Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 1 of 27

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHER DISTRICT OF NEW YORK

BRAD BARKAU, Individually and on Behalf

of All Others Similarly Situated,

No:____________

Plaintiff,
CLASS ACTION COMPLAINT
v.
CALIFORNIA RESOURCES
CORPORATION,

DEMAND FOR JURY TRIAL

Defendant.

Plaintiff Brad Barkau (Plaintiff), individually and on behalf of all others similarly
situated, by his attorneys, hereby alleges the following based upon information and belief, and
upon the investigation by his counsel, which included a review of United States Securities and
Exchange Commission (SEC) filings by California Resources Corporation (California
Resources or the Company), as well as regulatory filings and reports, press releases and other
public statements issued by the Company, and analysts reports about the Company.
NATURE OF THE CLAIM
This is a class action on behalf of all persons who beneficially owned California
Resources (i) 5% Notes due 2020 (CUSIP 13057QAB3; 13057QAA5; U1303AAA4) (the 5%
Notes); (ii) 5% Notes due 2021 (CUSIP 13057QAD9) (the 5% Notes); and 6% Notes due
2024 (CUSIP 13057QAF4; 13057QAE7; U1303AAC0) (the 6% Notes, together with the 5%
Notes and 5% Notes, the Class Notes), from November 12, 2015 to the present (the Class

Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 2 of 27

Period). Plaintiff brings claims under the Trust Indenture Act of 1939 (the TIA), 15 U.S.C.
77aaa-77bbbb, and for breach of contract and unjust enrichment.
On November 12, 2015, California Resources announced the commencement of a
private exchange offer (the Exchange Offer), upon terms and conditions set forth in a private
offering memorandum (the Offering Memorandum) for up to $1 billion aggregate principal
amount of the Class Notes (the Maximum Exchange Amount, subsequently increased to $2.8125
billion). The Class Notes would be exchanged for newly issued 8% Second Lien Notes due 2022
(the New Secured Notes). Notably, the Exchange Offer was conducted as a private offer, despite
the fact that the Class Notes were registered and publicly traded without any prerequisites. As a
result, only Qualified Institutional Buyers (QIBs) and non-U.S. persons within the meaning of
SEC Rule 902(k) of Regulation S, promulgated under the Securities Act of 1933 (the Securities
Act), were eligible to participate in the Exchange Offer.
QIBs are defined in SEC Rule 144A, promulgated under the Securities Act as,
among other eligible entities, generally an entity that owns and invests on a discretionary basis at
least $100 million. 17 C.F.R. 230.144A. QIBs can include banks, savings and loans associations,
insurance companies, investment companies, employee benefit plans or entities owned entirely by
accredited investors. QIBs can be foreign or domestic entities, however, they must be institutions.
Regardless of how wealthy or sophisticated an individual is, he or she are barred from becoming
a QIB.
By excluding non-QIB investors from participating in the Exchange Offer, the
Company provided unfair and improper benefits to QIBs, including, inter alia, violating the terms
of the Indenture, dated October 1, 2014, by and among California Resources, the Companys
subsidiaries as guarantors, and Wells Fargo Bank, N.A., (Trustee) (the Indenture)(Ex. A),

Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 3 of 27

which governs the Class Notes; the implied covenant of good faith and fair dealing found in every
contract under New York law; and the TIA.
The Indenture is a contract between the Company and the holders of the Class
Notes. The terms that govern the relationship between the parties are expressly written in the
Indenture. Throughout the Indenture, Class Noteholders are provided the right and the Company
has the obligation to treat all holders equally. For example, Section 3.02 of the Indenture provides
that [i]f less than all of the Notes of a series are to be redeemed at any time, the Trustee shall
select the Notes of such series to be redeemed among the Holders of the Notes on a pro rata
basis[.] (Emphasis added.)
The TIA was implemented to supplement the Securities Act, and provides for
various protection for bond investors. Among the protections for bond investors, Section 316(b)
provides every noteholder the legal right to to receive payment of the principal of and interest on
such indenture security, on or after the respective due dates expressed in such indenture security,
or to institute suit for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such holder (Emphasis added.)
The selective and exclusionary nature of the Exchange Offer was unfair and
discriminatory towards the non-QIB holders of the Class Notes who purchased the registered
securities in the public market, relying on the right to equal treatment of all noteholders. As noted
by Bloomberg, those investors who do not participate in the Exchange Offer know [they]re going
to take a hit. Accordingly, the exclusion of non-QIBs from the Exchange Offer injured the Class
Noteholders (excluding QIBs and non-U.S. persons) and unjustly enriched Defendant, by
unrightfully subordinating the Class Notes to the New Secured Notes created in the Exchange
Offer.

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JURISDICTION AND VENUE

This Court has subject matter jurisdiction over the federal law claims pursuant to
15 U.S.C. 77vvv(b), Section 322(b) of the TIA and 28 U.S.C 1331.
This Court has supplemental jurisdiction over the state law claims in this action
pursuant to 28 U.S.C. 1367.
This Court has personal jurisdiction over Defendant. The Class Notes were sold
and marketed in New York, such that Defendant maintains sufficient minimum contacts in this
jurisdiction. Additionally, pursuant to Section 12.10 of the Indenture, Defendant irrevocably
consented to the jurisdiction of, inter alia, this Court, for any actions arising out of or based upon
the Indenture and the Class Notes.
This Court is the proper venue for this action, pursuant to Section 322(b) of the
TIA, 15 U.S.C. 77vvv(b), Section 22(a) of the Securities Act of 1933, 15 U.S.C. 77v(a), and 28
U.S.C. 1391(b) and (c). Defendant, directly and indirectly, singly and in concert, made use of
the means and instrumentalities of transportation and communication in, or the instrumentalities
of, interstate commerce, or of the mails in connection with the unlawful acts and practices and
course of business alleged in this Complaint. Additionally, Section 12.10 of the Indenture provides
that the Defendant irrevocably and unconditionally waives any objection to the laying of venue of
any suit, action or other proceeding in, inter alia, this Court.
THE PARTIES
Plaintiff acquired 6% Notes prior to the announcement of the Exchange Offer and
has continued to hold 6% Notes at all times relevant to this action. Plaintiff is a U.S. person who
does not qualify as a QIB, and was therefore ineligible to participate in the Exchange Offer.

Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 5 of 27

Defendant California Resources Corporation is a Delaware corporation, with its

principle executive offices located at 9200 Oakdale Ave, Los Angeles, California 91311.
FURTHER SUBSTANTIVE ALLEGATIONS
Background
California Resources is an independent oil and natural gas exploration and
production company operating properties exclusively within the State of California. California
Resources was incorporated in Delaware as a wholly-owned subsidiary of Occidental Petroleum
Corporation (Occidental) on April 23, 2014. The Company remained a wholly-owned subsidiary
of Occidental until November 30, 2014, when Occidental distributed shares of our common stock
on a pro rata basis to Occidental stockholders and became an independent, publicly traded
company.
As noted by the Company in its annual report filed on Form 10-K with the SEC on
February 29, 2015, [m]uch of the global exploration and production industry is challenged at
current price levels, putting pressure on the industrys ability to generate positive cash flow and
access capital, which has led many industry companies to seek to restructure their finances.
The Companys Issuance of the Class Notes
On October 1, 2014, the Company issued $5.0 billion in aggregate principal
amount of the Class Notes, comprised of $1.00 billion of 5% Notes, $1.75 billion of 5% Notes
and $2.25 billion of 6% Notes, in a private placement. The Class Notes were issued at par and are
fully and unconditionally guaranteed on a senior unsecured basis by all of the Companys material
subsidiaries. The net proceeds from the issuance of the Class Notes were used to make a $4.95
billion cash distribution to Occidental in October 2014.

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Shortly after the initial issuance of the Class Notes, on March 12, 2015, the
Company filed a registration statement on Form S-4 with the SEC relating to an offer to exchange
Class Notes that had not been registered under the Securities Act with identical notes that had been
registered thereunder. (Ex. B.) The exchange of tendered unregistered notes for registered notes
was completed in April 2015.
On March 23, 2015, Moodys Investors Service (Moodys) downgraded the
Corporate Family Rating (CFR) of California Resources to Ba2 from Ba1 in light of expected
weaker financial performance. Specifically, the Class Notes were also downgraded to Ba2 from
Ba1. California Resources Speculative Grade Liquidity Rating was moved to SGL-3 from
SGL- 2. The press release announcing Moodys downgrade stated:
At the time of CRCs spin off from Occidental Petroleum Corporation,
leverage was elevated and the original Ba1 rating reflected the earnings
power for CRC with $100 oil prices, said Stuart Miller, Vice President and
Senior Credit Officer at Moodys. The dramatic drop in oil prices in light
of the high leverage has weakened CRCs risk profile to the point that a Ba2
rating is more appropriate. The company has slashed its capital budget to
live within cash flow in 2015. However, absent asset sales, weaker cash
flow generation will make it more difficult to realize meaningful debt
reduction in 2015 and 2016.
***
The downgrade of the CFR to Ba2 is in response to the difficult pricing
environment for an oil-focused producer with limited commodity price
hedge protection, unlike most of its peers that have had hedging programs
in place for a number of years. The unfortunate timing of the spin off from
Occidental Petroleum Corporation (Occidental, A2 stable) just as oil prices
began their abrupt slide has left the company exposed to low oil prices, high
leverage, and more limited financial flexibility than what was originally
expected. CRC is burdened with over $6 billion of debt, the result of a
similar sized dividend to Occidental prior to the spin off. As a result,
CRCs leverage metrics are weaker than most Ba1 and Ba2 exploration
and production companies.
***
In addition, with the reinvestment of its cash flow, there is little to no
ability to reduce the companys debt burden and leverage will remain
elevated.
***
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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 7 of 27

It is unlikely that the ratings will be upgraded given current cash flow and
leverage expectations.
(Emphasis added.)
Then, on September 16, 2015, Moodys downgraded the Companys CFR again to
B1

from

Ba2,

reflecting

weak

financial

performance

in

the

current commodity price environment. Specifically, the Class Notes were downgraded to B2
from Ba2. Moodys also affirmed the Companys SGL-3 Speculative Grade Liquidity Rating,
stating [t]he rating outlook is negative.
Commenting on the Companys bleak outlook, Moodys stated:
The downgrade of CRCs CFR to B1 reflects its weak credit metrics for leverage,
cash flow coverage, and operating and capital efficiency, that are more typical of
single-B or Caa rated peers. CRCs relatively high cost production (production,
SG&A and interest costs totaled $31.71 per boe for the second quarter 2015) and
weak commodity prices that Moodys does not expect to improve materially in
2016, leaves CRC will [sic] a limited ability to generate positive free cash flow and
reduce balance sheet debt. Given CRCs high cost structure, we expect to see
leveraged cash margins between $8-$11 per boe over the next 12 to 18 months. The
company has relatively little of its 2016 production hedged (just 5,000 bpd or less
than 5%). The company has stated that it plans to monetize assets and will
potentially consider other transactions that would allow it to reduce balance sheet
debt to $5 billion by year-end 2016. Even so, its leverage and cash flow metrics
will be weak for the B1 CFR.
***
In addition, with the reinvestment of its cash flow, there is little ability to reduce
the companys debt burden using free cash flow.
***
Moodys expects that the borrowing base will be sufficient for CRC to have access
to the full $1.25 billion in commitments, but such borrowing base is a function of
crude oil and natural gas commodity prices. The company had $590 million of
borrowings and $27 million of letters of credit as of June 30, 2015, and will remain
reliant on its revolver.
***
The term loan and revolving credit facility are rated three notches above the B1
CFR to reflect their secured nature and priority of claim on assets over unsecured
debt (including $5 billion of senior notes) in accordance with Moodys Loss-GivenDefault rating methodology. The senior unsecured notes are now rated B2, one
notch below the B1 CFR, as a result of being contractually subordinated in claim
to the secured debt.
The negative outlook reflects uncertainty in CRCs ability to improve its cash
flow and leverage metrics to levels supportive of the B1 CFR. The ratings could
be downgraded if retained cash flow to debt is not expected to increase above 10%
on a sustained basis, CRC does not continue to generate positive free cash flow or
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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 8 of 27

CRC does not improve its leverage. It is unlikely that the ratings will be upgraded
given current cash flow and leverage expectations.
(Emphasis added.)
In addition to the Class Notes, the Company has significant credit facilities that are
senior to the Class Notes. On September 24, 2014, California Resources entered into a credit
agreement with a syndicate of lenders, providing for (i) a five-year senior term loan facility (the
Term Loan Facility) and (ii) a five-year senior revolving loan facility (the Revolving Credit
Facility and, together with the Term Loan Facility, the Credit Facilities). The Credit Facilities
were amended on February 25, 2015, and changed certain financial covenants through December
31, 2016 (the Interim Covenant Period). The aggregate commitments of the lenders are $2.0
billion effectively reduced to $1.25 billion during the Interim Covenant Period and $1.0
billion under the Revolving Credit Facility and Term Loan Facility, respectively. The Revolving
Credit Facility includes a sub-limit of $400 million for the issuance of letters of credit. The
Company was required to repay the Term Loan Facility in quarterly installments of $25 million
beginning on March 31, 2016.
On February 23, 2016, the Company amended the Credit Facilities, which reduced
its borrowing base to $2.3 billion and the lenders Revolving Facility commitments to $1.6 billion.
At January 31, 2016, the Company had approximately $1.7 billion of outstanding debt under its
Revolving Credit and Term Loan Facilities, resulting in approximately $560 million of availability
under the new $2.3 billion borrowing base.
The Exchange Offer
On November 12, 2015, California Resources announced the commencement of
the private Exchange Offer. The terms and conditions were set forth in the Offering Memorandum,
and the related letter of transmittal. The Exchange Offer provided for a maximum of $1 billion
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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 9 of 27

aggregate principal amount of Class Notes to be tendered, in consideration for the New Secured
Notes. The Exchange Offer was set to expire on December 10, 2015, and offered a premium for
Class Notes tendered prior to November 25, 2015 (the Early Participation Period).
The following table sets forth the Exchange Consideration, Early Participation
Premium and Total Exchange Consideration for each series of Class Notes:

Title of
Class
Notes
5% Notes
5%
Notes
6% Notes

Principal
Exchange
Amount of Consideration
Class
in New
Notes
Secured
Tendered
Notes
$1,000
$750
$1,000
$750
$1,000

$750

Early
Participation
Premium
$50
$50

Total
Exchange
Consideration
$800
$800

$50

$800

In addition to the Exchange Consideration or Total Exchange Consideration, as applicable, the

Company agreed to pay in cash all accrued and unpaid interest on the Class Notes accepted in the
Exchange Offer from the applicable last interest payment date to, but not including, the Settlement
Date for the Exchange Offers.
Due to the fact that the Exchange Offer was conducted as a private offer and the
New Secured Notes were not registered under the Securities Act, only QIBs and non-U.S. persons
were eligible to participate in the Exchange Offer, to the unlawful exclusion of Plaintiff and other
non-QIB holders of the Class Notes.
The New Secured Notes mature on December 15, 2022 and bear interest at a rate
of 8.00% per annum, with interest payable semi-annually on each June 15 and December 15,
commencing June 15, 2016.
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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 10 of 27

The New Secured Notes constitute the general second-lien senior secured
obligations of the Company. As such, the New Secured Notes rank junior to the Companys
priority-lien indebtedness, but are effectively senior to all of the Companys existing and future
unsecured senior indebtedness, including the Class Notes.
The New Secured Notes are unconditionally guaranteed, jointly and severally, on a
senior secured basis by certain subsidiaries of the Company which guarantee California Resources
priority-lien credit agreement and the Class Notes. The New Secured Notes will initially be secured
by second-priority liens on all property and assets of the Company that secure the Companys
priority-lien credit facility.
Prior to December 15, 2018, the Company may redeem the New Secured Notes on
one or more occasions, at a redemption price equal to 100% of the principal, plus a make-whole
premium and accrued and unpaid interest and additional interest, to, but excluding, the applicable
redemption date. In addition, on or after December 15, 2018, the Company may redeem the New
Secured Notes at its option, in whole or in part, at the redemption prices equal to 104 percent of
par value, if redeemed in 2018 and 102 percent if redeemed in 2019, plus accrued and unpaid
interest.
Moreover, the Indenture, dated as of December 15, 2015, between the Company,
certain of its subsidiaries, as guarantors, and the Bank of New York Mellon Trust Company, N.A.,
as Trustee and Collateral Trustee (the New Secured Notes Indenture) (Ex. C.), which governs
the New Secured Notes, does not contain any registration rights. As provided in the Offering
Memorandum, [the Company] ha[s] not registered, nor do[es the Company] currently have any
plans to register, the New Secured Notes under the Securities Act, or with any securities regulatory
authority of any State or other jurisdiction. Therefore, the New Secured Notes will be subject to

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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 11 of 27

restrictions on transferability and resale. Thus, non-QIBs will be foreclosed from the opportunity
to acquire the New Secured Notes, even in the public market.
Again, the Offering Memorandum related to the Exchange Offer and New Secured
Notes was distributed only to QIBs and non-U.S. persons. On April 15, 2016, Plaintiffs counsel
was able to obtain a copy of the undisclosed Offering Memorandum. The Offering Memorandum
detailed numerous risks that greatly affect the Class Notes. Among the risks that Defendant
disclosed only to QIB holders of the Class Notes were the risks that:
a. During the pendency of the Exchange Offer[], it is likely that the market
prices of the [Class] Notes will be volatile.;
b. The [Class] Notes will not get the benefit of the Collateral securing the
New Secured Notes and will be effectively subordinated to the New
Secured Notes to the extent of the value of the Collateral securing the New
Secured Notes Any right that holders of the [Class] Notes have to receive
any assets upon the bankruptcy, liquidation, reorganization or other winding
up of the Company, and the resulting rights of holders of the [Class] Notes
to realize proceeds from the sale of any of our assets, will be effectively
subordinated to the claims of the holders of the New Secured Notes to the
extent of the value of the collateral securing the New Secured Notes.;
c. We may be unable to repay or refinance non-tendered [Class] Notes at
maturity. Without near term access to capital, continued funding from
existing or new lenders and other significant developments, there continues
to be substantial risk that we could be, among other things, unable to repay
the [Class] Notes at maturity. In this instance, holders of the [Class] Notes

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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 12 of 27

who fail to validly tender their [Class] Notes and/or whose tendered [Class]
Notes are not accepted for exchange by use may not be paid in full. If we
become subject to a bankruptcy or similar proceeding prior to the repayment
of such [Class] Notes, you may recover less than you would have had you
tendered such [Class] Notes for the New Secured Notes in the Exchange
Offer.;
d. The liquidity of the [Class] Notes that are not accepted for exchange will
be reduced. Upon consummation of the Exchange Offer[], the trading
market for [Class] Notes may become more limited due to the reduction in
the amount of the [Class] Notes outstanding. A more limited trading market
might adversely affect the liquidity, market price and price volatility of
these securities. There can be no assurance of the prices at which the
unexchanged [Class] Notes may be traded.; and
e. Despite our current level of indebtedness, we may still be able to incur
substantially more debt. This could further exacerbate the risks associated
with our substantial indebtedness.
(Emphasis in original.)
On November 27, 2015, the Company announced that as of two days prior,
approximately $3.3 billion in aggregate principal amount of the Class Notes, representing 65.8%
of the outstanding principal amount of the Class Notes, had been tendered pursuant to the
Exchange Offer.
The Company also announced that the aggregate principal amount of Class Notes
to be accepted in the Exchange Offer had increased from $1 billion to $2.8125 billion. To

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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 13 of 27

accommodate the increase, the Company extended the Early Participation Period to December 1,
2015. All other terms of the Exchange Offer, as previously announced, remain unchanged. As a
result of the increase in the amount of Class Notes to be accepted, up to approximately $2.250
billion in principal amount of New Secured Notes would be issued in the Exchange Offer.
The sweet deal presented by the Exchange Offer was apparent to the QIBs
eligible to participate. Based on the amount Class Notes already tendered as of November 27,
2015, only approximately 85.4% of Class Notes tendered in the Exchange Offer would be accepted
for exchange, even after accounting for the increase to $2.8125 billion.
On December 11, 2015, California Resources announced the expiration and final
results of the Exchange Offer. When the Exchange Offer finally closed, $3,653,296,000 in
aggregate principal amount of the Class Notes, representing 73 percent of the outstanding principal
amount of the Class Notes, had been tendered pursuant to the Exchange Offer. Thus, the
opportunity to exchange the Class Notes for the New Secured Notes, at a 20 percent discount
was so attractive that more than $840 million in aggregate principal amount of Class Notes above
the Maximum Exchange Amount tendered into the Exchange Offer.
Because the aggregate principal amount of Class Notes tendered during the Early
Participation Period exceeded the Maximum Exchange Amount, the Company accepted only the
Class Notes tendered prior to the Early Participation Period on a pro rata and did not accept any
Class Notes tendered after the Early Participation Period.
/
/
/
/

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The following table sets forth the principal amount tendered and accepted for each
series of Class Notes:

Title of
Class
Notes
5%
Notes
5%
Notes
6%
Notes

Principal
Amount
Outstanding
(in millions)
$1,000

Principal
Amount
Accepted
Principal Class
Pursuant to the
Amount
Note
Exchange
Proration Factor
Tendered Opt-in
Offer
Applied to Class
(in millions) Rate
(in millions)
Notes Tendered
$693.54
69.3%
$534.031
77%

$1,750

$1,196.25

68.3%

$921.243

77%

$2,250

$1,763.506

78.4%

$1,358.077

77%

On December 15, 2015, California Resources completed the Exchange Offer, and
issued $2,250,000,000 aggregate principal amount of the New Secured Notes, pursuant to the New
Secured Notes Indenture.
In connection with the Exchange Offer, the Company recorded a deferred gain of
approximately $560 million, which will be amortized using the effective interest rate method over
the term of the 2022 notes.
Following the closing of the Exchange Offer, on December 21, 2015, Moodys once
again downgraded the Companys CFR to Caa1 from B1, downgraded the Probability of Default
Rating to Caa1-PD/LD from B1-PD, and assigned a Caa1 rating to the New Secured Notes. The
Companys first lien revolving credit facility and term loan were downgraded to B1 from Ba1 and
the Class were downgraded to Caa3 from B2. The speculative grade liquidity rating was changed
to SGL-4 from SGL-3. The rating outlook remains negative. Moreover, Moodys considered the
Exchange Offer a distressed exchange, which is an event of default under Moodys definition of
default. Explaining its reasons for the downgrades, Moodys stated:
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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 15 of 27

The downgrade of CRCs CFR reflects our expectations the oil and gas prices will
remain weak in 2016, stressing the companys liquidity and credit metrics, said
James Wilkins, a Moodys Vice President. The company will need to seek relief
from its financial covenants under its credit agreement, as early as the first quarter
of 2016.
The downgrade of CRCs CFR to Caa1 reflects weak industry conditions with oil
and natural gas prices at multi-year lows that will pressure CRCs liquidity,
leverage and cash flow credit metrics. Moodys expects that the company will
require relief from its first lien leverage and interest coverage financial covenants
under its credit facility in 2016.
***
Moodys expects CRC to generate negative free cash flow in excess of $150 million
in 2016 and also believes that the companys attempts to monetize assets to reduce
debt will be difficult in the current commodity price environment. CRCs high cost
structure (production, SG&A and interest costs totaled $34.30 per boe for the third
quarter 2015, including Moodys standard adjustments), relatively unhedged
production volumes, weak commodity prices and term loan payments leave the
company in a significant negative cash flow position, even with minimal capex.
The recent notes exchange reduced the principal amount of outstanding notes by
$563 million, but the increase in interest expense weakens the companys interest
coverage. The company is operating one rig, down from a peak of 27 in October
2014, and kept production for the first nine months of 2015 above 2014 levels,
using three rigs. However, Moodys expects production to decline in 2016. CRC
generally has a more modest decline rate (around 10%-15%) than shale oil
producers that have accounted for much of the oil production growth in the US over
the past five years.
CRCs SGL-4 Speculative Grade Liquidity Rating reflects weak liquidity and
Moodys expectation the company will have to seek a waiver or amendment of
the two financial covenants under its revolving credit facility (a maximum first
lien debt leverage ratio of 2.25x and a minimum interest coverage ratio of 2.0x)
as early as the first quarter 2016. CRCs interest coverage ratio will suffer as it
starts to pay an additional $21 million per year in interest expense as a result of
the recent issuance of $2.25 billion of 8% second lien notes due 2022 in exchange
for $2.813 billion of senior unsecured notes with coupon rates between 5% and
6%.
***
The term loan and revolving credit facility are rated three notches above the Caa1
CFR, reflecting their secured first lien priority of claim on assets ahead of the $2.25
billion of second lien notes and $2.187 billion of unsecured debt, in accordance
with Moodys Loss-Given-Default rating methodology. The second lien notes (at
Caa1) are rated at the same level as the CFR and the senior notes (at Caa3) are now
rated two notches below the CFR, as a result of being contractually subordinated in
claim to the secured debt.

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Case 1:16-cv-02971-RA Document 1 Filed 04/21/16 Page 16 of 27

The negative outlook reflects uncertainty surrounding CRCs ability to maintain

compliance with its financial covenants and improve its liquidity cash flow and
leverage metrics to levels supportive of the Caa1 CFR. The ratings could be
downgraded if CRC appears unable to maintain an interest coverage ratio greater
than 1x or if its revolver availability diminishes materially. The ratings could be
upgraded if Moodys expects CRC to maintain retained cash flow to debt above
10% and interest coverage above 1.5x on a sustainable basis.
(Emphasis added.)
Accordingly, as a result of the Exchange Offer, from which non-QIBs were
excluded from participating in, non-QIB holders of the Class Notes were injured due to a
subsequent Moodys downgrade of the Class Notes that they alone were left holding, and by the
subordination of their notes to the New Secured Notes.
An article published by Bloomberg commented on the rush of QIBs seeking to
tender their Class Notes into the Exchange Offer, stating [b]ondholders are eager to exchange
their debt because they dont want to own securities that will be subordinated to the notes created
by the exchange[.] An analyst at Bloomberg Intelligence explained: You will be incentivized to
offer as many of the bonds as you have in hopes you get as much of the new secured debt as you
possibly can, because thats going to help mitigate your losses. If you dont go along with it,
you know youre going to take a hit. You might as well go along with it to minimize whatever that
hit is going to ultimately be.
Pertinent Terms of the Indenture and Rights Provided Therein
The Indenture is a binding contract entered into between the Company and Wells
Fargo, as Trustee on behalf of the noteholders, which delineates the rights of the holders and the
obligations of the issuer.

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The Indenture repeatedly provides for the right of holders of the Class Notes to be
treated equally and the Companys obligation to obtain noteholders consent to take action that
affects the holders rights. Such provisions include the following:
(i)

Section 3.02. Selection of Notes to Be Redeemed. (a) If less than all of the
Notes of a series are to be redeemed at any time, the Trustee shall select
the Notes of such series to be redeemed among the Holders of the Notes
on a pro rata basis, by lot or in accordance with any other method the
Trustee deems fair and appropriate (subject to the procedures of DTC or
any other Depositary and by maintaining the authorized denominations for
the Notes), or, if the Notes of such series are listed on any securities
exchange, by any other method that complies with the requirements of such
exchange. In the event of partial redemption by lot, the particular Notes of
such series to be redeemed shall be selected prior to giving a notice of such
redemption by the Trustee from the outstanding Notes of such series not
previously called for redemption.

(ii)

Section 4.09. Offer to Repurchase Upon a Change of Control.

(a) If a Change of Control Triggering Event occurs with respect to a series
of Notes, each Holder of Notes of such series will have the right to
require that the Company purchase all or any part (in amounts of
$1,000 or whole multiples of $1,000 in excess thereof) of such
Holders Notes pursuant to the offer described below (the Change of
Control Offer).
(b) Not later than 30 days after the date upon which any Change of Control
Triggering Event occurred with respect to a series of Notes or, at the
Companys option, prior to a Change of Control but after it is publicly
announced, the Company must notify the Trustee in writing and give
written notice of either such event to each Holder of Notes of such
series, at such Holders address appearing in the security register or
otherwise deliver notice in accordance with the Applicable Procedures
(the Change of Control Purchase Notice)

(iii)

Section 9.02. With Consent of Holders of Notes.

(a) Except as provided below in this Section 9.02, the Company, the
Guarantors, any other obligor under the Notes of a series and the Trustee
may amend or supplement this Indenture or the Notes of such series with
the consent of the Holders of at least a majority in aggregate principal
amount of all Notes (taken together as a single class) then outstanding and
affected by such amendment or supplement; provided, however, that no
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such modification or amendment may, without the consent of the Holder

of each outstanding Note of such series affected thereby:
(1) reduce the percentage of principal amount of Notes of such series whose
Holders must consent to an amendment, supplement or waiver of any
provision of this Indenture or the Notes of such series;
(7) impair the right of Holders of Notes of such series to receive payment
of the principal of and interest on Notes on the respective due dates therefor
and to institute suit for the enforcement of any such payment; or
(8) make any change in the percentage of principal amount of Notes of such
series necessary to waive compliance with certain provisions of this
Indenture.
(Emphasis added.)
Section 9.03 of the Indenture provides that [e]very amendment or supplement to
this Indenture or the Notes shall be set forth in an amended or supplemental Indenture that complies
with the TIA as then in effect.
Among the various rights provided to holders of the Class Notes, in accordance
with Section 316(b) of the TIA, Section 6.07 of the Indenture provides:
Rights of Holders of Notes to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder of
a Note to receive payment of principal, premium, if any, or interest on such Note,
on or after the respective due dates expressed in such Note, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of such Holder.
(Emphasis added.)
As is commonplace in bond indentures, the Indenture includes a no action clause,
which places a limitation and procedural requirements for noteholders to enforce certain claims
under the Indenture. Specifically, Section 6.06 of the Indenture provides:
(a) No Holder of any of the Notes of any series has any right to pursue any remedy
with respect to this Indenture unless (1) the Trustee shall have received written
notice that an Event of Default has occurred and is continuing, (2) the Trustee shall
have received a written request from Holders of at least 25% in aggregate principal
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amount of the outstanding Notes of such series to pursue such remedy, (3) the
Trustee shall have received indemnity from the Holders reasonably satisfactory to
it against loss, liability or expense to pursue such remedy as Trustee under the Notes
of such series and this Indenture, (4) the Trustee shall have failed to act for a
period of 60 days after receipt of such written notice, request and such offer of
security or indemnity, and (5) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders of a
majority in aggregate principal amount of the outstanding Notes of such series.
(b) The limitations set forth in paragraph (a) of this Section 6.06 do not, however,
apply to a suit instituted by a Holder of a Note of such series for the enforcement
of the payment of the principal of, premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note.
(Emphasis added.)
Notwithstanding Section 6.06 of the Indenture, Plaintiff is not barred from asserting
his, and those of all holders of Class Notes, under the Indenture for two reasons. First, compliance
with the requirements of Section 6.06 was not possible due to the time restraints of the Exchange
Offer. The Exchange Offer was first announced on November 12, 2015, was closed on December
10, 2015, and the New Secured Notes were issued on December 15, 2015. Thus all of the
complained of events at issue in this Complaint occurred well within the 60 day period in Section
6.06. Second, Plaintiff had good reason to doubt the impartiality any written notice provided to the
Trustee would receive. As mentioned above, the Indenture appoints Wells Fargo as Trustee of the
Indenture. (Ex. A, 1.1.) Timothy Sloan (Sloan), a member of California Resources Board of
Directors, is President and Chief Operating Officer at Wells Fargo. Thus, Sloan was on the Board
when the Exchange Offer was offered to the exclusion of non-QIBs and as a result he and Wells
Fargo were seriously conflicted in the transaction.
Section 7.01 of the Indenture details the numerous duties and liabilities of the
Trustee. The Indenture explicitly prohibits relief from liability for the Trustee as a result of its

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own negligent action, its own negligent failure to act, or its own willful misconduct, subject to
limited exceptions.
Lastly, Section 12.08 of the Indenture states: THIS INDENTURE, THE NOTES
AND THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. (Capitalization in
original.)
Federal Protections for Noteholders under Section 316(b) of the TIA
TIA provides a federally protected right for noteholders to receive payments due to
them, which may not be impaired without their consent.
Section 316(b) of the TIA states:
Notwithstanding any other provision of the indenture to be qualified, the right of
any holder of any indenture security to receive payment of the principal of and
interest on such indenture security, on or after the respective due dates expressed
in such in denture security, or to institute suit for the enforcement of any
such payment on or after such respective dates, shall not be impaired or affected
without the consent of such holder, except as to a postponement of an interest
payment consented to as provided in paragraph (2) of subsection (a), and except
that such indenture may contain provisions limiting or denying the right of any such
holder to institute any such suit, if and to the extent that the institution or
prosecution thereof or the entry of judgment therein would, under applicable
law, result in the surrender, impairment, waiver, or loss of the lien of such indenture
upon any property subject to such lien.
(Emphasis added.)
CLASS ACTION ALLEGATIONS
Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons or entities who held Class
Notes during the period from November 12, 2015 to the present. Excluded from the Class are
Directors and the Officers of California Resources and Trustees of the Class Notes, members of
their immediate families and their legal representatives, heirs, successors or assigns; any entity in
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which Defendant have or had a controlling interest; and any holders of the Class Notes that are
non-U.S. persons within the meaning of Rule 902(k) of Regulation S of the Securities Act or QIBs
within the meaning of Rule 144A of the Securities Act.
The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class members is unknown to Plaintiff at this time and
can only be ascertained through appropriate discovery, Plaintiff believes that there are at least
hundreds of members in the proposed Class. Record owners and other members of the Class may
be identified from records maintained by the Trust or its transfer agent and may be notified of the
pendency of this action by mail, using the forms of notice similar to that customarily used in
securities class actions. The Company has billions of dollars in the aggregate principal amount of
outstanding Class Notes that were not tendered into the Exchange Offer.
Plaintiffs claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants wrongful conduct alleged herein.
Plaintiff will fairly and adequately protect the interests of the members of the Class
and has retained counsel competent and experienced in class and securities litigation.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
a. whether the TIA was violated by Defendants acts as alleged herein:
b. whether Defendants acts as alleged herein breached the terms of the Indenture;
c. whether Defendants acts as alleged herein breached the implied covenant of good
faith and fair dealing;

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d. whether Defendants acts as alleged herein caused them to unjustly enrich itself;
and
e. the extent of damages sustained by Class members, and the appropriate measure of
damages or declaratory relief.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden
of individual litigation make it impossible for members of the Class to individually redress the
wrongs done to them. There will be no difficulty in the management of this action as a class action.
CAUSES OF ACTION
COUNT ONE
For Violations of 316 of the TIA,
15 U.S.C. 777ppp(b)
Plaintiff incorporates by reference each and every preceding paragraph as though
fully set forth herein.
This Count is brought pursuant to Section 316(b) of the TIA, 15 U.S.C.
777ppp(b), against the Company.
As acknowledged by, inter alia, Sections 1.03, and 9.03 of the Indenture, the Class
Notes fall within the protection and purview of the TIA.
Section 316(b) of the TIA explicitly provides that all holders of an indenture
security has an unconditional right to receive payment of the principal and interest due on such
indenture security. Moreover, Section 316(b) of the TIA protects the noteholder from any
impairments or negative affects without the explicit consent of such holder.

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By creating and issuing a new series of notes that are secured and senior to the Class
Notes in the Exchange Offer, the Company impaired the value of the Class Notes and affected the
likelihood of full repayment of principal and interest in the event of a default.
Non-QIB holders of the Class Notes did not provide, and were not asked for, their
consent for the impairment of their holdings in Class Notes that resulted from the creation of the
New Secured Notes.
Accordingly, Plaintiff and the Class are entitled to the declaratory relief sought in
Count Five.
COUNT TWO
Breach of Contract, Indenture, Section 6.07
Plaintiff incorporates by reference each and every preceding paragraph as though
fully set forth herein.
The Indenture was entered into, between California Resources, the Companys
subsidiaries, as guarantors, and Wells Fargo Bank, N.A., as Trustee, dated October 1, 2014, and
remains in effect to this day.
The Indenture is a binding and valid contract, which governs the Class Notes.
Section 6.07 of the Indenture provides all holders of Class Notes, including NonQIBs, the right to receive payment due on the Class Notes, to bring suit to enforce such rights and
to be protected from any impairment or affect without their consent.
By creating and issuing a new series of notes that are secured and senior to the
Class Notes in the Exchange Offer, the Company impaired the value of the Class Notes and
affected the likelihood of full repayment of principal and interest in the event of a default.

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Non-QIB holders of the Class Notes did not provide, and were not asked for, their
consent for the impairment of their holdings in Class Notes that resulted from the creation of the
New Secured Notes.
Accordingly, Plaintiff and the Class are entitled to the declaratory relief sought in
Count Five.
In addition, as a result of the Defendants breach of the Indenture, Plaintiff and the
Class have suffered damages in an amount to be determined at trial.
COUNT THREE
For Breach of the Covenant of Good Faith and Fair Dealing
Plaintiff incorporates by reference each and every preceding paragraph as though
fully set forth herein.
The Indenture was entered into, between California Resources, the Companys
subsidiaries as guarantors, and Wells Fargo Bank, N.A., as Trustee, dated October 1, 2014, and
remains in effect to this day.
The Indenture is a binding and valid contract, which governs the Class Notes.
By virtue of this contract, the Company, as a party to the Indenture, were at all
times bound by the covenant of good faith and fair dealing implied by this contractual obligation.
The Company violated the covenant of good faith and fair dealing by unfairly
discriminating against non-QIB holders of the Class Notes and subordinating their claims to the
New Secured Notes without consent.
As a direct and proximate result of this violation, Plaintiff and the Class have
sustained damages
/
/
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COUNT FOUR
Unjust Enrichment
Plaintiff incorporates by reference each and every preceding paragraph as though
fully set forth herein.
Through the issuance of the New Secured Notes, Defendant has unjustly enriched
itself by recording a gain of approximately $560 million on the Exchange Offer. This ill-gotten
gain came at the expense of Plaintiff and members of the Class that held Class Notes that were
subordinated to the improperly created New Secured Notes.
Retention of the gain obtained as a result of the issuance of the New Secured Notes
is unjust and inequitable because it was the result of Defendants violations of the TIA and a breach
of the Indenture.
Because Defendants retention of the non-gratuitous benefits conferred on it by
Plaintiff and members of the Class is unjust and inequitable, Defendant must pay restitution to
Plaintiff and members of the Class for its unjust enrichment, as ordered by the Court.
COUNT FIVE
Declaratory Judgment
Plaintiff incorporates by reference each and every preceding paragraph as though
fully set forth herein.
As alleged above, Plaintiff and the Class have stated claims against Defendant
based on violations of the TIA, breach of contract, and unjust enrichment.
Defendant has violated the terms of the TIA by improperly impairing the Class
Notes and subordinating them to the New Secured Notes without consent. Additionally,
Defendants actions in connection with the Exchange Offer breached the terms of the Indenture.
Defendants violations of the TIA and breach of the Indenture caused it to unjustly enrich itself to
the tune of $560 million at the expense of Plaintiff and the Class.
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An actual controversy has arisen in the wake of the Exchange Offer regarding the
validity and enforceability of the New Secured Notes. Plaintiff maintains that the Exchange Offer
and related issuance of the New Secured Notes impaired the rights of the non-QIB holders of the
Class Notes, thereby violating the TIA and breaching the terms of the Indenture.
Accordingly, Plaintiff seeks a declaration, pursuant to 28 U.S.C. 2201, that
Defendants issuance of the New Secured Notes through the Exchange Offer is null and void,
ineffective and invalid, that any liens securing the New Secured Notes are null and void, ineffective
and invalid, and that the Exchange Offer resulted in an Event of Default, pursuant to the Indenture.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays for judgment as follows:
(a)

Declaring this action to be a proper class action pursuant to Fed. R Civ. R. 23;

(b)

Designation of Plaintiff as Class Representative;

(c)

Designation of Levi & Korsinsky, LLP as Class Counsel;

(d)

Awarding Plaintiff and the Class damages;

(e)

Pre- and post-judgment interest;

(f)

Declaratory relief, as described herein;

(g)

Awarding Plaintiff the costs and disbursements of this action, including reasonable
allowance of fees and costs for Plaintiffs attorneys, experts, and accountants; and

(h)

Such other and further relief as the Court deems just and proper.

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Dated: April 21, 2016

By: /s/ Eduard Korsinsky

Eduard Korsinsky
LEVI & KORSINSKY LLP
30 Broad Street, 24th Floor
New York, NY 10004
Tel: (212) 363-7500
Fax: (212) 363-7171
Attorney for Plaintiff

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