Document:

Blueprint

Execution Version

 

SETTLEMENT AGREEMENT

 

This
Settlement Agreement (this “Settlement Agreement”),
dated as of July 20, 2018, is by and between Lazarus Energy, LLC, a
Delaware limited liability company (“Lazarus”); Blue Dolphin
Energy Company, a Delaware corporation (“BDEC”); Lazarus Energy
Holdings, LLC, a Delaware limited liability company
(“LEH”); Nixon Product
Storage, LLC, a Delaware limited liability company
(“Nixon”); Carroll &
Company Financial Holdings, L.P. (“C&C”); Jonathan
Carroll (“Carroll” and, together
with Lazarus, BDEC, LEH, Nixon, and C&C the “Lazarus Parties”); and
GEL Tex Marketing, LLC, a Delaware limited liability company
(“GEL
Tex”) (each, a “Party” and, collectively,
the “Parties”).

 

RECITALS

 

WHEREAS, Lazarus
and GEL Tex are party to (1) that certain Crude Oil Supply and Throughput Services
Agreement, effective August 12, 2011 and (2) that certain
Joint Marketing Agreement,
effective August 12, 2011 (collectively, the “GEL Tex Agreements”).
Lazarus’ obligations under the GEL Tex Agreements are secured
by a perfected security agreement on certain of Lazarus’
assets (the “GEL Tex
Security Interest”);

 

WHEREAS, Lazarus
and GEL Tex are party to that certain arbitration case conducted by
the American Arbitration Association Commercial Arbitration
Tribunal in connection with certain disputes under and relating to
the GEL Tex Agreements, styled Lazarus Energy, LLC v. GEL Tex Marketing,
LLC, Case No. 02-16-0001-5548 (the “Arbitration”);

 

WHEREAS, a final
award (the “Final
Award”), attached as Exhibit A
hereto, was entered in the Arbitration on August 11, 2017, in which
the arbitrator, among other things, (a) found that Lazarus
materially breached the GEL Tex Agreements; and (b) awarded damages
to GEL Tex in the aggregate amount of $31,278,563.40 plus simple
interest at the rate of five percent (5%) per annum from and after
the date of the Final Award until paid, which amount includes
$11,649,102.00 in damages resulting from Lazarus’ failure to
pay GEL Tex for delivered crude oil. The Final Award provides that
unless and until it is satisfied, the GEL Tex Agreements and the
GEL Tex Security Interest remain in full force and
effect;

 

WHEREAS, on August
14, 2017, GEL Tex moved for the District Court of Harris County,
Texas, 165th Judicial District (the “District Court”) to
confirm the Final Award, commencing that certain action styled
Gel Tex Marketing, LLC v. Lazarus
Energy, LLC and Lazarus Energy Holdings, LLC, Cause No.
2016-28397 (the “District Court
Action”);

 

WHEREAS, on
September 18, 2017, GEL Tex, Lazarus, BDEC, LEH, and Carroll
entered into that certain Stipulation Regarding Confirmation and
Enforcement of Final Award (as amended from time to time,
the “Continuance
Agreement”), whereby, among other things, the Parties
agreed to continue the date of the hearing in the District Court
Action for confirmation of the Final Award for a period of ninety
(90) days (as extended from time to time, the “Continuance Period”) in
order to facilitate discussions over a settlement regarding the
Final Award, and Lazarus: (a) paid GEL Tex $1,500,000.00 and (b)
consented to the release to GEL Tex of $2,168,855.77 held in the
registry of the District Court, both of which were applied to
reduce the balance of the Final Award (collectively, the
“Initial
Payments”);

 

 

 

 

WHEREAS, the
Parties have entered nine consecutive amendments to the Continuance
Agreement that have extended the Continuance Period through and
including July 31, 2018. As consideration for the amendments to the
Continuance Agreement, from time to time, Lazarus made additional
payments to GEL Tex in the aggregate amount of $3,500,000.00 to
further reduce the balance of the Final Award (together with the
Initial Payments, the “Continuance
Payments”);

 

WHEREAS, during the
Continuance Period, the Parties have engaged in good faith
negotiations over the terms of a potential settlement of the Final
Award;

 

WHEREAS, the
Lazarus Parties and their affiliates are exploring the possibility
of obtaining a commercial loan in the aggregate principal amount of
$10,000,000.00 for the purpose of paying off, pursuant to a
comprehensive settlement, Lazarus’ obligations relating to
the Final Award (such a loan, as further described and pursuant to
the terms set forth in this Settlement Agreement, the
“Settlement
Financing”);

 

WHEREAS, the
Parties acknowledge and agree that the Lazarus assets that are
subject to the GEL Tex Security Agreement are valued at no less
than $12,500,000.00;

 

WHEREAS, the
Parties have agreed on the terms of a settlement between the
Lazarus Parties and GEL Tex regarding the Final Award and resolving
the Arbitration and the District Court Action contingent upon the
Lazarus Parties’ obtaining the Settlement Financing to fund a
settlement in accordance with such terms.

 

NOW,
THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth in this Settlement Agreement,
and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties,
intending to be legally bound, agree as follows:

 

AGREEMENT

 

1.           Effective
Date. This Settlement Agreement shall become effective and
binding upon each Party upon the date of its execution by the
Parties (the “Effective
Date”).

 

2.           Interim
Payments. During the period from and after the occurrence of
the Effective Date until the earlier of (a) the Settlement Payment
Date (defined below) and (b) the Termination Date (defined below)
(such period, the “Interim Period”), on the
last business day of each calendar month, the Lazarus Parties shall
pay GEL Tex $500,000.00 in cash (each such payment, an
“Interim
Payment”), which payments shall reduce the balance of
the Final Award. The Lazarus Parties shall pay GEL Tex the first
such payment on August 31, 2018.

 

3.           Settlement
Payment. At any time during the Interim Period, the Lazarus
Parties may direct $10,000,000.00 in cash, exclusive of the
Retained Payments (defined below), from the proceeds of the
Settlement Financing to be paid directly to GEL Tex in complete and
final satisfaction of Lazarus’ obligations under the Final
Award (such payment, the “Settlement Payment”). The
date upon which GEL Tex receives the Settlement Payment, if any,
and provided the Lazarus Parties have made all required Interim
Payments through such date, is referred to herein as the
“Settlement Payment
Date.” For the avoidance of doubt, GEL Tex will retain
all Interim Payments and Continuance Payments (collectively, the
“Retained
Payments”) regardless of the occurrence or
non-occurrence of the Settlement Payment Date and regardless of
whether the Termination Date has or has not occurred.

 

 

 

2

 

 

4.           Carroll
Security Agreement. Simultaneously with the execution of
this Settlement Agreement, Carroll and C&C shall enter into a
security agreement in the form attached hereto as Exhibit B
(the “Carroll
Security Agreement”). The Carroll Security Agreement
shall be satisfied and automatically released upon the ninety-first
(91st) day after the Settlement Payment Date if none of the Lazarus
Parties has commenced a bankruptcy case by that date. All LEH
organizational documents, including without limitation the
Lazarus Energy Holdings LLC
Amended and Restated Limited Liability Company Agreement,
dated as of February 15, 2008 (the “LEH Documents”), shall be
in form and substance acceptable to GEL Tex until the occurrence of
the ninety-first (91st) day following the Settlement Payment Date.
Any amendment of the LEH Documents before such date without prior
written consent by GEL Tex shall constitute a breach of the
Settlement Agreement.

 

5.           Nixon
Re-Formation; Vesting of Assets and Liabilities. Prior to
the consummation of the Settlement Financing the Lazarus Parties
shall: (a) cause Nixon to file amended and restated formation
documents whereby Nixon shall become a single purpose entity for
purposes of consummating the Settlement Financing and its ability
to commence a bankruptcy case or otherwise restructure its
obligations shall be restricted; (b) assign to Nixon the tank
leases that will constitute the collateral for the Settlement
Financing; and (c) cause Nixon to assume joint and several
liability for all or a portion of the Final Award; provided, however, that Nixon shall
assume not less than $12,500,000.00 of the Final Award; and
provided, further, that
such assumption by Nixon will neither release nor limit the
liability of any Lazarus Party under the Final Award.  All
documentation for the re-formation of Nixon and the vesting of
assets and liabilities in Nixon shall be in form and substance
acceptable to GEL Tex.

 

6.           Veritex
Amendments.  The Parties agree and acknowledge that in
order to consummate this Settlement Agreement (including the
Settlement Financing), the Lazarus Parties must obtain waivers and
amendments (the “Veritex Waivers”) of
various agreements between certain of the Lazarus Parties or their
affiliates with Veritex Bank N.A. (“Veritex Bank”), as
successor to Sovereign Bank, N.A., as lender, including: (a) the
Loan Agreement dated as of
June 2015, (b) the Loan
Agreement dated as of December 2015, (c) the Loan and Security Agreement dated as of
May 2016, and (d) other operative documents memorializing the
foregoing agreements. All documentation of the Veritex Waivers
shall be in form and substance acceptable to GEL Tex.

 

7.           Forbearance;
Continuance. During the Interim Period, GEL Tex shall not
take any action to confirm, enforce, collect, execute upon,
perfect, or exercise any remedies in connection with the Final
Award. During the Interim Period, GEL Tex and the Lazarus Parties
shall take such actions as are necessary to continue the date of
the hearing in the District Court Action for confirmation of the
Final Award.

 

8.           Right
of Inspection. During the Interim Period, the Lazarus
Parties shall permit GEL Tex and its advisors at any time to
inspect the Lazarus Parties’ property, examine the Lazarus
Parties’ books and records, and discuss the Lazarus
Parties’ affairs with their respective officers, directors,
accountants, and attorneys.

 

 

 

3

 

 

9.           Good
Faith Efforts. During the Interim Period, the Lazarus
Parties agree to work in good faith and to take such reasonable
actions as are necessary for the Lazarus Parties to obtain the
Settlement Financing in accordance with the terms of this
Settlement Agreement.

 

10.           Restrictive
Covenants. (a) During the Interim Period, without the prior
written consent of GEL Tex, which consent may be granted or
withheld in GEL Tex’s sole discretion, the Lazarus
Parties and all of their
respective affiliates shall:  

 

(i) 

Debt Incurrence. Not incur or
become liable for any debt (other than under such existing
debt instruments and amounts as reflected in Exhibit C
hereto);1

 

(ii) 

Lien Incurrence. Not permit to exist any
liens or other encumbrances on any of their
respective assets (other than the specific existing liens and
other encumbrances listed in Exhibit C
hereto);

 

(iii) 

Asset Dispositions. Not transfer, assign, sell,
lease, or convey any asset to any person or entity (including
to affiliates) other than (a) refined product sales for fair
value in the ordinary course of business by the Lazarus Parties to
unaffiliated third parties except jet fuel sales to LEH
for fair value for further sale to the Defense Logistics
Agency, (b) payment to their respective unaffiliated
third-party trade creditors in the ordinary course of business, and
(c) scheduled debt payments to unaffiliated third-party lenders
under the existing debt instruments and payment terms reflected in
Exhibit
C hereto;

 

(iv) 

Affiliate Transactions. Not engage in any affiliate
transactions or other arrangements of any kind whatsoever (other
than the existing affiliate transactions specifically described in
Exhibit
C hereto) and not amend or modify any terms of such existing
affiliate transactions;

 

(v) 

Payment of Debts, Bankruptcy. Not fail
to pay debts generally as they become due or become party
to (or made the subject of) any bankruptcy,
reorganization, liquidation, or similar proceeding;

 

(vi) 

Investments, Combinations, and Changes in
Control. Not form or make an investment in any new
subsidiary or business venture or merge or
consolidate with any other entity, or acquire any material assets
of any kind, or allow any changes in the current equity ownership
of any Lazarus Party or any of their affiliates; and

 

(vii) 

Certain Amendments. Not amend or
supplement any of their debt instruments, liens, or organizational
documents, or change their names or the location of their principal
place of business. 

 

(b) 

Notwithstanding the
foregoing Section 10(a)(i)–(vii), in the event, and only in
the event, in order to secure the Settlement Financing, actions in
violation of Section 10(a)(i)–(vii) are required to be taken
by the Lazarus Parties, the Lazarus Parties shall be permitted to
take such actions that are required to incur the Settlement
Financing and any related obligations (including, without
limitation, a guaranty of the Settlement Financing from the United
States of America acting through and by its agency, the Rural
Business Cooperative Service, United States Department of
Agriculture, or its successor agency), provided that such actions shall not be
effective or legally binding upon the Lazarus Parties or their
assets unless and until GEL Tex has provided prior written consent
to such actions.

 

 

1 It is understood
that as to debt of Jonathan and Gina Carroll in their individual
capacities to which the other Lazarus Parties have no liability or
obligation, Exhibit C
hereto contains only such debt and amounts that represent material
indebtedness of such individuals.

 

 

4

 

 

11.           Conditional
Mutual Releases.

 

(a) 

Release of Lazarus. Upon the
occurrence of the Settlement Payment Date, GEL Tex, and each of its
respective current, former or future subsidiaries, parents,
representatives, assigns, affiliates, predecessors, agents,
attorneys, successors, shareholders, members, officers, directors,
and employees, and their heirs, administrators, personal
representatives, and trustees, and any person claiming by, through
or under any of them (hereafter, collectively, the
“Releasing GEL Tex
Parties”), do hereby forever release, waive and
discharge the Lazarus Parties, and each of their respective
current, former or future subsidiaries, parents, representatives,
assigns, affiliates, predecessors, agents, attorneys, successors,
shareholders, members, officers, directors, and employees, and
their heirs, administrators, personal representatives, and
trustees, and any person claiming by, through or under any of them
(hereafter, collectively, the “Released Lazarus
Parties”), from any and all claims, counterclaims,
demands, damages, debts, agreements, covenants, suits, contracts,
obligations, liabilities, accounts, offsets, rights, actions and
causes of action of any nature whatsoever, in any way arising from
the beginning of time until the Settlement Payment Date
(hereinafter, the “GEL Tex Claims”), whether
arising at law or in equity, whether presently possessed or
possessed in the future, whether known or unknown, whether direct
or indirect, liquidated or unliquidated, whether presently accrued
or to accrue hereafter, whether absolute or contingent, foreseen or
unforeseen, and whether asserted in any litigation, or for or
because of or as a result of any matter whatsoever or thing done,
omitted, or suffered to be done (or alleged to be done, omitted or
suffered to be done) by the Released Lazarus Parties; provided however, the Carroll
Security Agreement shall not be released until the 91st day after
the Settlement Payment Date and only if none of the Lazarus Parties
has commenced a bankruptcy case by that date. The GEL Tex Claims
released herein shall include, but not be limited to, any GEL Tex
Claims that the Releasing GEL Tex Parties (or any of them) have
asserted, or could have asserted, against the Released Lazarus
Parties. Notwithstanding any of the foregoing, nothing herein shall
be construed or deemed as a release of the Lazarus Parties’
obligations arising under this Settlement Agreement, nor shall this
paragraph be construed or deemed to be a release of any claims of
whatever nature that the Releasing GEL Tex Parties have or may have
against persons or entities other than the Released Lazarus
Parties.

 

(b) 

Release of GEL Tex. Upon the
occurrence of the Settlement Payment Date, the Lazarus Parties, and
each of their respective current, former or future subsidiaries,
parents, representatives, assigns, affiliates, predecessors,
agents, attorneys, successors, shareholders, members, officers,
directors, and employees, and their heirs, administrators, personal
representatives, and trustees, and any person claiming by, through
or under any of them (hereafter, collectively, the
“Releasing Lazarus
Parties”), do hereby forever release, waive and
discharge GEL Tex, and each of its respective current, former or
future subsidiaries, parents, representatives, assigns, affiliates,
predecessors, agents, attorneys, successors, shareholders, members,
officers, directors, and employees, and their heirs,
administrators, personal representatives, and trustees, and any
person claiming by, through or under any of them (hereafter,
collectively, the “Released GEL Tex
Parties”), from any and all claims, counterclaims,
demands, damages, debts, agreements, covenants, suits, contracts,
obligations, liabilities, accounts, offsets, rights, actions and
causes of action of any nature whatsoever, in any way arising from
the beginning of time until the Settlement Payment Date
(hereinafter, the “Lazarus Claims”), whether
arising at law or in equity, whether presently possessed or
possessed in the future, whether known or unknown, whether direct
or indirect, liquidated or unliquidated, whether presently accrued
or to accrue hereafter, whether absolute or contingent, foreseen or
unforeseen, and whether asserted in any litigation, or for or
because of or as a result of any matter whatsoever or thing done,
omitted, or suffered to be done (or alleged to be done, omitted or
suffered to be done) by the Released GEL Tex Parties. The Lazarus
Claims released herein shall include, but not be limited to, any
Lazarus Claims that the Releasing Lazarus Parties (or any of them)
have asserted, or could have asserted, against the Released GEL Tex
Parties. Notwithstanding any of the foregoing, nothing herein shall
be construed or deemed as a release of GEL Tex’s obligations
arising under this Settlement Agreement, nor shall this paragraph
be construed or deemed to be a release of any claims of whatever
nature that the Releasing Lazarus Parties have or may have against
persons or entities other than the Released GEL Tex
Parties.

 

 

 

5

 

 

12.           Waiver
of Unknown Claims. The Parties hereby acknowledge that there
is a risk that subsequent to the execution of this Settlement
Agreement, they may incur, suffer or sustain injury, loss, damage,
costs, attorneys’ fees, expenses, or any of these, which were
in some way caused by or connected with the matters referred or
released herein. The Parties also acknowledge that different or
additional facts may be discovered in addition to what they now
know, believe to be true, or might anticipate with respect to the
matters herein released. The Parties further acknowledge that there
is a risk that such damages as are presently known may become more
serious than they now expect or anticipate. Nevertheless, the
Parties expressly agree that this Settlement Agreement has been
negotiated and agreed upon in light of those realizations, and they
hereby expressly waive all rights which they may have or hereafter
acquire on account of such new, undiscovered, or unsuspected
damages or facts.

 

13.           Termination
of Other Agreements. Upon the occurrence of the Settlement
Payment Date, if any, except for this Settlement Agreement and the
Carroll Security Interest, all agreements between the Lazarus
Parties and any of their affiliates, on the one hand, and GEL Tex
and any of its affiliates, on the other hand, including, for the
avoidance of doubt, the GEL Tex Agreements, will be deemed
terminated and of no further force or effect.

 

14.           Stipulation
of Dismissal. Upon the occurrence of the Settlement Payment
Date, if any, Lazarus and GEL Tex, through their attorneys, shall
execute and file with the District Court, a stipulation of
dismissal, with prejudice, in the District Court Action in the form
attached hereto as Exhibit D,
which stipulation may thereafter be filed by either Lazarus or GEL
Tex without notice. Upon the occurrence of the Settlement Payment
Date, if any, the Parties shall take such actions as are necessary
to dismiss the Arbitration with prejudice.

 

15.           Events
of Default. Each of the following shall constitute an
“Event of
Default” under this Settlement Agreement:

 

(a) 

Payment Default. The failure, refusal
or neglect of the Lazarus Parties to pay any Interim Payment when
due to GEL Tex if such failure, refusal, or neglect shall continue
unremedied for a period of three (3) business days from the date
such payment is due.

 

(b) 

Restrictive Covenant Default. The
failure of any Lazarus Party to properly observe, keep or perform
any of the restrictive covenants set forth in Section 10
(restrictive covenants) (other than as permitted under Section
10(b)), if such failure, refusal, or neglect shall continue
unremedied for a period of three (3) business days.

 

(c) 

Other Default. The failure of any
Lazarus Party to properly observe, keep or perform any of the
covenants set forth in any provision of this Settlement Agreement
other than in Section 10 (restrictive covenants), if such failure,
refusal, or neglect shall continue unremedied for a period of
fifteen (15) business days.

 

 

 

6

 

 

(d) 

Settlement Financing Milestones
Default. The failure of the Lazarus Parties to achieve any
of the following milestones in connection with obtaining the
Settlement Financing:

 

(i) 

Provide GEL Tex
with a copy of the United States Department of Agriculture’s
Conditional Commitment of the Settlement Financing by no later than
ninety (90) days after the Effective Date, unless otherwise
extended in writing by GEL Tex;

 

(ii) 

Provide GEL Tex
with copies of the fully executed loan documents for the Settlement
Financing by no later than one hundred and fifty (150) days after
the Effective Date, unless otherwise extended in writing by GEL
Tex;

 

(iii) 

Provide GEL Tex
with monthly updates on the fifteenth (15th) day of each month, or
as soon thereafter as reasonably possible, regarding the status of
the Lazarus Parties’ obtaining the Settlement Financing from
any unaffiliated third-party banking or other financial institution
negotiating the Settlement Financing, or Veritex Bank;
or

 

(iv) 

Provide GEL Tex
with copies of any final term sheets, loan documents, or other
related documents regarding the Settlement Financing between the
Lazarus Parties, any unaffiliated third-party banking or other
financial institution negotiating the Settlement Financing, or
Veritex Bank within five (5) business days of the Lazarus
Parties’ execution of such documents.

 

16.           Termination
Right. GEL Tex may terminate this Settlement Agreement by
written notice delivered to the Lazarus Parties, which notice may
be delivered following the occurrence and during the continuation
of an Event of Default that remains unremedied after the period
specified in Section 15 (events of default) has elapsed, stating
its intention to immediately invoke its termination right under
this Section 16 (a “Termination
Notice”).

 

(a) 

Absent the Willful
Breach (as defined below) of a restrictive covenant specified in
Section 10 (restrictive covenants), delivery of a Termination
Notice shall be GEL Tex’s sole remedy under this Settlement
Agreement. Notwithstanding the foregoing and for the avoidance of
doubt, in the event GEL Tex terminates this Settlement Agreement by
delivering a Termination Notice, nothing contained in this
Settlement Agreement shall directly or indirectly in any way
whatsoever impair, prejudice, or otherwise adversely affect any
right, claim, cause of action, privilege, or remedy of GEL Tex
under the GEL Tex Agreements, the Final Award, or applicable
law.

 

 

 

7

 

 

(b) 

For purposes of
this Settlement Agreement, a “Willful Breach” means any
willful breach of the terms of this Settlement Agreement, including
any breach based on actions of the breaching party that are (i)
fraudulent, (ii) deliberate or intentional, (iii) made in bad
faith, (iv) taken maliciously, or (v) known by senior management
prior to the action being taken. Notwithstanding anything herein to
the contrary, failure of employees or persons otherwise under the
direction or control of a party to know the terms of this Agreement
does not constitute a defense to a claim of Willful
Breach.

 

17.           Termination.
This Settlement Agreement shall terminate automatically upon the
earliest to occur of (the date of such occurrence, the
“Termination
Date”):

 

(a) 

December 31, 2018,
unless otherwise extended in writing by GEL Tex, if the Settlement
Payment Date has not occurred on or before such date;
or

 

(b) 

the date of
delivery of a Termination Notice by GEL Tex in accordance with
Section 16 (termination right).

 

18.           Notice.
All notices, requests and demands to or upon the respective Parties
hereto under this Settlement Agreement shall be in writing and
shall be (a) sent by certified mail, return receipt requested,
postage prepaid or (b) by email, addressed as follows, or to such
other address as may hereafter be designated in writing by the
applicable Party, and shall be deemed received when delivered to
the designated address:

 

To the
Lazarus Parties:

Jonathan
Carroll

801
Travis Street, Suite 2100

Houston,
TX 77002

Email:
JCarroll@lazarusenergy.com

Telephone:
(713) 568-4740

 

with
a copy, which shall not constitute notice, to:

Stroock
& Stroock & Lavan LLP

2029
Century Park East

Los
Angeles, CA 90067

Attention:
Frank Merola, Esq.

Email:
fmerola@stroock.com

Telephone:
(310) 556-5800

 

and
with a copy, which shall not constitute notice, to:

Stroock
& Stroock & Lavan LLP

180
Maiden Lane

New
York, NY 10038

Attention:
Brian Wells, Esq.

Email:
bwells@stroock.com

Telephone:
(212) 806-5400

 

 

 

8

 

 

To GEL
Tex:

GEL
Tex Marketing, LLC

919
Milam, Suite 2100

Houston,
TX 77002

Attention:
Robert V. Deere

Email:
Bob.Deere@genlp.com

Telephone:
(713) 860-2500

 

with
a copy, which shall not constitute notice, to:

GEL
Tex Marketing, LLC

919
Milam, Suite 2100

Houston,
TX 77002

Attention:
Kristen Jesulaitis

Email:
Kristen.Jesulaitis@genlp.com

Telephone:
(713) 860-2500

 

and
with a copy, which shall not constitute notice, to:

Haynes
and Boone, LLP

1221
McKinney, Suite 2100

Houston,
TX 77010

Attention:
Charles A. Beckham, Jr., Esq.

Email:
Charles.Beckham@haynesboone.com

Telephone:
(713) 547-2000

 

19.         
Wire Instructions.
Interim Payments, the Settlement Payment, and any other payments to
GEL Tex made hereunder shall be made by wire transfer of
immediately available funds to in accordance with the following
wire instructions:

 

GEL Tex
Marketing LLC

Bank of
America

Wire
ABA: 026009593

Account
Number: 004640401104

 

20.        
Modification and
Waiver. No modification or waiver of any of the provisions
of this Settlement Agreement shall be valid and enforceable unless
such modification or waiver is in writing and signed by the Party
to be charged and, unless otherwise stated therein, no such
modification or waiver shall constitute a modification or waiver of
any other provision hereof (whether or not similar) or constitute a
continuing waiver.

 

21.        
Authority; Binding
Effect. Each Party has the full power, right, and authority
to enter into this Settlement Agreement, to perform, observe and
comply with all of such Party’s agreements and obligations
hereunder, and to consummate the transactions contemplated hereby.
Such Party has taken all action required to be taken by it with
respect to the execution and delivery of this Settlement Agreement.
Upon the Effective Date, the terms, provisions, covenants, and
agreements contained in this Settlement Agreement shall bind each
of the Parties and the respective successors, assigns, and heirs,
as applicable, of each of the Parties.

 

 

 

9

 

 

22.           Assignment;
No Third Party Beneficiaries. Neither this Settlement
Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned by any Party (whether by operation of
law or otherwise) without the prior written consent of the other
Party. This Settlement Agreement is for the sole benefit of the
Parties to this Settlement Agreement and their successors and
assigns and, except for Sections 11 (conditional mutual releases)
and 13 (termination of other agreements), nothing in this
Settlement Agreement, express or implied, is intended to or shall
confer upon any other person or entity any legal or equitable
right, benefit, or remedy of any nature whatsoever under or by
reason of this Settlement Agreement.

 

23.           Termination
of Continuance Agreement. The Parties hereby terminate the
Continuance Agreement. The Continuance Agreement shall have no
further force or effect and is superseded in its entirety by this
Settlement Agreement.

 

24.      
Complete Agreement.
THIS SETTLEMENT AGREEMENT CONTAINS THE ENTIRE AGREEMENT AND
UNDERSTANDING AMONG THE PARTIES CONCERNING THE SETTLEMENT OF
DISPUTES RELATED TO THE ARBITRATION, FINAL AWARD, AND THE DISTRICT
COURT ACTION AND SUPERSEDES AND REPLACES ALL PRIOR NEGOTIATIONS,
REPRESENTATIONS, UNDERSTANDINGS, PROPOSED AGREEMENTS AND
AGREEMENTS, WRITTEN OR ORAL CONCERNING THE SETTLEMENT OF DISPUTES
RELATED TO THE ARBITRATION, FINAL AWARD, AND THE DISTRICT COURT
ACTION.

 

25.           Construction
of Agreement. This Settlement Agreement was the result of
voluntary negotiations and preparation by and among the Parties and
their respective attorneys. This Settlement Agreement and the
consideration given herein are the result of a compromise between
the Parties and shall not be considered an admission of wrongdoing,
liability, fault or responsibility by any Party to another; any
such liability is expressly denied and disclaimed. The Parties
expressly acknowledge and agree that this Settlement Agreement
shall not be deemed prepared or drafted by one party or another, or
their attorneys, and will be construed accordingly.

 

26.           Headings.
The headings in this Settlement Agreement are intended solely for
convenience of reference and shall be given no effect in the
construction or interpretation of this Settlement
Agreement.

 

27.         
Governing Law and
Jurisdiction. THIS SETTLEMENT AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED, IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, WITHOUT REGARD TO CONFLICTS OF LAWS PROVISIONS
THEREIN. EXCLUSIVE JURISDICTION OF ALL DISPUTES REGARDING THIS
SETTLEMENT AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY SHALL
BE IN THE COURTS LOCATED IN HARRIS COUNTY, TEXAS. EACH PARTY
EXPRESSLY SUBMITS TO THE JURISDICTION OF AND VENUE IN THE FEDERAL
AND STATE COURTS LOCATED IN HARRIS COUNTY, TEXAS U.S. FOR ANY AND
ALL CLAIMS, DISPUTES, OR LITIGATION RELATING TO, AND ARISING OUT OF
THIS SETTLEMENT AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.

 

 

 

10

 

 

28.           Waiver
of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS SETTLEMENT AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS SETTLEMENT AGREEMENT BY, AMONG OTHER
THINGS, THE CONDITIONAL MUTUAL RELEASES CONTAINED IN
SECTION 11 (CONDITIONAL MUTUAL RELEASES).

 

29.           Indemnity.  Notwithstanding
the Conditional Mutual Releases specified in Section 11
(conditional mutual releases), the Lazarus Parties shall indemnify,
defend, and hold harmless the GEL Tex Releasing Parties from and
against any and all third party claims, suits, damages, losses,
expenses or liabilities (including reasonable attorneys’ fees
and expenses) incurred or suffered by any of the GEL Tex Releasing
Parties arising by reason of or resulting in whole or in part from
any of the Lazarus Parties’ acts or omissions.

 

30.           Forward
Contracts. The GEL Tex Agreements, taken together, are a
forward contract as contemplated under section 546(e) of the
Bankruptcy Code and as defined under section 101(25) of the
Bankruptcy Code, for the supply of crude oil. The Settlement
Payment constitutes a settlement payment in connection with GEL
Tex’s forward contract, and GEL Tex is a forward contract
merchant, as contemplated under section 546(e) of the Bankruptcy
Code and as defined under section 101(26) of the Bankruptcy
Code.

 

31.           Severability.
Any term or provision of this Settlement Agreement that is invalid
or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the sole extent of such invalidity
or unenforceability without rendering invalid or unenforceable the
remainder of such term or provision or the remaining terms and
provisions of this Settlement Agreement in any jurisdiction. If any
provision of this Settlement Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so
broad as is enforceable. Upon any other determination that a term
or provision is invalid or unenforceable, the Parties will
negotiate in good faith to modify this Settlement Agreement so as
to effect the original intent of the Parties as closely as possible
in a mutually acceptable manner in order that the transactions
contemplated hereby be consummated as originally contemplated to
the greatest extent possible.

 

32.           Counterparts,
Electronic Signatures. This Settlement Agreement may be
executed in counterparts, each of which shall be deemed an
original, and which together shall constitute a single agreement.
Signature pages transmitted electronically (including electronic
mail) may be used with the same force and effect as the original,
manually signed documents.

 

33.           Effect
of Termination. On and after the Termination Date, this
Settlement Agreement shall be of no further force and effect and
the Parties shall be returned to their respective rights and
remedies as they existed before the Effective Date; provided however, that GEL Tex reserves
all claims, rights and remedies for breach of this Settlement
Agreement in the event of termination under Section 17(b)
(termination) based upon a Willful Breach of a restrictive covenant
specified in Section 10 (restrictive covenants); provided further, that the outstanding
balance of the Final Award shall be reduced by the Retained
Payments received by GEL Tex. For the avoidance of doubt, upon the
occurrence of the Termination Date, all of GEL Tex’s and the
Lazarus Parties’ claims, defenses, rights, and remedies are
reserved, including without limitation any and all GEL Tex Claims
and Lazarus Claims and any and all claims for breach of this
Settlement Agreement, and GEL Tex shall retain all Retained
Payments received on or prior to the Termination Date.

 

[Remainder of page intentionally left blank.]

 

 

11

 

IN
WITNESS WHEREOF, the undersigned have caused this Settlement
Agreement to be duly executed and delivered as of the date first
set forth above.

 

GEL TEX
MARKETING, LLC

 

	

By:

	

R.V.
DEERE

	
 

	

Name:

	

ROBERT
V. DEERE

	
 

	

Title:

	

CHIEF
FINANCIAL OFFICER

	
 

 

LAZARUS
ENERGY, LLC

 

	

By:

	

/s/
JONATHAN CARROLL

	
 

	

Name:

	

JONATHAN
CARROLL

	
 

	

Title:

	

PRESIDENT

	
 

 

BLUE
DOLPHIN ENERGY COMPANY

 

	

By:

	

/s/
JONATHAN CARROLL

	
 

	

Name:

	

JONATHAN
CARROLL

	
 

	

Title:

	

PRESIDENT

	
 

 

LAZARUS
ENERGY HOLDINGS, LLC

 

	

By:

	

/s/
JONATHAN CARROLL

	
 

	

Name:

	

JONATHAN
CARROLL

	
 

	

Title:

	

PRESIDENT

	
 

 

NIXON
PRODUCT STORAGE, LLC

 

	

By:

	

/s/
JONATHAN CARROLL

	
 

	

Name:

	

JONATHAN
CARROLL

	
 

	

Title:

	

PRESIDENT

	
 

 

 

CARROLL
& COMPANY FINANCIAL HOLDINGS, L.P.

 

	

By:

	

/s/
JONATHAN CARROLL

	
 

	

Name:

	

LAZARUS
FINANCIAL, LLC

	
 

	

Title:

	

GENERAL
PARTNER

	
 

 

 

	

By:

	

/s/
JONATHAN CARROLL

	
 

	
 

	

Jonathan
Carroll

	
 

[Signature Page to Settlement Agreement]

 

 

Exhibit
A

 

The Final
Award

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Exhibit A

 

AMERICAN ARBITRATION ASSOCIATION

Commercial Arbitration Tribunal

 

	
LAZARUS
ENERGY, LLC,

Claimant
and Counterclaim

Respondent

               
-v-
                                                                              

 

GEL
TEX MARKETING, LLC.

Respondent
and Counterclaimant.

	
)

)

)   
Case No. 02-16-0001-5548 

)   

)

)

 

FINAL AWARD

 

1. The
undersigned Arbitrator, having been designated in accordance with
the arbitration agreement entered into between the above-named
Parties, having been sworn in, and having duly heard the proofs and
allegations of the Parties, hereby AWARD as
follows:

 

INTRODUCTION

 

2. This
dispute concerns the Parties' performance of a series of three
interrelated agreements (the "Agreements") each effective August
12, 2011, and all governed by Texas law. Under these Agreements, an
affiliate of Respondent GEL Tex Marketing, LLC ("GEL
Tex")1
was to provide financing for the
refurbishment of a crude oil refinery located in Nixon, Texas (the
"Refinery"), approximately 45 miles southeast of San Antonio, owned
and operated by Claimant Lazarus Energy, LLC.
("Lazarus").2
GEL Tex was also to be the sole
supplier of crude oil to the Refinery once it was
operational.

 

3. The
Agreements provided that GEL Tex would not be paid for the crude
oil on delivery, only after the crude oil was refined and sold to
purchasers of the refinery's specialty products, primarily jet and
diesel fuel and naphtha. In the event proceeds remained after
payments for the crude oil and other specified amounts, they would
be shared between the Parties in a contractually prescribed manner.
Lazarus had primary

 

1
GEL Tex is a subsidiary of Genesis
Energy, L.P. ("Genesis"), a publicly traded master limited
partnership providing midstream energy infrastructure and logistics
services primarily in the Gulf Coast region of the United
States.

 

2
Lazarus is a
wholly-owned subsidiary of Blue Dolphin Energy Company ("Blue
Dolphin"), a publicly traded corporation, 19% of whose shares are
owned by the public, with the remaining 81% owned by Lazarus Energy
Holdings, LLC ("LEH"). Jonathan Carroll ("Carroll"), the chief
executive officer of Lazarus, Blue Dolphin and LEH, owns 61% of
LEH, and thus controls all three companies. The Refinery accounts
for 99% of the affiliated companies'
operations.

 

 

 

responsibility
for the marketing of the refined products, although GEL Tex was
expected to provide marketing services as well.

 

4. 

This
arrangement provided significant benefits to Lazarus, which lacked
the financial ability to refurbish the Refinery and purchase the
required amounts of crude oil on normal credit terms. Overall,
Lazarus received distributions for: construction (over $11
million); loan re-payments (over $6 million); and operating cash
(over $33 million).

 

5. 

The
fact that payment for crude oil would not occur until after the
refined products were sold created financial risks for GEL Tex and
the Parties' Agreements contained several provisions designed to
mitigate those risks. The effectiveness of these protections,
however, hinged on. Lazarus' compliance with them. The dispute here
largely arises from Lazarus' failure to do so.

 

THE
PARTIES' AGREEMENTS

 

6. 

Effective
August 12, 2011, Lazarus signed a Construction and Funding Contract
(the "Construction Agreement") with Milam Services, Inc. ("Milam"),
a GEL Tex affiliate, under which Milam facilitated the
refurbishment of the Refinery and provided the funds to do so. Ex.
J-1.

 

7. 

Effective
the same date, GEL Tex and Lazarus entered into two contracts, the
Crude Oil Supply and Throughput Services Agreement ("Supply
Agreement"), Ex. J-2, and the Joint Marketing Agreement ("Marketing
Agreement"). Exs. J-2 and J-3, respectively.

 

8. 

This
dispute implicates a number of the Agreements' provisions, several
of which are discussed below.

 

Construction Agreement

 

9. 

Although
the focus of this arbitration is on the Supply Agreement and the
Marketing Agreement, the Construction Agreement also contains
provisions bearing on the issues here.

 

10. 

Section
12.2(a) requires that Lazarus operate the Refinery in the Ordinary
Course of Business, which term is defined in Section 1.1 as the
"ordinary course of business consistent with past custom and
practice (including with respect to quantity and
frequency)".

 

11. 

Section
13.3(e) precludes Lazarus from entering into any contracts with
third parties "that would materially affect or impair" the rights
of Milam or its Affiliates (including GEL Tex) under the
Agreements, without the written consent of Milam or its affected
Affiliate.

 

Page 2  AAA Case No. 02-16-0001-5548

 

 

 

12. Under Section 13.5, Lazarus is likewise
precluded from entering into a transaction with any of its
Affiliates unless Lazarus demonstrates to GEL Tex's satisfaction
that "the terms of the proposed transaction are at least as
favorable as those [Lazarus] could obtain in an arm's length
transaction" with an unaffiliated party. As stated in Section 13's
introduction, consent to such transaction must be provided in
writing.3

 

13.
Section 18.1 sets out events that qualify as "Owner [Lazarus]
Events of Default" occurring under any of the Agreements, including
when:

 

(a)           

[Lazarus]
fails to transfer to [GEL Tex] any customer payment for the sale of
the Nixon Product sent to [Lazarus] that (i) are owed to [GEL Tex]
.... or (ii) are subject to the accounting of [Lazarus] under any
[contract] within two (2) Business Days of receipt of such payments
by [Lazarus];

 

(b)           

[Lazarus]
fails to comply with any material term of [any of the agreements]
(except for a default described under [the prior provision], and
that noncompliance continues for thirty (30) days after the first
date that [Milani] notifies [Lazarus] in writing of its
noncompliance; ...

 

(m)
a Material Adverse Effect occurs  

 

14.
"Material Adverse Effect" is defined in Section 1.1 to mean "any
change, effect, event, occurrence, condition or other circumstance
which individually or in the aggregate, with other changes,
effects, events, conditions or other circumstances that adversely
affect the value of the business, operations, condition (financial
or otherwise) or prospect of [Lazarus] or the [Nixon Plant], or
adversely affects (a) the ability of [Lazarus] to perform any of
its obligations under [one of the Agreements] or (b) the validity
or enforceability of any [of the Agreements] or (c) the rights and
remedies of or benefits available to [GEL Tex] under [any of the
Agreements].

 

Supply Agreement (Ex. J-2)

 

15. Section 1.2 of the Supply Agreement
defines -Nixon
Product" as the "Crude Oil and other Hydrocarbons refined and
processed by Lazarus at the [Refinery] pursuant to the terms of
this Agreement". The task of procuring crude oil for the Refinery
was performed by Genesis Crude Oil ("GCO"), a GEL Tex affiliate,
which purchased crude oil from suppliers, and arranged to have the
crude oil transported and delivered to the Refinery on GEL Tex's
behalf. GEL Tex in turn charged Lazarus for GCO's Cost of Crude Oil
("COC"). Section 1.2 defines the COC to be charged under the
Agreements as the price "calculated using the pricing formula set
forth in Exhibit B", which provides:

 

 

3Under Section
13.1, Lazarus is prohibited from incurring debt without GEL Tex's
approval unless the debt is expressly and fully subordinated to the
Agreements' obligations. Although GEL Tex cites Section 13.6 as
assisting its arguments, Lazarus' commitment in that provision is
to Milam and not to its Affiliates.

 

Page 3  AAA Case No. 02-16-0001-5548

 

 

The
Crude Oil will be supplied to the refinery using the following
formula pricing:

 

Price
$USD = Daily Flint Hills Posting (monthly avg.) + Platt's-Plus
(monthly avg.) Freight Expense + A + B

 

"A"           

=
Deduct factor to be negotiated on a term basis with individual
leaseholders.

 

The
typical term is 30 days, 90 days, 180 days, or one
year.

 

"B"           

=
GEL [Tex]'s cost associated with hedging Crude Oil and/or Nixon
Product (as defined in the Joint Marketing Agreement).

 

Freight
Expenses will vary according to the distance to the lease from the
[Refinery], among other factors. The expenses will be averaged over
all the delivered barrels in a calendar month.

 

16. 

Section
3.1 of the Supply Agreement specifies that:

 

Exclusive
Supplier: GEL [Tex] shall be
the exclusive supplier of Crude Oil for all operational
requirements for the [Nixon Refinery] which are estimated to be up
to 15,000 Bbls/day.

 

17. 

In
Section 3.2 GEL Tex is assured "exclusive use and utilization of"
three Storage Tanks (51, 53 and 54) at the Refinery. Section 4.3
establishes the fee to be paid for such usage and the circumstances
under which GEL Tex can recover the fee. Provisions regarding the
responsibility for cleaning of these Storage Tanks upon termination
of the Agreements are found in Sections 4.3(b) and
5.3(a).

 

18. 

Supply
Agreement Section 3.3 provides that:

 

Compensation for Crude
Oil; Grant of Lien: All Crude
Oil shall be provided to Lazarus at the Cost of Crude Oil. All
Crude Oil supplied to Lazarus by GEL [Tex] will be paid for by
Lazarus pursuant to and through the terms of the Joint Marketing
Agreement. As security for all of the obligations owed to GEL [Tex]
or its Affiliates under the Joint Marketing Agreement, Lazarus
hereby grants, assigns, transfers and conveys to GEL [Tex] a
security interest in and a general lien upon the Nixon Product and
any profits, proceeds, products, revenues, and other income derived
from or attributable to the Nixon Product until such time as
Lazarus has fulfilled its obligations under the Joint Marketing
Agreement.4

 

 

4GEL
Tex perfected this lien in May 2012.

 

Page 4  AAA Case No. 02-16-0001.-5548

 

 

 

19. 

Section
3.4 precludes Lazarus from using the crude oil received from GEL
Tex "for any purpose other than for the operation of the" Refinery
or as otherwise provided in the Supply Agreement.

 

20. 

Under
Section 4.2(a) of the Supply Agreement, Lazarus must provide to GEL
Tex on a daily basis the following information regarding each
delivery of crude oil to the Refinery: (a) the carrier's name, (b)
the carrying vehicle or vessel, (c) the custody transfer point, (d)
the type, grade and quality of Crude Oil received, (e) the
estimated time of arrival, and (f) any other pertinent information,
including all documentation required by law concerning the receipt,
handling or storage of Crude Oil.

 

21. 

As
in the Construction Agreement, Lazarus is required in Section 5.5
of the Supply Agreement to operate the Refinery in the Ordinary
Course of Business. Section 7.1 requires that Lazarus secure
insurance protecting the crude oil's full market value and, in any
event, to hold GEL Tex harmless from any crude oil losses occurring
after oil is delivered to the Refinery.

 

22. 

The Supply Agreement originally provided for an
initial term of 3 years, which was to be automatically renewed for
successive 1-year terms unless either Party, on 90 days notice
prior to the expiration of the initial terms or of a renewal term,
elected to terminate (Section 2.1). Each Party had the right to
terminate the Supply Agreement early and without liability in the
event the other Party's unexcused failure to perform that was not
cured within 45 days of a written notice of the alleged failure
(Section 2.2).5
As explained below, this provision was
later modified to extend the Agreements until August 12, 2019, and
to eliminate Lazarus' right to early
termination.

 

Marketing Agreement (Ex. J-3)

 

23. 

Section
2.1 of the Marketing Agreement obligates each Party to "act in good
faith towards and cooperate with the other Party" to promote the
successful marketing of Nixon Product, and assure that their
Affiliates do the same. In addition, each Party is to provide
information to the other that is reasonably necessary for the Party
to comply with its obligations under the Marketing
Agreement.

 

24. 

Section 3.1 states that Lazarus is to have the
sole responsibility for entering into written contracts for the
purchase and sale of Nixon Product. Section 2.3, however, specifies
that Lazarus is to make no contract with a third party that "would
materially affect or impair GEL [Tex]'s or its Affiliates rights
under this Marketing Agreement (each a "Material
Event"), the Construction
Contract, or the Supply Agreement without first consulting with GEL
[Tex] and obtaining GEL [Tex]'s prior written consent to such
Material Event".

 

 

5
Similar termination
provisions are found in Section 7.1 of the Marketing Agreement,
which were also later modified in the same way.

 

Page 5  AAA Case No. 02-16-0001-5548

 

 

25. 

In
addition, Section 3.3 of the Marketing Agreement establishes that
GEL Tex has the right, prior to any sale of Nixon Product, "to
confirm that all customers meet the requirements of GEL [Tex]'s
customer credit approval process". Only after the purchaser passed
GEL Tex's credit check was Lazarus authorized to make the necessary
contractual arrangements sell product to a prospective
purchaser.

 

26. 

Section
4.1 of the Marketing Agreement establishes GEL Tex as the
collection agent for all invoiced amounts for the sale of Nixon
Product. To receive these moneys, GEL Tex is to establish a bank
account, to be called the Nixon Product Sales Account, referred to
by the Parties as the "Lockbox". "[A]11 amounts collected from the
sale of Nixon Product shall be deposited into" the Lockbox. This
requirement also applies to any payment for Nixon Product that
Lazarus receives directly, which amounts Lazarus must transfer to
GEL Tex for deposit into the Lockbox within a day of receiving them
(Section 3.2). As the entity responsible for administering payments
from the Lockbox GEL Tex receives a monthly Performance Fee of
$150,000, if such funds are available.

 

27. 

Lazarus is also required by Section 3.2 to (a)
direct all customers to make all payments for the purchase of Nixon
Product directly to GEL Tex until further notice and (b) secure
from each customer a executed copy of a "Notice of Direction of
Payments", which the Parties refer to as a Notice of Assignment
("NOA"). A form NOA
is attached as Exhibit C to the Marketing
Agreement.

 

28. 

The
NOAs specify that payment will be made either to GEL Tex directly
by check or to a specific GEL Tex bank account at Bank of America
and that the NOA "is irrevocable and [purchasers] should continue
to remit such payments [in the manner provided] until [they]
receive other written instructions signed by an authorized officer
of GEL [Tex] and Lazarus". NOAs are to be signed by GEL Tex,
Lazarus and the customer, thereby placing GEL Tex in privity with
each purchaser of Nixon Product that signs a NOA.

 

29. 

The
order of payments from the Lockbox, the "Waterfall" was originally
was set out in Sections 4.2, 5.2 and Exhibit B of the Marketing
Agreement. As discussed below, the Parties subsequently amended the
order of distributions by letter agreement dated August 1,
2012.

 

30. 

To
assure that GEL Tex could properly oversee the Refinery's
operations, Section 3.4 requires Lazarus to provide to GEL Tex on
each business day, the following information regarding the prior
day's activities at the Refinery: (a) daily yield data for the
Nixon Product, (b) documentation of all bills of lading for
delivery of the Nixon Product, (c) inventory reports for Crude Oil
delivered pursuant to the Supply Agreement and for Nixon Product,
(d) how Lazarus has expended any Tank Storage Fee charged; and (e)
any other report or information GEL Tex requests related to
operation of the Refinery.

 

Page 6  AAA Case No. 02-16-0001-5548

 

 

 

AMENDMENTS
TO THE AGREEMENTS

 

31.
Since the execution of the Agreements, the Parties have entered
into various letter agreements suspending, amending and
supplementing the Agreements. Exs. J-5 through J-14. Most of these
involved temporary modifications of the distribution priorities for
funds in the Lockbox to tide Lazarus over during periods of
inadequate revenues. Some were longer lasting and two are
particularly relevant here.

 

32
Effective August 1, 2012, the Parties clarified and modified
certain Marketing Agreement provisions regarding the order in which
Lockbox distributions would be made. Ex. J-9. Noting that Lazarus
owed GEL Tex over $2.3 million for crude oil delivered in May and
June 2012, the Parties acknowledged that these Deficit Crude
Amounts had to be paid from subsequent months' total revenues
resulting from the sale of Nixon Products in subsequent months. The
Parties established that payments from future product sales
revenues (the "Available Proceeds") would be distributed in the
following order:

 

● 

To
Lazarus, for taxes due on product sales;

 

● 

To
GEL Tex for any unpaid COC from prior months' deliveries and for
those of the current month;

 

To
the extent that additional revenues remained after these payments,
these amounts ("Gross Profits") were to be distributed as
follows

 

● 

To Lazarus, Operations Payment of $750,000 and to
GEL Tex a Performance Fee of $150,000;6

 

● 

To
GEL Tex, financial statement preparation fees, tank storage fees,
and product transportation costs, and any other unpaid, non-crude
oil amounts;

 

● 

A
division of remaining revenues between the Parties in accordance
with formulas set out in their agreements.

 

33.
To eliminate any uncertainty about the treatment of unpaid COC from
prior months, Section 3(c) of the August 1, 2012 letter agreement
specifically provided that any unpaid COC amounts from prior
periods (and for the current period) had to be paid fully prior to
determining whether any other proceeds were available for
distribution. With regard to the issues here, this meant that
payment of Operations Payments to

 

 

6
Following a letter agreement dated
June 4, 2015, certain Lazarus' distributions were to be diverted to
Sovereign Bank ("Sovereign") to assure satisfaction of Lazarus'
monthly mortgage payment, provided that Gross Profits distributable
to Lazarus were available to make the distribution. Ex.
J-14.

 

Page 7  AAA Case No. 02-16-0001-5548

 

 

Lazarus and Performance Fees to GEL Tex would not
be occurring unless all delivered crude oil had been paid
for.7

 

34. 

On October 24, 2013, the Parties further modified
the Agreements. Ex. J-13. At the time, Lazarus owed $11.36 million
to Milam and GEL Tex, and apparently had some difficulty paying for
certain equipment and services Lazarus ordered for the Refinery. As
part of the Parties' resolution of these issues, the term and
termination provisions of the Supply Agreement and the Marketing
Agreement were modified in Section 2(a) to eliminate Lazarus'
ability to terminate the Agreements and to extend the Agreements'
terms until August 12, 2019.8

 

35. 

In
addition, in Section 2(g) of the October 24, 2013 letter agreement,
Lazarus agreed to release GEL Tex from all claims Lazarus might
have had against GEL Tex prior to the date of the letter agreement,
specifically:

 

from
any and all Claims or losses of every kind or nature at this time
known or unknown, direct or indirect, fixed or contingent, which
[Lazarus and related parties] have or hereafter may have arising
out of any act, occurrence, transaction, or omission occurring from
the beginning of time to the date of the execution of this Letter
Agreement if related to [the Agreements, as amended] except that
future obligations of [GEL Tex] shall not be included in the
[released claims]. IT IS THE EXPRESS INTENT OF THE RELEASING
PARTIES THAT THE RELEASED CLAIMS SHALL INCLUDE ANY CLAIMS OR CAUSES
OF ACTION ARISING FROM OR ATTRIBUTBLE TO THE NEGLIGENCE, GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF [GEL TEX].

 

THE
PARTIES' ARBITRATION AGREEMENT

 

36. 

Also
effective August 12, 2011, the Parties entered into a Dispute
Resolution Agreement (the "Arbitration Agreement"), applicable to,
and governing "all disputes between the applicable Parties" under
each of the Agreements. Ex. J-4 at 3.

 

37. 

The Arbitration Agreement provides that disputes
shall be arbitrated before a single arbitrator, in Houston, Texas,
under the AAA's Commercial Arbitration Rules in effect at the time
a demand for arbitration was made and under the Texas Arbitration
Act. The Arbitrator is authorized to grant any relief he or she
deems fair and reasonable, subject to the limitation that the
arbitration shall be governed by "the laws of the State of Texas,
including, without limitation, relating to arbitration, discovery,
evidence, remedies, damages, attorneys' fees and pre- and
post-judgment (award) interest". Id. at 4. The Arbitration Agreement itself is governed
by "the laws of the State of Texas without regard to its conflicts
of laws principles". Id. at 6.

 

7This
appears to have been the case under the original Agreements but
apparently had been a point of contention in the early months of
the Parties' arrangement.

 

8The
letter agreement also required that Lazarus only use the funds from
the Operating Payments to pay the Refinery's operating expenses,
which apparently Lazarus had not always done
previously.

 

Page 8  AAA Case No. 02-16-0001-5548

 

 

38. 

Furthermore, neither Party is to have any
liability for any "special, indirect, incidental, or consequential
loss or damage whatsoever, or any special, indirect, incidental, or
consequential (including lost profits or lost investment
opportunity) liability in connection with its performance of its
obligations under" the Agreements. Id at 5.

 

39. 

The Arbitration Agreement specifically authorizes
the Arbitrator to impose any provisional remedy during the
arbitration that would be available from a court of law, and to
take other actions that the Arbitrator deems appropriate to the
same extent a judge could pursuant to the Texas Rules of Civil
Procedure. Id.

 

40. 

Each Party has the right, however, "to seek a
preliminary, temporary, and/or permanent injunction against the
other Party... in a court of competent jurisdiction in Houston,
Harris County, Texas, U.S.A. If such action is commenced, the
Parties may claim against the other for reasonable and necessary
attorneys' fees, expenses, and costs incurred relating to such
legal proceedings". Id.

 

41. 

The costs and expenses of the arbitration,
including the fees of the Arbitrator, are to be borne by the
Parties in the manner chosen by the Arbitrator, although in no case
is the prevailing Party to bear more than one-half of such costs,
expenses and fees. Attorneys' fees may be awarded as allowed by
law. Id.

 

INTRODUCTION
TO THE DISPUTE

 

42. 

As
indicated by the number of times the Agreements have been amended,
largely to address Lazarus' financial stresses, the Parties'
relationship has experienced difficulties from the beginning. This
section of the Final Award focuses only on the events leading to
the current dispute.

 

43. 

Refinery operations during 2014 and into 2015
appear to have been relatively smooth. In late fall 2015, however,
GEL Tex noticed an unusual build up in the Refinery's inventory of
refined products, particularly jet fuel and diesel fuel (the
Refinery's most valuable products), and inquired as to the reason.
Lazarus provided assurances that this build-up was intended to
avoid having to sell the products into a poor market, which Lazarus
expected to improve.9
In particular, Lazarus emphasized that
it was attempting to secure a contract from the Defense Logistics
Agency — Energy ("DLA") that would bring substantial benefits
to the Parties. No timetable for an award of such a contract was
provided.

 

44. 

In
November 2015, Lazarus asked that Genesis financially support
efforts to secure Small Business Administration ("SBA") HUBZone
status, which would facilitate the

 

9Carroll
described the circumstances as a "contango" situation,
i.e.,
when the futures price of a refined
product is higher than the current spot price, suggesting but not
assuring, that the product will sell at a higher price if sold in
the future. The reverse situation, where futures prices are lower
than current spot prices, is referred to as
"backwardation".

 

Page 9  AAA Case No. 02-16-0001-5548

 

 

 

securing
of favorable DLA contracts for the Refinery's products. When GEL
Tex declined to provide funds or a letter of credit, Carroll,
apparently frustrated by what he viewed as GEL Tex's lack of
support, suggested terminating the Agreements.

 

45. 

GEL
Tex responded that it had no obligation to provide further
financial support to the project and that, as established in the
October 24, 2013 letter agreement, Lazarus had no ability to
terminate the Agreements. Nevertheless, GEL Tex stated that it
would consider any detailed proposal Lazarus presented. The record
reflects no Lazarus response to this invitation.

 

46. 

By
mid-January 2016, the inventory level had grown to levels almost
double those in August-October 2015. GEL Tex expressed increased
concern noting that when product is not sold, GEL Tex is not being
paid for the crude oil it supplies. In a mid-February 2016 meeting,
GEL Tex expressed considerable discomfort with its credit exposure
and insisted that Lazarus provide a plan to reduce the Refinery's
inventory. No such plan was provided.

 

47. 

In
addition to GEL Tex not receiving payment for its crude oil, the
Refinery's cash flow became negative in February 2016 because the
Refinery was receiving no significant revenues from the sale of
products. Even though this meant that Lazarus was not entitled to
receive any Operations Payments, Lazarus declined to increase the
Refinery's sales.

 

48. 

In
mid-to-late March 2016, the Parties agreed that GEL Tex would
provide the Refinery in April approximately 14,000 barrels of crude
oil per day. On April 1, 2016, however, without any advance notice
to Lazarus, GEL Tex began deliveries of approximately 7,000 barrels
per day.

 

49. 

Following
an inquiry by Carroll, GEL Tex's Mr. Smith ("Smith") responded on
April 2, 2016, that:

 

Since
September 2015, Nixon's monthly crude purchase request/deliveries
have exceeded refined product sales. As a result, during this
period, [the Refinery] accumulated over 300,000 barrels of
inventory  On numerous occasions, GEL Tex has stated our
concern about the builds, and asked for your plans to reduce
inventory. In a January meeting, you mentioned several new
customers who might be interested in buying product (i.e. Citgo and
Calumet) but we haven't seen any offers yet. However, during our
recent conversations in February, you stated your intent was to
take advantage of the "curve shape" (i.e. trading). Building
inventory for trading purposes is inconsistent with both the spirit
and terms of our Agreements. Our intent is to reduce crude
deliveries until (a) inventory declines to a more moderate level
and (b) product sales volume increases to a level consistent with
your run rate.

 

Page 10  AAA Case No. 02-16-0001-5548

 

 

 

Smith
indicated that GEL Tex was eager to assist in marketing the
Refinery's products but needed guidance on which customers Lazarus
wanted GEL Tex to contact. Ex. J-33.

 

50. 

Carroll responded on April 6, 2016, contesting
Smith's recollection of the earlier meetings and agreeing that
building inventory for the purpose of trading was "inconsistent
with both the spirit and terms of the Agreements." Carroll insisted
that he was not engaged in trading and pointed out that the
inventory was hedged in part, to the benefit of both parties.
Carroll listed several prospective markets for the Refinery's
diesel oil, and informed GEL Tex that LEH had been awarded a
contract to supply DLA approximately 978,000 barrels of jet fuel.
Carroll stated that GEL Tex's actions were a "serious breach of our
agreement" but expressed hope that deliveries of 12,500 barrels per
day could commence shortly.10
Ex. J-34 at 1-3.

 

51. 

Smith
responded two days later that GEL Tex had provided approximately
$15.5 million of crude oil for which it had not been paid and would
not be paid until product was sold. In Smith's view, Carroll had
not provided "concrete details ... only hypothetical customers and
sales targets", which Smith did not view as operational
requirements. GEL Tex requested substantive marketing information
that would permit assessment of the Refinery's needs. If received,
GEL Tex would determine the appropriate level of crude volume for
delivery. Ex. J-34 at 1.

 

52. 

Also
on April 8, 2016, attorneys for GEL Tex notified Lazarus that
because the Refinery's product inventory was approximately 300,000
barrels (double the norm), GEL Tex viewed Lazarus as having
materially breached the Agreements, by violating Lazarus' marketing
and sales obligations, and failing to provide information regarding
anticipated sales. Accordingly, GEL Tex would not be increasing
deliveries until inventory declined and sales volumes increased.
Ex. R-186.

 

53. 

Carroll's response on April 14, 2016 (Ex. C-148)
re-stated (almost verbatim) its earlier-expressed views regarding
Lazarus' potential markets and asserted that GEL Tex's level of
deliveries would result in the "inevitable shut-down" of the
Refinery because the Refinery could not "safely operate with the
amount of crude currently being delivered".11
Carroll noted again the award of the
DLA contract, stating that "liftings" would start in the next
several weeks. Carroll attached copies of DLA's March 29, 2016
"award" to LEH and an April 1, 2016 contract between Lazarus and
LEH for the sale of up to 976,405 bbls of jet fuel to LEH over the
following 12 months at a price equal to 2 1/2 cents over the index
price for jet fuel ("Lazarus/LEH Sales Agreement"). Ex.
J-32.

 

 

10The
correspondence failed to mention that Lazarus did not in fact have
a contract with DLA at that time, that the "award" would have to be
re-bid and, thus, no contract could come into effect for some time,
if then. Carroll testified that he told GEL Tex at some point that
was the case.

 

11The
record does not reflect any Refinery shut down or safety issues,
perhaps because Lazarus may have purchased some crude oil from
Shell Oil.

 

Page 11  AAA Case No. 02-16-0001-5548

 

 

 

54. 

Review of the DLA award and the Lazarus/LEH
Agreement revealed to GEL Tex that Lazarus did not intend to share
with GEL Tex the full benefits of any DLA award. Rather, Lazarus
intended to sell the jet fuel to LEH at a price consistent with
(and slightly above) what Lazarus generally received from other
purchasers for jet fuel and allow LEH to retain the remaining
amount (approximately 12.2 cents per barrel). Ex. R-80. Under the
Lazarus/LEH Sales Agreement, proceeds from the sale of product by
Lazarus to LEH were to be paid to Lazarus, not to the Lockbox.
Lazarus had not secured a NOA from LEH requiring payment of that
amount into the Lockbox and had not given GEL Tex an opportunity to
assess LEH's credit in advance of the sale.12

 

55. 

On April 19, 2016, GEL Tex's attorneys notified
Lazarus that GEL Tex expected. LEH to have DLA direct all payments
under the DLA contract to the GEL Tex and to transfer the DLA
contract to Lazarus. Ex. C-149. Lazarus and LEH satisfied neither
of the requests.13

 

56. 

GEL Tex thereafter declined to increase deliveries
above 7,000-7,500 barrels a day. Even though Lazarus claimed a
market for jet fuel coming on line sometime in May, it had no plans
for the sale of diesel fuel inventories, which continued to build.
Ex. J35.14
GEL Tex did advance to Lazarus
$141,178 to be used as an Operations Payment, "to encourage Lazarus
to use its efforts to reduce inventory". GEL Tex emphasized that it
would not continue to provide such advances without such a
reduction and, hopefully, the Refinery's return to profitability.
Ex. C-152. This demand prompted no noticeable change in the
Refinery's marketing efforts.

 

57. 

On May 2, 2016, GEL Tex initiated a lawsuit
against Lazarus and LEH in the Harris County District Court
("District Court") seeking a Temporary Restraining Order ("TRO")
and a Temporary Injunction against both entities. The District
Court granted the requested TRO and set the Temporary Injunction
request for hearing. On the same day, GEL Tex alerted Sovereign
that Lazarus was not complying with its obligations under the
Agreements. In particular, Lazarus was not selling product on a
timely basis and had contracted to sell jet fuel to an affiliate
without GEL Tex's knowledge or agreement, and without requiring
that the funds from the DLA contract be paid into the
Lockbox.15

 

 

12
As recently as
February 24, 2016, the SBA had rejected LEH's application to
qualify to bid for the DLA contract because of a lack of financial
stability. Ex.C-144.

 

13'It
is not clear that the SBA would have allowed the transfer of the
DLA contract to Lazarus but the record reflects no LEH attempt to
determine whether that was possible or to explore any other
alternatives.

 

14
DLA began purchasing
jet fuel on May 18, 2016. GEL Tex continued deliveries at reduced
levels in June 2016 because, in its view, inventories of diesel oil
remained excessive. Ex. R-89.

 

15Section
4(c) of the June 4, 2015 letter agreement required GEL Tex to
notify Sovereign of any Lazarus defaults. If not cured within 30
days, GEL Tex had the right to assert all of its remedies under the
Agreements. Ex. J-14.

 

Page 12  AAA Case No. 02-16-0001-5548

 

 

 

58. 

By
the time GEL Tex's request for an injunction was heard in the
District Court, it had become clear that Lazarus was not requiring
all purchasers of Refinery products to pay into the Lockbox, and in
some instances had directed that moneys due be paid directly to
Lazarus, despite knowing that by doing so Lazarus was violating the
Agreements and that the customers complying with these instructions
would be violating their NOAs.

 

59. 

The entities involved included Valero, Pinnacle
and Shell. The Shell transaction was particularly questionable. Not
only had Lazarus "bought" crude from Shell on credit without GEL
Tex's authorization and in violation of Lazarus' commitment to GEL
Tex as the Refinery's sole crude oil supplier, but also when
Lazarus could not pay for the crude oil, Lazarus permitted Shell to
take payment for part of that debt in the form of $1.5 million of
diesel fuel made from GEL Tex-sourced crude oil in which GEL Tex
held a security interest.16

 

60. 

After
several days of hearings, the District Court on June 20, 2016,
issued a Temporary Injunction, finding that GEL Tex faced imminent
harm because (a) payments for Nixon Product required to be
deposited in the Lockbox were instead being deposited in a Lazarus
bank account, (b) money being paid to LEH by DLA for jet fuel
derived from Nixon Product was flowing to LEH instead of to the
Lockbox; (c) Lazarus' improper diversion of payments for Nixon
Product to itself rather than to the Lockbox would prevent payment
for ongoing operations, and (d) Lazarus' refusal to provide to GEL
Tex the information required by the Supply Agreement and Marketing
Agreement precluded GEL Tex from proper administration of the
Lockbox.

 

61. 

The District Court further found that GEL Tex
would probably suffer irreparable injury for which there was no
adequate remedy at law because Lazarus and LEH (a) probably would
not be able to pay damages awarded in a judgment; and (b) were
causing incalculable harm by diverting monies from the Lockbox
necessary to fund on-going operations at the Refinery and by
refusing to provide information necessary to administer the
Lockbox, a function necessary to the on-going operation of the
Refinery.17

 

62. 

The
District Court ordered Lazarus to "instruct its customers that all
payments for the Nixon [Refinery] refined products from crude oil
supplied by GEL Tex are to be made directly to the Bank of America
'Nixon Products Sales Account' or lockbox'".

 

 

16Lazarus'
claim that it played no part in Shell's removal of such diesel fuel
from the Refinery is not credible. Indeed, Lazarus provided to
Shell, also in violation of the Agreement, confidential information
regarding the Parties' contractual relationship. Shell is now the
primary, if not sole, supplier of crude oil to the Refinery. It
seems clear that beginning at least in the spring of 2016, Lazarus
was in active discussions with Shell about replacing GEL Tex in
whole or in part as the Refinery's crude oil
supplier.

 

17Lazarus'
refusal to provide data regarding the Refinery's operations had the
effect of shielding from GEL Tex's sight the full extent of
Lazarus' inappropriate activities.

 

Page 13  AAA Case No. 02-16-0001-5548

 

 

 

The
District Court noted that LEH should be treated as a customer of
Lazarus for this purpose. Lazarus was also directed to provide to
GEL Tex the information regarding crude oil receipts and refinery
operations required by Sections 4.2(a) of the Supply Agreement and
3.4 of the Marketing Agreement. Thus, with respect to Lazarus, the
Temporary Injunction amounted to a command that Lazarus comply with
the Agreements pending resolution of the dispute.

 

63. 

In
the case of LEH, the District Court directed LEH to pay into the
District Court's registry, within two days of receiving the funds,
the differential between the amounts of money received from DLA
less the cost of the same Nixon Product that it purchased from
Lazarus. Ex. R-187.

 

64. 

Lazarus
and LEH did not seek rehearing of the Temporary Injunction or seek
an appeal. Nor did they fully comply with these directives. In some
instances, for example, Lazarus sold products produced from GEL Tex
crude oil to companies whose credit had never been vetted by GEL
Tex and under agreements requiring payment directly to Lazarus in
contravention of both the Agreements and the Temporary Injunction.
Lazarus claimed it could do so because the sales were "provisional"
or "trial" sales, even though no such exemption exists in the
Agreements or the Temporary Injunction. Exs. R-106, R-158. In
addition, even though Carroll had total control over all the funds
involved, Lazarus and LEH did not pay into the Lockbox the full
amount LEH owed Lazarus under the Lazarus/LEH Sales Agreement and
LEH did not pay into the District Court registry the full
differential paid to LEH under the DLA contract.

 

65. 

Throughout this period, Lazarus asserted that the
Refinery was generating Gross Profits and that GEL Tex should be
making payments to Sovereign in satisfaction of Lazarus' mortgage
obligations as well as Operations Payments to Lazarus. GEL Tex,
relying on the August 1, 2012 letter agreement, responded that
neither payment was required unless Gross Profits existed and Gross
Profits could not exist until funds were available to satisfy all
amounts due for GEL Tex's past and present crude oil
deliveries. See, e.g., Exs. C-8, R-185 (stating that the deficiency
through June 2016 was $4.6 million). Lazarus never offered a
contrary interpretation of the August 1, 2012 letter agreement and
continued to divert money from the Lockbox.18

 

66. 

While
the Temporary Injunction request was pending, Lazarus, on May 13,
2016, filed its arbitration demand with the AAA. GEL Tex submitted
its Answer and Counterclaim on June 3, 2016, noting that Lazarus
had not specified any claims in its filing.

 

67. 

The
appointment of the undersigned as the sole Arbitrator was confirmed
on August 1, 2016. Following a Preliminary Hearing on August 15,
the Arbitrator issued Procedural Order No. 1 establishing a
comprehensive procedural schedule and

 

 

18GEL
Tex was required within weeks to seek, and secure, District Court
enforcement of the Temporary Injunction's requirement that Lazarus
provide to GEL Tex the contractually required information regarding
crude oil deliveries and Refinery operations.

 

Page 14  AAA Case No. 02-16-0001-5548

 

 

 

various
case management directives. Pursuant to this order, comprehensive
claims, counter-claims and responses thereto were filed on August
29, 2016, September 12, 2016 and September 26, 2016,
respectively.

 

68. 

GEL
Tex resumed requested crude oil delivery levels July 1, 2016 and
continued to provide crude oil at those levels for the next four
months, but Lazarus' increasingly obvious failure to perform its
obligations under the Agreements and the Temporary Injunction
further strained the Parties' relationship.

 

69. 

On
September 9, 2016, GEL Tex filed an Application for Appointment of
Receiver. Lazarus' response included a request for dissolution of
the District Court's Temporary Injunction and approval of LEH's
intervention in the arbitration. Following the submission of
various responsive pleadings and further requests, oral argument
was scheduled for Wednesday, November 9, 2016.

 

70. 

On
Friday, November 4, 2016, Lazarus, without any prior notice,
informed GEL Tex that Lazarus would no longer accept GEL Tex crude
oil at the Refinery. Ex. J-38. At the hearing on November 9, 2016,
GEL Tex represented to the Arbitrator that, without waiving any
claims, it would respect Lazarus' declaration and would no longer
be delivering crude oil to the Refinery.

 

71. 

Following
unsuccessful settlement discussions, and further oral argument on
Wednesday, November 16, 2016, the Arbitrator issued rulings on the
pending issues on November 30, 2016 in an Order on Motions. The
Arbitrator denied GEL Tex's request for appointment of a receiver,
Lazarus' request for dissolution of the Temporary Injunction, and
LEH's request for intervention. The Arbitrator's decision relied in
significant part on the assumption that Lazarus would comply with
the District Court's Temporary Injunction and, if not, that GEL Tex
would seek enforcement. Neither assumption proved to be
correct.

 

72. 

In the Order on Motions, the Arbitrator also
granted GEL Tex's request for an order requiring that Lazarus sell
all GEL Tex Refined Products of a particular type before selling
any refined products of a similar type produced from non-GEL TEX
crude oil, effective immediately.19
The record indicates that Lazarus did
not comply with this directive either.

 

73. 

Seven
days of hearings were held April 24-26 and 28, and May 1-3, 2017,
during which the testimony of 6 witnesses, including two experts,
was presented and cross-examined. Post-hearing briefs were
submitted on June 2 and 16, 2017, and submissions and objections to
requests for attorneys' fees, and to responses to
certain

 

 

19Lazarus
had initially represented that it would not be processing any of
GEL Tex's crude oil in the Nixon Plant storage tanks, which Lazarus
represented were unusable. Nevertheless, without notice to GEL Tex,
Lazarus began doing so, apparently sometime between the November 9
and the November 16 hearings. None of the proceeds from the
resulting refined products appear to have been paid into the
Lockbox.

 

Page 15  AAA Case No. 02-16-0001-5548

 

 

questions
on which the Arbitrator requested additional presentations, were
filed on July 7, 2017 and July 17, 2017. The record was closed on
July 21, 2017.

 

THE PARTIES' CLAIMS, COUNTER-CLAIMS, DEFENSES AND REQUESTS FOR
RELIEF20

 

74. Lazarus requests:

 

a. 

A
finding that GEL Tex materially breached the Agreements in April
2016, and a declaration that the Agreements were terminated as of
the date of that material breach;

 

b. 

An
award of $5,680,031 in damages for GEL Tex's allegedly improper 50
cents per barrel addition to the COC;

 

c. 

An
award of $2,351,555 in damages for GEL Tex's alleged failure in
April, May and June 2012 to hedge properly the Refinery's
products;

 

d. 

An
order requiring GEL Tex to remove and dispose of, at its sole
expense, all residual material in Refinery tanks 51, 53, and 54, as
allegedly required by §5.3(a) of the Supply
Agreement;

 

e. 

An
order requiring GEL Tex to amend the NOAs to release all parties
from them because they allegedly can cover only refined products
produced from GEL-Tex sourced crude oil;

 

f. 

An
award of $1,200,000 in damages for fees that GEL Tex allegedly owes
for the storage of diesel fuel at Ingleside, Texas;

 

g. 

An
award to Lazarus of its reasonable attorneys' fees, pre judgment
interest, post-judgment interest, and any and all other relief to
which Lazarus is entitled.

 

 

20 The
Tribunal's Procedural Order No. 10, issued February 18, 2017,
provided at page 2 that "[a]ny claim, counter-claim and/or defense
not referenced in the pre-hearing briefs shall be deemed waived and
abandoned." In Lazarus' Claim submitted August 29, 2016, Lazarus
asserted among other things that GEL Tex had fraudulently induced
Lazarus to enter into the Agreements without revealing GEL Tex's
intention to add 50 cents to the actual COC, had failed to
distribute certain administrative and other expenses/Operations
Payments, failed to pay the costs of including dyes and chemicals
in the Refinery's products, and had tortiously interfered with
Lazarus' customer relations by refusing to cancel the NOAs after
GEL Tex deliveries of crude oil ceased. GEL Tex asserted defenses
of unclean hands and unjust enrichment. Both Parties have claimed
breaches of the Agreements arising from Lazarus' efforts to "cover"
for the reduction in volumes in April 2016 by purchasing from other
suppliers. These asserted claims and defenses by the Parties were
not re-asserted in their Pre-Hearing Briefs or supported by
evidence presented at the hearing. Thus, these previously asserted
claims and defenses were waived and abandoned and, in any event,
neither Party carried its burden of proof on any of these
issues.

 

Page 16  AAA Case No. 02-16-0001-5548

 

 

 

h.
With respect to GEL Tex's claims, that the Tribunal
hold:

 

i. 

GEL
Tex should take nothing on its fuel loss and fuel gas
claim;

 

ii. 

GEL
Tex is not entitled to any portion of the LEH/DLA
differential;

 

iii. 

The
Temporary Injunction was wrongfully issued and the funds in the
court registry should be released to Lazarus;

 

iv. 

GEL
Tex is not entitled to future damages;

 

v. 

GEL
Tex is only entitled to recover certain of the past damages it
seeks.

 

75.
GEL Tex requests:

 

a. 

An
award of $11,692,632 in damages resulting from Lazarus' alleged
breach of its obligation to pay GEL Tex for crude oil supplied to
the Refinery, including findings that Lazarus diverted to itself
proceeds from the sale of refined products made from GEL
Tex-sourced crude oil and failed to secure from the purchasers of
such products NOAs directing proceeds to the Lockbox;

 

b. 

An
award of at least $3,222,904 in damages for crude oil allegedly
lost and/or for refined products used as fuel for Refinery
operations but not paid for;

 

c. 

An
award of $132,929 in damages arising from the diversion of crude
oil deliveries required as a result of Lazarus' notice that the
Refinery would no longer receive any additional crude oil from GEL
Tex;

 

d. 

An
award of $14,962,758 or $16,354,723 in expectation damages (the
difference depending on LEH's ability to secure a third contract
with DLA) resulting from Lazarus' alleged material breach of
contract when it decided not to receive any additional crude oil
from GEL Tex;

 

e. 

A
determination that Lazarus committed a "fraudulent transfer" as
that term is

 

used
in the Texas Uniform Fraudulent Transfer Act ("TUFTA") by allegedly
improperly and fraudulently contracting with its affiliate LEH to
skim profits from sales of refined product to the DLA and, based on
such a determination, an order of attachment and execution with
respect to the funds currently in the registry of the District
Court, requiring that the Clerk deposit the funds into the
Lockbox;

 

f. 

A
declaration that that the term "Nixon Product" as defined in the
Supply Agreement encompasses all refined product made at the Nixon
Refinery while

 

Page 17  AAA Case No. 02-16-0001-5548

 

 

the
Supply Agreement is in effect regardless from where or from whom
Lazarus secured its crude oil feedstock.

 

g. 

An
award to GEL Tex of its reasonable attorneys' fees, prejudgment
interest, post-judgment interest, and any and all other relief to
which GEL Tex is entitled.

 

h. 

With
respect to Lazarus' claims, GEL Tex requests:

 

i. 

A
determination that GEL Tex did not breach the Agreements;
and

 

ii.
A determination that Lazarus take nothing.

 

FINDINGS OF FACT AND CONCLUSIONS OF LAW

 

76. Lazarus is Not Entitled to
Recover Any Part of the SO-Cent per Barrel Amount Included in the
COC GEL Tex Bills Lazarus.

 

a. 

There
is no dispute that from the outset of the Parties' Agreements, the
amount that GEL Tex billed to Lazarus for the COC included a
50-cent per barrel charge in addition to amounts paid directly to
crude oil suppliers and trucking companies, and for
hedging.

 

b. 

Lazarus
asserts that the Supply Agreement did not permit the addition of
this 50-cent per barrel charge and that it was surreptitiously,
fraudulently, and without Lazarus' knowledge, added to GEL Tex's
actual COC. Lazarus requests the return of all such charges since
the commencement of billing under the Supply Agreement, which
Lazarus asserts total $5,680,031.

 

c. 

Lazarus argues that Exhibit B to the Supply Agreement sets out the manner in
which the COC paid by Lazarus is to be calculated and does contain
any authority to impose a 50-cent charge on top of the listed costs
and that it had "no idea" that GEL Tex was "fleecing" Lazarus, by
adding this charge and by hiding information regarding this charge
from Lazarus until discovery enabled Lazarus to see what GEL Tex
was actually doing.

 

d. 

Although the 50-cent charge has been included in
each month's billing for the COC, Lazarus asserts that it is not
obligated to pay the 50-cent charge because Lazarus knew nothing
about it and, therefore, could not have agreed to it. The record
does not support Lazarus' allegations.21

 

 

21 Lazarus has
occasionally asserted that the $150,000 Performance Fee payable to
GEL Tex under the Marketing Agreement was intended to cover the
indirect costs relating to purchasing crude oil. The Performance
Fee, however, is paid in return for GEL Tex's administration of the
Lockbox and related functions, not for the purchase of crude
oil.

 

Page 18  AAA Case No. 02-16-0001-5548

 

 

 

e. 

Although Lazarus claims the 50-cent charge is
inconsistent with Exhibit B to the Supply Agreement. That is not
the case. Exhibit B provides that the COC calculation is to be made
by adding up the costs paid to suppliers based on a Flint Hills
Index22
and a Platt's index, freight expenses,
a "deduct factor" negotiated on a term basis with individual lease
holders selling crude oil destined for the Refinery, and GEL Tex's
costs associated with hedging the crude oil or the Refinery's
refined products.

 

f. 

Although
the actual amounts paid to freight haulers, suppliers and companies
providing hedges are easily determined, other costs, particularly
internal costs such as the salaries of those employees arranging
and overseeing trucking operations, negotiating with suppliers,
preparing division orders, administering a portion of the hedging
program, etc. are not so easy to ascertain and account for on a
monthly, per barrel basis. The same is true of the negotiated
"deduct factor", which involves the amount that the price paid for
crude oil is reduced in return for the purchaser assuming
responsibility for various activities and related costs that a
seller might otherwise be expected to perform and
absorb.

 

g. 

Lazarus has conceded that internal costs can be
taken into account in determining the COC. Indeed, if they were not
accounted for, and charged to Lazarus, GEL Tex would effectively
lose money on every barrel sold to Lazarus. While the Supply
Agreement contemplates that GEL Tex would not make money on the
sales to the Refinery, GEL Tex was entitled to recover all of the
costs associated with those sales.23

 

h. 

GEL
Tex recognized early on the difficulty it would face in identifying
and quantifying these indirect costs on monthly and per barrel
bases, and GEL Tex's Mr. Wakefield ("Wakefield") raised the issue
with Lazarus before the Agreements were signed. Although no
agreement was reached, emails at the time and Wakefield's testimony
at hearing indicate that Carroll recognized and understood the
issue and acknowledged the need for a mechanism to capture these
indirect costs on an ongoing basis.

 

i. 

When
GEL Tex was establishing the accounting for the COC, GEL Tex and
GCO agreed that a 50-cent charge should be part of GCO's charge to
GEL

 

 

22
Both Parties appear
to agree that the Flint Hills index was never used in calculating
the COC, but neither asserts that not doing so in any way
prejudiced the other Party or breached the Supply
Agreement.

 

23Lazarus'
acknowledgment that some indirect costs are properly recoverable in
the COC is inconsistent with Lazarus' assertion that it is entitled
to the return of all 50-cent per barrel charges. The record
contains no evidence that would remedy this deficiency, a matter on
which Lazarus has the burden of proof. In addition, a portion of
Lazarus' claim would be barred by the applicable four-year statute
of limitations because the claim was first raised during the June
2016 hearings in the District Court and because Lazarus
contractually agreed to waive its right to bring any such claim
arising prior to the August 24, 2013 letter agreement.
See
Ex. J-13 at 3-4,
¶2(g).

 

Page 19  AAA Case No. 02-16-0001-5548

 

 

 

Tex for the COC, and that is how the charge was
accounted for from the beginning of, and throughout, the Parties'
relationship.24
This treatment meant that GCO charged
GEL Tex for both the amounts it paid suppliers and truckers and
50-cent per barrel. GEL Tex in turn invoiced Lazarus for the total
amount it paid to GCO, which included the 50-cent charge as part of
the total cost. Thus, GEL Tex itself was not making any "profit",
only billing what it was charged by its affiliate
GCO.

 

This
comports with the notion that GEL Tex was only to charge its costs
to Lazarus. However, because GCO is affiliated with GEL Tex,
whether the Parties agreed that a 50-cent charge was an appropriate
mechanism for recovery of GCO's internal costs must be examined
further.

 

k.
Lazarus asserts that GEL Tex's failure to separately reflect the
50-cent charge in the summaries provided to Lazarus, even though
the charge was reflected in summaries of the transactions between
GCO and GEL Tex, demonstrates that GEL Tex was trying to hide the
charge. But summaries sent to Lazarus properly reflected what GEL
Tex paid for the crude it purchased from GCO. Moreover, the 50-cent
charge was not hidden. Lazarus knew about the charge and separately
and explicitly took it into account in its own internal reports.
There was nothing surreptitious about the charge's inclusion in the
COC.

 

1.
Sometime after crude oil deliveries to the Refinery commenced,
Lazarus' Mr. Whitney ("Whitney") and Lazarus' Chief Financial
Officer Mr. Byrd ("Byrd") spoke with Wakefield and asked about the
origin of the 50-cent charge, Wakefield explained that he had
discussed the charge with Carroll, which reflected the internal
costs of acquiring the crude. Whitney said that sounded fine. Tr.
1232.

 

m.
On August 9, 2012, Byrd asked GEL Tex about a roughly 50-cent
difference his accountants had noticed between the actual amounts
paid to suppliers and the amount that Lazarus was being charged.
Ex. J-25. Mr. Gibson ("Gibson"), GEL Tex's accountant responsible
for the GEL Tex/Lazarus relationship, responded, copying Carroll
and Lazarus' Controller, Christian Schlosser ("Schlosser"),
that:

 

I
spoke with the Crude oil guys, and they said that the price that
[GCO] sends is based on the indexes and contracts they have. There
is an additional 50 cents added on to cover Genesis costs
to

 

 

24Lazarus'
argument is largely based on various emails referring to the
50-cent charge as "profit", "the meat", and other words that
Lazarus asserts should be read to indicate that the 50-cent charge
was profit, not properly recoverable costs. Those emails are at
best ambiguous in that they do not explain the extent to which the
writer understood the transaction or how the writer meant the term
used. Among other things these emails can be read as referring to
gross profits or recovery of overhead, neither of which would
assist Lazarus' claim. Lazarus chose not to try to clarify the
intended meaning of the terms used by calling the authors of these
emails to testify, i.e.,
the "empty chairs",
and must accept the documents' ambiguities.

 

Page 20  AAA Case No. 02-16-0001-5548

 

 

 

arrive
at the price I see [at GEL Tex]. This is to cover division orders,
back office allocated costs, etc.

 

According
to the agreement, we are selling crude bbls to you at cost, and
there is no profit on the sale of crude to Nixon. Please let me
know if there is anything else you need and if you have had a
chance to review the Gross Profits files I sent
yesterday.

 

n. 

This
communication fully discloses the existence of the 50-cent and in
general the basis for it. The record reflects no objection to this
explanation or to the charge. Byrd testified in deposition (he was
not called as a witness) that Lazarus knew about the 50-cent charge
and did not object to it. Carroll acknowledged that at the time he
made the decision, he told Byrd not to object to the 50-cent
charge.

 

o. 

Lazarus'
knowledge and acceptance of the 50-cent charge was also reflected
in Lazarus' internal accounting. For example, on August 14, 2012,
shortly after Gibson's explanation and Carroll's decision to accept
the imposition of the 50-cent charge, Schlosser sent to Carroll and
Byrd. Lazarus' projected EBITDA estimate for August 2012 Refinery
operations, noting that it included "Genesis's $0.50 per bbl
'cost'. Ex. R-141. Byrd's response likewise noted that the COC
included in that analysis specifically included the 50-cent charge.
Ex. R-36.

 

P. Lazarus continued to include the 50-cent charge
in its internal calculations for the remainder of the Parties'
relationship. See, e.g., Exs. R-48, R-49, R-51, R55, R-62, R-64, and R-68,
and indeed shared some of these calculations with GEL Tex.
See, e.g.,
Ex. R-117. Lazarus also included the
50-cent charge in the COC figures reported to its auditors and to
the SEC. Indeed, the record shows that after August 2012 Lazarus
voiced no objection or concern regarding the 50-cent per barrel
charge until the Temporary Injunction hearing before the District
Court, a period of almost four years.

 

q. 

In
summary, the record demonstrates that Lazarus knew about the
50-cent charge from the outset, understood what it was intended to
cover, agreed to it, reflected the charge in its own profit and
loss projections and submissions to its auditors and the SEC, paid
the charge every month without objection, and never challenged the
charge until court proceedings began in mid-2016. Consequently,
Lazarus' claims that GEL Tex improperly included the 50-cent charge
in the COC and defrauded Lazarus by hiding and/or misrepresenting
the charge are unsupportable.

 

r. 

The
Arbitrator finds and holds that Lazarus' claim for an award of
damages equal to the total amount paid as a result of the 50-cent
charge is contrary to the record evidence, which shows that there
was no breach of contract and that

 

Page 21  AAA Case No.
02-16-0001-5548

 

 

Lazarus'
claim is barred by the doctrines of quasi-estoppel, ratification
and waiver. The claim is, therefore, denied.

 

77.
Lazarus is Not Entitled to Recover Losses Incurred in May-June 2012
When Crude Oil Delivered to the Refinery Was Not
Hedged.

 

a. 

Although
the Parties' Letter of Intent regarding the project indicated that
GEL Tex would be responsible for hedging strategies used with
respect to both crude oil and refined products, that assignment of
responsibility did not find its way into the Agreements. Indeed,
Lazarus concedes that the Agreements place no obligations on GEL
Tex with respect to hedging.

 

b. 

When the Refinery was starting up, and GEL Tex was
delivering crude oil and refining it whenever possible, GEL Tex
hedged the crude oil and the products. As Refinery operations
became ratable, i.e.,
generally balanced between incoming
crude oil and outgoing products, on March 2, 2012, GEL Tex
(Wakefield) notified Lazarus (Byrd):

 

We
are rateably taking off our hedges and closing the hedge book. We
agreed that we would not hedge once the refinery became rateable.
If we shutdown, then we will hedge both crude and products. We
currently have just 16,000 bbls of heat [heating oil] left on the
books but as soon as we get down to zero we will not have any
hedges   unless you request them.

 

c. 

The
record shows that the 16,000 bbls of heating oil were sold in a
week or so and GEL Tex took off its hedges. The record reflects no
response by Lazarus to GEL Tex's warning that GEL Tex, absent
further instruction from Lazarus, would not be hedging any crude or
products. As a result, no crude oil hedges were in place after GEL
Tex sold the 16,000 barrels of heating oil in early March 2012
through June 2012.

 

d. 

In the period April-June 2012, the market for
crude and products turned downward, resulting in a reduction in
value of both the crude and products at the Refinery. The Parties
appear to agree that the associated losses incurred in the May and
June 2012 totaled approximately $2.35 million.25

 

e. 

Thereafter,
Lazarus and GEL Tex agreed that Lazarus would determine hedging
strategy, and inform GEL Tex, which would then put the requested
hedges in place.

 

 

25Although
Carroll testified that hedging was an area of particular importance
to him, he offered no explanation regarding Lazarus' failure to
inquire about hedging in light of Wakefield's communication or
Lazarus' failure to discover the absence of hedges for almost
31/2
months, even though
the value of the Refinery's crude oil and products was rapidly
falling and any hedging costs, had hedging occurred, would have
been reflected in the COC calculations.

 

Page 22  AAA Case No. 02-16-0001-5548

 

 

 

f. 

On
August 4, 2012, Carroll reported the loss to Blue Dolphin's Board
of Directors and its auditors. He did not suggest in any way that
the loss resulted from a GEL Tex breach of its obligations and
acknowledged that the Agreements did not require GEL Tex to
institute a hedging program. Ex. R33. The record contains no
evidence suggesting that Lazarus believed GEL Tex was responsible
for these losses before Lazarus made this claim when it submitted
its Statement of Claim in August 2016.

 

g. 

Lazarus'
claim suffers from a number of defects. First, most, if not all, of
Lazarus' claim, even if valid, is barred by the applicable
four-year statute of limitations. Second, in the October 24, 2013
modification of the Agreements, Lazarus waived the right to bring
any claims against GEL Tex and Milam for any act occurring prior to
the date of that modification. Ex. J-13 at 3, §2(g) (quoted at
¶35 above). Therefore, Lazarus has previously waived its right
to bring this hedging claim, which involves actions taken (or not
taken) well before October 24, 2013.

 

h. 

Lazarus
asserts that the Arbitrator cannot consider the effect of Section
2(g) because GEL Tex failed to plead waiver as part of its
affirmative defenses to this claim in its Pre-Hearing Brief and the
Arbitrator had stated on several occasions that claims and defenses
not raised in the pre-hearing briefs would be considered waived and
abandoned. While that prohibition would be binding on the Parties,
it cannot be binding on the Arbitrator, who is obligated to address
all issues fairly raised by the record. Here, the document involved
is a modification of, and therefore part of, the Agreements that
the Arbitrator has been asked by both Parties to interpret and
apply. Ignoring a provision that bars one of Lazarus' claims would
be inconsistent with, among other things, the Arbitrator's
obligation, established in the Arbitration Agreement to reach a
"fair and reasonable" result in light of the record before
him.

 

i. 

Moreover,
Lazarus clearly knew about Section 2(g), asked about it in the
hearings, and mentioned it in Lazarus' Post-Hearing Brief.
Furthermore, when the Arbitrator focused on the issue following the
submission of the Parties' briefs, he provided both Parties an
opportunity to brief the effect of Section 2(g) and to respond to
the other Party's analysis. Lazarus presented no substantive
argument on the point, reiterating that the Arbitrator could not
consider the matter in light of his procedural instructions to the
Parties. Consequently, the Arbitrator's consideration of Section
2(g) is in no way a surprise or disadvantage to Lazarus, which had
full opportunity to address it.

 

J.

In
any event, in addition to the problems presented by limitations and
Section 2(g), Lazarus has failed to provide any factual,
contractual or legal basis for its claim regarding the absence of
hedges on crude oil and products at the Refinery in April-June
2012.

 

Page 23  AAA Case No. 02-16-0001-5548

 

 

 

k.

For
all of these reasons, Lazarus' claim that GEL Tex is responsible
for losses

 

caused
by the absence of hedging in the period April-June 2102 is
denied.

 

78.
Lazarus is Not Entitled to Collect From GEL Tex Fees for the
Storage of Diesel Oil at Ingleside.

 

a. 

As Lazarus was building inventory at the Refinery
in 2015, it moved some of the Refinery's diesel fuel to tanks at an
Ingleside, Texas facility owned by Carroll. Sometime later, Lazarus
billed GEL Tex for this storage at Ingleside, and GEL Tex refused
to pay. Ex. R-76. Lazarus asserts that GEL Tex should be made to
pay tank rental fees imposed by the Ingleside facility for storage
of these products, a total of $1,200,000.26

 

b. 

Lazarus
was unable to identify any contractual provision requiring that GEL
Tex pay for such off-site storage fees, and a review of the
Agreements indicates that Refinery operating costs, including
storage of the Refinery's products, are costs to be borne by
Lazarus. The movement of the diesel fuel to a facility owned by the
Lazarus affiliate, without prior consultation with GEL Tex, which
never agreed to pay such storage costs, also violated Section 13.5
of the Construction Agreement and Sections 2.1 and 2.3 of the
Marketing Agreement.

 

c. 

Early in the Parties' relationship (in 2012) the
Parties agreed that transfer of some diesel fuel to Ingleside was
appropriate at that time because of the ability to load the product
on to barges from that location. The record indicates that, even
then, GEL Tex did not pay any associated storage fees because
storage was understood to be Lazarus' responsibility. As Wakefield
explained, this earlier storage at Ingleside was just a case of
Lazarus deciding to move its inventory in an effort to improve
product marketability, and not something for which GEL Tex had any
cost responsibility. Tr. 1371-1372. See also 1982-1983.

 

d. 

The
record is clear that by declining to pay these storage costs, which
are Lazarus' contractual responsibility, GEL Tex breached no
contractual obligation. Therefore, the Arbitrator finds and holds
that Lazarus is not entitled to recover the Ingleside storage
fees.

 

79.
GEL Tex did Not Materially Breach the Agreements by Reducing
Deliveries to the Refinery in April-June 2016.

 

a.
Lazarus argues that the reduction of crude oil deliveries to the
Refinery beginning on April 1, 2016 and continuing through June
2016, constituted a material breach of the Parties' Agreements,
resulting in termination of those Agreements either at that time
or, at the latest, in November 2016 when

 

 

26
Lazarus provided no
evidence that these charges were fairly negotiated, charged in
accordance with an established fee schedule or reasonable in any
other respect.

 

Page 24  AAA Case No. 02-16-0001-5548

 

 

 

Lazarus
announced the Refinery would no longer receive crude oil from GEL
Tex. Lazarus does not seek damages as a result of GEL Tex's
reduction of deliveries. Rather, Lazarus seeks a determination that
this alleged breach and resulting termination released Lazarus from
any obligation to comply with the Agreements going
forward.

 

b. 

Lazarus'
position largely rests on Section 3.1 of the Supply Agreement which
states that GEL Tex is to be the exclusive crude oil supplier "for
all operational requirements for the [Refinery] which are estimated
to be up to 15,000 Bbls /day". Ex. J-2 at 5.

 

c. 

Lazarus
asserts that it, and it alone, is authorized to determine the
extent of the

 

Refinery's "operational requirements" at any point in time and that
GEL Tex must deliver crude oil in amounts consistent with that
determination, even if delivery of all or part of such volumes is
not "commercially viable".27

 

d. 

Relying
on what Lazarus views as an agreement in March 2016 that GEL Tex
would deliver in April 2016 14,000 barrels of crude oil per day,
Lazarus argues that GEL Tex's unilateral reduction of deliveries to
the Refinery beginning April 2016 to approximately 7,000 barrels
per day deprived Lazarus of contractual benefits it legitimately
expected, and constituted a material breach of GEL Tex's
obligations under Section 3.1, justifying termination of the
Agreements.

 

e. 

This contention fails for several reasons. First,
under the October 24, 2013 Letter Agreement, see ¶34 above, Lazarus waived its right to
terminate the Supply Agreement and the Marketing Agreement, and
agreed that, unless GEL Tex terminated those Agreements, they would
remain in effect until August 12, 2019. Thus, Lazarus had no
contractual right to claim a breach and terminate the
Agreements.

 

Second,
Lazarus did not claim at the time that the Agreements had
terminated. Indeed, Lazarus has never sent a formal notice of
termination to GEL Tex. As recently as March 31, 2017, Blue Dolphin
reported in its 2016 10-K, that despite an ongoing dispute with GEL
Tex, the Agreements were being maintained and that any failure to
continue to maintain them could adversely affect Lazarus'
operations, liquidity and financial condition. This representation
cannot be squared with Lazarus' claim here that the Agreements
terminated a year earlier, and must be given effect in light of the
fact that the statements were made as part of audited financials
and submitted

 

 

27Lazarus
further opines that only Lazarus, as operator of the Refinery, had
the knowledge and expertise necessary to make such a determination.
Lazarus is, at best, confusing detailed knowledge of the Refinery's
operations with knowledge regarding the marketing of refined
products, which is the matter at issue here. GEL Tex appears to
have had ample knowledge of the former and considerable knowledge
regarding the latter.

 

Page 25  AAA Case No. 02-16-0001-5548

 

 

 

to the SEC subject to the possibility of criminal
penalties in the event the statements were materially
misleading.28

 

g. 

Third,
in order to prevail on its claim that the Agreements terminated in
April 2016, applicable law requires that Lazarus show it did not
continue to accept GEL Tex's performance, and enjoy the benefits
of, the Agreements after the alleged material breach. The record
shows, however, that Lazarus continued to accept crude oil from GEL
Tex (at requested levels after June 2016), process and sell it,
until Lazarus announced it would no longer accept crude oil from
GEL Tex in November 2016.

 

h. 

Lazarus' failure to adhere to all of the terms of
the Agreements during this period, e.g., not requiring payments into the Lockbox, not
requiring new customers to execute NOAs, and not requiring existing
customers to comply with their NOAs, does not in any way suggest
that Lazarus considered the Agreements terminated. If anything,
these actions show that Lazarus was intent on continuing to enjoy
the benefits of the Agreements — GEL Tex's delivery of crude
oil and associated credit support -- while ignoring many of its own
obligations under them.

 

i. 

Fourth,
Lazarus' argument that, under the circumstances here, GEL Tex's
reduction in crude oil deliveries constituted a breach of the
Agreements, much less a material one, is
unsupportable.

 

 

28
Attached to Lazarus'
Post-Hearing Brief, and self-described as Ex. C-242, is a copy of a
Blue Dolphin Form 8-K apparently filed with the SEC on May 1, 2017,
during the hearings and after Carroll acknowledged that the 2016
10-K indicated that the Agreements were still in effect. Although
Lazarus offered no reason for its failure to present this document
at hearing or for its belated offer at this point, the Arbitrator
will take judicial notice of it. The Arbitrator notes that, unlike
the 10-K, the 8-K is a company, not an auditor generated document,
which reads as much like a legal argument as a financial
disclosure.

 

The
8-K asserts that the Agreements have terminated but does not say
when the company believes that occurred, or when, if at all,
Lazarus stopped maintaining the Agreements as previously
represented. Blue Dolphin asserts that termination of the
Agreements was not previously disclosed "because of the ongoing
dispute" with GEL Tex. This statement is not only surprising in
light of the 10-K's representation (only one month earlier) but
comes perilously close to saying that the company's prior
disclosures regarding the status of the Agreements were knowingly
misleading. In addition, the filling erroneously states that GEL
Tex "recently relinquished its claims for equitable and declaratory
relief and its ability to keep the contracts in force and effect on
a going-forward basis".

 

The
Arbitrator also takes judicial notice of Blue Dolphin's 10-Q
filling on May 15, 2017, in which Blue Dolphin reveals that as a
result of the Form 8-K disclosure, several agreements not involved
here had to be rewritten because their effectiveness was dependent
on the continuation of the Agreements. This contract re-writing was
approved on May 9, 2017, more than a year after Lazarus claims in
this proceeding that the Agreements terminated. Presumably, Blue
Dolphin would have taken these steps earlier if it had truly
believed the Agreements were no longer in effect. Thus, the most
that can be said for the 8-K and the 10-Q is that as of May 1,
2017, the company no longer asserts that it is maintaining the
Agreements.

 

Page 26  AAA Case No. 02-16-0001-5548

 

 

J. While Section 3.1 of the Supply Agreement,
provides for the supply of the Refinery's "operational
requirements", it does not require a supply of crude oil equal to
the Refinery's operational capacity or capability, which is how
Lazarus would have it read.29
The term "requirements" contemplates a
judgment as to the Refinery's needs. Nothing in the Agreements
suggests that only Lazarus is to make this judgment, or that it can
unilaterally decide on a course of action that is not "commercially
viable" for GEL Tex.

 

k.
Although the literal language of the Agreements provides little
direction as to how the Refinery's "requirements" can or should be
determined, the structure of the Parties' contractual arrangements
reveal an intention that is not consistent with Lazarus'
position.

 

1.
The Agreements contemplate a reasonable balance between deliveries
of crude and the production and sale of refined products, what some
witnesses referred to as a "rateable" operation of the Refinery.
While it was understood that the Refinery would always have some
crude oil stored on premises and some refined products on premises
awaiting sale, those inventories were expected to be generally
consistent with the Refinery's "run rate". That is, sales would be
made in a manner consistent with the incoming crude supplies. The
record indicates that this was how the Refinery was generally
operated from the beginning of operations through the latter part
of 2015. This kind of balanced operation was the Ordinary Course of
Business "consistent with past custom and practice" that was
contemplated by Section 12.2(a) of the Construction Agreement and
Section 5.5 of the Supply Agreement.

 

m. 

If
the arrangement operated otherwise, GEL Tex could be exposed to
even greater financial risk than the Agreements contemplated. As
explained above, GEL Tex did not get paid for the crude oil it
delivered to the Refinery until after the crude oil was refined and
the resulting products sold. In the meantime, GEL Tex was
responsible for the carrying costs of the delivered crude oil.
Thus, if sales of refined products were delayed, GEL Tex's carrying
costs, and its financial risk, were increased.

 

n. 

Another
indication that the "Ordinary Course of Business" did not include
the kind of inventory buildup that Lazarus undertook is that
without sales of refined products, Lazarus would not have enough
money to operate the Refinery. Only through the sales of refined
products and the subsequent sharing of Gross Profits would such
funds be available to Lazarus. Indeed, the Agreements provided that
there be Gross Profits and payment of all prior deficits before
Lazarus could receive even the Operations Payment, much less any
profits' distribution. Placing Lazarus in such an illiquid position
was not in the interest of either Party. Thus, the Agreements must
be read and

 

 

29In
fact, for almost all of the Refinery's operations under the
Agreement, Lazarus requested and GEL Tex delivered crude oil at
levels well below 15,000 barrels per day, often, with Lazarus'
agreement at levels below those Lazarus initially
requested.

 

Page 27  AAA Case No. 02-16-0001-5548

 

 

 

understood
to provide that, absent agreement of the Parties to a different
approach, Lazarus was expected to sell products generally
consistent with the crude oil it was receiving and
processing.

 

o. Contrary to Lazarus' argument, the Agreements
do not contemplate that either Party would have the unilateral
right to determine the Refinery's operational requirements. Instead
the Parties were to work together in good faith to arrive at a
result consistent with the Agreements' intended purposes. In March
2016 (and for a number of months before that), however, Lazarus was
not conducting its part of the relationship in good faith and, as
will be discussed below, see ¶87, in building up inventories of jet fuel
was actually trying an end run around the Agreements designed to
deprive GEL Tex of sales proceeds to which it was
entitled.30

 

P.
Nor can the Agreements reasonably be read to provide Lazarus the
unilateral right to engage in speculation regarding the possibility
of improved future markets and the direction of market prices. Yet,
in demanding that GEL Tex deliver millions of dollars of crude oil
(at no cost to Lazarus) without regard to the Refinery's inventory
build-up and lack of sales, that is exactly what Lazarus was doing
in late 2015 and early 2016.

 

q.
Although the Parties could have agreed to the buildup, as they once
did earlier in the relationship (involving fewer volumes and a
shorter time frame) GEL Tex was under no obligation to, and
expressly did not, do so here. After pressing Lazarus to reduce the
Refinery's excessive inventories, and seeing no evidence of sales
agreements necessary to reduce inventories, GEL Tex determined that
the Refinery's "operational requirements" were not equal, or even
close, to its physical capabilities and reduced deliveries of crude
oil to levels GEL Tex believed to be more consistent with the needs
of the Refinery at the time. Nothing in the Agreements precluded
GEL Tex from taking this action. The fact is that it was Lazarus,
not GEL Tex, which was acting in a manner inconsistent with the
Parties' intentions in the Agreements.

 

The
record does not support Lazarus' allegation that GEL Tex reduced
deliveries in response to Lazarus' requests for accounting
information regarding the 50-cent charge. No document was produced
suggesting a tie between the reduction of deliveries and Lazarus'
request for certain documents, and testimony exists that the two
events were unrelated. Neither the accounting requests on which
Lazarus relies or the Parties contemporaneous emails involve or
even mention the 50-cent charge. Rather, they concerned requests
for invoices and tickets reflecting GCO's purchases from the
numerous suppliers. Lazarus makes no attempt to explain how these
requests can be viewed as involving the 50-cent charge or causing
GEL Tex to reduce deliveries (inasmuch as the 50-cent charge had
been agreed to long

 

 

30Lazarus
was also violating its obligation under Section 2.1 of the
Marketing Agreement, Ex. J-3, to use reasonable efforts and due
diligence to expand the Refinery's markets.

 

Page 28  AAA Case No. 02-16-0001-5548

 

 

 

ago).
In any event, as explained above, there was ample reason for GEL
Tex to reduce deliveries regardless of any pending accounting
issues.

 

s. 

Lazarus
also claims that GEL Tex acted in a manner inconsistent with the
Agreements by not promptly restarting crude oil deliveries at
requested levels once Lazarus began to sell off its inventories of
jet fuel. The record does not indicate, however, that GEL Tex
improperly assessed the Refinery's needs. Indeed, Lazarus'
retention of unusually high diesel fuel inventories, without an
obvious market, was clearly a prohibited bet, at GEL Tex's expense,
on the direction of market prices.

 

t. 

Moreover,
despite Lazarus' complaints, there is no evidence that Lazarus
failed to meet any of its sales obligations when GEL Tex continued
reduced delivery levels through June 2016. Because deliveries
supporting the DLA contract did not begin until mid-May and diesel
inventory only began to move in June 2016, Lazarus had no need for
products in excess of those it had on hand and could refine using
reduced levels of GEL Tex's crude oil.

 

u. 

For
all these reasons, the Arbitrator finds and holds that Lazarus has
not demonstrated that GEL Tex's reduction of deliveries to the
Refinery beginning April 1, 2016 and continuing to the end of June
2016 constituted or even could contractually constitute, a material
breach of the Agreement, resulting in termination of the
Agreements, either then or in November 2016, and in no way
justified Lazarus' repeated failures to comply with its obligations
under them.

 

80. Lazarus' Request For an Order
Directing GEL Tex to Remove All Residual Material from Refinery
Tanks 51, 53 and 54 is Denied.

 

a. 

Section
5.3(a) of the Supply Agreement provides that "upon termination of
this Agreement, GEL shall remove and dispose of, at its expense,
all residual material from the Storage Tanks, equipment and/or
facilities at GEL's sole expense". Lazarus seeks an order directing
GEL Tex to either clean out Refinery tanks 51, 53 and 54, or
provide Lazarus $1.5 million to $2.0 million so that Lazarus can do
so. Because Lazarus has failed to support in any respect the
claimed dollar amounts, the Arbitrator hereby denies the latter
portion of Lazarus' request and focuses instead on the request for
an order directing GEL Tex to clean out the three
tanks.

 

b. 

Although
the literal language of the Agreement is fairly straight forward,
the proper interpretation of that language under the circumstances
here is not.

 

c. 

To
begin with, Section 5.3(a) does not by its terms require that GEL
Tex do more than remove any remaining residual material. There is
no requirement

 

Page 29  AAA Case No. 02-16-0001-5548

 

 

 

in that provision that GEL Tex clean the tanks
after removing the residual material.31

 

d. 

In
addition, as discussed herein at ¶79 above, the Agreements
have not terminated. Therefore, any obligations GEL Tex may have
under the Agreements to dispose of the crude oil remaining in the
three tanks have not yet arisen. Consequently, the Arbitrator will
treat Lazarus' claim as a request for a declaratory order regarding
GEL Tex's obligation once termination has occurred.

 

e. 

The Agreements when executed contemplated that GEL
Tex would provide all of the Refinery's crude oil. Therefore, when
the Agreements ended, only GEL Tex-supplied crude oil would remain
in the tanks. Thus, it was reasonable to require that GEL Tex
remove any remaining crude oi1.32
The Agreements are silent regarding
GEL Tex's obligations in the event all materials in the tanks are
not attributable to GEL Tex.

 

f. 

The record shows that the tanks have been used in
ways inconsistent with the Agreements' original assumptions. Tank
51 has been used as a slop tank, a receptacle for material
resulting from the handling of all suppliers' crude oil. Likewise,
even prior to the processing of all retrievable GEL Tex crude oil,
Lazarus used at least one of the tanks to store another supplier's
refined product. Most importantly, the levels of material in the
tanks 53 and 54 have apparently changed and even increased long
after GEL Tex stopped delivering crude oil to the
Refinery.33
Thus, whether GEL Tex is solely
responsible for the materials remaining in the tanks is at the very
least unclear.

 

g. 

The
burden to demonstrate that GEL Tex is responsible for all the
materials currently remaining in the three tanks is on Lazarus.
Lazarus has had total control of the tanks since it declined to
take additional deliveries from GEL Tex in early November 2016,
even precluding GEL Tex representatives from taking measurements of
the tanks' contents. The absence of evidence supporting Lazarus'
request ultimately requires a finding against Lazarus.

 

h. 

While
the question is a close one, the Arbitrator finds and holds that
Lazarus has not maintained and utilized the tanks in a manner
consistent with the

 

 

31Lazarus
appears to have known this previously asking only that GEL Tex
remove the remaining crude oil from the tanks, Tr. 417, and
requesting bids (never produced) only for disposition of the
remaining material. Tr. 419.

 

32If
the tanks are to be used again, these unusable materials, if
removed, would have to be replaced. Thus, it is common practice for
a successor to purchase the tank bottoms from a tank's prior
user.

 

33
Carroll claimed that
use of the tanks for purposes unrelated to other crude suppliers
did not occur and that shifting volumes in tanks 53 and 54 was the
result of volumes moving from one tank to the other with no total
increase in materials. That suggestion is inconsistent with data
showing that total volumes in these two tanks have increased at the
same time. See,
e.g., Ex.
R-175 (1/12/17-1/13/17).

 

Page 30  AAA Case No. 02-16-0001-5548

 

 

 

Agreements'
original understanding and intentions, thereby relieving GEL Tex of
its original obligations.

 

i. No evidence exists that this ruling will harm
Lazarus. To use the tanks going forward, volumes equal to those
remaining in Tanks 53 and 54 will be required to support future
storage of crude in these tanks. Alternatively, Lazarus could
remove the remaining materials itself and sell
them.34

 

81
GEL Tex's Claim for Damages Resulting From Lazarus' Failure to Pay
For Delivered Crude Oil and For Unpaid Performance Fees is
Granted.

 

a. 

GEL Tex's expert witness Mr. Van Meter ("Van
Meter") presented evidence supporting GEL Tex's claimed entitlement
to $11,692,632 in damages for crude oil it delivered to the
Refinery and was not paid for, and unpaid Performance Fees. This
claim has four components: (i) the Accumulated Deficit through
October 31, 2016 ($3,571,990, which includes $600,000 in unpaid
Performance Fees); (b) the cost of unpaid crude oil inventory
($100,936) as of January 18, 2017 (the date of the most recent
measurement reflected in the record); (c) the COC associated with
unpaid for pre-October 31, 2016 sales to LEH ($2,213,225); and (d)
the net COC of volumes delivered prior to October 31, 2016 but
refined thereafter (less the amounts paid into the Lockbox,
$5,806,481, which includes $750,000 in Performance
Fees).35

 

b. 

GEL Tex has presented substantial evidence in
support of these claims. This evidence shows among other things
that prior to November 4, 2016, when Lazarus repudiated the
Agreements, it had simply refused to pay money it owed for crude
oil received at the Refinery, notwithstanding the clear
requirements of the Temporary Injunction.36

 

c. 

Lerman
concedes that GEL Tex is entitled to recover $7,847,342 for the
unpaid crude balance but challenges the remainder of Van Meter's
proposed recovery on a number of grounds, asserting that (i)
because the crude oil was later processed and sold, there is no
need for an additional payment; (ii) the calculations improperly
include the 50-cent per barrel charge that Lazarus claims was
improperly added to the COC, (iii) Van Meter improperly assumed
that the Agreements did not terminate in April 2016 (incorrectly
resulting in the inclusion of Performance Fees and hedging losses
and gains in November

 

 

34Because
GEL Tex will receive payment for these volumes through the
expectation damages awarded in ¶85 below, GEL Tex will be
fully compensated.

 

35These
payments include amounts paid for the sale of products not
necessarily generated by GEL Tex provided crude oil, which Lazarus
has referred to as "proxies".

 

36
Carroll conceded that
Lazarus failed to comply with the Temporary Injunction payment
requirements. Tr. 653.

 

Page 31  AAA Case No. 02-16-0001-5548

 

 

and
December 2016); and (iv) Van Meter improperly priced the "tank
heels" (the crude oil remaining in Tanks 53 and 54). Only the
latter challenge has any merit.

 

d. 

Lerman asserts that because the crude at issue was
later processed and sold, GEL Tex has a "receivable" for that
portion of the sales price and thus Lazarus owes nothing more. This
argument is inconsistent with the Agreement. GEL Tex has a right to
be paid for its COC before the sharing of refined product proceeds
is considered.37
Lazarus' failure to make these
payments, because it was diverting revenues from the
Lockbox,38
does not relieve Lazarus of that
obligation, whatever legal rights GEL Tex may have in the refined
products and against those who purchased them.

 

e. 

The
suggestion that the unpaid amount should be reduced by the
elimination of the effect of the 50-cent per barrel in the COC
calculations is based on arguments already rejected in ¶76
above, and therefore is without merit.

 

f. 

Likewise,
the challenge to the inclusion of Performance Fees and hedging
losses and gains during November and December 2016 is based on the
assumption that the Agreements terminated in April 2016. As
explained in ¶79 above, that assumption is without merit and
is not a valid basis for challenging Van Meter's
calculations.

 

g. 

Lazarus'
objection to the pricing of "tank heels" at historical costs covers
both "tank heels" that were in fact processed in the
Refinery and "tank heels" that remained in Tanks 53 and 54 as of
January 18, 2017. In both instances, Van Meter established the COC
based on those volumes' historical cost to GEL Tex, which had
purchased the crude from the prior lessee of the tanks at
approximately $95.89 a barrel at a time when crude oil commanded a
higher price than it does now. Lazarus asserts that the valuations
of both portions of the "tank heels" should be reduced to reflect
current market prices.39

 

h. 

Although
the Agreements provide that GEL Tex is to be reimbursed for its
actual COC, different treatment is required in the case of the
"tank heels" currently (as of January 18, 2017) remaining in Tanks
53 and 54.

 

The
Agreements contemplate that GEL Tex is to be compensated at the COC
for crude oil it provides as feedstock for the Refinery. The now
remaining "tank heels", which are not available for processing, do
not satisfy this

 

 

37For the same
reason, Lazarus' assertion that the COC non-payment amounts should
be run through the Waterfall is without merit.

 

38 The record
indicates that no money has been paid into the Lockbox since
January 2017.

 

39 At an
earlier stage in this arbitration, Lazarus represented that it
could not process a portion of the "tank heels". The record now
indicates that it found a way to refine most of those volumes. What
is left is undoubtedly crude oil Lazarus could not find a way to
refine, or it would have done so.

 

Page 32  AAA Case No.
02-16-0001-5548

 

 

 

requirement
and should not be priced at more than market value (which is what
any third-party purchaser of this crude oil would pay, just as GEL
Tex did at any earlier time). The fact that GEL Tex might not
recover the money it previously spent for these unusable amounts is
not determinative. GEL Tex made an investment in the now-remaining
crude oil which turned out not to earn a return.

 

J. For purposes here, an
appropriate market level price for the remaining `lank heels" is
the $44.56, the value that GEL Tex has used in its calculation of
lost future benefits. As applied to the 847.97 barrels of "tank
heels" remaining as of January 18, 2017, this results in a value of
$37,786, rather than the value of $81,316 GEL Tex claims, and GEL
Tex's request for damages through October 2016 will be reduced by
the difference between those amounts.

 

k.
The same analysis does not apply, however, to the "tank heels" that
Lazarus has used in the Refinery. The Agreements contemplate that
Lazarus will reimburse GEL Tex for its COC when that crude is used
in Refinery operations without regard to the value of the refined
products produced from that crude oil. Lazarus chose to refine a
considerable portion of GEL Tex-sourced crude oil that Lazarus
previously referred to as "tank heels" and must bear the
consequences of that decision inasmuch as GEL Tex had no obligation
to hedge the value of this crude oil.

 

1. 
For these reasons, the Arbitrator finds and holds that GEL Tex is
entitled to an award
of $11,649,102 in damages arising from unpaid-for crude oil and
unpaid Performance Fees.

 

82.
GEL Tex's Claim for Damages Related to Crude Oil Loss and Products
Used for Fuel is Granted.

 

a. 

The record shows that from the very beginning of
the Refinery's operations the Refinery experienced significant
crude oil loss, as measured by the difference between the
Refinery's total crude oil throughput and the Refinery's production
of what Lazarus viewed as salable refined products. These losses
ranged from as little as 1-1'/2 % in the Refinery's early years to
approximately 3% in 2016. Exs. J-53, J-54.40

 

b. 

These
losses were well above those normally experienced in the industry,
which are in the 0.1% - 0.2% range, and were a matter of concern
and discussed with Lazarus, particularly early in the
project.

 

 

40Curiously,
those "losses" tended to increase in the periods when Lazarus was
under its greatest financial stress, i.e.,
2013 and 2016, and
decrease when economic conditions improved. The record reveals no
reason why increased crude loss and fuel use would only have
occurred at these times.

 

Page 33  AAA Case No. 02-16-0001-5548

 

 

 

c. 

The Supply Agreement speaks directly to the
responsibility for crude oil losses. Section 8.2 provides that GEL
Tex is not responsible for crude oil losses occurring once crude
oil is stored in the tanks. Section 7.1 obligates Lazarus to secure
and maintain in effect liability insurance covering the full market
value of any loss of crude oil. The record indicates that only up
to March 29, 2012, but not thereafter, did Lazarus have such
insurance in effect.41

 

d. 

Section
7.1 further provides that:

 

Notwithstanding
anything to the contrary set forth herein, Lazarus shall be liable
to and hold GEL, its agents and employees, its manager, and their
respective parents, subsidiaries and affiliates harmless from any
and all claims, demands, losses, costs and expenses for Crude Oil
loss, damage or contamination, of whatsoever kind and howsoever
arising.

 

Ex.
J-2 at 11. Thus, Lazarus is responsible to GEL Tex for the "full
market value" of any Crude Oil losses "howsoever
arising".

 

e. 

Van
Meter calculated that through the period ending October 31, 2016
(and taking into account the applicable limitations period) the
unaccounted for volumes totaled 394,000 barrels for which GEL Tex
was never compensated. Van Meter calculated the unaccounted for
volumes by subtracting the monthly volume of refined product
produced for sale from the monthly crude oil volumes entering the
refinery.

 

Van Meter further determined that the largest
portion of the unaccounted-for volumes involved refined products
— "light ends", a combination of propane, natural gas,
butane, propylene, and straight-run naphtha — that were not
sold to third parties but were used by Lazarus as fuel for Refinery
operations.42
Pricing the fuel gas volumes at the
selling price of liquefied petroleum gas ("LPG"), less the cost of
fractionation and transportation that would be required to market
the "light ends", and pricing the remaining portion of
unaccounted-for volumes as though they had been processed and sold
as refined product, Van Meter calculated that GEL Tex was entitled
to damages

 

 

41
Ex. R-1. Carroll
testified that he thought such insurance policies were and are in
effect but Lazarus produced no policy covering a period after March
29, 2012. Thus, there is no credible basis to believe that any such
policy existed or exists. Tr. 559. The fact that Lazarus made no
claims under such a policy, even when its losses increased, further
supports the conclusion that no such insurance policy existed or
exists.

 

42Lazarus
does not measure the refined products used as fuel. The division of
unaccounted-for volumes between lost volumes and fuel use volumes
is based on witness testimony from both Parties that the amount of
refined products used as fuel was equivalent to 1.9%-2.0% of crude
oil volumes delivered. Van Meter's calculation was based on the
1.9% figure, which provides a reasonable basis for his allocation
between unaccounted for and fuel use volumes.

 

Page 34  AAA Case No. 02-16-0001-5548

 

 

 

of
$3,222,904. All but $927,000 of the $3,222,904 is, according to Van
Meter, related to fuel use. Tr. 2166-2167.

 

g. 

Lerman argued that Van Meter's use of volumetric
figures is, as a matter of physics, improper and that the proper
way to measure any such loss is on a mass basis. In his view,
refineries do not, and cannot, operate in a way that achieves the
type of volumetric balance that Van Meter assumes. Without
providing any alternative to the Van Meter calculation,
e.g.,
one based on a mass balance, Lerman
asserted that there is no valid evidence of loss. Lerman also
challenged Van Meter's use of the adjusted LPG prices to value
volumes used for fuel and Van Meter's determination that it was
appropriate to value the unaccounted for, non-fuel use amounts on
the assumption that such amounts would have been processed and sold
at the sales prices applicable at the time of the
loss.

 

h. 

This
question of how to measure the unaccounted-for volumes must be
guided by what the Parties intended when they entered into the
Supply Agreement and how they have applied that contract language
during the course of the relationship. Although the Agreement
contains no useful definition of "loss", the Parties' practice
since the beginning of the contractual relationship has been to
calculate such unaccounted-for volumes by subtracting the volume of
the Refinery's salable products from the crude oil throughput
volumes. In every monthly summary since the project began
unaccounted-for volumes were calculated on this basis, generally
with input from Lazarus as to what the volume should be. Thus, it
appears the Parties understood that, at least for purposes of the
Parties' Agreements, the amount of unaccounted-for volumes was to
be calculated on this basis. Indeed, until this arbitration no
objection had been raised to this approach.

 

i. 

That
the Parties agreed this methodology is an acceptable method of
calculating the Refinery' unaccounted-for volumes is re-enforced by
the fact that in Lazarus' SEC filings, Lazarus calculated these
volumes in exactly the same manner. For example, in the Blue
Dolphin 10-K filed March 31, 2017 (after Lerman's objections to Van
Meter's calculations had been submitted), Blue Dolphin, after
setting out the Refinery's volumetric throughput and its volumetric
production, stated that:

 

The
difference between total refinery throughput (volume processed as
input) and total refinery production (volume processed as output)
represents refinery fuel use and loss.

 

Ex.
R-118S at 41.

 

j. 

Thus,
from both project accounting and investing public standpoints, the
references in Section 7.1 are, have been and should be understood
to mean Crude Loss should be calculated on a volumetric basis. The
record provides

 

Page 35  AAA Case No. 02-16-0001-5548

 

 

no
basis for a different understanding of that language at this time
or for this purpose.

 

k.
Sections 7.1 and 8.2 of the Supply Agreement, cited above, make
clear that Lazarus is obligated to make GEL Tex whole for any such
losses.

 

1.Lazarus
argues that it is inappropriate to charge for its use of "light
ends" as

 

fuel
for the Refinery's operations. Lazarus views these products as
"unmarketable" "waste" for which it has found a use. The record
indicates, however, that there is a market for these products but
Lazarus found the logistics involved complicated and potentially
expensive, and chose not to utilize these alternatives. Whatever
the difficulties involved, however, they would not justify Lazarus'
use of those products without paying for them.

 

m. 

Lazarus
apparently determined early on that, because of Lazarus' lack of
investment capital, these products were of more value to it as fuel
than as refined products available for sale. As a result Lazarus
essentially marketed the products to itself, paying nothing into
the Lockbox for them and thus not sharing their value with GEL Tex
as the Agreements require.

 

n. 

Lazarus
is responsible under the Agreements for the costs of operating the
Refinery and, when permitted by the Parties' Agreements, receives
Operations Payments to defray those costs. Thus, the cost of fuel
is a cost for which Lazarus is responsible. By not paying for the
"light ends", Lazarus shifted to GEL Tex costs for which Lazarus
was solely responsible.

 

o. 

Lazarus
claims that its use of these "light ends" without charge is
authorized by Section 3.4 of the Supply Agreement, which provides
that Lazarus "is not entitled to use" any of the GEL Tex-provided
crude oil "for any purpose other than for operation of the
Facility". This provision does not assist Lazarus. First, this
provision applies only to the use of crude oil, it does not speak
in any way to the use of refined products, which "light ends" are.
Second, fairly read, Section 3.4 is no more than an admonition that
Lazarus is not permitted to use the GEL Tex crude oil Lazarus
receives anywhere other than in the Refinery.

 

P.
As discussed in some detail above, the Agreements are clear that
the Refinery's refined products are to be marketed and sold, and
the profits shared, in the manner provided in the Agreements. They
do not say that Lazarus can retain the entire value of any refined
products for its own benefit.

 

q. 

Therefore,
Lazarus is not entitled to reduce its obligations for lost and
unaccounted for volumes by the amount of refined products it used
as fuel.

 

r. 

The
Parties disagree on how the fuel use and other unaccounted for
volumes should be valued for purposes of calculating GEL Tex's
damages. GEL Tex

 

Page 36  AAA Case No.
02-16-0001-5548

 

 

proposed
that fuel use volumes should be priced at the cost of LPG/propane
(reduced by the costs that would be incurred for transportation and
fractionation) and that the remaining unaccounted-for volumes
should be assumed to have been refined and sold at the same prices
as received for the Refinery's actual refined products. Using this
methodology, Van Meter calculated GEL Tex's past damages for
unaccounted amounts at $3,222,904.

 

s. 

After reviewing the post-hearing briefs the
Arbitrator requested additional presentations, based on the
existing record, regarding the possible impact of a decision not to
price the non-fuel gas portion of the unaccounted amount based on
prices received for the full slate of the Refinery's products. GEL
Tex asserted that, at the very least, all of the unaccounted for
volumes should be priced at the same LPG/propane cost applicable to
the refined products the Refinery uses as fuel. The result of this
approach is a $660,538 reduction in the requested damage amount, or
a total of $2,562,366.43

 

t. 

Lazarus'
response has been that it should not be charged for any of the
unaccounted for volumes and that there is no basis for using any
price GEL Tex supports.

 

u. 

The
Arbitrator finds and holds that Van Meter's use of the adjusted
LPG/propane pricing for fuel use and other unaccounted for volumes
is reasonable. In the case of the fuel use volumes, the LPG/propane
price (which takes into account the need to transport and
fractionate any such volumes) is a reliable proxy for the value to
Lazarus of the fuel it uses to run the Refinery. If these volumes
were not available to Lazarus it would have to secure alternatives
that would cost at least this much. Indeed, as GEL Tex has
explained, the LPG/propane price Van Meter used is actually a
conservative measure. Supp. Post-Hearing Br. at 6-7.

 

v. 

With
respect to the remaining unaccounted for volumes, LPG/propane
pricing is also appropriate. First, because Lazarus has chosen not
to meter the volumes used as fuel, these additional unaccounted for
volumes may in fact have been consumed as fuel in Refinery
operations. Indeed, Carroll testified that he did not believe the
Refinery lost any crude oil. Tr. 558-559. If so, that would mean
that the unaccounted-for volumes should be understood as being used
in the Refinery's operations.

 

w. 

Second,
under Section 5.3 of the Marketing Agreement, if an amount Lazarus
owes to GEL Tex is "unascertainable", GEL Tex has the discretion
under its

 

 

43Using
what was available in the record, GEL Tex also provided
calculations for alternative damage scenarios in which the only
award for unaccounted for volumes was based on fuel use volumes and
in which the unaccounted for amounts were priced at the price of an
"EP Mix" a blend of ethane and propane that is clearly a lower
grade product (primarily due to the ethane component) than the
unaccounted for volumes at issue here.

 

Page 37  AAA Case No. 02-16-0001-5548

 

 

 

authority
as custodian of the Lockbox and administrator of the Waterfall, to
pay itself "an estimated amount" so long as that estimate is
commercially reasonable. Ex. J-3 at 13-14. Pricing the non-fuel gas
portion of the unaccounted-for volumes based on the price of
LPG/propane is, under the circumstances here commercially
reasonable and fairly enforces Lazarus' obligation to insure or
reimburse GEL Tex for the fair market value of crude oil they could
have (and may have) been processed.

 

x.
For all of the above reasons, the Arbitrator finds and holds that
GEL Tex is entitled to recover $2,562,366 in damages for fuel use
and other unaccounted for volumes.

 

83. GEL Tex's Request for a
Determination that Lazarus Materially Breached and Repudiated the
Agreements is Granted.

 

a. 

GEL
Tex requests a specific determination that Lazarus materially
breached the Agreements. Although GEL Tex focuses on Lazarus'
announcement on November 4, 2016, that the Refinery would no longer
accept GEL Tex-source crude oil, there were many instances prior to
that act that would qualify as material breaches of the
Agreements.

 

b. 

Without
repeating all of them here, suffice it to say that Lazarus' refusal
to require purchasers to sign NOAs, its directives to purchasers to
pay Lazarus directly and not the Lockbox, and its refusal to
provide GEL Tex with timely information regarding Refinery
operations, both before and after the District Court's Temporary
Injunction, all qualify as material breaches of the Agreements that
Lazarus declined to remedy.

 

c. 

The November 4, 2016, announcement, however, was
an explicit repudiation of the Agreements' core premise,
i.e.,
that GEL Tex would be the Refinery's
sole supplier. Thus, it too was a material breach of those
Agreements.

 

d. 

For
these reasons, GEL Tex's request for a determination that Lazarus
materially breached and repudiated the Agreements by refusing in
November 2016 to accept additional crude oil deliveries from GEL
Tex is granted.

 

84. GEL Tex is Entitled to Recover
Costs Incurred to Divert Crude to Alternative Customers When Told
the Refinery Would No Longer Accept GEL Tex
Crude.

 

a. 

When
notified on November 4, 2016, that Lazarus would no longer accept
GEL Tex crude at the refinery, GEL Tex was required to divert to
other purchasers crude oil scheduled for delivery to the
Refinery.

 

b. 

GEL
Tex provided detailed information regarding the suppliers involved
and the resulting costs to sell the crude elsewhere, which
reflected costs totaling

 

Page 38  AAA Case No.
02-16-0001-5548

 

 

$132,928.81.
Lazarus does not challenge this calculation, asserting only that no
reimbursement is required because the Agreements had terminated in
April 2016. As discussed above at ¶79, the Agreements did not
terminate in April 2016 and remained in full force and effect in
November 2016 when Lazarus notified GEL Tex that Lazarus would no
longer accept crude oil deliveries from GEL Tex.

 

c.
Therefore, the Arbitrator finds and holds that GEL Tex is entitled
to an award of $132,928.81 as reimbursement of costs it incurred in
diverting crude oil to other purchasers in November
2016.

 

85.
GEL Tex is Entitled to Damages Reflecting the Loss of Future
Benefits it Would Have Received had Lazarus Performed Under the
Agreements.

 

a. 

As
explained previously, the Agreements, as amended by the October 24,
2013 Letter Agreement, provide that they will continue in effect
until termination on August 12, 2019. On November 4, 2016, however,
Lazarus repudiated the Agreements, refusing to accept delivery of
GEL Tex crude and in many instances refusing to pay for the crude
oil it had received or to share the proceeds of products resulting
from the refining of GEL Tex crude oil.

 

b. 

When
a party to an agreement breaches and repudiates that agreement, the
other party may recover the value of the expected performance of
the agreement in future or expectation damages. In determining the
loss or damage incurred, the goal is to put the injured party in
the economic position in which it would have been had the contract
been performed.

 

c. 

Van
Meter based his calculation of GEL Tex's future profits on what he
called the "benefit of the bargain". His analysis assumed that
absent Lazarus' repudiation of the Agreements the Parties would
have experienced financial gains through August 12, 2019, which
would have been shared in the manner provided in the
Agreements.

 

d. 

Based
on estimates regarding the amount of products to be sold, the
estimated prices for those products, and the average costs of
production and other activities, he calculated Gross Profits under
two scenarios. The first scenario assumed that the current
contractual arrangements with DLA would last only thorough April
2018 (the date the current DLA contract will expire); the second
assumed that the DLA relationship would extend through August 12,
2019, the termination date of the Agreements.

 

e. 

Based
on these estimates and assumptions, and after applying the
Waterfall, Van Meter concluded that GEL Tex was entitled to recover
$14,962,758 if the arrangements with the DLA lasted only until
April 2018, and $16,354,723 if they were maintained until the
termination date on August 12, 2019.

 

Page 39  AAA Case No.
02-16-0001-5548

 

 

 

f. 

On cross-examination, Van Meter acknowledged that
if GEL Tex was granted the Performance Fee amounts he recommended
in connection with the accumulated deficit damages, $750,000 should
be eliminated from both of these future damage calculations.
Because this amount was previously awarded, see ¶81 above, Van Meter's proposed future
damages calculations must be reduced accordingly, to $14,212,758
and $15,604,723, respectively.

 

g. 

In
addition, these amounts must be further reduced to reflect the
adjustment made above to the pricing of the non-fuel gas portion of
the unaccounted volumes, since Van Meter used a similar methodology
in his future damages calculation. As a result, the proposed future
damage calculations must each be reduced by $594,372, resulting in
revised damage calculations for the two scenarios of $13,618,386
and $15,010,351.

 

h. 

Lerman asserts that Van Meter should have
estimated the margins to be earned on the produced products using a
3:2:1 "crack spread",44
which Lerman states is sometimes used
by refineries as a benchmark. Van Meter chose to use instead
margins he projected would be earned on the actual slate of
products produced from the Refinery, which is a more accurate
measure and gives rise to no legitimate basis for
objection.

 

i. 

Leman
also objected to Van Meter's decision to average "crack spreads"
over a 22-month period (January 2015-October 2016) to predict the
future "crack spreads" used in his damage model, asserting that Van
Meter should have used a later historical period. Instead, Lerman
asserted that the resulting "crack spread" ($6.80 per barrel) was
unrealistic because of what Lerman claimed was a "structural
change" in the market based on his review of "crack spreads" in
portions of 2016. Lerman instead chose a "crack spread" of $3.83
based on GEL Tex's October 2016 Gross Profit calculation.
Lerman’s overall opinion, which was based in part on his
previously rejected fuel gas position, was that GEL Tex is entitled
to no more than $5,100,000 in future damages.

 

J. Van
Meter explained that he chose the longer period because of the
volatility of prices and costs associated with refinery operations
and because he was forecasting for a three-year period during which
prices and costs could be expected to vary. Van Meter's use of this
approach appears to better take into account the variations in the
market that can be expected over the lengthy period involved and is
therefore more likely to capture the damage that GEL Tex will
suffer as a result of Lazarus' breach and repudiation of the
Agreements than the snap-shot approach Lerman used. Therefore, the
Arbitrator finds Van Meter's approach fully supported and
reasonable, and therefore approves it.

 

 

44The
"crack spread" is the difference between the price of crude oil and
the prices of refined products extracted from
it.

 

Page 40  AAA Case No.
02-16-0001-5548

 

 

k.
As noted, Van Meter has offered alternative calculations of future
lost profits based on the assumption that LEFT will continue to
secure a contract with the DLA beginning after April 2018 that
would result in substantial profits. Although there are reasons to
believe that LEH will be able to secure a further contract with
DLA, this assumption is speculative, particularly given the
vagaries of the governmental procurement process and the financial
pressures under which the Refinery is operating. Therefore, the
Arbitrator finds that GEL Tex has not adequately supported the
higher of Van Meter's damage calculations.

 

1.For
all these reasons, the Arbitrator finds and holds that GEL Tex is
entitled to

an
award of $13,618,386 for the loss of future benefits suffered as a
result of Lazarus' repudiation of the Agreements in November 2016
when it declined to accept any further GEL Tex deliveries of crude
oil at the Refinery.

 

86. Lazarus Request for Dissolution
of the District Court's Temporary Injunction is
Denied.

 

a. 

As
noted previously, the District Court entered a Temporary Injunction
on June 20, 2016, requiring that Lazarus comply with its
contractual obligations regarding the depositing of money received
for the sale of Nixon Product into the Lockbox and that LEH deposit
into the District Court registry the differential LEH was earning
on the DLA contract, approximately 12.5 cents per
barrel.

 

b. 

Lazarus requests that the Arbitrator dissolve the
Temporary Injunction and relieve Lazarus of its obligations
thereunder. Apparently Lazarus would have the Arbitrator in the
process excuse as well Lazarus' (and LEH' s) failure to comply with
the Temporary Injunction. Lazarus has not provided any authority
suggesting that the Arbitrator, under the circumstances here, has
the authority to overturn or modify in any respect a final judicial
order, particularly one directed in part at an entity is not a
party to this arbitration.45

 

c. 

Further,
although Lazarus asserts that the Temporary Injunction was
wrongfully entered, support for this claim is hard to find. In
Lazarus' Pre-Hearing Brief, it provides a summary of its overall
view of the process leading to the Temporary Injunction, states
that the District Court "erroneously" and "improvidently" granted
injunctive relief and cites authority providing that a party that
wrongfully obtains injunctive relief against another is liable for
damages caused by the issuance of the injunction. Lazarus does not
explain how in its view the District Court erred or what damages it
may have suffered

 

 

45The
Arbitrator's decision below that GEL Tex is entitled to have the
funds currently in the registry delivered to the Lockbox, addresses
an issue — to whom the funds in the registry should be
disbursed — left open by the Temporary Injunction, and is in
no way inconsistent with it.

 

Page 41  AAA Case No. 02-16-0001-5548

 

 

as
a result. It simply asserts that GEL Tex subsequently used to the
Temporary Injunction to "harass and injure Lazarus".

 

d. 

The
issue was not addressed during the hearing. Lazarus provides no
additional substantive information about this claim, with the only
mention being a request for a finding that "the injunction was
wrongly issued and that the funds in the court registry should be
released to Lazarus". Lazarus' Post-Hearing Brief at 75. Lazarus'
Post-Hearing Response Brief contains no argument or statement on
the issue at all.

 

e. 

For
these reasons, the Arbitrator finds and holds that Lazarus has
provided no evidence or legal argument warranting an attempted
dissolution of the District Court's Temporary Injunction and denies
Lazarus' request for such an award.

 

87.
GEL Tex's Request for a Determination that Lazarus' Sale of Jet
Fuel to LEH was a "Fraudulent Transfer" Within the Meaning of TUFTA
is Granted.

 

a. 

GEL
Tex seeks a determination that the Lazarus/LEH Sales Agreement
violated TUFTA and that the funds in the District Court registry
are proceeds of a fraudulent transfer of jet fuel from Lazarus to
LEIL In the event such findings are made, GEL Tex requests that the
Arbitrator approve issuance of a writ of attachment directing the
District Court to deposit the funds currently in the registry into
the Lockbox -- $2,143,460.37 -- in partial satisfaction of Lazarus'
obligations to GEL Tex. For the reasons set out below, the
Arbitrator grants this request.

 

b. 

TUFTA
provides, in part, that

 

(a)
A transfer made ... by a debtor is fraudulent as to a creditor,
whether the creditor's claim arose before or within a reasonable
time after the transfer was made ... if the debtor made the
transfer ...

 

(1) 

with
the actual intent to hinder, delay, or defraud any creditor of the
debtor; or

 

(2) 

without
receiving reasonably equivalent value in exchange for the transfer
.... and the debtor:

 

(B)
intended to incur, or believed or reasonably should have believed
that the debtor would incur, debts beyond the debtor's ability to
pay as they became due.

 

TEX.
BUS. & COM. CODE ANN. §§24.005(a)(1),
24.005(a)(2)(B).

 

Page 42  AAA Case No.
02-16-0001-5548

 

 

 

c. 

GEL
Tex has the burden to demonstrate that, in entering into the
Lazarus/LEH Sales Agreement Lazarus effected a fraudulent transfer
within the meaning of TUFTA and that GEL Tex is entitled to the
remedies available in the case of such transfers.

 

d. 

No
dispute exists as to GEL Tex's status as a creditor of Lazarus. and
that Lazarus is, and was at the time of the Lazarus/LEH Sales
Agreement, GEL Tex's debtor.

 

e. 

Whether
the transfer of jet fuel pursuant to the Lazarus/LEH Sales
Agreement was made with the "actual intent to hinder, delay,
or defraud" GEL Tex is a fact question, as are the questions
whether Lazarus received reasonably equivalent value for what it
transferred and whether Lazarus knew or should have known that
Lazarus would incur debts beyond its ability to pay
them.46
Circumstantial proof may be used to
prove fraudulent intent because direct proof is often
unavailable.

 

f. 

Facts and circumstances that may be considered in
making an "actual intent ... to defraud" determination include,
among others, transfer to an insider, a lawsuit filed or threatened
by the creditor against the debtor prior to the transfer,
concealment of the transfer, whether the consideration the debtor
received was reasonably equivalent to the value of the asset
transferred, and the debtor's insolvency at the time of the
transfer or shortly afterwards. The presence of several of these
factors is sufficient to permit the Arbitrator to reasonably infer
fraudulent intent. Ho v. MacArthur Ranch
LLC, 395 S.W.3d, 328-29 (Tex.
App. — Dallas 2013, no pet.).

 

g. 

The
transfer that allowed LEH to secure all of the DLA contract
benefits was unquestionably an insider transaction. LEH is Lazarus'
affiliate. Carroll is effectively the majority owner of Lazarus and
LEH and as CEO of both controls their actions. Thus, Lazarus and
LEH were not negotiating at arms length in arriving at the
Lazarus/LEH Sales Agreement, which Carroll signed on behalf of LEH
and undoubtedly directed Byrd, the CFO of both Lazarus and LEH, to
sign for Lazarus. That Carroll knew this arrangement violated the
Agreements is equally clear. Although Carroll had the ability to
assure Lazarus' compliance with the Agreements, he intentionally
did not do so.

 

h. 

That
Lazarus sought to conceal the true nature of the Lazarus/LEH
arrangement is also clear. Although the Parties have exchanged
arguments regarding whether GEL Tex should have known about the
structure of the sale, the fact that GEL Tex might have been able
to figure out that LEH would be a necessary participant in the DLA
arrangement, is not determinative. What is determinative is the
lack of any evidence indicating that GEL Tex knew or should have
known that Lazarus would structure the arrangement in
a

 

 

46
GEL Tex has not
sought to show that Lazarus' debts were greater than the fair value
of its assets. Instead it has focused on what it sees as Lazarus'
inability to pay its debts as they came due.

 

Page 43  AAA Case No. 02-16-0001-5548

 

 

way
that did not allow GEL Tex to share in the large price premium that
the DLA paid to LEH and did not require the deposit of any proceeds
of the sale into the Lockbox. Indeed, it is reasonable to conclude
that Lazarus knew full well that GEL Tex would object to any such
arrangement and kept entirely to itself the fact that LEH intended
to retain at least the vast majority proceeds of the DLA
arrangement. As a result, Lazarus' true intentions were
purposefully hidden from GEL Tex until it was in Lazarus' best
interest to reveal them.

 

i.Lazarus
entered into the Lazarus/LEH Sales Agreement to sell jet fuel to
LETI

without
satisfying the Agreements' very clear and specific requirements
that, prior to any sale: (i) GEL Tex must have reviewed and
approved the credit of the proposed purchaser, (ii) Lazarus must
have prepared a contract for such sale specifying that moneys paid
for the purchase of the product are to be deposited into the
Lockbox by the purchaser or by Lazarus, and (iii) Lazarus must have
secured from the proposed purchaser a NOA requiring deposit of all
payments into the Lockbox and placing the proposed purchaser and
GEL Tex in contractual privity. In addition, even though GEL Tex
was specifically authorized to review in advance any third-party or
affiliate transaction that impacted the Agreements, GEL Tex was not
advised of the Lazarus/LEH Sales Agreement until two weeks after it
was executed, underscoring Lazarus' disregard for its obligation to
deal with GEL Tex in good faith.

 

J.
The record also suggests that the only reason that Lazarus revealed
the existence of the Lazarus/LEH Sales Agreement (and the DLA
award) when it did was to support its assertion, following GEL
Tex's reduction of crude oil deliveries, that the Refinery needed
more crude oil. Otherwise, there is little doubt that Lazarus would
have kept the arrangement secret even longer.

 

k.
There is no evidence that Lazarus received anything of real value
in return for transferring millions of dollars' worth of jet fuel
to an affiliated entity that would be retaining almost all of the
DLA contract benefits. While the Lazarus/LEH Sales Agreement
theoretically promised Lazarus would receive some benefits from the
arrangement, the record indicates that LEH paid Lazarus much less
than was required under their agreement and even those funds were
not paid into the Lockbox. The clear intention was that whatever
the contract provided, within the corporate group LEH would retain
virtually all of the DLA contract proceeds.

 

1.
Even when Lazarus and LEH were instructed by the District Court to
fulfill the terms of the Agreements, Lazarus and LEH declined to do
so. When these facts are added to absence of any contractual
requirement that LEH pay what it owed to Lazarus into the Lockbox
compels the conclusion that the purported transaction was a mirage,
designed to avoid the requirements of Agreements that quite clearly
provide for a sharing of revenues received in connection with the
sale of the Refinery's products, and thus fraudulently to deprive
GEL Tex of moneys to which it was entitled.

 

Page 44  AAA Case No. 02-16-0001-5548

 

 

m. 

Lazarus
could have resolved the situation at any time after the Lazarus/LEH
Sales Agreement was signed simply by agreeing to adhere to its
obligations under the Agreements. Yet Lazarus declined, even after
GEL Tex sued Lazarus and LEH, more than two weeks before actual
deliveries to DLA began. This behavior re-enforces the notion that
Lazarus willfully charted, and adhered to, a course intended to
siphon away from Lazarus virtually all the benefits of the DLA
contract, even when doing so had severe economic consequences for
Lazarus and materially impaired GEL Tex's contractual
rights.

 

n. 

Lazarus
alleges that GEL Tex always knew about LEH's involvement in the
sale to DLA, made no immediate objection to it, has no complaint
because the Lazarus/LEH sales agreement establishes a price well
above the index price, and any GEL Tex insistence on securing more
of the DLA sale proceeds would have resulted in LEH losing the DLA
contract. None of these are valid objections and do not in any way
excuse or explain away what was unquestionably an attempt by the
management of Lazarus and LEH to furtively enter into a contractual
arrangement intentionally designed to deny GEL Tex its fair share
of the DLA sales proceeds.

 

o. 

Although GEL Tex may have known that LEH would
have to be involved in any DLA transaction (because such contracts
could only be awarded to HUBZone-qualified entities), as noted
above there is no evidence suggesting GEL Tex knew or should have
known that Lazarus intended to allow LEH to keep all of the money
from the DLA transaction, or in particular the amounts above index,
for itself.47

 

P. The record does not support in any respect the
suggestion that GEL Tex failed to promptly object to LEH's
retention of funds from the DLA transaction. See GEL Tex Post-Hearing Brief at 23 (listing GEL
Tex's prompt objections to the transaction).

 

q.
The pricing of the sale by Lazarus to LEH (2 1/2 cents above index)
is only superficially helpful to Lazarus. The price was not one
established through arms-length negotiations. Moreover, the price
chosen represents only a small portion of the proceeds from the
sale to DLA, with the additional funds to be retained by LEH.
Perhaps most importantly there is no evidence that LEH ever
intended to pay Lazarus the contract price, or that Lazarus
intended to satisfy its obligations under the Agreements, further
supporting the notion that

 

 

47Lazarus
cites its email of December 28, 2015, referring to a need to
establish a transfer price for a possible DLA contract. This does
not suggest in any way that GEL Tex was agreeing, or would agree,
to whatever transfer price arrangement Lazarus may have had in mind
at the time. No evidence exists that Lazarus raised the issue at
any time between that email and its agreement with LEH. Tr.
514-515.

 

Page 45  AAA Case No.
02-16-0001-5548

 

 

the
Lazarus/LEH Sales Agreement was a blatant attempt to deprive GEL
Tex of moneys in which it had a right to share.

 

r. 

Lazarus' assertion that sharing the DLA contract
proceeds with GEL Tex would have caused LEH to lose the DLA
contract is unsupported. The SBA regulations regarding the HUBZone
program make no reference to any such prohibition. The only
requirements relevant here are that the applicant be
creditworthy48
and have 35% of its employees in the
underdeveloped area.49
Nothing in those regulations or in the
record suggests that the ultimate destination of the money paid,
other than the amount flowing to the local employees, was of any
concern to SBA. Indeed, Carroll testified that there might have
been some ability to shift more of the proceeds to GEL Tex and
provided no evidence that there was any bar to sharing the proceeds
with GEL Tex in the manner contemplated by the
Agreements.50

 

s. 

Lazarus
knew when it entered into the Lazarus/LEH Sales Agreement that
having the DLA contract proceeds go to LEH, rather than into the
Lockbox, would mean that it would not be able to pay its existing
debts much less those arising in the future. At the time, the
accumulated deficit in the Lockbox was over $4.0 million, and
growing, as inventory of jet fuel and diesel continued to build. In
addition, because there were no Gross Profits, it was obvious that
if Lazarus complied with the Agreements, many months would pass
before GEL Tex would be able to make Lazarus' mortgage payments to
Sovereign, make any Operations' Payments to Lazarus, or distribute
any Gross Profits. Lazarus knew that GEL Tex had reduced crude oil
deliveries to the Refinery, decreasing Lazarus' ability to generate
additional revenues in the near future, and potentially increasing
the accumulated deficit.

 

t. 

With the proceeds of the DLA sale diverted to LEH
(effectively in their entirety),51
Lazarus was absolutely certain to be
incurring debts beyond its ability to pay as they became due. Blue
Dolphin's 10-Q covering the second quarter of 2016, the period
during which deliveries to the Refinery were

 

 

48LEH had
substantial difficulty in establishing its creditworthiness to the
satisfaction of the SBA. Exh. 144.

 

49 LEH could
satisfy this requirement only by demonstrating that all of the
Refinery's employees were LEH employees.

 

50 Perhaps if
Lazarus and LEH had tried to negotiate a price sharing arrangement
that took into account the costs LEH incurred in qualifying for
HUBZone status and securing the DLA contract, they and GEL Tex
might have come to a mutually agreeable result that diverged from
the literal requirements of the Agreements revenue sharing
provisions. By deciding to try to keep virtually all the proceeds
within LEH, however, Lazarus' management forfeited that
opportunity.

 

51 As noted
previously, it seems clear that there was never any intention to
have LEH pay either the Lockbox or Lazarus a significant part of
the DLA proceeds. Thus, the fact that proceeds would be generated
from the DLA sale did not mean that Lazarus' economic situation
would improve in any respect.

 

Page 46  AAA Case No.
02-16-0001-5548

 

 

 

reduced, the Lazarus/LEH Sales Agreement was
signed, GEL Tex filed suit against Lazarus, and LEH deliveries to
DLA began, and indicates the financial straits in which Lazarus
found itself. Ex. R-118Q.52

 

u. At the end of that quarter Blue Dolphin
reported a working capital deficit of $40.7 million with long-term
capital taken into account, and of $11 million if long-term debt
was disregarded.53
The 10-Q also reveals that Blue
Dolphin and its affiliates were in violation of the debt service
coverage ratios, the current ratios and the debt to net worth
ratios established in the financial covenants of approximately
$35.0 million of loans secured by the Refinery's assets. If the
lender, Sovereign, had declared this amount immediately due and
payable, as was its right, Blue Dolphin would not have been able to
pay that amount and Sovereign could have seized the Refinery's
assets. Ex. R-118Q, at 20-23, 50.

 

The
10-Q also indicates that Blue Dolphin's (and thus Lazarus') future
viability was dependent on maintaining the Agreements, regarding
which GEL Tex had filed suit and with which Lazarus had no
intention of complying, as evidenced by the Lazarus/LEH Sales
Agreement and the numerous payments for GEL Tex- sourced crude oil
that Lazarus had diverted from the Lockbox.

 

w. 

An
additional item not reflected in the 10-Q is Lazarus and LEH's
inability, while attempting to forestall issuance of the Temporary
Injunction, to find a bank that would provide a $4.0 million letter
of credit payable to GEL Tex in the event Lazarus' failure to
perform continued.

 

x. 

The
conclusion that Lazarus was insolvent at this time is further
supported by the Shell transaction, under which Lazarus acquired
crude oil from Shell on credit and then allowed Shell to take
product that had been refined from GEL Tex crude oil from the
Refinery in payment for the crude oil debt that Lazarus owed. The
only credible explanation for Lazarus allowing this to happen is
that Lazarus was unable to pay its debt to Shell when it came due
and simply converted to its own benefit refined product in which
GEL Tex had a legal and financial interest that Lazarus was
contractually bound to protect.

 

y. 

When
presented with this information regarding Lazarus' refusal to
perform its obligations under the Agreements, the District Court,
in issuing the Temporary Injunction, found that Lazarus would
probably not be able to pay damages for Lazarus' breaches of
contract. Lazarus offers no reason to

 

52As
noted above, Lazarus
accounted for 99% of Blue Dolphin's operations.

 

53 While
these numbers are based on the book values, and not market values
of Blue Dolphin's assets, in the event of a forced sale, any
appraised values are likely to be significantly above the
achievable sales price of such assets.

 

Page 47  AAA Case No. 02-16-0001-5548

 

 

 

reconsider
this finding. In fact, Lazarus has made no attempt to demonstrate
that Lazarus was solvent during this period, simply asserting that
GEL Tex could not prove insolvency.

 

z.
Finally, the insolvency of Lazarus at this time is underscored by
the fact that, facing potential judicial contempt proceedings,
Lazarus simply refused to comply with the Temporary Injunction,
preferring instead to avoid satisfying these legally required
obligations (paying into the Lockbox) in order to have access to
cash to which it was not entitled. This wanton disregard for a
court order that it declined to challenge, and simply chose to
ignore in large part, can only be explained as an act of a company
and organization in dire financial straits that could not continue
to operate without converting to its own use money it was obligated
to pay to and share with others.

 

aa.
The Arbitrator therefore finds and holds that: (i) when the
Lazarus/LEH Sales Agreement was executed, GEL Tex was a creditor of
Lazarus and Lazarus was a debtor of GEL Tex; (ii) Lazarus and LEH
are affiliated companies not negotiating at arms length; (iii)
Lazarus transferred jet fuel to LEH with the intent to defraud GEL
Tex and deprive it of funds to which it was entitled; (iv) the jet
fuel was transferred to LEH in exchange for a worthless (and never
intended to be fully performed) promise by LEH to pay Lazarus; and
(v) Lazarus entered into the Lazarus/LEH Sales Agreement at a time
when it was insolvent and was only able to continue operating
because it converted to its own use and the use of its affiliate
LEH, moneys due to GEL Tex and the Lockbox. Therefore, the
Arbitrator finds and holds that the Lazarus/LEH Sales Agreement was
a "fraudulent transfer" within the meaning of TUFTA.

 

88. GEL Tex's Request for an Order
of Attachment and Execution with Regard to the Funds Currently in
the Registry of the District Court is Granted.

 

a. 

GEL
Tex requests an Order of Attachment and Execution regarding the
Funds currently in the District Court's registry,
requiring that the Clerk deposit the funds into the Lockbox in
partial satisfaction of the amounts owed GEL
Tex.54

 

b. 

Based
on the analysis and holding in the prior section, the Arbitrator
finds and holds that the funds currently in the registry of the
District Court are proceeds of the fraudulent transfer of jet fuel
from Lazarus to LEH.

 

c. 

The
Arbitration Agreement provides the Arbitrator authority to take
actions equivalent to those that could be taken by a District Judge
under the Texas Rules of Civil Procedure. Ex. J-4 at 5,
§4.5(b). In addition, the AAA Commercial Rules under which
this arbitration is being conducted provide in

 

 

54This
amount does not appear to be all the "differential" that the
District Court required that LEH deposit into the registry. At some
point, LEH apparently ceased complying with the Temporary
Injunction in this respect.

 

Page 48  AAA Case No. 02-16-0001-5548

 

 

 

Rule
47 that the Arbitrator may take such action as he deems just and
equitable and within the scope of the agreement of the
Parties.

 

d. As discussed in the prior section of this Final
Award, the moneys LEH received from the DLA transaction and
deposited in the District Court registry were moneys that should
have gone into the Lockbox in the first place. Therefore, the
Arbitrator finds and holds that the requested relief is reasonable
and fully supported by the record. An executed copy of an Order for
Issuance of a Writ of Attachment is attached as Appendix A to this
Final. Award.55

 

89. Lazarus' Request for an Order
Interpreting the Term "Nixon Product" as Applicable only to Refined
Products Produced from GEL Tex-Sourced Crude Oil is Denied; GEL
Tex's Request for a Determination that the Term "Nixon Product"
Applies to all Refined Products Produced at the Refinery During the
Term of the Agreements is Granted in Part.

 

a. 

Both
Parties request rulings regarding the NOAs. Lazarus requests that
GEL Tex be required to eliminate from the NOAs the requirement that
the proceeds of all sales of "Nixon Product" be deposited into the
Lockbox. Lazarus argues that "Nixon Product" was only intended to
refer to refined products made from GEL Tex-sourced crude oil and
should no longer control the disposition of proceeds from the
Refinery's sale of products now that the crude oil being refined is
not provided by GEL Tex.

 

b. 

According
to Lazarus, the continued existence of the NOAs impairs Lazarus'
ability to conduct its business because certain customers,
incorrectly in Lazarus' view, understand the term "Nixon Product"
to apply to all Refinery products whether or not the crude oil from
which the products are derived come from GEL Tex sourced crude oil.
Lazarus asserts that GEL Tex's refusal to amend the NOAs reflects a
lack of good faith and breaches the Agreements and requests that
GEL Tex be required to amend the NOAs to eliminate the requirement
for payment to the Lockbox.

 

c. 

GEL Tex seeks a declaratory order that the
term -Nixon
Product" applies to all refined products made at the Refinery
whether or not produced from GEL Tex-sourced crude
oil.

 

d. 

In
this regard, GEL Tex points to Section 1.2 of the Supply Agreement,
which defines "Nixon Product" as "the Crude Oil and other
Hydrocarbons refined and processed by Lazarus as the Facility
pursuant to the terms of this Agreement". In the same section of
the Supply Agreement, "Crude Oil" is defined as "all crude oil,
condensate and other liquid hydrocarbon substances". Neither
reference is specifically limited to crude oil provided by GEL
Tex.

 

 

55
Lazarus has raised no
objection to the form of the Order.

 

Page 49  AAA Case No. 02-16-0001-5548

 

 

 

e. 

Although
there is some superficial logic to Lazarus' request, that request
is disingenuous. The Agreements, including the NOA requirement, are
predicated on the assumption that the Parties would adhere to their
obligations and Lazarus agreed not to terminate the Agreements. The
situation of which Lazarus now complains is thus entirely of its
own making, caused by its breaches of the Agreements and its
decision no longer to accept GEL Tex crude oil.

 

f. 

Having
created this situation, Lazarus has no valid complaint about the
NOAs, particularly since it does and will owe GEL Tex money due as
a result of Lazarus' non-compliance with the Agreements. Indeed, to
the extent any money is actually paid to the Lockbox because of a
binding NOA, Lazarus' debts to GEL Tex would be reduced. Little, if
any, evidence exists that the existence of the NOAs, which Lazarus
itself has often ignored, has truly had an adverse impact on
Lazarus' business, suggesting that in fact it has not.

 

g. 

The
Agreements are currently scheduled to remain in effect through
August 12, 2019. Lazarus has offered no reason why the NOAs should
not continue in force until that date and/or until Lazarus' debts
to GEL Tex are fully discharged, whichever occurs earliest.
Therefore, the Arbitrator finds and holds that Lazarus has not
demonstrated that it is either entitled to or needs in any way a
modification of the NOAs.

 

h. 

For
essentially the same reasons, GEL Tex's request for declaratory
order is granted to the extent described below. The definitions
cited above literally provide that the term "Nixon Crude" applies
to all refined products produced at the Refinery, without regard to
the source of the crude oil processed. Lazarus' assertion that the
words should be interpreted otherwise is only remotely plausible
because Lazarus refused to abide by other provisions in the
Agreements.

 

As long as the Agreements are in effect, "Nixon
Product" should be understood to mean what the Parties meant when
Agreements were entered into, i.e., "all Crude Oil and other Hydrocarbons refined and
processed by Lazarus at the Facility pursuant to the terms of this
Agreement". The "Agreement" in question is the Marketing Agreement
(not the Supply Agreement). Because that Agreement was intended to
cover all refined products produced at the Refinery for the term of
the Agreement, all refined products produced by the Refinery are to
be considered "Nixon Product" for the term of the Marketing
Agreement, which remains in force. Any other interpretation would
result in rewarding Lazarus for a material breach of that
Agreement.

 

J.
Following issuance of this Final Award, Lazarus will have an
obligation to pay to GEL Tex the amounts specified herein. Once
that is done, Lazarus will

 

Page 50  AAA Case No.
02-16-0001-5548

 

 

 

have satisfied the obligations it undertook in
executing the Agreements. In the event that Lazarus satisfies its
obligations under this Final Award prior to August 12, 2019, the
Agreements and the NOAs should be considered terminated and of no
further effect. Otherwise, the Agreements and the NOAs shall be
binding on Lazarus until the Agreements terminate by their terms on
August 12, 2019.56

 

90.
Attorneys' Fees and Related Costs

 

a. 

The
Arbitrator is authorized by Section 4.6 of the Arbitration
Agreement to award "costs and expenses, including the fees of the"
Arbitrator, "in such proportion as the" Arbitrator shall determine.
Attorneys' fees may be awarded as allowed by law. This
authorization is affirmed by Section 4.5(b)'s reference to such
fees and Section 4.7's statement that the Parties may claim against
each other for "reasonable and necessary attorneys' fees, expenses
and costs" related to any authorized actions in the District Court.
Each Party has submitted detailed requests for recovery of
attorneys' fees and related costs, appropriately supported by
affidavits and detailed billing information.

 

b. 

Lazarus
seeks recovery of attorneys' fees and costs for the period from
April 2016, when its attorneys were retained to represent Lazarus
in connection with its dispute with GEL Tex through June 30, 2017,
totaling $1,558,581.00, and an estimated $20,350 to $40,700 in
post-award fees (assuming proceedings only in the District Court),
for a total on the high side of $1,599,281.00.

 

c. 

GEL
Tex, which was represented by two law firms in connection with this
dispute, seeks recovery of attorneys' fees and expenses for the
period April 2016 through June 30, 2017 totaling $2,955,446.30 and
$117,852.97, respectively. GEL Tex estimates that it will incur an
additional $20,900.00 in attorneys' fees through the end of the
arbitration and $136,732.50 for post-award activities, including
defending the award in the District Court, the Court of Civil
Appeals and the Texas Supreme Court. These amounts total
$3,230,932.77.

 

d. 

Neither Party substantively objected to the
other's request. Lazarus noted that GEL Tex's request was
significantly larger than Lazarus' and GEL Tex noted that it could
not really comment on Lazarus' request because its attorneys'
billing statements were submitted to the Arbitrator for
in camera
review only. Neither Party
objected to the time frames for which the requested fees and costs
are requested or to the post-award attorneys' fees
requests.

 

 

561n
GEL Tex's Supplemental Post-Hearing Brief, GEL Tex suggested that
it should have the discretion to extend the NOAs after the
termination date in the event that Lazarus had not fully satisfied
it obligations to GEL Tex by that date. The Arbitrator denies that
request as not supported by the Agreements.

 

Page 51  AAA Case No. 02-16-0001-5548

 

 

e. 

The
Arbitrator finds reasonable the amounts requested by both Parties.
Given the complexity of GEL Tex's claims, the differences between
the amounts charged by the Parties' attorneys is understandable and
reasonable.

 

f. 

As
explained above, Lazarus has not prevailed on any of its claims in
this proceeding and has only succeeded in reducing GEL Tex's
counterclaims in relatively small ways. Therefore, the Arbitrator
concludes that Lazarus is not entitled to recover any of its
attorneys' fees.

 

g. 

In
contrast, GEL Tex has prevailed on all its counter-claims, defeated
Lazarus' claims and been awarded nearly all of the amounts
requested. The Arbitrator finds and holds that GEL Tex is entitled
to recover all of its past and future attorneys' fees and related
expenses in the amount of $3,230,932.77.

 

91. Interest

 

a. 

Neither
Party has specifically requested an award of pre-award interest on
any of the sums involved, and the Arbitrator will not award
any.

 

b. 

With
respect to post-award interest, Texas law provides that in a breach
of contract case in which the contract does not specify the
interest rate, post-award and post-judgment interest rates are the
same and are established by §304.003 of the Texas Financial
Code.

 

c. 

Section
304.003 provides that interest shall be based on the Federal
Reserve Bank prime rate, but shall be no less than 5% and no more
than 15%. Pursuant to that provision, the Texas Office of Consumer
Credit Commissioner has set at 5% the annual rate to be used at
this time. Simple interest at that rate is what the Arbitrator
hereby approves with respect to all amounts awarded in this
arbitration for to both post-award and post-judgment periods.
Interest at this rate shall run from and after the date of this
Final Award until the amounts awarded (with interest) are fully
paid.

 

92. Administrative Fees, Expenses and Arbitrator
Compensation

 

a. 

The
Arbitrator is authorized to apportion between the Parties the AAA's
administrative fees, the AAA and Arbitrator expenses, and the
Arbitrator's compensation.

 

b. 

The
administrative fees and expenses of the American Arbitration
Association totaling $39,340.32 and the compensation and expenses
of the Arbitrator totaling $120,415.00 shall be borne by
Lazarus.

 

Page 52  AAA Case No.
02-16-0001-5548

 

 

 

c.
Therefore, the Arbitrator finds and holds that GEL Tex shall be
awarded and Lazarus shall reimburse GEL Tex the sum of $84,847.82
representing that portion of said fees and expenses in excess of
the apportioned costs previously incurred by GEL Tex.

 

AWARD

 

For
the reasons set forth above, the Arbitrator AWARDS as
follows:

 

1. 

Lazarus'
claim against GEL Tex for damages arising from GEL Tex's inclusion
of a 50-cent per barrel charge in the COC billed to Lazarus is
denied.

 

2. 

Lazarus'
claim against GEL Tex for damages resulting during the period
April-June 2012 when the Refinery's crude oil and products were not
hedged is denied.

 

3. 

Lazarus'
claim against GEL Tex for damages resulting from GEL Tex's refusal
to pay tank lease fees for storage of product at Ingleside is
denied.

 

4. 

Lazarus'
request for a determination that GEL Tex materially breached the
Agreements by reducing deliveries to the Refinery in April-June
2016 is denied.

 

5. 

Lazarus'
request for a determination that the Agreements terminated in April
2016, or at the very latest, in November 2016, is
denied.

 

6. 

Lazarus'
request for an order directing GEL Tex to remove all residual
material from Refinery Tanks 51, 53 and 54 is denied.

 

7. 

GEL
Tex's claim against Lazarus for damages resulting from Lazarus'
failure to pay for delivered crude oil and Performance Fees due GEL
Tex under the Agreements is granted in the amount of
$11,649,102.

 

8. 

GEL
Tex's claim against Lazarus for damages resulting from Lazarus'
failure to pay for crude oil loss and for products used for fuel is
granted in the amount of $2,562,366.

 

9. 

GEL
Tex claim against Lazarus for costs incurred when GEL Tex was
required to divert crude oil to alternative customers when Lazarus
declared the Refinery would no longer accept GEL Tex crude oil is
granted in the amount of $132,928.81.

 

10. 

GEL
Tex's request for a determination that Lazarus materially breached
and repudiated the Agreements by refusing in November 2016 to
accept additional crude oil deliveries from GEL Tex is
granted.

 

11. 

GEL
Tex claim against Lazarus for expectation damages measured by the
benefits GEL Tex would have received had Lazarus performed for the
full term of the Agreements is granted in the amount of
$13,618,386.

 

Page 53  AAA Case No. 02-16-0001-5548

 

 

12. 

Lazarus'
request that the District Court's Temporary Injunction be dissolved
is denied.

 

13. 

GEL Tex's request for a determination that
Lazarus' sale of jet fuel to
LEH was a "fraudulent transfer" as that term is used in the TUFTA
is granted.

 

14. 

GEL
Tex's request for an order of attachment and execution with respect
to the funds currently in the registry of the District Court of
Harris County, Texas, requiring that the Clerk deposit the funds
into the Lockbox in partial satisfaction of LEH's debt to Lazarus
is granted. A copy of such order is attached to this Final Award as
Appendix A.

 

15. 

Lazarus'
request for an order interpreting the term "Nixon Product" as
applicable only to refined products produced from GEL Tex-sourced
crude oil is denied.

 

16. 

Lazarus'
request for an order requiring GEL Tex to eliminate from existing
NOAs the requirement that all proceeds from the sale of "Nixon
Product" be deposited into the Lockbox is denied.

 

17. 

GEL
Tex's request for a determination that the term "Nixon Product"
applies to all refined products produced at the Refinery during the
term of the Agreements is granted.

 

18. 

The
Agreements and the NOAs are currently in effect and will remain in
effect until August 12, 2019, or the date on which Lazarus pays to
GEL Tex all of the amounts awarded herein, including interest,
whichever occurs earliest.

 

19. 

Lazarus'
request for an award of its attorneys' fees and related costs is
denied.

 

20. 

GEL
Tex's request for an award of its attorneys' fees and related costs
totaling $3,230,932.77 is granted.

 

21. 

GEL
Tex is awarded, and Lazarus shall pay, $84,847.82, representing the
AAA fees, expenses and Arbitrator compensation GEL Tex previously
incurred.

 

22. 

All
amounts awarded in this Final Award shall bear simple interest at
the rate of 5% per annum from and after the date of this Final
Award until paid.

 

23. 

This
Final Award is in full settlement of all claims and counterclaims
submitted in this arbitration. All claims and counterclaims not
specifically addressed herein are denied.

 

Page 54  AAA Case No. 02-16-0001-5548

 

 

 

Entered this 11th day of August 2017

 

/s/ PLATT W. DAVIS, III

Platt W. Davis III

Arbitrator

 

Page
55                                                                              
AAA Case No. 02-16-0001-5548

 

 

Appendix A

 

AMERICAN ARBITRATION ASSOCIATION

IN THE MATTER OF THE ARBITRATION BETWEEN:

 

	
 

LAZARUS ENERGY, L.L.C.

 

Claimant/Counter-Respondent,

v.

 

GEL TEX MARKETING, LLC,

 

Respondent / Counter-Claimant.

 

	
§

§

§

§

§

§

§

§

§

§

§

§

	
 CASE
NO. 02-16-8001-7510

 

ORDER FOR ISSUANCE OF WRIT OF ATTACHMENT

 

On June 2, 2017, respondent/counter-claimant GEL Tex Marketing, LLC
(“GEL Tex”) submitted post-hearing briefing containing
an application for issuance of a writ of attachment which would
require that the Harris County District Court Clerk deposit the
funds currently in the registry of the District Court in Cause No.
2016-28397 to the "lockbox," Claimant Lazarus Energy, L.L.C.
("Lazarus") had an opportunity to respond to the post-hearing
briefing, and both parties were asked to submit subsequent briefing
regarding GEL Tex's application on July 7 and 17,
2017.

 

Alter considering the submissions on file with the Tribunal, the
evidence before the Tribunal, and the arguments of counsel, the
Tribunal GRANTS GEL Tex 's application and finds

That GEL Tex is ENTITLED to a writ of attachment with respect to
the funds currently in the 
registry of the District Court of Harris County, Texas, related to
Cause No. 2016-28397 on the following grounds:

 

1.        GEL Tex is a creditor
and Lazarus is a debtor as defined in Uniform Fraudulent
Transfer Act (“UFTA”) Sections 24.002(4) &
(6);

 

 

 

2.         GEL Tex
has prevailed on its claim under UFTA Sections 24.005(a)(I),
24.005(a)(2)(B), and 24.006(a), by demonstrating
that, inter
alia, Lazarus and Lazarus
Energy Holdings are affiliated entities, Lazarus transferred jet
fuel to Lazarus Energy Holdings with the intent to defraud GEL Tex.
Lazarus Energy Holdings got valuable jet fuel in exchange for a
worthless promise from Lazarus Energy Holdings to pay, and Lazarus
is insolvent;

 

3.         The funds
ordered by the Harris County District Court to be deposited in
the registry in Cause No. 2016-28397 are
"proceeds"
of fraudulent transfers of jet fuel
from Lazarus to Lazarus Energy Holdings;

 

4.        
As set forth above and more fully in
the Final Award issued in these proceedings, Lazarus
is justly indebted to GEL Tex:

 

5.         Attachment
of the registry funds has not been sought for the purpose of
injuring or harassing Lazarus; and

 

6.        
GEL Tex will probably lose the debt
without a writ of attachment because, inter alia, Lazarus has previously disposed of funds with the intent
to defraud GEL Tex. Lazarus has previously disposed of funds
without leaving an amount sufficient to pay GEL Tex. Lazarus owes
GEL Tex for property obtained by Lazarus under false pretenses, and
Lazarus is insolvent.

 

IT IS, THEREFORE, ORDERED that, upon confirmation
by the District Court, the clerk shall issue a writ of attachment that commands a
sheriff or constable of any county within the State of Texas
to attach and hold all funds deposited in the registry of the
District Court of Harris County, Texas, in Cause No. 2016-28397, up
to a maximum value of the amount of damages awarded to GEL Tex in
the Final Award. Once attached, the property shall be issued to the
following account, subject to further order of the District Court,
unless the property is replevied according to the provisions of the
law and the Texas Rules of Civil Procedure.

 

 

 

 

Institution:
Bank of America

Account
Holder: GEL Tex Marketing, LLC

Account
Number: 004640401104

ACH
ABA Number: 011000138

Wire
ABA Number: 026009593

 

IT
IS FURTHER ORDERED that Lazarus, in order to replevy property
attached pursuant to the writ, must file with the officer who
levied the writ a bond, in conformity with the law, in the amount
of $2,143.460.37, unless Lazarus files bond in an amount otherwise
provided by the law and the Texas Rules of Civil
Procedure.

 

Dated this 11th
of August, 2017.

 

 

/s/ PLATT W. DAVIS, III

Platt
W. Davis, III

Arbitrator

 

 

 

 

 

 

Exhibit
B

 

Carroll Security
Agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit B

 

Execution Version

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (as amended, restated,
supplemented or otherwise modified, this “Security
Agreement”) dated
effective as of July 20, 2018, is made by JONATHAN CARROLL, an
individual residing in the State of Texas
(“Carroll”)
and CARROLL & COMPANY FINANCIAL HOLDINGS, L.P., a Texas limited
partnership (“C&C”,
and together with Carroll, “Pledgor”),
in favor of GEL TEX MARKETING, LLC, a Delaware limited liability
company (“Secured
Party”).

 

WHEREAS, Pledgor, the other Lazarus Parties and
Secured Party are parties to that certain Settlement Agreement,
dated as of the date hereof (such agreement, as amended, restated,
supplemented or otherwise modified from time to time, being
hereinafter referred to as the “Settlement
Agreement”);

 

WHEREAS,
pursuant to the Settlement Agreement, Pledgor has agreed to enter
into this Security Agreement in favor of Secured Party;
and

 

WHEREAS,
Pledgor has determined that the execution, delivery and performance
of this Security Agreement directly benefits, and is in the best
interest of, Pledgor.

 

NOW,
THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as
follows:

 

ARTICLE
I

DEFINITIONS

 

1.01 Definitions.
All capitalized terms used herein but
not defined herein have the meanings given to such terms in the
Settlement Agreement. The following terms shall have the following
meanings:

 

“Bankruptcy
Code” means the Federal
Bankruptcy Code of 1978, Title 11 of the United States Code, as
amended from time to time.

 

“Bankruptcy
Event” means the
occurrence of any of the following: (i) any Lazarus Party
institutes or consents to the institution of any proceeding under
any Debtor Relief Law, or (ii) any receiver, trustee, custodian,
conservator, liquidator, rehabilitator or similar officer is
appointed with respect to any Lazarus Party without the
application, direction or consent of (a) any Lazarus Party or (b)
Secured Party or its affiliates.

 

“Collateral”
means the Pledged LLC Interests and all Proceeds
therefrom.

 

“Debtor
Relief Laws” means the
Bankruptcy Code, and all other liquidation, bankruptcy, moratorium,
receivership, insolvency, reorganization, or similar debtor relief
laws of the United States or other applicable jurisdictions,
including, but not limited to, an assignment for the benefit of
creditors, or application for or consent to the appointment of any
receiver, trustee, custodian, conservator, liquidator,
rehabilitator or similar officer for the debtor or for all or any
material part of its property.

“Default
Rate” means an interest
rate of five percent (5%) per annum. “Event of
Default” means the
occurrence of any of the following events:

 

1

 

 

 

(a)           Pledgor
shall fail to perform or observe any term, covenant, or agreement
contained in (i) Sections
2.01, 4.02,
4.03
or 4.04
of this Security Agreement;
(ii) Sections
4.01, 4.05
or 4.07
of this Security Agreement and such
failure continues for two (2) business days; or (iii) any other
provision of this Security Agreement and such failure continues for
thirty (30) days;

 

(b)           any
representation, warranty, certification or statement of fact made
or deemed made by or on behalf of Pledgor in this Security
Agreement shall be incorrect or misleading in any material respect
when made or deemed made; or

 

(c)           (i)
this Security Agreement, for any reason other than as expressly
permitted hereunder, ceases to be in full force and effect; (ii)
any Lazarus Party contests in any manner the validity or
enforceability of this Security Agreement or its obligations
hereunder; or (iii) any Lazarus Party denies that it has any or
further liability or obligation.

 

“LEH”
means Lazarus Energy Holdings LLC, a Delaware limited liability
company.

 

“LEH
Organization Documents”
means (a) the Certificate of Formation of LEH and (b) the Amended
and Restated Limited Liability Company Agreement of LEH dated as of
February 15, 2008 (in each case, as amended, restated or otherwise
modified from time to time).

 

“Lien”
means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge, or
preference, priority or other security interest or preferential
arrangement in the nature of a security interest of any kind or
nature whatsoever (including any conditional sale or other title
retention agreement, any easement, right of way or other
encumbrance on title to real property, and any financing lease
having substantially the same economic effect as any of the
foregoing).

 

“Obligations”
means all indebtedness, obligations and liabilities of Pledgor to
Secured Party under this Security Agreement, including, without
limitation the obligation to make, or cause to be made, the Carroll
Payment, subject to the terms of Section
2.01.

 

“Pledged LLC
Interests” means all
limited liability company interests owned by Pledgor in LEH,
including all limited liability company interests listed on
Schedule
I and the certificates, if any,
representing such limited liability company interests as such
interest may be increased or otherwise adjusted from time to time,
including (a) all of Pledgor’s right, title, and interest in
any and all distributions, issues, profits, and shares (including
rights in the nature of warrants, purchase options, or options to
acquire any property or further interest in LEH) payable or
distributable by LEH, whether in cash or otherwise, whether for
capital or income or surplus or otherwise, including distributions
upon liquidation, dissolution, revision, reclassification,
split-up, or other change or transaction affecting LEH, or as a
sale, refinancing, or other capital transaction affecting any
assets or property of LEH; (b) all of Pledgor’s right, title,
and interest as a member with respect to LEH under the LEH
Organization Documents; (c) all of Pledgor’s rights under the
LEH Organization Documents; (d) all of Pledgor’s right to
vote upon, approve, or consent to (or withhold consent or approval
to) any matter pursuant to the LEH Organization Documents, or
otherwise to control, manage, or direct the affairs of LEH; and (e)
all of Pledgor’s right to terminate, amend, supplement,
modify or waive performance under, the LEH Organization Documents,
or perform thereunder, and to compel performance and otherwise to
exercise all remedies thereunder; and (f) all Proceeds
therefrom.

 

“Proceeds”
means all “Proceeds” as such term is defined in
Section
9-102(65) of the UCC and, in
any event, shall include, without limitation, all dividends or
other income from the Pledged LLC Interests, collections thereon,
proceeds of sale thereof or distributions with respect
thereto.

 

2

 

 

“Securities
Act” means the United
States Securities Act of 1933, as amended.
“Security
Interest” means the
security interest granted pursuant to Section
2.02.

 

“Termination
Date” means (a) the date
that is ninety one (91) days after the Settlement Payment Date, but
only so long as no Bankruptcy Event has occurred and is continuing
on such date, or (b) such later date on which the applicable case
or cases of the applicable Lazarus Party under any Debtor Relief
Law are fully and finally closed or dismissed (as reasonably
determined by Secured Party) so long as, on such date, Secured
Party has received and retained the full and final amount of the
Settlement Payment.

 

“UCC”
means the Uniform Commercial Code as in effect from time to time in
the State of Texas, or, when the context implies, the Uniform
Commercial Code as in effect from time to time in any other
applicable jurisdiction.

 

1.02 Other
Definitional Provisions.
The words “hereof,”
“herein”, “hereto” and
“hereunder” and words of similar import when used in
this Security Agreement shall refer to this Security Agreement as a
whole and not to any particular provision of this Security
Agreement, and Section and Schedule references are to this Security
Agreement unless otherwise specified. The meanings given to terms
defined herein shall be equally applicable to both the singular and
plural forms of such terms. Where the context requires, terms
relating to the Collateral or any part thereof, when used in
relation to Pledgor, shall refer to Pledgor’s Collateral or
the relevant part thereof. Capitalized terms defined in the UCC and
not otherwise defined herein shall have the meaning assigned
thereto in the UCC.

 

ARTICLE II

SETTLEMENT PAYMENT; SECURITY INTEREST

 

2.01 Agreement
Regarding Settlement Payment.Carroll
hereby agrees that, if a Bankruptcy Event shall occur and thereafter, for
whatever reason, Secured Party shall be required to return to any
Lazarus Party or otherwise disgorge all or any part of the
Settlement Payment theretofore received by Secured Party (each, a
“Returned
Payment”), Carroll shall,
within five (5) Business Days after receipt of written notice
thereof from Secured Party, pay, or cause to be paid, the amount of
such Returned Payment to Secured Party in immediately available
funds, without set off, deduction or counterclaim of any kind (the
“Carroll
Payment”).

 

2.02 Grant
of Security Interest.
Pledgor hereby grants to Secured
Party, a Lien and security interest in the Collateral (the
“Security
Interest”), as collateral
security for the prompt and complete payment and performance when
due of the Obligations.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

Pledgor
hereby represents and warrants on the date hereof
that:

 

3.01 Authorization
of Agreement; No Conflict.
The execution, delivery and
performance of this Security Agreement by Pledgor (a) has been duly
authorized by all necessary corporate action or other
organizational action; (b) are within the power and authority of
Pledgor; (c) will not violate any applicable law; (d) subject to
delivery of applicable permits and consents under
Section
3.03, will not contravene the
terms of the LEH Organization Documents; (e) will not result in the
breach of, or constitute a default under, any contractual
obligation by which Pledgor or any of its property may be bound;
provided that, and for the avoidance of doubt, the execution of,
and performance under, this Agreement shall be deemed to not
constitute a breach of or default under any contract among
any

 

3

 

 

Pledgor, on the one hand, and the Secured Party or any of its
affiliates, on the other hand, and (f) will not result in the
creation of any Lien upon any property of Pledgor, except for Liens
created hereby.

 

3.02 Enforceability.
This Security Agreement is a legal,
valid and binding obligation of Pledgor, enforceable in accordance
with its terms, except as may be limited by bankruptcy, insolvency
or similar laws of general application relating to the enforcement
of creditor’s rights and by general equitable
principles.

 

3.03 Permits
and Consents.
No permits, consents, or registrations
are necessary or required in connection with the execution,
delivery and performance of this Security Agreement, except those
that have already been obtained, given or made and are in full
force and effect (including, without limitation, any such necessary
consent of any stockholder, partner, member or creditor of Pledgor
or director of LEH).

 

3.04Perfection
and Priority.
The Security Interest shall constitute
a valid, first priority

security interest in favor of the Secured Party in the Collateral,
and when properly perfected by filing a financing statement, shall
constitute a valid and perfected security interest in and Lien on
the Collateral, subject to no other Liens, to the extent such
security interest can be perfected by filing under the UCC. The
financing statement may be filed in the office of the Secretary of
State of the State of (i) in the case of Carroll, Carroll’s
principal residence and (ii) in the case of C&C, its formation,
in each case, as disclosed on Schedule
II.

 

3.05 Pledged
LLC Interests.
Schedule
I is true, correct and complete
in all respects as of the date hereof. The Pledged LLC Interests
constitute all of the outstanding equity interests in which Pledgor
has any right, title or interest in LEH as of the date
hereof.

 

3.06 Valid
Issuance.
All of the Pledged LLC Interests have
been duly authorized, validly issued, fully paid and, to the extent
applicable, are nonassessable.

 

3.07 Ownership.
Pledgor is the legal and beneficial
owner of its Collateral, free and clear of any Liens, or options in
favor of, or claims of any other person or entity, except the Lien
created by this Security Agreement.

 

3.08 Location
of Books and Records.
The locations where Pledgor keeps its
books and records relating to the Collateral are specified
on Schedule
II. Pledgor has not changed his
or its name during the past five (5) years except as disclosed
on Schedule
II.

 

3.09 Certificates;
Article 8.
None of the Pledged LLC Interests are
evidenced by physical certificates or are securities governed
by Article
8 of the
UCC.

 

3.10 LEH
Organization Documents.
Pledgor has delivered to Secured Party
true and complete copies of the LEH Organization Documents and any
other material agreements governing or affecting the Pledged LLC
Interests, which agreements, including the LEH Organization
Documents, are currently in full force and effect and have not been
amended or modified.

 

ARTICLE IV

COVENANTS

 

Pledgor
covenants and agrees with Secured Party that until the Termination
Date:

 

4

 

 

 

4.01 Performance
of Obligations.
Pledgor agrees that, as a member or
other owner of an equity interest of LEH, it will abide by, perform
and discharge each and every material obligation, covenant and
agreement to be abided by, performed or discharged by Pledgor under
the terms of the LEH Organization Documents, at no cost or expense
to Secured Party. Anything herein to the contrary notwithstanding:
(a) Pledgor shall perform all of its duties and obligations under
the LEH Organization Documents to the same extent and with the same
liabilities as if this Security Agreement had not been executed,
(b) the exercise by Secured Party of any of its rights hereunder
shall not release Pledgor from any of its duties or obligations
under the LEH Organization Documents, (c) Secured Party shall not
have any obligation or liability under the LEH Organization
Documents by reason of this Security Agreement and Secured Party
shall not be obligated to perform any of the obligations or duties
of Pledgor thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder, and (d) Secured Party
shall not have any liability in contract or tort for
Pledgor’s acts or omissions.

 

4.02 Delivery
of Collateral.
If Pledgor shall, as a result of its
ownership of the Collateral,

become entitled to receive or shall receive any certificated
securities (including, without limitation, any certificate
representing a distribution in connection with any
reclassification, increase or reduction of capital), option or
rights, whether in addition to, in substitution of, as a conversion
of, or in exchange for any of the Collateral, or otherwise in
respect thereof, Pledgor shall accept the same as the agent of
Secured Party, hold the same in trust for Secured Party and deliver
the same forthwith, but in any event five (5) business days, to
Secured Party in the exact form received, duly indorsed by Pledgor
to Secured Party, if required, together with an undated power
covering such certificate duly executed in blank by Pledgor and
with, if Secured Party so requests, signature guaranteed, to be
held by Secured Party, subject to the terms hereof, as additional
collateral security for the Obligations. In addition, any sums paid
upon or in respect of the Collateral upon the liquidation or
dissolution of LEH shall constitute Collateral hereunder and shall
be paid over to Secured Party forthwith, but in any event five (5)
business days.

 

4.03 Certain
Actions.
Without the prior written consent of
Secured Party, Pledgor will not (a) vote to enable, or take any
other action to permit, LEH to issue any equity interests (or
otherwise transfer the assets of LEH outside the ordinary course of
business), or other equity securities of any nature or to issue any
other securities convertible into or granting the right to purchase
or exchange for any equity interests of any nature of LEH, (b)
consent to any modification, extension or alteration of the terms
of the LEH Organization Documents, (c) accept a surrender of the
LEH Organization Documents or waive any breach of or default under
the LEH Organization Documents by any other party thereto, (d)
sell, assign, transfer, exchange, or otherwise dispose of, or grant
any option with respect to, the Collateral, or (e) create, incur or
permit to exist any Lien or option in favor of, or any claim of any
person or entity with respect to, any of the Collateral or its
interests in LEH, or any interest therein, except the Lien created
by this Security Agreement.

 

4.04 Maintenance
of Security Interest.
Pledgor shall maintain the Security
Interest created by this Security Agreement as a perfected Security
Interest having the priority described in Section
3.04 and shall defend such
Security Interest against the claims and demands of all persons or
entities whomsoever.

 

4.05 Certain
Prohibited Actions.
Pledgor will not, except upon at least
ten (10) days’ prior written notice to Secured Party and
delivery to Secured Party of all additional financing statements
(executed, if necessary, for any particular filing jurisdiction)
and other instruments and documents reasonably requested by Secured
Party to maintain the validity, perfection and priority of the
Security Interest:

 

(a) change the location of the office where he or
it keeps books and records relating to the Collateral from that
identified on Schedule
II;

 

5

 

 

 

(b) 

change
his or its name to such an extent that any financing statement
filed by Secured Party in connection with this Security Agreement
would become misleading;

 

(c) 

change his or its principal residence or
jurisdiction of formation or organization to a jurisdiction other
than the jurisdiction identified on Schedule
II;

 

(d) 

vote to amend the LEH Organization Documents to
provide that the Pledged LLC Interests are securities governed
by Article
8 of the UCC (and Pledgor
agrees and acknowledges that any such vote shall be invalid and any
such amendment shall be void ab initio); or

 

(e) 

permit
any Pledged LLC Interests to be evidenced by physical
certificates.

 

4.06 Financing
Statements.
Pursuant to Section 9-509
of the UCC and any other applicable
law, Pledgor authorizes Secured Party to file or record financing
statements and other filing or recording documents or instruments
describing the Collateral in such form and in such offices as
Secured Party reasonably determines appropriate to perfect the
Security Interest of Secured Party under this Security Agreement.
Such financing statements may describe the Collateral in the same
manner as described herein or may contain an indication or
description of Collateral that describes such property in any other
manner as Secured Party may reasonably determine, in its sole
discretion, is necessary to ensure the perfection of the Security
Interest. Further, a photographic or other reproduction of this
Security Agreement shall be sufficient as a financing statement or
other filing or recording document or instrument for filing or
recording in any jurisdiction.

 

4.07 Further
Assurances.
At any time and from time to time,
upon the written request of Secured Party, and at the sole expense
of Pledgor, Pledgor will take any and all commercially reasonably
actions necessary or required by Secured Party for the purposes of
obtaining or preserving the full benefits of this Security
Agreement and of the rights and powers herein granted. If any
amount payable under or in connection with any of the Collateral
shall be or become evidenced by any promissory note, other
instrument or chattel paper, such note, instrument or chattel paper
shall be delivered to Secured Party as provided herein, duly
endorsed in a manner satisfactory to Secured Party, to be held as
Collateral pursuant to this Security Agreement.

 

ARTICLE V

DISTRIBUTIONS; VOTING

 

Unless
an Event of Default shall have occurred and be continuing, (a)
Pledgor shall be permitted to receive all cash dividends and
distributions paid in accordance with the terms of the LEH
Organization Documents in respect of the Collateral, and (b) until
Secured Party notifies Pledgor in writing of the exercise of its
rights hereunder, Pledgor shall retain the sole right to vote the
Pledged LLC Interests and exercise all rights of ownership with
respect to all organizational questions for all purposes not
inconsistent with the terms hereof; provided that Pledgor shall not
exercise any of such voting or other rights in a manner adverse to
the Collateral or Secured Party.

 

ARTICLE VI

EVENTS OF DEFAULT AND REMEDIES

 

6.01 Rights
of Secured Party.
If an Event of Default shall occur and
be continuing (i) Secured Party shall have the right to receive any
and all cash dividends paid in respect of the distributions with
respect to the Pledged LLC Interests and make application thereof
to the Obligations in such order and manner as it may determine in
its sole discretion. In furtherance thereof, Pledgor hereby
authorizes and instructs LEH to (i) comply with
any

 

6

 

 

 

instruction
received by it from Secured Party in writing that (A) states that
an Event of Default has occurred and (B) is otherwise in accordance
with the terms of this Security Agreement, without any other or
further instructions from Pledgor, and Pledgor agrees that LEH
shall be fully protected in so complying, and (ii) upon the
occurrence of an Event of Default, if requested by Secured Party,
pay any distributions or other payments with respect to any Pledged
LLC Interests directly to Secured Party.

 

(b)
The rights of Secured Party hereunder shall not be conditioned or
contingent upon the pursuit by Secured Party of any right or remedy
against Pledgor, or against any other person or entity which may be
or become liable in respect of all or any part of the Obligations,
or against any collateral security therefor, guarantee thereof or
right of offset with respect thereto. Secured Party shall not be
liable for any failure to demand, collect or realize upon all or
any part of the Collateral, or for any delay in doing so, nor shall
Secured Party be under any obligation to sell or otherwise dispose
of any Collateral upon the request of Pledgor or any other person
or entity, or to take any other action whatsoever with regard to
the Collateral or any part thereof.

 

6.02 Remedies.
If an Event of Default shall occur,
subject to Section
6.05 below, Secured Party shall
be entitled to (but shall not be required to) exercise all rights
and remedies granted in this Security Agreement and in any other
instrument or agreement securing, evidencing or relating to the
Obligations, and in addition thereto, all rights and remedies of a
secured party under the UCC or any other applicable law. Without
limiting the generality of the foregoing, with regard to the scope
of Secured Party’s remedies, Secured Party, without demand of
performance or other demand, presentment, protest, advertisement or
notice of any kind (except any notice required by any applicable
law referred to below) to or upon Pledgor or any other person or
entity (all and each of which demands, defenses, advertisements and
notices are hereby waived), may in such circumstances forthwith
collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give option or
options to purchase or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the
foregoing), in one or more parcels at public or private sale or
sales, in office of Secured Party or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may
deem best, for cash or on credit or for future delivery without
assumption of any credit risk. Secured Party shall have the right
upon any such public sale or sales, and, to the extent permitted by
any applicable law, upon any such private sale or sales, to
purchase the whole or any part of the Collateral so sold, free of
any right or equity of redemption in Pledgor, which right or equity
is hereby waived or released. To the extent permitted by any
applicable law, Pledgor waives all claims, damages and demands they
may acquire against Secured Party arising out of the exercise by
them of any rights hereunder; provided, such waiver shall not be
available to the extent that such claims, damages and demands are
determined by a court of competent jurisdiction by final and
nonappealable judgment to have resulted from the gross negligence
or willful misconduct of Secured Party. If any notice of a proposed
sale or other disposition of Collateral shall be required by any
applicable law, such notice shall be deemed reasonable and proper
if given at least ten (10) days before such sale or other
disposition.

 

6.03 Securities
Act.
Pledgor recognizes that, by reason of
certain prohibitions contained in

the Securities Act and applicable state securities laws, Secured
Party may be compelled, with respect to any sale of all or any part
of the Pledged LLC Interests conducted without prior registration
or qualification of such Pledged LLC Interests under the Securities
Act and/or such state securities laws, to limit purchasers to those
who will agree, among other things, to acquire the Pledged LLC
Interests for their own account, for investment and not with a view
to the distribution or resale thereof. Pledgor acknowledges that
any such private sale may be at prices and on terms less favorable
than those obtainable through a public sale without such
restrictions (including a public offering made pursuant to a
registration statement under the Securities Act) and,
notwithstanding such circumstances, Pledgor agrees that any such
private sale shall be deemed to have been made in a commercially
reasonable manner and

 

7

 

 

 

that Secured Party shall have no obligation to engage in public
sales and no obligation to delay the sale of any Pledged LLC
Interests for the period of time necessary to permit LEH to
register it for a form of public sale requiring registration under
the Securities Act or under applicable state securities laws, even
if LEH would, or should, agree to so register it. If Secured Party
determines to exercise its right to sell any or all of the Pledged
LLC Interests, upon written request, Pledgor shall and shall use
its best efforts to cause LEH from time to time to furnish to
Secured Party all such information as Secured Party may request in
order to determine the number and nature of interest, shares or
other instruments included in the Pledged LLC Interests which may
be sold by Secured Party in exempt transactions under the
Securities Act and the rules and regulations of the Securities and
Exchange Commission thereunder, as the same are from time to time
in effect.

 

6.04 Secured
Party’s Appointment as Attorney-In-Fact.
Pledgor hereby irrevocably constitutes
and appoints Secured Party and any officer or agent thereof, with
full power of substitution, as its true and lawful attorney-in-fact
with full irrevocable power and authority in the place and stead of
Pledgor, and in the name of Pledgor or in its own name, for the
purpose of carrying out the terms of this Security Agreement, upon
the occurrence and during the continuation of an Event of Default,
to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to
accomplish the purposes of this Security Agreement, and, without
limiting the generality of the foregoing, Pledgor hereby gives
Secured Party the power and right, on behalf of Pledgor, without
notice to or assent by Pledgor, to do any or all of the following
upon the occurrence and during the continuation of an Event of
Default:

 

(i) 

pay
or discharge taxes and Liens levied, or placed on, or threatened
against the Collateral;

 

(ii) 

execute,
in connection with any sale provided for in this Security
Agreement, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral;
and

 

(iii) 

(A)
commence and prosecute any suits, actions or proceedings at law or
in equity in any court of competent jurisdiction to collect the
Collateral or any portion thereof and to enforce any other right in
respect of any Collateral; (B) defend any suit, action or
proceeding brought against Pledgor with respect to any Collateral;
(C) settle, compromise or adjust any such suit, action or
proceeding and, in connection therewith, give such discharges or
releases as Secured Party may deem appropriate; and (D) generally,
sell, transfer, pledge and make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely
as though Secured Party were the absolute owner thereof for all
purposes, and do, at Secured Party’s option and
Pledgor’s expense, at any time, or from time to time, all
acts and things which Secured Party deems necessary to protect,
preserve or realize upon the Collateral and Secured Party’s
Security Interest therein and to effect the intent of this Security
Agreement, all as fully and effectively as Pledgor might
do.

 

(b) If Pledgor fails to perform or comply with any
of its agreements contained herein, Secured Party, at its option,
but without any obligation to do so, may perform or comply, or
otherwise cause performance or compliance, with such agreement in
accordance with the provisions of 
Section 6.04(a) of this
Security Agreement.

 

8

 

 

 

(c) 

The
reasonable expenses of Secured Party incurred in connection with
actions taken pursuant to the terms of this Security Agreement
shall be payable by Pledgor to Secured Party on demand. Such
amounts, together with interest thereon from date incurred until
paid by Pledgor at the Default Rate, shall constitute additional
Obligations and shall be secured by and entitled to the benefits of
this Security Agreement.

 

(d) 

Pledgor hereby ratifies all that said attorneys
shall lawfully do or cause to be done by virtue hereof, in
accordance with Section
6.04(a) of this Security
Agreement. All powers, authorizations and agencies contained in
this Security Agreement are coupled with an interest and are
irrevocable until the Termination Date.

 

6.05 Remedies
as Against the Collateral.
Notwithstanding any other term or
provision of this Security Agreement to the contrary, including,
without limitation, Section
6.02 above, Pledgor shall not
have any personal liability under this Security Agreement for the
payment of Obligations upon an Event of Default, and Secured
Party’s only recourse for the satisfaction of the Obligations
and the payment and performance of such Obligations upon an Event
of Default, shall be Secured Party’s exercise of its rights
and remedies with respect to the Collateral pursuant hereto and
applicable law only and not against any Pledgor (except as
specifically described above in this sentence) or any of its
respective principals, directors, officers, members, employees or
assets. Secured Party agrees that it shall not seek or obtain any
deficiency or personal judgment against Pledgor in connection with
a default or an Event of Default hereunder.

 

ARTICLE VII

MISCELLANEOUS

 

7.01 Amendments,
etc. With Respect to the Obligations.
Pledgor shall remain obligated
hereunder, and the Collateral shall remain subject to the Lien
granted hereby, notwithstanding that, without any reservation of
rights against Pledgor, and without notice to or further assent by
Pledgor, any demand for payment of any of the Obligations made by
Secured Party may be rescinded by Secured Party, and any of the
Obligations continued, and the Obligations, or the liability of
Pledgor or any other person or entity upon or for any part thereof,
or any collateral security or guarantee therefor or right of offset
with respect thereto, may, from time to time, in whole or in part,
be renewed, extended, amended, modified, accelerated, compromised,
waived, surrendered, or released by Secured Party, as Secured Party
may deem advisable from time to time, and any guarantee, right of
offset or other collateral security at any time held by Secured
Party for the payment of the Obligations may be sold, exchanged,
waived, surrendered or released. Secured Party shall have no
obligation to protect, secure, perfect or insure any other Lien at
any time held by it as security for the Obligations or any property
subject thereto. Except as otherwise set forth in this Security
Agreement, Pledgor waives any and all notice of the creation,
renewal, extension or accrual of any of the Obligations and notice
of or proof of reliance by Secured Party upon this Security
Agreement; the Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred in reliance
upon this Security Agreement; and all dealings between Pledgor, on
the one hand, and Secured Party, on the other, shall likewise be
conclusively presumed to have been had or consummated in reliance
upon this Security Agreement. Except as otherwise set forth in this
Security Agreement, Pledgor waives diligence, presentment, protest,
demand for payment and notice of default or nonpayment to or upon
Pledgor with respect to the Obligations.

 

7.02 No
Subrogation.
Notwithstanding any payment or
payments made by Pledgor hereunder, or the receipt of any amounts
by Secured Party with respect to any of the Collateral, Pledgor
shall not be entitled to be subrogated to any of the rights of
Secured Party against any other Lazarus Party or against any other
collateral security held by Secured Party for the payment of the
Obligations, nor shall Pledgor seek any reimbursement from any
Lazarus Party in respect of payments made by Pledgor
in

 

9

 

 

 

connection with the Collateral, or amounts realized by Secured
Party in connection with the Collateral, until the Termination
Date. If any amount shall be paid to Pledgor on account of such
subrogation rights at any time when all of the Obligations shall
not have been paid in full, such amount shall be held by Pledgor in
trust for Secured Party, segregated from other funds of Pledgor,
and if, and only if, the Termination Date has not occurred, shall,
forthwith upon receipt by Pledgor, be turned over to Secured Party
in the exact form received by Pledgor (duly indorsed by Secured
Party, if required) to be applied against the Obligations, whether
matured or unmatured, in such order and manner as Secured Party
determines in its sole discretion.

 

7.03 Limitation
on Duties Regarding Collateral.
Secured Party’s sole duty with
respect to the custody, safekeeping and physical preservation of
the Collateral, if any, in its possession, under
Section
9-207 of the UCC or otherwise,
shall be to deal with it in the same manner as Secured Party deals
with similar securities and property for its own account. Neither
Secured Party nor any of its directors, officers, employees or
agents shall be liable for failure to demand, collect or realize
upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral
upon the request of Pledgor or otherwise.

 

7.04 Application
of Proceeds.
Upon the occurrence and during the
continuation of an Event of Default, the proceeds of any sale of,
or other realization upon, all or any part of the Collateral shall
be applied by Secured Party to the Obligations in such order and
manner as Secured Party may determine in its sole
discretion.

 

7.05 Powers
Coupled with an Interest.
All authorizations and agencies herein
contained with respect to the Collateral constitute irrevocable
powers coupled with an interest.

 

7.06 Severability
of Provisions.
Whenever possible, each provision of
this Security Agreement shall be interpreted in such manner as to
be effective and valid under applicable law. If any provision of
this Security Agreement shall be invalid, illegal or unenforceable
in any respect under any applicable law, the validity, legality and
enforceability of the remaining provisions of this Security
Agreement shall not be affected or impaired
thereby.

 

7.07 Titles
and Captions.
Captions and section headings
appearing herein are included solely for convenience of reference
and are not intended to affect the interpretation of any provision
of this Security Agreement.

 

7.08 No
Waiver by Course of Conduct, Cumulative Remedies.
No waiver of any Event of Default
shall be a waiver of any other Event of Default. No failure on the
part of Secured Party to exercise and no delay in exercising, and
no course of dealing with respect to, any right, power or privilege
under this Security Agreement shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege. No remedy,
right or power conferred upon Secured Party is intended to be
exclusive of any other remedy, right or power given hereunder or
now or hereafter existing at law, in equity, or otherwise, and all
such remedies, rights and powers shall be
cumulative.

 

7.09 Amendments,
Waivers and Consents.
No term, covenant, agreement or
condition of this Security Agreement may be amended or waived, nor
may any consent be given, except in writing executed by Pledgor and
Secured Party.

 

7.10 Expenses
and Waiver of Consequential Damages.

 

10

 

 

 

(a) 

Pledgor
agrees to pay or reimburse Secured Party for all its reasonable and
documented costs and expenses incurred in connection with enforcing
any rights under this Security Agreement, including, without
limitation, the reasonable and documented fees and disbursements of
one (1) counsel to Secured Party.

 

(b) 

[Reserved].

 

(c) 

To the fullest extent permitted by applicable law,
Pledgor shall not assert, and hereby waives, any claim against
Secured Party and its participants, shareholders, directors,
officers, employees, agents, accountants and attorneys and their
respective heirs, legal representatives, successors and
assigns, on any theory of liability, for special, indirect,
consequential or punitive damages (as opposed to direct or actual
damages) arising out of, in connection with, or as a result of,
this Security Agreement.

 

(d) 

All amounts due under this Section
7.10 shall be payable promptly
after written demand therefor. Such amounts, together with interest
thereon from ten (10) days after actual receipt of such written
demand until paid by Pledgor at the Default Rate, shall constitute
additional Obligations and shall be secured by and entitled to the
benefits of this Security Agreement.

 

7.11 Successor
and Assigns.
This Security Agreement shall be
binding upon the successors and assigns of Pledgor, and shall inure
to the benefit of Pledgor and Secured Party and their successors
and assigns; provided that neither Secured Party nor Pledgor may assign,
transfer or delegate any of its rights or obligations under this
Security Agreement without the prior written consent of the other
party hereto.

 

7.12 Governing
Law; Choice of Forum; Jury Trial.

 

(a) 

Governing Law.
THIS SECURITY
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED, IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
CONFLICTS OF LAWS PROVISIONS THEREIN. EXCLUSIVE JURISDICTION OF ALL
DISPUTES REGARDING THIS SECURITY AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY SHALL BE IN THE COURTS LOCATED IN HARRIS
COUNTY, TEXAS. EACH PARTY EXPRESSLY SUBMITS TO THE JURISDICTION OF
AND VENUE IN THE FEDERAL AND STATE COURTS LOCATED IN HARRIS COUNTY,
TEXAS U.S. FOR ANY AND ALL CLAIMS, DISPUTES, OR LITIGATION RELATING
TO, AND ARISING OUT OF THIS SECURITY AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.

 

(b) 

Waiver of Jury
Trial. EACH OF
THE PARTIES TO THIS SECURITY AGREEMENT HEREBY IRREVOCABLY WAIVES
ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SETTLEMENT
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY MAKES
THIS WAIVER VOLUNTARILY.

 

7.13 Notices.
Whenever this Security Agreement
requires or permits any notice, approval, request or demand from
one party to another, the notice, approval, request or demand must
be in writing and shall be deemed to have been given when
personally served, five (5) Business Days after being deposited in
the United States mail, registered or certified, return receipt
requested, and addressed to the party to be notified at the
following address (or at such other address as may have been
designated by written notice):

 

11

 

 

 

Secured
Party:  

GEL
Tex Marketing, LLC

919
Milam, Suite 2100

Houston,
TX 77002

Attention: Robert V. Deere Email:
Bob.Deere@genlp.com Telephone:
(713) 860-2500

 

with
a copy to:

GEL
Tex Marketing, LLC

919
Milam, Suite 2100

Houston,
TX 77002

Attention:
Kristen Jesulaitis

Email: Kristen.Jesulaitis@genlp.com

Telephone:
(713) 860-2500

 

and
with a copy to:

Haynes
and Boone, LLP

1221
McKinney, Suite 2100

Houston,
TX 77010

Attention:
Charles A. Beckham, Jr., Esq.

Email: Charles.Beckham@haynesboone.com

Telephone:
(713) 547-2000

 

Pledgor:    

Carroll
& Company Financial Holdings, L.P.

Attention:
Jonathan Carroll

801
Travis Street, Suite 2100

Houston,
TX 77002

Email: JCarroll@lazarusenergy.com

Telephone:
(713) 568-4740

 

and
Jonathan Carroll, in his individual capacity

801
Travis Street, Suite 2100

Houston,
TX 77002

Email: JCarroll@lazarusenergy.com

Telephone:
(713) 568-4740

 

with
a copy to:

Stroock
& Stroock & Lavan LLP

2029
Century Park East

Los
Angeles, CA 90067

Attention: Frank Merola, Esq.

Email:
fmerola@stroock.com

Telephone: (310) 556-5800

 

and
with a copy to:

Stroock
& Stroock & Lavan LLP

180
Maiden Lane

New
York, NY 10038

 

Attention:
Brian Wells, Esq.

Email: bwells@stroock.com

Telephone:
(212) 806-5400

 

12

 

 

 

7.14  
Counterparts;
Integration; Effectiveness.
This Security Agreement may be
executed in any number of counterparts, all of which taken
together shall constitute one and the same agreement and any of the
parties hereto may execute this Security Agreement by signing any
such counterpart. Delivery of an executed counterpart of a
signature page of this Security Agreement by telecopy or electronic
mail shall be effective as delivery of a manually executed
counterpart of this Security Agreement. This Security Agreement
shall remain in effect at all times until terminated in accordance
with 
Section 7.18.

 

7.15  

[Reserved.]

 

7.16 Advice
of Counsel, No Strict Construction.
Each of the parties represents to each
other party hereto that it has discussed this Security Agreement
with its counsel. The parties hereto have participated jointly in
the negotiation and drafting of this Security Agreement. In the
event an ambiguity or question of intent or interpretation arises,
this Security Agreement shall be construed as if drafted jointly by
the parties hereto and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Security Agreement.

 

7.17 Acknowledgements.
Pledgor hereby acknowledges
that:

 

(a) 

Secured
Party has no fiduciary relationship with or duty to Pledgor arising
out of or in connection with this Security Agreement and the
relationship between Pledgor, on the one hand, and Secured Party,
on the other hand, in connection herewith or therewith is solely
that of debtor and creditor; and

 

(b) 

no
joint venture is created hereby or otherwise exists by virtue of
the transactions contemplated hereunder between Pledgor and Secured
Party.

 

7.18 Termination.
This Security Agreement and all
obligations (other than those expressly stated to survive such
termination) of Secured Party and Pledgor hereunder shall terminate
on the Termination Date, all without delivery of any instrument or
performance of any act by any party.

 

7.19 ENTIRETY.
THIS SECURITY
AGREEMENT AND THE SETTLEMENT AGREEMENT EMBODY THE FINAL, ENTIRE
AGREEMENT OF PLEDGOR AND SECURED PARTY WITH RESPECT TO THE SUBJECT
MATTER HEREOF AND THEREOF AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS,
WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND
THEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF
PLEDGOR AND SECURED PARTY. THERE ARE NO ORAL AGREEMENTS BETWEEN
PLEDGOR AND SECURED PARTY.

 

[Signature Pages Follow]

 

13

 

 

 

IN
WITNESS WHEREOF, the undersigned has caused this Security Agreement
to be effective as of the date first above written.

 

PLEDGOR:

 

CARROLL & COMPANY FINANCIAL HOLDINGS, L.P.

 

By: /s/ JONATHAN
CARROLL

Name: LAZARUS FINANCIAL,
LLC

Title: GENERAL
PARTNER

 

JONATHAN CARROLL

 

By:/s/JONATHAN
CARROLL

 

 

Signature Page to Security Agreement

 

 

 

 

SECURED PARTY:

 

GEL TEX MARKETING, LLC

 

By: /s/ R.V.
DEERE

Name: ROBERT V.
DEERE

Title: CHIEF FINANCIAL
OFFICER

 

 

Signature Page to Security Agreement

 

 

 

 

SCHEDULE I

DESCRIPTION OF PLEDGED LLC INTERESTS

 

 

 

	

Limited

Liability

Company

	

Pledgor

	

Certificate

No.

(if
any)

	

No. &

Type of

Shares

	

% of

Outstanding

LLC Interests

of the Limited

Liability

Company

	

Certificated

(Y/N)

	

Lazarus
Energy

Holdings
LLC

 

	

Carroll
& Company Financial Holdings, L.P.

 

	

N/A

 

	

344,094

 

	

3.9%

 

	

No.

 

	

Lazarus
Energy

Holdings
LLC

 

	

Jonathan
Carroll

 

	

N/A

 

	

4,973,190

 

	

56.3%

 

	

No.

 

 

 

 

Schedule I to Security Agreement

 

 

 

SCHEDULE II

 

LOCATION OF BOOKS AND RECORDS; NAME CHANGES

 

	

Pledgor

	

Principal Residence or State

	

Location of Books and

	
 

	

of Formation/Organization

	

Records

	
 

	
 

	

Carroll & Company Financial Holdings, L.P.

 

	

Texas

 

	

3240
Inwood Drive, Houston,

Texas
77019

 

	

Jonathan Carroll

 

	

Texas

 

	

3240
Inwood Drive, Houston,

Texas
77019

 

 

 

 

Name Changes: None

 

 

Schedule II to Security Agreement

 

 

 

 

Exhibit
C

 

Material
Agreements and Indetedness

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

	
 

	
 

	

Entity

	

Debt / Commercial Agreements

	

Term

	

Payment Structure

	

Liens / Security Interest

	

Related Party(ies)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
I.

	
 

	

Blue Dolphin Energy Company (“BDCO”)

	
● Amended
and Restated Promissory Note dated June 30, 2017 between LEH, as
Lender, and BDCO, as Borrower (~$2.5 Million BDCO-LEH
Note)

	
Matures
January 2019.

	
Interest
accrues at 8.0%; balloon payment due at maturity.

	
None

	
LEH

	
 

	
 

	
 

	
● Amended and Restated Promissory
Note dated March 31, 2017
between Ingleside, as Lender, and BDCO, as Borrower (~$1.1 Million
BDCO-Ingleside Note)

	
Matures
January 2019.

	
Interest
accrues at 8.0%; balloon payment due at maturity.

	
None

	
Ingleside

	
 

	
 

	
 

	
● Amended
and Restated Promissory Note dated March 31, 2017 between Lazarus
Capital, as Lender, and BDCO, as Borrower (~$0.1 Million
BDCO-Carroll Note)

	
Matures
January 2019.

	
Revolver;
principal and interest paid quarterly; interest accrues at 8.0%;
payment 50% cash and 50% BDCO common stock.

	
None

	
Lazarus
Capital /

Jonathan
Carroll

	
 

	
 

	
 

	
● Amended
and Restated Operating Agreement dated April 1, 2017 between BDCO,
LE, and LEH

	
Attachment “A”Material Agreements
and IndebtednessExpires April 1, 2020, upon written notice of
either party of a material breach, or upon 90 days’ notice by
BDCO’s Board of Directors if the Board determines the
agreement is no longer in BDCO’s best interests.

	
Attachment “A”Material Agreements
and IndebtednessLEH is reimbursed at cost plus 5% for reasonable
costs incurred while LEH performs the Services.

	
N/A

	
LE

LEH

	
 

	
A.

	
Lazarus
Energy, LLC (“LE”)

	
● Loan
Agreement dated June 22, 2015 among Sovereign Bank, NA, as Lender,
LE, as Borrower, and Jonathan Pitts Carroll, Sr., BDCO, LRM, and
LEH, as Guarantors (Veritex Community Bank (“Veritex”)
successor in interest to Sovereign Bank by merger) ($25.0 Million
Veritex USDA Loan)

	
Matures
June 2034.

	
Principal
and interest paid monthly; interest accrues at Prime + 2.75%;
monthly payment currently $205,973.

	
Secured
by: (i) a first lien on all Nixon Facility business assets
(excluding accounts receivable and inventory), (ii) assignment of
all Nixon Facility contracts, permits, and licenses, (iii) absolute
assignment of Nixon Facility rents and leases, including tank
rental income, (iv) a $1.0 million payment reserve account held by
the bank, and (v) a pledge of $5.0 million of a life insurance
policy on Jonathan Carroll.

	
BDCO

LRM

LEH

Jonathan
Carroll

 

 

A-1 

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
 

	
 

	
● Promissory
Note dated June 1, 2006 between LE, as Maker, and Notre Dame
Investors, as Payee ($8.0 Million Notre Dame / Kissick
Loan)

	
Matured
January 2018.

 

 

 

 

	
Payee
subordinated right to payments, as well as any security interest
and liens on the Nixon Facility, in favor of Veritex.

	
Secured
by Deed of Trust, Security Agreement and Financing Statements,
which encumber the Nixon Facility and general assets of
LE.  

	
None

	
 

	
 

	
 

	
● Amended
and Restated Guaranty Fee Agreement dated April 1, 2017 between LE
and Jonathan Carroll (Guaranty Fee Agreement ties to $25.0 Million
Veritex USDA Loan; amounts owed to Jonathan Carroll captured under
~$1.0 Million BDCO-Carroll Note)

	
Terminates
when $25.0 Million Veritex USDA Loan paid in full.

 

 

 

 

	
2%
fee per annum, paid monthly on outstanding balance.

	
N/A

	
Jonathan
Carroll

	
 

	
 

	
 

	
● Amended
and Restated Operating Agreement dated April 1, 2017 between BDCO,
LE, and LEH

	
Expires
April 1, 2020, upon written notice of either party of a material
breach, or upon 90 days’ notice by BDCO’s Board of
Directors if the Board determines the agreement is no longer in
BDCO’s best interests.

	
LEH
is reimbursed at cost plus 5% for reasonable costs incurred while
LEH performs the Services.

	
N/A

	
BDCO

LEH

	
 

	
 

	
 

	
● Product
Sales Agreement between LE and LEH dated April 1, 2018 (jet fuel
sales)

	
Earliest
to occur of: (i) one-year term expiring March 31, 2019 plus a
30-day carryover or (ii) delivery of the maximum quantity of jet
fuel.

	
$0.03
per gallon above relevant Platt’s Gulf Coast Pipeline Index
on the sales date.

	
N/A

	
LEH

	
 

	
 

	
 

	
● Ground
Lease Agreement dated June 1, 2015 between LE and LRM

	
Terminates
March 2035.

	
Base
rent at $10,000 per month.

	
N/A

	
LRM

	
 

	
 

	
 

	
● Tolling
Agreement dated May 24, 2016 between LMT and LE (LE’s use of
barge loading facility in Ingleside, Texas)

	
5-year
term expiring May 2021.

	
Monthly
reservation fee of $50,400 up to 84,000 gallons per day; additional
$0.02 per gallon for tolling volumes greater than 210,000 per
quarter.

	
N/A

	
LRM

	
 

	
 

	
 

	
● Tolling
Agreement dated October 1, 2015 between LRM, as Owner, and LE, as
Customer (LE’s use of certain Nixon Facility Processing
Units)

	
12-year
term expiring October 2027.

	
Quarterly
reservation fee of $180,000 up to 210,000 gallons per quarter;
additional $0.05 per gallon for tolling volumes greater than
210,000 per quarter.

	
N/A

	
LRM

 

A-2

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

	
 

	
 

	
 

	
● Amended and
Restated Tank Lease Agreement dated January 1, 2016 between
Ingleside and LE (periodic additional product storage
needs)

	
Terminated April
2017.

	
N/A

	
N/A

	
Ingleside

	
 

	
B.

	
Lazarus Refining
& Marketing, LLC (“LRM”)

	
● Loan Agreement
dated December 4, 2015 among Sovereign, as Lender, LRM, as
Borrower, and Jonathan Pitts Carroll, Sr., BDCO, LE, and LEH, as
Guarantors (Veritex successor in interest to Sovereign Bank by
merger) ($10.0 Million Veritex USDA Loan)

	
Matures December
2034.

	
Principal and
interest paid monthly; interest accrues at Prime + 2.75%; monthly
payment currently $74,111.

	
Secured by: (i) a
second priority lien on the rights of LE in the Nixon Facility and
the other collateral of LE pursuant to a security agreement; (ii) a
first priority lien on the real property interests of LRM; (iii) a
first priority lien on all of LRM’s fixtures, furniture,
machinery and equipment; (iv) a first priority lien on all of
LRM’s contractual rights, general intangibles and
instruments, except with respect to LRM’s rights in its
leases of certain specified tanks, with respect to which Veritex
has a second priority lien in such leases subordinate to a prior
lien granted by LRM to Veritex to secure obligations of LRM under
the $2.0 Million Veritex Loan; and (v) all other collateral as
described in the security documents

	
BDCO

LE

LEH

Jonathan
Carroll

	
 

	
 

	
 

	
● Loan and Security
Agreement dated May 2, 2014 among Sovereign and LRM ($2.0 Million
Sovereign Loan)

	
Retired.

	
NA

	
Secured by
assignment of certain leases of LRM and certain assets of LEH;
guaranteed by Jonathan Carroll.

	
Jonathan
Carroll

	
 

	
 

	
 

	
● Master Lease
Agreement / Amended and Restated Schedule No. 001 dated January 7,
2015 between LRM and Tetra Financial Group,
Inc.

	
Matured November
2017; amount paid off April 2018.

	
N/A

	
N/A

	
N/A

	
 

	
 

	
 

	
● Amended and
Restated Guaranty Fee Agreement dated April 1, 2017 between LRM and
Jonathan Carroll (Guaranty Fee Agreement ties to $10.0 Million
Veritex USDA Loan; amounts owed to Jonathan Carroll captured under
~$1.0 Million BDCO-Carroll Note)

	
Terminates when
$10.0 Million Veritex USDA Loan paid in full.

	
2% fee per annum,
paid monthly on outstanding balance.

	
N/A

	
Jonathan
Carroll

	
 

	
 

	
 

	
● Amended and
Restated Guaranty Fee Agreement dated April 1, 2017 between LRM and
Jonathan Carroll (Guaranty Fee Agreement ties to $2.0 Million
Sovereign Loan; amounts owed to Jonathan Carroll captured under
~$1.0 Million BDCO-Carroll Note)

	
Terminates when $2.0 Million
Sovereign Loan paid in full.

	
2% fee per annum, paid monthly on
outstanding balance.

	
N/A

	
Jonathan
Carroll

 

A-3

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
 

	
 

	
● Ground
Lease Agreement dated June 1, 2015 between LE and LRM

	
Terminates March
2035.

	
Base rent at
$10,000 per month.

	
N/A

	
LE

	
 

	
 

	
 

	
● Tolling
Agreement dated October 1, 2015 between LRM, as Owner, and LE, as
Customer (LE’s use of certain Nixon Facility Processing
Units)

	
12-year term
expiring October 2027.

 

 

 

 

 

	
Quarterly
reservation fee of $180,000 up to 210,000 gallons per quarter;
additional $0.05 per gallon for tolling volumes greater than
210,000 per quarter.

	
N/A

	
LE

	
 

	
C.

	
Nixon Product
Storage, LLC (“NPS”)

	
● None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
D.

	
Blue
Dolphin Pipe Line Company (“BDPL”)

	
● Loan
and Security Agreement dated August 15, 2016 between LEH, as
Lender, and BDPL, as Debtor ($4.0 Million BDPL-LEH
Loan)

	
Matures
August 2018.

	
$500,000
payment per year; balloon payment due at maturity; interest accrues
at 16.0%.

	
Secured
by real property (193 acres of BDPL-owned land) and fixtures and
personal property located in Freeport, Texas.

	
LEH

	
 

	
D.

	
Blue
Dolphin Services Company

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
F.

	
Blue
Dolphin Exploration Company

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
G.

	
Blue
Dolphin Petroleum Company

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
H.

	
Petroport,
Inc.

	
None

	
N/A

	
N/A

	
N/A

	
N/A

 

A-4

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	

I.

	
 

	

Lazarus Energy Holdings, LLC

	
● Note
Purchase Agreement dated December 6, 2006 between LEH, Lazarus
Refining & Marketing, LLC (previous LEH subsidiary), and
Louisiana I, Louisiana II, LE and LTRII, as Issuers, and John
Kissick and AP Energy Partners LLC, as Investors

	
SEE
$2.0 MILLION KISSICK BRIDGE 1 AND $1.0 MILLION AP BRIDGE PROMISSORY
NOTES BELOW

	
N/A

	
N/A

	
N/A

	
 

	
 

	
 

	
● Promissory
Note (8% Senior Note Due 2007) dated December 6, 2006 between
Louisiana I, Louisiana II, LE and LTRII, as Issuers, and John
Kissick, as Holder ($2.0 Million Kissick Bridge 1)

	
Matured;
past due.

	
Balloon
payment due at maturity; accrues interest at 8.0%; currently
payments on demand.

	
Secured
by Collateral Documents as defined in the Note Guaranty, the
Gatehouse Guaranty, and the Gatehouse Mortgage.

	
LEH

	
 

	
 

	
 

	
● Promissory
Note (8% Senior Note Due 2007) dated December 6, 2006 between
Louisiana I, Louisiana II, LE and LTRII, as Issuers, and AP Energy
Partners LLC, as Holder ($1.0 Million AP Bridge 1)

	
Matured;
past due.

	
Balloon
payment due at maturity; accrues interest at 8.0%; currently
payments on demand.

	
Secured
by Collateral Documents as defined in the Note Guaranty, the
Gatehouse Guaranty, and the Gatehouse Mortgage.

	
LEH

	
 

	
 

	
 

	
● Note
Purchase Agreement dated February 21, 2007 between LEH, Lazarus
Refining & Marketing, LLC (previous LEH subsidiary), LE,
Louisiana I, Louisiana II, LTRII, as Issuers, and Initial
Noteholders, and Gatehouse Guarantor (~$2.9 Million Kissick Bridge
2)

	
Retired

	
N/A

	
N/A

	
N/A

	
 

	
 

	
 

	
● Promissory
Note (8% Senior Note) to John H. Kissick, as Holder ($1.0 Million
Kissick Bridge 3)

	
Matured;
past due.

	
Balloon
payment due at maturity; accrues interest at 8.0%; currently
payments on demand.

	
No
security identified.

	
LEH

	
 

	
 

	
 

	
● Loan
and Security Agreement dated August 15, 2016 between John H.
Kissick, as Lender, and LEH, as Debtor ($4.0 Million Kissick 2016
Note)

	
Matures October
2018.

	
$500,000 payment
per year; balloon payment due at maturity; interest accrues at
16.0%.

	
Secured by
substantially all of LEH’s personal property, as well as (i)
the Property described in that certain Deed of Trust, Mortgage,
Security Agreement, Assignment of Leases And Rents, Financing
Statement And Fixture Filing dated as of August 15, 2016,
executed by Debtor for the benefit of Lender; and (ii) all Payment
Rights described in that certain Collateral
Assignment dated as of August 15, 2016, executed by Debtor in
favor of Lender.

	
John
H. Kissick

 

A-5

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
 

	
 

	
● Promissory
Note with Notre Dame Investors, Inc., as Holder ($1.5 Million Notre
Dame/NDI Note)

	
Matures July
2025.

	
Accrues interest at
6.0%; current monthly payment of $13,068.

	
Secured by
promissory note between NALIC and LEH.

	
LTRII

	
 

	
 

	
 

	
● Promissory
Note dated May 21, 2013 between LEH, as Maker, and Scoggin LLC, as
Payee ($6.0 Million Scoggins Note)

	
Matures December
2020.

	
Semi-annual
payments of $500,000.

	
Guaranteed by
Louisiana I, Louisiana II, and LTRII.

	
Louisiana
I

Louisiana
II

LTRII

	
 

	
 

	
 

	
● Promissory
Note between North American Life Insurance Company, as Issuer, and
LEH, as Holder ($2.0 Million NALIC Note)

	
Matures April
2024.

	
Accrues interest at
8.0%; current monthly payment of $20,000 to David
Roberson.

	
No security
identified.

	
Jonathan
Carroll

Gina
Carroll

	
 

	
 

	
 

	
● Loan
and Security Agreement dated August 15, 2016 between LEH, as
Lender, and BDPL, as Debtor ($4.0 Million BDPL-LEH
Loan)

	
Matures August
2018.

	
$500,000 payment
per year; balloon payment due at maturity; interest accrues at
16.0%.

	
Secured by real
property (193 acres of BDPL-owned land) and fixtures and personal
property located in Freeport, Texas.

	
BDCO
/ BDPL

	
 

	
 

	
 

	
● Amended
and Restated Promissory Note dated June 30, 2017 between LEH, as
Lender, and BDCO, as Borrower (~$2.5 Million BDCO-LEH
Note)

	
Matures January
2019.

	
Interest accrues at
8.0%; balloon payment due at maturity.

	
N/A

	
BDCO

	
 

	
 

	
 

	
● Amended
and Restated Operating Agreement dated April 1, 2017 between BDCO,
LE, and LEH

	
Expires April 1,
2020, upon written notice of either party of a material breach, or
upon 90 days’ notice by BDCO’s Board of Directors if
the Board determines the agreement is no longer in BDCO’s
best interests.

	
LEH is reimbursed
at cost plus 5% for reasonable costs incurred while LEH performs
the Services.

	
N/A

	
BDCO

LE

	
 

	
 

	
 

	
● Terminal
Services Agreement dated April 1, 2016 between LEH and LRM (storage
of jet fuel)

	
Terminated April
2017.

	
N/A

	
N/A

	
LRM

	
 

	
 

	
 

	
● Equipment
Finance Agreement dated June 15, 2018 between LEH and Star Capital
Group / Wells Fargo Equipment Finance, Manufacturer Services
Group

	
36-month term;
matures June 2021.

	
Monthly payment of
$8,089.

	
Security interest
in collateral; collateral includes cooling tower, heat exchanger,
and chiller pump; guaranteed by Jonathan Carroll.

	
Jonathan
Carroll

 

	
 

	
A.

	
Lazarus
Texas Refinery I, LLC (“LTRI”)

	
● Promissory
Note to National Oil Recovery Corporation, as Holder (~$2.7 Million
NORCO Note)

	
Retired.

	
N/A

	
N/A

	
N/A

	
 

	
B.

	
Lazarus
Texas Refinery II, LLC (“LTRII”)

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
C.

	
Lazarus
Louisiana Refinery, LLC (“Louisiana I”)

	
None

	
N/A

	
N/A

	
N/A

	
N/A

 

A-6

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
D.

	
Lazarus
Louisiana Refinery II, LLC (“Louisiana
II”)

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
E.

	
Lazarus
Forest Products, LLC (“LFP”)

	
● Loan
Modification Agreement dated December 12, 2011 between One World
Bank, NA (“One World”), as Lender, LO, and LFP, as
Borrowers, and Jonathan P. Carroll, Sr. and LEH, as Guarantors (SEE
BELOW LFP USDA AND SBA LOANS)

	
No
change to terms.

	
Principal
and interest paid monthly; balloon payment due at
maturity.

	
Secured
by collateral comprised of real estate described in the Mortgages
and the personal property described in the Security Agreements;
guaranteed by LEH and Jonathan Carroll.

	
LO

Jonathan
Carroll

LEH

	
 

	
 

	
 

	
● Loan
Agreement dated December 21, 2009 between One World, as Lender, LO
and LFP, as Borrowers ($1.6 Million LFP SBA Loan)

	
Matures
December 2019.

	
Principal
and interest paid monthly; balloon payment due at maturity; monthly
payment currently $18,448.

	
Secured
by collateral comprised of real estate described in the Mortgages
and the personal property described in the Security Agreements;
guaranteed by LEH and Jonathan Carroll.

	
LO

LEH

Jonathan
Carroll

	
 

	
 

	
 

	
● Promissory
Note dated December 31, 2008 between One World, as Lender, and
J&D Lumber, Inc., as Borrower / Assumption Agreement dated
December 31, 2009 wherein LO and LFP assumed J&D Lumber’s
Obligations as Borrowers ($3.3 Million LFP USDA Loan)

	
Matures
December 2028.

	
Principal
and interest paid monthly; balloon payment due at maturity; monthly
payment currently $22,596.

	
Secured
by collateral comprised of real estate described in the Mortgages
and the personal property described in the Security Agreements;
guaranteed by LEH and Jonathan Carroll.

	
LO

LEH

Jonathan
Carroll

	
 

	
F.

	
Lazarus
Oklahoma, LLC (“LO”)

	
● Loan
Modification Agreement dated December 12, 2011 between One World,
as Lender, LO, and LFP, as Borrowers, and Jonathan P. Carroll, Sr.
and LEH, as Guarantors (SEE BELOW LO USDA AND SBA
LOANS)

	
No
change to term.

	
Principal
and interest paid monthly; balloon payment due at
maturity.

	
Secured
by collateral comprised of real estate described in the Mortgages
and the personal property described in the Security Agreements;
guaranteed by LEH and Jonathan Carroll.

	
LFP

Jonathan
Carroll

LEH

	
 

	
 

	
 

	
● Loan
Agreement dated December 21, 2009 between One World, as Lender, LO
and LFP, as Borrowers ($1.6 Million LO SBA Loan)

	
Matures
December 2019.

	
Principal
and interest paid monthly; balloon payment due at maturity; monthly
payment currently $18,448.

	
Secured
by collateral comprised of real estate described in the Mortgages
and the personal property described in the Security Agreements;
guaranteed by LEH and Jonathan Carroll.

	
LFP

LEH

Jonathan
Carroll

	
 

	
 

	
 

	
● Promissory
Note dated December 31, 2008 between One World, as Lender, and
J&D Lumber, Inc., as Borrower / Assumption Agreement dated
December 31, 2009 wherein LO and LFP assumed J&D Lumber’s
Obligations as Borrowers ($3.3 Million LO USDA Loan)

	
Matures
December 2028.

	
Principal
and interest paid monthly; balloon payment due at maturity; monthly
payment currently $22,596.

	
Secured
by collateral comprised of real estate described in the Mortgages
and the personal property described in the Security Agreements;
guaranteed by LEH and Jonathan Carroll.

	
LFP

LEH

Jonathan
Carroll

	
 

	
G.

	
Lazarus
Energy Development, LLC

	
None

	
N/A

	
N/A

	
N/A

	
N/A

 

A-7 

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
H.

	
Lazarus
Environmental, LLC

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
I.

	
Lazarus
Marine Terminal I, LLC (“LMT”)

	
● Loan
and Security Agreement dated May 31, 2016 among Sovereign, as
Lender, and LMT, as Borrower (Veritex successor in interest to
Sovereign Bank by merger) ($1.0 Million Veritex Loan)

	
Matures
May 2019.

	
Principal
and interest paid monthly; interest accrues at Prime + 2.75%;
monthly payment currently $30,038.

	
Personal
property of Borrower; guaranteed by Jonathan Carroll and
LEH

	
Jonathan
Carroll

LEH

	
 

	
 

	
 

	
● Tolling
Agreement dated May 24, 2016 between LMT and LE (LE’s use of
barge loading facility in Ingleside, Texas)

	
5-year
term expiring May 2021.

	
Monthly
reservation fee of $50,400 up to 84,000 gallons per day; additional
$0.02 per gallon for tolling volumes greater than 210,000 per
quarter.

	
N/A

	
LE

	
 

	
J.

	
Lazarus
Midstream GP, LLC

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
K.

	
Lazarus
Midstream Partners, LP

	
None

	
N/A

	
N/A

	
N/A

	
N/A

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
L.

	
Lazarus
Midstream Acquisition Corp.

	
None

	
N/A

	
N/A

	
N/A

	
N/A

 

A-8

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	

III.

	
 

	

Jonathan P. Carroll

	
 

	
 

	
 

	
 

	
 

	
 

	
A.

	
Ingleside
Crude, LLC (“Ingleside”)

	
● Loan
Agreement dated July 18, 2013 between Green Bank, NA (“Green
Bank”), as Lender, and Ingleside, as Borrower ($1.9 Million
funded out of $3.2 Million)(Green Bank SBA Loan I)

	
Matures
July 2023.

	
Monthly
payment of principal and interest; interest accrues at Prime +
2.75%; monthly payment currently $30,617.

	
Secured by 1st
perfected security interest, subject
to no other liens, in personal property (equipment and machinery);
pledge of corporate stock (100,000 shares of BDCO common stock), an
SBA guarantee, and a perfected 1st
lien and assignment of leases on all
existing, renovated and new tanks located at the Ingleside, Texas
tank farm; additional collateral includes assignment of life
insurance policy on Jonathan Carroll; loan guaranteed by Jonathan
Carroll.

	
Jonathan
Carroll

	
 

	
 

	
 

	
● Construction
Loan Agreement dated October 7, 2015 between Green Bank, N.A., as
Lender, and Ingleside, as Borrower ($1.6 Million Green Bank SBA
Loan II)

	
Matures
October 2025.

	
Principal
and interest; interest accrues at Prime + 2.75%; monthly payment
currently $20,050.

	
Secured
by all of Borrower’s property, now owned or hereafter
acquired and wherever located, together with all replacements,
accessions, proceeds, and products, to wit: all business assets,
including without limitation, all Equipment, Fixtures, Inventory,
Investment Property, Documents, Instruments, Chattel Paper,
Accounts, Contract Rights, Deposit Accounts, General Intangibles,
Intellectual Property and Farm Products, including without
limitation those items of property described in the Security
Agreement exhibits, incorporated therein for all purposes.;
guaranteed by Jonathan Carroll.

	
Jonathan
Carroll

	
 

	
 

	
 

	
● Amended
and Restated Promissory Note dated March 31, 2017 between
Ingleside, as Lender, and BDCO, as Borrower (~$1.1 Million
BDCO-Ingleside Note)

	
Matures
January 2019.

	
Interest
accrues at 8.0%; balloon payment due at maturity.

	
None

	
BDCO

	
 

	
 

	
 

	
● Amended
and Restated Tank Lease Agreement dated January 1, 2016 between
Ingleside and LE (periodic additional product storage
needs)

	
Terminated
April 2017.

	
N/A

	
N/A

	
LE

 

A-9

 

Exhibit
“C”

Material
Agreements and Indebtedness

 

 

	
 

	
B.

	
Lazarus
Capital, LLC (f/k/a Lazarus Financial, LLC) (“Lazarus
Capital”)

	
● Amended
and Restated Promissory Note dated March 31, 2017 between Lazarus
Capital, as Lender, and BDCO, as Borrower (~$0.1 Million
BDCO-Carroll Note)

	
Matures
January 2019.

	
Revolver;
principal and interest paid quarterly; interest accrues at 8.0%;
payment 50% in cash and 50% in BDCO common stock.

	
None

	
BDCO

	
 

	
C.

	
Carroll
& Company Financial Holdings, LP

	
None

	
N/A

	
N/A

	
N/A

	
N/A

 

 

 

 

 

  A-10

 

 

Exhibit
D

 

Stipulation of
Dismissal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit D

 

CAUSE
NO. 2016-28397

 

	
GEL
Tex Marketing, LLC,

 

Petitioner

 

v.

 

Lazarus
Energy, LLC

 

Respondent

  

	
§

§

§

§

§

§

§

§

§

 

	
IN
THE DISTRICT COURT OF

 

 

 

HARRIS
COUNTY, TEXAS

 

 

 

165th
JUDICIAL DISTRICT

 

 

STIPULATION OF DISMISSAL OF CLAIMS AGAINST LAZARUS ENERGY,
LLC

 

Plaintiff/Petitioner
GEL Tex Marketing, LLC and Defendant/Respondent Lazarus Energy, LLC
jointly announce to the Court that they have reached a settlement
of all pending matters between them. Accordingly, GEL Tex
Marketing, LLC hereby non-suits with prejudice its claims against
Lazarus Energy, LLC. Each party will bear its own costs and
fees.

By
the electronic signature of its counsel below, Lazarus Energy, LLC
has noted its agreement to this Stipulation.

Accordingly,
GEL Tex Marketing, LLC respectfully requests that the Court enter
the attached order dismissing Lazarus Energy, LLC with
prejudice.

 

 

1

 

 

 

Respectfully
submitted,

 

RUSTY HARDIN & ASSOCIATES, LLP

 

/s/ Rusty
Hardin

Rusty
Hardin

Texas
Bar No. 08972800

rhardin@rustyhardin.com

Joe
Roden

Texas
Bar No. 00794549

jroden@rustyhardin.com

Jeremy
T. Monthy

Texas
Bar No. 24073240

jmonthy@rustyhardin.com

1401
McKinney St., Suite 2250

Houston,
Texas 77010

Telephone:
(713) 652-9000

Facsimile:
(713) 652-9800

SUSMAN GODFREY, LLP

 

/s/ Brian D.
Melton

Brian
D. Melton

Texas
Bar No. 24010620

Neal
S. Manne

Texas
Bar No. 12937980

1000
Louisiana, Suite 5100

Houston,
Texas 77002-5096

Telephone:
(713) 653-7825

Facsimile:
(713) 654-6666

BMelton@SusmanGodfrey.com

NManne@SusmanGodfrey.com

 

ATTORNEYS
FOR LAZARUS ENERGY, LLC

 

 

DLA PIPER LLP (US)

Christina
E. Ponig

Texas
Bar No. 24041706

christina.ponig@dlapiper.com

Brett
D. Solberg

Texas
Bar No. 24070651

brett.solberg@dlapiper.com

1000
Louisiana, Suite 2800

Houston,
Texas 77002

Telephone:
(713) 424-8400

Facsimile:
(713) 424-8401

 

ATTORNEYS FOR

GEL TEX MARKETING, LLC

 

Certificate of Service

 

The
undersigned certify that a true and correct copy of the foregoing
document has been served electronically on                                                                     
on all counsel of record.

 

_______________________________

/s/

 

 

2

 

 

CAUSE
NO. 2016-28397

 

	
GEL
Tex Marketing, LLC,

 

Petitioner

 

v.

 

Lazarus
Energy, LLC

 

Respondent

	
§

§

§

§

§

§

§

§

§

	
IN
THE DISTRICT COURT OF

 

 

 

HARRIS
COUNTY, TEXAS

 

 

 

165th
JUDICIAL DISTRICT

 

 

ORDER OF DISMISSAL OF CLAIMS AGAINST

LAZARUS ENERGY, LLC

 

Plaintiff/Petitioner
GEL Tex Marketing, LLC filed a stipulation of dismissal announcing
that it had settled its claims against Defendant/Respondent Lazarus
Energy, LLC. It non-suited those claims with prejudice and
requested that the Court enter this Order confirming
dismissal.

Consistent
with that request, the Court hereby dismisses GEL Tex Marketing,
LLC’s claims against Lazarus Energy, LLC with
prejudice.

 

Signed on                                    
at                                                     
..

 

 

________________________________

PRESIDING
DISTRICT JUDGE

 

 

 

  3Exhibit 10.1

 

Business Loan
Agreement

 

	Principal	Loan Date	Maturity Date	Loan No.	Call / Coll	Account	Officer	Initials
	$1,800,000.00 	07/20/2018	7/20/2021	1218300	 	 	ACS	 ACS
	References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.
	Any item above containing “***” has been omitted due to text length limitations.

 

	Company:	 	Hawksite 27 Development Company, LLC	 	Lender:	 	Main Bank
	 	 	333 Rio Rancho Blvd NE, Suite 202	 	 	 	Albuquerque Office
	 	 	Rio Rancho, NM 87124	 	 	 	7300 Menaul Blvd., NE
	 	 	 	 	 	 	Albuquerque, NM 87110

 

 

 

THIS
BUSINESS LOAN AGREEMENT dated July 20, 2018, is made and executed between Hawksite 27 Development Company, LLC (“Borrower”)
and Main Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from
Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be
described on any exhibit or schedule attached to this Agreement. Borrower understands and agrees that: (A) in granting, renewing,
or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in
this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s
sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

 

TERM.
This Agreement shall be effective as of July 20, 2018, and shall continue in full force and effect until such time as all
of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’
fees, and other fees and charges, or until July 20, 2021.

 

CONDITIONS PRECEDENT
TO EACH ADVANCE. Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall
be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related
Documents.

 

Loan
Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting
to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security
Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for
the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

 

Borrower’s
Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have
provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

 

Payment
of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable
as specified in this Agreement or any Related Document.

 

Representations
and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and correct.

 

No
Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default
under this Agreement or under any Related Document.

 

REPRESENTATIONS
AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement
of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

 

Organization. Borrower
is a limited liability company which is, and at all times shall be, duly organized, validly existing, and in good standing under
and by virtue of the laws of the State of New Mexico. Borrower is duly authorized to transact business in all other states in
which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in
which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign limited liability
company in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition.
Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged
or presently proposes to engage. Borrower maintains an office at 333 Rio Rancho Blvd NE, Suite 202, Rio Rancho, NM 87124. Unless
Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records
including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s
state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in
full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes,
orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business
activities.

 

Assumed
Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names
used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower
does business: None.

 

Authorization.
Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized
by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any
provision of (a) Borrower’s articles of organization or membership agreements, or (b) any agreement or other instrument
binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s
properties.

 

Financial Information.
Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial
condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition
subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.

 

Legal
Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when
delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their
respective terms.

 

Properties.
Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing
to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns
and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security
documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s
legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

 

Hazardous Substances.
Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period
of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal,
release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower
has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use,
generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about
or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or
claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized
user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on,
under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender
and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance
of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense
and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence
in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future
claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any
such laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims, losses, liabilities, damages,
penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous
waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify and
defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall
not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

 

Litigation and Claims.
No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes)

 

     

     

    

	Loan
    No: 1218300	 	BUSINESS
    LOAN AGREEMENT
(Continued)	 	Page
    2

 

against
Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial
condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged
by Lender in writing.

 

Taxes.
To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be
filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently
being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been
provided.

 

Lien
Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or
indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s
Security Interests and rights in and to such Collateral.

 

Binding
Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers
thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective
terms.

 

AFFIRMATIVE COVENANTS. Borrower
covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

 

Notices
of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial
condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions
affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition
of any Guarantor.

 

Financial
Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and
audit Borrower’s books and records at all reasonable times.

 

Financial
Statements. Furnish Lender with the following:

 

Annual
Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year,
Borrower’s balance sheet and income statement for the year ended, prepared by Borrower.

 

Additional
Requirements. Tax Returns. Not later than ninety (90) days after AMREP Corporation has filed its tax return for the tax reporting
period ended, Borrower shall deliver the AMREP Corporation tax return to the Lender.

 

All
financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent
basis, and certified by Borrower as being true and correct.

 

Additional Information.
Furnish such additional information and statements, as Lender may request from time to time.

 

Additional
Requirements.

 

HVCRE:
Borrower shall maintain a minimum 15% cash equity at all times, including subordinate lien(s). Any additional financing on said
property will need to have Main Bank’s prior written approval.

 

Insurance. Maintain
fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s
properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice
to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired
in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss
payable or other endorsements as Lender may require.

 

Insurance Reports. Furnish
to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the
policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and
the manner of determining those values; and (6) the expiration date of the policy. 

 

Guaranties.
Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantor
named below, on Lender’s forms, and in the amount and under the conditions set forth in those guaranties.

 

	Name of Guarantor	 	Amount
	AMREP Southwest Inc.	 	Unlimited

 

Other
Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower
and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

 

Loan
Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary
by Lender in writing.

 

Taxes,
Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower’s properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (1) the legality of the same shall be contested in good faith by appropriate
proceedings, and (2) Borrower shall have established on Borrower’s books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with GAAP.

 

Performance.
Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related
Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in
writing of any default in connection with any agreement.

 

Operations.
Maintain executive and management personnel with substantially the same qualifications and experience as the present executive
and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner.

 

Environmental
Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings
as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance
defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive,
at or affecting any property or any facility owned, leased or used by Borrower.

 

Compliance with Governmental
Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities
applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral,
including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance,
or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender
in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not
jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect
Lender’s interest.

 

Inspection.
Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s
other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s
books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer
generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower,
upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide
Lender with copies of any records it may request, all at Borrower’s expense.

 

Compliance Certificates.
Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower’s chief
financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth
in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate,
no Event of Default exists under this Agreement.

 

Environmental
Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to
exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third
party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal,
state or local governmental authorities ; shall furnish to Lender promptly and in any event within thirty (30) days after receipt
thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any
environmental activity whether or not there is damage to the environment and/or other natural resources.

 

Additional
Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments,
financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to

 

     

     

    

	Loan
    No: 1218300	 	BUSINESS
    LOAN AGREEMENT
(Continued)	 	Page
    3

 

evidence and
secure the Loans and to perfect all Security Interests.

 

Consent
to Loan Participation. Lender may provide to any one or more purchasers, or potential purchasers, any information or knowledge
Lender may have about Borrower or about any other matter related to the Loan provided that: (i) Lender notifies Borrower in writing
of such disclosure prior to such disclosure; and (ii) such purchaser executes, acknowledges and delivers to Lender and Borrower
a confidentiality agreement in form and substance mutually acceptable to Borrower and Lender.

 

LENDER’S EXPENDITURES.
If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower
fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure
to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents,
Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including
but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied
or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures
incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred
or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender’s
option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any
installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of
the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

 

NEGATIVE
COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the
prior written consent of Lender:

 

Agreements.
Enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s
obligations under this Agreement or in connection herewith.

 

CESSATION
OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other
agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if : (A) Borrower or any Guarantor
is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor
has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy
or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition,
in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender.

 

RIGHT OF SETOFF. To
the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether
checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts
Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff
would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums
owing on the Indebtedness against any and all such accounts.

 

DEFAULT.
Each of the following shall constitute an Event of Default under this Agreement:

 

Payment Default. Borrower
fails to make any payment when due under the Loan.

 

Other
Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained
in any other agreement between Lender and Borrower.

 

False Statements. Any
warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement
or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes
false or misleading at any time thereafter.

 

Death
or Insolvency. The dissolution of Borrower (regardless of whether election to continue is made), any member withdraws from
Borrower, or any other termination of Borrower’s existence as a going business or the death of any member, the insolvency
of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

 

Defective
Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure
of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

 

Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the
Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim
which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture
proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

 

Events
Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

 

Adverse
Change. A material adverse change occurs in Borrower’s financial condition.

 

Right
to Cure. If any default is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar
default within the preceding twelve (12) months, it may be cured if Borrower or Grantor, as the case may be, after Lender sends
written notice to Borrower or Grantor, as the case may be, demanding cure of such default: (1) cure the default within fifteen
(15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender’s
sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.

 

EFFECT OF AN EVENT OF
DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents,
all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will
terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all Indebtedness
immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default
of the type described in the “Insolvency” subsect ion above, such acceleration shall be automatic and not optional.
In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may
be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect
Lender’s right to declare a default and to exercise its rights and remedies.

 

CROSS COLLATERALIZATION.
Any and all collateral pledged to the bank for this and other loans is hereby pledged as collateral to this loan.

 

MAXIMUM
LOAN AMOUNT. In the event sufficient lot sales have not occurred on/by July 20, 2020, Borrower will be required to reduce
the principal balance of the loan to a maximum amount of $1,700,000.00 at the end of twenty four (24) months from the start date
of the loan. Main Bank will only release lots through the sale to unrelated third parties.

 

LOT
RELEASE PROVISION. Minimum Lot Release Price: Individual lots will be released at the greater of 55% of the sales price or
$30,000.00 (approximately 60 lots).

 

MISCELLANEOUS
PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

 

Amendments.
This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in
writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

 

Attorneys’
Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’
fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay
someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’
fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals,
and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may
be directed by the court.

 

Caption
Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.

 

Governing
Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the
laws of the State of New Mexico without regard to its conflicts of law provisions. This Agreement has been accepted by Lender
in the State of New Mexico.

 

     

     

    

	Loan
    No: 1218300	 	BUSINESS
    LOAN AGREEMENT
(Continued)	 	Page
    4

 

No
Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in
writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of
such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No
prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute
a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall
not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of Lender.

 

Notices.
Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered,
when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight
courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid,
directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s
address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless
otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed
to be notice given to all Borrowers.

 

Severability.
If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to
any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance.
If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending
provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality,
invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of
any other provision of this Agreement.

 

Subsidiaries
of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s
subsidiaries. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender
to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

 

Successors
and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents
shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower
shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the
prior written consent of Lender.

 

Survival
of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all
representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered
by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation
made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to
Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each
Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid
in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

 

Time is of the Essence.
Time is of the essence in the performance of this Agreement.

 

Waive
Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim
brought by any party against any other party.

 

DEFINITIONS.
The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically
stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words
and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial
Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance
with generally accepted accounting principles as in effect on the date of this Agreement:

 

Advance. The word
“Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf on a line
of credit or multiple advance basis under the terms and conditions of this Agreement.

 

Agreement.
The word “Agreement” means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified
from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

 

Borrower.
The word “Borrower” means Hawksite 27 Development Company, LLC and includes all co-signers and co-makers signing
the Note and all their successors and assigns.

 

Collateral.
The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form
of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral
chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.

 

Environmental
Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances
relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments
and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state
or federal laws, rules, or regulations adopted pursuant thereto.

 

Event
of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the
default section of this Agreement.

 

GAAP. The
word “GAAP” means generally accepted accounting principles.

 

Grantor.
The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral
for the Loan, including without limitation all Borrowers granting such a Security Interest.

 

Guarantor. The word
“Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

 

Guaranty. The word
“Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of
the Note.

 

Hazardous Substances.
The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical
or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly
used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances”
are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste
as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos.

 

Indebtedness. The word
“Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest
together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any
of the Related Documents.

 

     

     

    

	Loan
    No: 1218300	 	BUSINESS
    LOAN AGREEMENT
(Continued)	 	Page
    5

 

Lender.
The word “Lender” means Main Bank, its successors and assigns.

 

Loan.
The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter
existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described
on any exhibit or schedule attached to this Agreement from time to time.

 

Note.
The word “Note” means The Promissory Note dated July 20, 2018, in the original principal amount of $1,800,000.00
from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of,
and substitutions for the Promissory Note or Agreement.

 

Related
Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental
agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments,
agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

 

Security
Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants,
arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing,
or creating a Security Interest.

 

Security
Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present
and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop
pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor ’s lien, equipment trust, conditional sale,
trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or
lien interest whatsoever whether created by law, contract, or otherwise.

 

BORROWER
ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN
AGREEMENT IS DATED JULY 20, 2018.

 

	BORROWER:
	 	 	 
	HAWKSITE 27 DEVELOPMENT COMPANY, LLC
	 	 	 
	 	 	 
	By:	/s/ Carey A. Plant	 
	 	Carey A. Plant, Vice President and Secretary
	 	Date: July 24, 2018
	 	 	 
	 	 	 
	LENDER:	 
	 	 	 
	MAIN BANK	 
	 	 	 
	 	 	 
	By:	/s/ Alan Shettlesworth	 
	 	Alan Shettlesworth, President & COO

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