American court hearing recordings and interviews - Season 3. Episode 6. June 29, 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: July 8, 2023

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This is Judge Jones. The time is 1.30 Central. Today is June the 29th, 2023. It's the docket for Houston, Texas. On the 130 docket, we have the jointly administered cases under case number 22-90341, core scientific ink. 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 this afternoon's hearing. First time that you speak, if you would, please state your name and who you represent. That really does help the reporters in the event that a transcript request is made. For those parties who are in the

courtroom, if you choose to speak, you would please come to the lectern so that everyone can both see you and hear you. For those folks who are on GoToMeeting, I have activated the handraising feature. If you haven't already done so, know you're going to be speaking. If you'd give me a five star, I'll get you unmuted. If you change your mind during the hearing, you can again hit five star at any time. Finally, we are recording this afternoon using Courtspeak. We'll get the audio up on the docket shortly after the conclusion of the hearing this afternoon. So we've got a couple of people that raised their hands. All right.

Mr. Schrock, are you starting to start this off this afternoon? Excuse me. I am, Your Honor. Ray Schrock, Wild Gatch, counsel for the debtors. I'll be kicking it off and good afternoon. First of all, Your Honor, thanks for allowing this to appear electronic We, uh, it was a very strange thing. I've never had this happen, but we actually couldn't get flights, uh, you know,

Wednesday or Thursday. You know, it was a bizarre thing that was occurring with, you know, the cancellation. So we appreciate the accommodation. We did it, you know, coordinate with the other parties on the same appearance as well. So, Your Honor, I'm going to start off. We did file a demonstrative.

So with that, we'd like those to want. If it helps you, I've looked at the PowerPoint. I've also read the, plan and disclosure statement. Okay, perfect. Would you like me to put it up, Your Honor, for others, or I'm happy not to? No. Are you going to do it yourself?

No. No, Your Honor. I'm going to ask my colleague Austin Prattree to put it up. Of course. I was going to say, yes, I want to see, I want everyone to see the PowerPoint. I was just going to be amazed. if you were going to ask for control. No.

No, no, I wouldn't do that. And Mr. Crabtree, you should have control at this point. Great. Austin, if he could put up the presentation. He's got control. I just checked again. Okay. We have a backup plan just in case if Cliff

has to do. Okay, there we go. There we go. Okay, if you just look for the next page, please, Austin. Okay, so here we're going to cover today. It's an update on plan negotiations, the summary of the plan and treatment, liquidity update, as well as next steps, Your Honor.

So, Austin, please flip. One more. So overall, I'd say, you know, we had a busy last several weeks since we were last in front of Your Honor. We, you know, did present on the business plan. have gotten feedback from all the major constituent groups. As you know, we had the exclusivity hearing, and following that, we did submit the consensual plan framework

to the key stakeholder groups. We first met with the advisors, and then later we were able to meet with all of the principles as well, and, you know, we did have those parties restricted at this point. You know, there was a lot of back and forth, you know, among the advisors. But on June 16th, you know, we did receive some feedback prior to that point, but June 16th, we submitted a draft of a plan to the key stakeholder groups, advisors. We filed a plan and disclosure statement on the 20th, consistent with the goal with your honor,

pet set, and that we appreciate, frankly, for just keeping the cases moving. That plan and disclosure statement does reflect, as you notice, there's, you know, two options, you know, with regard to the convertible note holders. There's a cram-up plan, and there's a consensual plan. Why did we file that, I guess, is one, you know, consistent or one question that people may have. We're going to try really, really hard to get to a consensual plan, Your Honor, and I want to emphasize that. We did reserve time with Judge Isker for later in July in the event that we can't get there. But unless somebody else is aware of how to handle when you believe there's equity value at a company and you've got secured creditors that aren't on board, it's really your option.

And we are a unique situation where we're coming out of a period of, you know, great turmoil for Bitcoin and for this particular asset. we're going to see, you know, how open the capital markets are, you know, for this company. PJP is already out there, you know, doing, you know, putting together, you know, capital-raise efforts that's, you know, in process. But overall, our fundamental belief is that there's equity value, you know, and that, you know, with the rise in the Bitcoin price, with, you know, where the company has, you know, can come compared to where it started and we'll take you through some of that. We think there's very little doubt, listen, there is equity value here. We're going to have to find a way, frankly, to get all of the constituents to accept,

you know, some compromises around how are we going to, you know, we want very much like the company be leveraged so it doesn't end up in this situation again. If it doesn't, you know, if it doesn't have, if the Bitcoin price goes down, or some other adverse event. But fundamentally, we have to get the parties to focus on it and get in a room. So we've got responses back so far from the Equity Committee.

We've got a response back from the UCC. I'm relatively optimistic that at the end of the day we're going to have consensus with those two groups. The equipment lenders, there's a good dialogue and a back and forth. I think that, you know, relatively optimistic we could find a solution there as well. The convertible loadholders are, you know, probably going to be the most challenging party

for us to reach consensus with. But I do think, you know, we're being very creative in terms of what we're thinking about. I know that, you know, I have great respect for my friend Mr. Hansen, and I know that he's reasonable to intervene if there's any way to try and bridge the gap either through, you know, throughout mechanisms. The company just doesn't want, obviously, to leave all the value, have people recover more than 100 cents. I think, you know, Mr. Hansen's perspective, I'm sure he'll give you,

but, you know, they have a different view of value, and they don't want to, you know, be left with something less than 100 cents, if we believe there is equity. So that's where the rub is. You know, I would prefer not to have the novel valuation, you know, a Bitcoin mining company trial if we can avoid it. But if we have to, we're prepared to go down that road. We are, but we're working really hard to get, you know, consensus where we can.

And I think that at the end of the day, I don't want to just run the mediation and just have, you know, judges go say, listen, here we are. I really like to try and narrow the differences, at least before we get in a room with them. But I think getting the parties, frankly, in person and getting people focused, you know, at the end of next month, that's going to be what really, you know, if there's a way to turn the corner and get people to consensus, that's what's going to do it. But we've been busy or we are going to be prepared to file the motion to approve the disclosure statement by the middle of this month because we want to keep the timing that we've set, which is to still try and emerge by the middle of, you know, by the. into September, certainly. But we're not disillusioned in that we think that we know we still have what to do with these parties. The good news is the company's doing well. Let me ask.

Sorry, Your Honor. You want to say something? No, I was just, again, because I want to be helpful to the process. Would it be helpful to give you a hearing date for the disclosure statement? Yes, sir. Your Honor. What were you thinking? You know, Ms. Berkovich, you wanted to help me out there with, you know, I know

we were playing for mid-July filing and we did have a, hold on just a second. So I asked a bad question. Ms. Berkovich, what was Mr. Schrock thinking? Your Honor, if we can get to a fairly consensual plan in D.S. by mid-July, I think the first week in August is the week that the doing begins July 31st would be a good week to the disclosure statement hearing. Do you want the disclosure statement hearing on July 31st? I think that's a little too early.

I think if you get your honor around August 3rd or certainly the week following, that would sufficient and let me ask again disclosure statement hearings don't typically generate that many sparks I am happy to do it later that week I have a Laredo docket on Thursday the 3rd so we could do it by video on the 3rd if that would work for everybody I could also do it on the 7th if that is preferable I I will just go ahead and say just give it where we are at the moment to avoid everybody else piping in and suggesting the seventh. I'll suggest the seventh just in the event that we don't have in the event we don't have consent.

Right. Is anyone got a scheduling conflict for the seventh that can't be managed? All right. Then why don't we do this? Mr. Schrock, I'll go ahead and schedule a hearing on the disclosure statement that is filed as it may be subsequently amended. for August the 7th, 2023 at you want late in the day or early in the morning or lunchtime? Lunchtime would be great, Your Honor. Then if I did at noon my time, that would be 1 o'clock for the folks on the East Coast.

Would that work? That's fine for the year. All right, then go ahead and notice it for August the 7th at noon central. We'll do, Your Honor, and thank you very much. So I'm probably going to have some comments at the end of the status conference, Your Honor, but I wanted to hand the lectern. I have some any more questions over to Ms. Berkovich. All right, thank you.

Ms. Berkovich. Good afternoon. Good afternoon. Good afternoon, Your Honor. Rudy Verne Berkevich from Wild Gostle for the debtor. Moving on to slide 6. I know, Your Honor, read the plan of disclosure statement, so we don't need to delve into detail here,

but really the theory of our plan is to provide a plan that hopefully gets the consensus with everyone, but provide the not-consensual task of emergence if we can't fix consensus, particularly with the secured note holders. We need a way out of Chapter 11. There's two classes of note holders in April notes and August notes, as we call them. They have slightly different rights.

We classify them separately. And for each of those classes, if they accept the plan, they get their treatment 50% in equity and 50% in a new note, you know, total full pay for them. But either of those costs rejects the plan. The plan provides for a standard, you know, cram-up note for the full value of the claim. The default treatment for everyone else, or an exponent, actually, simply reflects the priorities that the NPRC2 tells us, provide a waterfall of value. Their claims are on top.

They get paid on full. Every secured creditor gets the present value in their secured claims, and they get to keep their collateral. We have many different classes of security creditors here. Beyond the convertible note holders, we have our mining equipment vendors, we have our non-minding equipment vendors.

We have credit fee-hounders, and we have mortgage claims. So all of them get their bankruptcy codes mandated treatment. Then unsecured creditors receive a 100% recovery in the form of new equity. And only after all non-priority creditors, or I should say, all non-subordinated creditors are paid and full, the residual values flow to equity holders and if there are any subordinated creditors. As Mr. Schrock said, we do expect there to be valued and so equity does get a recovery here. In addition, as Mr. Schrock said, we tried to be created here, and we understand that

predators have different interests in terms of what type of consideration they receive. Some of the classes have options to choose different treatment. There's a default treatment mandated by the bankruptcy code, but there's also options to elect maybe different form of consideration or slightly lesser claims and the like. We really are trying to please as many people as possible here, not still how to find the think her people's requirements. I appreciate the approach. It was an enjoyable read.

Okay. Good. And the next couple of slides get into very much detail about the plan treatment. Your Honor, about the plan, and I'm sure that everyone was called inside the plan. I don't know that we need to get into each one, but I'm happy to do so as the corporate life. I think that you've given everybody, if people want to know more, again, the documents are there. we're early on in the process.

If you want to go through it, I'm happy for you to do that for folks, but I don't need it. Okay. No, I don't think it's necessary. Again, we've been having lots of conversations with all of the major stakeholders. We've also had smaller private orders reach out to us, and we're taking all calls. You know, I just want to have a question about the plan to steal free to call. Mr. Schrocks, me, Mr. Carlson, just on the line, too. We're happy to talk to you.

And, again, for those folks who are on the video, If you want a copy of the PowerPoint, it can be found at docket entry number 1009. Sorry for the interruption. No, we can also email it. So next we go to slide 10. There are different ways of showing that the business is doing well, as Mr. Schrock said. Here we show just the company's cash position. And this slide is an update from something we showed the court previously that really shows

that we are doing well as compared to our initial forecast in December. Not only that, but we've updated the budget periodically, and we've exceeded all of our budgets from a cash position. So, you know, in just to drop the numbers, you know, even though the expected case duration has been extended by four months, our projected end in liquidity is forecast to be $48 million greater than our initial budget when excluding the impact of dip-drawn and repayments. and please report that he had not had to draw on the dip any further in support in terms of approval of the replacement gift in early February.

So we've actually been repaying the gift in the last few months because of the Texas cash. And Mr. Berger. So here to me. Yes. No, my apologies. I was just going to say the improvements or the improvement that has occurred, is it just solely due to rise in price of the commodity or have there been struck? structural changes that the expense structure is now much better.

Or both. It's primarily as a result of increased, you know, receipts from self-mining through the factors we discussed last time that impact how much we get from our mining of the Bitcoin, as well as very importantly, the decrease in power dispersment, which has favorable energy pricing since the beginning of the case, As well as obviously always good management of the companies, but there haven't been many structural changes to business. There have been a few. We mentioned some in our support, some changes in the way we contract, for example, with our hosting customers,

but overall it's been new factors. Thank you. And let's go to the next step to some of our presentation on page 12. Again, we're going to continue with our daily conversations with all of our major stakeholders and minor stakeholders. We hope, if necessary, we'll vote a mediation to resolve remaining dispute. We hope not to get there. We've got a date there. Having a date, just like your honor gave us a date for file the plan, that was very helpful.

And having those couple nights around the clock to get the plan on file, and I think having a date for mediation will cause people to work hard to try to get to date before then. Then you will file a disclosure statement and be back before your honor and on your step is for approval. you know that brings us for confirmation you know early to mid-September was not full exit by the end of the third quarter thank you that concludes my presentation and unless your honor had been for the question uh i don't but thank you other parties want to talk you have be heard your honor so we're happy to turn over the podium no of course thank you i just didn't know if there were if there was anything else the

debtors wanted to address let me ask um let's see uh mr wilpool Okay. Had you hit five star on your phone or do you have me double safety? It's become my standard. Can you hear me now? I can't. Thank you. I always wanted to make me. Brett Miller, he's been long dead, but I'm here in his place today. Brett Miller, Wilkie Far and Gallagher, I'm not quite sure why I automatically popped up as Wilkie in the box.

But for the official committee of unsecured creditors, we've been working with the debtors regarding negotiations. regarding the business plan. We provided comments to the plan. Some of our comments made it into the file draft. Others remain on an open list. And we absolutely agree with the comments that creditors should be paid in full. I mean, I support Mr. Shrock and this program

which completely that it's a hundred cent case. But the devil's in the details in getting there is going to be interesting regarding valuation. regarding currency. We did make a counter-proposal regarding the proposed note that's in the draft plan, which, you know, we're happy to sit down further and work out the details on that one.

But the committee does see the value here. Your Honor is correct. The Bitcoin pricing itself, and Ms. Burke, which said, the other factors make this a real solid case for 100 cents creditors and something left over for equity. I'll let Mr. Hansen speak for his clients, but we also have to open up the dialogue with them, and as well as with the Equity Committee and the equipment lenders.

So the creditors committee is open for business and speaking with everyone and hope to facilitate getting a deal done as quickly as possible. I really appreciate the comments. Thank you. Because everyone's going to have to figure out how to manage uncertainty in this, because it can just move really far, really quick. and so I appreciate everybody being flexible and creative and trying to figure out how to deal with that uncertainty.

But thank you. Mr. Autry, you raised your hands? Your Honor, I was just demonstrating by a technical lack of technical skills. I apologize. No, you should have said I was just testing in case I had something important to say. I would have enjoyed that. Anyone else have comments they want to make Mr. Hansen, or Mr. Lohan, I'll come back to you.

Yes, Your Honor. Yes, go ahead, please. Good afternoon. Good afternoon, Your Honor. Can you hear me okay? Loud and clear, and thank you for checking. Thanks. Chris Hanson, with all these things on behalf of the Adha Committee

and Converable Note, was Your Honor? Yeah, I just say that we obviously echoed the better sentiment. We want nothing more than an agreeable deal, where we all come back to you and present a plan that everybody's on board with what most people are on board with, and we can proceed to confirmation. The problem that we're having on is we're struggling a little bit. You know, the valuation, the business plan and the valuation of the business plan

that's in the plan of real innovation that was filed has equity and money. And if you look at the plan, right, it basically sets up a everybody consent to it. And if you don't, we'll cram you down. And on the cram downside, especially when you think about what the better purports is a solvent entity, cramming down, or effectively having 1129B compliant debt from a convertible note perspective is one very interesting aspect. Another angle that is interesting is that the plan contemplates raising new capital in order to at least partially pay debt service.

So in the context of that, it really raises some interesting questions around the business plan of value. And the business plan itself is really only applicable in the consensual sense. If there's a crime down here and those debt service costs rise dramatically across the capital structure or what kind of needs to be in the business plan. And so that's something that we need to evaluate to. And as I said, Your Honor, one of the struggles that we're having in terms of responding to the debtor, and again, just trying to be really open with you, Your Honor, is that we're

struggling because it's not as easy as saying, oh, well, why don't we just adjust a little bit here or there on our treatment? As you can tell, there are an awful lot of security classes of creditors around this capital structure. And as Mr. Miller just pointed out, the debtor is saying, hey, we're going to pay everybody and full, and it just doesn't appear that that's possible. And so we're strongly a little bit with how

we would respond, because we're trying in our own head to think, well, if we pull lever A, that basically make the entirety of the process move, and how does that look? So it's been a little bit difficult for us to get there. We also obviously don't want to wind up this bankruptcy again anytime soon, if we're taking back to the amount of debt

based upon the volatile currency, which for the most part, dictate value here. We all know how power goes up and down pretty regularly. We've got a curve, and we can look at there, can actually plan for it as opposed to Bitcoin, which seems to be a little difficult to guess where it's going. So we just want to make sure, you know, the court understands that. We understand that Judge Isker had time at the end of the month. You know, that's fine.

We're happy to always happy to go talk to Joseph. If we need to, we'll see if we can work out on our own between here and then, you know. But if we don't get there, then obviously we know Your Honor is always open to giving everybody the day in court. We'll go through the evidence and the legal issues and then make rules. So I just wanted to give you a little bit of a feel for where we are, your honor. Got it. No, thank you. And, again, it all gets back.

I think we're just saying the same thing. You don't know how to manage the uncertainty. There are a couple of things that pop into my head. And again, I'm not a party. I'm not an advocate. I'm not a lawyer. And so I'm going to keep those thoughts to myself. The only reason I bring that up is that we all know who made me what I am.

That's why so many people hate him. and it might be worth having a conversation with Izger's sooner other than later because my guess is we'll probably tell you pretty close to the same thing. But again, you guys do what you want to do. Again, I agree with everything you said and I'll just wait to see what happens. Thank you, Your Honor. Mr. Lohan, I think you raised your hand. Did you opt to pull it back?

No, Your Honor, I just took down. but I appreciate just one second of your time. Again, for the record, Brian Lohen, our own boarder on behalf of Bairing, one of the equipment lenders. And we agree with Mr. Schrock and Ms. Berkowitz that this company needs it away out of bankruptcy, and we appreciate that the plan that filed

is definitely the means to push this case forward. Now, we disagree with our treatment that it was proposed under the plan. But like Mr. Miller, Like Mr. Miller, we have sent the debtors a counterproposal, and we appreciate that the debtors have been constructive in their engagement, and we hope that the debtors in the court understand that we try to work together, equipment lenders as a group, and we did band together six equipment lenders

to create the counterproposal to try to streamline the discussion. Hopefully, we don't need to, but of course, you know, We're always happy to participate in plan mediation. We certainly appreciate Judge Isker's time and guidance at the process. I'm just trying to keep him busy when he has idle time. He's a pain to deal with. So, no, it's just. He's going to get.

I'm thinking you guys. He's going to get bored. He had his last big confirmation hearing yesterday, he told us. So he's going to need some stuff to fill up the summer. See, what you heard, you got on video. I get the other 23 hours a day in person. No, he's, again, quite frankly, for this, I encourage that conversation sooner rather than later,

because I'm going to guess that he'll probably tell you something close to what I would say, and then none of you will like it, and then you'll go tweak it, and then you'll find common ground. So I encourage that sooner rather than later in all seriousness. I do think that he would be really helpful. But again, you folks, as I say before, you're the best there are. So I trust your judgment. You do what you think is right for your constituents.

Anyone else want to weigh in on any of this? All right. So Mr. Schroger. Mr. Meyer. Apologize, Your Honor. David Meyer, Vincent Elkins, on behalf of the Equity Committee. Just a few brief comments. I think no one can dispute here that all the markets.

trends are working in the debtor's favor. And I think Mr. Schrock and Ms. Berkovich today, Mr. Schrock and Ms. Berkovich has highlighted that well. But we, too, we believe this is a solvent-debtor case. We believe that equity holders should receive significant and meaningful recoveries. If anything, Your Honor, our client has the, seems to have the wide the company here type attitude in the first instance. But we are where we are.

And we, too, would welcome a conversation with Judge Izgar if it comes to that. and would eagerly participate in mediation except we're not able to reach a constructive resolution in the upcoming weeks. But I echo Mr. Schrock's comments that we're here and we'll continue to work with the company and all the stakeholders. Thank you. I expect nothing less because you are who you are. Mr. Schrock, let me ask you. I've given you hearing date for a disclosure statement. Is there anything else that you believe that I can do to help move?

the process forward? I don't think so at this time, Your Honor. I think setting the dates, you know, for filing the plan given this disclosure statement hearing is really what we needed. I will say that we take to heart, you know, your comments around getting judges involved as if we need to get them involved sooner, we won't wait. We do have some ideas about how to bridge the gap. I do want to note that, you know, the senior management team

I think we'll have with us in court the next time we're together. So if we need to talk a little bit more about the business, you know, questions around the business, how is performing, what are some of the issues that we're doing with? We're going to be prepared to do that. I do think also that the fact that this company, you know, we do intend, this company is going to be a public company when we emerge. And so when you have that kind of public market that will be there

for the company post-emergent. it does provide, I think, compared to at least with a private company, it provides a basis upon which you can start to see, how can I solve for value? Are people going to be right? Are they going to be people wrong? You know, you can make a true of mechanisms and the like, and especially if people think that if the value is there,

the proof will be in the pudding. So we're very cognizant of that, and at the same time, you know, we're trying to do the right thing by everybody here. we really appreciate the time and we're going to continue working hard. I got it. Thank you. Anyone else have any request or any comments they want to make? All right. Then everyone please have a wonderful and safe holiday. Don't fly. Joking. Sort of. But anyway, please have a wonderful holiday and I'll see everybody soon. Thank you. We'll be adjourned until 2.30.

Thanks, Your Honor. Thank you.