IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re: PACIFIC ENERGY RESOURCES LTD., et al., Debtor

Chapter 11 Case No. 09-10785 (KJC) (Jointly Administered) Related to Docket No. 1845 MEMORANDUM IN SUPPORT OF CONFIRMATION OF FIRST AMENDED CHAPTER 11 PLAN OF LIQUIDATION FOR PACIFIC ENERGY RESOURCES LTD., ET AL., AS MODIFIED

Dated: October 5, 2010 PACHULSKI STANG ZIEHL & JONES LLP Ira D. Kharasch (CA Bar No. 109084) James E. ONeill (DE Bar No. 4042) Maxim B. Litvak (CA Bar No. 215852) ScottaE. McFarland (DE Bar No. 4184) 919 North Market Street, Seventeenth Floor Post Office Box 8705 Wilmington, Delaware 19899-8705 (Courier 19801) Telephone: (302) 652-4100 Facsimile: (302) 652-4400 Counsel to Debtors and Debtors in Possession

The Debtors in these cases, along with the last four digits of each of the Debtors federal tax identification number, are: Pacific Energy Resources Ltd. (3442); Petrocal Acquisition Corp. (6249); Pacific Energy Alaska Holdings, LLC (tax I.D. # not available); Cameros Acquisition Corp. (5866); Pacific Energy Alaska Operating LLC (7021); Cameros Energy, Inc. (9487); and Gotland Oil, Inc. (5463). The mailing address for all of the Debtors is 111 W. Ocean Boulevard, Suite 1240, Long Beach, CA 90802.

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TABLE OF CONTENTS 1. II. INTRODUCTION ..................................................................................................1 OBJECTIONS TO CONFIRMATION ..................................................................2 A. B

.

Objection of Baker Hughes ......................................................................... 2 Objection of Forest .....................................................................................3

ForestBackground..................................................................................................3 1. 2. The Forest Subordinated Note is Subordinated By Its OwnTerms......................................................................................4 By this Courts Prior Order, the Senior Lenders Assigned Certain Distributions and Their Subordination Rights To Unsecured Creditors (Other Than Forest).......................................6 The Plan is Consistent With, and Implements, This Courts Previous Orders...............................................................................7

3.

Debtors Response to Objection of Forest..............................................................8 1. 2. 3. 4. C. D. III. The Plan Implements the Beta Sale Order......................................9 The Senior Lenders Assignment of Their Distributions to the Estates is Valid and Enforceable.....................................................9 Alternatively, the Senior Lenders Assignment of Subordination Rights to the Estates is Valid and Enforceable . ............................ 11 The Debtors will Amend the Plan to Address Many of Forests Remaining Objections ................................................................... 15

Objection of Union ................................................................................... 16 Objection of the Committee...................................................................... 17

THE PLAN MEETS ALL APPLICABLE REQUIREMENTS FOR CONFIRMATION UNDER SECTION 1129(B)................................................. 18 A. B. A Plan Proponent Must Show Compliance with Provisions of the Bankruptcy Code by the Preponderance of the Evidence......................... 18 The Plan Satisfies Section 1129(a)(1) ....................................................... 19 1. 2. 3. The Plan Properly Designates Classes of Claims and Interests (Sections 1123(a)(1) and 1122).................................................... 19 Specification of Unimpaired Classes (Section 1123(a)(2)) . ......... 20 Treatment of Impaired Classes (Section 1123(a)(3)) .................... 20

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4. 5. 6. 7. A. B. C. D. E. F. G. H. I. J. K. L. M.

Equal Treatment Within Classes (Section 1123(a)(4)) . ................ 20 Means for Implementation (Section 1123 (a)(5))......................... 21 Charter Provisions (Section 1123(a)(6)) ....................................... 21 Officers and Directors (Section 1123(a)(7) and 1 129(a)(5)) . ....... 21

The Proponents of the Plan have Satisfied Section 1 129(a)(2) ................23 The Plan was Proposed in Good Faith (Section 1 129(a)(3))....................24 Payments for Services and Expenses (Section 1129(a)(4)) ...................... 25 Plan Representative (Section 1129(a)(5)) ................................................. 26 Rate Changes (Section 1 129(a)(6))...........................................................26 The Plan Satisfies the "Best Interests" Test (Section 11 29(a)(7)) ............ 26 Acceptance by All Impaired Classes (Section 11 29(a)(8)).......................27 Treatment of Priority Claims (Section 1129(a)(9)) ..................................27 Acceptance of at Least One Impaired Class (Section 1 129(a)(l0)) .........27 Feasibility (Section 11 29(a)(1 1))..............................................................28 Payment of Certain Fees (Section 1 129(a)(12)) .......................................28 Continuation of Retiree Benefits (Section 1 129(a)(13))...........................28 Provisions Relating to Individual Debtors (Sections 1129(a)(14)-(16)) ......................................................................28

IV. THE PLAN SHOULD BE CONFIRMED PURSUANT TO SECTION 1129(B) OF THE BANKRUPTCY CODE.........................................................................29 A. B. The Plan Does Not Discriminate Unfairly with Respect to the Deemed Rejecting Classes........................................................................29 The Plan is "Fair and Equitable" with Respect to the Rejecting Classes. 31

V. THE SETTLEMENT OF INTER-COMPANY CLAIMS INCORPORATED IN THE PLAN SHOULD BE APPROVED.........................33 VI. THE EXCULPATION PROVISION IN THE PLAN IS CONSISTENT WITH APPLICABLE PRECEDENT AND SHOULD BE APPROVED.......................36 VII. CONCLUSION.....................................................................................................37

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The above-captioned debtors and debtors in possession (collectively, the "Debtors"), submit this memorandum in support of confirmation of the First Amended Chapter 11 Plan of Liquidation for Pacific Energy Resources Ltd., et al., as such plan may be further amended or modified (the "Plan"). Concurrently herewith, the Debtors have submitted a blackline version of the Plan reflecting amendments that the Debtors propose to make to the Plan to address various objections. I. INTRODUCTION This memorandum, together with the evidence to be adduced at the Confirmation Hearing, will establish that the Plan meets the requirements for confirmation pursuant to section 1129 of the United States Bankruptcy Code (as amended, the "Bankruptcy Code"). As set forth below, the Plan has been accepted by three impaired, non-insider, voting classes: Class 3 (Senior Lender Claims), Class 4 (General Unsecured Claims Against PERL), and Class 6 (General Unsecured Claims Against PEAO). The Plan also satisfies each of the substantive requirements of 11 U.S.C. 1129(a), other than subsection (a)(8), which requires acceptance by each impaired class. Because the Plan is deemed rejected by four impaired classes -- Class 7 (General Unsecured Claims against Petrocal, Cameros Acquisition, Cameros Energy and Gotland), Class 8 (Intercompany Claims), Class 9 (Subordinated Debt Claims), and Class 10 (Interests in the
The facts set forth in this memorandum are the facts that the Debtors intend to establish at the hearing on confirmation of the Plan through proffer, testimony or affidavit, including the Declaration of GeraldA. Tywoniuk in Support of the First Amended Chapter 11 Plan of Liquidation for Pacific Energy Resources Ltd., et al., as Modified (the "Tywoniuk Declaration"), filed concurrently herewith, or have been previously adduced at prior hearings. The Debtors respectfully request that the Court take judicial notice of all such prior evidence introduced in these cases. Unless otherwise defined, capitalized terms used herein shall have the meanings ascribed to them in the Plan or the Disclosure Statement in Respect of First Amended Plan of Liquidation for Pacific Energy Resources, Ltd. (the Disclosure Statement"), as the case may be. Class 1 (Priority Non-Tax Claims) and Class 2 (Miscellaneous Secured Claims) are unimpaired and, therefore, pursuant to section 1126(f) of the Bankruptcy Code, are deemed to accept the Plan.

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Debtors) - and the Plan has been rejected by Class 5 (General Unsecured Claims Against PEAR), the Debtors seek to confirm the Plan under 11 U.S.C. 1129(b). II. OBJECTIONS TO CONFIRMATION The Debtors have received the following objections to Confirmation of the Plan: (1) Baker Hughes Incorporated, for itself and certain of its operating divisions or subsidiaries ("Baker Hughes"); (2) Forest Oil Corporation ("Forest"); (3) Union Oil Company of California ("Union"); and (4) the Official Committee of Unsecured Creditors (the "Committee") A. Objection of Baker Hushes Although Baker Hughes is not currently a creditor of the Debtors estates, Baker Hughes objects to the Plan on the basis of a demand that Baker Hughes received from the Committee for the recovery of alleged preferential payments totaling $690,384.50. Baker Hughes goes to great lengths in its objection to set forth its various defenses to any preference claims, including among other points, that Baker Hughes is (or was) entitled to statutory liens on the Debtors property, that the Debtors contracts with Baker Hughes were assumed, and that Baker Hughes was a critical vendor in these cases. None of these arguments, however, has anything to do with confirmation of the Plan. Whatever defenses Baker Hughes may have to any avoidance actions are unaffected by the Plan, and may be raised in an adversary proceeding if and when such litigation is actually commenced. Further, Baker Hughes does not have standing to object to the Plan as it is not presently a creditor of these estates. To the extent that Baker Hughes returns avoidable transfers to the estates, then Baker Hughes may be entitled (in the future) to a claim arising under section

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502(h) of the Bankruptcy Code and such claim will be treated as a general unsecured claim in accordance with the provisions of the Plan. Hence, none of the objections raised by Baker Hughes have merit and all such objections should be overruled. B. Oblection of Forest Forest objects to the provisions of the Plan that effectuate a subordination of Forests claims arising under the Forest Subordinated Note (as defined below). Forest also raises certain other technical objections to the Plan, which for the most part have been addressed in the Debtors proposed amendments to the Plan. The key issue in dispute is the propriety of subordinating the bulk of Forests claims against these estates. This issue, along with some factual background, is addressed below: Forest Background Prior to August 24, 2007, Forest owned a 100% membership interest in Forest Alaska Operating, LLC ("Forest Alaska"), which in turn owned the oil and gas interests in Alaska that are referred to herein as the "Alaska Assets." On or about August 24, 2007, PERL purchased Forests 100% membership interest in Forest Alaska. As partial consideration for the purchase, PERL issued an unsecured accreting principal note (the "Forest Subordinated Note") to Forest in the original principal amount of $29,250,000. Under the Forest Subordinated Note,

After the acquisition, Forest Alaska changed its name to PEAO, and PEAR became its sole member (PERL is the sole member of PEAH).

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no payments were due until maturity on July 31, 2014; instead value accreted as of every July 31 until maturity. 1. The Forest Subordinated Note is Subordinated By Its Own Terms. By its own express terms, the Forest Subordinated Note is subordinated to the first and second priority prepetition secured loans provided by the Senior Lenders to fund PERLs acquisition of Forest Alaska. The Forest Subordinated Note provides for unequivocal subordination in favor of the Senior Lenders: [T]he Holder accepts and agrees that all payments of the principal of, Accreted Value and interest on (and other obligations, if any, with respect to) this Note by the Company, and all payments in respect of the foregoing by any Guarantor hereunder, shall be subordinated and junior in right of payment to the prior indefeasible payment in full in cash of all Senior Indebtedness. Forest Subordinated Note at 8.1. Under the terms of the Forest Subordinated Note, Forest may not receive any payments or take any enforcement action at any time when there is a payment default to the Senior Lenders and for ninety days after any other default (called a "Blockage Period" in the Forest Subordinated Note). Forest Subordinated Note at 8.2(a), 8.9. Any payments received by Forest must be held in trust for the benefit of, and be paid over to, the Senior Lenders. Forest Subordinated Note at 8.3(c). The Forest Subordinated Note further provides that, in the event of a bankruptcy, dissolution or other liquidation or reorganization of the Debtors:
6

PERL scheduled Forests claim under the Forest Subordinated Note as an unhiquidated contingent claim in the amount of $31,670,000 in its Amended Schedule F, filed June 3, 2009 (Docket No. 397), which is the accreted amount of such claim as of the Petition Date. In the Forest Subordinated Note, Forest is called the "Holder," PERL is called the "Company" and PEAH and PEAO are referenced as the "Guarantors."

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Upon any payment or distribution of assets or securities of the Company or any Guarantor of any kind or character, whether in cash, property or securities to the creditors of the Company or any Guarantor upon an dissolution or winding-up or total liquidation or reorganization of the Company or any Guarantor, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other similar proceeding relating to the Company or any Guarantor, any assignment on behalf of creditors or any marshalling of the Companys or any Guarantors assets and liabilities, the Senior Indebtedness Parties shall be entitled to receive indefeasible payment in full in cash of all obligations due in respect of such Senior Indebtedness (including interests accruing after, or which would accrue but for, the commencement of any proceeding a the rate specified in the applicable Senior Indebtedness, whether or not a claim for such interest would be allowed), or have provision made for such payment in a manner acceptable to the Senior Indebtedness Parties, before the Holder shall be entitled to receive any payment by or on behalf of the Company or any Guarantor to acquire any of this Note for cash, property or securities, or any distribution by the Company or any Guarantor with respect to this Note of any cash, property or securities. Forest Subordinated Note at 8.3(a). Under the terms of the Forest Subordinated Note, Forest may not accelerate the Forest Subordinated Note or pursue any remedies thereunder until the Senior Lenders are indefeasibly paid. Forest Subordinated Note at 8.4. The Senior Lenders right to payment is revived if any payment to them is "declared to be fraudulent or preferential or set aside or is required to be repaid to the trustee, receiver or any other party under any bankruptcy, insolvency or reorganization act, state or federal law, common law or equitable clause ...." Forest Subordinated Note at 8.3(g). The Senior Lenders also have a right to specific performance. Forest Subordinated Note at 8.3(f). Additionally, the Senior Lenders are authorized to take actions on

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behalf of Forest to assure payment to them if Forest fails to do so, "including, without limitation, voting this Note." Forest Subordinated Note at 8.3(b). 8 Nothing in the Forest Subordinated Note prohibits the Senior Lenders from transferring their subordination rights under the note. In fact, virtually no act of the Senior Lender would impair the subordination rights granted in the Forest Subordinated Notes. Forest Subordinated Note at 8.5; 8.7 (no waiver of subordination provisions). 2. By this Courts Prior Order, the Senior Lenders Assigned Certain Distributions and Their Subordination Rights To Unsecured Creditors (Other Than Forest). This Court has already recognized that the Senior Lenders subordination rights against Forest were transferrable to the estates for the benefit of general unsecured creditors (other than Forest). This Courts Final DIP Order, which was entered approximately sixteen months ago, provides in pertinent part that: The Prepetition Lenders and the DIP Lenders shall assign to the Estate, solely with respect to the Settlement Proceeds, if any, and the proceeds of Avoidance Actions, if any, for the benefit of holders of general unsecured claims, the subordination rights it [sic] currently has vis a vis the claims of Forest Oil Corporation...." Final DIP Order at 38. The Final DIP Order, however, contained a reservation of rights as to Forest as follows: Nothing in this Final Order shall determine any partys rights and obligations under that certain Subordination Agreement dated as of
See Blue Ridge Investors, II, LP v. Wachovia Bank, N.A. (In re Aerosol Packaging, LLC), 362 B.R. 43, 47 (Bankr. N.D. Ga. 2006) (senior creditor may vote claim of subordinated creditor per subordination agreement).
o

- Only Forest as "Holder" of the Forest Subordinated Note is subject to restrictions on transfer under the note. Any transfer of the Forest Subordinated Note by the Holder must be "made expressly subject to the subordination terms governing this Note." Forest Subordinated Note at 10.1.

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August 24, 2007 among the Prepetition Lenders and Forest Oil Corporation. Final DIP Order 38. Under this Courts Beta Sale Order, the Senior Lenders (referred to in the Beta Sale Order as the "Successful Bidders") retained a $75,000,000 "Remaining Claim" against the estates, which is secured by certain assets of the estates referred to therein (and in the Plan) as the "Excluded Interests." 0 The Beta Sale Order, which was entered over nine months ago, provides in pertinent part: As further consideration to the Debtors estates, the Successful Bidders are deemed to have assigned to the estates solely for the benefit of unsecured creditors (and not to be used for any other purposes) other than Forest Oil Corporation (or any successors or assigns thereof) any distributions on account of the Remaining Claim and all subordination rights against Forest Oil Corporation (or any successors or assigns thereof) as to any and all assets that become available to the estates other than the Excluded Interests. Beta Sale Order at 118. Unlike the Final DIP Order noted above, the Beta Sale Order contains no reservation of rights as to Forest. 3. The Plan is Consistent With, and Implements, This Courts Previous Orders. The Plan recognizes that the Senior Lenders distributions and subordination rights were previously transferred to the estates for the benefit of general unsecured creditors (other than Forest). The Plan is consistent with, and implements, paragraph 18 of the Beta Sale Order:

The Excluded Interests are generally: (a) any proceeds of a claim made by the Debtors under a business interruption insurance policy; (b) certain expected Alaska tax credits; and (c) any lift proceeds from Alaska oil sales that remain in a segregated account by Court order and that are subject to a currently pending adversary proceeding to determine the identity of the party or parties to which such funds belong.

10

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The sum of $40,000,000 shall be deemed allowed and treated as the Remaining Claim referenced in the Beta Sale Order. In accordance with the terms of the Beta Sale Order, distributions on account of the Remaining Claim were assigned to the Estates solely for the benefit of Holders of Allowed General Unsecured Claims (specifically excluding Forest Oil). Plan at 3(b)." Debtors Response to Objection of Forest Forest challenges the propriety of assigning the Senior Lenders subordination rights to the Debtors general unsecured creditors (other than Forest). Aside from the fact that this matter is resjudicata by virtue of the Beta Sale Order, Forest fails to address the point that no assignment of rights under the Forest Subordinated Note is required here. Rather, the Plan merely effectuates the Senior Lenders assignment of their share of actual distributions from the estates -- which by the terms of the Forest Subordinated Note includes distributions that would otherwise go to Forest on account of the note -- back to the estates, but solely for the benefit of unsecured creditors (other than Forest). The Senior Lenders are in effect "gifting" their share of distributions back to other general unsecured creditors (as the Senior Lenders are entirely free to do), but they have prohibited any such distributions from going back to Forest so that the Senior Lenders subordination rights against Forest may be fully enforced. Even if that were not enough, the Senior Lenders have also assigned their subordination rights under the Forest Subordinated Note. Such assignment is entirely valid and enforceable under applicable non-bankruptcy law. There are also no limitations in the Forest

Forest asserts that its claims that are unrelated to the Forest Subordinated Note should participate with other i general unsecured claims in the distributions assigned by the Secured Lenders. The Debtors do not disagree. The subordination of Forests claims effectuated through the Plan is limited to claims arising under the Forest Subordinated Note.

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Subordinated Note on the Senior Lenders ability to assign their subordination rights to third parties. Hence, whether the assignment of the Senior Lenders rights under the Forest Subordinated Note is enforceable or not, the Debtors general unsecured creditors (other than Forest) have the benefit of the Senior Lenders share of any distributions from the estates, which by the express terms of the Forest Subordinated Note includes any funds that would otherwise have been distributed to Forest on account of its claims under the note. 1. The Plan Implements the Beta Sale Order. As contemplated by the Final DIP Order and the Beta Sale Order, the Senior Lenders assigned their distributions on the Remaining Claim as well as their subordination rights under the Forest Subordinated Note to the estates for the sole benefit of general unsecured creditors (other than Forest). Both the Final DIP Order and the Beta Sale Order are final orders that are no longer subject to appeal. Notably, the Beta Sale Order contains no protective provisions or reservation of rights in favor of Forest. Hence, the provisions of the Beta Sale Order are resjudicata on the treatment of the Senior Lenders subordination rights against Forest. The Plan merely effectuates the terms of the Beta Sale Order. 2. The Senior Lenders Assignment of Their Distributions to the Estates is Valid and Enforceable. Under the express terms of the Forest Subordinated Note, so long as there is an outstanding default in the Debtors obligations to the Senior Lenders, Forest cannot recover any amounts on account of the Forest Subordinated Note, and any recoveries must be held in trust

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for, and turned over to, the Senior Lenders. Forest Subordinated Note at 8.2(a), 8.3(c), and

EI
That is the situation today. The Debtors have been unable to satisfy their obligations to the Senior Lenders in full. Under the Beta Sale Order, the Senior Lenders have an Allowed Remaining Claim in the amount of $75,000,000. Under the Plan, this claim is reduced to $40,000,000 by taking into account various Excluded Interests, which remain part of the Senior Lenders collateral. The Remaining Claim, however, remains substantial and unsatisfied, and such claim will not be paid in full in these cases. Hence, consistent with the subordination provisions in the Forest Subordinated Note in favor of the Senior Lenders, every dollar that becomes available to Forest out of these estates on account of the Forest Subordinated Note must be distributed to the Senior Lenders, and not to Forest. Under the Beta Sale Order, the Senior Lenders chose to assign their distributions on the Remaining Claim to the estates for the sole benefit of general unsecured creditors (other than Forest). Such assignment of distribution rights has nothing to do with the subordination arrangements that exist as between Forest and the Senior Lenders, except that the Senior Lenders have insisted on enforcing such provisions by prohibiting Forest from participating in any distributions. It is black letter law that a creditor may dispose of its own distribution as it sees fit, without regard to bankruptcy priorities. See, e.g., In re World Health Alternatives, Inc., 344 B.R. 291, 299 (Bankr. D. Del. 2006) ("agreements, like the one at issue here, are valid carve outs that allow the secured creditor to give up a portion of its lien for the benefit of junior creditors without violating the provisions of the Bankruptcy Code"), In re Genesis Health Ventures, Inc.,

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266 B.R. 591, 612 (Bankr. D. Del. 2001) (concluding that plan did not discriminate unfairly where secured lenders allocated a portion of their distribution of new common stock and warrants to classes of general unsecured creditors); Official Unsecured Creditors Committee v.

Stern (In re SPMMfg. Corp.), 984 F.2d 1305, 1312 (1st Cir. 1993) (upholding agreement
between an undersecured creditor and unsecured creditors to split monies realized by the secured lender because the funds earmarked for the unsecured creditor under the agreement would have, absent the agreement, gone solely to the secured creditor); compare In re Armstrong World

Industries, Inc., 432 F.3d 507, 539 (3d Cir. 2005) (distinguishing Genesis which "involved
property subject to the senior creditors liens that was carved out for the junior claimants"). Consistent with the foregoing precedent, the Senior Lenders here have agreed to "gift" a portion of their distribution to general unsecured creditors, excluding Forest. Notably, Forest has no rights in the distributions to the Senior Lenders. Indeed, in its objection to confirmation of the Plan, Forest does not contest the Senior Lenders contribution of their distributions to the Debtors general unsecured creditors (other than Forest). Forest only objects to the assignment of the Senior Lenders rights under the Forest Subordinated Note. The assignment of the Senior Lenders distributions under the Beta Sale Order was wholly independent of the Senior Lenders subordination rights under the Forest Subordinated Note, and is binding and enforceable against Forest. 3. Alternatively, the Senior Lenders Assignment of Subordination Rights to the Estates is Valid and Enforceable. As noted above, the Senior Lenders assigned their subordination rights against Forest to general unsecured creditors (other than Forest) under the Beta Sale Order. Given that

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such assignment has already occurred and the Plan merely implements the terms of the Beta Sale Order, Forests objection on this point is woefully late. Nonetheless, even were the Court to reach this issue, there is no prohibition in either the Forest Subordinated Note or applicable nonbankruptcy law on the assignment of the Senior Lenders subordination rights to the estates. Section 5 10(a) of the Bankruptcy Code provides as follows: A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law. 11 U.S.C. 510(a). The Forest Subordinated Note is governed by New York law. See Forest Subordinated Note at Article 13. In New York, a person who benefits from a subordination provision between a creditor and a debtor is an intended third party beneficiary of such provision and may enforce its subordination rights. See Cerebus Intl, Ltd. v. BanTec, Inc., 16 A.D.3d 126, 126, 791 N.Y.S.2d 28, 29 (App. Div. 2005) (holders of defendant issuers senior notes are third-party beneficiaries of issuers subordinated notes); Silverman v. Benmor Coats, Inc., 91 A.D.2d 959, 960, 458 N.Y.S.2d 578, 579 (App. Div. 1983) ("A subordination agreement is by its nature one to which the subordinate in whose favor it is made has an essential legal interest either as a direct party or as a third party beneficiary."). See JPMorgan Chase Bank, N.A. v. Baupost Group (In re Enron Creditors Recovery Corp.), 370 B.R. 64, 72 n. 1 (Bankr. S.D.N.Y. 2007) ("Entities that fall within the definition of Senior Indebtedness are third-party beneficiaries of the various indentures and loan agreements" which are governed by New York law), affd in part, rev d in part, 380 B.R. 307 (S.D.N.Y. 2008).

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By statute, third party beneficiaries may sue to enforce their rights under New York law. McKinney s CPLR 1004 Practice Commentaries (section 1004 "recognizes the right of a promissee to sue to enforce a third-party beneficiary contract.") (citations omitted). Also, a transferee of subordination rights may enforce such rights. The United States District Court for the Southern District of New York addressed a highly analogous situation in Khan v. Douglas Machine & Tool Co., Inc., 661 F.Supp.2d 437 (S.D.N.Y. 2009). In

Khan, a subordinated debentureholder and its borrower had entered into a subordination
agreement, which provided subordination rights to the borrowers senior lender. Id. at 440. The debentureholder sued the borrower for payment, arguing that it was no longer subject to the subordination provisions because senior lender had assigned its interests in the subordination agreement. Id. at 443. The court found that the senior lenders subordination rights were transferable, stating that "[a]t common law, rights under a contract involving no personal confidential relation and no exceptional personal skill or knowledge are generally assignable."

Id. at 445 (citing 3 Restatement (Second) of Contracts 3 17(2) (1981)). The court also found
that rights under a contract may be assigned except under three conditions: (1) there is clear contractual language prohibiting assignment; (2) the assignment would materially change the duty of the obligor, increase its burden or risk under the contract, impair the chance of securing return performance or reduce the contracts value; or (3) assignment is forbidden by statute or public policy. Id. at 445 (citation omitted). New York law similarly permits free assignability of contractual rights, except under three limited circumstances. McKinney s General Obligations Law 13-101 (claims or demands can be transferred except in one of the following cases: (1) where it is to recover

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damages for a personal injury; (2) where it is founded upon a grant or claim to or interest in real property that is void under a New York statute; or (3) where it is expressly forbidden by federal or New York statute or would contravene public policy). Forest argues that the assignment of the Senior Lenders subordination rights to general unsecured creditors (other than Forest) somehow prejudices Forest, or expands the terms of the Forest Subordinated Note beyond the Senior Lenders to cover general unsecured creditors generally. In fact, the assignment of subordination rights only goes so far as distributions that would otherwise be made to the Senior Lenders assuming that the Forest Subordinated Note were enforced according to its terms. The assignment of subordination rights does not subordinate Forest to the claims of unsecured creditors per Se, but rather merely recognizes the grim reality that: (i) the Senior Lenders have not been paid in full and have no prospect of being paid in full in these cases, (ii) the Senior Lenders are entitled to every penny that would otherwise go to Forest under the Forest Subordinated Note, and (iii) the Senior Lenders have assigned their distributions back to the estates solely for the benefit of general unsecured creditors (but not Forest, in light of the subordination provisions in the Forest Subordinated Note). Therefore, in addition to authorization under the Beta Sale Order, the assignment of subordination rights by the Senior Lenders to general unsecured creditors (other than Forest)

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was authorized by, and is entirely consistent with, applicable non-bankruptcy (New York) law. 12 Accordingly, the subordination provisions of the Forest Subordinated Note should be enforced in favor of general unsecured creditors (other than Forest) under section 510(a) of the Bankruptcy Code, as implemented through the Plan. 4. The Debtors will Amend the Plan to Address Many of Forests Remaining Objections. Aside from the issue of subordination, Forest also raises various technical objections to the Plan, which are addressed below.

(a)

The Plan improperly purports to sell or transfer Retained Rights ofAction.

The Debtors will amend the Plan at Article VI.D to provide that a sale or transfer of Retained Rights of Action is available to the extent consistent with applicable bankruptcy and nonbankruptcy law, subject to the approval of the Court on notice to parties in interest.

(b)

The Plan improperly allows the Debtors to veto the selection of members

of the Supervisory Board. Under the Plan at Article VI.E, the Committee selects the members of
the Supervisory Board, subject to the Debtors consent, which consent shall not be unreasonably withheld. The Debtors do not intend to amend this provision of the Plan, but believe that it will be a moot point as the issue of membership of the Supervisory Board will be determined at or prior to the Confirmation Hearing. The Debtors oppose Forests involvement on the Supervisory Board given potentially substantial claims that will need to be analyzed and, if appropriate,
Forest cites Robinson v. Howard Bank (In re Kors, Inc.) for the proposition that "subordination agreements will be enforced only between the parties entitled to priority who enter into such agreement." 819 F.2d 19, 23 (2d Cir. 1987). Kors, however, did not address an assignment of subordination rights (its context was the preservation of avoided liens for the estate under section 551 of the Bankruptcy Code). At least one bankruptcy court has held that where there is an assignment of subordination rights by lender to a bankruptcy trustee, the bankruptcy trustee may enforce such rights on behalf of the estate. In re Chicago, South Shore and South Bend Railroad, 146 B.R. 421, 428 (Bankr. N.D.Ill. 1992).
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pursued against Forest after the Effective Date of the Plan free of any influence or appearance of influence of Forest.

(c)

The Plan arguably contains improper third party releases. The Debtors

will amend the Plan at Article X.A.2 to clarify that nothing in the Plan is intended to limit Forests (or any other partys) right to bring cross claims or third party claims against nonDebtors.

(d)

The Plan improperly limits setoff, subrogation and recoupment rights of

creditors. The Debtors will amend the Plan at Article X.A.2 to clarify that nothing in the Plan is
intended to limit Forests (or any other partys) right to assert setoff, subrogation or recoupment rights.

(e)

The Plans exculpation provision could be interpreted to apply to post-

Effective Date acts. The Debtors will amend the Plan at Article X.B to clarify that exculpation is
limited to the time period up to and including the Effective Date. C. Objection of Union Unions objections to the Plan are summarized below and, to some extent, should be addressed through amendments to the Plan. First, Union asserts that the Plan is not feasible based on a number of large outstanding administrative expense claims. Although all administrative expenses claims other than those of Union have either been paid or provided for, Union is correct that the Plan is not feasible as to PEAO only to the extent that Union is awarded a substantial administrative expense claim. This issue is currently under submission to the Court, and the Debtors look

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forward to the Courts ruling on this matter. Pending a determination by the Court, the Debtors concede that the Plan cannot go effective as to PEAO. Second, Union asserts that the Plan does not classify Unions asserted secured claims, and improperly attempts to transfer Unions collateral (namely, asserted rights in the Excluded Interests) to the Senior Lenders. The Debtors will amend the Plan to clarify that, to the extent that it is determined by Final Order that Union has valid liens on any property of the Estates, such claims shall be treated as Miscellaneous Secured Claims in Class 2 under the Plan, which essentially means surrender of the collateral securing such claims. As to the validity of Unions asserted senior liens in estate property, the Debtors will defer this matter to the Senior Lenders, as this issue does not directly concern the estates. Third, Union argues that the Plan improperly seeks to discharge the Liquidating Debtors. Although this was not the intent of the Plan, the Debtors will amend the Plan at Article IV.B.2.b, 3.b, 4.b, 5.b and 6.b to state that the Holders of Allowed Claims in Classes 2, 3, 4, 5 and 6 shall receive treatment specified in the Plan, as the sole distribution or dividend from each applicable Debtor or its Estate under the Plan, deleting that such treatment is in full satisfaction, settlement, release, and extinguishment of Allowed Claims. Also, the Debtors will amend the Plan at Article X.A.2 to clarify that the permanent injunction under the Plan is limited to property of the Liquidating Debtors or the Estates. D. Obiection of the Committee The Committees objection to the Plan is focused on the sole issue of membership on the Supervisory Board. As noted above with reference to Forests objection, the Debtors anticipate that the Committee will nominate the members of the Supervisory Board in advance of

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the Confirmation Hearing, and the Debtors will either approve or disapprove of the Committees selection. To the extent of any dispute, the Court can address the issue at the Confirmation Hearing. Either way, the language of the Plan on this point is essentially moot. III. THE PLAN MEETS ALL APPLICABLE REQUIREMENTS FOR CONFIRMATION UNDER SECTION 1129(b) The Court may confirm a chapter 11 plan if the requirements of subsections 1 129(a)(1)-(a)(7) and (a)(9)-(a)(13) and section 1129(b) of the Bankruptcy Code are satisfied. The Debtors believe the Plan complies with the requirements of the Bankruptcy Code. 3 A. A Plan Proponent Must Show Compliance with Provisions of the Bankruptcy Code by the Preponderance of the Evidence As the Plan proponents, the Debtors bear the burden of proof on all elements necessary for confirmation and must establish each of the elements by a preponderance of the evidence. See In re Armstrong World Indus., Inc., 348 B.R. 111, 120 (D. Del. 2006); In re

Genesis Health Ventures, Inc., 266 B.R. 591, 616 n. 23 (Bankr. D. Del. 2001); In re Union Meeting Partners, 165 B.R. 553, 574 n. 17 (Bankr. E.D. Pa. 1994); In re Richard Buick, Inc.,
126 B.R. 840, 851 (Bankr. E.D. Pa. 1991). The Debtors will show by a preponderance of the evidence that the Plan complies with the applicable provisions of the Bankruptcy Code and should be confirmed.

Because Class 7 (General Unsecured Claims against Petrocal, Cameros Acquisition, Cameros Energy and Gotland), Class 8 (Intercompany Claims), Class 9 (Subordinated Debt Claims), and Class 10 (Interests in the Debtors) are deemed to reject the Plan and the Plan has been rejected by Class 5 (General Unsecured Claims Against PEAH), the Debtors have not satisfied section 1 129(a)(8). Nevertheless, for the reasons set forth in Section IV below, the Plan should be confirmed because the Debtors have satisfied the requirements of section 1129(b) as to Classes 5 and 7-10.

13

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B.

The Plan Satisfies Section 1129(a)(1) Section 1 129(a)(1) of the Bankruptcy Code requires that a plan comply with the

"applicable provisions" of the Bankruptcy Code. In determining whether the Plan satisfies section 1129(a)(1) of the Bankruptcy Code, the Court must consider section 1123(a) of the Bankruptcy Code, which sets forth certain items that a plan must contain; section 1122 of the Bankruptcy Code, which governs classification of claims; and section 510 of the Bankruptcy Code, which governs subordination of claims. See Federal Home Loan Mortgage Corp. v. Bugg

(In re Bugg), 172 B.R. 781, 783 (E.D. Pa. 1994).

1. The Plan Properly Designates Classes of Claims and Interests (Sections 1123(a)(1) and 1122). Section 1123 (a)(1) of the Bankruptcy Code requires that a plan classify all claims (with the exception of certain administrative and priority claims) and all interests, and that such classification comply with section 1122 of the Bankruptcy Code. Here, Article IV of the Plan designates ten classes of Claims and Interests. See Plan, Article IV. Consistent with section 1123 (a)(1) of the Bankruptcy Code, the Plan also provides for unclassified Administrative Expenses and Priority Tax Claims. See Plan, Article III. Additionally, the Plans classification scheme complies with section 1122 of the Bankruptcy Code. The Plan properly classifies secured Claims (Classes 2 and 3) separately from unsecured claims (Classes 1, 4, 5, 6, 7, 8, and 9). The Plan properly classifies unsecured claims by first subdividing such Claims into priority non-tax claims (Class 1) and non-priority Claims (Classes 4-9). Finally, the Plan properly classifies equity interests (Class 10).

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A plan proponent has significant flexibility in classifying claims and interests under section 1122 of the Bankruptcy Code as long as a reasonable legal or factual basis exists for the classification and all claims or interests within a particular class are substantially similar.

See John Hancock Mut. Life Ins. Co. v. Route 37 Business ParkAssocs.,

987 F.2d 154 (3d Cir.

1993); In re Jersey City Medical Center, 817 F.2d 1055, 1060-61 (3d Cir. 1987) ("Congress intended to afford bankruptcy judges broad discretion [under section 1122] to decide the propriety of plans in light of the facts of each case"). The Plans classification scheme is proper and satisfies section 1122 of the Bankruptcy Code because, as described above, such scheme recognizes the differing legal and equitable rights of the holders of Claims and Interests. 2. Specification of Unimpaired Classes (Section 1123(a)(2)). Section 1123(a)(2) of the Bankruptcy Code requires that the Plan "specify any class of claims or interests that is not impaired under the plan." The Plan meets this requirement by identifying each unimpaired class: Class 1 (Priority Non-Tax Claims) and Class 2 (Miscellaneous Secured Claims). See Plan, Article V(A). 3. Treatment of Impaired Classes (Section 1123(a)(3)). Section 1123 (a)(3) of the Bankruptcy Code requires that the Plan "specify the treatment of any classes of claims or interests that is impaired under the plan." The Plan meets this requirement by setting forth the treatment of each impaired Class. See Plan, Article IV(B). 4. Equal Treatment Within Classes (Section 1123(a)(4)). Section 1123 (a)(4) of the Bankruptcy Code requires that the Plan "provide the same treatment for each claim or interest of a particular class unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest." The

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Plan provides that Holders of Allowed Claims will receive the same percentage recoveries from the Debtors as other Allowed Claims within their respective classes. See Plan, Article IV. Therefore, the Plan meets this requirement. 5. Means for Implementation (Section 1123 (a)(5)). Section 1123 (a)(5) of the Bankruptcy Code requires that the Plan provide "adequate means" for its implementation. The Plan satisfies this requirement by setting forth in Article VI the primary provisions necessary to implement the Plan, including provisions specifying the powers, rights, and duties of the Liquidating Debtors, Plan Representative and Supervisory Board. See Plan, Article VI (A), (C), (D), (E) and (F). The Plan also contains: (i) provisions governing distributions, see Plan, Article VIII; (ii) procedures for resolving disputed claims and interests, see Plan, Article VIII(D) and Article IX(A) and (B); and (iii) provisions specifying the treatment of executory contracts, see Plan, Article VII. Together, these provisions provide "adequate means" for implementation of the Plan. 6. Charter Provisions (Section 1123(a)(6)). Section 1123(a)(6) of the Bankruptcy Code requires the inclusion of provisions in charters of the entities described therein that: (a) prohibits the issuance of nonvoting equity securities and (b) provide for an "appropriate distribution" of voting power among those securities possessing voting power. This provision is contained in Article VI(I) of the Plan. 7. Officers and Directors (Section 1123(a)(7) and 1129(a)(5)). Section 1123 (a)(7) of the Bankruptcy Code requires that the Plans provisions with respect to the manner of selection of any director, officer, or trustee, or any successor thereto, be "consistent with the interests of creditors and equity security holders and with public

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policy. . . ." In addition, section 11 29(a)(5) of the Bankruptcy Code requires that the Debtors disclose the identity of certain individuals who will hold positions with the Liquidating Debtors after confirmation of the Plan.4 Under section 1 129(a)(5)(A)(i) of the Bankruptcy Code, the proponent of a plan must disclose the "identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer or voting trustee of the debtor,. . . or a successor to the debtor under the plan." Section 1 l29(a)(5)(A)(ii) of the Bankruptcy Code further requires that the service of such individuals be "consistent with the interests of creditors and equity security holders with public policy." Section 1129(a)(5)(B) of the Bankruptcy Code requires that the plan proponent disclose the "identity of any insider that will be employed or retained by the reorganized debtor, and the nature of any compensation for such insider." The Debtors have complied with sections 1 129(a)(5) and 1123 (a)(7) of the Bankruptcy Code. The initial Plan Representative is identified in Article VI(E) of the Plan as Gerald A. Tywoniuk. Mr. Tywoniuk is the Acting Chief Executive Officer and Chief Financial Officer of the Debtors. He has been Chief Financial Officer of the Debtors since August 13, 2008. Mr. Tywoniuk is the only insider who will be retained by the Liquidating Debtors from and after the Effective Date of the Plan. Mr. Tywoniuk s compensation as Plan Representative shall be on an hourly basis at the rate of $275 per hour, plus reimbursement of reasonable expenses. The Plan specifies that any successor to the initial Plan Representative shall be selected by the Supervisory Board, subject to the approval of the Bankruptcy Court.

Because related requirements are set forth ni sections 1 129(a)(5) and 1123 (a)(7) of the Bankruptcy Code, the Debtors address both of those sections in this section of the Memorandum.

14

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Also, Article VI(E) of the Plan provides that the members of the Supervisory Board will be selected by the Committee, subject to the Debtors consent, which shall not be unreasonably withheld. The Debtors anticipate that the Committee will nominate the Supervisory Board in advance of the Confirmation Hearing. Under the Plan, the members of the Supervisory Board receive no compensation for their services, other than reimbursement for reasonable expenses. In the event of a vacancy on the Supervisory Board, the remaining members of the Supervisory Board or the Bankruptcy Court shall select a replacement. The foregoing provisions of the Plan concerning the Plan Representative and Supervisory Board are consistent with the interests of creditors and with public policy and satisfy sections 1123(a)(7) and 1 129(a)(5) of the Bankruptcy Code. A. The Proponents of the Plan have Satisfied Section 1129(a)(2) Section 1 129(a)(2) of the Bankruptcy Code requires that a plan proponent comply with the applicable provisions of the Bankruptcy Code. The principal purpose of section 1 129(a)(2) is to ensure that a plan proponent has complied with section 1125 of the Bankruptcy Code in soliciting acceptance of the Plan. See In re Resorts Intl, Inc., 145 B.R. 412, 468-69 (Bankr. D.N.J. 1990); see also H.R. Rep. No. 95-595, 95 th Cong. 1" Sess. 412 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6368. On September 1, 2010, the Debtors distributed Solicitation Packages to all holders of Class 3 (Senior Lender Claims), Class 4 (General Unsecured Claims Against PERL), Class 5 (General Unsecured Claims Against PEAH) and Class 6 (General Unsecured Claims Against PEAO).5 The Disclosure Statement provides extensive information regarding, among other
15

The Solicitation Packages were mailed on September 1,2010. See Docket Nos. 1863 and 1864.

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things: (i) the Plan; (ii) events preceding the commencement of these chapter 11 cases; (iii) claims asserted against the Debtors estates; (iv) risk factors affecting the Plan; (v) a liquidation analysis setting forth the estimated return that creditors would receive in Chapter 7; (vi) financial information and valuations that would be relevant to creditors determinations of whether to accept or reject the Plan; and (vii) federal tax law consequences of the Plan. B. The Plan was Proposed in Good Faith (Section 1129(a)(3)) Section 1 129(a)(3) of the Bankruptcy Code requires that a plan be "proposed in good faith and not by any means forbidden by law." Although not defined in the Bankruptcy Code, "good faith" has been described by the courts to include: (1) the debtors "legitimate hope of success," In re Century Glove, Inc., Civ. A. 90-400-SLR, 1993 WL 239489, at *4 (D. Del. Feb. 10, 1993) (quoting In re Sun Country Development, Inc., 764 F.2d 406, 408 (5th Cir. 1985)); see also In re Shoen, 193 B.R. 302, 318 (Bankr. D. Ariz. 1996) (citations omitted); (ii) a showing that the plan was proposed with "honesty and good intentions," see Kane v. JohnsManville Corp., 843 F.2d 636, 649 (2d Cir. 1988) (citations omitted); (iii) the existence of "a reasonable likelihood that the plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code," In re Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984) (citations omitted); see Traders State Bank v. Mann Farms, Inc. (In re Mann Farms, Inc.), 917 F.2d 1210, 1214 (9th Cir. 1990) (citations omitted); Ryan v. Loui (In re Corey), 892 F.2d 829, 835 (9t Cir. 1989); and (iv) whether the debtors bankruptcy filing was designed to abuse the judicial process and the purpose of the reorganization provisions of the Bankruptcy Code. See Natural Land Corp. v. Baker Farms, Inc., 825 F.2d 296, 298 (11th Cir. 1987); In re VIP

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Motor Lodge, Inc., 133 B.R. 41, 44 (Bankr. D. Del. 199 1) (finding of good faith where debtor did not seek to use the bankruptcy process for dilatory purposes). The Debtors are liquidating their estates and maximizing returns for their creditors. Following the Effective Date, the Liquidating Debtors, through the Plan Representative, will make distributions to creditors consistent with the Plan. Thus, the Debtors have proposed the Plan in good faith and not by any means forbidden by law, thereby satisfying section 1129(a)(3) of the Bankruptcy Code. Moreover, no person has filed a valid objection to confirmation of the Plan on the grounds that the Plan was not proposed in good faith or by any means forbidden by law. Accordingly, pursuant to Bankruptcy Rule 3020(b)(2), the Court may determine compliance with section 1129(a)(3) of the Bankruptcy Code without receiving evidence on such issues. C. Payments for Services and Expenses (Section 1129(a)(4)) The Debtors will not make any payments "for services or for costs and expenses in or in connection with the case. . . , or in connection with the plan and incident to the case," unless such payments either have been approved by the Court as reasonable or are subject to approval of the Court as reasonable, thus satisfying section 1129(a)(4) of the Bankruptcy Code. The Plans procedures set forth in Articles III and XIV(B)(2 and (3) of the Plan providing for judicial review and approval of fees, costs and expenses to be paid by the Debtors satisfy the requirements of section 11 29(a)(4) of the Bankruptcy Code. See In re Resorts Intl, Inc., 145 B.R. at 475 (section 1129(a)(4) of the Bankruptcy Code is satisfied if fees, costs and expenses are subject to final court approval).

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D.

Plan Representative (Section 1129(a)(5)) The Debtors have addressed the manner in which they have complied with section

1 129(a)(5) of the Bankruptcy Code above. E. Rate Changes (Section 1129(a)(6)) Section 1129(a)(6) of the Bankruptcy Code relating to regulated rate changes is inapplicable to the Debtors. F. The Plan Satisfies the "Best Interests" Test (Section 1129(a)(7)) The "best interests" test of section 11 29(a)(7) of the Bankruptcy Code requires that holders of impaired claims or interests who do not vote to accept the Plan "receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under Chapter 7 of [title 11] on such date." 11 U.S.C. 1 129(a)(7)(A)(ii). If the Court finds that each non-consenting member of an impaired claim would receive at least as much under the Plan as it would receive in a Chapter 7 liquidation, the Plan satisfies the best interests test. See In re Century Glove, Inc., supra at *7 As set forth in Article XVIII(B) of the Disclosure Statement, members of all impaired classes will receive at least as much under the Plan as they would in a chapter 7 liquidation. Accordingly, the Plan satisfies the "best interests" test because no impaired, nonconsenting class members will receive less under the Plan than they would in a Chapter 7 liquidation.

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G.

Acceptance by All Impaired Classes (Section 1129(a)(8)) Three impaired classes entitled to vote on the Plan -- Class 3 (Senior Lender

Claims), Class 4 (General Unsecured Claims Against PERL), and Class 6 (General Unsecured Claims Against PEAO) -- have voted to accept the Plan in accordance with section 1126(c) of the Bankruptcy Code. However, Class 7 (General Unsecured Claims against Petrocal, Cameros Acquisition, Cameros Energy and Gotland), Class 8 (Intercompany Claims), Class 9 (Subordinated Debt Claims), and Class 10 (Interests in the Debtors), which are impaired, are deemed to reject the Plan. See 11 U.S.C. 1126(g). Further, Class 5 (General Unsecured Claims Against PEAH) has voted against the Plan. Accordingly, section 11 29(a)(8) of the Bankruptcy Code has not been satisfied, and the Debtors, therefore, request confirmation of the Plan under section 1129(b) of the Bankruptcy Code. See Part IV below. H. Treatment of Priority Claims (Section 1129(a)(9)) Section 1129(a)(9) of the Bankruptcy Code contains a number of requirements concerning the payment of priority claims. The Plans payment provisions meet these requirements. See Plan, Article 111(C) and IV(B)(l). I. Acceptance of at Least One Impaired Class (Section 1129(a)(10)) If a plan has one or more impaired classes of claims, section 11 29(a)( 10) of the Bankruptcy Code requires that at least one such class vote to accept the plan, determined without including any acceptance of the plan by any insider. Class 3 (Senior Lender Claims), Class 4 (General Unsecured Claims Against PERL), and Class 6 (General Unsecured Claims Against PEAO) are three impaired classes that have voted to accept the Plan and no votes cast by any "insiders" have been included, thus satisfying section 11 29(a)(1 0) of the Bankruptcy Code.

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J.

Feasibility (Section 1129(a)(11)) Section 1129(a)(1 1) of the Bankruptcy Code provides that a plan may be

confirmed only if "[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan." The Debtors have adequate cash on hand to satisfy all obligations under the Plan, provided that Unions administrative claims against PEAO (which are currently under submission with the Court) are disallowed. Accordingly, subject to the foregoing proviso, the Plan is feasible and satisfies section 1 129(a)(1 1) of the Bankruptcy Code. K. Payment of Certain Fees (Section 1129(a)(12)) All fees payable under 28 U.S.C. 1930 have been paid or will be paid on or before the Effective Date pursuant to Article XIV(B)(9) of the Plan. The Debtors thus comply with section 1129(a)(12). L. Continuation of Retiree Benefits (Section 1129(a)(13)) Section 1 129(a)(13) of the Bankruptcy Code requires the continuation of retiree benefits for the duration of the period that the debtor has obligated itself to provide such benefits. Section 1129(a)(13) of the Bankruptcy Code is inapplicable to the Debtors. M. Provisions Relating to Individual Debtors (Sections 1129(a)(14)-(16)) The Debtors are not required by a judicial or administrative order, or by statute, to pay domestic support obligations within the meaning of section 1129(d)(14) of the Bankruptcy Code. The Debtors are not individuals, and accordingly, section 1 129(a)(15) of the Bankruptcy Code is inapplicable to these cases. Finally, the Debtors are moneyed, businesses or commercial

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corporations, and accordingly, section 1129(a)(16) of the Bankruptcy Code is inapplicable in these cases. Iv. THE PLAN SHOULD BE CONFIRMED PURSUANT TO SECTION 1129(b) OF THE BANKRUPTCY CODE. Because Class 7 (General Unsecured Claims against Petrocal, Cameros Acquisition, Cameros Energy and Gotland), Class 8 (Intercompany Claims), Class 9 (Subordinated Debt Claims), and Class 10 (Interests in the Debtors) are deemed to reject the Plan and Class 5 (General Unsecured Claims Against PEAH) voted against the Plan, the requirements of subsection 1129(a)(8) of the Bankruptcy Code are not satisfied, and the Debtors thus request confirmation of the Plan under section 1129(b) of the Bankruptcy Code. Section 1129(b) of the Bankruptcy Code, the so-called "cramdown" provisions, provides that if all of the applicable confirmation requirements of section 1129(a) of the Bankruptcy Code other than subsection (8) (requiring all impaired classes to accept the plan) are met, the court, on request of the plan proponent, shall confirm the Plan if it does not "discriminate unfairly" and is "fair and equitable" with respect to each class of claims or interests that is impaired under, and that has not accepted, the Plan. 11 U.S.C. 1129(b)(1). A. The Plan Does Not Discriminate Unfairly with Respect to the Deemed Rejecting Classes The "unfair discrimination" standard of section 1129(b) of the Bankruptcy Code does not prohibit all types of discrimination among holders of Claims and Interests; it merely prohibits unfair discrimination. In re The Leslie Fay Cos., Inc., 207 B.R. 764, 791 n. 37 (Bankr. S.D.N.Y. 1997). It requires that a dissenting class receive "treatment which allocates value to

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the [dissenting] class in a manner consistent with the treatment afforded to other classes with similar legal claims against the debtor," In re Mcorp Fin., Inc., 137 B.R. 219, 234 (Bankr. S.D. Tex. 1192), dismissed on other grounds, 139 B.R. 820 (S.D. Tex. 1992), so that "a dissenting class will receive relative value equal to the value given to all other similarly situated classes."

In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y. 1987), affd sub nom., Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988); see also CoreStates Bank, N.A. v. United Chemical Techs., 202 B.R. 33, 47 (E.D. Pa. 1996).
The Bankruptcy Code does not define "unfair discrimination," leaving it to the courts to develop their own definitions and criteria. In re Environdyne Indus., No. 93 B 310, 1993 WL 566565, at *36 (Bankr. N.D. Ill. 1993). According to the Leslie Fay court, "[t]he section 1129(b)(1) test boils down to whether the proposed discrimination between classes has a reasonable basis and is necessary for the reorganization." In re The Leslie Fay Cos., Inc., 207 B.R. at 791 n. 37. Class 5 under the Plan consists of General Unsecured Claims against PEAH. One of the two creditors submitting ballots in Class 5 (Cook Inlet Pipeline Company) voted against the Plan. Under the Plan, Class 5 receives essentially the same treatment as the other general unsecured classes under the Plan -- namely, a pro rata share of any net assets available to unsecured creditors out of the applicable Debtor (here, PEAH). The Plan does not discriminate unfairly as to Class 5 because creditors in this Class receive precisely what they are entitled to in the bankruptcy priority scheme, and nothing less, under the Plan. Class 7 under the Plan consists of General Unsecured Claims against Petrocal, Cameros Acquisition, Cameros Energy and Gotland. The Plan does not discriminate unfairly as

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to Class 7 Claims because there are no assets in the estates of Petrocal, Cameros Acquisition, Cameros Energy and Gotland to pay claims and the Chapter 11 cases of these Debtors will be dismissed on the Effective Date. Class 8 under the Plan consists of Intercompany Claims. The Plan does not discriminate unfairly as to Class 8 Claims because the Plan sets forth the terms of an inter-estate settlement that provides for the release of all intercompany claims and the Debtors, as proponents of the Plan, agreed to such releases. The details and rationale underlying the interestate settlement are set forth in Article VI.H of the Plan and Article VII of the Disclosure Statement, and are addressed further below. No creditor has objected to the inter-estate settlement under the Plan. Class 9 under the Plan consists of the Claims of Forest that are subordinated to the claims of the Senior Lenders under the Forest Subordinated Note. Forest has objected to the Plan on this point, and the Debtors responses thereto are addressed above. It is the Debtors position that the Plan does not discriminate unfairly against Forest, and merely effectuates the prepetition subordination agreement between Forest and the Senior Lenders. The Plan also does not discriminate unfairly against Class 10 (Interests) because holders are Interests are subordinate to all other Classes under the Plan and are not legally "entitled" to receive any distribution given that the Debtors are clearly insolvent. B. The Plan is "Fair and Equitable" with Respect to the Rejecting Classes The Plan is "fair and equitable" as to Classes 5 and 7 through 10 pursuant to section 1129(b) of the Bankruptcy Code. The requirements of the "fair and equitable" test with respect to unsecured creditors and equity holders are set forth in sections 11 29(b)(2)(B) and

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11 29(b)(2)(C). Each section specifies two alternative requirements, only one of which must be satisfied in order for a plan to be fair and equitable with respect to a dissenting class of unsecured creditors or equity interests. See 11 U.S.C. 1 129(b)(2)(B)(i), (ii) and 11 29(b)(2)(C)(i), (ii); see

also In re P.J. Keating Co., 168 B.R. 464, 468 (Bankr. D. Mass. 1994) ("test under section
11 29(b)(2)(C) is an alternative one") The Plan is fair and equitable as to Classes 5, 7, 8 and 9 because, as required by section 1129(b) with respect to a class of unsecured claims, the Plan provides that the holder of any claim or interest that is junior to the claims of such class will not receive or retain any property under the Plan on account of any such junior claim. The only Class that is junior to Classes 5, 7, 8 and 9 is the Interest Holders. Pursuant to the Plan, Interest Holders are to receive nothing under the Plan. Similarly, with respect to Class 10, the Plan satisfies the second paragraph of section 1129(b)(2)(C) of the Bankruptcy Code. That section permits the "cramdown" of nonassenting classes of equity interests as long as: the holders of any interests that is junior to the interests of such [dissenting] class [does] not receive or retain under the plan on account of such junior interest any property. 11 U.S.C. 11 29(b)(2)(C) (ii). The Plan satisfies this requirement because no Class junior to Class 10 will receive or retain any property under the Plan. Thus, the Debtors satisfy the "cramdown" requirements of section 1129(b) of the Bankruptcy Code, and the Plan may be confirmed notwithstanding the Debtors inability to comply with section 11 29(a)(8) of the Bankruptcy Code.

ky

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THE SETTLEMENT OF INTER-COMPANY CLAIMS INCORPORATED IN THE PLAN SHOULD BE APPROVED As set forth in the Plan and the Disclosure Statement, the Plan effectuates a settlement among the Debtors that provides for the distribution of the Unsecured Creditor Fund to the Holders of Allowed General Unsecured Claims against PERL, the Alaska Fund, if any, to the Holders of Allowed General Unsecured Claims against PEAO, and the Wind-Down Fund, if any, to the Holders of Allowed General Unsecured Claims against PERL after all Allowed Administrative Expense Claims, Priority Tax Claims and Priority Non-Tax Claims of the other Debtors have been satisfied and for a waiver, release and discharge of each of the Debtors from any and all Intercompany Claims and Rights of Action amongst and between any or all of the Debtors. The Settlement lays the framework for the distributions set forth in the Plan, and is the result of arms length, good faith negotiations between the Debtors and the Committee and has the Committees approval. The Debtors urge the Court to approve the settlement pursuant to section 1 123(b)(3)(A) of the Bankruptcy Code and Bankruptcy Rule 9019. In reviewing a proposed settlement, the Court must determine that (1) it is "fair and equitable," Protective Comm. for Ind Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 1163 (1968), and (2) in the best interests of the estate, In re

Louises, Inc., 211 B.R. 798, 801 (D. Del. 1997); In re Best Prods. Co., 168 B.R. 35,50 (Bankr.
S.D.N.Y. 1994). Bankruptcy Rule 9019(a) commits the approval or rejection of a settlement to the sound discretion of the bankruptcy court. In re Michael, 183 B.R. 230, 232 (Bankr. D. Mont. 1995).

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In ruling on a proposed compromise, however, the Court should not substitute its own judgment for that of the trustee or debtor in possession. See In re Carla Leather, Inc., 44 B.R. 457, 466 (Bankr. S.D.N.Y. 1984), affd, 50 B.R. 765 (S.D.N.Y. 1985). Nor is the Courts task to determine whether the settlement was the best that the trustee could have obtained. See In

re WT Grant, 699 F.2d 599, 608, 613 (2d Cir. 1982), cert, denied, 464 U.S. 822, 104 S.Ct. 89
(1983). Rather, the Court should "canvass the issues and see whether the settlement fall [s] below the lowest point in the range of reasonableness." Id. at 608; see also In re Bell &

Beckwith, 87 B.R. 472, 474 (N.D. Ohio 1987). In determining whether to approve a
compromise, a bankruptcy court is not required to conduct a "mini-trial" on the merits of the underlying cause of action. US. v Alaska National Bank of the North (In the Matter of Walsh

Construction, Inc.), 669 F.2d 1325, 1328 (9th Cir. 1982); see also In re Blair, 538 F.2d 849, 85152 (9th Cir. 1976). The Third Circuit specifically sets forth four criteria to be considered by the court in determining the fairness, reasonableness, and adequacy of a settlement, as follows: (a) (b) (c) the probability of success in litigation; the likely difficulties in collection; the complexity of the litigation involved, and the expense,

inconvenience and delay necessarily attending it; and (d) the paramount interest of creditors.

In re Martin, 91 F.3d 389, 393 (3d Cir. 1996); see also In re RFE Industries, Inc.,
283 F.3d 159, 165 (3rd Cir. 2002). Although not directly on point under the circumstances of

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these Chapter 11 Cases, the Debtors submit that each of these factors is satisfied with respect to the Settlement. As detailed in Article VII of the Disclosure Statement, the Debtors believe that the Settlement is reasonable and in the best interests of the Estates because it resolves inter-estate claims that may exist as to the Unsecured Creditor Fund, the Wind-Down Fund, if any, and the Alaska Fund, if any, in an equitable and efficient manner. The Settlement also allows for a prompt and efficient distribution of the remaining assets in the Estates to creditors and wind-up of the Debtors affairs pursuant to the terms of the Plan. PEAO owes approximately $68 million to PERL and approximately $50 million to PEAH. Even without consideration of these substantial Intercompany Claims, PEAO has minimal assets available to satisfy what the Debtors estimate could be up to $275 million in potential Allowed General Unsecured Claims. Hence, the value of the Intercompany Claims of PERL and PEAH against PEAO, even if Allowed in full, are minimal. Rather than attempting to collect on such Claims and further diluting the minimal assets available to third party creditors of PEAO, the Settlement contemplates a release of such Intercompany Claims. In exchange, PERL will ensure that sufficient funds are set aside in order to satisfy all administrative and priority claims incurred on behalf of the PEAO and PEAH estates. In addition, PEAO and PERL shall retain any and all litigation rights that may be available to these estates against third parties (other than the other Debtors). Notably, the Unsecured Creditor Fund and the Wind-Down Fund were created in the context of the Beta Sale Order. The Beta Assets were wholly owned by PERL, and not PEAO or PEAH. As a result, when also taking into account the substantial $68 million claim

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that PERL has against PEAO, it is entirely appropriate to allocate the entirety of the Unsecured Creditor Fund and the Wind-Down Fund to PERL. Similarly, the cash available to the Alaska Fund, if any, will be solely derived from the Union Adversary, which arises out of the dispute regarding validity and priority of Unions alleged liens against working interests and production owned by PEAO in certain oil and gas properties located in Trading Bay in Alaska, and Unions rights to the proceeds of such production. Thus, the Alaska Fund is solely attributable to the liquidation of PEAOs assets. In sum, the Debtors submit that the Settlement represents a positive resolution of inter-estate issues that is supported by the paramount interests of creditors, and should be approved by the Bankruptcy Court. Accordingly, pursuant to section 1 123(b)(3)(A) of the Bankruptcy Code and Bankruptcy Rule 9019, the Debtors urge the Court to approve the Settlement incorporated in the Plan. VI. THE EXCULPATION PROVISION IN THE PLAN IS CONSISTENT WITH APPLICABLE PRECEDENT AND SHOULD BE APPROVED The Plan contains customary provisions exculpating certain parties instrumental to the Plan. These provisions are consistent with applicable precedent and should be approved. In PWS Holding Corp., 228 F.3d 224, 235 (3d Cir. 2000), the Third Circuit approved a plan provision that released claims "brought in connection with work on the bankruptcy reorganization plan.. . ." The plan provision at issue in PWS did not "eliminate

liability but rather limit[ed] it to willful misconduct or gross negligence." Id. The Third Circuit characterized such provision as a "commonplace provision in Chapter 11 plans." Id.

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Here, the Plan contains similar provisions. See Plan, Article X(B). These provisions are all consistent with the holding in PWS and are customarily approved in this jurisdiction. Accordingly, the Plan provisions that establish a willful misconduct/gross negligence liability standard are consistent with applicable law and should be approved. VII. CONCLUSION For the foregoing reasons and those to be presented at the Confirmation Hearing, the Court should: (a) overrule any objections to confirmation not previously withdrawn or settled; (b) confirm the Plan; and (c) grant the Debtors such other and further relief as is just and proper. Dated: October 5, 2010 PACHULSKI STANG ZIEHL & JONES LLP

/s/ Kathleen P. Makowski Ira D. Kharasch (CA Bar No. 109084) James E. ONeill (DE Bar No. 4042) Maxim B. Litvak (CA Bar No. 215852) Scotta E. McFarland (Bar No. 4184) Kathleen P. Makowski (DE Bar No. 3648) 919 North Market Street, Seventeenth Floor Post Office Box 8705 Wilmington, Delaware 19899-8705 (Courier 19801) Telephone: (302) 652-4100 Facsimile: (302) 652-4400 Counsel to Debtors and Debtors in Possession

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