American court hearing recordings and interviews - Season 3. Episode 5. March 20, 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 25, 2023

The excerpt below lists eligible equity security holders appointed to the official committee of equity security holders in the U.S. bankruptcy proceedings of Core Scientific Inc, The excerpt is drawn from the document filed as docket number 724 in Core Scientific Inc.'s U.S. bankruptcy proceedings. For the complete text of this document and more documents filed in the case, there is a free docket available at https://www.cases.stretto.com/CoreScientific. Note: The free docket does not seem to be consistently accessible with a VPN on, so trying to access with VPN on may result in an error message that goes away if the VPN is switched off.)IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISIONIn re: CORE SCIENTIFIC, INC., et al. Chapter 11 Case No. 22-90341NOTICE OF APPOINTMENT OF OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERSTO THE HONORABLE DAVID R. JONES,UNITED STATES BANKRUPTCY JUDGE:COMES NOW the United States Trustee, pursuant to § 1102(a) and 1102(b)(2) of the Bankruptcy Code, and hereby appoints the following eligible equity security holders to the official committee of equity security holders in the above captioned case:1 Rudolph Family Trust c/o Lawrence Rudolph Trustee 613 Canyon Greens Dr. Las Vegas, NV 89144 310-909-9745 [e-mail]2 Douglas S. Wall 4233 Versailles Ave. Dallas, TX 75205 214-662-9255 [e-mail]3 Brent Berge 6718 E. Rovey Ave. Paradise Valley, AZ 85253 602-430-3673 [e-mail]4 Foundry Digital LLC Attn: Ryan Boyle 1100 Pittsford Victor Rd. Pittsford, NY 14534 646-465-4195 [e-mail]5 RBH Holdings, LLC c/o Randall B. Hale 3737 Buffalo Speedway, Ste. 1800 Houston, TX 77098 713-304-8262 [e-mail]6 Aaron Baker 2895 W. Capovilla Ave., #140 Las Vegas, NV 89119 702-830-1741 [e-mail]7 Janice J. Kelly c/o Dee J. Kelly, Jr. 201 Main St., Ste, 2500 Fort Worth, TX 76102 817-332-2500 [e-mail]

Good afternoon, everyone. This is Judge Jones. The time is 112 Central. Today is March the 20th, 20th, 2023. This is the docket for Houston, Texas. Next on the 1 o'clock docket, we have the jointly administered cases under case number 22-90341, Core Scientific Inc. Folks, please don't forget to record your electronic appearance. 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 the hearing. First time that you speak, if you would, please state your name and who you, represent that really does give the court reporters a good point of reference to do what is now a very difficult job. We are recording this afternoon using court speak. We'll have the audio up on

the docket shortly after the conclusion of the hearing this afternoon. For folks in the courtroom, if you would make sure you speak from the lectern, since that's the only place we have a camera, that way you can both be seen and be heard. All right. Mr. Perez, good afternoon. Alfredo Perez on behalf of the debtors. Your Honor, with me and who will be presenting the motion is Ms. Christine Calabrese. And Your Honor, I think I'm happy to report that as the result of the good work done by all of the other people at the firm, Not Me, that we were able to come to a form of order, that we have agreed, that is agreed among the parties, and that is filed at docket 702.

It has two red lines, one from what we filed originally about a week ago, and then one from what we filed last night. I think with that, Your Honor, and the goal of the language that was put in there, I don't think anybody actually is complaining about the deal. The goal is to make sure we preserve everyone's rights, and that's just been further refined. One other thing, Your Honor, we are working on a more detailed, scheduled of the actual equipment going back and that's just going to take a little bit of time but we will file that schedule with the court at the appropriate time it doesn't hold up anything but just so if anybody wants

to go back and look at it and so that'll actually delineate the equipment which has been delivered and is on site versus equipment that hasn't been delivered because I understand that makes a huge difference and most of it is that one picture that we showed you of the transformer that's that's That's most of, you know, that's the biggest single component. But we're just going to do that just so there's no confusion. It's not, we don't want to hold up anything, but it's just, we're good for it. No, I got it. And I've looked at the red line to the last red line.

The approach just makes sense to me. I agree with you. I think everybody understands it's a good deal all the way around. And just everyone wants to make sure that they all. aren't the one that's paying for it. I totally got that. Thank you, Your Honor. All right. Ms. Calabrese? Thank you, Your Honor. No pressure, but I want your A-plus game today.

All right, I will bring my A-plus game. All right, so thanks very much, Your Honor. We have Michael Brose here. He's joining remotely. He's a declarant for the debtors on the 1990-factors. His declaration is docketed at 699-9, and I'd like to move that declaration into evidence if it so pleases the court. All right, thank you. Any objection to the admission of Mr. Brose's declaration found pursuant to the protocol at docket number 699-9? All right, then it's admitted.

Anyone wish to cross-examine Mr. Brose? You sure you don't want to take a shot? All right, then Mr. Brose excuses as a witness. Thank you. And I've read the declaration. Thank you, Your Honor. We've also prepared a presentation for the court. It's brief, and the purpose is to set the stage from a factual perspective

and also walk the court through some of the key terms from the settlement and the basis for approval. The presentation is docketed at 699-10. I'd also like to move that demonstrative into evidence. All right. Thank you. Any objection for purposes of today only? All right, then it's admitted as a demonstrative.

Are you going to walk me through it? Yes. So if you could get control to my colleague Austin Crabtree. He has control. Thank you, Your Honor. So if we could please pull up first page of the back. Let's give a minute. Mr. Crabtree is also bringing his A-plus game.

Got it. On the controls. I think he's related to Mr. Carlson. Okay. Awesome, next slide, please. Okay, so like I said, Your Honor, this is really for purposes of table setting. The two data center facilities that are relevant here are the Cedarville and the Cottonwood Data Center facilities.

We'll go through those briefly, talk through the debtor's relationship with PPM, disputes between the debtors and priority power, walk through the key terms of the settlement, and then the Bayses for people. Next slide, Austin. So the Cottonwood and Cedarville facilities are in West Texas. This was Cores entry into the West Texas space. You can see the Cottonwood facility on the map that's in Barstow and Cedarville. avails in Pecos, which I, you know, Googled and it looks like they're 26 miles apart. So pretty

nearby. Next slide, please, Austin. Okay, so this is the Cottonwood Data Center facility. You can see that it's mostly a large, large plot of land that's partially constructed. So there are some, there's some infrastructure on the site, and construction has halted. And as you, I'm sure, know from our motion, the reason construction halted is that Core was anticipating a large amount of energy across the Cottonwood and Cedarvale facilities. When Core realized those facilities would not energize up to that amount, Core halted construction on the facilities. So Cottonwood is partially constructed and if we look at the next slide, you'll see that Cedar Vell is similarly partially constructed facility that would be hosting miners.

Currently the Cedar Vell facility is not operational. It was anticipated to energize up to 700 120 megawatts, but Core is not currently operating that facility. The Cottonwood facility is partially operational, but significantly under-energized. The debtors were anticipating 300 megawatts for that facility. Next slide, please. So in 2021, Corps decided to enter the West Texas space and wanted to build data center facilities in West Texas, and that's when Corps contracted with PPM. Freddie Power is an energy management services procurement and infrastructure. structure development firm. So here we'll talk through a little bit how what that means for

the debtors. That provides third parties like Corps with consulting and energy procurement services. So here there are four agreements that are relevant to the settlement, two executed and two agreements that were unexecuted pre-petition, but priority power has been operating under in any event. So the first, Your Honor, all of these agreements have very similar names. So we've given them some user-friendly nicknames that I'm going to use for this presentation. So the first agreement that was executed is the power procurement agreement. It was executed in June of 2021, and under that agreement, Priority Power provides a host of different consulting and power procurement services for Corps, the most relevant of which is

negotiating Corps' electricity supply agreement with its retail electric provider. Here, Core's retail electric provider or rep is Shell. So priority power under this power procurement agreement has the exclusive right to negotiate Corps' rep agreement with Shell or any other rep. Under this agreement, priority power is paid a monthly fee based on kilowatt usage. The next relevant agreement was executed in August of 2021. We call it the construction agreement. Under this agreement, priority power agreed to build out the electrical infrastructure at the Cedar

Bale and Cottonwood sites. And under this agreement, priority power was paid actual costs plus a certain percentage on top. There are also two draft agreements between Corps and Priority Power that were in draft form as of August 2021, but were never executed. Party Power has anyway been performing under them, and the services under these agreements are very helpful for the debtors. The first agreement, is an asset management agreement. So as I understand it, sometimes at the facilities like a fuse will blow or there'll be some sort of maintenance that's required,

and Priority Power will perform that maintenance, which is very helpful to Corps because there's not a lot of providers in the West Texas space, and Priority Power is familiar with those facilities as the company that engineered them and built them out. The other is an curtailment agreement, This one's a little bit more complicated to explain, but there's basically a day ahead energy trading program. And parity power, as Core's qualified scheduling entity or queasy,

participates in that program. So if Core, for example, decides, or if the debtors decide to curtail or not use energy during a high use period, they'll get revenue back. So it incentivizes the reduction of using energy during really high usage times. So the revenue that's generated through that program, of that revenue that's generated, priority power retains a certain percentage and passes the remainder along to Corps. So far, priority power has been performing under that agreement, but has retained $514,000 or so approximately of revenue that was generated under that program.

And that's core share? That is, Core's position is that. that's core share and that priority power should have passed it along to core. In the motion, we call that the retained DR revenue. Next slide, please, Austin. Okay, so I've already teed this up, but there are really two primary disputes between the debtors and priority power. On the one hand, Corps says that we have potential claims and causes of action

against priority power arising from the anticipated amount of energy. The debtors were anticipating at the Cedarvale and Cottonwood Facilities. We have potential claims and causes of action that we could pursue. On the other hand, priority power has two primary points. The first is that they are entitled to the retained DR revenues, that $514,000 under the Portailment Agreement. And the other are asserted mechanics liens relating to the work performed at the Cedar Vell and Cottonwood facilities, goods, labor, materials.

So they have an asserted lien for approximately $20.8 million. That's the landscape of the dispute. Austin, next slide, please. Okay, so it's against that backdrop that core, that the debtors and PPM started negotiating and ultimately executed a global settlement agreement. It's before your honor today. This agreement would resolve all issues

owed between the debtors and priority power. So it's structured as a walkaway to restructure a positive go-forward relationship between the debtors and priority power. So the principal terms of the PPM settlement. The first of that priority power would have a single allowed claim for the approximately 20.8 million and that would be deemed paid in full. And so when it's a single allowed claim, what type of claim?

It would be the complete claim that would be extinguished by the transfer of assets to the party. And my... Okay, we're going to work our way through this. So what kind of claims are there? There are secured claims. Right. And they're asserting. an M&M lien claim, aren't they? Yes, so that would be a secure.

A secured claim. Okay, got it. So they're going to get an allowed secured claim for $20.8 million, which is going to be being paid in full by the transfer of all the debtor's interest in the equipment back, whatever that is. Yes. Okay. Any, the debtor's interest, to the exempt they have any, in the equipment that's listed in MSA. Got it.

And that would be free and clear. And how are you going to meet the 363F requirement? So, Your Honor, first my understanding is that because of the proposed order that we submitted today that Mr. Perez mentioned at the outset, my understanding is that we actually don't have any, that we do have the consent we need to move forward with this deal. Because that's one of the requirements. Yes. Or one of the options, right? So our best option for meeting 363F would be consent, and I believe,

we haven't. Always. What was going to be your plan B? Plan B would be 363F3, Your Honor. So that would be a little bit of a trickier question, but we could discuss in more detail the value of the assets and whether we could satisfy 363F3. Did you have a plan C? Mr. Perez might have a plan C, Your Honor, but I just have plan A and B. That's nice pivot. All right. Go ahead. Okay, so in addition to that transfer and extinguishing of the $20.8 million, the debtors would assume the power procurement agreement with some terms amended.

And the parties have agreed to the language? Yes, the parties have agreed to the language on the amendment. The most important of which is that the debtors will have the optionality to negotiate its own rep agreement. Okay. We would also enter into those two other. agreements I mentioned, the asset management and curtailment agreements. So those would be executed. The purpose there is just to really give some clarity and execute agreements that priority power has been performing under. Yeah. And so, you know, let them keep what's been generated to date

and then going forward. There's the split will then occur per the terms of the agreement. That's right, Your Honor. So they can keep the retained DR revenue. Obviously, we reserve all all arguments that we were entitled to it in the first place, but as part of the settlement, priority power keeps the $514,000 and will also pay an additional $85,000 for their legal and out-of-pocket expenses. Okay. And then there are some other terms. The debtors would agree to introduce priority power to any acquirer of the facility, so that priority power has the option to potentially work without acquiring moving forward, and a mutual release of all claims and potential causes of

action. Okay. Okay. So the equipment that's listed on NXA that the debtors will be transferring to priority power really splits up into three large buckets as we see it. Well, let's start all the way on the right. The largest bucket of equipment is currently in priority power's possession and was never delivered or shipped to core, and that's about $17 million. And why is that important? It's important because we would say that priority powers lien is controlling and that title never shifted to the debtors, which would have an impact on for the debtors other constituents and their interest in that. So it's not sure. It's not yours.

It's theirs. Got it. Priority powers. And that's the bulk of this, Your Honor. So that's 17 million never transferred to Corps. So priority power is retaining that equipment. that equipment. Free of any claims by the debtor? Yes. I got it. Then the next bucket I'd like to talk about is the equipment that was delivered to Corps but never installed. That's 5.8 million

worth of equipment and Core has that equipment currently staged at the facilities. Austin, if you can go to the next slide quickly. So here's here's one piece of equipment that's been delivered and staged. It's an uninstalled and unassembled substation power transformer at the Cottonwood facility. This is listed on AnnexA and it will transfer back to PPM. You hadn't hooked up the wires, you're just going to go out, put it on the truck, take it. Well, I'm not going to do that. But that will happen, yes. Okay. Awesome, if you could flip back. Okay. Then we have the equipment that was delivered and installed. That's a much smaller amount. It's, $340,000 or so, give a chip.

Right. And what has to happen there? So there, I believe it's a thick. I'm a little bit out of my deck here, but I believe that's a fixture. And it's fun. Yeah. So it's a fixture, and I believe that priority power's mechanics lien is the priority lien on that $340,000 as well.

Right. So the M&M lien attaches where? The M&M lien attaches to the equipment and it stays with it. I'm sorry, it stays with the equipment. So priority power now that it's a fixture. Is it when it was a fixed, Avalina? I've remembered. It attaches the land improvements and fixtures.

There you go. Okay. And so who's responsible? Because this is where wires have been hooked up, right? wires have been hooked up to the extent. You ever seen one of these things in real life? I have not seen one of these things in real life. So, you know, it's, I grew up an engineer.

Electrical is a matter of fact. So, you know, this is, this has got some work involved in actually doing this stuff. Who's responsible for disconnecting it? I believe priority power. is to pick up the equipment that's being transferred back. All right, so they're responsible for safely disconnecting the equipment and removing it. I can't say, Your Honor, that I remember speaking about that specific term, but I'm sure that the debtors and parity power could reach some mutually acceptable.

Of course, but you're going to do these for the next 40 years, right? Yeah. So as you're looking at them, you want to make sure you understand how that's going to be accomplished, because that's not free. And you also want to make sure as a fiduciary that you have appropriate oversight. And that may mean that somebody's just standing out there watching. It may mean that you have to have an expert, but you always want to make sure as you're working through this

because you want to be able to get this done and move on. You don't want to have to look back over your shoulder. Make sense? Yes. Okay. Absolutely. All right. Keep going.

So those are the three big categories that the equipment divides into. Austin, if we can go to the next slide, please. This is the substation. Austin, next slide. Which is a very cool picture, by the way. Your Honor, I see the slide on Mr. Crabtree's computer, but it's not, there we go. So against that backdrop, you know, from the debtor's perspective, approval of the PPM settlement is warranted. This is a good deal for the debtor's estate.

Litigating the debtor's potential claims, you know, success is uncertain. It will be expensive. It will be costly. The priority power settlement is the product of good faith, arms length negotiation. We've been heavily negotiating this agreement since the middle of February, but have been in talks since a little bit later than that. And it's also reasonable and in the debtor's best interest. This will satisfy priority powers claim and the PPM liens with surplus equipment.

I did not mention that. This is surplus equipment that the debtors cannot utilize because they're not going to continue building out those facilities. Right. So it's just excess. The debtors will also have the flexibility to negotiate that electricity supply agreement I mentioned with the REP, which will provide valuable optionality to the debtors. My understanding is that the debtors believe they might be able to negotiate a better agreement,

but if they can't, priority power is still there to negotiate an agreement for the debtors and the choice of the debtors, whether it does its own or it goes with parity power. And then it will – this is important as well. It will stabilize the relationship between the debtors and parity power moving forward. party power is important to the debtors. This is a key relationship for them in the context of the Cedarville and Cottonwood sites. And the settlement agreement will provide

some much needed clarity going forward. Right, makes sense to me. What else? Thank you, Your Honor. That's all I have on the motion, unless I'm happy to address any additional questions. And so what do you want me to do? Oh, yes.

So we would like you to please approve the 1990-19 motion allow the debtors to assume the power procurement agreement and also enter into the new agreements that I mentioned, the procurement agreement and the asset matter. And the latest form of order is what? It's documented at 702. There are a bunch of things docketed at 702, right? There are.

The latest form of order is the proposed order docket at 702 along with additional redlines that request the changes. Okay. So 7. 702-1. Okay, got it. Thank you.

Nice job. Appreciate it, Your Honor. All right. Mr. Hanson, any comment that you want to make on behalf of your clients, I think I understand the business decision that got made, and I think you got, I think you got the right balance, but obviously I didn't want to take away your ability to make any statements you thought were appropriate. Oh, Mr. Hansen, I'm sorry, we can't hear you?

Can you hit five-star for me? There we go. Okay, Your Honor? Yes, sir, loud and clear. Thank you. All right, great. Yes, Your Honor. I did want to make a couple of remarks on behalf of the ad hoc committee of secured

convertible note holders. The first of which is we're obviously withdrawing our objection in connection with the consent that we're rendering with the entry of the order. But I did want to just give a little bit of history as to how we arrived at having to file our objection to reservation rights last night because I think it's helpful for the court, not only on this issue, but context as we move forward as there are, there may be others that come up. So, you know, we obviously, we appreciate that the debtors came to us early and identified these issues for us, talked to us about the context of the settlement.

Of course, with a lien through UCC one that the debtors stipulated to on the debtor's equipment, which includes the fixtures, we were a bit concerned that they were not going to be able to satisfy Section 363 because there are no cash proceeds from the settlement. So from an F3 perspective, it didn't look like anything was coming in that obviously would have exceeded the value of those on the equipment. So it was really a question of consent at that point.

And there are other leads on the equipment as well. They may be junior in nature, given their debt and others, but they're out there. And so we had that concern. And we do have this kind of curious situation where it is a settlement, but it's also a transfer of collateral, free and clear of the interest or the lien interest in that collateral, for no active consideration, right?

There is consideration in the form of relief of a claim, which doesn't necessarily benefit our part is because we believe that we have a senior lien, but we never more as understood that it was important for the vendors to try to move through, and we wanted to be constructive here. So the suggestion that we made, which is incorporated into the order, was that we receive effectively an equivalent lien in the, in value, something that we don't currently have a lead in, so effectively a trade, if you will. And the doubt is remittable to that.

I think the reason we had to file the objection in the ROR last night is because we were looking through it with the debtors and all the other parties, and people have not yet agreed on the punt concept that's contained on the order. I think we and the debtors had to get a little bit of time for others to get there. And that punt concept is, instead of trying to litigate today what the value of this equipment is and the debtor's interest in it and the extent of the lien, let's push that off a little bit because it may

or may not be important in the context of what's to come from a plan negotiation which is where we all need to get to. We were prepared, obviously, to come before the court and make all kinds of arguments about whose interests were and what the value might be, but it didn't make sense to do that today. So that was the guy

doing behind the punt, and I'm glad that public parties agreed on that this morning because the debtors and the no-holders thought that was the right approach. It is important to look at those three buckets of assets, though, and I did want to just point out that while you have the Q&A with Fedders' Council, the low point is we have the equipment at PPM's facility. I don't think that there should be, there's obviously no finding in the record.

Yeah, it was really just colloquially between you and counsel. But the point that the equipment being at PPM's facility means that it is not the Federer equipment, and we've, no one's able to establish that for us. We've asked for whether or not the debtors have actually paid for that equipment, whether there was a purchase order which demonstrates one title to that property would transfer, you know, as a result of a title of payment, and just because it's out there, it doesn't mean that they, it belongs to them. So that's an issue that if we have to get to in the future, we'll get to it.

The other two, when it being on the debtor's property, are a little bit easier, you know, to deal with, but that's pretty important. And obviously to assist us in dealing with the issue going forward, the debtors are still trying to determine whether or not they have paid for that equipment and where those purchase orders are so that we can determine title transfer. And then last year, I just wanted to say for the record that it's really important to the ad hoc group of secured convertible mobile no-holders that nothing in connection with the order entered today sets that a passenger for any future transaction, whether that's a settlement

with other mechanic's lien holders, other secured parties, etc. Our view is the very bespoke situation. we are happy to support it, but we don't want to have any type of methodology to adhere by anybody for, in terms of whose property belongs to who, what the value of those liens are, what the value of other property may be, et cetera. And we'll cross that bridge when we get to it on this one, and what we hope is that we have a business plan from the governor soon and a plan negotiation to try to bring some consensus to the court.

But again, we're reserving all of our rights on the future settlements. Got it. Thank you. Anyone else have any comments? Yes, sir. Good afternoon, Your Honor. Scott Bowling, Baker-Bots, on behalf of Priority Power. With me in the courtroom today is my partner, Danny David,

together with two members of priority senior management team, Mr. John Vick, the chairman and chief commercial officer. Afternoon. As well as Mr. Brooks Antwild, the chief legal officer. Got it. Good afternoon to you. Your Honor, we obviously support the settlement. We'd like to thank the court for your time today.

I think the better is the wild team and the other parties for their instructive work for this. All right. Thank you. So first, Mr. Hanson, let me go back and deal with the issues that you've raised. Number one, I very much appreciate the business approach that your client took. I think that the right balance has been struck. You are right. I was really just having a little fun with counsel.

I agree that title is going to, can be driven by many things, including, contracts, including documentary evidence, and again, not trying to get too far on that, but I do think that it is an evidentiary issue that will have to be flushed out if as and when necessary. So again, just having some fun with the young lawyer just to see what she read and see what she hadn't read. So did not intend for that to in any way be binding on your clients. Likewise, again, every situation.

exist on its own merits, and this is not indicative of a path forward for any particular transaction other than the one that is before me. And so hopefully that will give your clients some comfort that they can make business decisions and not inadvertently stub their toe along the way with respect to the next one. With respect to the motion that I have before me, I do find that I have jurisdiction over the matter pursuant to 28 U.S.C. Section 1334. Do find that the approval of a compromise constitutes a core proceeding under 28 U.S.C. Section 157. Further find that I have the requisite constitutional authority to enter a final order.

I am comfortable based upon the uncontested record that the debtor has prudently exercised its business judgment. And again, in those cases, which we all know and recite all the time, that the Fifth Circuit has said, I'm not to substitute my own judgment for that of the debtor. I'm simply to look at the range of business judgment and see that it falls within the reasonable range. This is prudent business judgment. It's at the top. Again, I think it's just the right balance. I understand the economics from the debtor's point of view, from PPM's point of view.

I got the transaction that has been proposed. It just makes good sense to me to the extent that the compromise includes a transfer of property, not something that doesn't happen on a regular basis. Again, all of the issues that might have been issues have been resolved with the consent by the note holders. Don't have any concerns whatsoever. I will grant the motion using the order at 702-1. We will get that on the docket promptly, so that will show up this afternoon. Anything else we need to address?

Nothing further, Your Honor. Maybe be excused? Absolutely. Thank you all. Be well. Folks who are on for the 115. Thank you.