Case KG Doc 266 Filed 06/14/17 Page 1 of 27

Transcription

1 Case KG Doc 266 Filed 06/14/17 Page 1 of 27 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: Venoco, LLC, et al., Debtors. 1 Chapter 11 Case No (KG) (Jointly Administered) Hearing Date: July 24, 2017 at 2:00 p.m. (EST) Objection Deadline: July 5, 2017 at 4:00 p.m. (EST) MOTION OF ASPEN AMERICAN INSURANCE COMPANY & ASPEN SPECIALITY INSURANCE COMPANY FOR AN ORDER GRANTING ASPEN: (I) LEAVE TO EXERCISE ITS RIGHT OF RECOUPMENT, OR, TO THE EXTENT NECESSARY, RELIEF FROM THE AUTOMATIC STAY, FOR CAUSE, PURSUANT TO 11 U.S.C. 362(d) TO SET OFF MUTUAL PRE-PETITION OBLIGATIONS; (II) ADEQUATE PROTECTION AS TO CERTAIN SURETY BONDS, PURSUANT TO 11 U.S.C. 361, 364(c) OR 364 (d), OR, ALTERNATIVELY, (A) RELIEF FROM THE AUTOMATIC STAY, FOR CAUSE, PURSUANT TO 11 U.S.C. 362(d) TO CANCEL CERTAIN SURETY BONDS AND (B) REQUIRING THE DEBTORS TO REPLACE CERTAIN SURETY BONDS; (III) WAIVING THE STAY OF FED. R. BANKR. P. 4001(a)(3); AND (IV) SUCH OTHER OR FURTHER RELIEF AS MAY BE APPROPRIATE Aspen American Insurance Company and Aspen Specialty Insurance Company (together, Aspen ), by and through their undersigned attorneys, file this motion (the Motion ) for an order granting Aspen (i) leave to exercise its right of recoupment, or to the extent that the relief requested is deemed to be for set-off, rather than recoupment, relief from the automatic stay, for cause, pursuant to 11 U.S.C. 362(d), to set off mutual pre-petition obligations; (ii) adequate protection as to certain surety bonds, pursuant to 11 U.S.C. 361, 364(c) or 364 (d) or, alternatively, (a) relief from the automatic stay, for cause, pursuant to 11 U.S.C. 362(d) to cancel certain surety bonds or (b) requiring the Debtors to replace the bonds; (iii) waiving the 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Venoco, LLC (3555); TexCal Energy (LP) LLC (0806); Whittier Pipeline Corporation (1560); TexCal Energy (GP) LLC (0808); Ellwood Pipeline, Inc. (5631); and TexCal Energy South Texas, L.P. (0812). The Debtors main corporate and mailing address for purposes of these chapter 11 cases is: Venoco, LLC, th Street, Suite 3900, Denver, CO

2 Case KG Doc 266 Filed 06/14/17 Page 2 of 27 stay of Fed. R. Bankr. P. 4001(a)(3) in connection with Aspen s request for stay relief to (a) set off mutual pre-petition obligations and (b) cancel the surety bonds, if such alternate relief is ultimately granted; and (iv) such other or further relief as may be appropriate. In support of the Motion, Aspen respectfully states as follows: PRELIMINARY STATEMENT 1. Aspen has executed eleven (11) surety Bonds (as defined herein) with an aggregate penal sum of almost $42 million on behalf of the Debtors, and in favor of a number of California state and federal government entities, as obligees, in connection with the Debtors performance under certain leases, franchises, and permits related to the Debtors oil and gas exploration, production, and development operations. In connection with the issuance of the Bonds, Venoco provided $6.2 million in collateral to Aspen to secure both Venoco s and Aspen s obligations under the Bonds. As a result of the Debtors defaults under two of the Bonds, Bond No. SU04578 and Bond No. SU04557, issued in favor of the California State Lands Commission (the CSLC ), in connection with the Debtors operations at South Ellwood Field (the SEF Bonds ), Aspen has received claims in excess of the $22 million aggregate penal sum of the SEF Bonds, which Aspen is in the process of paying. Aspen may continue to receive additional claims on the Bonds in the course of this bankruptcy proceeding. Accordingly, Aspen seeks to exercise its right of recoupment to draw on the collateral and use it to partially indemnity itself for the $22 million in losses it will incur as a result of resolving the claims against the SEF Bonds. 2. Aspen asserts that it does not need stay relief to exercise its right of recoupment, but to the extent that the relief requested in this regard is deemed to be for set-off, rather than recoupment, Aspen seeks relief from the automatic stay for cause to set off the mutual prepetition claim of the Debtors against Aspen for the $6.2 million in collateral against Aspen s pre- 2

3 Case KG Doc 266 Filed 06/14/17 Page 3 of 27 petition claim against the Debtors for $22 million, which arises out of the claim on the SEF Bonds. In addition to its right to stay relief to effect its setoff rights, Aspen is also entitled to relief from the stay to draw on the collateral because the Debtors have failed to provide Aspen with adequate protection for the continuing use of its surety credit post-petition. The $6.2 million in collateral Aspen is holding is not sufficient adequate protection against the $22 million in claims Aspen has received on the SEF Bonds, or the potential future claims it may receive on the remaining nine (9) Bonds. 3. The Debtors are continuing to rely upon Aspen s extension of surety credit postpetition in connection with nine (9) of the Bonds, which, as financial accommodations, allow the Debtors to comply with their statutory and regulatory obligations and maximize the goingconcern value of their assets for sale, and to continue operating and generating revenue during the pendency of this case. Aspen thus requests adequate protection, either through a letter of credit, cash or superpriority administrative expense status, for the continuing use of its surety bond credit during these bankruptcy proceedings. Alternatively, in the absence of the provision of the necessary adequate protection, Aspen seeks stay relief to cancel the remaining surety bonds, which, as executory contracts for a financial accommodation, cannot be assumed without Aspen s consent. If the Bonds cannot be cancelled by their terms or under applicable non-bankruptcy law, Aspen requests that the Court require the Debtors to provide replacement bonds from another surety, or provide other security satisfactory to the Obligees in place of the Bonds. The Debtors should not be able to continue to use Aspen s surety credit post-petition without its consent and without providing adequate protection. JURISDICTION, VENUE AND STATUTORY PREDICATES 3

4 Case KG Doc 266 Filed 06/14/17 Page 4 of The Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and Venue is proper in this Court pursuant to 28 U.S.C This is a core proceeding as defined in 28 U.S.C. 157 (b)(2)(a), (G) and (O). The statutory predicates for the relief requested herein with respect to the request for stay relief to draw on the collateral are 11 U.S.C. 362(d), as complemented by section 553, and Fed. R. Bankr. P. 4001(a)(3). The statutory predicates for the relief requested herein with respect to the request for adequate protection, or alternatively, stay relief to cancel the bonds are 11 U.S.C. 361, 363(e), 364 (c) and/or (d), and 365(c)(2), (e)(2)(b). RELEVANT BACKGROUND The Chapter 11 Cases 5. On April 17, 2017 (the Petition Date ), the Debtors each commenced with this Court a voluntary case under chapter 11 of title 11 of the United States Code (the Bankruptcy Code ). The Debtors are operating their businesses as debtors-in-possession, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in the Debtors cases. 6. The Debtors chapter 11 cases are being jointly administered for procedural purposes only pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ). 7. To date, no official committee of unsecured creditors had been appointed by the United States Trustee. [D.I. 104]. 8. On the Petition Date, the Debtors filed the Debtor s Motion for Entry of a Final Order (I) Authorizing the Debtors to (A) Maintain and Renew Existing Insurance Policies and (B) Continue Prepetition Surety Bonds, and Pay Obligations Arising Thereunder, and (II) Authorizing Financial Institutions to Honor All Obligations Related Thereto [D.I. 9] (the Surety 4

5 Case KG Doc 266 Filed 06/14/17 Page 5 of 27 Program Motion ), among other first day motions. A hearing with respect to the relief requested in the Surety Program Motion was held on April 18, Immediately following the hearing, the Court entered the Final Order (I) Authorizing the Debtors to (A) Maintain and Renew Existing Insurance Policies and (B) Continue Prepetition Surety Bonds, and Pay Obligations Arising Thereunder, and (II) Authorizing Financial Institutions to Honor All Obligations Related Thereto [D.I. 43] (the Final Order ). 9. The Final Order provides that it is effective on an interim basis with respect to Aspen and U.S. Specialty Insurance Company and its affiliates ( USSIC, and together with Aspen, the Objectors ) and the list of Bonds set forth on Exhibit C of the Surety Program Motion. In the absence of the filing of a written objection to the Final Order, the Final Order would become binding upon the Objectors. 10. On Friday, April 28, 2017, Aspen filed its Objection to the Final Order [D.I. 78] (the Aspen Objection ). Shortly thereafter USSIC filed a joinder to the Objection [D.I. 83]. Aspen filed its Supplement to the Objection on May 16, 2017 [D.I. 110]. A hearing has been scheduled for June 23, 2017 on the applicability of the Final Order to the Objectors. 11. The Debtors filed the Motion for Entry of an Order (I) Establishing Bidding and Sale Procedures for the Sale of Certain of the Debtors Assets, (II) Approving the Sale of Such Assets and (III) Granting Related Relief [D.I. 93] (the Sale Procedures Motion ) and the First Omnibus Motion for Entry of an Order, (I) Authorizing the Debtors to (A) Reject Certain Unexpired Leases and Executory Contracts and (B) Abandon Certain Property, and (II) Granting Certain Related Relief [D.I.102] (the First Executory Contracts Rejection Motion ), on May 4,

6 Case KG Doc 266 Filed 06/14/17 Page 6 of An Order was entered on May 25, 2017, granting the Sale Procedures Motion [D.I. 201]. A hearing on the First Executory Contracts Rejection Motion has been scheduled for June 23, The Bonds and Indemnity Agreement 13. Aspen has issued eleven (11) separate surety bonds (each a Bond and collectively, the Bonds ) at the request and on behalf of Debtors, as principals, in connection with the Debtors performance under certain leases, franchises, and permits related to the Debtors oil and gas exploration, production, and development operations. The Bonds are for the benefit of certain obligees (each an Obligee and, collectively, the Obligees ), often governmental units and other public agencies or entities, as set forth in Exhibit B to the Surety Program Motion and Exhibit A to the Declaration of Robert K. Grennan in support of the Motion, dated June 9, 2017 (the Grennan Decl. ), 3. The aggregate penal sum of the Bonds is $41,687, The SEF Bonds are not needed by the Debtors to support their post-petition operations, and are the subject of defaults by the Debtors described more fully below. (Grennan Decl. 10). 15. The Debtors are continuing to rely upon Aspen s surety credit post-petition in connection with nine (9) Bonds, with an aggregate penal sum of $19,687,250, which are required by the Debtors to support their post-petition operations. (Grennan Decl. 14). 16. In connection with Aspen s issuance of the Bonds, prior to the Petition Date, Aspen entered into the General Agreement of Indemnity, dated November 3, 2016 (the Indemnity Agreement ), with Venoco, LLC and its present or future affiliates or subsidiaries. 6

7 Case KG Doc 266 Filed 06/14/17 Page 7 of 27 (Grennan Decl. 4). A copy of the Indemnity Agreement is attached as Exhibit B to the Grennan Decl. 17. Pursuant to the Indemnity Agreement, the Debtors agreed, jointly and severally, to indemnify and save harmless Aspen from and against any and all liabilities, claims, demands, payments, losses, damages, costs and expenses, including attorney s fees and costs, and consultant s fees and disbursements, which it may incur and/or pay (a) to investigate and/or resolve claims against the Bonds; (b) in any action or proceeding between the Debtors and Aspen; and/or (c) in any action or proceeding between Aspen and any third party. (Id. 5). The Debtors further agreed to deposit with Aspen on demand the amount of any reserve Aspen establishes for any existing liability or claim, and/or any expenses associated therewith, whether or not any assertion or payment of such liability, claim, or expense has been made at the time of Aspen s demand. (Id. 6). 18. The Indemnity Agreement provides further that the Debtors expressly agreed that Aspen, in its sole discretion, by written demand, may require the Debtors to provide Aspen with collateral in the amount representing the total of any undischarged liabilities under the Bonds as determined by Aspen. (Id. 7). 19. At or about the time that the Debtors executed the Indemnity Agreement, they also provided Aspen with $6.2 million in securities (the Collateral ), pursuant to the terms of that certain Collateralized Surety Bond Program Master Pledge and Security Agreement (the Pledge Agreement ) and the corresponding Control Agreement (together, with the Pledge Agreement, the Security Agreements ), pursuant to which Aspen holds a perfected security interest in the Collateral. (Grennan Decl. 8 and Exs. C and D). See also N.Y. U.C.C & cmt. 4; N.Y. U.C.C & cmt. 3 (McKinney 2017). 7

8 Case KG Doc 266 Filed 06/14/17 Page 8 of On or about April 13, 2017, Aspen made a pre-petition demand for collateral sufficient to cover all of its open and active bond exposure in accordance with the terms of the Indemnity Agreement. Accordingly, Aspen was seeking an additional $35,487, in collateral to cover its total bonded exposure of $41,687, The Debtors did not honor the collateral demand. (Id. 9 and Ex. E). 21. On or about April 17, 2017, the Debtors submitted to CSLC quitclaims of the South Ellwood Field Leases, PRC 3120, PRC 3242, and PRC 421 (the SEF Leases ). (Id. 10 and Ex. F). 22. On or about April 19, 2017, two days after the Debtors commenced these bankruptcy cases, Aspen received a written request from the CSLC for payment of the full aggregate penal sum of the SEF Bonds, $22 million, in connection with Venoco s quitclaims for the SEF Leases. (Id.). 23. Aspen and its counsel have had ongoing discussions with the CSLC regarding its demand for payment by Aspen under the SEF Bonds in order to complete the Debtors decommissioning obligations under the SEF Leases. (Id. 11; Declaration of David Veis, Esq., dated June 8, 2017 (the Veis Decl. ), 5). 24. The CSLC has provided a wide range of estimates for the cost of completion, but none of the estimates have been less than the aggregate penal sum of the SEF Bonds. In fact, the CSLC estimates have ranged from $40 million to approximately $120 million. (Grennan Decl. 12; Veis Decl. 6-7). 25. The Debtors have advised that their own estimate for their asset retirement obligations in connection with South Ellwood Field, including the SEF Leases, is approximately $48.6 million. (Veis Decl. 8). 8

9 Case KG Doc 266 Filed 06/14/17 Page 9 of Aspen and CSLC are negotiating a settlement agreement to resolve the CSLC s claims on the Bonds, but any such settlement will result, in part, in Aspen paying to the CSLC the aggregate penal sum of the two SEF Bonds, or $22 million. (Grennan Decl. 13; Veis Decl. 9). 27. Aspen has incurred and will continue to incur losses, legal fees and expenses, and may incur consultants fees, in connection with furnishing and continuing the Bonds, as well as resolving claims thereunder. (Grennan Decl. 15). 28. However, the Collateral is insufficient to cover the Debtors continuing obligations under the SEF Leases and SEF Bonds to properly decommission, abandon, and plug the South Ellwood Field, and/or any future claims. (Id. 18; see Veis Decl. 6-8). 29. While the Debtors and Aspen have attempted, through counsel, to negotiate appropriate language for the Final Order to allow Aspen to continue extending its surety credit during these bankruptcy proceedings, they have not been able to reach an agreement for maintaining and continuing the Bonds needed by the Debtors to support their continuing operations. 2 (Grennan Decl. 17). Aspen is unwilling to continue extending surety credit to the 2 Aspen has requested that the following language should be incorporated into the Debtors proposed Final Order on the Surety Program Motion: a. The Debtors are authorized, but not directed, to maintain the Surety Bond Program without interruption, including paying any prepetition or post-petition premiums and other obligations, providing collateral, renewing or obtaining new surety bonds, and executing other agreements in connection with the Surety Bond Program, in each case in the ordinary course of business. Nothing herein shall preclude a Surety from either (i) declining to renew any existing Surety Bond, (ii) declining to extend any existing Surety Bond beyond its term, (iii) declining to provide consent to, or otherwise exercising any rights in response to, the proposed assumption and/or assignment of any existing Surety Bond, any indemnity agreements between the Surety and any Debtor(s) or other indemnitor, and/or any underlying bonded contract, whether pursuant to a sale, plan or other process, or from exercising any other or further rights with respect to a sale, plan or similar process (and nothing in this order shall be a determination that a Surety Bond or Indemnity Agreement and/or any underlying bonded contract is or is not an executory contract); (iv) declining to issue any new or additional Surety Bond; or (v) cancelling any Surety Bonds at the request of the Debtors. Further nothing in this Order impairs any rights of the Surety as to (a) any funds it is holding and/or being held for it, whether in trust, as security or otherwise, (b) any substitutions or replacements of said funds (including accretions to and interest earned on said funds), and (c) any letters of credit related to any indemnity, collateral trust, or related agreements between the Surety and any of the Debtors. b. Any claim asserted by a Surety for indemnification under any Indemnity Agreement, related to or arising out of any actual, potential, or asserted liability of the Surety to any beneficiary or obligee under any Surety 9

10 Case KG Doc 266 Filed 06/14/17 Page 10 of 27 Debtors during these bankruptcy proceedings absent the Debtors providing Aspen with adequate protection. (Id. 18). To date, the Debtors have refused to provide adequate protection. (Id.). LEGAL ARGUMENT I. ASPEN IS ENTITLED TO EXERCISE ITS RIGHT OF RECOUPMENT TO INDEMNIFY ITSELF FOR LOSSES ON THE BONDS. 30. Aspen asserts that it is entitled to exercise its right of recoupment to draw on the Collateral in order to partially indemnify itself for the payments it will be making in response to the CSLC s claims for $22 million under the SEF Bonds. Although relief from the automatic stay is not needed in order for Aspen to exercise its right of recoupment, to the extent that the relief requested in this regard is deemed to be for set-off, rather than recoupment, Aspen also seeks relief from the stay, as more fully discussed below. See Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065, 1079 (3d Cir. 1992) (... recoupment is an equitable exception to the automatic stay. ); 5 COLLIER ON BANKRUPTCY (Alan N. Resnick & Henry J. Sommer eds., 16 th ed.) ( the better view is that the automatic stay does not apply to bar or restrain a legitimate right of recoupment because, properly construed, recoupment applies to define the obligation in question, rather than establish or enforce a separate debt ). 31. The doctrine of recoupment allows a creditor to assert that mutual claims extinguish one another in bankruptcy, even if such claims could not be set-off under 11 U.S.C See Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984). [W]here the creditor's claim Bond shall be treated as a post-petition claim to the extent that the actual, potential, or asserted liability of the Debtors to any beneficiary or obligee under the applicable bonded contract arises out of a post-petition breach of such bonded contract. c. To the extent that any Surety Bond was issued, is renewed, or remains in place post-petition without cancellation as part of the Surety Bond Program and is subject to a prepetition Indemnity Agreement, the Debtors indemnification obligations under such prepetition Indemnity Agreement arising on account of such Surety Bond (including any reasonable fees and expenses of counsel as provided for in such Indemnity Agreement) shall be deemed to be post-petition obligations of the Debtors. 10

11 Case KG Doc 266 Filed 06/14/17 Page 11 of 27 against the debtor arises from the same transaction as the debtor's claim, it is essentially a defense to the debtor's claim against the creditor rather than a mutual obligation, and application of the limitations on setoff in bankruptcy would be inequitable. Id.; In re Univ. Med. Ctr., 973 F.2d 1065, 1080 (3d Cir. 1992) ( Thus, so long as the creditor's claim arises out of the identical transaction as the debtor's, that claim may be offset against the debt owed to the debtor, without concern for the limitations put on the doctrine of setoff by Code section 553. ) 32. The Third Circuit has defined the equitable doctrine of recoupment as the setting up of a demand arising from the same transaction as the plaintiff's claim or cause of action, strictly for the purpose of abatement or reduction of such claim. In re Tel. Warehouse, Inc., 259 B.R. 64, 67 (Bankr. D. Del. 2001)(emphasis in the original)(quoting Univ. Med. Ctr., 973 F.2d at 1079). To establish a basis for recoupment, the creditor must demonstrate that both debts arise out of a single integrated transaction. See In re Commc n Dynamics, Inc., 300 B.R. 220, 226 (Bankr. D. Del. 2003) ( Rather, both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations. ) 33. Here, the Collateral was provided at about the same time the Debtors executed the Indemnity Agreement, on or about November 3, 2016, in order to secure Aspen s obligations under the Bonds. The Collateral is being held pursuant to the Security Agreements that were also executed at about that time. As evidenced by these integrated documents, Aspen s claim against the Debtors to indemnify it for any losses sustained under the Bonds arises from the same transaction in which the Collateral was provided. Thus, Aspen should be permitted to exercise its right of recoupment to draw on the Collateral to partially indemnify itself for payment of the CSLC s $22 million claim on the SEF Bonds. 11

12 Case KG Doc 266 Filed 06/14/17 Page 12 of 27 II. ASPEN IS ENTITLED TO RELIEF FROM THE AUTOMATIC STAY, FOR CAUSE, TO SET OFF MUTUAL PRE-PETITION OBLIGATIONS. 34. As a result of the single integrated transaction, in which the Indemnity Agreement, Bonds, and Collateral were exchanged between Aspen and the Debtors, and the claims arising between Aspen and the Debtors in connection therewith, Aspen should be permitted to exercise its right of recoupment to draw on the Collateral without first seeking stay relief. 35. To the extent that the relief requested above is deemed to be for set-off, rather than recoupment, in an abundance of caution, Aspen seeks relief from the automatic stay to exercise its right to set-off the mutual pre-petition obligations between itself and the Debtors with respect to the Collateral and claims on the Bonds. 36. A party is entitled to relief from the automatic stay under section 362(d) of the Bankruptcy Code as follows: (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay - (1) for cause, including the lack of adequate protection of an interest in property of such party in interest The terms for cause and adequate protection are not defined in the Bankruptcy Code. Under 11 U.S.C. 362(g), the burden is on the moving party to make an initial showing of cause. The ultimate determination whether to lift a stay depends upon the facts underlying a given motion. In re Bogdanovich, 292 F.3d 104, 110 (2d Cir. 2002). In order to establish cause, the party seeking relief from the stay must show that the balance of hardships from not obtaining relief tips significantly in its favor. In re American Classic Voyages, 298 B.R. 222, 225 (D. Del. 2003)(citation omitted). Aspen is entitled on two grounds to relief from the 12

13 Case KG Doc 266 Filed 06/14/17 Page 13 of 27 automatic stay to draw on the Collateral: to effectuate a setoff and based upon lack of adequate protection. A. Aspen is Entitled to Relief from the Automatic Stay in Order to Exercise its Setoff Rights. 37. As discussed above, Aspen provided the Debtors with $41,687, in Bonds in connection with various leases and agreements entered into between the Debtors and various public entity obligees. 38. As a condition for the issuance of the Bonds, the Debtors pledged the Collateral to partially secure Aspen against any defaults by the Debtors which may trigger obligations under the Bonds. 39. Aspen has received a claim under the SEF Bonds from the CSLC for payment in excess of $22 million, as a result of Debtors submission of quitclaims of the SEF Leases. (Grennan Decl. 10). Although Debtor is the primary obligor, and Aspen only the secondary obligor, with respect to any claims by the CSLC under the SEF Leases and Bonds, the Debtors have advised that they are unwilling, or unable, to address their defaults under the SEF Leases. Accordingly, Aspen intends to pay the CSLC claims and seeks leave of this Court to set off the Collateral against the losses resulting from the $22 million claim by the CSLC under the SEF Bonds. (Grennan Decl. 13; Veis Decl. 9); see also In re Whimsy, Inc., 221 B.R. 69, 72 (S.D.N.Y. 1998) ( Rooted in the common law, setoff is a creditor's equitable right to deduct a debt it owes to a debtor from a claim it has against the debtor arising out of a separate transaction. ) 40. Thus, the Debtors have a pre-petition residuary interest in the Collateral while Aspen has a pre-petition claim against the Debtors as a result of the CSLC s $22 million claim against Aspen under the SEF Bonds. 13

14 Case KG Doc 266 Filed 06/14/17 Page 14 of Under section 553 of the Bankruptcy Code, bankruptcy does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case... Thus, the Bankruptcy Code does not create an independent right of setoff, but preserves whatever rights of setoff exist under non-bankruptcy contract or commercial law. See Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, (1995) ( Although no federal right of setoff is created by the Bankruptcy Code, 11 U.S.C. 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy. ). 42. The Security Agreements and the Indemnity Agreement are governed by the laws of the State of New York, and thus, it is to this law which the Bankruptcy Court must look to determine the existence of the right of setoff. As the Second Circuit has stated, [t]here is no question that New York has long recognized a common law right of setoff. See Official Comm. of Unsecured Creditors v. Mfrs. and Traders Trust Co. (In re Bennett Funding Group, Inc.), 146 F.3d 136, 139 (2d Cir. 1998) (noting that New York has codified the right to setoff under N.Y. Debt. & Cred. Law 151 (McKinney 1997)). 43. [S]etoff requires mutuality of parties; that is, the same creditor must hold both a debt to and a claim against the same debtor. In re Whimsy, Inc., 221 B.R. at 72; Matter of Bevill, Bresler & Schulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3d Cir. 1990) ( The right of setoff depends on the existence of mutual debts and claims between creditor and debtor. ) Here, Aspen has a pre-petition obligation to the Debtors, in the form of the Collateral, and a pre-petition claim against the Debtors, based upon the CSLC claims. 44. Thus, there is a mutuality of parties and pre-petition claims that establishes the 14

15 Case KG Doc 266 Filed 06/14/17 Page 15 of 27 basis for Aspen s request that this Court grant it stay relief to draw on the Collateral in order to mitigate its damages as a result of the Debtors defaults under the Bonds and the claims that arose as a result thereof. B. Aspen is Also Entitled to Relief from the Automatic Stay Due to the Lack of Adequate Protection. 45. In this case, cause for relief from the automatic stay also exists to permit Aspen to draw on the Collateral because Aspen is not adequately protected. Aspen issued the Bonds to the Debtors with an aggregate penal sum of $41,687, As discussed above, on the Petition Date, the Debtors submitted quitclaims of the SEF Leases to the CSLC, resulting in claims on the SEF Bonds in excess of $22 million. The Debtors have pledged only $6.2 million to Aspen in Collateral, leaving Aspen severely under-secured with respect to its exposure under the Bonds. 46. A creditor is entitled to relief from the stay where, as here, its interest is not adequately protected. See 3 COLLIER ON BANKRUPTCY [3][b] (Alan N. Resnick & Henry J. Sommer eds., 16 th ed.) ( Relief from the stay is available to a party with an interest in property of the estate when the party s interest is not adequately protected. ); In re Ram Mfg., Inc., 32 B.R. 969, 971 (Bankr. E.D. Pa. 1983) (granting motion for stay relief to modify the stay, and noting that [t]he evidence deduced at trial indicates that the $1,176, indebtedness is secured by only $643, of collateral. In light of this... the bank has established a prima facie case for relief under 362(d)(1), which was not refuted by the trustee); In re Dye, 502 B.R. 47, 56 (Bankr. M.D. Pa. 2013) (granting stay relief motion, among other reasons, because Debtors only had $1,475,000 in equity on offered properties, which was insufficient to provide adequate protection to creditors who were owed $1,730, on cross-collateralized loans); Cf. In re All Land Investments, LLC, 468 B.R. 676, 693 (Bankr. D. Del. 2012) (granting stay relief pursuant to both 362(d)(1) and 362(d)(2) due to lack of adequate protection where there was no equity in 15

16 Case KG Doc 266 Filed 06/14/17 Page 16 of 27 property and Debtor had not made payments on debt). 47. Accordingly, due to the lack of adequate protection for the $22 million in claims Aspen now faces on the SEF Bonds, and the claims it may face in the future under the remaining Bonds, Aspen respectfully requests that it be granted relief from the stay to draw on the Collateral. II. ASPEN IS ENTITLED TO ADEQUATE PROTECTION FOR THE CONTINUED EXTENSION OF ITS SURETY CREDIT POST-PETITION, OR ALTERNATIVELY, TO (A) RELIEF FROM THE AUTOMATIC STAY TO CANCEL THE BONDS, TO THE EXTENT THE STAY APPLIES, OR (B) THE ENTRY OF AN ORDER PRECLUDING THE DEBTORS FROM RELYING UPON ASPEN S BONDS POST-PETITION AND REQUIRING REPLACEMENT OF THE BONDS. A. Aspen Cannot be Compelled to Maintain or Continue the Bonds for the Debtors Without Adequate Protection under 11 U.S.C. 361, 364(c) or 364(d). 48. Aspen respectfully submits that it cannot be compelled to keep the Bonds in place for the benefit of Debtors without being provided with adequate protection under 11 U.S.C. 361, 364(c) or 364(d). 49. Section 361 of the Bankruptcy Code lists several potential types of protection, including periodic cash payments, replacement liens, and any other relief that will result in the realization... of the indubitable equivalent of [the creditor s] interest in such property. Adequate protection may take many forms, and what constitutes adequate protection is a factual determination that is made on a case-by-case basis. See Resolution Trust Corp. v. Swedeland Dev. Group, Inc. (In re Swedeland Dev. Group, Inc.), 16 F.3d 552, 564 (3d Cir. 1994) (courts are permitted discretion to fashion appropriate protection for a secured party and the determination of whether there is adequate protection is made on a case-by-case basis). Aspen is seeking adequate protection in the form of cash collateral, a letter of credit, and/or a grant of superpriority administrative expense status for any post-petition defaults with respect to the Bonds, which continue to provide surety credit to support the Debtors ongoing operations. 16

17 Case KG Doc 266 Filed 06/14/17 Page 17 of Aspen is not seeking adequate protection with respect to the two SEF Bonds on which claims have already been made by the CSLC as a result of the Debtors quitclaims of the SEF Leases, but only as to the remaining nine (9) Bonds upon which the Debtors are relying to support their continued operations in the course of these bankruptcy proceedings. The SEF Bonds, together, have an aggregate penal sum of $22 million. The aggregate penal sum of the remaining nine (9) Bonds is $19,687,250. (Grennan Decl. 4 and 13). 51. Section 364(c) of the Bankruptcy Code permits a debtor unable to obtain unsecured credit allowable in the ordinary course under section 364(a) to obtain credit (1) with priority over any or all administrative expenses specified in sections 503(b) or 507(b); (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien. 11 U.S.C. 364(c); see also Borne Chem. Co. v. Lincoln First Commercial Corp. (In re Borne Chem. Co.), 9 B.R. 263, 270 (Bankr. D.N.J. 1981) (holding that financing order had provided for superpriority payment over all other administrative expenses, pursuant to 364(c), when debtor and creditor agreed that that it was impossible for debtor to obtain credit to finance the debtor s plan of reorganization on an unsecured basis). 52. The Bankruptcy Code goes even further to permit the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if the trustee is unable to obtain such credit otherwise, and there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. 11 U.S.C. 364(d); see also In re Dunes Casino Hotel, 60 B.R. 784, (Bankr. D.N.J. 1986) (permitting financing pursuant to section 364(d)(1)(B) because debtor 17

18 Case KG Doc 266 Filed 06/14/17 Page 18 of 27 was unable to obtain credit on unsecured basis or on the basis of granting a lien subject to existing liens). 53. It will be exceedingly difficult for the Debtors to obtain bonding capacity from a new surety at this time under either 364(a) of the Bankruptcy Code, on an unsecured basis in the ordinary course of business, or under 364(b), as an allowed administrative expense. Thus, because the Debtors will only be able to obtain surety credit from another surety pursuant to either 364(c) or (d), the Debtors should be required, similarly, to collateralize Aspen s maintenance and continuation of the Bonds or, at the very least, grant superpriority administrative expense status to Aspen relating to any post-petition defaults of pre-petition or post-petition obligations of Debtors arising under or in connection with the Bonds and Indemnity Agreement. 54. Although Venoco has pledged to Aspen $6.2 million dollars in collateral to secure its obligations under all of the Bonds, as discussed above, Aspen is seeking relief from the automatic stay to draw on the Collateral. However, because Aspen has agreed to pay to the CSLC the full penal sum of the SEF Bonds, or $22 million, if the Court grants Aspen s request for stay relief, and Aspen draws on its collateral, it will not be left with any collateral security with which to secure itself with respect to any post-petition claims which may be made under the remaining nine (9) Bonds. 55. Moreover, with respect to certain of the Debtors assets which they seek to sell pursuant to the Sale Procedures Motion and Order [D.I. 93, D.I. 201], the Bonds will need to remain in place so that the Debtors may continue to operate as a going concern and obtain the maximum value for those assets at sale. Accordingly, the Debtors are continuing to use Aspen s credit to secure performance of its obligations during these bankruptcy proceedings; Aspen is thus 18

19 Case KG Doc 266 Filed 06/14/17 Page 19 of 27 entitled to adequate protection in the course of this bankruptcy for the Debtors reliance upon its Bonds in the continuing operations of their assets. B. Alternatively, if the Debtors Fail to Provide Adequate Protection, Aspen should be Granted Stay Relief to Cancel the Bonds, to the Extent the Stay Applies, or the Debtors Should be Required to Replace the Bonds. 56. Because Aspen does not consent to the Debtors continuing to utilize its surety credit during these bankruptcy proceedings, in the absence of adequate protection, the Court should either grant stay relief to permit Aspen to cancel the Bonds, to the extent the stay applies, or require the Debtors to provide replacement bonds. 57. As discussed in Section I, supra, 362(d)(1) provides that the Court may grant relief from the automatic stay for cause, including lack of adequate protection. 58. Aspen asserts that it has two grounds for relief from the automatic stay to cancel the Bonds for cause : a) lack of adequate protection and b) the bonds are executory contracts for financial accommodations under section 365(c)(2) that may not be assumed, at least not without Aspen s consent. 1. Stay Relief Should Be Granted To Cancel The Bonds Due To Lack Of Adequate Protection. 59. If the Debtors fail to provide the adequate protection requested in section II(A), supra, Aspen should be granted relief from the automatic stay under 362(d)(1) to cancel the Bonds, to the extent the stay applies. 60. Venoco pledged to Aspen $6.2 million in Collateral to secure Aspen against exposure on eleven (11) Bonds with an aggregate penal sum of $42 million. If the Court grants Aspen s application for relief from the automatic stay to exercise its setoff rights and draw on the Collateral to partially indemnify itself for the $22 million Aspen will pay in losses as a result of the CSLC s claims on the SEF Bonds, Aspen will have no collateral against which to secure itself 19

20 Case KG Doc 266 Filed 06/14/17 Page 20 of 27 for its exposure on the remaining nine (9) Bonds, with an aggregate penal sum of almost $20 million. 61. Aspen should not be required to continue to extend its surety credit to the Debtors in the course of these bankruptcy proceedings without adequate protection. Thus, if the Debtors fail to provide adequate protection for the remaining Bonds, Aspen should be granted stay relief to cancel those Bonds. See 3 COLLIER ON BANKRUPTCY [3][b] (Alan N. Resnick & Henry J. Sommer eds., 16 th ed.) ( Relief from the stay is available to a party with an interest in property of the estate when the party s interest is not adequately protected. ). See also In re Ram Mfg., Inc., 32 B.R. at 971; In re Dye, 502 B.R. at Stay Relief Should Be Granted To Cancel The Bonds Because The Bonds Are Non- Assumable Financial Accommodations. 62. Moreover, Aspen asserts that, in the absence of adequate protection, it is also entitled to relief from that automatic stay for cause, because, pursuant to 11 U.S.C. 365(c)(2), the Bonds are executory contracts to extend financial accommodations and, as such, may not be assumed by the Debtors and/or assigned to a third-party, at least not without Aspen s consent. 63. Under Section 365(c)(2) of the Bankruptcy Code, the Trustee may not assume or assign any executory contract or unexpired lease of the debtor... if such contract is a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the debtor Courts have recognized that surety bonds are financial accommodations under Section 365(c)(2) of the Bankruptcy Code. See Citizens and S. Nat l Bank v. Thomas B. Hamilton Co. (In re Thomas B. Hamilton Co.), 969 F.2d 1013, 1019 (11th Cir. 1992) ( loan commitments, guaranty and surety contracts, and other contracts the principal purpose of which is to extend financing to or guarantee the financial obligations of the debtor are contracts to extend 20

21 Case KG Doc 266 Filed 06/14/17 Page 21 of 27 financial accommodations within the meaning of 365(c)(2). ); Edwards Mobile Home Sales, Inc. v. Ohio Casualty Insurance Co. (In re Edwards Mobile Home Sales, Inc.), 119 B.R. 857, 859 (Bankr. M.D. Fla. 1990) (surety bond issued to Chapter 11 debtor mobile-home dealer, which was a prerequisite to obtaining a license from the state division of motor vehicles, was a financial accommodation which could not be assumed pursuant to section 365(c)(2)); Wegner Farms Co. v. Merchants Bonding Co. (In re Wegner Farms Co.), 49 B.R. 440, 444 (Bankr. N.D. Iowa 1985) (holding that a surety bond securing certain of a grain dealer s financial obligations in the event of default was a financial accommodation within the meaning of section 365(c)(2)). 65. In understanding a surety bond as a financial accommodation it is important to note that a surety bond is not an insurance policy; rather, it is a form of guarantee. A bond is issued to guarantee certain obligations of a principal to another party. See Restatement (First) of Security 82 (1941) (explaining a suretyship obligation is commonly understood to be an extension of credit through an agreement to stand for the debt of another). Obligations of a surety under the bond run to the obligee, up to the penal sum of the bond and subject to the terms of the bond, indemnity agreement and/or any applicable statutory requirements. 66. Under a surety contract, simply paying a surety bond premium does not end the involvement of a principal. Instead, a principal always remains liable to repay any losses which the surety sustains. Restatement (Third) of Suretyship and Guaranty 1, 18 cmt. A (1995). Furthermore, the principal signs the bonds and remains the primary obligor of the obligations set forth in the bond. The surety s role is that of secondary obligor. By contrast, under a common liability insurance policy, payment in full of a premium ends the involvement and obligation of the insured and the insured can call upon the insurer to pay the insured obligation. That is not the case with a surety bond in which the principal must perform the bonded obligation, and the 21

22 Case KG Doc 266 Filed 06/14/17 Page 22 of 27 surety, as well as the bond obligee, are entitled to recourse against the principal to compel the principal to perform the bonded obligation. Restatement (Third) of Suretyship and Guaranty 18, 21. Unlike an insurance policy, if a surety incurs a loss on a surety bond, it is always entitled to recover the full amount of that loss from the principal. Restatement (Third) of Suretyship and Guaranty As financial accommodations, the Bonds may not be assumed by the Debtors and, therefore, Aspen should be entitled to stay relief to cancel the Bonds, to the extent the stay applies. 68. In this regard, The United States Court of Appeals for the Third Circuit has held that relief from the automatic stay is not necessary to terminate executory, non-assumable financial accommodations. See Watts v. Pennsylvania Housing Finance Co., 876 F.2d 1090 (3d Cir. 1989) (holding that the automatic stay does not apply to the post-petition termination of a contract to make a loan or financial accommodation to a debtor because such contract is excepted from the general rule prohibiting the termination of contracts upon a bankruptcy filing, pursuant to section 365(e)(2)(B) of the Bankruptcy Code). Other courts including the Ninth Circuit Court of Appeals, however, have required stay relief to terminate a contract for non-assumable financial accommodations. See, e.g., Computer Commc ns, Inc. v. Codex Corp. (In re Computer Commc ns, Inc.), 824 F.2d 725,731 (9th Cir. 1987); see also Wegner Farms Co. v. Merchants 3 In further distinguishing a surety bond from an insurance policy, it is also important to note that, as a matter of common law, a bond principal is liable to indemnify and exonerate a surety for any losses the surety may sustain under the bond. Exoneration is the surety's right to require its bond principal and indemnitors to discharge or perform the bonded obligation and thereby relieve the surety of the burden of doing so before the surety must make any payment. The common law right of indemnification permits a surety to obtain reimbursement from the primarily responsible party only after a surety has actually made payments in discharging a bonded obligation. Milwaukie Constr. Co. v. Glenns Falls Ins. Co., 367 F.2d 964, 967 (9th Cir. 1966) (citing Admiral Oriental Line v. United States, 86 F.2d 201 (2d Cir. 1936)). 22

23 Case KG Doc 266 Filed 06/14/17 Page 23 of 27 Bonding Co. (In re Wegner Farms Co.), 49 B.R. 440 (Bankr. N.D. Iowa 1985). In an abundance of caution, however, Aspen seeks stay relief to cancel the Bonds. 69. In this case, cause for relief from the automatic stay exists to cancel the Bonds. The Bonds are at once executory and non-assumable financial accommodations through which surety credit was provided by Aspen to the Debtors. Aspen, however, did not bond the Debtorsin-Possession. Under sections 365(c)(2) and (e)(2)(b) of the Bankruptcy Code, Aspen has no obligation, and cannot be compelled, to maintain the Bonds during the pendency of these bankruptcy proceedings so that the Debtors may meet their continuing obligations under the various statues and regulations which require surety credit to support the Debtors continuing operations. 70. Under section 365(e)(2)(B) of the Bankruptcy Code, contracts to extend financial accommodations are excluded from the general principle that a party may not terminate a contract upon bankruptcy. See In re Cardinal Indus., Inc., 146 B.R. 720, 732 (Bankr. S.D. Ohio 1992); In re Swift Aire Lines, Inc., 30 B.R. 490, 496 (B.A.P. 9th Cir. 1983). This financial accommodations exception to section 365 codifies the policy against compelling a party to extend credit to a debtor post-petition. 71. Therefore, when section 365(e)(2)(B) applies to an executory, non-assumable contract to extend financial accommodations, cause exists under section 362(d)(1) for relief from the automatic stay to terminate the contract. Gov t Nat l Mortgage Corp. v. Adana Mortgage Bankers, Inc. (In re Adana Mortgage Bankers, Inc.), 12 B.R. 977, (Bankr. N.D. Ga. 1980)( Termination is the inevitable final disposition of these [a]greements as allowed under section 365(e)(2) ). 72. The Bonds are executory contracts of financial accommodation under which the 23

24 Case KG Doc 266 Filed 06/14/17 Page 24 of 27 Debtors have the primary continuing performance obligation, and Aspen, as surety, has a secondary performance obligation as to which the Debtors remain obligated to both exonerate and indemnify Aspen. As such, the bonds cannot be assumed by the Debtors under sections 365(c)(2) and 365(e)(2)(B). Aspen cannot be compelled to continue to extend surety credit to the Debtors post-petition. It logically follows that, in the absence of adequate protection: (i) Debtors are not entitled to continue to benefit from or rely upon the Bonds; and (ii) Aspen has a legal and factual basis for being granted relief from the automatic stay under section 362(d) of the Bankruptcy Code in order to cancel the Bonds. See Adana Mortgage Bankers, Inc., 12 B.R. 977 (finding cause for stay relief under 11 U.S.C. 362(d) and 365(e)(2)(B)). 73. Here, of the remaining nine (9) Bonds, three of the Bonds expressly provide that Aspen may cancel the Bonds without cause, upon written notice to the Debtors and Obligees. To the extent the remaining six (6) Bonds cannot be cancelled by their terms or under applicable nonbankruptcy law, those Bonds, and any Bonds the Debtors continue to need for their operations, must be replaced by the Debtors with new bonds, or other security satisfactory to the Obligees. If the Debtors cannot procure surety bonds, which, as noted above, it may be difficult to do unless they can provide collateral, the Debtors should be directed to suspend all operations which are dependent upon the provision of surety credit. REQUEST FOR WAIVER OF THE INJUNCTION UNDER BANKR. R. 4001(a)(3) 74. With respect to Aspen s request for relief from the automatic stay to effectuate its rights of setoff, Aspen respectfully requests a waiver of the injunction under Bankr. R. 4001(a)(3) as it is imperative that Aspen have immediate access to the Collateral. Aspen and the CSLC continue to have ongoing discussions regarding settlement of the CSLC s claims for payment of the aggregate penal sum of the SEF Bonds. However, Aspen expects that the parties will be 24

25 Case KG Doc 266 Filed 06/14/17 Page 25 of 27 finalizing the settlement shortly, and upon execution of the settlement agreement, it will be expected to pay a large portion of the $22 million aggregate penal sum immediately. Accordingly, Aspen requests that it be granted immediate access to the Collateral. 75. With respect to Aspen s request, as an alternate form of relief, that it be granted relief from the automatic stay to cancel the Bonds, the notice periods for the Motion and for cancellation of the Bonds allow the Debtors ample opportunity to obtain surety credit from another source to the extent the Debtors require replacement bonding while continuing their operations in Chapter 11. Accordingly, it is respectfully submitted that the Court should enter an order, to become effective upon entry, and thus waiving the injunction under Bankruptcy Rule 4001(a)(3), granting Aspen stay relief to cancel the Bonds in accordance with their terms and any applicable non-bankruptcy law. Waiver of the 14-day interim period imposed by Bankruptcy Rule 4001(a)(3) is necessary so that Aspen may provide the requisite written notice of cancellation to the Debtors and Obligees (typically, between 30 and 90 days notice) immediately upon entry of an order granting the Motion so that the notice periods may being to run without further delay. NOTICE 76. Notice of the Motion has been given to: (i) the Office of the United States Trustee; (ii) Debtors counsel; (iii) the entities listed on the Consolidated List of Creditors Holding the 20 Largest Unsecured Claims filed pursuant to Bankruptcy Rule 1007(d); (iv) the Obligees to the Bonds; and (v) all parties requesting notice pursuant to Bankruptcy Rule Aspen submits that, under the circumstances, no further notice is required. 25

26 Case KG Doc 266 Filed 06/14/17 Page 26 of 27 NO PRIOR REQUEST 77. No prior request for stay relief with respect to the Collateral has been made to this or any other court. A prior request for adequate protection was subsumed in Aspen s prior Objection, and Supplement to the Objection, to entry of the Final Order on the Surety Program Motion [D.I. 78, D.I. 110], but no independent application for such relief, or alternatively, for stay relief to cancel the Bonds, has been made to this or any other court. CONCLUSION WHEREFORE, for each of the reasons set forth above, Aspen respectfully requests that the Court enter an order, to become effective upon entry, thus waiving the injunction under Bankruptcy Rule 4001(a)(3), granting Aspen: (i) leave to exercise its right of recoupment, or to the extent that the relief requested is deemed to be for set-off, rather than recoupment, relief from the automatic stay, for cause, pursuant to 11 U.S.C. 362(d) to setoff mutual pre-petition obligations of the Debtors and Aspen; (ii) adequate protection in the form of collateral or superpriority administrative expense status or, alternatively, relief from the automatic stay to cancel the Bonds and/or requiring the Debtors to replace the Bonds; (iii) waiving the stay of Fed. R. Bankr. P. 4001(a)(3) in connection with Aspen s request for stay relief to (a) set off mutual pre-petition obligations and (b) cancel the Bonds, if such alternate relief is ultimately granted ; and (iv) such other or further relief as may be appropriate. Dated: June 14, 2017 Wilmington, Delaware Respectfully submitted, WHITEFORD TAYLOR & PRESTON LLC By: /s/ Thomas J. Francella, Jr. Thomas J. Francella, Jr., Esq., #3835 The Renaissance Centre 405 North King Street, Suite

27 Case KG Doc 266 Filed 06/14/17 Page 27 of 27 Wilmington, Delaware Telephone: (302) Facsimile: (302) and- CHIESA SHAHINIAN & GIANTOMASI PC By: /s/ Scott A. Zuber Scott A. Zuber One Boland Drive West Orange, New Jersey Tel: (973) Fax: (973) Attorneys for Aspen American Insurance Company and Aspen Specialty Insurance Company 27

28 Case KG Doc Filed 06/14/17 Page 1 of 3 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re: Venoco, LLC, et al., Debtors. 1 Chapter 11 Case No (KG) (Jointly Administered) Hearing Date: July 24, 2017 at 2:00 p.m. (EST) Objection Deadline: July 5, 2017 at 4:00 p.m. (EST) NOTICE OF MOTION OF ASPEN AMERICAN INSURANCE COMPANY & ASPEN SPECIALITY INSURANCE COMPANY FOR AN ORDER GRANTING ASPEN: (I) LEAVE TO EXERCISE ITS RIGHT OF RECOUPMENT, OR, TO THE EXTENT NECESSARY, RELIEF FROM THE AUTOMATIC STAY, FOR CAUSE, PURSUANT TO 11 U.S.C. 362(d) TO SET OFF MUTUAL PRE-PETITION OBLIGATIONS; (II) ADEQUATE PROTECTION AS TO CERTAIN SURETY BONDS, PURSUANT TO 11 U.S.C. 361, 364(c) OR 364 (d), OR, ALTERNATIVELY, (A) RELIEF FROM THE AUTOMATIC STAY, FOR CAUSE, PURSUANT TO 11 U.S.C. 362(d) TO CANCEL CERTAIN SURETY BONDS AND (B) REQUIRING THE DEBTORS TO REPLACE CERTAIN SURETY BONDS; (III) WAIVING THE STAY OF FED. R. BANKR. P. 4001(a)(3); AND (IV) SUCH OTHER OR FURTHER RELIEF AS MAY BE APPROPRIATE TO: Venoco, LLC th Street Suite 3900 Denver, CO Bracewell, LLP Attn: Robert G. Burns, Esq. 251 Avenue of the Americas, 49 th Floor New York, NY Morris, Nichols, Arsht & Tunnell Attn: Robert J. Dehney, Esq. Marcy J. McLaughlin, Esq. Andrew R. Remming, Esq N. Market Street P.O. Box 1347 Wilmington, DE Benjamin A. Hackman, Esq. Office of the United States Trustee J. Caleb Boggs Federal Building 844 King Street, Suite 2207 Wilmington, DE The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Venoco, LLC (3555); TexCal Energy (LP) LLC (0806); Whittier Pipeline Corporation (1560); TexCal Energy (GP) LLC (0808); Ellwood Pipeline, Inc. (5631); and TexCal Energy South Texas, L.P. (0812). The Debtors main corporate and mailing address for purposes of these chapter 11 cases is: Venoco, LLC, th Street, Suite 3900, Denver, CO

29 Case KG Doc Filed 06/14/17 Page 2 of 3 Bracewell, LLP Attn: Mark E. Dendinger, Esq. City Place I, 34 th Floor 185 Asylum Street Hartford, CT Aspen American Insurance Company & Aspen Specialty Insurance Company, has filed the above captioned motion (the Motion ), which seeks the following relief: (i) Leave to exercise its right of recoupment, or to the extent that the relief requested is deemed to be for set-off, rather than recoupment, relief from the automatic stay, for cause, pursuant to 11 U.S.C. 362(d), to set off mutual pre-petition obligations; (ii) Adequate protection as to certain surety bonds, pursuant to 11 U.S.C. 361, 364(c) or (d) or, alternatively, (a) relief from the automatic stay, for cause, pursuant to 11 U.S.C. 362(d) to cancel certain surety bonds; and (b) requiring the Debtors to replace certain surety bonds; (iii) Waiving the stay of Fed. R. Bankr. P. 4001(a)(3) with respect to all of the above requests for relief from the automatic stay; and (iv) such other or further relief as may be appropriate. A HEARING ON THE MOTION WILL BE HELD ON July 24, 2017, at 2 p.m. (Eastern Standard Time) (the Hearing Date ) before the Honorable Kevin Gross at the United States Bankruptcy Court for the District of Delaware (the Court ), 824 N. Market Street, 6 th Floor, Courtroom #1, Wilmington, DE You are required to file a response (and the supporting documentation required by Local Rule (c)) to the attached motion at least seven (7) days before the Hearing Date. At the same time, you must serve a copy of the response upon movant s attorneys: Whiteford Taylor & Preston, LLC Chiesa Shahinian & Giantomasi PC Attn: Thomas J. Francella, Jr., Esq. Attn: Scott A. Zuber, Esq. The Renaissance Centre One Boland Drive 405 North King Street, Suite 500 West Orange, NJ Wilmington, DE Telephone: (973)

30 Case KG Doc Filed 06/14/17 Page 3 of 3 Telephone: (302) Facsimile: (973) Facsimile: (302) szuber@csglaw.com tfrancella@wtplaw.com The Hearing Date specified above may be a preliminary hearing or may be consolidated with the final hearing, as determined by the Court. The attorneys for the parties shall confer with respect to the issues raised by the motion in advance for the purpose of determining whether a consent judgment may be entered and/or for the purpose of stipulating to relevant facts such as value of the property, and the extent and validity of any security instrument. Dated: June 14, 2017 Wilmington, Delaware Respectfully submitted, WHITEFORD TAYLOR & PRESTON LLC By: /s/ Thomas J. Francella, Jr. Thomas J. Francella, Jr., Esq., #3835 The Renaissance Centre 405 North King Street, Suite 500 Wilmington, Delaware Telephone: (302) Facsimile: (302) tfrancella@wtplaw.com -and- CHIESA SHAHINIAN & GIANTOMASI PC By: /s/ Scott A. Zuber Scott A. Zuber One Boland Drive West Orange, New Jersey Tel: (973) Fax: (973) szuber@csglaw.com Attorneys for Aspen American Insurance Company and Aspen Specialty Insurance Company

31 Case KG Doc Filed 06/14/17 Page 1 of 3

32 Case KG Doc Filed 06/14/17 Page 2 of 3

33 Case KG Doc Filed 06/14/17 Page 3 of 3

34 Case KG Doc Filed 06/14/17 Page 1 of 3

35 Case KG Doc Filed 06/14/17 Page 2 of 3

36 Case KG Doc Filed 06/14/17 Page 3 of 3

37 Case KG Doc Filed 06/14/17 Page 1 of 3

38 Case KG Doc Filed 06/14/17 Page 2 of 3

39 Case KG Doc Filed 06/14/17 Page 3 of 3

40 Case KG Doc Filed 06/14/17 Page 1 of 5

41 Case KG Doc Filed 06/14/17 Page 2 of 5

42 Case KG Doc Filed 06/14/17 Page 3 of 5

43 Case KG Doc Filed 06/14/17 Page 4 of 5

44 Case KG Doc Filed 06/14/17 Page 5 of 5

45 Case KG Doc Filed 06/14/17 Page 1 of 2

46 Case KG Doc Filed 06/14/17 Page 2 of 2

47 Case KG Doc Filed 06/14/17 Page 1 of 5

48 Case KG Doc Filed 06/14/17 Page 2 of 5

49 Case KG Doc Filed 06/14/17 Page 3 of 5