American court hearing recordings and interviews - Nikola Corp. - September 5, 2025 bankruptcy hearing (Delaware, USA)

Episode Date: September 8, 2025

For more information about the Nikola Corp. chapter 11 bankruptcy proceedings see https://dm.epiq11.com/case/nikola/info

Your Honor, may please the court, Blake Cleary of Potter Anderson and Karoon on behalf of Necroft and its affiliated debtors and debtors in possession. Your Honor, first of all, thank you for scheduling confirmation today. We do much appreciate it. It's an important day in the life of this company and the natural progression and next step. With that, we did file a couple of pleadings at the end of yesterday, so we have an amended agenda, and hopefully they have made their way to you. they relate to a plan supplement an amendment to the witness and exhibit list as well as a notation of the withdrawal of mr milton's objection to confirmation your honor yes thank you with that i wanted to make you know i'm i'm here with my colleagues from potter anderson as well as josh morse and his colleagues from good morning He's going to make further introductions, but I wanted to just set that up for your honor.

And again, thank you, and I will turn it over to my co-counsel. Thank you, Mr. Claree. Good morning, Mr. Morris. Good morning, Your Honor. Very wonderful to see you on this Friday afternoon. Yes. For the record, Joshua Morris from Pillsbury Winthrop Shop Pitman, LOP, Council to the Debtors. We have some new and some not so new faces here today with me, and I want to make sure to introduce

members of my team as well as the witnesses. From my team, we have Rachman Connolly, my partner, and Ari Berman, my partner as well as my colleagues, Andrew Alfano and Chas Berman. Chas Coleman, sorry. Yes, I'm familiar with his work. A lot going on in my head right now. The declarants, we have three, one appearing remotely, and that's Emily Young, who is the director at Epic Corporate Restructuring LLC, the debtors claims and noticing agents. Yes.

She'll be in a moment submitting the ballot tabulation declaration, which appears at document number 952. It just confirms the debtor's compliance with solicitation procedures order, providing tabulation summary and a report of excluded balance, as well as report of the opt-outs. We also have who's appearing in the courtroom today, Ryan Rowan, a managing director at M3. advisory partners. Good morning. L.P. the debtor's financial advisor. He submitted a confirmation brief declaration that appears at docket number 958 that provided an updated liquidation analysis, which is attached as

exhibit one to his declaration. It was also attached as an exhibit to the second amended plan, which we filed on Tuesday. He had provided some test. testimony regarding feasibility of the plan as rebuttal evidence to the Milton confirmation objection, which appeared at 910, which has now been withdrawn, as Mr. Cleary indicated. Also in the courtroom is Britton Worthen. Morning. The chief legal officer of debtor Nicola Corporation. He submitted a number of declarations, some of which may be pertinent today, some of which may not be. Just want to run through those to give your honor some context.

First, the confirmation brief declaration, which is document number 957. It provides the evidentiary support for not only our confirmation brief, but provides the 1990-support for the SEC support, or excuse me, the SEC resolution, which I'm going to walk through in a moment. The settlement of the derivative actions, which will be seeking final approval of today, support for the appointment of the liquidating trustee and then provide some limited rebuttal evidence to the Milton equitable coordination objection which that appears at docket number 911 he also has provided four other declarations which will be seeking to move into evidence the SEC classification memo

declaration which appears at docket number 796 dash one that That provides the evidentiary support for the relief requested in the SEC classification memo, docket number 796. That's now been rendered moot by virtue of the SEC resolution, as well as the Reyes Action Classification Memo declaration, which appears at docket number 804-1. That provides the evidentiary support for the relief requested in the Reyes classification memo, which is document number 804. That is not contested, no objections were filed to that one. As well as the Milton claim classification memo declaration, that's docket number 808-1. That provides the evidentiary support for the relief requested in the Milton claim classification memo.

That's docket number 808. In that one, there is also a counterparty to that docket that is unsealed. There'll be some discussion about that that we'll need to deal with in a little while. And finally, the shareholder securities claim classification memo declaration, which is docket 820-1, that provides the evidentiary support for the relief requested in our shareholder securities claim classification memo. That's docket 820. Now, as you are well aware, we are here today, seek an entry of the conference conference. information order which we initially filed at document number 964 and then we had some additional cleanup changes between Tuesday and late last night and we filed a notice of revised order as well as a black line yes at docket number 99 that order seeks to approve the disclosure statement that you entered back in July on a final basis and confirms the second amended plan which appears at

I do want to note that as I spoke about in the beginning of the presentation that we did file a black line on Tuesday against the solicitation version of plan that was docket number 744 and that black line appears at docket number 956. Now a plan is fairly straightforward liquidating plan. It does a few things. establishes liquidating trust to pursue and monetize remaining assets including preserve the state claims. Paves the way for the settlement of the derivative actions, which I'm happy to report. We found out yesterday that the Chancellor McCormick has scheduled for November 22nd. Wines down the remaining operations, which are very, very limited at this point. of the debtors' estates.

And after paying administrative claims and priority claims in cash in full on the affected date as set forth in the liquidation analysis, it estimates that class three general unsecured claim recoveries are going to be between 20.7% and 75.3%. As discussed in the Young Declaration, the debtors complied with all the solicitation procedure order requirements regarding services,

service of the required notices, as well as the solicitation packages and appropriate certificates of service are filed on the docket. The Young Declaration also confirms that the debtors received near unanimous approval in favor of the plan. 99.98% if my math is direct, representing 148.1 million in amounts and 97.4 representing 68 out of 70 number from class three. That's the only impaired class under the plan entitled to vote voted in favor of the plan.

In anticipation of today's hearing, the debtors have also been working diligently to reach consensual resolution of various objections. As I indicated on Tuesday night, the second amended plan, which is filed at document number 955 addresses certain of these resolutions, including the SEC which is document number 935 the Mitsubishi objection which is docket number 937 and then also a few informal objections that we received prior to the filing of that plan including objections raised by the Texas comptroller of public accounts and the US Department of Justice and I want to walk through I want to walk through and give the court just a brief

update on each of those the resolutions most importantly the SEC objection and mr. Baddeley and mr. Schurr I'm sure I've butchered the pronunciation of her name even though I've had at least a hundred phone calls with her so I apologize are here in courts and they've been great partners with us throughout this case to try and work this out but the the SEC objection which appears at docket number 935 again the debtors in the SEC were able to reach agreement on a consensual resolution of the debtors purported subordination of the SEC claim under the plan for the reasons that are explained in the SEC claim memorandum

that we filed at document number 796 and then as they objected to and under this defined term that's in the plan, the SEC claim resolution, it's contemplated to be approved by the confirmation order. The debtors in the SEC have agreed that the SEC claim, which is claim number 10420, which the SEC claim, excuse me, the SEC filed recently in the amount of, in excess of $83 million, and that amended the SEC's scheduled claim in the amount of $80.2 million will be allowed and treated under the plan in three different ways. First, the SEC has voluntarily agreed that 40 million of that 83.052 million is going to be

classified and treated junior in priority to the general unsecured claims, and therefore the SEC junior claim, as we've defined it under the plan, is going to be allowed and treated in class seven of the plan. And then second, the debtors have agreed to classify the residual $43,052,974.90 of the SEC claim as a general unsecured claim in class three provided, however, that the sole distribution on account of that SEC unscured claim is going to be a $4 million cash payment to the SEC on the effective date. And the SEC has agreed to forego any further distributions on account of the SEC unsecured claim under Class 3 of the plan. And then finally, there is an agreement that the debtors, the estates, liquidating trust, and their successors and signs will release all causes of action that each of them may have against the SEC. And with that, I would just ask Mr. Badley and or Monsieur to confirm that there are.

understanding of the resolution is as articulated. Good morning, Mr. Adley. It's good to see you. Good morning. Your Honor, you as well, David Badley for the SEC with Trude Sawyer. Mr. Morse's description of the compromise is correct and it's set forth in Article 4J of the plan. Yes. Thank you very much for thank you. I also want to point out that the committee works hand-in-glove with the debtors on this resolution as confirmed the committee statement that appears at docket number 965 the committee helped develop the SEC claim resolution and supports that fully and if Mr. Manel is willing to confirm that on the

record for the for the record Doug Manel good morning Mr. Mawler good morning your honor confirmed Mr. Morris the committee is fully supportive of the SEC resolution thank you mr. Mal okay moving on to the Mitsubishi resolution Mitsubishi filed an objection that appears in document number 937, Devers has agreed to add language to the proposed confirmation order that we understand resolves that objection. With that, I'd ask counsel to Mr. – excuse me, to Mitsubishi, which I believe today is Mr. Detweiler, to confirm on the record that the resolution

of the Mitsubishi objection. Good to see you, Mr. Detwana. Welcome. Good to see you, Your Honor. May it please the Court, Don Debtweiler, and behalf. on Dallelan behalf of Michibisi's objection has been resolved by the inclusion of the language. Thank you, Mr. Doe. Thank you, Your Honor.

Thank you, counsel. I'd also mentioned a few informal objections. The Texas Comptroller had a few issues that we were able to address through agreed provisions to the confirmation order. I'm unclear as to whether anyone from the Texas Comptroller is either here in the courtroom, courtroom or it's appeared at the hearing. However, we have email communications that confirm that the informal communications, or excuse to be informal objection has been resolved with the changes agreed. Okay.

Let me just pause and see if anybody from the Texas controller is on the line and would like to be heard. Okay. I hear no response. Thank you. And similarly with the U.S. Department of Justice, we've had an active dialogue with counsel to the U.S. Department of Justice in various capacities, but with respect to informal objections and comments, we addressed those concerns through the changes to the confirmation order and I believe

if counsel has appeared or would like to confirm that on the record, we're happy to step aside and have that happen as well. Okay. Would the Department of Justice like to be heard? Good morning, Mr. Prevan. Welcome. Good morning, Your Honor. Dr. Bond, on behalf of the United States, we'd just like to confirm that we have worked with the Devers Council and all of our issues have been resolved. Thank you, Mr. Providence.

Thank you. And then one more that I didn't mention, and that's the Milton confirmation objection at docket number 910. That one took issue with the feasibility of the plan. We found out during a meet-and-confer call yesterday afternoon that that objection was going to be withdrawn, and I believe the notice of withdrawal was filed yesterday afternoon.

Yes, I saw that. So that leaves just a handful of unresolved issues. First of all, the certain components of the, oh, I do want to mention the United States trustee objection that appears at docket number 908 take an issue with the opt-out releases and then the injunction. And then the injunction, I did confirm to Mr. Fox that the objection to the Bankruptcy Rule 3020 waiver that we've resolved that issue. I'll walk through that during my presentation. Also unresolved is the Milton equitable subordination objection that appears at docket number 911, taking an issue with the plan's classification and treatment of the Milton claim in class.

eight and then there's two others that I will talk about in a moment did want to raise one one thing that we also learned during our meeting confer with Milton's counsel yesterday afternoon we found out for the first time yesterday yesterday that mr. Milton intends to cross-examine mr. Worthing on various topics to support a brand new legal theory which isn't reflected in the equitable subordination objection this is document number 9-11 that somehow Nicola's relative conduct should alleviate the Milton claim from being equitably subordinated we don't believe there's any legal or factual

support that's been offered in the record or for us to be able to respond to other than potentially on the fly. And so we may need some guidance from you later today as to how to proceed as this morning develops. Okay, we'll get there. We'll get there. Just previewing some issues. One other preview issue, we also understand that Mr. Milton is here today to attempt, to substantiate apparently his proof of claim.

This is claim number 54. And by way of background, you may have seen some of this percolate a little bit when we were here during the Relief from Stay proceedings, as well as you saw some of it in the papers. And exhibit C to that claim includes a listing of 19 professional firms and dollar amounts that are alleged to have been paid to such firms as of April 1st, 2025.

As detailed at paragraph 139 of our memorandum, back on July 8th, I requested proof of payment, confirmation of how much had already been paid, because we believe that set forth in other pleadings that nearly $40 million of that had already been advanced and then also to provide copies of all the invoices subordinating that proof of claim nothing was provided to the debtors and then in the Milton equitable subordination objection that's again docket number 911 at page 10 footnote 3 there's an allegation that we didn't request the information quote until quite recently and Milton will supply the information once the compilation is complete. We inquired yesterday whether the during a series of meeting confers when the compilation was going to be complete and we're still awaiting an answer.

This may be a question for Mr. Milton's counsel. Mr. Milton has not identified any exhibits to be admitted today. So, and Mr. Cousins, good morning. It's good to have you here. Morning. You know, if the thieves that have been paid to professionals are properly at issue today, and I think that's an issue that I'm sure we would get to, I mean, the only evidence of those would be the invoices,

testimony regarding what they might say clearly would not be admissible. Good morning, Your Honor. Scott Cousins and Sean Bernanke on behalf of Trevor Milton, who is in the courtroom, Your Honor. It's identified on the debtors exhibit list. We had a meeting confirm. We tried to agree to avoid bringing Mr. Milton in, but we just couldn't reach an agreement. He will testify that the fees are paid.

They're entitled to cross-examine him. We believe that satisfies prima facie evidence that has to get rebutted. The court can rule on it as appropriate, but it is identified as I think it's the debtor's last exhibit, and we just can come to an agreement about admissibility. Okay. And I will add, his testimony is going to be limited to just what's in the proof of claim, and the debtors can, in the committee can cross-examine on it. Thank you very much.

Thank you. Thank you. We're previewing this issue now to avoid, you know, this circus of Mr. Milton going to come up and try and substantiate more than $70 million of alleged professional fees that have been paid. He shouldn't be allowed to show up today and offer testimony to attempt to do so without supporting documentation. We believe it's wholly inappropriate and prejudicial.

The one thing that they have provided thus far, just to give you a sense of the game that are going on are to the committee they provided pages of the Cahill invoices as you may have seen from the exhibit Cahill is a quite a bit of money allegedly and it's pages and pages and pages however every single time entry is completely redacted as to render the the provision of the these invoices wholly irrelevant to the ability to do anything with them. And so, again, to ask us to on the fly be able to comprehend what he's going to tell us, to not be able to take in, to not be able to analyze, especially when, you know,

this request has been pending for two months and we show up at trial, it seems like something else is going on here. Okay, well, we'll get to that. We'll cross that bridge when we come to. Of course, yeah. Of course. Two other objections are also unresolved. The LEED Securities Class Action Plaintiff objection, docket number 909, that takes issue with the Plans classification treatment of their claim in Class 7. and then the individual shareholder objections, including a number of informal objections that were listed on the initial agenda.

I don't have the updated docket number. I apologize. The initial one was docket 969 as responses and objections items Romanette 3 through Romanette 9. And then also the Scudder objection, which is docket number 904, taking issue with various plan confirmation. issues. Turning to the first order of, I guess, real business is to move into evidence the declarations that are going to be providing the evidentiary support for today's hearing. The first declaration that we'd like to move into evidence of the Young Declaration, Your Honor,

that appears at docket number 952. And again, we appreciate the accommodation of allowing Ms. Young to appear remotely at today's hearing. We ask that that declaration be moved into evidence. Okay. Does anybody object to the admission of Ms. Young's declaration in support of confirmation? Okay, I hear no response. The declaration is admitted.

Is there anybody who wishes to cross-examine Ms. Young? Okay, once again, I hear no response. Ms. Young, thank you for appearing this morning. I appreciate it. Thank you so much, Your Honor. Good morning, Mr. Fox. Good morning, Your Honor. May it peace of court, Tim Fox on behalf of the United States Trustee.

just to preview issues with respect to the unresolved items in the U.S. trustee objection, I did identify that my office would like to move into evidence Nicola Corporation's bankruptcy schedules at docket item 203. I just wanted to preview that we'll be using information from docket item 203 in connection with some of Ms. Young's testimony, so I thought this was an appropriate time to identify that item for the court. Okay. Thank you. And Your Honor, just so you know, we will not have any objection to doing that. we understand what the purpose of that is going to be. Okay, thank you, Mr. Morrison.

The next declaration, Your Honor, is the Rowan confirmation declaration, which appears at docket number 958. Mr. Rowan is in the courtroom today and available for cross-examination. If none, we'd ask to move to admit that, so declaration into evidence. Does anybody object to the admission of Mr. Rowan's declaration in support of plan confirmation? Okay, I hear no response. It is admitted. Does anybody wish to cross-examine Mr. Rowan?

Okay, I hear no response. Thank you, Your Honor. This is going to be a bit tedious, but I'd like to do Mr. Worthen's declaration just one by one. I think that makes sense. Yeah, no, that's fine. Okay, I apologize. First, the SEC classification memo declaration, which appears at target number 796-1. As I indicated, Mr. Worthing is available for cross-examination.

If none, we'd seek to move that in its evidence. Okay. object to mr. worthens or the admission of mr. Worthen's declaration that appears at docket number 796 dash one okay here no response it is admitted next is the Reyes action classification memo declaration from mr. Werthen docket number 804 dash one again he's available for cross-examination if no objection for cross-examination we'd like to move that in evidence does anybody does anybody object to the admission of mr.

Worthen's declaration that appears at docket number 804-1 I hear no response that is admitted next is the Worthen shareholder securities claim classification memo declaration which appears at 820-1 if no objections like to move that does anybody object to the admission of mr. Worthing's declaration that appears at docket number 820-1 I hear no response it is admitted thank you Next is the Worthing confirmation brief declaration which appears at 957. No objections request to move that into evidence. Does anybody object to the admission of Mr. Worthing's declaration that appears at docket number 957?

Okay, I hear no response. It is admitted. Thank you, Your Honor. And finally the Worthing Milton Claim classification memo declaration which appears at docket number 808-1. Okay. Subject to the ability to cross-examine, does anybody object to the admission of Mr. Worthing's declaration that appears at docket number 808-1. Mr. Cousins. Good morning, again, Your Honor, Scott Cousins on behalf of the Chairman.

We don't object to the admission, but we do in the question of him. Okay, very good. Thank you. And, Your Honor, one thing, we are going to offer Mr. Worthing for some supplemental direct examination. Okay. I propose that we do that first, and then allow Mr. Cousins. to do cross-examination so that he could listen to the testimony and then cross on that,

plus anything else he'd like to cross on with respect to the declaration. Okay, very good. It seems like a more efficient way to do everything. I agree. I agree. And with that, I'll invite Mr. Connolly to come up to the podium and call Britt and Worthen to the stand. Okay, very good. Mr. Connolly, it's a pleasure to have you here.

One thing that I'm forgetting is before we have the witness on the stand, we'd like to just go ahead and move our exhibits, certain of our exhibits, into evidence. Move in exhibits 1 through 37 and 39 through 52. Okay. Does anybody object to the admission of debtors' exhibits? one through 37 and 39 through 52 in support of claim confirmation mr. cousins your honor I'm sorry to stand up no objection I guess I could have shouted that from the table no that's fine that's fine good to have you at my podium

good thank you those exhibits are admitted thank you mr. Connolly good morning your honor pleasure to be here yes pleasure to have you for the record Rockmont Connolly Pillsbury for the debtors As Mr. Morse mentioned, we are calling Mr. Worthen up for supplemental direct testimony. Okay. Mr. Worthing, could you remain standing, please? Thank you. Good morning.

Would you please raise your right hand? Do you affirm that you will tell the truth the whole truth and nothing but the truth to the best of your knowledge and ability? Yes. Would you please state your full name and spell your last name for the record? Thank you. You may be seated. Okay. Mr. Connolly.

Good morning, Mr. Worthing. You stated your name for the record. Could you please state your current position? Yes, I'm currently serving as the chief legal officer of Mekula Corporation. How long have you served as the chief legal officer? About 10 years. What are your primary responsibilities as chief legal officer? As chief legal officer, I'm generally responsible for all legal matters at the company.

So would that include staying apprised and keeping up to speed on legal matters involving the company? so pending proceedings? Yes. And as part of your responsibilities, did you have any role in the engagement of outside counsel? Yes, I did. And did you generally review invoices from outside counsel? Yes, I did. Are you familiar with the claim filed by Trevor Milton in these Chapter 11 cases?

I am. And are you aware if the debtors are seeking to equitably subordinate that claim? That is my understanding, yes. We've all done it. We've all done it. Stock our fridge with good intentions only to sacrifice nutrition for consumption. convenience. Keep your body and mind nourished with whole-body meal shakes from Kachava. It's got 25 grams of protein, 6 grams of fiber, greens, and so much more. But it actually tastes

delicious. Try one of Kachava's indulgent flavors today. Shop now through December 2nd to get 30% off your first purchase of two or more bags. Go to kachava.com and use code news. That's k-A-V-A-V-A-com code news. Who was Trevor Milton in relation to Nikola? founder, largest shareholder and CEO, and then changed to the executive chairman when the company were public. And are you aware if Mr. Milton was alleged to have made any false or misleading statements to investors or the public about Nicola?

Yes, I believe there were allegations related to the statements made by Mr. Milton in the veracity of those statements. So I don't want to get into the content of those statements, but I want to talk about the fallout of those allegations. So Mr. Worthing, are you familiar with a Hindenberg research report involving Nikola? I am. And can we talk about that, I guess, just starting from the basic question of who's Hindenberg research? Hindenberg research is a short-seller report that at various times targets different companies. It was led by an individual named Nate Anderson. We came to find out. He published a report about NICLA in September of 2020 time period.

And can you describe from a very high level the nature of that report? The general headline of the report is that Nicola was a fraud, but the contents of the report went on to make certain allegations related to various public statements that Mr. Milton had made in a social media account and other things. And so following the report, did any regulators, the SEC or the DOJ, take any actions with respect to Mr. Milton or with respect. respect to Nicola? Yeah, following the report, Nicola actually engaged counsel and to receive advice on how to actually deal with this. They thought it was best that we actually reach out to the SEC and the DOJ to tell them that we were doing our own internal investigation.

At the time that they had reached out, our counsel was told that the SEC had already begun an investigation on the company related to some of Mr. Milton's social media. and then shortly thereafter, we received subpoenas from the Department of Justice and the SEC, and an investigation ensued. Okay, and do you recall who your outside counsel was for that matter? That's Kirkland and Ellis. So let's start with the SEC. So the SEC served you with the subpoena, you said, right?

They did. And do you recall the nature, what is your understanding of the nature of the SEC's inquiry? The major of the SEC's inquiry was to determine whether or not any of the outside. allegations that were leveled in the Hindenberg report were accurate, whether or not NEPLA was, in fact, a fraud, and whether or not there was truth or not not truth to some of the statements that had been made by the company's executive chairman at the time. And did the investigation culminate in any formal proceeding or enforcement action?

It did. The company ended up settling with the SEC, I believe, in December of 21. Did you recall the settlement amount? It was about $125 million. And as of the bankruptcy petition date, do you recall how much of that had been paid? I believe approximately $45 million are paid. So if my math is correct, that would mean $80 million or so remained unpaid. Is that correct?

That's correct. Did Nicola face any litigation from shareholders or investors or other stakeholders? Yes. Shortly after the company had received the subpoenas from the SEC, and the DOJ, and those were made public. We received service of lawsuits as it related to securities class action and derivative actions based basically on the same allegations that had been raised in the Hennepard report related to statements made by Mr. Milton. And do you recall, did NICLA hire outside counsel in connection with those lawsuits as well?

We did. Who was your outside counsel for that? I would say counsel for both the derivative and class action. eventually landed at Paul Weiss. We originally had Kirkland helping on that, and then we transitioned to Paul Weiss. And then you mentioned also a Department of Justice investigation. Can you just describe your understanding from a high level of the nature of that investigation? Yes, it would have been the same as the SEC's investigation.

So the DOJ and the SEC were working in tandem. They weren't really two separate investigations. They were, when there were witness interviews, both the SEC and the DOJ would attend. And so the nature of the DOJ's investigation. was the same as the SECs. They were looking into allegations of fraud and misrepresentation at the company. And did you hire separate outside legal counsel for that investigation? We did not. It was the same counsel. Kirkland and Ellis represented the company in both investigations from the SEC and the DOJ. So in your role as Chief Legal Officer, you received invoice – invoices, I assume, from Kirkland and Ellis and Paul Weiss. Is that – is that right?

That's correct. And Nicola incurred, would it be a fair characterization to say significant legal fees in connection with those proceedings? Yes. Do you recall the amount? Yes. I think the amount was quantified as part of an arbitration proceeding that was eventually adjudicated in 2022 and then confirmed by a federal district court in Arizona. That amount is about $46 million. dollars.

Moving on, are you aware of any arbitration proceedings between Nicola and Mr. Milton? Yes, there were two. One I just mentioned, which was brought by the company at the direction of the company's board against Mr. Milton for breach of fiduciary duty, and the other one was a fee arbitration as there was a dispute as it related to the advancement of fees and the reasonableness of those fees that were being incurred as part of Mr. Milton's defense. Okay, so there were two arbitrations. I want to focus for now on the breach of fiduciary duty arbitration.

So you said Nicola brought claims in an arbitration proceeding against Mr. Milton. Can you describe from a high level the basis of those breach of fiduciary duty claims? Sure. The gist of the claim was that Mr. Milton's conduct related to certain things he was saying. in social media via his own social media account or whether it be on a podcast, we're not in the best interest of the company. In fact, we're made in bad faith and we're a breach of his duty of loyalty and care to the company. And do you recall how the arbitration panel ruled on those claims?

Yes. The three-judge arbitration panel ruled in favor of the company, finding that Mr. Milton was 97% responsible for the harm that he had caused as a result of his breach of fiduciary duty. And did the arbitration panel grant Nica any monetary remedy? Yes. The arbitration panel granted a total award of $167 million related and broken down to $466 million of that being approximately from fees and cost incurred related to professionals that the company had to engage

as fallout from Mr. Milton's conduct, as well as the $120,000. $25 million settlement that the company had entered into, both of those numbers at a 97% amount. Just to keep the record clear, the $125 million settlement was with the SEC, right? That's correct. So in connection with the breach of fiduciary duty arbitration proceeding, did Nicaa hire outside legal counsel? We did. And do you recall who outside counsel was for that matter? Yes, it was Caswitz, Benson & Torres.

And do you recall approximately the amount of fees that Casowitz incurred? Yeah, the arbitration proceeding that was handled by Casowitz cost the company about $11 million. Do you recall when the SEC and DOJ investigations became public? Yeah, I believe it was shortly after the company had received the subpoenas, which would have been, you know, October time period of 2020, the company had an obligation to, as a publicly traded company, to report all material matters that a reasonable investor would want to know and the disclosure was made. Does that mean that you would have had to have filed an SEC filing disclosing the outstanding

investigations? Is that fair? Yeah. And I can't remember exactly. It either would either would have been a standalone filing or it would have been as part of an upcoming 10-Q that was filed with the company because it would have been right around third quarter. And around that time, we're following that public disclosure. How did Nicholas stock perform? Not well. Yeah. stock took a significant hit, not only as a result of the disclosure of the SEC and the DOJ investigation, but continuing activities in conduct continue to put a downward pressure on the stock price.

And based on your recollection, did these events, you know, the public disclosure of the SEC and DOJ investigations, and then the down, you know, the dip in the stock price, did those, did those events have any impact on Nicholas operations? Yes. As a result of the DOJ and the SEC investigations and the continual news about Mr. Milton's indictment and eventual conviction, the company faced significant headwinds. The company lost partners, company lost professionals. The company – the company's ability to raise capital was significantly hindered. The cost of capital went up. insurance costs went up. There were significant, significant problems. We had various parties that we'd entered into term sheets with that had stepped away from those agreements because of concerns about the allegations.

So I want to expound a little bit on that. You talked about partners. Do you have any specific examples in mind? Sure. The company had publicly disclosed a deal that it had entered into with General Motors, where it was going to jointly develop fuel cells or buy fuel cells from GM batteries. GM was going to take a significant stake in the company. It was a several billion-dollar transaction.

That was announced before. All of this came out. Then after the ICC and the DOJ investigation, GM stepped away from that deal. We were – – – sorry, let me – police finish you. I mean to cut you off. Sorry about that.

I was going to move on to a separate one if you were going to ask me about that. In your recollection was that with the partnership with GM, was that expected to be valuable for the company? Oh, for sure. I mean, GM was a – I mean, is a household name, and their investment in Nikola and partnering with them on technology would have allowed us to build trucks at a cheaper cost. We could have gotten to scale faster. And so it was a significant partnership that the company was excited about that evaporated as a result of these investigations. Do you think that partnering with the household names you put it would be good for brand value? Absolutely.

For sure. Okay, so we talked about GM. Do you have any other specific examples in mind? Yes, we'd entered into an agreement also with Republic Services to work on a refuse truck. Similarly, as a result of the DOJ and SEC investigation, they had backed away from that, not publicly disclosed. At the time, we had been having conversations with VP about doing a partnership related to energy. and producing hydrogen and hydrogen filling stations. Those conversations evaporated.

We also had been in very lengthy and deep conversations with Amazon about truck purchases. Once this hit, those went away. And we tried repeatedly to get them back to the table to have a conversation. They would never talk to us again, despite repeated efforts. And just to clarify the record, is BP, does that mean British Petroleum? Yes, thank you. And, you know, like the GM relationships, Were these potential partnerships expected to be valuable for the company?

Absolutely. Otherwise, we wouldn't have been pursuing them. So you talked also about other relationships. I think you said with advisors. Can you elaborate on that a little bit? Sure. I mean, we had been using Morgan Stanley as our investment banker. They had helped us through the public IPO process.

Because the IPO had gone so well, we were in discussions with Morgan Stanley to go back out the market to raise more money. Raised money was the lifeblood of the company. We weren't producing vehicles yet. We didn't have any revenue yet, and so we were depending on additional proceeds, either equity or debt, to kind of help the company along

and continue and finish out its development of the products. And so what the plan was to go back to market immediately, this hit DOJ and SEC investigation. There's no raising money while that's pending. Nobody will talk to you. So we had been working with Morgan Stanley. They said that they could still potentially help us out, but eventually they told us that their committee would not approve working with NICLA going forward.

So we lost our investment banker as a result of this. We lost our bank. Our bankers even told us they wanted us to move their money. And we had, frankly, hundreds of millions of dollars apart from the IPO with the bank. Bank said, get out, go find another bank. So in your capital raising efforts, would you normally have relied heavily on an investment banker like Morgan Stanley? Yeah, absolutely.

I mean, they have the relationships with the potential investors. I mean, they're significant and who you hire as a banker. You're relying on them to be able to generate the interest in what you're trying to do from the money raised, be able to communicate, you know, the company's value.

And so having the right investment banker is a critical piece. Morgan Stanley has a very good name, particularly in the vehicle investment making space. Losing them as a partner was difficult. Would you say that losing an investment banker precluded you from raising additional capital? I don't know if that's a fair statement. I mean, you can always go and try to get with other investment bankers, and we did eventually.

But what you're left with, particularly after the negative publicity that NICLA had borne was raising capital in less than ideal circumstances. The company needed money to continue to operate. And so then at that point, you're having conversations with very expensive money partners that put terms to you that are less than ideal because you need the money to keep the company float, to keep people employed, to keep development going, and it's a tough cycle. So I want to talk about the final item that you mentioned, which is insurance premiums. Can you elaborate on that? You said that your insurance premiums went out, I believe, right? It did. I mean, D&O coverage, any other coverage for the company, given the history of the company, it got expensive. D&O coverage during that time was already expensive. It was that we were already seeing historical highs, but when we went to re-up policies, it was millions more.

So, all right, I appreciate that. To wrap it all up, so the SEC and DOJ investigations were linked, as you testified, to statements Mr. Milton made to the public about Nikola. Is that a fair characterization? Yeah, I think that's fair. I mean, it was born out of the Hindenburg report that came public, and then there was a direct inquiry by the SEC and the DOJ. Like I said before, though, when we had come to the SEC, because the goal, when you're under investigation, or when something like this happens, at least this is what I learned from counsel, the goal is to get to the SEC and DOJ first, kind of self-report, say we're going to do an investigation,

we're going to get to the bottom of this. When we went to the SEC and said, hey, you know, we're coming to you hat in hand. We're going to get to the bottom of this and figure out if there's any truth to any of these allegations in the Hindenburg report. The SEC said, not so fast. We're not going to give you credit because you're already under investigation. You just didn't know it. We've been following you guys for a while based on statements that Mr. Milton would have been making in the public. Okay.

And just to wrap it, we talked about, you know, penalties and fees. It's fair to say that the SEC investigation, the DOJ investigation, were bad for the company's balance sheet. Absolutely. I don't know how they could be good. They were devastating. We talked about $45 million out the door to pay the SEC fine, right? Yes, that was what has been paid, at least as the filing of the bankruptcy of the $125 million. And I think you mentioned a similar amount about $46 million for advisor fees and connection with those proceedings?

Yeah, I mean, that was up until the date of the arbitration award. But, you know, we continue to incur costs as it relates to, at least we did prior to bankruptcy. the class action litigation and the derivative litigation and then you you also mentioned fees payable or paid to Casowitz about 11 million right that's right to bring the arbitration to try to recover from mr. Milton so if I if my math is right that you add those numbers up the amount paid to the SEC the amount paid to the amount paid to Kerskowitz brings you over a hundred million about right I think that's about right no no further questions but like

the reserve for redirects yes mr. Brenneke good morning welcome good morning your honor thank you for allowing this morning Sean Brennick Lewis Brisboy representing Trevor Milton yes please do good morning good morning we even had the chance to meet that as I introduced myself to his honor my name is Sean Brennick and attorney who was Bruce Brze boy representing Trevor Milton nice to meet you pleasure you testified on direct that some of your responsibilities as the chief legal officer were to generally oversee all the legal matters for the company.

You have that generally correct? Yeah, I believe that's what I testified. And does that include making sure that public statements are complete and accurate? To the extent that I was aware of those statements, yes, we would always want to make sure that anything that was said by the company was complete and accurate. Michael is a Delaware corporation, right? It is. And you're aware that both Delaware law and federal securities law require companies to have a level of controls in place to the board level to make sure the information is correct and accurate.

Sure. Testified a bit about Mr. Milton's proof of claim in the case here. And you're aware, are you not that the debtors, arguing that Mr. Milton is not entitled to indemnification. Is that correct? I believe that's one of the arguments that's been made, yes. And that is in part because the indemnification issue had already been determined. Yes, I believe you're referencing the arbitration award by the three-judge panel that was confirmed by the federal court. in both documents the federal court and the panel determined that based on

mr. Milton's conduct that indemnification is not wanted do you have the two the binders of the debtors council vote up to no books oh certainly I'm going to ask you to turn to exhibit ten is that tab ten of tab ten yes I believe the debtor's memorandum of law in support of the debtors chapter 11 liquidating plan regarding proper classification of the Milton claim pursuant to section 510c bankruptcy code and objection to the Milton claim that the yes I see that thank you and I will note that exhibit 10 tab 10 here has been filed under seal so I will ask you the questions I will ask you I'm going to try to avoid having me testify as to anything that was redacted and put in the public record. But I'm sure my colleagues here will correct me if I go over that line and tell me that I'm going too far afield. Do you recognize this document, sir?

I do. Did you have any involvement in putting this together? Not really. Counsel did that. I had an opportunity to review it and provide comment. but given the fact that it was a legal memorandum it was handled mostly by counsel. I apologize for it. No, you're fine.

And you submitted a declaration attesting to the accuracy of the information in here. Is that correct? That's correct. And I believe that's Exhibit 11. Yes. Bear with me for a second here. I want to make sure that I have the redacted version of this as well, and that's Exhibit 20. the redacted public

so I'm going to ask you if you can to put both of those side by side I both say sealed are they okay I see it I correct here that on page 30 paragraph 101 at the last

line there this is where the debtor is talking about the indemnification amounts of already been found to be unreasonable and should therefore be disallowed. Do that that correct? You're referring to page 30, paragraph 105?

101. I'm sorry. It starts on page 29. Okay. For simplicity, I'll strike that and I will ask you about paragraph 105. If you just read that, my question is simply going to be, in this paragraph, the debtor is saying, confirming what you would just testify to that the claim for indemnification is precluded because of the arbitration award that was issued.

Is that right? Apologies. Are you referring to paragraph 101 or 105? 105. Okay. Nothing on 101. Okay. Turned to 1.

Yes. It references the determination in the arbitration proceeding that talks about their ruling that Mr. Milton is not entitled to identification. I believe that's what the award says, yes. And if you can look at footnote 6 on page 29, this, I will caution you this has a redacted portion. So I'll only ask, I will do my best to only ask you a question about the unredacted portion.

Yes. So if the arbitration provision, if the arbitration award had precluded a claim for, denification, but isn't that contradicted by footnote 6, which says that NICLA's request in the NICO breach of duty arbitration proceeding to recover and it was redacted out, was denied without prejudice to resolution of such issues in the Milton Fee arbitration following the resolution of the federal conviction. So doesn't it stand to reason that the issue was actually pushed down the line

until after the resolution of the federal conviction process? I don't believe so. The arbitration award clearly says that there is no indemnification. That's a clear statement in there. My interpretation of what the panel was trying to do was to set aside the separate advancement issue on the Cahill fees that had already been advanced, and they were letting that be

and therefore not bringing that in. So advancement, my interpretation of what I thought the panel was trying to do was there was a difference between advancement in that instance and kind of indemnification endemification going forward. And you understand that the basis for Mr. Milton's proof of claim here is right to indemnification, right?

Yes, I believe that is the underlying basis for his proof of claim. So you would mention what your interpretation of the Arbitration Award is. I'd like to turn to see what the actual award says. And this is another situation where we have a document that was filed confidentially and then a redacted version. The confidential version is Exhibit 15, and the redacted is Exhibit 25. You could pull both of those. I'm sorry.

I do. Thank you. Sorry about that. Turning to page 79 onto 80 and I'll ask you, sir, to look at the unredacted Exhibit 15. My questions will be general, so it's not to reveal any of the company

page 79. Review those pages. Did the arbitration panel reach any decisions about Mr. Milton's right to indemnification? It would be a yes or no, I believe you'd have to disclose what's in the confidential information. Yeah, sorry, what's the question you're wondering? Did the arbitration panel here render any decisions about Mr. Milton's right to indemnification? Yeah, I believe I previously tested.

This is not – I'm not trying to get at what his understanding. understanding is, Your Honor. I'm trying to get out what the panel actually came out with. You can argue that. Yeah, I guess, and I invite your response to the... You've finally broken loose from work. Three friends, one tea time, and then the text. Honey, there's water in the basement. Not exactly how you pictured your Saturday.

That's when you call us, Cincinnati Insurance. We always answer the call, because real protection means showing up. even when things are in the rough. Cincinnati Insurance. Let us make your bad day better. Find an agent at CINFIN.com. Testified earlier that there were two arbitrations pending. The first was a breach of fiduciary duty arbitration that Nicola brought,

and there was a second, but I think counsel would only focus on the breach of fiduciary duty arbitration. I'd like to ask you about the other arbitration. What is your understanding of that? Yes, that arbitration actually was originally brought by Mr. Milton against Nicola because there was a dispute about the reasonableness of Cahill's fees. And so there was repeated conversations between myself and Mr. Milton's attorney, Brad Bondi at Cahill, about the size of the legal. bills that we were getting and under the indemnification agreement I believe the

company did have an obligation to advance fees but it said specifically that the company had an obligation to advance reasonable fees and so the company was taking issue with the reasonableness of Cahill's fees and so while we were disputing that there were several months that bills went unpaid to Cahill Cahill filed the arbitration to request payment. The issue was never about whether or not, at least from Nicholas' position, whether or not Mr. Milton was entitled to advancement. That was in the agreement, and we had said that. The issue was always about the reasonableness of the fees that were being incurred

by Cahill. Literally millions and millions of dollars a month. And so we had an arbitration proceeding that was in Arizona under the AAA, three-judge panel. We had argued that $18 million dollars of the fees were unreasonable. I think the panel came back and said that 17.2 million of the fees were found to be unreasonable. They basically found in our favor on the unreasonableness. So that, that arbitration, what is the status of that arbitration, by the way? I mean, nothing has happened in that arbitration for multiple years. Stayed, is that correct? I don't know about stayed. We had a ruling. The parties can go back at any time to the extent.

I believe that there is still any issues with bills, but no, no, no, but no, but no, bills have ever been put back in front of that panel for years. The arbitration is still pending that's just state. Is that right? Like I said before, I don't know if that's accurate. I think it's – the panel had reached out at one point to determine whether or not it could be closed. And I think the Parsi's potentially had said you can leave it open to the extent that anybody is going to bring bills, but nobody has brought any bills or any issues before that panel for a couple of years.

Do you understand that the reason for that is the automatic stay imposed by the filing of the bankruptcy? The reason for what? The reason for the stay or the lag in the first arbitration. I am generally aware of the automatic stay, but I don't believe that's the reason why nothing has been put in front of that panel in a couple of years. Could I ask you to turn to Exhibit 28, please? I'm there. And this is the second amended combined disclosure statement in Chapter 11 plan of liquidation of Nicola Corporation and its debtor affiliates. Have you seen this document?

I believe I have. There's been a lot of filings in this case. I think we'll actually make an effort to interview everything, so I'm sure at one point I did review this document. Do you have any questions? You can turn to Exhibit 30, which is a declaration. I believe the title says it's in support of this. Okay. Does that help you with whether you reviewed this?

Yes, like I said, I believe I had reviewed it. All right. In Exhibit 28, you could turn to page 34. I'm going to direct your attention to the bottom of page. Last paragraph. Can you see that? I do. And doesn't this say that it's the Milton fee arbitration,

which, Do you understand that to mean that that's the arbitration that Mr. Milton filed that we've been talking about as the first arbitration? Yes, I believe that's right. And that that stayed remains stalled and subject to the automatic stay, right? I'm not disputing that. I thought the previous question was, you know, the reason why there hasn't been anything put in front of that court for the last two years was because of the automatic stay that was recently

issued by this, by this court. I guess my testimony was trying to clarify that that's not my understanding of the reason why nothing has been done in that arbitration proceeding for years. I testified a bit about the SEC investigation and specifically the investigation that it started into NICola. Do you remember that testimony? I think your testimony was that the nature of that inquiry was whether the allegations in the hinders, Bloomberg report were accurate and fraud and truth of the statements that Mr. Milton made. Is that correct? It was a high-level generalization, but I think that's generally accurate, yeah.

I'd ask you to turn to Exhibit 7. I'm there. So if we turn to page 2, step back. Do you recognize this document? I do. This is the titled Order Instituting Cease and Assist Proceeding, pursuant to Section 8A of the Securities Act, 1930. in Section 21C of the Securities Exchange Act 1934, making findings and imposing remedial sanctions and a cease and desist order.

Is this the document that Nicola entered into to resolve the SEC investigation? Yes. And you reviewed this document? I have. If we turn to page two, paragraphs 1, 2 and 3, isn't it true that the, inquiry that at the SEC was investigating in the subject this order was not limited to the truth of statements that Mr. Milton had made, but also included Nicholas violations of federal securities rules pertaining to the implementation and the maintenance of controls and procedures.

Yes, I would agree that the document includes not a only allegations about, like it says in paragraph two, that Nicola primarily misled investor through scores and misrepresentations by its CEO and later executive chairman Trevor Milton. There is other allegations in here as it relates to company conduct, but I would also add, one, that you're given this document by the SEC and not given any opportunity to make any revisions to it. It's a take it or leave a document, given that they tell you. it's on a no-admit or deny basis.

Two, while the company disagreed specifically with specific things related to things that the SEC took issue with in the company's filings, the company has never restated, never changed, never had to correct a financial statement based upon its disclosures. I guess the answer to my question then was that the SEC investigation wasn't just limited to the truth of statements that Mr. Melville. Yeah, that's correct. And I don't believe I testified previously that that's the only thing that it was about. And if we turn to page 5, paragraph 19, the SEC here finds that that NIC did not have a process in place to ensure that information published by Milton was communicated to management. As the general counsel, wouldn't that have been within your scope of responsibility to make sure that that that was. was in place? Yes, I would agree with that and I would

disagree with this statement by the SEC. We did have a process in place. We had asked Mr. Milton to have his social media reviewed. He had refused. The only time that Trevor came to me and asked me to review pieces

of his social media was when I had to do something related to the SPAC filing or something related to our public offering, which frankly none of those were ever considered inaccurate or were the subject of the investigation against Mr. Milton. If it had to do with anything about vehicle technology, the advancement of our fueling, any of those other things, Trevor never would have, nor did he ever come to me about those types of things in his social media. He was considered the expert on those, not me.

And despite our requests not only from me, but also from the CEO at the time, Mark Russell and Ken Brady, the CFO, at the the time. We couldn't get Mr. Milton to comply with that. He was posting things on social media. We had asked the media team to alert us to any issues that they were aware of. Occasionally they did, and when they did, I would raise those issues with Mr. Milton. But as we came to find out in the Hindenburg report, there were a whole bunch of things that we were never aware of, and that apparently the media department didn't know were issues. So there were things that the SEC includes in this cease and desist order that don't pertain to things about Mr. Milton, including misleading pictures and statements about refueling capabilities, hydrogen stations, the ability to produce electricity. All of those things are included in here, correct, without involving states.

statements pertaining to Mr. Milton. Your Honor, you may be heard just briefly. This goes back to my issue with this whole sojourn into these questions. We made a point to tee up today's proceedings what I would characterize as the right way. We filed our plan, we filed our disclosure statement approval of that we filed our memorandum of law seeking to equitably subordinate

mr. Milton's claim on July 29th 2025 the objection that we got back did not take issue with raise this comparable false theory that is trying to be manufactured in front of our eyes, which we don't understand the basis for in the law and believe is quite a waste of the court's time. We continue to object and we've been very patient with the witness this time who traveled here from Arizona to support confirmation. But I think enough is enough, and we'd like to close this portion of the the proceeding and move forward with the rest of our confirmation hearing.

Mr. Barney, I can certainly appreciate their desire to close this portion. I would suggest, though, that, Your Honor, that they are seeking to subordinate this claim on equitable bases, and they have painted a picture throughout the course here of these proceedings as to all of these actions that Mr. Milton had taken. and how he did all of this and actually, on direct, it was all the testimony about how Mr. Milton's actions caused all this harm and how he'd done all of this. What we're doing, Your Honor, is in an equitable position.

Your Honor, she needs to consider all the factors. Everything that's going on. Okay. This might be a good time to talk about, you know, what I think the relevant evidence may be regarding the equitable subordination issue. The argument for equitable subordination is based upon the conviction for which Mr. Milton subsequently was pardoned by President Trump, and it's also based upon the arbitral rulings that were affirmed and made an order of the district court. It just seems to me as a matter of issue of inclusion, I can't and won't revisit what the

what the court found and what the jury found in the criminal proceeding, nor the findings that were affirmed by the district court in Arizona. You know, as a general matter, I mean, I think I understand, I think I understand where you're going, but also you're raising issues that could have been raised in the two plan objections. and wasn't raised there and I'm struggling to determine why they aren't any new objections I haven't been waived plan objection point your honor may have a moment to consult my colleague oh of course please do please take them thank yes

thank you for the patient's yes sir sir sir right certainly your honor this is not a part in the objection it's under rule 510 C and it's asking for it to consider all of the relevant factors and The witness had testified to one of the arbitrations and got into some detail about that, so we're partially exploring that. And then there was a mention of the second arbitration, but nothing there. And that is the basis, or one of the basis for the equitable subordination, and then to some extent also the flame disallowance.

So we would ask, Your Honor, to allow us to continue this to show what actually was going on in that arbitration, exploring the testimony and discussing the arbitration that wasn't covered. Mr. Morris. Your Honor, the other side appears to be attempting to craft an argument about comparable faults. The main arbitration panel, as you are well aware, after many witnesses, I think the proceedings went on for nine or ten days, found that Mr. Milton was 97% that fault. And we're going to litigate that and talk about the SEC order

and things like that. Yeah, that was the question I was going to pose. It seems to me that the arbitral finding was that there was 3% fault of the company. And that's an issue, or it's a fact that is, is before the court and I am bound by. So I appreciate the point that you're trying to get to, but I think it's already been established and nothing that Mr. Worthing could testify to

would cause me to take the improper step of revisiting issues that I'm precluded from revisiting. And as, if I may continue, Your Honor, and as to this other fee arbitration, as you recall, this is the same fee arbitration that they attempted to obtain relief from the automatic stay in order to restart after, have been long dormance. Our position, and this is more argument for later, is that once the arbitration panel had ruled that, Mr. Milton was not entitled to indemnification,

and then the district court affirmed that on page four of Exhibit 50, which Mr. Worthen also confirmed through his testimony, that of course nothing happened because Mr. Milton knew that he wasn't entitled to any indemnification, notwithstanding apparently that he had paid $40-something million. If he was entitled to this indemnification, you know that if I'm coming out of pocket $40 million, that I'm going absolutely back to that panel every month as I'm stroking checks,

and I'm going back to the company if I think that I have a right. I mean, actions speak louder than words. Your Honor, I think counsel was correct when you started that that's for argument. That's certainly an argument here. But I think he missed one point in that he's presuming there was a decision on the right to indemnification that wasn't the case under the arbitration award that right and that's something that that that I can read the documents and interpret it and there is no there's no amount of outside or extrinsic evidence that

would inform my my reading of the arbitral ruling so you know where does that leave I don't think that the, you know, what I agree is a line of questioning that seems to be going at the relative fault of Nicola as opposed to Mr. Milton is at issue because it's already been determined. So I don't know that it's necessary or really relevant to pursue further line of. questioning going to that issue because again I think it's issue of preclusion I'm bound by it there's nothing nothing new that I can learn okay thank you mr. Brennan just a few more questions and this goes to your testimony you talked about the agreement with General Motors yes right and then I think your testimony was that that was harmed as a result of the

SEC investigations yes that was that was also there were other aspects to the General Motors issue right not just those investigations what you're talking about you had also testified that

the other shareholder suits were also borne out of the statements by Mr. Milton right? Yes like we had discussed earlier there were also other bases for those right? Yeah they brought other allegations

in those class action and derivative actions, yes. Yes, certainly. Mr. Detwey. May it please the court, Donald Detweiler, on behalf of Mitsubishe, H.C. Capital. Your Honor, I have another matter and asked to be excused. I thought you were rising to ask to be excused. And my counsel is on as well.

We both ask to be excused. Certainly. Okay. Have a good weekend, Mr. Lerner. Yes, thank you. I mean, you too. Thank you. Your Honor, I have no further questions.

Okay. Thank you, Mr. Brown. Mr. Connolly, any redirect? Which is that? This is what, is a part of here is grabbing me. Very inappropriate, am I done? I have good news, which is that pretty much everything I had for redirect has been addressed. There's just one point, one single question that I want to clarify.

On direct, we talked about the Milton Arbitration Award. Do you recall that? Yes. That hasn't been collected yet, right? That's correct. That's not been collected. Okay. No further questions.

Okay, thank you. Based upon that question, any more recross, Mr. Brennick? No, Your Honor. Okay. Is there anybody else who wishes a question of witness? Okay, I hear no response. Mr. Worthing, you are excused, sir. Thank you, Your Honor.

Mr. Baddell? The benches can jump out at you. Your Honor, I just wanted to make a quick statement. I hope it's an obvious point, but there was some testimony both on direct and cross-examination about certain statements that members of the SEC staff may have made. We are not a party to this dispute, so we are not raising evidentiary objections. I just wanted to point out for the record that we consider that hearsay and that our silence should not be interpreted as any sort of agreement or endorsement with that testimony.

I certainly understand you. Thank you, sir. Mr. Morris. Thank you, Your Honor. For the record, Joshua Morris, for the debtors. I think that moves us to the main fireworks, I guess. confirmation our confirmation brief file the document number 959 goes through exhaustively I believe all applicable requirements and appreciate you extending our

page limit we tried to put everything into a single documents so that it would be perhaps more streamlined I guess but we believe that all applicable requirements to not only approve the disclosure statement on a final basis but find compliance with the solicitation procedures order and finally confirm the plan are set forth in that brief. Confirmation brief also addresses the reasons the debtor believes the debtors believe each of the remaining objections that haven't been resolved as I've walked through should be overruled. Debtors also believe we've met all relevant final disclosure statement approval, solicitation

and confirmation requirements have been met and a plan satisfies all of the debtor's obligations under the solicitation procedures order and sections, among others, 1125, 1126, 1129 of the Bankruptcy Code. For efficiency purposes and to say if everyone in the audience for falling asleep, I propose that we dispose of the route recitation of all the individual confirmation standards and we just sort of move straight into arguments

regarding the remaining objections and I'd like to first start with the United States trustee objection. Okay. Then I'll move into the Milton Equitable coordination objection. I'm going to handle both of those. And then we'll do the lead securities class action plaintiff objection and the individual shareholder objection.

And my colleague, Mr. Alpano, is going to handle both of those. Okay. Now, at some point, I believe that Mr. Cousins and Mr. Brendick are going to want to put on evidence in support of their objection. to confirmation. Am I correct about that? Good morning, Your Honor, Scott Cousins. Good morning.

We're not objecting to confirmation, but to the reply. Well, yeah, insofar as the plan would equitably subordinate Mr. Milton's claim. So on that issue, you do intend to put on evidence in support of your objection? Yes. Okay, okay. Why don't you think of that timing and whether it would make sense? at some point in the next while to stop for lunch and if there's going to be additional witness testimony, whether we might do that after people to have an opportunity to have a bite.

What if we were to perhaps do the U.S. trustee objection, and then I sit down and let Mr. Alfano jump up and we do the other two, and then we do the equitable coordination after the break? I think that's fine. Okay. Yeah, thank you. So the United States trustee has objected at documents – excuse me, a docket number 908 – take issue with the opt-out releases.

When we were in front of Your Honor for the initial approval of the disclosure statement and solicitation procedures back on July 21st, we were exceedingly careful to determine a release approach using an opt-out voting process for class three that we believe that was sound. That process ensured to provide members of class three with clear and conspicuous notice of the releases and a meaningful opportunity to opt out of granting them to the debtors. It also provided each of those members of that class an opportunity to object to the granting of those releases. That ability to opt out and to object, of course, was separate and apart from their opportunity

to vote on the plan. The release provisions in the plan are also structured as very limited opt-out consensual releases that apply only to the creditors who are entitled to vote on the plan, so it's only the holders of general unsecured claims in class three that received notice of the plan and its releases and that affirmatively elected not to opt out or didn't otherwise object to granting the releases in the plan. We didn't come up with this approach out of thin air. It's consistent

with the approach to granting releases and many other Chapter 11 cases in this district, including the Indianapolis Downs case, expansion, Arsenal Intermediate Holdings, and Malincrott, to name a few. And we've cited all these in our brief for your honor.

We also... Now, with ours, you cite Arsenal, of course, that was a Judge Goldblatt decision. I think it's fair to say he's reconsidered his views. Yes, I understand. We also intentionally styled it after what Your Honor ultimately approved in the Fisker case. And the goal was to provide detailed and transparent notice regarding the effect of third-party releases to the affected parties

and an opportunity to opt out or to object. The reply brief goes through the multiple avenues that Class 3 had to opt out, and showed your honor what the form of ballot looked out or looked like and we also did that in our disclosure statement reply so what did the results yield and this is what mr fox is going to stand up and take issue with but as set forth in the young declaration that's stock at number 952 class three did take advantage of the ability to opt out of granting releases 42 of the 70 class three holders that voted for the plan opted out of granting the release and that's Young Declaration Exhibit C.

In addition, 16 other holders who didn't vote on the plan, they submitted opt-outs. And that's Young Declaration, paragraph 12. We believe that this is evidence that the opt-out approach that we implemented actually worked. Our memorandum also cited, you know, Chapter 11 cases around the country that implemented similar opt-out mechanisms in a post-Burdue world. And I'm not going to go through the chapter inverse of all those because it's going to put everyone to sleep.

And I know you're very familiar with these cases. But recent Delaware cases have continued to reject similar arguments made by Mr. Fox's office, which I know you're also well aware of. And the debtor's solicitation process satisfied fact satisfied factors that are found in all of those recent cases, including, among other things, transparent and prominent notice, overwhelming creditor support, and limited release provisions as well. Based on that, we believe that the third-party releases here are consensual and appropriate and should be approved.

The U.S. trustee makes two other arguments. Number one, that there's no legal basis for the injunction, barring the claims against the non-debtors. We understand that Judge Stickles ruled in the 99-cent's store case in a very similar context, that the injunction provisions that are included in Article 12D of the plan, just merely implement the release and exculpation provisions. We believe it's appropriate here, and the injection should be overruled. The U.S. trustee also took issue with the waiver of the bankruptcy. rule 3020 stay given the timing between confirmation and the effective date which can't occur

until we have the final hearing in the chance of report which isn't going to happen until November 20th we just simply agreed to remove that and informed Mr. Fox at that yes so and with that I will pass the podium to Mr. Fox and reserve additional comments certainly Good morning, Mr. Fox. Good morning, Your Honor. May it please the court, Tim Fox on behalf of the United States trustee. So, Your Honor, I appreciate Mr. Morse comments, and again, note the 30-20 issue has been mooted by the time here, so we appreciate that. I want to start similarly to where Mr. Morse did, and that's, Your Honor, our papers reflect the U.S. trustees' position on this issue.

I know Your Honor has ruled on this in the past, so I'm not going to try to belabor the points of law, but to the extent Your Honor has any questions about the briefing or anything with respect to those arguments as applied to the facts here. Of course, I'm at your disposal to respond to those queries. What Mr. Morse and his argument outlined is that, and consistent with my earlier request to admit the bankruptcy schedules for Nicola Corporation at Docket Item 203, Mr. Morse touted that you had 70 parties that voted on the plan as well as an additional 16 that acted on the opt-out and Your Honor, the reason the U.S. trustee moved into evidence the debtor's schedule and this is that Nicola Corporation the main operating debtor of these Chapter 11 debtors is that in docket item 203 for Schedule e-slash-f which is at page 155 of according to the ECF stamp at the top of that document, Nicola Corporation scheduled 526 general unsecured creditors

with respect to what was in its books and records as the schedules were prepared. If you compare that to the parties acting on the plan and the opt-out here in this case, that results in about a 16% level of engagement with the scheduled creditors of Nicola Corporation, as it relates to that opt-out. And so, Your Honor, the U.S. trustee, as noted in our papers, contends that that level of participation doesn't reflect consent among the creditors sought to be bound by these third-party releases, but rather reflects a default position as being forced to act on the opt-out as opposed to affirmatively agree to relinquish rights against non-debtor third parties.

One of the common elements my office is stressed is that when talking about the third-party release relief that is being sought, you have a non-debtor on the one hand in the form of the creditor or other party that the plan intends to bind, and another non-debtor on the part of the beneficiaries of the third-party release. And again, the U.S. trustee contends that there's no provision of the bankruptcy code that requires non-debtor creditors or voting parties to act to a avoid an impairment of the rights to non-debtor third-party release beneficiaries. It's not the same as rejection of a contract or anything else under the code that would put a party's rights at risk of default if they don't appear and voice opposition to that relief. So, Your Honor, again, there's low participation rate. I know that that exists in many cases with respect to voting on plans as a primary principle, but when it relates to the rights against third parties, again, the U.S. trustee views that as not a sufficient manifestation of consent in light of the Supreme Court's guidance in Purdue to have those parties relinquish those rights.

So, Your Honor, if you have any questions, again, happy to address them and would otherwise just rely on our papers with respect to the issue. Yeah, I understand the argument and its application to the facts of this case, and I do thank you in your office for the the outstanding briefing on an issue that is certainly remains somewhat contentious and I understand the importance of it to to your office so I thank you for the presentation thank you your honor thank you your honor I don't have any comments in response okay we'll just rest on our papers and argument on that point and turn the podium over to mr. Alpano good morning good morning to have you for the record Andrew Alfonno from Pillsbury for the debtors I believe I

might be the last act before lunch so I will try and keep it brief but but also give the objections a thoroughness particularly the pro se objections the thoroughness that they deserve yes so I'll be handling two different kinds of objections to the plan the first is the objection by the lead class plaintiffs that's Romanette 13 on the agenda and then also the several formal and informal objections by class five equity holders and those are listed at romanette three through nine 11 and 16 now with respect to the objection the limited objection by the class action plaintiffs to subordination under the plan for the sake of the record the debtors filed their brief in support of subordination on August 1st

that docket number 820. That was about 19 days before objections to the plan were due, and over a month before the debtor's brief in support of confirmation was due, and I'll talk a little bit more about why that's relevant later. The class action plaintiffs filed their limited objection with respect to subordination pursuant to the plan on August 20th at docket number 909, and the debtors filed their reply to the... limited objection and brief in support of confirmation and subordination at docket

number 959 on September 2nd now before I get into the objection if I may set the stage as your honor I'm sure is aware from your review of the plan class seven of the plan seeks to subordinate certain claims pursuant to section 510b of the Bankruptcy Code and section 510b require subordination of any claims that are based on the purchase or sale of securities. And while the court, I'm sure is familiar with his provision of the code, I understand, we may or may not have some new clerks in the room.

And so for everyone's benefit, Section 510B is to essentially prevent equity holders who took the higher risk of an equity investment to elevate that equity interest into a claim by alleging, for example, damage resulting from the purchase of sales securities and so the debtor's brief sets forth their arguments with respect to subordination first the class action plaintiffs filed a $13 million claim against debtor NICLA Corporation and

that's on the claims register as proof of claim number one zero two five seven that claim is based on a pre-petition term sheet between NICLA and the class action plaintiffs that would have settled a reported class action pending in the United States District Court for the District of Arizona titled Bortenau the Nikola Corporation and that action essentially asserts securities law violations based on false and misleading statements and omissions by Nikola regarding its business plan and its business prospect in press releases and SEC filings and the like and

and I quote from the complaint, as a result of those misrepresentations and omissions, NECLA shareholders who purchased or otherwise acquired shares of NECLA securities, did so at artificially inflated prices, and then the subsequent decline in the value of those, in the value of that those securities once those things came to light, is the damages that they suffered. and that is at paragraph 884 of the class action plaintiff's complaint, which we attached as Exhibit B to our brief in support of subordination. Now, there are multiple other instances in the class action plaintiff's complaint where they say in no unclear terms that the claims they assert arise from the purchase and sale of securities, and that's at paragraph number is 416 and 810.

of the class action plaintiff's complaint that is again attached to the brief and support of subordination. We also cite cases including from this district that show the law requires but for causation when analyzing whether a claim arises from the purchase of sale of securities. In other words, the fact that the Lee class plaintiffs may assert a claim based on a breach of contract, if you're even if the term sheet even was a contract does not elevate it to to a general unsecure claim we still believe it's subordinated in response to our brief which was which was filed on August 1st the class action plaintiffs filed the limited objection on August 20th with respect to subordination and the objection takes issue with the process that the debtors undertook the class action plaintiffs assert

that bankruptcy rule 2007, a claim objection is the proper procedural mechanism for the debtors to seek subordination. They also claim that a claim objection under bankruptcy rule 2007 would constitute proper notice and a hearing under the bankruptcy code and not a subordination pursuant to the plan. And as we stated in our reply, Your Honor, we believe the bankruptcy rules say the precise opposite under bankruptcy rule 7,001H, it actually requires an adversary proceeding to subordinate a claim except when subordination is provided in a Chapter 11 plan. And although we believe Rule 7,01H is enough on its own, we believe our request to subordinate

their claim through the plan has provided more than appropriate. notice and hearing under these circumstances. Our brief in support of confirmation was not due until September 2nd. We filed our brief in support of confirmation with respect to subordination on August 1st. And so they had approximately 19 days until their objection deadline to respond to that. And we filed our reply in support of subordination on September 2nd. And now, you know, we're here today before, Your Honor, to argue the issue after it's been aspirin, after it's been fully briefed.

And therefore, for those reasons, Your Honor, we ask that you overrule the class action plaintiff's objection to support me. Okay, well, let me hear from the elite class plaintiffs, please. Mr. Barcelona, great to have you here. Good morning. Good morning, Your Honor. For the record, Joe Barcelona from Patchman Stein, Walderman, Hayden, on behalf of the class plaintiffs and your honor we did file a limited objection and I think this is a very simple argument it is procedural but it's also legal in a bit

can a plan object to a claim and your honor the code and the rules do not contemplate that a plan is the proper procedural vehicle to object to a point isn't an objection objection and subordination two different concepts Correct, correct, Your Honor, yes, but they can make a ruling on subordination, but they didn't take the steps to give us our day in court to talk about the underlying guts of the claim itself. I mean, you're seeing in this hearing right now, Mr. Milton is prosecuting his claim. That's because the code doesn't contemplate putting claim objections into a plan confirmation, right? There are other components of the plan that can survive and continue, but still, it must be bifurcated. We must get our day in court because we're not just filing a proof of claim and saying this is our damages.

There was a negotiated document with the debtors pre-petitioned, their restructuring counsel based on a settlement and representations made to the class about what we would get. And an assigned written agreement, an executory contract was made, and we came into court believing the debtors would prosecute all the agreements that they committed to previously. In fact, they even listed under penalty of perjury on their top creditors list with the petition, our claim is the, I think, the fifth largest gut claim at the time. So, again, I'm not here to litigate that claim, and the code contemplates that no one should have to litigate their claim in connection with confirmation. I am arguing the fact, Your Honor, that 503A, 1123, none of these provisions provide for a plan to object to a claim.

And honestly, if the debtors had reached out and said, well, extricate your claim, I wouldn't be standing here today. However, now it's wrapped up into this concept of the plan, and we have to think about appellate rights. I'm glad the 30-20 waiver is now gone. There are other issues that we need to think about and deal with. And counsel can't state that they didn't think about filing proofs, objections to claims earlier because their first omnibus objection at 861 was to other equitable proofs of interest to subordinate them. They could have done the same thing with us. They could have filed a motion to reject our executory contract, the settlement agreement,

and then we could have dealt with all the subordination issues there. They did not. They wanted to consolidate it into this one plan to prosecute it with the momentum of confirmation, which I completely appreciate. But we should have our separate day in court, and the code gives us that right. What if they never object to the claim? Then it stands. If it's subordinated as a practical matter,

why would anybody object to the claim unless the returns were into the estate were so large that I mean you'd be dealing with a very good problem at that point but they I guess I just view the the I'm struggling to to understand why subordination under 510b which is specifically provided for under the code should be viewed as an objection to a claim when it's really just seeking certain treatment of what presently isn't allowed claim against the debtor's estates? Could because your honor the plan contemplates termination,

disallowance, other rights and, you know, destruction of that claim through the plan, through the confirmation order. It is supposed to be a bifurcated claim. They should have taken the extra step to bring us into court. Maybe they didn't want to deal with that issue because again, there are a lot of thorny issues related to the facts of how we came to that settlement agreement and said on our rights.

as we allowed the case to proceed. So, again, I'm not here to litigate the claim. I'm here just on the legal argument that a plan cannot include an objection to that claim, and that should be bifurcated, and we should have our separate day in court. Okay. Thank you very much, Mr. Barcelona. Thank you, Your Honor. Okay. Mr. Alfano, any response to Mr. Borselaunice comments? Yes, Your Honor. I'll try and keep it brief.

I think, Your Honor, understands well that we're not objecting to allowance of the claim. at this point through the plan. We are seeking to subordinate the claim. Bankruptcy Rule 7,01H, clearly allows us to do so pursuant to the plan. Simply, if we get subordination of the claim, as Your Honor pointed out, we don't intend to object to allowance. It would be a waste of estate dollars. and any concerns about us, you know, not wanting to use, you know, confirmation or not giving them their day in court, is sort of belied by the fact that, you know, we filed this brief insubordination, in support of subordination, frankly, earlier than we may have otherwise had to.

I mean, under the solicitation procedures orders. In all, Your Honor, I'm just struggling to see how they square their position about. a claim objection in light of the plain language of rule 7,001H. I have no further questions. Okay, great. Thank you, Your Honor. And with that, I will move on to the individual shareholder objections. The debtors received several formal and informal objections from Class 5 holders of equity interests under the plan.

plan those include the objections by Lisa Scudder and Lucas Naparko who filed their objections to to the plan and some portions of those objections actually more or more so disclosure objections to the disclosure statement and the formal objections will file at that docket numbers 904 and 922 on August 19th and August 23rd respectively the informant objections we've we've listed they're not on the docket but we've listed them on the agenda and they're at Romanette three through nine the individual equity holders share some common themes among them which which we addressed in our

reply brief first the the objections alleged thatters did not provide any detail on the valuation of assets or the methodology At the same time, they also allege that the debtors have not performed an independent valuation of assets or that there was no valuation of assets done at all. The debtors respectfully disagree. I think it would be difficult to find other cases where there were as many market checks on value of the debtor's assets as there were in this one. you know there were multiple pre-petition marketing processes which are detailed in article 3B2a of the plan including by city bank btig and Goldman Sachs before the petition date around the same time that you know Pillsbury came onto the scene there was a

marketing process conducted by Hulahan Loki to sell the business as a going concern and then there were subsequent marketing processes by Hilcoe STX commodities and Gordon brothers all these marketing processes are detailed in section 3 B2 and 4E of the plan and then attached as exhibit 2 to the Ryan Rowan declaration filed at docket number 958 shows the methodology and the assumptions used in the liquidation analysis and essentially the water flow waterfall and distribution of the state proceeds which we believe show conclusively that holders of equity interests are not entitled to any distribution under the

plan next the holders of equity interests allege that the debtors have failed to perform a meaningful investigation unfortunately this company has been some form of an investigation in one way or another since since the fall of 2020 essentially there were multiple investigations covered conducted by governmental authorities internally by the company pre-petition which mr. Werthen spoke to earlier and then most recently post-petitioned by the UCC who takes their fiduciary role very seriously the UCC ultimately agreed to support the derivative settlement and then now releases and exculpations in the plan for officers and directors and therefore we believe that more than adequate investigation has been performed next the holders of the equity interest lack argue a lack of meaningful participation in the bankruptcy process the young declaration a docket number 952 shows that all holders were provided

with notice of inter-approval of the disclosure statement and of the plan confirmation hearing. The debtors took in all the informal and the formal objections that were filed, irrespective of when, and we are now addressing them here before your honor. Bankruptcy Code Section 1126G, we believe shows clearly, and that's consistent with your Honor's ruling on the solicitation procedures order, procedure's order that class five equity holders because you're not entitled to anything under the plan they are deemed to reject and simply not entitled to vote and so we think that you know under these circumstances holders of equity

interests have had all the meaningful participation that they're entitled to in these cases just the last point that I will address is that class five equity holders argue unfair treatment and you know Unfortunately, and while I do sympathize with them, unfortunately under the absolute priority rule, under Section 1129, B2B, Romanette 2, senior classes must be paid in full before junior classes can receive any distributions under a Chapter 11 plan. And the liquidation analysis and the market test that we've conducted over the course of these cases proved conclusively that they simply are not entitled to. to any distribution on account of their equity. With that, Your Honor, I'd ask that you overruled class five

equities holder objections. I did just want to note that at some point, I saw one of the informal objectors pop up on Zoom. Okay. Let me start by asking if the objectors who filed formal objection would like to be heard. So I first invite Ms. Gutter if she's on the line to offer her comments. Ms. Gutter, are you there?

Okay, I hear no response. And then Mr. Niparko, are you on the line, sir? Okay, again, for the record, I've paused, waited for a response, and I've heard no response from neither. Ms. Gutter or Mr. Niparko. Are there any others on the line who are equity holders who wish to be heard? Okay, the record should show that I paused about 10 seconds and have heard no response. Thank you.

Okay. Okay. Mr. Morse. Your Honor, I believe that leaves the Milton Equitable Subordination objection, which I think we talked earlier. We maybe take a break and then come back, given that it is Friday afternoon. still with great weather outside, I'd propose that we take a very accelerated break and conclude today's proceedings as quickly as promptly as possible. Yeah, I agree.

Also not to put your staff at any inconvenience as well. Yeah. Now, I'd like to come back on the record at 115, and I think we should think conceptually about what it is that's before us with regard to equitable coordination. that gives everybody a chance to refine their presentations for the afternoon. I think I've hinted at some of it. It seems that the analysis for me is that, again, I have President Trump's pardon. I have the conviction, and I have the arbitral award that was confirmed by the district.

Court in Arizona and those are sort of the issues have been put in play in addition to remarks that President Trump is represented in the papers to have made following the granting of the pardon. As I've indicated earlier, it seems to me that there is an issue, well, there's a matter of issue preclusion and that I have the fact of the conviction. I have the fact of the orbital award. And I can't revisit any of the findings made there.

So we've had argument about the effect of the pardon. I'll offer an opportunity for parties to address this issue following lunch. But given, well, let me start with this. Is there any question that the pardon that was attached as an objection to Mr. Milton's objection is the pardon that President Trump granted? We don't believe so, Your Honor. Okay. We've indicated it's not an innocence pardon.

It's the normal regular way pardon that's a... So there's no, my question is there's no dispute about, there's not going to be any objection to it's authenticity or anything like that. Okay. Okay. So again, have an opportunity to address this point. I want to offer you the chance to think about it. The, you know, my presumption, of course, is that, is that like any president, President Trump speaks with absolute clarity. when he issues a pardon. And the pardon, the pardon says what it says. Any comments that may have made outside of the pardon would strike me as likely being inadmissible,

as extrinsic evidence to interpret what I think is a fairly, straightforward and robust statement about the nature of the pardon. So I'm not making any decisions about admissibility of evidence, but I do want to offer you the opportunity to consider that as you prepare for the afternoon. So I think that the way I'm at least conceptualizing it, and I spent a great deal of time thinking about it. this that the the analysis requires looking at the the the findings of the courts and the arbitration panel that was confirmed by a court what is the effect of

those whether issue of conclusion applies and and assuming for the sake of argument that the pardon would carry with it a determination of innocence, whether that's supportable under applicable law and whether in fact that occurred. So I think it could, I think with those comments which I hope are helpful, I think it can inform the evidentiary presentation for the afternoon. but it strikes me as, you know, if I go, if I make a determination that equitable subordination is appropriate, then I don't need to get to the alternative relief that was requested, which was disallowing the claim. If, on the other hand, I determine that equitable subordination is not warranted, then there is a claim objection, and there's an issue.

that we have to determine there. So it may be that we deal with equitable subordination first, and after I've had an opportunity to consider everything before me, if we need to get to the claim allowance thing, that we can deal with that. But I think a step-by-step approach might be more efficient for everybody. I agree, Your Honor. Okay.

You would be happy to proceed in that manner. Okay. since I'm talking about Mr. Milton's issues, let me just hear from Mr. Cousins or Mr. Brannock if that conceptual approach to how to deal with the afternoon's proceedings makes sense to you. Good afternoon, Your Honor, Scott Couss on behalf of Trevor Milton. Mr. Morris and I did have a discussion about this. It's not really bifurcated. It's the gating issue. Yeah, there's a gating issue.

And then the bifurcation, whether. whether it goes back to the second arbitration panel or the court determines indemnification rights and reasonableness of fees. I agree with the approach. I hear you loud and clear on both the criminal versus the civil – as the court knows, everybody knows – pardon doesn't get you out of civil liability – just related to the conviction, and we'll be prepared to address that. Okay.

MR. And – I'm going to defer to the court. Mr. Milton would not need to testify on the gating. If the court determines the gating issue, then we wouldn't need testimony about the claim because you would have subordinated it. But I guess to create the record, I think I have to put Mr. Milton on to talk about that,

and then whether the court gives that any way it in bifur gates or whether the court knocks it out under 510C would come into play. Well, I think what might be most efficient would be for us, to view them as sort of two separate proceedings because if the equitable subordination issue turns out to be dispositive, then there would be no need for Mr. Milton's testimony on the allowance and reasonableness of the fee issue. and so I tend to think that efficiency would ask us to actually bifurcate those proceedings.

I mean all in this afternoon, but that's where I'm going with that. The debtors are happy to proceed in that fashion. That makes a lot of sense to us. Does that make it, does that prejudice in any way your ability of argue the equitable subordination. I take not because I think you've acknowledged that that's not an issue that requires testimony. That's correct. And I think that does make sense. And Mr. Morrison actually and I just yesterday talked about, you know, is there a way to make it more efficient for the court than others? Okay. Well, as Mr. Morris pointed out, it's a Friday.

Weather is beautiful. No, but the important thing is that, you know, it matters a great deal made that Mr. Mr. President, the opportunity to make all his arguments. And my client came in for a long way, so I want to make sure that if the court says, yeah, I want to hear that that he has an opportunity to testify. Oh, he will. Yeah, absolutely. I appreciate him coming, and that's why we're here today. Thank you. Thank you, as always.

No, thank you. Okay, so we'll come back at 1.15. Okay. We're in recess. Okay, Mr. Morris. Hi. David Badley. We don't want to interrupt the proceedings later. I think Ms. Sawyer and I may need to depart about an hour. I've run it by Mr. Morris. I don't think

he has any reason why we need to stay. I just want to make sure your honor would be okay if we were to excuse ourselves. Certainly. Thank you for coming up today. Okay. Thank you. Thank you. Your Honor, Joshua Morris for the debtors. I think based on our pre-break order of operations, we're going to do the Milton Equitable Sportination objective. and then see where that takes us and then if we need to do the claim disallowance we would do that secondarily but we would focus now on the equitable

subordination okay so that brings us to the equitable subordination objection which appears at document number 9-1-1 which takes issue with the debtors proposed classification and treatment of the Milton claim into class number eight as detailed in our Milton claim memo, which appears at docket number 808, which is filed back on July 29th, debtor seek to equably subordinate the proof of claim number 54, which appears as exhibit number 38, just for the record, it has not been admitted. It's just here today. Or in the alternative to disallow the Milton claim in its entirety, but we hope not to need to even get to that. The class eight of the plan consists of equably subordinated claims.

The only one that's at issue is Mr. Milton's claim. And the Milton claim is classified under the plan as class eight pursuant to Section 510C of the Bankruptcy Code and the principles of equitable subordination. There are three elements directionally to a request for equitable subordination. Number one, there has to be an equitable conduct. Number two, there has to be injury to the debtor or its creditors. And number three, equitably subordinated claim can't be inconsistent with the bankruptcy code. As set forth in our confirmation or brief in support of confirmation, we believe all three of those elements are more than satisfied here. Turning to the first element, which is the inequitable conduct, as the court is well aware,

Milton was an insider of the debtors. He served as the debtor CEO and executive chairman until September of 2020, and he dominated the debtors' communications with the public. There's evidence of that in exhibit number 13, which is the indictment at page 12. Milton quote, I wanted to be in control.

I wanted to be in communication with the public about what we are. As an insider, Milton's conduct demands closer scrutiny under the case law. And Milton must rebut the debtor's material evidence of unfair conduct by proving the fairness of his transactions with the debtor. That's from the mid-American waste systems case,

which we're gonna be referring to a lot during my argument today. That's at 284BR 53, page 69, bankruptcy decision from the District of Delaware here in 2002. Milton used his insider power to control the debtors and ultimately breached his fiduciary duties of loyalty and good faith to Nicola and was ultimately convicted of securities and wire fraud. But as we've talked about earlier, we're not here to rehash or retry or do any of that

with respect to that conduct because you have more than enough evidence in front of you about that. And let's just go through just very briefly what that evidence is. The contours of that behavior have been litigated ad nauseum by both the Milton Award arbitration panel and SDMI. The parties to the breach of duty arbitration proceeding conducted months of extensive discovery before holding the eight-day hearing before the three-member arbitration panel that resulted in the Milton Award.

The Milton Award conclusively found, as you've seen, that, quote, Milton violated his fiduciary duties of loyalty and good faith to Nicola through a pattern of false in this leading public statements about Nicola's products and the state of their development and by subordinating the company's interest who is owned by refusing to all efforts to review and approve his public statements in advance. That's at Exhibit 25 of the redacted Milton Award at page 53. The Milton Arbitration Panel also held, quote, we could not conclude Milton acted in good faith and in a manner that Milton reasonably believed to be in or not opposed to the best interests of Nicola. Accordingly, there's no basis for Milton to receive indemnification.

That's Exhibit 25, the redacted Milton Award at 59, under this indemnification agreement. That forms the basis for his claim number 54. And Milton is precluded, as we've talked about, from relitigating the Milton Award before this court. The fact that the Milton Award is on appeal in the Ninth Circuit, which is something that I would have expected them to argue but they didn't, is of no consequence. And I just want to give you comfort of that. The pendency of an appeal does not mitigate the preclusive effect of an otherwise valid judgment. And this is from the U.S. versus five unlabel boxes case, 572 F-3rd 169 at page 175. It's a Third Circuit case from 2009.

And then upon confirmation of the Milton Award by the District Court in Arizona, the Milton Award became a final, a valid and final judgment entitled to the same force in effect as a judgment in any other action. That's from the Teamsters Local 177 versus UPS case, found at 966, F3rd 245 at page 251, also a Third Circuit case from 2020. Milton's revisionist history with respect to this Milton pardon also lacks merit. In the first instance, this statement by President Trump is inadmissible hearsay, not only under federal rule of evidence 801C, but under cases that include U.S. versus Salins that we cited 993 F.S. 344, F.H. 346, which is a Third Circuit case from 1993. There's also, as we indicated in our papers, no indication that Milton received a quote-unquote

innocence-based pardon. We explained that in our memo of pages 53 and 54. Now, a pardon for actual innocence must state on its face that it was based on actual innocence, as indicated in the, I'm going to mess up the pronunciation, Bultby versus U.S. 2024, Westlaw 322, 0261 at Star 8. That's a federal CL June 27th, 2024 case.

Like the Benton pardon that we cited in our papers, Milton's pardon is silent on its face as to Milton's innocence or rehabilitation, rendering their arguments, which Mr. Cousins, to move away from right before we left for lunch, totally moot. We attached a copy of that Benton pardon, or excuse me, it's admitted as exhibit number 34. So you can compare that pardon with Mr. Milton's pardon and see they're exactly the same. And that case is US versus Benton, 98, F4-1119, it's a DC circuit case from 2020.

With that, we believe that the inequitable conduct element has been established. Element two is injury to the debtor for its creditors. We've submitted a mountain of evidence on the injury and also had Mr. Worthing supplement that evidence this morning during his supplemental testimony. His – Milton's inequitable conduct directly injured not only Nicola, but its creditors as well. Following the issuance of the Hindenberg report, which publicized multiple false and misleading statements made by Milton, Nica's stock price dropped approximately 43 percent, resulting in substantial losses to not only Nikaa's investors, but substantial harm to the debtors as well.

That's found at exhibit number 13, which is the indictment at page 43. Thousands of retail investors targeted by Milton's inequitable conduct suffered substantial losses. In some cases, totaling tens of hundreds of thousands of dollars, compromising their financial security and retirement savings. Same exhibit at the same page, 43. Milton's false and misleading statements caused an onslaught of litigation against the debtors. We heard about that this morning. Not only the SEC investigation that resulted in the $125 million civil penalty, of which approximately $45 million was paid as of the petition date,

but there's another $4 million that's going to be paid to the SEC under our plan. NICLA encouraged substantial additional legal fees defending against the SEC investigation and various class actions stemming from Milton's conduct related to Mr. Milton's conduct. As Mr. Worthing testified this morning, those costs, certain of those costs were quantified in the arbitration, in the amount of about $46 million, but those also did not include the $11 million that were paid to Casowitz to conduct the arbitration. Mr. Worthen also testified this morning about increased cost of capital, increased cost of D&O insurance, loss of customer opportunities, including General Motors and others.

as well as lost relationships, some with investment banks, Morgan Stanley, and things like that. The debtors were ultimately unable to ever recover from the reputational damage, civil penalties, and amassing legal fees caused by Milton's misconduct, which is a substantial factor for why we stand here before your honor today. Under the Mid-American case that I mentioned in the beginning of my presentation, Milton's burden is to rebutts all of this harm that we have brought before, Your Honor. And that's found at 284, BR, pages 76, and 77. There's no evidence that's been submitted to rebut any of that harm.

As a result, we believe element number two has also been established. Element number three is that the equitable subordination that the debtors have requested is consistent with the goal of the bankruptcy code. We believe that Milton's conduct here skewed the prospect for distributions in this case on an equitable basis and subordination of his claim corrects this. What do I mean by this? So if the court does not subordinate or disallow his claim, he's presumably going to be permitted to be permitted to be. to share pro rata in class three with the other general unsecured creditors. Part of the trust assets that are going to be used to satisfy general insecure claims are going to be collections from the Milton Arbitration Award,

which is currently 96.8 million plus we're going to lop on interest, plus the $4 million that's going to be paid to the SEA. This would obviously include proceeds under the Arbitration Award from his 97% share or false from the SEC fine, among other things. He should not be able to share rateably with other general unsecured creditors on account of claims held by debtors against him because of his wrongful conduct. All other arguments and issues aside, that would in and of itself be an inequitable result here.

And accordingly, subordinating his claim is not inconsistent with the bankruptcy code. It essentially writes the wrong. And we submit that subordinating his claim on an equitable basis under 510 , as we've requested under the plan is more than appropriate. Okay, thank you, Mr. Moore. I'll reserve for any comments.

Okay. Let me hear from Mr. Milton's team. Mr. Cousins. Mr. Cousin. Good afternoon, Your Honor. Good afternoon. We agree with Mr. Morse. Mr. Milton needs an opportunity to rebut,

and he's here to testify. What we're seeing, Your Honor, is loosely nomenclature a double penalty. The 97% and the 3% that we've been talking about. But then an effort to wipe out subordinate whatever the term is, his claims. Now, that wouldn't be an unsecured claim because classical netting set off recoupment scenario when A owes B and B owes A, that's netted, and he needs an opportunity to rebut the claims of inequitable conduct and ultimately prove up his claim.

Otherwise, he's suffering effectively a double penalty, the 97%, and the vacation for the lack of a better verb of his potential counterclaims. We're prepared to put him on the stand. We're prepared to talk about it. But we do need an opportunity. We would request the court an opportunity before the court just subordinates without the bifurcated process that we were talking about.

Let me ask you this. What type of evidence could I consider by way of rebuttal when you know, as I signaled earlier, I believe that just on the grounds of issue preclusion, there are facts that have been established judicially that are binding upon this court. So how could we possibly rebut any of that when, you know, if you look at the arbitration ruling, you know, I read it, and I have dozens of pages. of findings regarding the tribunal found to give rise to liability and the effects of that conduct.

I think that's all been established in such a way that there's just, there's no further evidence on that I can consider because it's already been done. Well, what I'm talking about is his ability, whether, when we say, cited some cases on this front to assert recoupment not even set-off. It claim that if the court equitably subordinates his claim, that set-off, that recoupment is gone. It's vacated, and he has no ability to mitigate his 97 percent responsibility, and it's effectively akin to a default.

We certainly believe that in the principles of equitable subordination, the court needs to look at all factors, including his potential claims, which he's prepared to talk about and testify about, and address, I do want to address the testimony that Mr. Worthing went into and asked the court to take a look at the, unsealed or I'm sorry the sealed version of the exhibit that we walk through pages 79 to 81 where we have an instance where the debtors are asserting that he has no right to indemnification and he has no right to advancement of fees but that's not what I want to be careful that's not what the unread that's what the that's not what the sealed version of that says And there's a separate arbitration panel, and I highlighted it this morning before a bunch. Excuse me that is prepared to address that. The reasonableness of the fees, the rights to advancement, the right to indemnification,

or this court could do it in a, I don't know, a mini trial, an estimation of his eating, determine whether the fees that Mr. Worthen testified he reviewed and objected to the Cahill-Gordon fees, are reasonable. And that's all I'm asking for is the court address the bifurcation issue. Don't subordinate now. Let us address the counterclaim, the recoupment, et cetera. And in particular, I think when you look at the solicitation, for example, That's the plan's the liquidating plan talks about.

Milton's breach of fiduciary duties eliminated his entitlement to indemnification. Well, that's not true, Your Honor. They solicited based on that. And when the court looks at the sealed version of the award, you'll see they didn't even agree to that. Certainly the panel didn't. And again, this is a threshold matter. He's not entitled to indemnification. his bold-faced attempt to further delay the administration, it's all over their pleadings,

in particular, the plan, the confirmation brief. And the committee even goes and adopts that and says, he was not entitled to indemnication for the failure to act in good faith in a manner. Now that's citing one of the two arbitration provisions decisions, which is up on appeal on the Ninth Circuit. But it's ignoring the second one. And the court will recall we were here for the court seeking relief from the automatic stay in order to go back to what we're calling is the second arbitration, but Mr. Milton commenced it first. And I would just encourage the court to see that, that this is so one-sided, it amounts to a double penalty. He doesn't

get to liquidate his claims and set off those claims against the 97-7. percent that we've been talking about. With respect to the pardon, yes, he was indicted. Yes, he was convicted. Yes, he was sentenced to four years, but yes, he was pardon. But this isn't the general pardon. Now, for example, the Carter administration in – I'll find in a second, the noon.

Yeah, and that was just a general draft. I don't mean the majority. It was essentially a pardon, a general pardon that wasn't specific, and there wasn't a specific finding of innocence. Take it what it's worth, but, you know, President Trump did say that Mr. Milton did nothing wrong. It's a specific pardon, and I'm willing to stipulate, Your Honor, that for purposes of the criminal piece, and respect to the pardon, and it's Hornwick Law, that it doesn't – it's –

doesn't address state law claims it only addresses the federal law claims and he specifically found that Milton was found innocent well but he didn't say I read the pardon he didn't say that there are we we know of instances where the president has reported to grant a pardon based upon his belief that the the the person convicted was it was innocent so we know that that a president knows how to say that in a pardon and President Trump he just didn't say it he's been represented to me and I believe you I read the passage in your in your objection where he said he did nothing wrong but

aren't I, in the first instance, required to look at the pardon and determine if it's clear on its face. And only if I can't decipher it. At that point, might I look to extrinsic evidence to interpret it? But I do believe that our president speaks with great clarity and did so in this instance when he granted the pardon. and I don't know why I would look beyond his own words in that pardon to try to interpret its meaning. Well, I will suggest politely, Your Honor, this, to my knowledge, is an issue of first impression where bankruptcy courts ask to weigh the impact of a pardon in connection with 510. I believe it is.

I believe that is. And not to suggest that, well, I understand the court, but I also understand that you don't have to address the criminal piece when if you look at the civil piece, that gets back to the double penalty, as it were, is that he has to have a right to assert his claims to mitigate the 97% that we've been talking about. I do

the Supreme Court cases there's some very old cases the Garland case for example talks about blot out the existence of guilt I think it's far simpler for the court to look just at the civil piece as opposed to the criminal piece

and I look for guidance from bankruptcy courts it's not there I understand the court's point about that's not parole evidence but secondary evidence to indicate what President Trump meant in connection with the pardon. But we certainly believe that you don't have to get there.

You can just look at the civil peace. With respect to civil peace, this is a court of equity, and under 510C, under the court is required to weigh the principles of equity. And we believe that Mr. Milton and Mr. Morris agrees that we must be able to rebut the claims of inequitable conduct, the injury to creditors, and not being inconsistent with provisions of the bank receipt code. But wasn't the opportunity to do that at the arbitration? And then in the subsequent proceedings in the...

in the district court in Arizona and then ultimately in the appeal. This isn't the place to determine the extent of its liability or to the extent to which it might have been mitigated by activities that would be computed to the company because it's already been done. Other than there's a proof of claim that is in this court that the court's seeking is being asked to subordinate. and I think that that's an independent basis. I understand. And again, I'm not asking this court to revisit. I'm not sure if it's full faith in credit or race. It's issue of preclusion.

Yeah, issue of conclusion or whatever. Yeah, why would this court second guess a finding by a tribunal? Well, it's not why would I? It's I can't. Okay, fair. I literally don't have that authority. There's nothing I can do with that. I mean, that's the concern that I, you know, I want to tease out and get an opportunity to hear about it

because I don't think that I quite literally have that authority. Fair enough. But Mr. Milton's here. He's entitled to rebut. What we'd ask is that he'd be allowed to take the stand and talk about, his conduct, the company's conduct, and the $69 million in attorney's fees. For example, well, the $69 million in attorney's fees only becomes relevant if we make it past the 510C issue. Exactly.

The gating, and we've been calling it, and I agree with that, Your Honor. I will note that Mr. Milton did not get a chance in the arbitration to testify because he was invoking his Fifth Amendment privilege. Well, it's not taking you have a chance. He made, he made, probably the right decision, but it was a decision that he was able to make for himself. Your Honor, you and I are in agreement. I might be using the wrong words, but yes, that's right.

He invoked that privilege. Yes, he could have testified. He could have potentially risked that exposure. He doesn't have that exposure as a result of the pardon. And I believe it's important for the court to way both the conduct that he's been accused of. That he's been found liable for. Well, it's different.

It's different. Not in the SEC. For example, the SEC hasn't made a finding, but. Well, the arbitration. The arbitration. And in the criminal case. And an opportunity to either prove up his claims, right, to indemnification, advancement, and reimbursement, either here or before the second arbitration panel.

And, Your Honor, I'm trying to stay away from that. because you already denied that, and I'm not trying to relitigate that. I understand. But I just, at some point, that needs to be liquidated. And what I suggest, respectfully, is save the subordination piece. Let's go to the bifurcation piece, address that claim. It's a secured claim. It's not a Class 3 claim.

And see if he can net off, net set, what's set off, et cetera, his claims. And he's certainly here to, to testify if the court would be wanting to hear from them. Well, to return back to that issue about so often recoupment, because I thought that was an interesting issue. You cite one case, you cite the Kaiser case, which is a Judge Walrath case, and that in turn cited a Third Circuit case.

I think Lee v. Schweiger? Yeah. I did read those cases, and in neither of those cases, was subordination of a claim at issue. Look, I know your work well. If you had found that case that addressed, given the context of equitable subordination, you would have cited it. But in reading the two opinions, Judge Walraf's opinion and the Third Circuit opinion,

and I kind of struggle to sync it up with the considerations when determining whether equitable subordination is warranted under 510 C. So maybe you could address that more directly. That's fair. So the way I've been thinking about it, and we did not cite this case, it's Jersey Medical, a Third Circuit decision,

is what it talks about is a recoupment, as a common law right. It's not in 550, whatever, the set-off provision. It's not a backdoor way of calculating secured claim because it's a common law right. So he has a right to prove up that claim. And if that right mitigates the 97, loosely saying the 97%, he should have an opportunity to do that. And that's just consistent with due process.

So Jersey Medical, if I recall, had to do with Medicare recoupments. But it talks about the common law right of recoupment that's not statutory. And so – and that's the way I've always looked at it. And, Your Honor, we did not cite that. But it's just the way I viewed it now that this has developed. We are not trying to re-litigate the arbitration. I understand very clear. We have an appellate right.

The court is respectfully – or as the court points out, not allowed to collaterally attack that or address it. But what I'm talking about is the bifurcation process is that it would be inequitable. It would be a double penalty if the court today equitally subordinated his claim and didn't give him the opportunity to prove up the other pieces of his claim.

Okay. I understand the argument, Mr. Cousness. Thank you, Your Honor. Okay. Mr. Morris, do you have any response? Just a few pieces to make. you a little more comfortable with some things that Mr. Cousin said perhaps. One thing he did indicate incorrectly that we solicited on the basis of Mr. Milton's claim being fully subordinated.

That's incorrect. If you look at one of my favorite documents in this case, as Mr. Cousin knows, is our liquidation analysis. Yes. which he did not read. Yeah, I did review the liquidation analysis, I understand the point. No, but Exhibit B to Duckett number 774.

That's the solicitation version. Okay. And if you look at page 113 of 115, these are the global notes. Just talk about, you know, various notes to the liquidation analysis. So in note 14, the bottom of that page talks about the estimated general unsecured claims. The low case, and I'm quoting here, the low case assumes a scenario where claim number 54 filed by Trevor Milton is equably subordinated and or disallowed in full. The high case scenario assumes a scenario where claim number 54 filed by Trevor Milton is allowed as a general unsecured claim in the amount of $32.91 million, which represents the difference between the filed claim amount, which is the $69.8 million, that we've been.

been talking about and the aggregate amount of indemnity I mean going to the next page expenses Nicola has already advanced and paid to Trevor Milton the 36.844 million pursuant to orders entered in the Milton fee arbitration and otherwise. This ties back to Milton claim memo. This is the paragraph that Mr. Cousins partner inadvertently started talking about with mr. Worthen on the stand that confirmed that we've already advanced a substantial portion of this 69.8 million dollars number one and that we believe the fee arbitration panel has already found that another

large portion the 17.2 of Cahill's fees has already been found to be unreasonable I believe this is why that they haven't responded to my request for confirmation of how much is outstanding because 69.8 million is an outstanding. It's more like 14 or 15 or something like that because we've already paid 36. The arbitration panel, the fee arbitration panel has already found 17 to be unreasonable. And these other 18 or 19 firms, if you look at the indemnification award, and his identification agreement, which is my next point, are probably not going to be able to fall within the appropriate indemnififible expenses under that agreement.

Now going back to this whole point of under the indemnification agreement, indemnification award, and trying to trap Mr. Worthen into saying this, that, and the other, the whole point of that is two. And I'm going to just clarify this for your honor. So when you go back and read this, it's going to be very clear. On page 59, and I'm going to just use. page numbers because some of these are redacted or some of these are redacted provisions so on page 59 the panel found just directionally that he was not entitled to indemnification because he breached

his fiduciary duties okay and this goes back to his indemnification agreement which is exhibit a to his proof of claim Now, this is not admitted because there was an attempt last night to have us agree to admit this that we thought was perhaps for an improper reason. And so that's why we didn't move to agree to admit this. And we didn't want to get tricked into anything. But this indemnification agreement is talked about ad nauseum in the arbitration award. It was.

You can read for yourself. But it's paragraph. to see at the top of page three, and it talks about that, you know, essentially he's only entitled to indemnification if indemnity acted in good faith and in a manner indemnity reasonably believed to be in or not opposed to the best interest of the company. Under relevant case law, when you are convicted of fraud and wire, all the things that were convicted of, that the pardon does not strip away. It strips away the penalty associated with that, but doesn't strip away the underlying conviction. You are not acting in the good faith,

which is why the panel found, we believe, we assert that he's not entitled to indemnification. You can read for yourself why the panel thought that. This other reference on page 79 is talking about something wholly different altogether. It's talking about the $36.8 million and whether the arbitration panel can award those damages to the company as part of the award. Those are the monies that we had already advanced to Mr. Milton by the separate fee arbitration panel. And this arbitration panel, it's more of like a jurisdictional issue. They are saying, again, our interpretation that we don't want to mess with that panel.

If you believe that you're entitled to go and do that clawback, then you go to that panel. and you go force Mr. Milton to give that money back to you with that panel. That was our interpretation of this. That's that footnote that they tried, the gotcha footnote that they tried to have Mr. Worthen, you know, admit to earlier. And that's what this whole thing is about. But importantly, if you look at the district court decision affirming the arbitration panel award, That's Exhibit 50. If you look at page 4, line 18 through 21.

And I'll quote, talking about what the panel found. It then settled that there was no basis for Milton to receive indemnification under the indemnification agreement, but that he was entitled to contribution from Nicola based on the contribution provision. Okay? So he may be entitled to something else, but he is not entitled to this indemnification. And so if he's seeking indemnification, that's what he's asserting under this claim. We've paid most of it to him. We've asked for the documents, him getting up on the stand and saying that we've paid it,

with this, with that. That is not going to do anything today other than. cause more of a circus than we've already had before your honor. The other thing... It's the world's most boring circus. Yeah, it's the world's most boring circus. To be sure. It has been a circus.

No, but also... But also, it's irrelevant. If you find that the claim is... The claim, whatever it is, which doesn't matter right now, is equitably subordinated. It may matter at some point down the road, if the claim is $1, if it's $69, or if it's the $300 million that they asserted

in two pleading signed by their lawyers in previous cases or in previous situations. It doesn't matter because that only matters down the road if we somehow collect millions and millions and millions and millions of dollars as the litigation trustee does. But today, equitable subordination, we've proven it up. It was their time to come and at least make an attempt to show why it wasn't appropriate. And that process is not to have Mr. Milton get up on the stand and say that I paid those expenses

or let me explain who consulting for $983,000 and $333.33 is. Mr. Cousins. Thank you, Your Honor. Mr. Worthing testified to the payment of Kirkland's fees, Cahill's fees, Casowitz's fees. We should be entitled to the same testimony. Mr. Morris can cross Mr. Milton as to the basis for the claim and his theories and this and that and the other thing. We just request an opportunity for him to testify, not rule on the gating item, the gating issue, the equitable subordination, and then address, perhaps address that after Mr. Milton's testimony.

Well, think about gating issues that they come first. I know. I think we already agreed to. Right? I'm not being smart. No, I mean, that's kind of the definition of it. It has to come first. And I understand.

and that's why I'm saying that absent hearing from Mr. Milton, it's a double penalty. He has no – his claim is vacated, and we all can agree that equity, a subordinated claim, is never going to receive a dime in this case. So to say that, oh, maybe one day under a 502J, I can reconsider and have his claim allowed, equity is not going to – or subordinate a claim would not get a recovery. I understand. Thank you, Mr. Cousis. Did anybody else wish to be heard before conclude?

Your Honor, Doug Bannel, Morrison, of course, on behalf of the official committee. Your Honor, we submitted a statement in support of confirmation of the Chapter 11 plan, and it's one of these rare instances where I couldn't agree more with my colleague, Mr. Morse. Doesn't happen that often, but I think he's identified all the case. key issues and I think we have a gating item before us before we need to hear any further evidence okay okay thank you look I I've given this issue a great deal of consideration and I found the the argument today to be very well presented it doesn't change the analysis that I arrived at as of this morning

so I'm just going to give my ruling on the equitable subordination issue. I am going to overrule the objection. The debtors are seeking to subordinate Mr. Milton's claims under 510C1, and that section allows for subordination of a claim under principles of equitable subordination. This court has enumerated a number of times over, the principles of equitable subordination and the proper method for determining whether a claim should be equitably subordinated in re and mid-American waste systems is a significant case on this point and in that case this court explained

that the essential purpose of equitable subordination is to undo any inequality in the claim position of a creditor that will produce injustice or unfairness to other creditors in terms of distribution of the estate and we identified the the three-pronged test that mr. Morris pointed to which are that the claim it must have been engaged in some type of an equitable conduct that the misconduct must have resulted in injury to other creditors were conferred an unfair advantage on the claimant and that equal subordination of the claim must not be inconsistent with the bankruptcy code. We know that from Mid-American and a number of other opinions, including my own opinion in Ameri First Financial,

that claims, when asserted by an insider or a fiduciary, require a higher level of scrutiny. And when a claimant is an insider, there are three categories in misconduct that constitute inequitable conduct, which goes to the first prong of the test. And that those are fraud, illegality, imprude fiduciary duties undercapitalization or the claimant's use of the creditor as an alter ego or mere instrumentality. in support of the request for equitable subordination, the debtors first assert that Mr. Milton is an insider. I think we can all agree that he was an insider. He was the founder, CEO at the time of the misconduct, and plainly he was an insider for purposes of the first prong of that three-pronged test. And when we get to that first prong to look at an equitable conduct, as I've signaled throughout today's hearing, I do find that it's already been established in other proceedings that Mr. Milton committed misconduct in the form of fraud,

illegality, and breach of fiduciary duties, and his criminal conviction and the arbitration finding evidenced this. and it's not something that is subject to challenge. I find the principle of collateral estoppel applies here or issue preclusion. And for that reason, there is no evidence that I could hear that would any way tend to mitigate the damage or otherwise affect the analysis on equitable subordination, and that's why I don't need, nor I think it's appropriate to hear any other evidence in support of the equitable subordination issue. In the, it's been referred to as the Milton Award, the arbitral finding, the panel found

that Mr. Milton violated his fiduciary duty as loyalty in good faith, pure pattern of false and misleading public statements about Nicholas Products, and the state of the state. to their development and by subordinating the company's interest to his own by refusing all efforts to review and approve his public statements in advance, which goes to some of the testimony that we heard this morning. Thus, it was established in the arbitration that Mr. Milton, at a minimum, breached his fiduciary duties, which is inequitable conduct as we understand it when assessing whether, equitable subordination is appropriate. The criminal conviction also evidences the commission of fraud and another illegality.

And the argument that Mr. Milton has made is that his criminal conduct can't constitute evidence to support equitable subordination because his contention is that the president made a determination of innocence and part Mr. Milton on the basis of that innocence. And I disagree with this argument for several reasons. First, the pardon power does not extend to the authority to determine innocence. And the Supreme Court and the Third Circuit have reviewed the President's pardon power multiple times. We talked about In Ray Garland from 159 years ago. There's been a lot of case law in the interim, which shows how the Supreme Court has evolved in its thinking on what it means to receive a pardon.

And the Third Circuit in the Noonan opinion engaged in a really deep dive of what a pardon is. where does the power come from? I mean, it's a great discussion of how the founders would have understood the pardon power based upon the English common law and goes back hundreds of years in its analysis. So we have guidance. The Ex parte Garland case did say that a presidential pardon blots out of existence, the guilt of the convicted. However, there is that subsequent jury.

prudence and the you know what one could look at the the Nixon versus United States opinion from the Supreme Court where they said that the granting of a pardon is in no sense an overturning of a judgment of conviction by some other tribunal and the you know the Supreme Court in Noonan and there were I I spent Lerity Week in reading pardon cases My fault is very interesting, but I really wanted to understand this, because I think it's a very, you know, it's an important issue. And the courts have very widely recognized that Garland, the dictum in Garland, is not good well. It's not the standard that the Supreme Court applies.

and the Nixon opinion is pretty explicit in that regard as well as in an earlier cases in a bunch of cases since. The Noonan opinion, which of course is a Third Circuit opinion, therefore binds me, offers particularly helpful guidance for this matter, I thought. And although that case is about whether a pardon can cause a court to expunge the pardoned person's criminal record. As I noted, it offers a fulsome detailing of pardon law and analysis of the pardon's effects in the extent of a president's power in issuing a pardon. And one of the things about the new opinion that is most interesting and it again, their analysis, I do believe to be binding on me, is that they looked at the interaction between the presidential pardon power and the judicial power.

So it emphasized that there's a separation of powers, and under Article 2, Section 2 of the Constitution, the President has the power to grant recreats and pardons for offenses against the United States. That power is unquestioned, and it's certainly not an issue here. Mr. Milton received a pardon. But Article 3 of the Constitution

establishes that the judicial power of the United States is vested in one Supreme Court and in such inferior courts as the Congress may from time to time ordain and establish. And based on the Third Circuit's analysis of those sections of the Constitution, the Third Circuit concluded that the authority to maintain judicial records, in the case of expungement, was an inherent judicial power, that the Constitution delegated to the judicial branch. And because of that delegation to the judicial branch,

the pardon power, which was delegated to the president in Article 2, couldn't interfere with the judicial power. So, in other words, as I understand Noonan, the teaching of that case is that the president is without power to adjudicate a person to be innocent such that records could be expunged or that I think it would apply in this case that I could find that there was a finding of innocence

such as to erase the existence of the criminal case and the findings and the verdict in that case. Because just as the authority to maintain judicial records is an inherent judicial power, the authority to determine criminal liability is an inherent judicial power. And it's one of the most important powers that judiciary has. So it's when we're determining if somebody is criminally liable or innocent, the judiciary has to make that determination.

The presidential power has been described in various ways as a prerogative of mercy or an act that the president can make to serve the public good. But the Supreme Court stated a pardon is an act of grace, and it's proceeding from the power entrusted with the execution of laws which exempts the individual on whom it is bestowed from the punishment. the law inflicts for a crime he is committed. So the president did bestow this act of grace upon Mr. Milton, but it doesn't rewrite history or erase the facts that were determined at his criminal trial. But even if the pardoned power did extend

to determine innocence, you know, left to the point that I made repeatedly that the pardoned, is clear on its face and there was no finding of innocence. And I assume that the president speaks with complete clarity. And he did so when issuing an official grant of clemency pursuant to that constitutional pardon power. And because the pardon is unambiguous and clear on its face, I don't need to look to, nor

can I look, to extrinsic evidence of the president's other statements to interpret or supplement the official pardon. So I'm not going to consider any out-of-court statements that the president made when his words were perfectly direct and clear and stated exactly what his intentions were when issuing the pardon. And even if I couldn't consider. consider the criminal conviction, I do have the arbitration panel's findings of the misconduct. And they provide more than adequate evidence, an overwhelming amount of evidence, to fulfill

the first prong of the equitable subordination test. We, in this forum, we can't relitigate the issues in the arbitration. We can't relitigate whether he breached his fiduciary duties. Those findings were made, and the award was upheld by the district court in the district of Arizona. And the relitigating would be contrary to the principle of issue conclusion to raise a number of times. And it applies when there's been a final determination on the merits, and that's what you have in the arbitration. So because there has been a final determination, determination on the merits in that arbitration and as affirmed by the and ordered by the

district court mr. Milton would be precluded from denying that there was any breach of its fiduciary duties so settled on that first prong but I'll go over the other prongs the second prong requires that the claimants misconduct resulted in any to other creditors or conferred an unfair advantage on the claimant. There's certainly overwhelming evidence of that first problem, the injury to other creditors, have extensive unrebutted evidence on that fact. The evidence before me is that the fraudulent statements and breaches of fiduciary duty resulted in an injury to creditors.

creditors to shareholders and to the company itself and that damage caused millions and millions and millions hundreds of millions and dollars in losses these actions largely led to nickel's inability to pay a lot of its debt the fall of its stock price and ultimately its insolvency so in example evidence of the record about the harm to the debtors that was caused by the misconduct. Finally, that third prong examines whether equitable subordination or requires that it not be inconsistent with other provisions of the bankruptcy code. And there are no other provisions of the bankruptcy code that anybody has pointed to

or that I could find that would make a finding of equitable subordination inconsistent with the code. and on the set-off issue, you know, I've looked at the cases that Mr. Milton cites, and I simply don't find them applicable to the analysis of equitable subordination. So I didn't find them of an awful lot of help in determining these issues. So because the debtor has met all three prongs for equitable. subordination and because the the pardon argument of innocence fails I'm overruling the objection to equitable subordination of mr. Milton's claim number 54 I have a few other objections that I need to address and the the

first one that I heard was the United States trustees objection and again I thank Mr. Fox in his office for their very thoughtful argument in the thoroughness of the briefs. As Mr. Fox knows and as others in the courtroom are aware, on other instances, I found that in opt-out post-Purdue be an appropriate mechanism of determining that consent was given and the United States trustees argument addresses in part sort of a philosophical view or a doctrinal difference in how this should be approached with one being a sort of a due process argument which is what I've adopted on other occasions and on the other hand this contract theory that my colleague and friend Judge Goldblatt applied in the smallhold case I think the due process argument is an appropriate argument.

And in this case, the third-party releases or the opt-out had applied to one class of creditors. This is not an instance where I've seen in other places where, for instance, shareholders are being required to execute an opt-out. This only went to a fairly small class of creditors. and it's hard to attach much weight to how many creditors opted out because there is a creditor apathy problem. We're all familiar with that. The math that was recited to me was that we had about 16% response rate on votes.

In my experience, that's not a bad number. It's actually a pretty good response. But ultimately, I don't know if that's all that germane to the analysis. because my determination is based on that due process analysis that I think the majority of courts have employed over a period of many, many years. There was an opportunity for creditors in class three to tell us whether they've consented or not by opting out.

And it was the ballot and the paper were clear on their face that if they wish to opt out of the third-party releases, that they could simply return a ballot and strike the opt-out box and stake their ground out. And a number of creditors did it, a number, a significant number I thought, who didn't vote opted out. So I do find that the opt-out mechanism used here was a pretty important. appropriate. On the injunction issue, I'll suffice it to say that I agree with the analysis of my colleague, Judge Stickles, and do find that the injunction here is appropriately tailored and drafted and similar to what I've seen a number of other cases where it's been approved.

And of course the rule 30-20 issue is no longer in play, but based on all that, I'm going to overrule the objection by the office of the United States trustee. And again, express my thanks to Mr. Fox and the attorneys of that program for their excellent work in connection with this issue that I know is very important to them. The lead class plaintiff is also objected to the plan. And again, I've given the arguments a great deal of consideration. requires subordination of claims that arise from damages arising from the purchase or sale of securities. And that's precisely what we have here.

I don't agree that subordination must be pursued through a claim objection under Rule 2007. I could find no authority that, to my satisfaction, would support that that that's the rule and would be in my view inconsistent with the structure of the bankruptcy code and and also implicitly rule 7,008 which implicitly provides that you can do it through a contested matter and again as I've described with the structure of the code that can be done in connection with plan concordination The lead class plaintiffs certainly received notice and opportunity for a hearing that hearing has happened. I've considered the arguments very carefully, but I am going overruled,

I do frankly just view it as a fairly garden variety of light to be subordination arising out of the damages from the purchase of claim of security, so that objection is also overruled. As for the equity holder objections, we had two written objections and we had I had several formal or informal objections. I read the formal objections and today was the date that all parties had notice of is the date where we would have a hearing on confirmation of the plan. I invited each of the formal objectors to be heard today, and neither one of them appeared to have attended the hearing by Zoom,

which was the opportunity that they had. And similarly, there were no people who spoke up, and I asked for any informal objectors to be heard. So I would view those objections as abandoned, but I will address in substance the arguments that they made. There is an objection based upon disclosure, and I don't find that argument to be credible. There was a liquidation analysis that came accompanied with a great deal of expertise. as to how the liquidation analysis operated the assumptions and how it worked. And there was Mr. Rowan's declaration that gets into detail on that.

Mr. Rowan was subject to cross-examination today and nobody took the opportunity to cross-examine him and test his testimony regarding the liquidation analysis. There was also a contention that there had been no meaningful investigation. I think to say the least, the notion that Nicola hasn't been adequately investigated is a difficult one to support. We know that the Department of Justice and the Securities and Exchange Commission expended an enormous amount of time and resources in their investigations. The evidence before me is also that there was an internal investigation, and the committee has reported that it's done his own investigation. So I think it's fair to say that the bushes have been more than soundly thrashed and beaten

in pursuit of causes of action. that might be pursued on behalf of the estate. There was, and also an objection common to the two written objections, that there have been a lack of opportunity for meaningful participation. The fact that they received notice and had the opportunity to respond to tend to undermine that argument in my view. and in addition I noted that today was the day to speak directly to me, and nobody took that opportunity.

Class 5 is a class that was deemed to reject, and for that reason, as is universally the case, doesn't get to vote. That's what the bankruptcy code requires. So there is no requirement here that equity holders be given the opportunity to vote. on the plan because they are presumed to reject because equity is being canceled under this plan. And then finally there is the argument that they're being unfairly treated, but under Section 1129 B2B, we have the absolute priority rule and it dictates the result that I'm proving today because there is frankly no prospect of recovery.

to equity. And there is simply, there's just no path to recovery, unfortunately. It's always sad when retail investors lose in these cases. And it's particularly regrettable when the losses may have been attributable or were found to be attributable to bad acts.

But that's, that this is the result. that the bankruptcy code mandates. So with all that, I'm overruling the objections to the plan, and I also find on a final basis that the disclosure statement satisfies the requirements of Section 1125, so it's approved on a final basis, and the plan likewise meets all the requirements for confirmation

under 1129 and the related provisions of the bankruptcy code that section 1129 incorporates. So for those reasons, I am confirming the plan today. For the record, Joshua Morris for the debtors. Thank you very much, Your Honor. Very much appreciate the well-reasoned words. I think you've seen the revised... form of confirmation order? Yes, I reviewed it this morning.

Perfect. I think what we'd like to do, we have a couple conforming nits to the plan that will be submitted as exhibit to that confirmation order. What we'd like to do is just submit that under certification of counsel following the hearing so that everything is buttoned up. And we'll do that. And I don't think we have anything else for your honor. Thank you in your chambers for all the help and assistance.

Thank you, and I want to express my gratitude for the really, really fine work that all the attorneys who appeared before me today rendered in furtherance of this case. It was outstanding work all around, and you have my gratitude for that. There were really important issues, and it was very well presented. It makes it a pleasure to do my job when I have the aid of such an effective counsel. Thank you. Thank you. All right.

Well, I wish everybody a good...