American court hearing recordings and interviews - Season 3. Episode 1. January 3, 2023. In re Core Scientific, Inc., et al., chapter 11 bankruptcy case number 22-90341, audio of hearing held in bankruptcy proceedings pending before the U.S. Bankruptcy Court for the Southern District of Texas #crypto

Episode Date: March 19, 2023

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Your time is 11 o'clock central. On the 11 o'clock docket, we have the jointly administered cases under case number 22-90341 core scientific meet. Folks, please don't forget to record your electronic appearance if it's the first or it's been a while, perhaps even an entire year. That's a quick trip to the website, a couple of mouse clicks. You can do that at any time prior to the conclusion of this morning's hearing. First time that you speak, if you will, please state your name. name and who you represent. That really does help with the court reporter a good point of reference in the event that a transcript request is made. We are recording this morning using

court speak. We'll have the audio up on the docket shortly after the conclusion of this morning's hearing. I previously told everyone there we go that I have activated the hand-raising feature. You know you're going to be speaking. I haven't already done so if you give me a five star. Mr. Perez, I just saw you. I don't I think just looking at the numbers that we have the while populous in the meeting. Your Honor, good morning. It's Chris Turner, but we just want to confirm that our audio

was working. I saw you pop on earlier and I could hear you so, yes. We can't hear you if you're attending a speech talk. I think mine un-muted. Wow, so did I start over? Yeah, we heard you down. My apologies. My apologies to everyone. So let me start again. The time is 1101 Central. Happy New Year to everyone.

Today is January the 3rd, 2023. This is the docket for Houston, Texas. On the docket this morning, we have the jointly administered cases under case number 22-90341, Core Scientific Inc. We are recording this morning using court speak. We'll have the audio up on the docket shortly after the conclusion of the hearing. Please don't forget to record your electronic appearance. That's a quick trip to the website. You can do that at any time prior to the conclusion of the hearing. First time that you do speak, if you would, please state your name and who you represent. That plays a very important role in giving the court reporters a point of reference

in the event that a transcript request is made. I think I got it. I was better the first time than I was the second, in any event. In any event. Mr. Perez, good morning. Are you doing intros and then handing it off? I think, Your Honor, that's correct. Along with me is my partner is Ronee Berkovich and Ted Zaccredis,

and I think Ms. Berkowitz will handle the matters initially. All right. Thank you. Let me ask, are we going forward today? Yes, Your Honor. Right. Is there, I really didn't understand the reason why there was a request to seal Celsius's preliminary objection. Was that done by agreement? Was there a discussion? I generally don't like to do that unless there's a reason. And having read it, I just didn't see the reason. Your Honor, for the record, Chris Trennan, Kirkland-L. for Celsius and affiliated debtors and debtors with possession. Build our objection. Your Honor, there's a protective order in the feliest case.

That material is governed by the protective order. In advance of filing our objection, we reached out to counsel for court and ask them, you know, what if anything they believe was confidential, it should be sealed. They provide us with a list. To be clear, and as Your Honor may have seen in our sealing motion, we don't believe that the sealing of that information is necessary. But pursuant to the protective order, that's what we're required to do. It was designated by court, so we comply with our obligations under.

our protective order filed and under seal. And under that protective order, court has seven days to object and argue about why that should be sealed. And if they don't object, it will automatically be unsealed after seven days. So there's a process to go through, again, to be clear, we don't believe that it needs to be sealed or it should be sealed, but we get it at the request of court.

All right. So this was, yes, Mr. Zacharias, good morning. Yes, Your Honor. I want to address the credit creditors from the debtors on the ceiling issue. So most of those documents relate third-party agreements or third-party discussions, and that's why we kept them confidential because they're not just our information. And, you know, the transcripts of the depositions, we allowed those in, and anything that was between the parties, we allowed those in.

But because the documents that they wanted related to third-parties, that's why we maintain the confidentiality. It's separate from the issue that we don't think any of that is relevant, but just on the confidentiality point, that was the reason behind it. So was that with respect to Mr. Brown's affidavit? Yes. It was all on the issue about the underlying dispute on the contract.

So let me take a step back. And again, I'm not trying to get in the middle of whatever arrangement was made. Mr. Brown's affidavit is totally. inappropriate for so many different reasons. I'm not going to consider it on any basis. Quite frankly, probably ought to simply be struck based upon what's on file. But I want to talk just about the objection itself, which is docket number 211, which is the actual, that's the actual sealed document. Is there a reason why that should be sealed? And if there is, I'm not, again, not trying to step on the toes of any agreement that's been reached.

Is having read it, I don't understand why it was sealed. I got why you would have an issue with Mr. Brown's affidavit, but best I can tell, that wasn't actually sealed. Well, we didn't discuss within advance the objection. they sent us a list of documents that related to the underlying dispute and some deposition testimony and that's what we referred to.

When I read the objection this morning, I mean, I think the front half it relates to the dispute about the rejection to the extent that the decision is one. And then the back half is on the underlying contract dispute, which we don't even think is relevant in the rejection context.

Presumably if they were seeing, because there is reference to the underlying documents that are confidential in that back. back hat. Probably that's why they sealed that. I didn't see this beforehand, but the driver for the sealing from our perspective where the third-party documents said some are referenced in this objection. Right, but the document, all of the materials themselves are attached to Mr. Brown's affidavit, which, again, just looking at it, isn't sealed. Right. I know that's a bit. Sorry, go ahead. Your Honor, there's a seal version of

an unsealed version, certainly exhibits are not confidential and were not sealed. Certainly the exhibits were confidential and were sealed for that reason. There's two versions. The seal version is a 212. I'm sorry. Yes, the affidavit. It's 214 is the sealed version, which has all of the documents. And 212 is the redacted version, which those documents that were confidential was attached

to the affidavit publicly and the remainder were not attached. I did not appreciate that they weren't identical. Okay, I got it. All right. But with respect to the objection itself, that was sealed as well, correct? That's right, Your Honor. We did that because we made reference in the objection to certain documents that horse counsel told us they believed it was confidential,

and so we didn't want to have the horse sort of be out of the barn at that point if it turned out that those documents were to be confidential. And again, we don't believe that they are, that the references are confidential, but, you know, it's hard to reseal something once we post it public. No. And the only one second on the docket, and it's no longer sealed. I totally got that. But I do, and again, if there is a legitimate reason that it should be sealed,

then I'm all for it. But I really disfavor these situations where anyone who has an interest in the can't understand what's going on because everything gets sealed. And again, there's a good reason to seal it. I'm all for it. I don't want it to be used as a competitive advantage or embarrassment or if it discloses any sort of confidential information. I just didn't see it.

Mr. Securities? Yeah, so I think the point I made there, Your Honor, and looking at the objection is through page 9 before Section 4 As it relates to the rejection, I don't think any of that, that section has anything to do with the underlying dispute and the documents that issue. They could have, we didn't say anything about that. They could have unsealed that front portion or a DACA of the back piece. I mean, I haven't gone through every document that they cite from Section 4 to the end. I'm sure there's some in here that fall within what we would consider competitive information and third-party information,

but certainly, in addition to not being relevant. But I think they could easily unseal the first eight and three-quarters pages that have nothing to do with the underlying dispute or claim to confidentiality and relate just to the rejection views. All right. So for purposes of today, because I don't want to get off track, I'm going to leave it where it says. But I'm urging everybody, again, if there's a legitimate reason to seal something, then fine. and I understand that there are real reasons to do it. What I really don't want to see as a developing habit where every single pleading is sealed

because I think that just does a disservice to the process, and I just don't think it's needed most of the time. I wonder what happened. Please enter your six-digit conference vote. You have reached the support room. We'll now connect you to your call. There are 19 attendees in this conference. Your host is joined.

Your Honor. Conference, muted. All right, evidently, evidently the entire call was dropped. My apologies. We'll go back as far as we need to. I do have everybody muted. So if you would give me a five-star again, I would be much appreciated. Your Honor, we can hear you now.

This is Alfredo. Thank you, and I have you unmuted. I'm waiting for the other folks. Yes, Mr. Connick. And Mr. Secretes, can you hear me? Mr. Perez, could you text your colleagues in New York and tell them that they need to dial in again? Yes, sir. Mr. Coney, can you hear me just thumbs up or thumbs down?

All right, I need for you to hit five-star again. Your Honor, it looks like our whole line dropped, so we re-dialed in on my cell phone. Can you hear me okay on the cell phone? Loud and clear, however you're doing that. I guess whatever until just now when you asked me if we could hear you. Okay. No. Let's take a minute and get everybody in.

I've got Mr. Perez back and he's live. I don't think that we have Mr. Secreides' back line yet. We'll put in the chat that everybody should re-dial and that's the best way to get recounted. I think everyone has... Everyone has done that. I now have 80-some-odd folks back on the line. Thank you, Your Honor. I think you can. I can't hear you. Hold on. There's a Chicago number just popped up. There we go. Thank you, Your Honor. I appreciate you helping them through the technicality.

No, no, no. Let's see. Do we have... No, we don't even have... Ah, there he's back. Zacharias, can you hear me? I can't hear you. Could you think me? there it is. There's the 646 number. All right. We good? We are good. All right. So I don't know where I lost you, but let me just sort of take a step back. And again, I want to make it very clear. If there are legitimate reasons

for pleadings to be sealed, I'm all for it. I understand the reasons for that. What I don't want to do is to start a habit where every single thing that gets filed in the case is sealed. I just think that that does a disservice to the process. And again, if there are reasons that part or all of this, the motion, the affidavit, I'm sorry, the objection or the affidavit should be sealed, I don't want to parse through and say pages two through eight shouldn't be and the remainder shouldn't be.

I'll leave it like it is and just please take the position of, being yourself on the outside looking in, wanting to follow, and wanting to understand what's going on in the case. Legitimate reason, great. But otherwise, I'd really prefer the transparency. So let's just proceed from there. Okay. Well, certainly, Steve.

Thank you. And, Your Honor, this is Alfredo Veras. But they did file a redacted version of the objection at 213, I think. that's the one that I pulled down before we ever got anything else. No, I just, where I started was the sealed version of the objection, and I just didn't understand why it was sealed. I didn't learn anything in there that I didn't have already in my base knowledge set, and that's why I just didn't understand it,

because all I see is what's on the docket. All right? So with that, let me... No, thank you both. So let me go ahead and... Mr. Koenig, and again, I'm not trying to dictate how this proceeding goes. I'm still trying to understand what it is

that your primary complaint focuses on. because I'm having difficulty other than trying to be strategic. I'm having great difficulty in understanding the position that you're taking. Sure, Your Honor. Again, for the record, Chris Conan. So look, our concern here, Your Honor, is process and timing. Let me start with the strategic point. We're not seeking to make a dollar off of core following today.

We've agreed that they can turn off our rigs effective today. and that, you know, they don't get to continue to charge us. We don't continue to pay for it. We understand what we're trying to do is make sure that there's a process that gives us adequate time to talk to our stakeholders, gives us the opportunity to talk to Judge Glenn and move forward on that basis. I mean, candidly, Your Honor, we think this is an emergency entirely of Coresome-making.

They filed this two business days ago. They knew all of the facts on the petition data. It was in the first-day declaration. It was referenced in the first-day hearing. We don't really understand why they filed it when they did. did last week. But to the extent there is an emergency to ballot, we've agreed to take care of that. If we allow them to turn off the rigs, their alleged harm from continuing to go through

and have to pay or continue to service a contract that they believe is not value maximizing, that that concern will no longer be there. But that will give us the adequate time that we need and we think it's appropriate to, you know, we're debtor in our own Chapter 11 case, we have our own bankruptcy judge, and we have litigation with Corps that is pending before Judge Glenn right now. So we're trying to be mindful of Judge Glenn. We don't want to get sideways with him. We don't want him to feel like the rug was sort of pulled out from under him on an emergency

basis. And if this had been said on regular notice, we would have had time to work with Corps and to go to go to Judge Glenn and propose a list of a motion. To be clear, we're not opposing the rejection at the appropriate time. we're not opposing the listing of the automatic state because we think that court could demonstrate cause. But we think as a technical matter, the automatic state exists and is in place,

and the debtor can't just waive the automatic stay. There's black letter law that says that the state protects not only the debtor, but the debtor's credit to make sure that the debtor can't lift the stay to allow a friendly creditor and proceed. And so we think that the process is important. And again, we don't think that Corps is going to suffer one iota from having done this,

because they can turn off the power on our rates today. But that'll give us time to go to our own constituents, to go to our own core, and we will support a joint stipulation with Corps that we believe in automatic space should be lifted, and that will also give us the time to continue to work with Core on the terms of the transition. I'm sure Your Honor saw on the objection we filed last night

that we proposed terms for the transition to the 37,000 rates. We just, frankly, given the emergency, haven't had the time to finish working that out, with court as counsel, but we think that that would be appropriate and reasonable, and frankly, we think it's required by the automatic stay in our own case. And so what provision of the automatic stay is it that you think that the sheer act of rejection violates? We think it's control over property of the estate. I mean, it's black-ledger law that the debtor can enforce compliance with an executory contract

by the non-better counterpricle. We're just two-beders here. But Celthia can compel to comply with the contract and it's an automatic state provision. And that's what we did. That's exactly what we did in our bankruptcy. We brought a motion for contempt and a motion to

enforce the automatic state to compel the non-veter counterparty, the then-n-veter counterparty core to comply with the automatic stay. And so we believe that. Let's peel that back a bit. So the act of rejection is simply nothing more than giving the debtor the right to breach the agreement and excusing future performance.

A motion to enforce and for contempt absolutely impacts the stay in this case. Did you agree? We agree and that's why we haven't pursued that motion. in our own case there. And so how is it, because the debtor could, the debtor could just stop performing. And that wouldn't violate the stay. Yes. They could just stop performing and it doesn't violate the stay.

I think it could violate self-use of stay. I think in order for us to continue. What would, if I just decide not to perform, I'm third party. dealing with your Celsius debtor. If I choose not to perform, how could that possibly violate the automatic stay in your case and what provision? Because we have the right, Your Honor,

the contract is itself property of the estate and contractual rights are property of the estate. And so we have the ability to enforce those contractual rights in our own bankruptcy and we file the motion to enforce the automatic stay in our bankruptcy. But that's not the state. The stay doesn't have to do with seeking enforcement.

You can absolutely file a motion to compel performance. But until you do that, until you have an order, which you don't have an order, and you can't get one at this point, without violating the stay in my case, how does non-performance violate the automatic stay? Because we have contractual. we have contractual rights, that's property of the estate, and their failure to perform under them. It gives rise to a claim, perhaps. But tell me what provision of the automatic stay that simple non-performance violates. I think it's an attempt to exercise control over the property

of the estate, but it's not even close. What am I trying to exercise control over? I'm just simply saying I either can't or won't perform. What property right is that exercising control over? other than my own. It's our contractual rights to compel performance from the non-better. So if I told you that I consider that to be a frivolous argument, where would you like to go from here? What I would say is we have litigation that's pending in front of Judge Glenn, and we think that it's appropriate, as I said earlier,

that he not sort of have the rug pulled out from under him, that there's litigation that this would effectively move. If the rejection goes forward, that would move the litigation in front of Judge Blatton. How so? It may limit it, but how does it pull the rug out from underneath it? If there was a right between your petition date and the date of rejection, that cause of action hasn't been affected. It hasn't just simply rejecting the contract doesn't affect what happens next.

It doesn't affect what happens to the computers. it doesn't happen to enforcement. Sure. Your Honor, I'll concede that. I'll move instead of the rate for the property of the estate that we're really concerned about, right? It's not about at this point. And I totally agree. It's not about the contractual right.

So, let me say this, about the third. Sorry, Your Honor. Now, let me say this to both of you. So one, the debtor has almost an unqualified right to reject so long as there is a rat. national business reason for doing it. And you've acknowledged that that reason exists. So what, and I, and again, I'm talking to you, but I'm also talking to the debtor.

I'm not going to let you use this as a strategic maneuver, and I think that you're actually taking advantage of Judge Glenn without Judge Glenn being able to voice his own concerns. I think it's exactly the opposite of what you're representing to make. That all being said, my debtor is not going to use the rejection of the contract to gain a strategic advantage in dealing with very valuable and expensive and sensitive property, which are the computers themselves. So what I, and again, I'm not trying to dictate the course of the hearing. I just need to get this on the right track because you folks are not talking to one

another, you're talking past one another, and I don't think that you want a third party in this conversation because I tend not to listen very well. There needs to be a structured, agreed, orderly, efficient, cost-effective way of dealing with the termination of the relationship without prejudice to whatever monetary issues may exist out there. You folks, will be work that out. But I'm not going to let this, there aren't going to be computers on the sidewalk, and I know that nobody would do that, but it's just a statement. There aren't going to be computers on the sidewalk. There isn't going to be, there isn't going to be air conditioning turned off that would endanger sensitive electronic components. It didn't going to be, well, you've got to come

pick them up between the hours of four and five. Not going to happen. I'm going to do this the right way. So we can have a hearing on whether or not the debtor is entitled to reject the agreement. You and the respond, or you and the objection acknowledge that that's a losing battle. It's just a question of when. And I'm telling you the win is going to be right now. And we can spend time figuring out the right way to effectuate the transition. that we maximize the current situation that we find ourselves in for both bankruptcy estate. That's what we should all be working toward.

Not trying to hang somebody up with a contempt motion or a sanctions motion or trying to set this up so that we can charge rent for computers or we can try to make a point. Not going to happen either way. But this seems to me that we ought to be focused on having a conversation about how we end this in an honorable and transparent way without the involvement of either Judge Glenn or Judge Jones. This ought to be an operational transition that, quite frankly, no one who wears the black dress ought to be engaged in. Now, unfortunately for you, I lived in a data center for a long time, and I feel like I know an awful lot about it. we don't really want to test that theory. So let me ask, do we want to take a break and perhaps talk about a reset on how to proceed with the hearing,

or do we want to proceed ahead with the hearing? Your Honor, I think it would be helpful for us to have a few minutes to talk offline and come back to Your Honor. We certainly understand and appreciate your comments about the stage. Just to be clear, we just felt like we could have conceded in our case and given that we have our own judge and our own constituents. It was something that we felt like we had to do. I'm not bothered by it at all. I think it's wrong.

I think there's a huge difference between rejecting a contract and then what happens next. It's the what happens next that absolutely touches on the set. And I haven't heard, and I asked everyone who would listen to me over the past couple of days, as to give me the best argument you can come up with as to how a rejection would possibly violate an automatic stay in a case filed by the counterparty.

I haven't heard it yet. May be that it's out there, and I just haven't met anybody smart enough, and I may not be smart enough to come up with it myself. But I don't see it. It's what happens next. And so I want the thing that happens next is the most important thing to me. So let's focus on that. Let me ask, the wild team have any opposition?

Because it is your hearing. And again, I didn't mean to hijack your hearing. Any objection from the wild team was I taken a couple of minutes and see if we can talk about what I think the most important part of this is, and that's the transition. No objection, Your Honor.

We agree with you. So it's 11.30. This is not a short conversation. Should we check in at noon? Does that make sense? And that would be noon central? 30 minutes from now for everyone. All right.

Then what I'll do? I'm going to leave everything up and running. I will mute everything and I'll make sure that I don't, I'll make sure that I unmute it when I get back on. If it turns out that there are productive discussions and you need more time, just have somebody pop back on and say we need more time. way folks who want to monitor can hear it and we'll figure out what to do next. If we don't go in a productive direction, then what I'll expect when we come back at noon is that the debtor will present its case and we'll move forward. Okay?

Yes. We've actually had preliminary discussions about these, which are the issues that have been confident that we can use a 30-minute productively to get for resolution. We'll start that right away. Perfect. All right, then I'll see everybody back at noon central. Thank you. Thank you. All right, folks, it is 12 o'clock noon.

We are back on the record in the jointly administered cases under case number 22-90341, Core Scientific. Folks, where are we? Your Honor, Chris Tonek, for the record. We had very productive conversations. We used to time well. Language was proposed by core that we believe works. We've recommended it to our clients.

Frankly, we need the clients to sign off on. We're not expecting any issues, but we need a little bit more time to confirm with the client. Our proposal would be to submit an agreed form of order, you know, assuming that the client agrees to it. But I think that we're resolved in the terms of an orderly transition that works for both Celsius and support. All right. Did you agree? Your Honor, yes, that's agreed. Just one request.

We're losing more than $1,000 an hour by leaving the machines on. So since it's agreed that we can turn the machines off, we intend to do so. right after this hearing while we work out the form of order. Mr. Coney, are you any objection to that? No, Your Honor. And I assume that there's no process for taking the machines down. It literally is just disconnecting power. No, there is a process to craft palatizing.

Oh, for right now, no, it's simply turning off the power. Okay, I just, I lived a life where there was a process to taking something down. I just want to make sure that we were following any protocol that was in place or any process that was needed in order to ensure the longevity or preserve the integrity of the equipment. Corps will do that in the decommissioning process. Right, Mr. Connick, let me ask, I'm sorry, go ahead. I was going to say, I apologize, Your Honor. I was just going to say that's part of the language that we've agreed to is that part of the transition is how is Corps going to be rag and palletized and get everything.

anything ready for pickup. But as far as just turning off the machines, we have no objection to them doing that right after this hearing. Okay. Let's just, let's talk to the people that know and make sure that, again, you know, I've lived in a world where if you've flipped off the power switch without running a process, yeah, it was a million dollar mistake. So let's, let's make sure we do it, do it the right way. Mr. Coney, let me ask you this. I'm perfectly comfortable if you tell me that you are proposing to simply submit an agreed order. I'm also perfectly happy if you want to, I can give you some time this afternoon, if you want to come back and say, you know, we have an agreed order, you can upload it

before then, or we have this outstanding issue. You know the conversations that have occurred, obviously, much better than I do. What would be the most productive? I'm happy to take the time if it's not in position to you or to chambers. I don't know what your schedule is like. I don't believe we're going to meet the time. We've got a very productive conversation. I expect we'll be able to get there on a great form of order pretty rapidly.

But if your honor is time this afternoon, we certainly won't stay negative. I've had a number of things go off the docket, so I'm perfectly happy to give you all some time if you think it would be helpful. Happy to have a placeholder on your calendar, and if we end up not needing the time, we can always. contact Mr. Alonzo. Absolutely. How about 3.30 Central? That would be 430 East Coast. Would that work for everybody? Okay. Okay. Then what we'll do is we will adjourn the hearing until 3.30 with hopes that perhaps in the read order can be uploaded prior to. But if folks who are listening, what I will do is at 3.30, whether we have a hearing or not, I will get on the line and make an announcement so that folks aren't wondering what's occurring.

Any objections to that? No, Your Honor. And again, if you've uploaded an agreed order, no need for you to get on. I know you've got a million other things to do. All I'm going to do is to, if there's been an agreed order, I'm just going to make the announcement and agreed order has been uploaded. I either have or haven't signed it, and if I have signed it, it's on the docket at docket number X. That's all I'll do.

Okay. Okay, Your Honor. And one just quick item to flag, and it's not an issue for today. It's just sort of a coming attraction, and we wanted to make sure while we had, Your Honor, in front of us. We discovered that Seltie recently made a prepayment for January services. That prepayments in the amount of about $4.7 million. Not for today, not for rejection. It's not going to be part of this resolution, but it's going to be a resolution that we need to work on very soon.

We're going to start talking to Corps immediately. Hopefully we can reach a resolution. If not, you know, we expect to bring it before Your Honor. but just wanted to flag so that you were aware of it as a coming attraction, potentially either a resolution or another dispute that's going to arrive. I got it. I assume that this is just one and a number of issues that you folks are going to have to address. And as I told you first day and I meant it, I mean it today.

As soon as you folks are ready to tee things up, you will have my undivided attention promptly. Thank you. We appreciate. We just wanted to make sure your honor wasn't surprised. Nope. I got it. And what's the fun in life if you can't get surprised from time to time? I will see everybody, if I need to, at 3.30, and if not, again, just reach out to Mr. Alonzo and let him know that an order is there. All right?

Thank you, everyone. We'll be adjourned until two.