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Full title: Objection to Confirmation of Plan Filed by US Specialty Insurance Company. (Related document(s):205 Amended Chapter 11 Plan) (Attachments: # 1 Exhibit 1)(Mayer, Simon) (Entered: 05/24/2021)

Document posted on May 23, 2021 in the bankruptcy, 8 pages and 0 tables.

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To the extent the Proposed Plan attempts to prohibit USSIC from exercising its subrogation rights against non-operating working interest parties, such prohibition may constitute an impermissible third party releases.To the extent the Liquidating Trust, the Debtors, and/or the Post-Effective Date Debtors seek to utilize such Bonds they will need USSIC’s consent and will be required to satisfy past due bonding obligations and pay on-going premiums. Pursuant to the payment and indemnity agreement between the Debtors and USSIC, USSIC is subrogated to all rights of the Debtor to collect or be reimbursed by co-owners or other parties that may be obligated to contribute to pay P&A Obligations (as defined in the Plan), including Statutory P&A Claims (as defined in the Plan).To the extent the Liquidating Trust, the Debtors, and/or the Post-Effective Date Debtors seek to utilize such Bonds they will need USSIC’s consent and must satisfy past due bonding obligations and pay premiums on a go-forward basis.USSIC reserves all rights, including, without limitation, all of its rights, claims, defenses, and remedies with respect to the Debtors (or other parties) and all matters in their cases, including but not limited to USSIC’s rights to assert any claims, rights to setoff, rights of subrogation, or rights of recoupment under the relevant agreements, applicable law, or otherwise.

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION IN RE: § § Case No. 21-30710 CASTEX ENERGY 2005 HOLDCO, § LLC, et al., § Chapter 11 § Debtors.1 § (Jointly Administered) U.S. SPECIALTY INSURANCE COMPANY’S OBJECTION TO CONFIRMATION OF DEBTORS’ SECOND AMENDED JOINT CHAPTER 11 PLAN [Relates to Docket No. 205] To the Honorable Marvin Isgur, United States Bankruptcy Judge: U.S. Specialty Insurance Company’s (“USSIC”) submits this objection (the “Objection”) to the confirmation of the Debtors’ Second Amended Joint Chapter 11 Plan [Docket No. 205] (the “Proposed Plan”), and respectfully would show the Court as follows: SUMMARY 1. As presently formulated it does not appear that the Proposed Plan has been fully conceived. There are several uncertainties with the Proposed Plan that raise concerns and potential objections, including the following: (i) The Proposed Plan does not clearly identify whether and how the Estates’ Assets, including its oil and gas assets, will be transferred into the Liquidating Trust or the mechanism for accomplishing such transfer. (ii) The Proposed Plan improperly seeks to prohibit USSIC from exercising its rights under the Bonds (defined below) and the related payment and indemnity agreements, including its subrogation rights. 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, as applicable, are: Castex Energy 2005 Holdco, LLC (6832); Castex Energy 2005, LLC (6832); Castex Energy Partners, LLC (6832); and Castex Offshore, Inc. (8432). The Debtors’ mailing address is One Memorial City Plaza, 800 Gessner Rd., Suite 925, Houston, Texas 77024.

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(iii) To the extent the Proposed Plan attempts to prohibit USSIC from exercising its subrogation rights against non-operating working interest parties, such prohibition may constitute an impermissible third party releases. (iv) The Proposed Plan does not clearly define the Liquidating Trust’s relationship to the remaining Post-Effective Date Debtors. The Debtors cannot use the transfer to the Liquidating Trust to strip USSIC’s rights under the Bonds and related payment and indemnity agreements, such as their subrogation rights, but maintain the Bond obligations. If the Debtors are bound under the payment and indemnity agreements, the Liquidating Trustee, as the potential owner and sole controller of the Post-Effective Date Debtors, must also be bound by such agreements. (v) It is not clear whether the Proposed Plan is feasible. While the Proposed Plan spells out various funds and assets left to the Liquidating Trust, it is not clear how this waterfall will address the existing and ongoing decommissioning obligations. (vi) The Bonds and related payment and indemnity obligations are financial accommodations contracts and surety arrangements. They are not property of the estate. To the extent the Liquidating Trust, the Debtors, and/or the Post-Effective Date Debtors seek to utilize such Bonds they will need USSIC’s consent and will be required to satisfy past due bonding obligations and pay on-going premiums. As formulated, it is unclear whether the Proposed Plan intends that the Bonds will be utilized on a go-forward basis for decommissioning activities and/or operations. (vii) Finally, the Proposed Plan improperly includes the Liquidating Trustee as a released party. Such release is improper, in part, because the formation of the Liquidating Trust does occur until entry of the Confirmation Order or sometime thereafter. 2. The Debtors bear the burden of establishing that the Proposed Plan meets the requirements under the Bankruptcy Code to be confirmed, including feasibility. Because of the above identified uncertainties, the Debtors likely cannot meet this burden. For these reasons, USSIC requests that the Court deny confirmation of the Proposed Plan. BACKGROUND 3. The Debtors are a private oil and gas company focused on exploration and development in South Louisiana and the Gulf of Mexico. In order to perform oil and gas operations

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offshore, Debtors have acquired certain bonds to secure decommissioning obligations. USSIC and the Debtors are parties to certain bonds, a payment and indemnity agreement, and related agreements. USSIC issued 16 surety bonds to the Debtors (the “Bonds”) to secure certain of the Debtors’ payment or performance of various obligations to governmental and non-governmental obligees for a total penal sum of $11,589,000.00. A schedule of the Bonds is as follows: Bond Number Penalty Amount Principal B004411 $3,000,000.00 Castex Offshore Inc. B006086 $300,000.00 Castex Offshore Inc. B007468 $744,000.00 Castex Offshore Inc. B007494 $1,000,000.00 Castex Offshore Inc. B007495 $1,200,000.00 Castex Offshore Inc. B008860 $2,800,000.00 Castex Offshore Inc. B009746 $700,000.00 Castex Offshore Inc. B009747 $315,000.00 Castex Offshore Inc. B009748 $280,000.00 Castex Offshore Inc. B009756 $145,000.00 Castex Offshore Inc. B009757 $195,000.00 Castex Offshore Inc. B009758 $215,000.00 Castex Offshore Inc. B009759 $225,000.00 Castex Offshore Inc. B009761 $180,000.00 Castex Offshore Inc. B009762 $145,000.00 Castex Offshore Inc. B009763 $145,000.00 Castex Offshore Inc. Total $11,589,000.00 4. A true and correct copy of USSIC’s proof of claim filed in the Castex Offshore, Inc. bankruptcy case, which includes the related Payment and Indemnity Agreements is attached hereto as Exhibit 1. 5. There are provisions in the Proposed Plan that are inconsistent with the rights of USSIC and other similarly situated creditors under the Bankruptcy Code. OBJECTION 6. As the Plan proponents, the Debtors bear the burden of establishing that the Proposed Plan complies with each confirmation requirement under section 1129(a) by a preponderance of evidence. Heartland Federal Sav. & Loan Assoc. v. Briscoe Enterprises, Ltd.

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(In re Briscoe Enterprises, Ltd.), 994 F.2d 1160, 1165, 66–68 (5th Cir. 1993). If the Proposed Plan fails to comply with any one of those requirements, it cannot be confirmed. The Proposed Plan, however, fails to meet the requirements under 1129(a) and, thus, cannot be confirmed. A. Will the Debtors’ Oil and Gas Assets be Transferred into the Liquidating Trust? 7. The Proposed Plan does not clearly identify whether and how the Estates’ Assets, including its oil and gas assets, will be transferred into the Liquidating Trust. The “catch all” plain language of the Proposed Plan—“all other assets of the Debtors”—seems to indicate that the Debtors’ oil and gas assets will be transferred, but it is not clear, particularly in what structure. [Proposed Plan, Art. I, def. “Liquidating Trust Assets”]. Given that the Estates’ oil and gas assets constitute the Estates’ primary assets, the Plan should clearly state whether or not and how such assets may be transferred into the Liquidating Trust. 8. Moreover, if such assets are to be transferred into the Liquidating Trust, the process for transferring such interests into the Liquidating Trust are neither defined nor understood. How do the Debtors intend to obtain any necessary regulatory signoff for the Liquidating Trust to own such assets? If the Liquidating Trust is obtaining title to the oil and gas assets, and therefore falling in to the chain of title, does the Liquidating Trust have sufficient assets to address the P&A Obligations of those assets? The Proposed Plan is silent on these issues. B. The Proposed Plan May Not Impair USSIC’s Subrogation and Other Rights Under the Bonds. 9. The Proposed Plan indicates that the purported transfers will be free and clear of all liens, claims and interests. The Proposed Plan further expressly seeks to strip USSIC’s subrogation right and enjoin USSIC from asserting such rights against third-parties. Specifically, the Proposed Plan states:

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[A]ll Persons who have held, hold, or may hold Claims against the Debtors are permanently enjoined on and after the Effective Date from . . . asserting any right of subrogation of any kind against any obligation due to the Debtors, the Estates or the Liquidating Trust with respect to any such Claim . . . . [Proposed Plan, Art. VII.D]. 10. The Proposed Plan further attempts to prohibit USSIC from its subrogation rights related to Statutory P&A Claims. For the avoidance of doubt, Statutory P&A Claims shall not be assignable or payable, under any theory, including subrogation, to any party other than a Regulatory Agency. [Proposed Plan, Art. III.K]. 11. USSIC objects to the extent the Proposed Plan impairs or attempts to preclude USSIC’s existing subrogation rights under the Bonds and related payment and indemnity agreements. C. The Proposed Plan Contains Improper Third Party Releases. 12. The provisions of the Proposed Plan appear to prohibit USSIC from enforcing its subrogation rights. To the extent this is the case, such prohibition likely also functions as a third party releases which are impermissible under Fifth Circuit law. 13. Pursuant to the payment and indemnity agreement between the Debtors and USSIC, USSIC is subrogated to all rights of the Debtor to collect or be reimbursed by co-owners or other parties that may be obligated to contribute to pay P&A Obligations (as defined in the Plan), including Statutory P&A Claims (as defined in the Plan). 14. The potential prohibitions against USSIC’s subrogation rights in the Proposed Plan act, in effect, as an impermissible third party release. The scope of releases authorized in the Fifth Circuit is limited to debtors and the creditors’ committee. See In re Pacific Lumber, Co., 584 F.3d 229, 252-53 (5th Cir. 2009). In finding more limited releases appropriate, the Fifth Circuit expressly noted that the “fresh start” provided by the Bankruptcy Code is limited.

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15. The Proposed Plan’s provisions prohibiting USSIC from enforcing its subrogation rights in effect provides broad releases and protections to some undefined set of co-owners and owners. This release exceeds the scope permissible under Pacific Lumber. D. The Liquidating Trust’s Relationship to the Remaining Post-Effective Date Debtors is Unclear. 16. The Proposed Plan does not clearly define the Liquidating Trust’s relationship to the remaining Post-Effective Date Debtors. Under the Proposed Plan, some of the Debtors appear to temporarily emerge to assist the Liquidating Trust with the windup of operations and liquidation of the assets. To that end, the Proposed Plan provides that the Liquidating Trustee shall have the sole authority to manage the Post-Effective Date Debtors. [Proposed Plan, Art. IV.C.2.]. 17. USSIC has serious concerns with respect to the treatment of its surety arrangement because, as mentioned above, the Proposed Plan appears to attempt to cut off USSIC’s rights under the payment and indemnity agreements, such as their subrogation rights, but maintain the Bond obligations. The Liquidating Trustee cannot have any more rights or any less obligations under the Bonds than the Debtors currently have. The Debtors are bound under the payment and indemnity agreement. The Liquidating Trustee, as the potential owner with sole control over the Post-Effective Date Debtors, should also be governed by that payment and indemnity agreement, which is part and parcel with the Bonds. E. The Proposed Plan Does Not Appear to be Feasible. 18. It is not clear whether the Proposed Plan is feasible. While the Proposed Plan spells out various funds and assets left to the Liquidating Trust to complete its wind down operations, it is not clear how the asset waterfall will be utilized to accomplish the P&A Obligations.

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F. The Proposed Plan Does Not Provide a Means for The Liquidating Trust to Procure The Necessary Replacement Surety Bonds. 19. There is no provision in the Proposed Plan for the Liquidating Trust to obtain replacement bonds. To the extent the Proposed Plan includes a transfer of the Bonds and related indemnity agreements, USSIC objects. The Bonds and related payment and indemnity obligations are financial accommodations contracts and surety arrangements. They are not property of the estate. The Bonds are not subject to transfer to the Liquidating Trust without consent of USSIC. 20. To the extent that any aspect of the Proposed Plan attempts to transfer the Bonds or separate them from the payment and indemnity agreements, such treatment is not appropriate and USSIC objects. To the extent the Liquidating Trust, the Debtors, and/or the Post-Effective Date Debtors seek to utilize such Bonds they will need USSIC’s consent and must satisfy past due bonding obligations and pay premiums on a go-forward basis. G. The Proposed Plan Improperly Includes The Liquidating Trustee as a Released Party. 21. Finally, the releases set forth in the Proposed Plan include releasing the Liquidating Trustee. Such release is improper, in part, because the formation of the Liquidating Trust does occur until entry of the Confirmation Order or sometime thereafter. RESERVATION OF RIGHTS 22. USSIC reserves all rights, including, without limitation, all of its rights, claims, defenses, and remedies with respect to the Debtors (or other parties) and all matters in their cases, including but not limited to USSIC’s rights to assert any claims, rights to setoff, rights of subrogation, or rights of recoupment under the relevant agreements, applicable law, or otherwise. Nothing in this Objection is intended to be, or should be construed as, a waiver by USSIC of any of its rights.

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CONCLUSION U.S. Specialty Insurance Company respectfully requests that the Court (i) sustain this Objection; (ii) deny confirmation of the Debtors’ Proposed Plan; and (iii) for such other relief as the Court deems just and proper. Dated: May 24, 2021 Respectfully submitted, /s/ Philip G. Eisenberg Philip G. Eisenberg Texas Bar No. 24033923 Elizabeth M. Guffy Texas Bar No. 08592525 Simon R. Mayer Texas Bar No. 24060243 LOCKE LORD LLP 600 Travis St., Suite 2800 Houston, TX 77002 Telephone: (713) 226-1200 Facsimile: (713) 223-3717 peisenberg@lockelord.com eguffy@lockelord.com simon.mayer@lockelord.com Attorneys for U.S. Specialty Insurance Company Certificate of Service I certify that on May 24, 2021, a copy of the foregoing document was served electronically via the Court’s Electronic Case Filing System on all parties registered for such service, including, but not limited to, counsel for the Debtors. /s/ Simon R. Mayer Simon R. Mayer

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