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1 2 3 4 In Re:

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA --oOo-Case No. SA10-16743-TA Santa Ana, California Wednesday, April 11, 2012 11:00 a.m.

) ) 5 WESTCLIFF MEDICAL ) LABORATORIES, INC., ) 6 ) Debtor. ) 7 ______________________________) 8 9 10 11 12 13 14 15 APPEARANCES: 16 For Plaintiff, Sunamerica Life Insurance: 17 18 19 20 21 For Laboratory Corp Of America/Lab West: 22 23 24

ADV. 11-01405 SUNAMERICA LIFE INSURANCE COMPANY V. LABORATORY CORPORATION OF AMERICA ET AL MOTION FOR PARTIAL SUMMARY ADJUDICATION

TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE THEODOR ALBERT UNITED STATES BANKRUPTCY JUDGE

DONALD CRAM, ESQ. SHELDON FLEMING, ESQ. Severson & Werson One Embarcadero Center Suite 2600 San Francisco, California 94111 (415) 398-3344 MICHAEL LUBIC, ESQ. K&L Gates, LLP 10100 Santa Monica Boulevard 7th Floor Los Angeles, California 90067 (310) 552-5000

Proceedings recorded by electronic sound recording; 25 transcript produced by transcription service.

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ii 1 Court Recorder: 2 3 4 Transcriber: 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Rick Reid United States Bankruptcy Court 411 West Fourth Street Suite 2030 Santa Ana, California 92701 Briggs Reporting Company, Inc. 6336 Greenwich Drive, Suite B San Diego, California 92122 (310) 410-4151

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1 1 2 3 4 SANTA ANA, CALIFORNIA WEDNESDAY, APRIL 11, 2012 --oOo-(Call to order of the Court.) THE COURT: Ten is Westcliff Medical Laboratories, 11:00 AM

5 Sunamerica Life vs. Laboratory Corporation of America. 6 MR. CRAM: Good morning, your Honor. Don Cram

7 with Severson and Werson on behalf of Plaintiff, Sunamerica. 8 MR. LUBIC: Good morning, your Honor. Michael

9 Lubic of K&L Gates for Laboratory Corporation of America and 10 its wholly owned subsidiary, Lab West. 11 12 tentative? 13 14 15 16 17 MR. CRAM: THE COURT: MR. CRAM: THE COURT: MR. CRAM: Yes, your Honor. And who would care to argue it? I guess that would be me, your Honor. All right. Your Honor, Sunamerica would ask you to As the THE COURT: Have you all had a chance to read the

18 reconsider your tentative ruling for four reasons.

19 Court points out in its tentative ruling, the severability of 20 the SNDA and the lease is purely a state law issue. When we

21 were here back on the Court's order to show cause, the Court 22 made a point of determining in its initial tentative ruling 23 that these are merely state law claims. 24 the Debtor. They don't involve

They don't involve administration of the estate

25 and on that basis, we think that the Court, or would ask the

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2 1 Court that, it would refrain from determining purely state 2 law issues regarding severability of contracts, deny this 3 motion and remand this case back to state court. 4 Secondly, we would argue that the asset purchase

5 agreement itself did include a provision that said or 6 provided for the sale of all rights under existing leases. 7 In this fact, viewed in the light most favorable to 8 Sunamerica, would lead to the conclusion that the SNDA was 9 sold and assigned in the APA. This is bolstered by the fact

10 that the APA itself lists contracts and leases that were not 11 assumed, and SNDA is not part of that list. To the extent

12 reasonable minds can differ on that particular issue, there's 13 an issue of material fact of what the parties, the seller and 14 the buyer, in this case really intended to sell. 15 the motion should be denied on that basis. 16 In furtherance of the factual record, it would Either way,

17 come to light that the purchasers in this case didn't even 18 review this particular lease, and I don't believe that a copy 19 of the lease was ever reviewed by the purchaser until this 20 litigation ensued. With the SNDA neither being specifically

21 listed as a contract to be assumed or a contract not to be 22 assumed in the APA, there exists a question of fact as to the 23 intent of the parties and that can't be resolved at this 24 hearing on summary judgment. The Court also points out that

25 had Sunamerica been involved in the case and possibly

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3 1 objected to the sale of the asset purchase agreement or the 2 motion to sell a long time ago, we probably wouldn't be here 3 today. That's well and good, but Sunamerica didn't receive

4 notice of the sale which might have afforded the opportunity 5 to object at the sale motion. 6 Number three, the Court points out that Lab West

7 seeks to avoid specific language in the SNDA which can be 8 read as waiving any right to seek off set of damages against 9 rent. The Court also points out that the crux of this issue

10 wasn't mentioned before until the reply brief, and Sunamerica 11 would point out like the attornment issue, which was where 12 the ball was before it was moved by the reply brief, it's 13 irrelevant to this case and it's immaterial. The lease

14 itself has several provisions in Article 13 and Article 16 15 which not only limit damages against the landlord, but 16 provide there can't be any rent abatement or any liability 17 for damages that they seek. 18 THE COURT: And if that's the case, presumably in I don't

19 the state court the judge will see it your way. 20 speak to that.

There may be somewhere in that lease all of I don't know, but The only

21 the same provisions or similar provisions.

22 I am not called upon to make that determination.

23 thing I am charged with, I think, in this hearing is does my 24 order allowing assumption and assignment include the SNDA or 25 not.

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4 1 MR. CRAM: Well, that's funny, your Honor, because

2 in the reply Lab West also argues for the first time that not 3 only was the SNDA not assumed and assigned to Lab West, but 4 it was not specifically rejected either. So, in essence, It's

5 what Lab West is trying to do is whip Sunamerica.

6 saying that sure, we assumed the lease and the provisions and 7 the obligations under the lease, but kings "X" the SNDA was 8 never rejected by the Debtor. Therefore, when upon

9 foreclosure, the lease was wiped out and we're not obligated 10 under the terms of the lease. So, I mean here again, we have

11 another quasi bankruptcy issue -12 13 now. THE COURT: Wait a minute. Run that past me again The

You say it was not -- the lease was not assumed?

14 lease was clearly assumed. 15 16 assigned. 17 THE COURT: All right. So, I didn't follow the MR. CRAM: The lease was clearly assumed and

18 rest of it then. 19 MR. CRAM: The Debtor's argument or, I'm sorry,

20 Lab Corp's argument is that the SNDA, although not assumed 21 and assigned, was never rejected. 22 23 it. 24 MR. CRAM: They're not in privity with it, but if THE COURT: So what. They're not in privity with

25 it was never rejected it was possibly still enforceable.

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5 1 THE COURT: By whom? Not them because they've

2 already disclaimed as loudly as they can that they're not in 3 privity with it. So, they just can't be heard to point to it

4 one way or the other it seems to me. 5 MR. CRAM: Well, if that's the Court view, we

6 would want that specifically in any Court ruling here today 7 because I don't think that Lab Corp can have its cake and eat 8 it too essentially, and that's what it's asking the Court to 9 rule. 10 THE COURT: Okay. Let's find out from Mr. Lubic

11 what exactly he wants the Court to rule, but my inclination 12 based upon what I have reviewed is to say that clearly the 13 lease was assumed and assigned, but the other document is not 14 an indivisible part of it. It's a severable part of it which Now, what happens to

15 was clearly not assumed and assigned.

16 it otherwise I don't know that I was called upon to look at, 17 but I can't imagine what they can do with it because they've 18 said with the one side of their mouth that they're not in 19 privity to it. So, how can they turn around and say but it's I don't know how that works in front I'm not sure I do,

20 nevertheless a shield. 21 any court of law.

Do I need to say so?

22 but let's hear what Mr. Lubic says on that point. 23 MR. LUBIC: Your Honor, would the Court like me to

24 respond to the other points raised or just limit my comments 25 to the subordination issue that --

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6 1 2 THE COURT: MR. LUBIC: Well, I'm willing to hear all of it. Okay. Well, briefly, severability is

3 not what's going on here.

Severability would be if we had

4 one contract and we were trying to make it into two 5 contracts. Here, there are clearly two different agreements

6 executed at different points in time by different parties. 7 What Sunamerica is seeking to do is to combine them into one 8 agreement. That's not severability. So, I don't think

9 that's an issue here. 10 THE COURT: Well, it is an issue. I'm just not

11 agreeing with Sunamerica that it is -- I find based upon this 12 record as a matter of contractual interpretation, not subject 13 to -- it could be I suppose a question of parole evidence. 14 It goes to the issue is a 56 motion the right way to go about 15 it. I don't see how those two things are part and parcel of

16 the same agreement, i.e. they are severable. 17 So, if it's unclear when I said it in the

18 tentative, what I meant to say is the two contracts are 19 severable. Because they are severable, then the focus turns Because they're

20 on well, what was assumed and assigned.

21 severable, I find that only the lease was assumed and 22 assigned. I didn't spend any ink talking about what happens

23 to the unassumed contract because frankly, I didn't think I 24 was called upon to do it, but I have to believe some place 25 based on the plan they rejected it, did they not, the Debtor?

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7 1 MR. LUBIC: I assume -- I will say that I didn't

2 pay much attention to plan confirmation, even though we have 3 a small pre-petition unsecured claim. 4 rejected pursuant to the plan. 5 THE COURT: Okay. So, it's a rejected claim and I assume that it was

6 the parties to that contract, not that they care at this 7 point, would I presume have a claim for damages. 8 think is fairly obvious. 9 this motion? That part I

Now, is that beyond the scope of

I can't quite fathom how you're going to be

10 able to successfully argue to some superior court judge if 11 that's where you're going to be, but it comes back to life 12 like Dracula in some way to age you. You've already

13 disclaimed in loud terms that you're not in privity with it, 14 aren't you? 15 16 us. 17 18 THE COURT: MR. LUBIC: So, what is he concerned about? It's still of record in the real MR. LUBIC We said it's not enforceable against

19 estate records for whatever effect that has. 20 THE COURT: Okay. So, it's of record. I'm not

21 sure where you go with that but okay. 22 MR. LUBIC: I'm not sure what it means either,

23 your Honor.

It doesn't just disappear just because our

24 client didn't purchase it. 25 THE COURT: That's like saying magna carta doesn't

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8 1 disappear. Does that mean I have right to sue under magna I don't know. I'm not in privity

2 carta against King John? 3 to it. 4

It sounds farfetched to me. MR. LUBIC: Your Honor, we're not asking the Court

5 to rule on what it means that Westcliff had not rejected the 6 agreement at the time the foreclosure sale took place. 7 8 THE COURT: MR. LUBIC: Okay. That's not before this Court. That's

9 an issue for the state court.

I think the Court dealt in its

10 tentative with the idea of a fine which in the APA about 11 trying to shoe horn this in as part of a right under an 12 existing lease. Clearly, under the lease there could have

13 been 10 different SNDA's as the owner refinanced its property 14 and new lenders required a different document. Different

15 tenants would have negotiated different languages, and I 16 think the APA is very clear, as is the sale order that Lab 17 West was only buying the assets that were enumerated and that 18 Lab West was not assuming any liabilities that were not 19 enumerated. 20 Counsel raised an issue about purchasers not While I was not part of that

21 having reviewed the Dyer lease.

22 process as that was not my team, the Dyer lease was 23 Westcliff's headquarter's operation and it's clinical lab. 24 It was well known that there was a catastrophic roof collapse 25 in January of 2010, and these were certainly things that Lab

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9 1 Corp people were looking at in the due diligence process 2 because they were absolutely critical to Westcliff's 3 operations and the success of the transition. 4 Counsel said for the first time that Sunamerica I believe it could be demonstrated,

5 did not have notice.

6 even if they were not on the service list, that they had 7 actual notice of the bankruptcy quite a long time ago. I

8 know I personally met with prior counsel for Sunamerica at 9 Sheperd Mullin last summer. It's a little late in the

10 process to be running in here and saying this isn't fair 11 because we didn't get notice of the bankruptcy back in May of 12 2010. While one reason Lab West does not like the SNDA is

13 the off set language, the piece that is very relevant for the 14 (indiscernible) is whether notice was appropriate, and Lab 15 West believes that this was a month to month lease. 16 So, while clarifying that Lab West did not have --

17 is not subject to the SNDA, if it is helpful we then need to 18 go back to the lease and make our arguments under the lease 19 itself. 20 21 22 23 THE COURT: MR. LUBIC: THE COURT: MR. LUBIC: But, that's not before this Court. Not before the Court. All right. So, I think all we really need is an

24 order that the SNDA is an executory contract and it's 25 different from the lease, and it wasn't assumed and assigned

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10 1 to Lab West. 2 3 go anyway. That's all. Well, that's as far as I'm inclined to

THE COURT:

As I told you gentlemen, not that I don't admire

4 your advocacy and your fine guys as well, this isn't really 5 my case. This is between two non-Debtors, right? So, go The only

6 forth and sort it out over in the superior court.

7 reason I think I was persuaded to put even a toe in here is 8 because of the unique bankruptcy issue that might be embedded 9 here by reason of the question of assumption and assignment 10 which was a product, along with a lot of other things, of my, 11 what was it, June 9th order? 12 13 MR. LUBIC: THE COURT: Yes. So, for that reason I've gone to this

14 trouble, but I don't intend to go any further in this case 15 because you guys have all kinds of issues which another court 16 is I'm sure ready to hear. 17 18 though. MR. CRAM: Your Honor, I want to respond briefly

I mean the issue with respect to the effect of the

19 SNDA, I mean, highlights the fact that there are fact issues 20 here and now which preclude to grant a summary judgment. 21 THE COURT: But, I'm not going to -- the effect of I make no statement,

22 this SNDA only insofar as assumption.

23 and I don't want to imply any statement, as to the rest of 24 it. If it exists somehow in the ether and has some kind of

25 effect, I don't reach that issue.

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11 1 MR. CRAM: The problem is the SNDA -- I don't

2 think the parties -- I don't think the parties even knew 3 about the SNDA at the time of the APA. 4 THE COURT: Okay. See, the way it works is if you

5 don't assume it, it's rejected. 6 MR. CRAM: But, it's our argument that it was not

7 included in the specific list of contracts to be assumed, and 8 it was not included in the specific list of contracts -9 10 11 THE COURT: MR. CRAM: THE COURT: But, I think the default -That it wasn't assumed. But, I think the default provision, or

12 at least everything I've ever -- the default is in favor of 13 rejection. 14 15 16 approved. 17 MR. CRAM: THE COURT: Well, I think that's --

Assumption has to be affirmatively

Rejection can happen by operation of law. MR. CRAM: But, there's a factual issue of whether

18 or not that the actual purchaser and seller intended for this 19 SNDA to be assumed or assigned pursuant to the agreement. 20 There's a factual issue. 21 THE COURT: Yeah, but the problem is even if they

22 might -- my order doesn't say it, and my order doesn't say it 23 didn't happen. You do not assume stuff that is not part of

24 my order just because you say well, I thought it was in 25 there. That's not going to work. So, if that's what your

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12 1 concern is -- I think if you want an advisory opinion, and 2 perhaps you don't, but I think it's rejected. That's what I

3 think you're going to find once you go through all the steps, 4 the law and so forth. You're going to find that if something So, it's

5 is not affirmatively assumed, it's rejected. 6 rejected.

Therefore, the parties to it have a damage claim. Don't

7 Now, what they've done with the damage claim, no idea.

8 know if it's important to you, but that's my reading of this. 9 I think it's a very narrow reading, and as Mr. Lubic has 10 outlined it I'm prepared to go that far. Further than that,

11 all the other implications of it I think is for another 12 court. 13 14 So, that's my view. MR. CRAM: THE COURT: Understood, your Honor. Okay? I appreciate -- by the way, Interesting issue. Everything

15 fine briefs on both sides.

16 would have been done differently had people been alerted to 17 the issue back when, but they weren't. So, now we have to

18 deal with the cards as they lay, and I think the cards as 19 they is if it's not assumed, it's rejected. Certainly, you

20 can't come in by implication this way is what I'm really 21 saying. If you look at the policy issue question at the very

22 end of my tentative, I think that's a concern to the Court. 23 We can't be in the situation where these things, like 24 implication, are part of our order, particularly in a big 25 operating business like this. It's very evident to me that

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13 1 Lab West were very particular. 2 this, and this. They said we want this and I don't

We don't want that and so forth.

3 want to cut back against the freedom people have to do it 4 that way because if I were to read as saying well, you not 5 only are assuming what's overtly stated, you're also assuming 6 what's implied. 7 to go there. 8 MR. CRAM: Understood, your Honor, but there's That's dangerous territory and I don't want

9 also a policy issue that a litigant can't argue out of one 10 side of its mouth as a shield, and out the other side of 11 their mouth and use items of -12 THE COURT: I agree if you want to show my brother I think if

13 and her sister this transcript, I totally agree.

14 they stand up and try to argue that as a shield, something 15 about the SDNA -16 17 MR. CRAM: THE COURT: SNDA. SNDA. Sorry. If they want to try to

18 argue as a shield, I think that's a illusory for whatever 19 persuasive value that has for you. 20 of my order. It's not going to be part The only thing

My order is extremely narrow.

21 I'm ordering is that the lease and only the lease was 22 assumed, and I find that the two contracts are several. 23 That's it. 24 25 Okay? MR. CRAM: THE COURT: Understood, your Honor. Thank you gentlemen. Would you

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14 1 prepare a form of order? 2 3 4 5 6 7 8 9 10 11 I certify that the foregoing is a correct MR. LUBIC: MR. CRAM: THE COURT: MR. CRAM: THE COURT: MR. CRAM: THE COURT: Yes, your Honor. May I review it, your Honor? Of course, you may. Thank you. Anything further? I don't believe so. Okay. Have a good one guys.

(Proceedings concluded.)

12 transcript from the electronic sound recording of the 13 proceedings in the above-entitled matter. 14 15 /s/ Holly Martens_______ Transcriber 16 17 18 19 20 21 22 23 24 25 5-14-12_______________ Date

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