Case Document 379 Filed in TXSB on 02/08/18 Page 1 of 9

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1 Case Document 379 Filed in TXSB on 02/08/18 Page 1 of 9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: COBALT INTERNATIONAL ENERGY, INC., et. al., 1 Debtor. Chapter 11 Case No (Ml (Jointly Administered OBJECTION OF VENARI OFFSHORE LLC TO DEBTORS MOTION FOR ENTRY OF AN ORDER DEEMING UNENFORCEABLE CERTAIN PREFERENTIAL RIGHTS Venari Offshore LLC ( Venari respectfully submits this objection (the Objection to the Debtors Motion for Entry of An Order Deeming Unenforceable Certain Preferential Rights (the Pref. Rights Motion 2 filed by the Debtors. 3 I. INTRODUCTION 1. In the Pref. Rights Motion, the Debtors seek to have this Court determine and then nullify a variety of preferential rights property rights relating to working interests in a number of oil and gas properties that the Debtors are seeking to sell. Furthermore, the Pref. Rights Motion purports to afford parties in interest just seven days to object to the Debtors request for relief. The Pref. Rights Motion is both procedurally flawed and substantively misplaced. A preferential right is a real covenant, and the Debtors cannot sell or assign their interests free and clear of such covenants. 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor's federal tax identification number, are: Cobalt International Energy, Inc. (1169; Cobalt International Energy GP, LLC (7374; Cobalt International Energy, L.P. (2411; Cobalt GOM LLC (7188; Cobalt GOM # I LLC (7262; and Cobalt GOM # 2 LLC (7316 (collectively, the Debtors. The Debtors' service address is: 920 Memorial City Way, Suite 100, Houston, Texas Dkt. No All capitalized terms not herein defined shall have the meanings ascribed to them in the Pref. Rights Motion

2 Case Document 379 Filed in TXSB on 02/08/18 Page 2 of 9 2. First, the Debtors request is procedurally improper. As discussed below, a determination of the validity, priority, or extent of a lien or other interest in property must be made in an adversary proceeding, absent the consent of the parties to determine the issue in a contested matter. Venari expressly does not consent to an adjudication of this issue in a contested matter, especially on shortened notice as is the case here. 3. Furthermore, and in the alternative, even if the relief requested in the Pref. Rights Motion was not procedurally flawed, the interest in question held by Venari is a real covenant that cannot be modified or stripped from the property in question; nor can the Debtor sell the properties in question free and clear of such interest absent Venari s consent. A. General Background II. BACKGROUND 4. On December 14, 2017 (the Petition Date, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a and 1108 of the Bankruptcy Code. The Debtors cases are being jointly administered. On December 21, 2017, the United States Trustee for the Southern District of Texas appointed an official committee of unsecured creditors pursuant to section 1102 of the Bankruptcy Code [Docket No. 117]. B. Relationship Between Venari and the Debtors 5. Venari and certain of the Debtors are joint interest owners in the Shenandoah Prospect, which is an ultra-deepwater Gulf of Mexico prospect. In connection with the Shenandoah Prospect, Venari and certain of the Debtors are party to that certain operating agreement for the Shenandoah Prospect dated April 1, 2008 (including any amendments, the

3 Case Document 379 Filed in TXSB on 02/08/18 Page 3 of 9 Operating Agreement. Pursuant to section 24.2 of the Operating Agreement, Venari holds a preferential right to purchase the Debtors interests (the Pref. Right, which applies to any Transfer of Interest: Debtors. Within thirty (30 days from receipt of the transfer notice, each non-assigning Party may exercise its preferential right to purchase its Participating Interest Share of the Working Interest offered (on the same terms and conditions, or on equivalent terms for a non-cash transaction as stated in the notice without reservations or conditions by written notice of that fact to all of the Parties To date, the Operating Agreement has been neither assumed nor rejected by the 7. Furthermore, section of the Operating Agreement expressly states that: this Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns and shall constitute a covenant running with the land comprising the Contract Area. 5 C. The Pref. Rights Motion 8. On February 1, 2018, the Debtors filed the Pref. Rights Motion, seeking entry of an order that would deem preferential rights and rights of first refusal unenforceable. 6 Right. 9. The Pref. Rights Motion sets an objection deadline of February 8, To date, the Debtors have not filed an adversary proceeding relating to the Pref. III. ARGUMENT A. The Relief Sought in the Pref. Rights Motion Can Only Be Granted in an Adversary Proceeding. 11. In the Pref. Rights Motion, the Debtors are seeking, on shortened notice, that the Court determine, in advance of any sale of the property in question, the nature, extent, and 4 Operating Agreement at Operating Agreement at Dkt. No

4 Case Document 379 Filed in TXSB on 02/08/18 Page 4 of 9 enforceability of Venari s property rights vis-à-vis the Debtors. Bankruptcy Rule 7001(2 defines adversary proceedings to include a proceeding to determine the validity, priority, or extent of a lien or other interest in property Bankruptcy Rule 7001(2 (emphasis added. Applying Rule 7001, courts have held that proceedings that fit within Rule 7001 categories must be resolved through an adversary proceeding (absent a waiver by the nonmoving parties, and that failure to proceed by adversary proceeding when one is required is reversible error. See, e.g., Haber Oil Co. v. Swinehart (In re Haber Oil, 12 F.3d 426, 443 (5th Cir (reversing bankruptcy court s determination of interest in property in contested matter as procedurally improper because no adversary proceeding was filed; Feld v. Zale Corp. (In Re Zale Corp., 62 F.3d 746, (5th Cir (reversing bankruptcy and district court because a third-party injunction could not be granted without conducting a full adversary proceeding under Rule 7001 absent a waiver; In re Village Mobile Homes, Inc., 947 F.2d 1282, 1283 (5th Cir (reversing bankruptcy and district court in granting conversion damages, because it was an action to recover money or property that could only be determined in an adversary proceeding absent a waiver by the non-movant under Bankruptcy Rule 7001; Lyons v. Lyons (In re Lyons, 995 F.2d 923, 924 (9th Cir (holding that, when a Rule 7001 category was at issue, the movant may obtain the authority he seeks only through an adversary proceeding ; In re Texas Pig Stands, Inc., BKR LMC, 2008 WL , at *3 (W.D. Tex. Aug. 27, 2008 ( Rule 7001 clearly states that a proceeding to determine the validity, priority or extent of a lien or other interest in property is an adversary proceeding. A bankruptcy court's failure to proceed by adversary proceeding when one is required is reversible error. ; In re Mansaray-Ruffin, 530 F.3d 230, 237 (3d Cir (holding that a party s due process rights were violated where a party deemed a property interest invalid through a plan because a confirmation hearing does not

5 Case Document 379 Filed in TXSB on 02/08/18 Page 5 of 9 provide the same due process protections as an adversary proceeding; In re Reilly, 71 B.R. 132 (Bankr. D. Mont (question of debtors' legal interest in 150-acre tract by reason of conveyance of one-half interest to creditor cannot be settled by confirmation of plan. 12. The Fifth Circuit s decision in Haber Oil Co. v. Swinehart (In re Haber Oil is controlling. 12 F.3d 426 (5th Cir In Haber Oil, the bankruptcy court determined the extent of a party s interest in certain funds in the context of certain contested matters (including a plan confirmation hearing, and imposed a constructive trust over the assets. Id. at 435. The Fifth Circuit reversed the bankruptcy court decision, and found that such determination could only be made in an adversary proceeding. Id. at 440. In doing so, the Fifth Circuit rejected the argument that a confirmation hearing was an adversary proceeding for all substantive purposes. Id. at In particular, the Fifth Circuit found that adversary proceedings were subject to Part VII of the Bankruptcy Rules, which provided numerous procedural safeguards that are not present in contested matters. Id. at 437; 438 n.1. For example, the adversary rules required the filing of a complaint that complies with the pleading requirements in the federal rules, service of summons, and a pretrial order, id. at , not to mention specific rules regarding discovery and other issues that are designed precisely to assist the bankruptcy court in resolving [these types of controversies] early in the proceedings. Id. at 440. Accordingly, the Fifth Circuit held that [t]he instant case demonstrates the difficulties that are apt to arise if the bankruptcy court too easily permits parties to circumvent the rules governing adversary proceedings, and reversed the bankruptcy court s decision. Id. at Here, the Debtors are seeking to have the Court determine the nature, extent, and enforceability of Venari s property rights in the Shenandoah Prospect in a contested matter, on

6 Case Document 379 Filed in TXSB on 02/08/18 Page 6 of 9 shortened notice. Under binding Fifth Circuit jurisprudence, as a matter of due process, and under the applicable Bankruptcy Rules, the nature, extent, and enforceability of property rights can only be determined in the context of an adversary proceeding. Accordingly, the Court should deny the relief requested because it is procedurally improper. B. The Debtors Cannot Sell or Assign Its Assets Free and Clear of the Pref. Right Because the Pref. Right is a Real Covenant. 15. In addition to being procedural improper, the motion, on the merits, is legally and factually unsupportable and should therefore be denied. As an initial matter, rights of first refusal, such as the Pref. Right, are enforceable in bankruptcy cases. See, e.g., In re IT Group, Inc., Co., 302 B.R. 483, 488 (D. Del. 2003; In re Olsen, 563 B.R. 899 (Bankr. E.D. Wisc. 2017; In re Capital Acquisitions & Management Corp., 341 B.R. 632 (Bankr. E.D. Ill Here, the Pref. Right in question is embedded in the Operating Agreement, which the Debtor has not sought to reject. Setting aside the issue of the impact of a rejection of the Operating Agreement on the provision in question a real covenant the Operating Agreement remains binding on the Debtors because a fundamental rule of bankruptcy law is that the estate succeeds to no more interest than the debtor possessed on the date of filing and the estate takes its property rights subject to any conditions or burdens existing thereon, that is, cum onere. See, e.g., In re Baquet, 61 B.R. 495, (D. Mont. 1986; Chicago Bd. of Trade v, Johnson, 264 U.S. 1, I 3 (1 924; Rieser v. Dayton Country Club Co. (In re Magness, 972 F.2d 689, 696 (6th Cir Also, the Debtor continues to be bound to its post-petition performance obligations under an executory contract in the gap period between the petition date and the date of the rejection of an agreement if it continues to accept the benefits of such contract. See, e.g., In re Tri-Union Development Corp., No H4-11, 2001 WL (Bankr. S.D. Tex. June 14, 2001 (pending assumption or rejection, the Debtor cannot enjoy the benefits of its

7 Case Document 379 Filed in TXSB on 02/08/18 Page 7 of 9 contract with the Operator without bearing the burdens or obligations imposed under the contract.. And, of course, if the Operating Agreement is assumed (which seems likely since the Debtors are marketing the Shenandoah Prospect, the terms and provisions of the Operating Agreement (including the Pref. Right will irrevocably bind the Debtors. See, e.g., Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir (the debtor must accept the contract as a whole if assumed; In re Foothills Texas, Inc., 46 B.R. 143,153 (Bankr. D. Del (as a general rule, the decision to assume or reject a contract is an all-or-nothing proposition Furthermore, the Debtors plain meaning interpretation of section 365(f 7 is not supported by case law where the contract provision at issue is a real covenant. For example, the Fifth Circuit has expressly held that a right to consent to the assignment of a pipeline a restriction on assignment was a real covenant that runs with the land, and that a debtor could therefore not sell the pipeline free and clear of such covenant unless it met the requirements of section 363(f. In re Energytec, Inc., 739 F.3d 215, 225 (5th Cir Under Texas law, a covenant runs with the land when it [1] touches and concerns the land; [2] relates to a thing in existence or specifically binds the parties and their assigns; [3] is intended by the original parties to run with the land; and [4] when the successor to the burden has notice. Id. at 221. In particular, the Energytec court found that a right to consent to any assignment touched and concerned the land, and was therefore a covenant running with the land, because it impacted the owner s interest in the property at issue and the value of such property. Id. at See Pref. Rights Motion at The Fifth Circuit remanded

8 Case Document 379 Filed in TXSB on 02/08/18 Page 8 of Here, as in Energytec, the Pref. Right touches and concerns the Debtors interests in the Contract Area because it impacts the Debtors interest in the property and it impacts the value of such property. Furthermore, the Operating Agreement expressly states that it shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns and shall constitute a covenant running with the land comprising the Contract Area. 9 Finally, the Operating Agreement was recorded in the applicable real property records. Accordingly, like the consent right in Energytec, the Pref. Right is a real covenant running with the Debtors interests in the Contract Area, and such interests cannot be sold or assigned free and clear of the Pref. Right. 10 IV. RESERVATION OF RIGHTS 20. Because the Pref. Rights Motion is being heard on shortened notice, Venari reserves all rights to supplement or amend this Objection, or to join any other objections. V. CONCLUSION WHEREFORE, Venari respectfully requests that this Court enter an order (i denying the Pref. Rights Motion, and (ii granting Venari such other and further relief as the Court deems proper, both at law and in equity. Dated: February 8, 2018 THOMPSON & KNIGHT LLP 9 Operating Agreement at The recent Sabine case is distinguishable. See generally In re Sabine Oil & Gas Corp., 567 B.R. 869, 872 S.D.N.Y First, Sabine required that the determination of the property interest be made in an adversary proceeding, not a contested matter. Id. at 873. Second, Sabine is a non-binding case dealing with a different right minimum volume commitments and transportation fees, whereas Eenergytec is binding law regarding the enforceability of real covenant restrictions on assignability (i.e. consent rights. Id. at 876. Indeed, the Sabine court expressly distinguished Energytec on the basis that the agreements at issue in Sabine did not have comparable restraints on the debtors right of alienation. Id. Thus, Sabine is inapplicable to the Pref. Rights Motion

9 Case Document 379 Filed in TXSB on 02/08/18 Page 9 of 9 By: /s/ Steven J. Levitt David Bennett Texas State Bar No Steven J. Levitt Texas State Bar No One Arts Plaza 1722 Routh Street, Suite 1500 Dallas, TX Telephone: Facsimile: david.bennett@tklaw.com steven.levitt@tklaw.com ATTORNEYS FOR VENARI OFFSHORE LLC CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing was served on all parties entitled to notice via the Court s electronic notification system on this 8 th day of February, /s/ Steven J. Levitt Steven J. Levitt