Case Title: Wilmington Trust Co. v. Calpine Corp.

Citation: 

Docket Number: 69910

State: delaware

Court: Delaware Supreme Court

Date: 2005-12-16T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE

WILMINGTON TRUST COMPANY,
Solely in its capacity as Second Indenture
Lien Trustee,
Defendant Below,
Appellant,
v.

CALPINE CORPORATION,

Plaintiff Below,
Appellee.

CALPINE CORPORATION,

Plaintiff Below,
Appellant/Cross-Appellee,

v,

BANK OF NEW YORK and
WILMINGTON TRUST COMPANY,

Defendants Below,
Appellees,

and
WILMINGTON TRUST COMPANY,
Solely in its Capacity as First Lien
Indenture Trustee,

Defendant Below,
Cross-Appellant.

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Nos. 602 and 603, 2005
Consolidated

Court Below: Court of Chancery
of the State of Delaware, in and
for New Castle County

C.A.No, 1669-N
Submitted: December 15, 2005
Decided: December 16, 2005

Before HOLLAND, BERGER and JACOBS, Justices.
ORDER

This 16" day of December 2005, upon consideration of the briefs of the
parties and the record in this case and oral argument, it appears to the Court that:

(1) This case involves multiple expedited appeals from an Order and Final
Judgment (“Order”) entered by the Court of Chancery on December 2, 2005,
implementing its post-trial Opinion handed down on November 22, 2005
(Opinion”),” and the rulings made at a hearing held on December 2, 2005. The
exigencies of time do not permit us to elaborate, or even summarize, the bases for
the parties’ disputes or the trial court’s reasoning and conclusions reached in
deciding the multitudinous and complex factual and legal issues before it. We
therefore have attached a copy of the Opinion and the Order for reference, and
unless noted otherwise, adopt in this Order the terms used by the trial court in its
Opinion,

2) Three issues are presented in these appeals: (1) whether the Court of
‘Chancery erred in determining that Calpine’s use of approximately $312 million of
the Rosetta Proceeds to purchase natural gas was not a permitted purchase of
Designated Assets, and, therefore, must be restored to the Designated Asset Sales
* Calpne Corporation v. The Bank of New York eta, 2008 WL 3111956 (Del. Ch),

2
Proceeds Account (“DASPA"); (2) whether the tril court erroneously held that the
First Lien Trustee lacked contractual standing to request a remedy for Calpine’s
adjudicated improper use of the approximately $312 million of Rosetta Proceeds
and to assert its counterclaims against Calpine; and (3) whether the Court of
Chancery abused its discretion in requiring the Restoration Proceeds to be re~
deposited in the DASPA on January 22, 2006 rather than on an earlier date, We
address those issues in that sequence.
The Designated Assets Issue

(3) Calpine contests the trial court's determination that Calpine’s use of
approximately $312 million of the Rosetta Proceeds to purchase natural gas was
not a permitted purchase of Designated Assets. Calpine argues, among other
things, that the Court of Chancery misconstrued the distinction between natural gas
assets and natural gas contracts, and mistakenly assumed that Designated Assets
‘must be long-term natural gas reserves. After carefully considering Calpine's
arguments, we conclude that the Court of Chancery correctly construed the
exclusion contained in the definition of “Designated Assets,” properly held that
Calpine’s purchases of natural gas using approximately $312 million of the Rosetta
Proceeds were not purchases of Designated Assets, and validly determined that
Calpine must restore the approximately $312 million of Rosetta Proceeds to the

DASPA. Accordingly, we affirm those determinations on the basis of, and for the
the Court of Chancery’s well-reasoned and well-written

 

The Contractual Standing Issue
(4) The First

 

‘Trustee challenges that portion of the Opinion (and
implementing provisions of the Order) adjudicating that the First Lien Trustee
lacked contractual standing to seek (i) the restoration to the DASPA of
approximately $312 million of the Rosetta Proceeds that Calpine had improperly
withdrawn, or (2) any relief with respect to the approximately $400 million
remaining in the DASPA. ‘The Opinion also determined that First Lien Trustee
lacked contractual standing to advance any of the counterclaims the First Lien
‘Trustee had asserted against Calpine in this action, other than the counterclaim for
indemnification of its litigation expenses. First Lien Trustee claims that those
determinations were erroneous as a matter of law for two reasons.

(9) First, it argues, the trial court’s “no contractual standing” rulings are
predicated upon the Court of Chancery's determination (embodied in Paragraph 3
of the Order) that Calpine’s use of the Rosetta Proceeds to make the June 2005
tender offer to the First Lien Noteholders extinguished any right of the First Lien
Indenture Trustee to demand (i) the restoration of those Rosetta Proceeds that were
withdrawn from the DASPA, or (i) other relief with respect to the $400 million of

Proceeds remaining in the DASPA Account. First Lien Trustee claims that that
predicate determination was erroneous, because the tender offer made by Calpine
was not a conforming Asset Sale Offer under the First Lien Indenture, which
allowed Calpine to make a tender offer only after Calpine had received Net
Proceeds from a sale of Designated Assets. The First Lien Trustee claims that
because Calpine did not receive the Net Proceeds before commencing its tender
offer, that offer was not a conforming Asset Sale Offer, and that the Court of
Chancery erred in holding otherwise

(©) Second, the First Lien Trustee claims that even if Calpine’s tender offer
for the First Lien Notes was a conforming Asset Sale Offer, the First Lien Trustee
had significant contractual rights with respect to the collateral that were conferred
by the Collateral and the Control Agreements, independent of whatever effect that
tender offer may have had. The First Lien Trustee claims that in reaching its
contrary conclusion, the Court of Chancery misconstrued those Agreements.

(7) After carefully considering the contentions of the parties and the record,
we conclude the First Lien Trustee's first claim of error is without merit, and that
the Court of Chancery correctly determined, for the reasons stated in its Opinion,

that the June 2005 tender offer to the First Lien Holders was a Quali

 

jing Offer.
‘We further conclude, however, that the First Lien Trustee's second claim of error
is meritorious. Even though that tender offer extinguished the First Lien Trustee's

right to object to uses of the Rosetta Proceeds not prohibited by the First Lien
Indenture, the First Lien Trustee retained an interest in those proceeds that
conferred upon the First Lien Trustee contractual standing to enforce the
Instruments in any this or any future transactions involving the collateral which
secures the First Lien Notes.

(8) The Rosetta Proceeds and any assets purchased with them are still
collateral for the First Lien Notes, subject to the First Lien Trustee’s senior lien
and to the First Lien Noteholders’ rights under the Control Agreement. Contrary
to the Court of Chancery’s determination, neither the First Lien Indenture nor any
provision of the Control Agreement exempts Calpine from strict compliance with
the requirements the Control Agreement imposes for withdrawing the proceeds of
4 sale of Designated Assets from the DASPA after a conforming tender offer under
the First Lien Indenture is made. The First Lien Trustee is a Secured Party. As
such, it is an express, intended beneficiary of the Control Agreement and is entitled
to enforce that Agreement’s provisions. The Control Agreement provides that
disbursements to Calpine from the DASPA may only be made upon proper
certification by Calpine that (among other things) “no Secured Debt Default has
occurred.” The term “Secured Debt Default” is defined in the Collateral
Agreement (of which the First Lien Trustee is an express beneficiary and a party
by virtue of having executed the Collateral Trust Joinder) as an event that

constitutes (or that upon the giving of notice or the passage of time would
constitute) a default that could cause the acceleration of the First Lien or the
Second Lien Debt.

(9) Calpine’s withdrawal of the Rosetta Proceeds in connection with the
Disputed Contracts was prohibited under the Collateral Agreement and the Second
Lien Indenture, because, as the Court of Chancery found, the Disputed Contracts
were not Designated Assets. Calpine’s withdrawal of $312 million from the
DASPA also constituted a Secured Debt Default under the Collateral Agreement,
the terms of which were made applicable to the Control Agreement, Under
Section 5.02 of the Control Agreement, the First Lien Trustee, as an intended

beneficiary of the Control Agreement, has the right to enforce that Agreement if

 

ithdrawals are made in violation of it. The Court of Chancery’s contrary
determination was, therefore, erroneous as a matter of law.
The Re-Deposit Date Extension Issue

(10) The Second Lien Trustee appeals from that portion of the Order
establishing January 22, 2006 as the date by which Calpine must restore the
approximately $312 million of the improperly withdrawn Rosetta Proceeds—the
Restoration Amount—to the DASPA. The Second Lien Trustee argues that under
the terms of the Indenture, Calpine is required to use the entire Rosetta Proceeds
(including the Restoration Amount) to: (1) purchase replacement Designated

Assets, (2) repurchase the First Lien Notes, or (3) make a tender offer to
repurchase the Second Lien Notes, by no later than January 3, 2006. Had the
Restoration Amount not been improperly withdrawn from the DASPA, that
amount would have been included in the collateral on deposit in the DASPA, with
the result that the DASPA would contain the full amount of the collateral to which
Second Lien Noteholders were found to be contractually entitled. By extending
the date for re-depositing the Restoration Amount from the January 3, 2006
deadline to January 22, 2006, the Court of Chancery increased by 19 days the time
during which the Noteholders will be deprived of the full collateral secured by the
Instruments. In doing that, the Second Lien Trustee argues, the Court of Chancery
abused its discretion.

(11) Although extending by 19 days the January 3, 2006 deadline for re-
‘depositing the Restoration Amount was within the Court of Chancery's discretion,
we conclude that any such extension must be made subject to conditions that
would adequately safeguard the Second Lien Noteholders’ contractual rights. We
affirm that portion of the trial court’s Order establishing January 22, 2006 as the
deadline by which Calpine must physically deposit the Restoration Amount into
the DASPA: That extended deadline is subject, however, to the following
‘conditions that, we conclude, will effectuate the 180 day deadline contractually

imposed by Section 4.10 (c) of the Second Lien Indenture and will protect those
Noteholders’ property rights in the collateral to which they have been found
contractually entitled:

) Until January 3, 2006, Calpine may use the proceeds in the DASPA to
purchase replacement Designated Assets or for any other proper purpose
that is authorized by the applicable Instruments.

b) Although Calpine is not required to deposit the Restoration Amount in
the DASPA until January 22, 2006, for purposes of calculating Excess
Proceeds, any unpaid Restoration Amount shall be added to the amount
actually on deposit in the DASPA as of January 3, 2006, with the result
that the entire Restoration Amount shall be regarded for all legal
Purposes as if it had been physically re-deposited in the DASPA on
January 3, 2006,

©) If after making the calculation in (b) above, there are more than $50
ion of Excess Proceeds, then Calpine must (i) make an irrevocable
(ce. non-withdrawable) tender offer to purchase the Second Lien Notes;
and (ii) the amount of that tender offer must include the entire unpaid
Restoration Amount in addition to the amount that is actually on deposit
in the DASPA on the date of the offer. During the period January 3,
2006 until the date on which payment to the Noteholders under the offer
is made, no DASPA funds may be disbursed for any purpose other than
to pay for Second Lien Notes that are tendered into the offer.

 

(12) This case shall be remanded to the Court of Chancery with directions
to modify its Order to conform to the rulings made herein. The conditions set forth
in paragraph (11) above will afford the parties a remedy that is consistent with, and

that effectuates, the trial court's equitable rulings by affording Calpine additional

 

‘time to fund its adjudicated obligation to restore the Restoration Amount to the
DASPA, while preserving and securing to their fullest extent the contract rights of

the Second Lien Noteholders. Requiring Calpine to make the tender offer in the
full amount (including the unpaid Restoration Amount) of the Excess Proceeds on
January 3, 2006 is appropriate, because the tender offer to the Second Lien
Noteholders must remain open for 20 days, and if Calpine redeposits the
Restoration Amount into the DASPA by January 19, 2006, the full amount of
Excess Proceeds will be on deposit to pay the Second Lien Noteholders who tender
into the offer.

NOW, THEREFORE, IT IS ORDERED that the Order and Final Judgment
of the Court of Chancery is affirmed in part, reversed in part, and modified in part.
This matter is remanded to the Court of Chancery for proceedings consistent with
this Order, and the Clerk of this Court is directed to issue the mandate
immediately.

BY THE COURT:
9 Jack B. Jacobs

Justice

10
 

EFiled: Dac 16 2005 9:21

Filing ID 7671809
Case Number Multi-case

INTHE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY

‘CALPINE CORPORATION,
init,

CA.No. 1669-N

‘THE BANK OF NEW YORK and
WILMINGTON TRUST COMPANY,

Defendants,

OPINION

‘Date Submitted: November 17, 2005
‘Date Decided: November 2, 2005

Edmond D. Johnsoa, Esquire, Petr B. Ladig, Eaquire, THE BAYARD FIRM, Wilmington,
Delaware; Robert P. Haney, Jc, Esquire, COVINGTON & BURLING, New York, Now
‘York, Anorneys fr Plaintf.

M. Duscan Grant, Eaquire, PEPPER HAMILTON LLP, Wilmington, Delaware; James
Gadsden, Haque, William H. Sloane, Eaquire, Karl Schaffer, Eoquire, CARTER
LEDYARD & MILBURN LLP, Atornays for Defendant The Bank of New York.

Bemard G. Conaway, Esquire, Sheldon K. Remnie, Esquire, FOX ROTHSCHILD LLP,
Wilmington, Delaware; Joseph F. Ryan, Esquire, Steven B. Lovine, Esquire, Lisa M.
IEP, Bonet Namath; Elvan S Wensum Sigment Wines Goes
‘Sigmund S. Wisser-Cross,
‘Esquire, BROWN RUDNICK BERLACK ISRAELS LLP, New York, New York,
Attorneys for Defendant Wilmingson Trust Company as First Lien Indenture Trustee.
Richard D. Allen, Esquire, Robert J. Dehney, Bequire, S. Mark Hurd, Esquire, MORRIS,
‘NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; Laurence Greenwald, Esquie,
Robin Keller, Baquire, Wendell H. Adar, Esquire, STROOCK & STROOCK & LAVAN
LLP, New York, New York, Aitomeys for Intervenor Wiimingion Trust Company as
‘Second Lien Indenture Trustee,

‘STRINE, Vice Chancellor,
‘This i the post-trial opinion in an expedited case involving 2 dispute between
‘oteholders (through an Indenture Truste fortwo different series of notes, the “First”
‘and “Second Lien Notes") and the issuer ofthe Notes, Calpine Corporation (“Calpine”).
Calpine operates natural gas-fueled power plans that generate electricity. This litigation
centers on Calpine's plans for the use of spproximately $852 million in net proceeds from
‘the sale of substantially ll ofits oi and natural gas asets to Rosetta Resauroes, inc. on
July 7,2005 (the “Rosetta Sale"). The "Rosetta Assets” that Calpine sold were
“Designated Assets” under important instruments protecting its Notcholders. When the
Rosetta Assets were sold he “Rosetta Proceeds” therefore were placed into a control
‘sccount and could only be used for certain purposes.

Calpine hoped to use the bulk ofthe $852 million inthe Roseta Proceeds to retire
all of is Fit Lien Notes through a tender offer offering to pay the Fest Lien Noteholders
‘par plus accrued interest. This use was mandated contractually by he indenture
‘governing Calpine's frst lien seies of notes (the “First Lien Indenture”). Rather than
‘eoeiving tenders from all ofthe First Lien Noteholders, only $139 million ofthe $785
ailion in First Lien Notes were tendered, all of which Calpine repurchased. ‘This left
(Calpine holding $709 million in Rosetta Proceeds, j

Calpine then emberked on purchases of natural gas for buming i its powerplants.
‘To accomplish those purcheses, Calpine usod the form contract typically used by sellers
nd purchasers of extracted natural gas — the Base Contract forthe Purchase and Sale of

 

| With scerud interest, Calpine paid approximately $143 million to repurchase approximately
‘$139 milion in fica amount of First Liew Notes

1
 

"Natural Gas promulgated by the North American Energy Standards Board (“NASB”)
‘—1s its foundational document (a “NAESB form contrect”).* In variance with its prior
‘ractice, however, Clpine modified its approach to purchasing natural gas by drafting
‘the contracts so that it would pay an immediate price forthe gas it purchased, take ttle
‘pon that payment, and keep tat gas in storage until it (or gas of similar quality) was
Aelivered to Calpine within the brief contact term, The price that Calpine ultimetely
aid typically was tobe determined by prize movements inthe spot market during the
Period up to delivery; moreover, if the seller filed to deliver all the purchased gas,
Calpine’ remedy was simply a cash payment in the amount necessary to cover through.
other gas purchases. Calpine had no right to insist ona remedy involving the actual
delivery ofthe precise amount of gas to which i supposedly held tie.

(Calpine structured the contracts in tis manner in order to argue tha its purchase
of natural gas constituted « purchase of Designated Assets, « permisible use ofthe
osetia Proceeds under the indetures forthe Second Lien Noteholders (taken together,
the "Second Lien Indenture”) once Calpine had made a qualifying tender offer to the ist
Lien Noteholders. ‘The term Designated Assets in the Fist and Second Lien Indentures
‘broadly refers to “all geothermal energy assets...and all... Gas Reserves... but
‘excluding () any geothermal energy assets that ae both unproven and undeveloped and
(contracts forthe purchase or sale of natural gas and natural gas supplied under such
contracts.” After the tender offer closed, Calpine epeat $313 million ofthe Rosetia

 

{ Nonth American Energy Standards Boar, General Terms and Conditions, Base Contract for
Salo and Purchase of Neural Gus, NAESB Standard 6.3.1, Api 19, 2002

2
Proceeds on natural gas for burning in its powerplants and certified to The Bark of New
‘York BONY") the relevant “Collateral Trustee,” tat these purchases were of
Designated Assets

‘Bvectually, the Noteholdes caught wind of Calpie's purchases and complained
{BONY that Calpine's we ofthe Rosete Proceeds to buy natural pa was
‘impermissible becuase it involved the une ofthe Rosete Proceeds fr "contacts forthe
‘arcbase o sale of natural gas and natural gus supplied under such contracts," and thus
id not involve the purchase of Designated Asset, Alter that objection surfaced, BONY
refised to futher release any more ofthe Rosetta Proceeds to Calpine for purchases of
natural gas. Calpine therefore brougt this ection agninst BONY, as Collteral True,
‘0d the Wilningion Trust Company, as indenture trustee for both the Fist and Seooed
Lien Notcholders (collectively, he “Indenture Trustees"), seeking a declaration that ite
lst and proposed use ofthe Rosetta Procends to buy natural gas constie penissible
purchases of Designated Assets,

{In tis opinion, I conclude that Calpice's proffered interpretation ofthe relevant
cxchusion fom the term Designated Assets is eroncous, By any measure, Calpine is
sing Rosetta Proceeds to buy “natural gas supplied under... a) contract] forthe sale
x purchase of natural gs...” The term wed in the exclusion i an obvious reference
toxcommon indstry term forthe corrects used to buy ad sell already-enracted naturel
‘8, Calpine itself appears to have proposed this exchaion, inorder to exchide from the
etntion of Designed Assets the trading activities of one of its subsidiaries, Notably,

 

‘hin subsidiary, Calpine Bnergy Services ("CES"), was the unit that made regula, large

3
 

purchases of natsra gas fr buming in Clpine's power plants, and by this exclusion,
Calpine therefore placed the ges received under those contracts outside the reach of
Designated Assets.

‘The contracts that Calpine has entered withthe Restta Proceeds are materially
indistinct from the prior contracts its subsidiaries used to aoquire natural gas for burning.
Calpine has never considered these prior contracts, or the natural gas acquired under
‘them, to be Designated Assets. The mere fact that Calpine restructured the recent
contacts in order to take “ile” tothe purchased gas upon contracting and before
detivery doesnot suffice to make those contracts anything other than what they are
isin labeled ané obviously are: “contacts forthe sale o purchase of manure gas end
the gas supplied under such contracts." Calpine’s use ofthe Rosette Proceeds for this
rpose was therefore impermissible and itmay not proced to make further purchases of
this kid, Because the correct party to challenge the past purchases — the Second Lien
[Noteholders — didnot seok redress forthe past purchases enti efter discovery hed
closed and trial was imminent, I defer on the question of the appropriate remedy for
(Calpine's inappropriate use of $313 milion ofthe Rosetta Proceeds although tis clear a
{iting and reasonably prompt restorative remedy isin oder.

1. Factual Background
‘A. The Notes

In July end Novernber 2003, Calpine ixued $295 billion of Second Lien Not,
‘govered by four subsaatally identical note indenture, collectively, the Second Liea
Indenture. The Second Lies Notes issued July 16, 2003, inchided $500 million floating

4
‘ate notes due 2007; $1.15 billion of 8.5% notes due 2010; ané $900 million of 8.75%
‘notes due 2013.” On November 18, 2003, Calpine issued the remaining Second Lien

‘Notes, which were S400 million of 9.875% notes due 2011. The Second Lien Notes are

 

secured by  scond priority lien on substantially all ofthe assets of Calpine, including,
‘but not limited to, Caipine's domestic ol and gas reserves, geothermal asses, and seven
Powerplant asst; 100% ofthe stock and other equity interests of Calpne'sfst-tee
  |
{Second Lien] Indenture” Thus, when the Indenture are read together, until Calpine
‘has faithfully fulfilled it cbigetion o make a Second Lien Qualified Offer, he Rosetta
Proceeds may only be used to acquire replacement Designated Asset or pay down First
Lien Notes.

(Calpine never intended to reach the stage when it would be required to launch a
‘Second Lien Qualified Offer although the Excess Rosetta Proceeds well exceeded $50
aillion. Calpine did not want to do so because the Socond Lien Notes were trading at
‘substatal discount to par andthe Second Lien Indenture requires Calpine to repurchase
‘be Second Lien Notes at par pls accrued interest. Launching a Second Lien Qualified
Offs, therefore, would involve Calpine paying a substantial premium onthe Second Lien
Notes.

For this reason, Calpine instead decided to use the excess Rosetta Proceads that
‘emnined afer the Qulified Offer oth holders ofthe Fist Lien Note to purchase what
itclaims ace Designated Assets, During the period ffom approximately July 25,2005 to
August 31, 2005, Calpine executed ten contracts (the “Disputed Contact”) with several
third-party supplies to purchase naturel gs for use a fuel in Calpine's powerplants. In
ll but one of the Disputed Contes, Calpine purchased natural gas or proposed to
purchase natural gas porsuant to NAESB form contacts.

‘The NAESB form contracts widely used by participants in the natural gas
industry as the standard form of egreement forthe puchase and sale of natural gas across
the North American market, It offers a standardized template of trms that faciitates

 

 

ry
‘Purchases and sales while allowing counteepertcs to negotiate provisions suchas price,
‘quantity, location, and duration. The NAESB form contract includes: (i) « Base Contract
for Sale and Purchase of Natural Gas; (i) General Terms and Condition; and (i) «
‘Transaction Confirmation for Immediate Delivery. Nine ofthe ten Disputed Contracts
(Calpine excouted during this ime utilized the NAESSB form contract, which included
‘execution ofa confinaation that provides for Calpine to prepay fo a quantity of gus a an
‘timated spot market price forthe following moath a ofthe dato the transaction closes.
‘The solitary contract among the Disputed Contracts that did not use the NAESB form
contract used a type of contract substantially similar in its material terms to the NAESB.
ae?

In late July and throughout August 2005, BONY procesed the ten requests made
‘by Calpine fo the release of $313 milion in funds inthe Sale Proceeds Account in order
{oc Calpine to purchase nataral gs in storage. The fit indicntion thatthe use of Roweta
‘Proceeds could be contested came in mid-July 2005 when Kelley Drye & Waren
(Kelley Dryo”), law frm represcnting ist Lien Noteholders holding & majority ofthe
First Lion Notes, contacted the Fist Lien Trustee requesting, among other things, thst
‘they be hired as counsel for the First Lien Trustee. At least as erly as July 22,
‘Wilmington Trust Corzpany requested that BONY provide an account belance forthe

 

°* The contract between Calpine nnd Corel Bnergy Resources, LP. tok the form ofa Storage
and Detivery Services Contract, which is x non-NAESB form contrac. See Tab J to 3X 37, As L
sco late inthis opinion, see note 44 and accompanying text, the contract with Cora conta
al the sae standard cootract tems found inthe NABSB form coatact and provides for
‘commer tee sinilr to thve inthe ether Disputed Consracs,

Is
 

Designated Auset Sale Proceeds Account. As of July27, BONY hd no responded,
forcing Wilmington Trust o reiterate its request on that date,

Ta eter dated August 5, 2005, Kelley Dye requested that BONY, a8 Collateral
‘Trusts, inform them of withdrawals from the Designated Asset Sale Proceeds Account
snd thatthe First Lien Trustee prmitno further withdrewala fom that Account without
‘rior notice othe counsel for Fit Lien Noteholdes. Kelley Dye received a eter dated
that same day from Covington & Burin, on behalf of Calpine, in response to an exter
‘request inquiring of Calpie's use of proceeds fom the Rosetta Sale. That leer
cxpline that Calpine would not provide the Notcholders with advance notice of
(Calpne's proposed uss forthe Rost Prooeeds but assured Kelley Drye that Calpine
‘was using the Proceeds in sevonéance with the terms of the First Indenture. No details
shout the exact use were given.

{ne eter sent one weok ltr to BONY, Kelley Drye explained that Calpine's
100, dated on or about Angus 9, 2005, appeared to indioate Rosetta Proceeds had been
‘Permit to be withdrawn from the Designtad Asset Sale Proceeds Account
‘Accordingly, the Fist Lien Noteholders ako requested copes of the Collateral Trusce’s
correspondence and documents pursuat to § 3.6 ofthe Collateral Trust Agreement. That
section permits the Indenture Trstes and each Firat and Second Lien Notsholder to

6
 

inspect and copy “any and all Security Documents... notices, certificates, instructions or
‘communications received by the Collateral Trste in its capacity as such."

‘On September 15,2005, BONY forwarded the requested corespoadence. The
Indenture Trustes tsintain tht it was not until they received this documentation that
‘hey Sas knew that Calpine had use the Roseta Proceeds to enter into the Disputed
Contracts and obiain natural gas for short-xm consumption as fuel. The next day,
Kelley Drye notified BONY that review of the forwarded documents “make clear that
‘withdnvals from such account exceeding $500 milion have occurred since July f 205,
despite. earlier requests. We reiterate our earior demands that oo futher
  Soe United States Undaroritrs ine. Cov. Falcon Contr. Corp, 2004 WL 497563, %6

"acguage from the viw of ‘reaonably intelligent person who has amined the conten of tho
xtre iategrated agreement and whois cognizant ofthe curios, practices, usages and
‘teminclogy aa geerally understood in the parcula trade or busines (tng Senaca Is. Cov.
Kempe Ins. Co, 2004 WL 1145830, at °4 (DN.Y. May 21,2004).

3 See NY.UCC. § 2-202; § 2-200 cant 12.

% See Kou v. Vulcan Ral & Constr. Co, 286 N.Y. 188, 198 (CX App, 1941); state of Hatch by
Ruaow ». NYCO Minerals, 665 N.Y 5.24 296, 298 (34 Dept 1997) cing 22 N.Y. Ju. 24
(Contras §242 (Technical wor are to be interpreted a usally understood by persons ia the
‘profesion or busisos to which they elt, and mos be taken inthe technical sense unless the
context ofthe instrament or an applicable usage orth surrounding circumstances clearly
indicate different meaning"; Restatement (Fst) of Contacts §235(0),
 

Defined Assets in the Instumeats. From Calpine's poropective when entering int the
Instruments, a narrower definition of Designated Assets ended to give it more flexibility.
‘Because the proceeds derived from selling Designated Assets could only be used for
limited purposes, the broader the definition of Designated Assets the more Celpine was
‘eetriced in its ability to do business. By way of pectineat example, ifthe term
Designated Assets covered te reditg activities of CES, Calpine woutd have been
resticted whenever it sold a futures contract ata profit meeting the $50 million threshold
or sold natural gait obtained by contact for an ammount above that threshold.

Put simply, Calpine's current desire to read the exclusions from the term
Designated Assets narrowly cannot obscure the reality that those exclusion seve inthe
‘ocdinary flow of business to limit the contractual inhibitions on Calpine's use ofits
sists, The present dispute simply underscores that, swith most things in lif, there was
‘corresponding cost to excluding categories from te term Designated Assets, which is
‘tiggered inthe les common circumstance when Calpine sells Designated Assets as iid
inthe Roweta Sale, At that point, what had been a benefit to Calpine — the exclusion of
asset type from the Designated Assets category — serves limi its exbiity to
  in he Instruments suggesting that the dates of
‘the Exclusion meant to deviate from the typical meaning that would be given othe
‘words “contrat forthe purchase or sale of natural gat,” the most logical reading iso
‘ive the Exclusion’ language its mest obvious reading, as cealy covering sles and
Purchase contracts in aleady-extractd natural gus hat re typically implemented using
variations ofthe NAESB form contact

‘tis also telling that although Calpine went out ofits way to restructure its
‘Purchases of natural gas inorder to try to easape te clear language ofthe Exclusion, it
id not do so in any way that made hove contracts economically distinct fom it prior
purchase arangemeat. Iti, of couse, tu tat inthe past Calpine did not typically take
tte to natural gas upon contact signing, but that concept had litle commercil
{mportnce, But Calpine commonly contractually obligated ise o purchase natura! gas
‘over short-term time periods in a manner tht dif litle fom the Disputed Contacts in
‘onomic and legal substance. Inthe Disputed Contracts, Calpine dd not require any
inalienable right oa particular batch of natural gaat a speci price. Rether, Calpine
‘ppically acquired ttle to en amount of maul gas that was supposedly placed in storage
Iai he ag ee tern Cs 2 |
Shien 5 so, SF ay ISON SOR
‘oma np onan rp ree ae

interpretation.” (hing New Bank of New England, NA.» Toronto-Domision Bank, 768 F.
‘Supp. 1017, 1022 DN. 1991).

 
st particular facility, withthe duty on is part 0 accep dlvery of portions of tht gus
jin accordance with «contractual schedule. The seller, however, refund the right to
commingle Calpine’s ited gas with other gus and to deliver to Calpine gas of a
‘comparable kind from any source.“ Moreover, ifthe seller didnot deliver the full
quantity of gus Calpine sopposedly owned, the oaly ibility the seller faced was to pay
Calpe the cost of cover. Calpine cannot demand specifi enforcement.

Consistent with this approach, the price that Calpine pai for gas initially typically
was tobe adjusted, upwards or downwards, based onthe change in the spot market pice
fiom the tim ofthe init snes contact until delivery” Although Calpine oreied parts
ofthe sales agreemeat to govern storage obligations, no seperate price was paid for
storage forthe obvious reason that a a mater of economic substance, the Dispted
(Contacts wore essentially indistinct fom an agreement to purchase a cersin amount of
188 pe day at pot market prices over thiy-day period. The simple legal and
‘conomio reality is that Calpine’ rights o receive the gus it purchased, regardless of le,
fod its esence in contract forthe sale ce purchase of natural gas. Those contracts
roquired the seller “storing” Capin’s purchased natural ga to deliver it to Calpine for a
ic adjusted to day-of every spot market prices, IF the seller storing the ga did not
SSeeNYUGC. § 120107.

‘2 Posll Dep. a 86.

“The iting of asin Calpine's ne might hve sore consequences in situon when &
tele went bankrupt by giving Calpe te igh lim ht he ler was now only ables,
helding Clpne’'spropry in srage. Sos Inrchange Bask v. Warde Bec: Contracting nc
308 BR. 65,666 (Banks. S.DNY. 200 (ching to US.C. § 541(0X1). Bay oven tung
‘his advantage, wich the indenture Truss poe with plaibleexpurens, the obvious
‘eon tht Calpine tok tile was ot to ain this hypatacal advantage fo ade low

probability scenario, bu solely to support its contractual argument. See Kelly Dep, at 72-73;
Roberts Dep. at 119; Oral Arg. Ty. at 185-184.

 

»
do 80, Calpine's only contractual remedy was the cost of cover.” Furthermore, Calpine’s
‘weak attempt to argue the the storage agresments are separable from the original
contract by which Calpine took tite is unavailing. By thee plan terms, the sles and
storage promises of Calpine nd ts seller are intrrelated and constitute what the
Disputed Contracts themselves refer to as a “single, integrated agreement

B. The aro Bvidence Doss Not Support Calpine’s Reading ofthe Exclusion

Although I donot believe thatthe Exclsion ie ambiguous, 1 will inthe interest of
Providing «full oord for review, note that none ofthe proffered parol evidence alters
‘my conclusion that Calpine’ interpretation ofthe Exclusion is erroneous.

‘Altria, Calpine presented evidence to show thatthe Exclusion was proposed by it
‘nan sttorpt to secure maximum flexibility forse. Tis testimony, however, fel far
short of convincing me tht the Exclusion mens what Calpine now says it means,

For one thing, Calpine presented no testimony regarding the actual scrivening of|
‘he Exclusion. Rather, it presented testimony by Calpine's CPO, Kelly hat he sought
“munximum flexibility” inthe negotiations over the Designated Assets definition" Kelly
—who never rea the Exclusion! — testified that he sought to exclude unproven reserves
{ium the definition of Designated Assets becanse Calpine got no credit inthe pricing of
its notes for such uaproven eserves and therefore should not face restrictions in
‘squting or disposing of them.=

 

8 Bg. X29 a CPN 00000817.
2 Bx. F10IX$7 a WIC335.

 
Likewise, Kelly sought to exclide trom the reach ofthe definition of Designated
Assets the ativiies of CES, Kelly's tesmmony was echoed by Bennett, s lawyer who led
‘the negotiations on behalf of Celpine over the Instruments. He recalls the Exclusion
‘being added to carve-out CES. Notably, Bennett could not shed light on the actu
rafting of the Exclusion or any discussions oft with Latham & Watkins, couse! forthe
initial purchases of the Sezond Lien Notes, Goldman Sacks.

(On balance, I ectualy find Kelly's and Bennetts testimony more supportive of the
Indenture Trustees" reading of the Exclusion than of Clpine's. When Calpine was
‘bargnning forthe Exclusion, is objective was to shrink the Designated Assets definition
15 nuch as possible, By doing so, it obtained more lexibility to run its basiness.
Notably, the Exclusion ensbied the unit that Clpine used to acquire natural ga forts
‘own use and for rading profits (by resale) to do 50 fie ofthe restraints onthe use of
‘proceeds from the sale of Designated Assets,

‘Thoda that the Exclusion didnot pertain when Calpine took “ite” to natural gas
‘was not one Calpine subjectively held at the time of contacting, nor was tone that
(Calpine shared with its negotiating adversary. Rather, Calpine sought the Exclusion on
the bass that its purchases of aleady-extrected natural gas in the commodity markets for
{raging and fuel equistion purposes were categorically different and should be outside
the deinion of Designated Assets, That rationale was not hinged on whether Calpine
‘was ncquiing already-extracted natural gas for fuel by  shot-erm contact in which it
took immediate tide (with deliveries over the next 30 to 60 day) rather than taking tle
‘when deliveries were made (over the same 30 t 60 dy period),

3
Jmagine if Calpine had explicitly told Goldman Sachs, inital purchasers of he
‘Second Lien Notes, tat its position was that CES was off limits when that benefited
Calpine, but that Calpine could sel ll fits Designated Assets and use therm to purchase
lamndreds of milion of dollars in fel for short-term consumption so long asthe contract
immediately vested “tide” to he gas in Calpine. If hat had occurred, {am highly
‘confident — to borrow «phrase Goldman Sachs Would ind familiar — chat Calpine
‘would not have obtained consent to tha lexbilty a the bargaining table. fn this same
‘connection iis notable that nether the offering document forthe First and Second Lien
‘Notes, nor the disclosures ised in connection withthe Qualified Offer, ever surfaced
such a possible se of proceeds from the sale of Designated Assets.” Why? Because the
“exclusion from the Exclusion” Calpine now contends existed from the get-go was not
conosived when the Instruments were drafted but only in 2005 after the Qualified Offer
‘nad suc disappointing resus,

‘Given the negotiating conten, the dividing line the plain language ofthe
testament deawe becomes even more logical, Designated Assets generally refered
Jong ved ase tht would retain vale over time. Although thse assets cou shrink
—in value through lifespan ora draw down of reserves —ssles of them sbove $50
millon would usally require « major transaction. When that occured, the Insrurpents
required that Calpine would ether buy comparsble replacement collateral — other
Designated Assets — or ue the proceds to reduce the obligation (iat o Second Lien
Debt collateralized by the Designated Asset,

 

C13, 14,62

2
By contrast, Calpine secured the exbility to sell unproven reserves orto dealin
‘alreedy-extracted natural gus inthe ordinery course of business Without restriction fiom
the definition of Designated Assets. If Calpine could profit by selling extracted natural
‘ans it purchased — regardless of amount — it was fee to use those proceeds without
‘restriction from the Designated Assets definition, In other words, by the Exclusion,
(Calpine obtained a rational carve-out enabling it to conduc its ordinary, but important,
‘commercial purchases and sales of ratural gas entirely ouside the restrictions on
Designated Assets. Ii only now, when an unusual and unforeseen opportunity
‘Presented itself, that Calpine was inspired to inven its current “tile”-based distinction.

Lastly, tothe exten that evidence of industry custom and usage can be purely
‘parol, that evidence weighs heavily agsinst Calpine. The Indenture Trustees” expert,
John Reed, provided entirely convincing testimony thatthe standard usage of the term
“contacts forthe purchase or sale of natural gas” applies to contracts using the NAESB.
form* (or its GISB predecessor) asa foundation that have the following etributes: ()) a

 

‘oantty of gusto be bought and sold pursuant to the agroement; ii) price forthe
‘coramodity; (ji) location of gas delivery; end (iv) a term of duation fr obligations of|
the partes to sellpurchase"*

‘Rood correctly observed that the Disputed Contracts all have those attributes. He
Also accurately observed thatthe restructuring of the Disputed Contracts to vest formal
tite in Calpine immediately upon contracting does not, by industry usage, render them

 

3
‘categorically different from the NAESB “Base Contract for Sale and Purchase of Netural
Gas,” which Calpine, via CES, routinely used to purchase natural gus for use as fuel
Indeed, he notes that cach ofthe Disputed Contracts uses words virally identical to
‘those to describe ise" and thatthe annexed “storage” contracts were nt, in any
‘material sease, distinct, but rather operated as an integrated agreement” Although Reod
‘admitted that the titling aspect might have some minor legal effect onthe rights of
Calpine, he persuasively showed tha this difference did not make the Disputed Contracts,
‘5 a matter of economic reality or industry custom, distinet from the contracts Calpine,
through CES, had historically used to acquire natural gas for feel, In short, te parol
‘evidence on industry customs convincingly showed thatthe language ofthe Exclusion
would, by industry parlance, encompass the Disputed Contracts because they were
“eontact{] for the purchase or sale of natural ga.”

‘This expert testimony also shed light on why the Exclusion used the words it did,
‘By using standard industry language deawing on the NAESB form contact, the
serivenors embodied in the Exclusion the broad range of vaciations of contracts for
parchase and sale used by participants in the alreedy-extracted natural gas commodity
‘markets, These were precisely the types of contracts that CES used to sell and purchase
aleeady-extracted natural gas, including gas for Calpine's own fuel needs. Thus, by using
industry terminology, Calpine extracted the broad Exclusion it wanted. Now, it mus live
With the downside of having dove so,

 
‘ML, Remedy For Celpine’sImoropes Use And Proposed
se Of The Rossa Proce

iaving determined that Calpine (9 could not permissbly eter into the Disputed
‘Contract and (i) may not enter into new contracts ofa similar nature using the Rosetta
Proceeds, I must now address the question of what todo about those conclusions, As to
the second determination, the anewer is easy anda declaration hat Celpie cannot enter
into future contracts for natal gas using the Rosetta Proceeds wil suffice, asthe
Collateral Trustee will refs to release the Proceeds for that purpose, given my ruling.

‘The stickier question is what remedy should issue as to Calpine’s use of $313,
million ofthe Rosetia Proceeds to enter into the Disputed Contacts, This question is
ifficat because only the First Lien Trustee filed timely claims seeking relief on this
score, The Fist Lien Trustee premised its request for relief on a vasety of grounds,
{nchadng the core ground of breach of contract, end duplicative belts and suspenders
snpuments such as unjust enrichment of Calpine end wrongful conversion of assets
‘belonging to the holders ofthe First Lien Notes. In essence, the First Lien Trustee argues
‘that Calpine should restore the $313 million phus appropriate interest to the Designated
‘Asst Sale Proceeds Account and require that thote fands be used in accordance with the
relovaot Instruments

For its part, the Second Lien Indenture Trustee now wishes similar elie. Butt
‘waited until Calpine ha aleady filed its opening pre-trial brief and eter discovery bad
slready closed to fle its owa countercaims demanding thet relief. By that time, tia was

‘emere two days abead.

3
(Calpine addreases the arguments ofthe two Indenture Trustees very
ifferently. Calpine argues thatthe First indenture Trste's claim for restoration of the
$313 millon must be denied beceuse the First indenture Truste lacks standing.
‘According to Calpine, once it made its tender offer othe First Lien Noteholders, it owed
‘0 further obligation tothe Pit Lien Noteholder as tothe use ofthe Rosetta Proceeds
‘ther than to avoid spending the funds on any use hat was not “otherwise proibited by
‘the [Fest Lien) Indentur."** Because the First Lien Indenture does not otherwise
rohit Calpine from soquiing natural gus with Designated Assets once Calpine
<schargos its obligation to make a Qualified Offer forthe First Lien Notes under §
410(d) ofthe Firat Lien ndentre, Calpine argues that he First Lien Trustee has no
standing to argue for relief reacting Calpine's misuse ofthe $313 million. Asto the
Second Lien Tastee, Calpine argues that its tardy request for relic requires deferral of
its request for restorative relief. I deal with each of these argurment in turn,

‘A. The ist Lien Tuste Lacks Stnding To Request A Remedy

‘The First Lien Trustee justifies its standing through two separate arguments, The
‘st is that Calpine's Qualified Offer in July 2005 didnot discharge its obligation to
‘make a Qualified Offi tothe Fit Lien Notebolders with any Resetia Proceeds not wed
tobuy Designated Asses. In this connection, the First Lien Trustee argues that § 4.102)
‘ofthe indenture prevets Calpine from commencing « Qualified Offer before it haa
sctunlyressived Excess Proceeds from a sal of Designated Assets, Bocuuse Calpine
lmunched the Qualified Offer for First Lion Notes before the Rosetta Proceeds were

 

9 Pt Tien Indenture § 4.1060,
 

sctually received, the Fit Lien Truce says the Qualified Offer docs not discharge
CCalpine’s duty unde §4.10().

‘But this argument isnot borne out by §4.10(4) itself. Under the terms of that
seotion in the First Lien Indentare, Calpine may make an offer to all holders ofthe
‘Priority notes when the “aggregate amount of Exoess Proceeds exceeds $50.0 million” or
“at euch ertcr point as may be elected by the Company.” When Calpine made its
‘Qualified Offer on June 9, 2005 it clearly conditioned the Offer on the consummation of
‘he Rosetta Sale and made clorthet it would be paying the First Lien Noteholders with
the proceeds from a sale of Designed Assets. There is uo dispute that Calpine offered
‘the Fist Lien Noteholdens the price required by §4.10(4), full repayment of principal
lus all accrued intrest.

In essence, Calpine forewent its right under § 4.10() of the First Lien Indenture io
{ake 180 days to purchase Designated Assets with Bxoens Proceeds before having to
‘make a Qualified Offer, [tinstead chose to make a Qualified Offer that would close at
‘he cation practicable time afte it nctually received the Excess Proceeds. I pereive no
possible offense to the contractual rights ofthe Fist Lien Noteholders by this course of|
‘ction. By the tems of the Frst Lien Indenture, once Calpine made a Qualified Offer to
the Fit Lien Noteholder, the Exooss Proceeds were “react at zero” and Calpine could
‘use any reaming funds for any purpose ‘not otherwise prohibited by this [First Liea]
Indenture."

 

a”
‘This inconvenient reality is what prompts Calpne's argument tht the First Lien
“Trustee has no sanding to complain about what Calpine did wih the Rosetta Proceeds
fer the Qualified Offer closed. Because n0 provision ofthe First Lien Indentre
otherwise prohibits Excess Proceods remaining after a Qualified Offer from being wed to
‘porchase neural gas, Calpine contends thatthe First Lien Trusts has no cognizable right
‘contest that usage.

‘This argument of Calpine’ is what inspires the First Lien Trustee's second bass
for asserting that ths standing. That argument consists ofthe proposition tht the Fist
[Lien Notsholdes have an enforceable interest in assuring that Calpine honors all the
‘provisions ofthe Control Agreement, including the referenced obligations under the
‘Second Liea Indenture, Although the Control Agreement and Colleteral Trust
‘Agreement were entered into before the First Indentare was executed, the First Lien
Trustee argues that a provision ofthe Control Agreement, §2.01(c, trumps the use ofthe
‘Bxcoat Proceeds under the First Lien Indecture. Not only that, but by the expres terms
‘of the Collateral Trust Agreement, which the Fist Lien Trustee became « party to
through the Joinder Agreement executed concurrently withthe ist Lien Indenture, the
Fist Lien Notebolders are deemed third-party beneficiaries ofthe Collateral Trust
‘Agreement and Control Agreement,

‘Therefore, the First Lien Trustee claims that it has standing to ensure that Calpine
only uses the Excess Proceeds i a manner consistent with he requirements of ll he
Instruments, including the Second Lien Indenture, even after Calpine has discharged ite
bligntions to the Fist Lien Noteholders, by making a Qualified Offer under §4.10(4) of,

8
the Psst Lie Indenture. Because the Control Agreement and Joinder Agreement operate
‘e harmonize the Fist and Second Lin Indentures, and because the First Lien

Neteolders are benefited incidentally by the provisions in those Agreements relting to

‘he Second Lien Noteholdes, the First Lien Taste has the right to complain if Calpine

oes not follow ll the ters — including those petsning solely to the Seoond Lien

[Noteholders. Asa practic! mater, tis means that the Fic Lien Trustoe is woking 1

enforce the restrictions ofthe Second Lien Indeature

‘That Indenture, when reed consisetly with the Fit Lien Indenture under the
(Collateral Trust end Collateral Joinder Agreements, operates to restct Calpine to tree
ses ofthe remaining Roseta Proceeds. Until 180 days from the receipt ofthe Roseta
Prooesds, ono about January 3, 2006, the Second Lien Indenture permits Calpine to
scquir Firs Lien Notes (which qualify as “Priority Lien Debt” under the Second Lien
Indenture) or Designated Assets. Atte od of hat period, Calpine must make a
Quslified Oe to dhe Second Lin Noteholdrs under §4.10(8) ofthe Second Lien
Indentre.

For obvious reaons, te Fct Lien Trustee would like to enforce this requirement
now. By requiring Calpine to replenish the Excess Proceeds poo! by $313 million, the
smmount of gas purchased under the excoted Disputed Contracts, the Fmt Lien Trustee
‘maximizes the pouitiliy tht Calpine will make another Qualified Ofer othe First Lien }
‘Noteholders or market purchases of First Lien Notes.

‘The problem forthe First Lion Trustee stat this understandable desire does tle
to show that he Firat Lien Noteholders have a legally cogeizable right to demand that

»
‘end. In other words, any benefit tothe Fist Lien Noteholders ofthe provisions ofthe
‘Secoed Lien Indenture restricting the use of Designated Assets is wholly incidental and
‘otintended. By its plain terms, the First Lien Indenture allows Calpine to wse any
remaining Rost Proocods for “any purpose not otherwise prohibited by this [Fn ier)
Tenure” once it has made a Qualified Offer unde § 4.10(8) ofthe Fist Lien Indenture
‘And, contrary to the First Lion Truszes reading, the Control Agreement makes cler that
‘and the Collateral Trust Agreement are inatrumental agroemeats that work to protect
the substntve rights granted by the Indentures. Thas, the text of § 2.01(¢KIKA) does
‘ot suppor the Fist Lien Trustee's argument tht §2.01(c) rumps the use of Excess
Proceeds under the Fnt Lien Indenture, Section 2.01(c))(A) recognizes that Priority
‘Debt (in this case, the First Lien Notes isssd in the future may include protections in
instruments, namely the Fist Lien Indenture, which can not be anticipated bythe Control
‘Agreement, which was exceuted before the iasuane of aay Priority Debt. Ths, §
201(0)6)(A), in olovant par, provides:

(Al specified amount ofthe funds on deposit ia the Designated Asset Sale

Proozeds Account (x) will be used . to (1) purchase other asets that

‘would constitute Dexignsied Assets or (2) repay Priority Lien Debt in

ach case in accordance with the applicable provisions of each Secured
Debt Docament... (emphasis added)

 

© Similarly, the Fis Lien Trustee rlies mistakenly on §3.02(e) and § 5.02 ofthe Control
Agreoment io suppot its posion ta they have sanding wo request «remedy oven afer Calpine
‘is flied the obigntions under §4.10(6) ofthe Ft Linn Indenture. ‘The plain meaning af
‘hose provisions offers no textual support forte Firt Lien Traste's postion. The fine vetence
‘of § 3.0%), te only relevant part of tat provision related to the dispute before the cour,

‘merely references the terms and conditions ofthe Conrol Agreement. Section 5.02, in lmnguage
highlighted bythe First Lin Trustee, reads “east such covenant and provision [ofthe Conta,
Agreement] being hr the sole benefit ofthe parties belo...” But, there is noting ia the text
‘neither provision tht suggest tha the First Lien Trustee continues io have an interet oz,

“
‘The proper partos who are the intended beneficiaries ofthe restition on
CCalpine's wie ofthe Remaining Rosetta Proceeds ae the Second Lien Notcholders. They
secured the ight to require Calpine, once it has satistied its obligations under the First
Lien Indenture, only to use remaining Exooss Proceeds to buy Designated Asses,
‘repurchase First Lien Notes, and, if those purposes didnot uve up the Proceeds, to make a
(Qualified Offer tothe Seoond Lien Noteholders. For that reason, I conclude that Calpine
is comect tat the First Liew Taste hs no right to demand retoration ofthe $313
rillion or other similar elie.

B, The Second Lien Trustee's Tandiness Warrants Deferral ofthe Restorative

‘Remedy Determination

‘The dilemma the First Lien Traste’s lack of standing creates i unfortunate.
Because the Fist and Second Lien Indentre Trustees have pursed identical objectives,
it seems a tad silly to refuse to address the appropriate relief simply beoeuse the Second
‘Len Trustee didnot timely filets counterclaims seeking rettoraton of the $313 milion.
‘That sad, the shape ofthe precise relief tht shouldbe awarded isa dlicete matter with
‘important implications for Calpine and al ofits constituencies. Therefor, I consider it
‘Prudent to defor the question of remedy until Calpine has enswered the Second Lien
‘Trustoc’s counterclaims (which it shell do by November 28, 2005), conferred withthe
‘Sccond Lien Trustee, and in the absence of agreement as to remedy, presented expedited
submissions of 15 pages adéressng the form of relief by Noversber 30, 2005, end five-

 

 

(hind party beneficiary in the use of procends fom the sale of Designated Assets once the Fit
‘eo Indenture's requirements are fet.
‘Page replies the next day, December 1. But, lest there be any confusion, some form of
‘lief equiring the restontion of $313 millon plu some modest interests slmost surely
‘in order with te primary question being when restoration has to ocur end what temporal
‘exibility Calpine will have to devote those restored proceeds tothe purchase of proper
‘Designated Assets or First Lien Notes, as opposed to a Qualified Offer under § 4.10(4) of
‘he Second Lien Indenture. The torpor ofthe Second Lien Trustee in filing the
‘ounterlaims will be taken into account in that remedial calculus,
1. Indemnification Rights
‘The First Lien Trustee has sought « declaration that itis entitled to indemnification

 

reasonable expenses in litigating this matter. Calpine sued the First Lien Trustee
‘and asked ito respond tots contentions fat its use of the $313 million to enter into the
Dispated Contracts and its desire to use the remainder of the Rosetta Proceeds to enter
{into contracts ofan identical nature was proper. Therefore, the First Lien Trustee
‘sattled to indemnification from Calpine under § 7.07 of the Fist Liew Indenture. In its

 

‘sper, Calpine argues thet the Fit Lien Trustee's request is premate as it has not
received «formal, documented request outside ofthe tigation proces. Although the
Fit Lien indenture § 7.07 does require prompt notice to Celpine of any request for
‘indemnification, t does not specify the form. The First Lien Trust has obviously given
such notice by its claim,

4 eannot decide the amount of indemnification to which the Fist Lien Trste i
‘nied but simply note it eatilement. Moreover, although Ihave found the Fit Lien
Traste had no standing ors its affmatve requests for eie, any attempt by Calpine

2
‘try to diminish that entitlement will be met with litle patience by me, given the
cbvious relationship between those requests and the issues thet Calpine presented in its
‘request for declaratory relief, and the realty that Calpine benefited by having the First
Lien Truste take the lead on issues of joat intrest to the First and Second Lien
‘Trustees, Absent that cooperation, Calpine would simply have had to indemnify the
‘Second Liea Trustee tom greater extent under § 7.07 of the Second Lien Indenture. In the
‘scheme of things, this isan issue of modest importance that rational persons of business
‘ad law ought tobe able to werk outon their own with no need for further judicial
intervention.
'V. Conclusion

For the foregoing ressons, (i) Calpine’s uso of the Rosetta Procceds to enter into
‘he Disputed Contracts violated the Second Lien Indecture and use of the Rosetta
Proceeds for similar contracts is impermissible; (i) the question of the appropriate
‘remedy for the Disputed Contracts is deferred briefly; and (ii) Calpine aball indemnity
‘the Undentare Trustees for their reasonable expenses upon submission of proper
‘documentation. BONY's motion to dismiss is also denied" The parties shall submit ¢

 

‘BONY bas argued tha Goldman Sachs Credit Parmers ("OSCP’), as &paty to the Collateral
‘Trt Agreement, i an indispensable pary. This dispute deals withthe only paris that have
batructed te relase ofthe Rosetis Proceeds — the Indeatare Trastes. Besides the Indentace
‘Tesstees, OSCP is tho only other relevant party to the Collateral Trust Agreement and GSCP has
‘bewa nlified ofthis action nd did not seek to intervene, most kl becatse Is interests were
{ily, incidentally, advocated bythe Indentare Trusts. As atrady discussed, ender § 5.11(0)
ofthe Collate! Trust Agreement, BONY it permite! to refrain for releasing funds fom the
Designated Asset Sale Proceeds Account inthe event of disagreement between the partes and
toi tht disagreement i resolved bythe putes or by a court order. With the issuance ofthis
pinion, BONY now has a declaratory judgment that provides it with lear direction, x court
‘oder to mtiay  $.11(b), nd that bids Calpine and tho partes who actually disagasad ‘Tin,

 

6
conforming order by November 30,2005, In that gar, the partic shall recognize that
intend to enter a complete final judgment promptly even if no agreement on remesiy can
be forged. That wl facilitate efficznay by avoiding piecemeal sppeal.

 

{fom liability perpective, BONY isin amore secure place than wien it elesed tho $913,
millica, which it id widhout having any idea of GSCP's position. Even i had ruled for
Calpine in his decisica, BONY 's motion would tl have been without free, Through arling
fr Calpine, I would have resolvod the coly disagreement between patios tothe Colteral Tras
(hat existed and declarntory rll could have boon linitod to addons only the pats before the
court. Should BONY bave somebow continued to far tha the releases proposed by Calpine
would have teen risky ve to GSCP's sence, practical resolutions for BONY would have
‘exisied. Most notably, BONY could have managed potential lability by siving GSCP notice
‘hat uniem GSCP objected within some period of time, it would releaso the Rogeta Proceeds. Ja
‘eve no ang inthis cae wl price GSCP. Fer hese mone, BONY's maton
‘amin in denied.

 

“
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

Ih AND FOR NEW CASTLE COUNTY
ALINE CORPORATION »
Pat ;

“ cane tcenn
THE BANK OF NEW YORK ant }
Wienoron musrcowmn, 3
Dated }

sworon, SAL Leena the sbovereferenced mater having

been heard and considered after fill bia on he merits, nd forthe reasons statin the Cours
Opinion dated Novesber 2, 2005 and thereon tthe Hering eld on Decerber 2 2005;
‘TTS HEREBY ORDERED, ADAJDGED AND DECREED THAT:

1 Finn Jodgment is catered in favor ef defendants The Bak of New Yor
snd Wilmington Trust Company, in its capacity as Second Lien Indestre Trustee, and agist
laietiff Calpine Coporaton (*Clpne”) on clans of Calpine in he complaint.

2 Calpine’s we of net proceeds ftom the sale of Designated Assis 10
Roveos Resources, ne. on uly 7, 2005 (Rove Proceed), to eater into contracts to purse
‘satu! gas during the period from approximately Joly 25,2008 to August 31,200, viited te
‘inden ofthe Second Lien Notholdes, and Calpie's use of the Rose Proceeds fr such
connct srr contact impermissible,

3. The tenor offer made by Calpine to the Fit Lien Netcelders with the
Rovean Proceeds extinguished aay right of the Fit Lien Indenture Trusie 10 demand
retomson ofthe RosersProcedswithtawn fom the Desgnatad Asset Sle Proceeds Acoust

an ses 2005
(he “Account” or other reli with eppect othe fads remaining in the Account.

4 Ta Light of purnpaph 5 above, Final Jagment is entered i fivor of
(Capi and gaint Wikningtn Trust Company int capacity a Fmt Lien Indentre Tater
‘wih respect to (a) Calpin's claim for dctarcoryjudgmeetaptnst Wimington Trast Compazy
in is capacity as First Lien lndeairsTraste, in accordance itn paragraph 3 above; and (b) all
of the cousterclaims amerted by Wilmington Tru Company in is oxpaciy as Fit Lien
Indeacre Troe, except fr ts event counterclsn fr delanatory jgment. Final Judgment
{a catered ia fava of Wilmington Trost Compary in a capacity as Fit Lien Indenture Troe
ad agsins Calpe with respect to Wimingion Tras’ sevecth eguteraim, in accordance
with paragraph 7 blow.

5. Final Dodges ie entered in Sor of Witingion Trast Company in it
capac as Second Lin Indenture Trusts onal fs coustercaims and gaint Calpine.

6 By Jamuary 2, 2006, Caine all mdepost 4 toa! amourt of
$311,782 955.5 (the “Resrtion Arscan”, ps interest fom the date any portion of te
Restoation Amount was withdewn foe the Account 0 the date of redepost, atthe rte
secruing in the Account dorag mach prod. Calpine may only uo he Restoration Ameunt or
‘ny partion thot to purchase Designed Acts, as defined in the Second Lite Indeatus,
snd repurchase Fit Lien debt up to Jum 22,2006. On January 22,2006, Calpine shall
epost imo the Account axy remaining porion of the Resosion Amount not previouily
deposited into the Actous, and all each suns in tbe Account on Jury 22,2006 shal be
ued for «tender offer for Second Lien Debt pursue tothe Second Lien Indenures. A any
tie tat Calpine elects to se the Resiontion Amouat 1 purchase Designated Assets or Fist
‘en Debt daring the period erweas enry ofthe Onder and Fal Jadgroeat and Jamary 22,
2006, Calpine stall fie depot such funds in the Account Cupine sall serenely
provide 10 the Bank of New Yer, te Second Lien Indenture Trt and the Fist Lien
Indetare Trste writen nose of ny request fr any diburverents ofthe Restoration Amout
‘or ay other funda curently Inthe Account and sal imsteneouly provide tothe Fir ard
‘Second Lien Indenture Trases oops of ll doeuresation provided to The Bank of New York.
‘Such documentation rovided shal inchude documenationrleting the ate apects of sch
‘eanecion, inching copies of retvan coctct,

7. Calpine is ireted wo indemnity Witingron Txt Company at Indentie
“Tranee under both the Fit and Second Lien Indentoes, parent Section 7.07 of te
Indemaes, for ix reasoasble expenses related tothe Station and shall promlly pay auch
‘expecses upon submission of proper documentation.

8, The Bank of New You's motion to dlamiss for lack of an indispensible

pany ie deied.