agent under the Mortgage described below (in such capacity, the " Mortgage '), and declared as follows. WITNES SETH: WHEREAS, ATP Oil & Gas Corporation, a Texas corporation (the "Mortgagor"), the last four digits of the Taxpayer Identification Number for which are 2774 and the Organizational Identification Number for which is , has heretofore executed that certain security document more particularly described in Schedule 1 attached hereto and incorporated herein for all purposes by this reference (the "Mortgage"); WHEREAS, the Mortgagee is the holder of the rights of the mortgagee and obligee of record under the Mortgage; WHEREAS, the Mortgage covers, among other properties, the interest of the Mortgagor in each of the properties described in Exhibit A attached hereto and incorporated herein for all purposes by this reference (collectively, the "Subject Properties"); WHEREAS, the Mortgagor and the parties signatory thereto as Royalty Owners (collectively the "Purchasers") have entered into that certain Purchase and Sale Agreement dated as of January 5, 2010 ("the Purchase Agreement") and, pursuant to the Purchase Agreement, the Mortgagor has, among other things, executed and delivered to the Purchasers that certain Conveyance of Term Overriding Royalty Interests dated as of January 5, 2010 from the Mortgagor to the Purchasers (the "Conveyance"), a full and complete copy of which Conveyance is attached hereto as Exhibit 13 and incorporated herein for all purposes by this reference, and that certain Multiple Indebtedness Mortgage dated as of January 5, 2010 from the Mortgagor to Citibank, N,A., a national banking association, as Collateral and Payment Agent for the Purchasers (the "Protective Mortg age ), a full and complete copy of which Protective. Mortgage is attached hereto as Exhibit C and incorporated herein for all purposes by this reference; WHEREAS, the Mortgagor and the Purchasers desire that the rights of the Purchasers as to the Subject Properties under the Conveyance and the Protective Mortgage shall be superior to the lien, security interest and other rights created by the Mortgage against the Subject Properties;

267 Case Document 52-6 Filed in TXSB on 08/20/12 Page 3 of 5 NOW, THEREFORE, the Mortgagee, for valuable consideration in hand paid, the receipt and sufficiency of which are hereby acknowledged, does hereby agree that the lien, security interest and other rights created by the Mortgage against the Subject Properties shall be and are hereby made subordinate, subject and inferior to the rights of the Purchasers as to the Subject Properties under the Conveyance and the Protective Mortgage and that the rights of Purchasers as to the Subject Properties under the Conveyance and the Protective Mortgage shall in no way be affected by the Mortgage, whether in the event of foreclosure under the Mortgage and the sale of the real or immoveable and personal or moveable property and fixtures subject to the Mortgage pursuant to such foreclosure or otherwise. This Act of Subordination of Lien is executed in reliance on the forms of the Conveyance and the Protective Mortgage attached hereto. No amendments or modifications to either of the foregoing shall be effective against the Mortgagee or shall increase the burdens of this Act of Subordination of Lien against the Mortgagee unless such amendments or modifications have been approved in writing by the Mortgagee. This Act of Subordination of Lien shall be governed by and construed and enforced in accordance with the laws of the State of Louisiana, without regard to principles of such laws relating to conflicts of law. This Act of Subordination of Lien is delivered on the date set forth below but shall be deemed effective as of 9:00 a.m., Louisiana time, on October 1, 2009 (Signatures appear on following page) -2-

268 Case Document 52-6 Filed in TXSB on 08/20/12 Page 4 of 5 THUS DONE AND PASSED in multiple originals in my office in New York County, New York, by the persons whose names appear above my signature below in the presence of the two undersigned competent witnesses and me, Notary, on the 4iday of BeccnTbr09, after due reading of the whole, Jo-nu J WITNESSES TO BOTH SIGNATURES - (- L.G1' Printed Name: Roland Martin A Printed Na1er ISmith MORTGAGEE: CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH (formerlyow as CREDIT SUISSE, CAYe ISL NDS BRANCH), as Col tieral A ent By: \ Name: 'NL1Pj Title: VICE By: Name: KIgTIN BUDDHDEW Title: ASSOCIATE Notary Public in and for the State of New York Marjorie E. Bull (Printed Name of Notary) Commission Number: 01BU MARJORIE E. EULL NOTARY PUELJC, Ste 01 Nw York No. 01NUBO51282 Qualfid U New York County Comrns3ioe Ex,,, ebruary 20, 20 fl

269 Case Document 52-6 Filed in TXSB on 08/20/12 Page 5 of 5 Schedule 1 Act of Mortgage, Security Agreement, Financing Statement, Fixture Filing and Assignment of Production dated as of June 27, 2008 from ATP Oil & Gas Corporation to Credit Suisse, as Collateral Agent, filed and recorded as follows: Recording Jurisdiction Recording Data Date of Recording Jefferson Parish, LA Mortgage Book 4377, Page Plaquemines Parish, LA Mortgage Book 501, Page 628, File Minerals Management Service I OCS-G 14016, OCS-G SI-i

270 Case Document 52-7 Filed in TXSB on 08/20/12 Page 1 of 36 EXHIBIT E

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