barkau v. california resources corp. - trust indenture act complaint.pdf

8/16/2019 Barkau v. California Resources Corp. - Trust Indenture Act complaint.pdf

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IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHER DISTRICT OF NEW YORK

BRAD BARKAU, Individually and on Behalfof All Others Similarly Situated,

Plaintiff,

v.

CALIFORNIA RESOURCES

CORPORATION,

Defendant.

No:____________

CLASS ACTION COMPLAINT

DEMAND FOR JURY TRIAL

Plaintiff Brad Barkau (“Plaintiff ”), individually and on behalf of all others similarly

situated, by his attorneys, hereby alleges the following based upon information and belief, and

upon the investigation by his counsel, which included a review of United States Securities and

Exchange Commission (“SEC”) filings by California Resources Corporation (“California

Resources” or the “Company”), as well as regulatory filings and reports, press releases and other

public statements issued by the Company, and analysts reports about the Company.

NATURE OF THE CLAIM

This is a class action on behalf of all persons who beneficially owned California

Resources’ (i) 5% Notes due 2020 (CUSIP 13057QAB3; 13057QAA5; U1303AAA4) (the “5%

Notes”); (ii) 5½% Notes due 2021 (CUSIP 13057QAD9) (the “5½% Notes”); and 6% Notes due

2024 (CUSIP 13057QAF4; 13057QAE7; U1303AAC0) (the “6% Notes,” together with the 5%

Notes and 5½% Notes, the “Class Notes”), from November 12, 2015 to the present (the “Class

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


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Period ”). Plaintiff brings claims under the Trust Indenture Act of 1939 (the “TIA”), 15 U.S.C. §§

77aaa-77bbbb, and for breach of contract and unjust enrichment.

On November 12, 2015, California Resources announced the commencement of a

private exchange offer (the “Exchange Offer ”), upon terms and conditions set forth in a private

offering memorandum (the “Offering Memorandum”) for up to $1 billion aggregate principal

amount of the Class Notes (the “Maximum Exchange Amount,” subsequently increased to $2.8125

billion). The Class Notes would be exchanged for newly issued 8% Second Lien Notes due 2022

(the “ New Secured Notes”). Notably, the Exchange Offer was conducted as a private offer, despite

the fact that the Class Notes were registered and publicly traded without any prerequisites. As a

result, only Qualified Institutional Buyers (“QIBs”) and non-U.S. persons within the meaning of

SEC Rule 902(k) of Regulation S, promulgated under the Securities Act of 1933 (the “Securities

Act”), were eligible to participate in the Exchange Offer.

QIBs are defined in SEC Rule 144A, promulgated under the Securities Act as,

among other eligible entities, generally an entity that owns and invests on a discretionary basis at

least $100 million. 17 C.F.R. § 230.144A. QIBs can include banks, savings and loans associations,

insurance companies, investment companies, employee benefit plans or entities owned entirely by

accredited investors. QIBs can be foreign or domestic entities, however, they must be institutions.

Regardless of how wealthy or sophisticated an individual is, he or she are barred from becoming

a QIB.

By excluding non-QIB investors from participating in the Exchange Offer, the

Company provided unfair and improper benefits to QIBs, including, inter alia, violating the terms

of the Indenture, dated October 1, 2014, by and among California Resources, the Company’s

subsidiaries as guarantors, and Wells Fargo Bank, N.A., (“Trustee”) (the “Indenture”)(Ex. A),



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which governs the Class Notes; the implied covenant of good faith and fair dealing found in every

contract under New York law; and the TIA.

The Indenture is a contract between the Company and the holders of the Class

Notes. The terms that govern the relationship between the parties are expressly written in the

Indenture. Throughout the Indenture, Class Noteholders are provided the right and the Company

has the obligation to treat all holders equally. For example, Section 3.02 of the Indenture provides

that “[i]f less than all of the Notes of a series are to be redeemed at any time, the Trustee shall

select the Notes of such series to be redeemed among the Holders of the Notes on a pro rata

basis[.]” (Emphasis added.)

The TIA was implemented to supplement the Securities Act, and provides for

various protection for bond investors. Among the protections for bond investors, Section §316(b)

provides every noteholder the legal right to “to receive payment of the principal of and interest on

such indenture security, on or after the respective due dates expressed in such indenture security,

or to institute suit for the enforcement of any such payment on or after such respective dates, shall

not be impaired or affected without the consent of such holder…” (Emphasis added.)

The selective and exclusionary nature of the Exchange Offer was unfair and

discriminatory towards the non-QIB holders of the Class Notes who purchased the registered

securities in the public market, relying on the right to equal treatment of all noteholders. As noted

by Bloomberg, those investors who do not participate in the Exchange Offer “know [they]’re going

to take a hit.” Accordingly, the exclusion of non-QIBs from the Exchange Offer injured the Class

Noteholders (excluding QIBs and non-U.S. persons) and unjustly enriched Defendant, by

unrightfully subordinating the Class Notes to the New Secured Notes created in the Exchange

Offer.



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JURISDICTION AND VENUE

This Court has subject matter jurisdiction over the federal law claims pursuant to

15 U.S.C. § 77vvv(b), Section 322(b) of the TIA and 28 U.S.C 1331.

This Court has supplemental jurisdiction over the state law claims in this action

pursuant to 28 U.S.C. § 1367.

This Court has personal jurisdiction over Defendant. The Class Notes were sold

and marketed in New York, such that Defendant maintains sufficient minimum contacts in this

jurisdiction. Additionally, pursuant to Section 12.10 of the Indenture, Defendant irrevocably

consented to the jurisdiction of, inter alia, this Court, for any actions arising out of or based upon

the Indenture and the Class Notes.

This Court is the proper venue for this action, pursuant to Section 322(b) of the

TIA, 15 U.S.C. § 77vvv(b), Section 22(a) of the Securities Act of 1933, 15 U.S.C. 77v(a), and 28

U.S.C. § 1391(b) and (c). Defendant, directly and indirectly, singly and in concert, made use of

the means and instrumentalities of transportation and communication in, or the instrumentalities

of, interstate commerce, or of the mails in connection with the unlawful acts and practices and

course of business alleged in this Complaint. Additionally, Section 12.10 of the Indenture provides

that the Defendant irrevocably and unconditionally waives any objection to the laying of venue of

any suit, action or other proceeding in, inter alia, this Court.

THE PARTIES

Plaintiff acquired 6% Notes prior to the announcement of the Exchange Offer and

has continued to hold 6% Notes at all times relevant to this action. Plaintiff is a U.S. person who

does not qualify as a QIB, and was therefore ineligible to participate in the Exchange Offer.



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Defendant California Resources Corporation is a Delaware corporation, with its

principle executive offices located at 9200 Oakdale Ave, Los Angeles, California 91311.

FURTHER SUBSTANTIVE ALLEGATIONS

Background

California Resources is an independent oil and natural gas exploration and

production company operating properties exclusively within the State of California. California

Resources was incorporated in Delaware as a wholly-owned subsidiary of Occidental Petroleum

Corporation (“Occidental”) on April 23, 2014. The Company remained a wholly-owned subsidiary

of Occidental until November 30, 2014, when Occidental distributed shares of our common stock

on a pro rata basis to Occidental stockholders and became an independent, publicly traded

company.

As noted by the Company in its annual report filed on Form 10-K with the SEC on

February 29, 2015, “[m]uch of the global exploration and production industry is challenged at

current price levels, putting pressure on the industry’s ability to generate positive cash flow and

access capital,” which has led many industry companies to seek to restructure their finances.

The Company’ s Issuance of the Class Notes

On October 1, 2014, the Company issued $5.0 billion in aggregate principal

amount of the Class Notes, comprised of $1.00 billion of 5% Notes, $1.75 billion of 5½% Notes

and $2.25 billion of 6% Notes, in a private placement. The Class Notes were issued at par and are

fully and unconditionally guaranteed on a senior unsecured basis by all of the Company’s material

subsidiaries. The net proceeds from the issuance of the Class Notes were used to make a $4.95

billion cash distribution to Occidental in October 2014.



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Shortly after the initial issuance of the Class Notes, on March 12, 2015, the

Company filed a registration statement on Form S-4 with the SEC relating to an offer to exchange

Class Notes that had not been registered under the Securities Act with identical notes that had been

registered thereunder. (Ex. B.) The exchange of tendered unregistered notes for registered notes

was completed in April 2015.

On March 23, 2015, Moody’s Investors Service (“Moody’s”) downgraded the

Corporate Family Rating (“CFR ”) of California Resources to Ba2 from Ba1 in light of expected

weaker financial performance. Specifically, the Class Notes were also downgraded to Ba2 from

Ba1. California Resources’ Speculative Grade Liquidity Rating was moved to SGL-3 from

SGL- 2. The press release announcing Moody’s downgrade stated:

“At the time of CRC’s spin off from Occidental Petroleum Corporation,leverage was elevated and the original Ba1 rating reflected the earnings power for CRC with $100 oil prices,” said Stuart Miller, Vice President andSenior Credit Officer at Moody’s. “The dramatic drop in oil prices in lightof the high leverage has weakened CRC’s risk profile to the point that a Ba2rating is more appropriate. The company has slashed its capital budget tolive within cash flow in 2015. However, absent asset sales, weaker cashflow generation will make it more difficult to realize meaningful debtreduction in 2015 and 2016.”

***

The downgrade of the CFR to Ba2 is in response to the difficult pricingenvironment for an oil-focused producer with limited commodity pricehedge protection, unlike most of its peers that have had hedging programsin place for a number of years. The unfortunate timing of the spin off fromOccidental Petroleum Corporation (Occidental, A2 stable) just as oil prices began their abrupt slide has left the company exposed to low oil prices, highleverage, and more limited financial flexibility than what was originallyexpected. CRC is burdened with over $6 billion of debt, the result of a similar sized dividend to Occidental prior to the spin off. As a result,CRC ’ s leverage metrics are weaker than most Ba1 and Ba2 exploration and production companies.

***

In addition, with the reinvestment of its cash flow, there is little to no ability to reduce the company’ s debt burden and leverage will remainelevated.

***



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It is unlikely that the ratings will be upgraded given current cash flow andleverage expectations.

(Emphasis added.)

Then, on September 16, 2015, Moody’s downgraded the Company’s CFR again to

B1 from Ba2, “reflecting weak financial performance in the

current commodity price environment.” Specifically, the Class Notes were downgraded to B2

from Ba2. Moody’s also affirmed the Company’s SGL-3 Speculative Grade Liquidity Rating,

stating “[t]he rating outlook is negative.”

Commenting on the Company’s bleak outlook, Moody’s stated:

The downgrade of CRC’s CFR to B1 reflects its weak credit metrics for leverage,cash flow coverage, and operating and capital efficiency, that are more typical ofsingle-B or Caa rated peers. CRC’s relatively high cost production (production,SG&A and interest costs totaled $31.71 per boe for the second quarter 2015) andweak commodity prices that Moody’s does not expect to improve materially in2016, leaves CRC will [sic] a limited ability to generate positive free cash flow andreduce balance sheet debt. Given CRC’s high cost structure, we expect to seeleveraged cash margins between $8-$11 per boe over the next 12 to 18 months. Thecompany has relatively little of its 2016 production hedged (just 5,000 bpd or lessthan 5%). The company has stated that it plans to monetize assets and will potentially consider other transactions that would allow it to reduce balance sheetdebt to $5 billion by year-end 2016. Even so, its leverage and cash flow metrics

will be weak for the B1 CFR. ***In addition, with the reinvestment of its cash flow, there is little ability to reducethe company’s debt burden using free cash flow.

***Moody’s expects that the borrowing base will be sufficient for CRC to have accessto the full $1.25 billion in commitments, but such borrowing base is a function ofcrude oil and natural gas commodity prices. The company had $590 million of borrowings and $27 million of letters of credit as of June 30, 2015, and will remainreliant on its revolver.

***The term loan and revolving credit facility are rated three notches above the B1CFR to reflect their secured nature and priority of claim on assets over unsecureddebt (including $5 billion of senior notes) in accordance with Moody’s Loss-Given-Default rating methodology. The senior unsecured notes are now rated B2, one notch below the B1 CFR, as a result of being contractually subordinated in claim to the secured debt.

The negative outlook reflects uncertainty in CRC ’ s ability to improve its cash flow and leverage metrics to levels supportive of the B1 CFR. The ratings could be downgraded if retained cash flow to debt is not expected to increase above 10%on a sustained basis, CRC does not continue to generate positive free cash flow or



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CRC does not improve its leverage . It is unlikely that the ratings will be upgraded given current cash flow and leverage expectations.

(Emphasis added.)

In addition to the Class Notes, the Company has significant credit facilities that are

senior to the Class Notes. On September 24, 2014, California Resources entered into a credit

agreement with a syndicate of lenders, providing for (i) a five-year senior term loan facility (the

“Term Loan Facility”) and (ii) a five-year senior revolving loan facility (the “Revolving Credit

Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Credit Facilities

were amended on February 25, 2015, and changed certain financial covenants through December

31, 2016 (the “Interim Covenant Period ”). The aggregate commitments of the lenders are $2.0

billion — effectively reduced to $1.25 billion during the Interim Covenant Period — and $1.0

billion under the Revolving Credit Facility and Term Loan Facility, respectively. The Revolving

Credit Facility includes a sub-limit of $400 million for the issuance of letters of credit. The

Company was required to repay the Term Loan Facility in quarterly installments of $25 million

beginning on March 31, 2016.

On February 23, 2016, the Company amended the Credit Facilities, which reduced

its borrowing base to $2.3 billion and the lenders’ Revolving Facility commitments to $1.6 billion.

At January 31, 2016, the Company had approximately $1.7 billion of outstanding debt under its

Revolving Credit and Term Loan Facilities, resulting in approximately $560 million of availability

under the new $2.3 billion borrowing base.

The Exchange Offer

On November 12, 2015, California Resources announced the commencement of

the private Exchange Offer. The terms and conditions were set forth in the Offering Memorandum,

and the related letter of transmittal. The Exchange Offer provided for a maximum of $1 billion



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aggregate principal amount of Class Notes to be tendered, in consideration for the New Secured

Notes. The Exchange Offer was set to expire on December 10, 2015, and offered a premium for

Class Notes tendered prior to November 25, 2015 (the “Early Participation Period ”).

The following table sets forth the Exchange Consideration, Early Participation

Premium and Total Exchange Consideration for each series of Class Notes:

Title of

ClassNotes

Principal

Amount of

Class

NotesTendered

Exchange

Consideration

in New

SecuredNotes

Early

ParticipationPremium

Total

ExchangeConsideration

5% Notes $1,000 $750 $50 $800

5½% Notes

$1,000 $750 $50 $800

6% Notes $1,000 $750 $50 $800

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

Company agreed to pay in cash all accrued and unpaid interest on the Class Notes accepted in the

Exchange Offer from the applicable last interest payment date to, but not including, the Settlement

Date for the Exchange Offers.

Due to the fact that the Exchange Offer was conducted as a private offer and the

New Secured Notes were not registered under the Securities Act, only QIBs and non-U.S. persons

were eligible to participate in the Exchange Offer, to the unlawful exclusion of Plaintiff and other

non-QIB holders of the Class Notes.

The New Secured Notes mature on December 15, 2022 and bear interest at a rate

of 8.00% per annum, with interest payable semi-annually on each June 15 and December 15,

commencing June 15, 2016.



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The New Secured Notes constitute the general second-lien senior secured

obligations of the Company. As such, the New Secured Notes rank junior to the Company’s

priority-lien indebtedness, but are effectively senior to all of the Company’ s existing and future

unsecured senior indebtedness, including the Class Notes.

The New Secured Notes are unconditionally guaranteed, jointly and severally, on a

senior secured basis by certain subsidiaries of the Company which guarantee California Resources’

priority-lien credit agreement and the Class Notes. The New Secured Notes will initially be secured

by second-priority liens on all property and assets of the Company that secure the Company’s

priority-lien credit facility.

Prior to December 15, 2018, the Company may redeem the New Secured Notes on

one or more occasions, at a redemption price equal to 100% of the principal, plus a “make-whole”

premium and accrued and unpaid interest and additional interest, to, but excluding, the applicable

redemption date. In addition, on or after December 15, 2018, the Company may redeem the New

Secured Notes at its option, in whole or in part, at the redemption prices equal to 104 percent of

par value, if redeemed in 2018 and 102 percent if redeemed in 2019, plus accrued and unpaid

interest.

Moreover, the Indenture, dated as of December 15, 2015, between the Company,

certain of its subsidiaries, as guarantors, and the Bank of New York Mellon Trust Company, N.A.,

as Trustee and Collateral Trustee (the “New Secured Notes Indenture”) (Ex. C.), which governs

the New Secured Notes, does not contain any registration rights. As provided in the Offering

Memorandum, “[the Company] ha[s] not registered, nor do[es the Company] currently have any

plans to register, the New Secured Notes under the Securities Act, or with any securities regulatory

authority of any State or other jurisdiction. Therefore, the New Secured Notes will be subject to



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restrictions on transferability and resale.” Thus, non-QIBs will be foreclosed from the opportunity

to acquire the New Secured Notes, even in the public market.

Again, the Offering Memorandum related to the Exchange Offer and New Secured

Notes was distributed only to QIBs and non-U.S. persons. On Apr il 15, 2016, Plaintiff’s counsel

was able to obtain a copy of the undisclosed Offering Memorandum. The Offering Memorandum

detailed numerous risks that greatly affect the Class Notes. Among the risks that Defendant

disclosed only to QIB holders of the Class Notes were the risks that:

a. “ During the pendency of the Exchange Offer[], it is likely that the market

prices of the [Class] Notes will be volatile.”;

b. “The [Class] Notes will not get the benefit of the Collateral securing the

New Secured Notes and will be effectively subordinated to the New

Secured Notes to the extent of the value of the Collateral securing the New

Secured Notes… Any right that holders of the [Class] Notes have to receive

any assets upon the bankruptcy, liquidation, reorganization or other winding

up of the Company, and the resulting rights of holders of the [Class] Notes

to realize proceeds from the sale of any of our assets, will be effectively

subordinated to the claims of the holders of the New Secured Notes to the

extent of the value of the collateral securing the New Secured Notes.”;

c. “We may be unable to repay or refinance non-tendered [Class] Notes at

maturity. Without near term access to capital, continued funding from

existing or new lenders and other significant developments, there continues

to be substantial risk that we could be, among other things, unable to repay

the [Class] Notes at maturity. In this instance, holders of the [Class] Notes



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who fail to validly tender their [Class] Notes and/or whose tendered [Class]

Notes are not accepted for exchange by use may not be paid in full. If we

become subject to a bankruptcy or similar proceeding prior to the repayment

of such [Class] Notes, you may recover less than you would have had you

tendered such [Class] Notes for the New Secured Notes in the Exchange

Offer .”;

d. “The liquidity of the [Class] Notes that are not accepted for exchange will

be reduced. Upon consummation of the Exchange Offer[], the trading

market for [Class] Notes may become more limited due to the reduction in

the amount of the [Class] Notes outstanding. A more limited trading market

might adversely affect the liquidity, market price and price volatility of

these securities. There can be no assurance of the prices at which the

unexchanged [Class] Notes may be traded .”; and

e. “ Despite our current level of indebtedness, we may still be able to incur

substantially more debt. This could further exacerbate the risks associated

with our substantial indebtedness.”

(Emphasis in original.)

On November 27, 2015, the Company announced that as of two days prior,

approximately $3.3 billion in aggregate principal amount of the Class Notes, representing 65.8%

of the outstanding principal amount of the Class Notes, had been tendered pursuant to the

Exchange Offer.

The Company also announced that the aggregate principal amount of Class Notes

to be accepted in the Exchange Offer had increased from $1 billion to $2.8125 billion. To



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accommodate the increase, the Company extended the Early Participation Period to December 1,

2015. All other terms of the Exchange Offer, as previously announced, remain unchanged. As a

result of the increase in the amount of Class Notes to be accepted, up to approximately $2.250

billion in principal amount of New Secured Notes would be issued in the Exchange Offer.

The “sweet deal” presented by the Exchange Offer was apparent to the QIBs

eligible to participate. Based on the amount Class Notes already tendered as of November 27,

2015, only approximately 85.4% of Class Notes tendered in the Exchange Offer would be accepted

for exchange, even after accounting for the increase to $2.8125 billion.

On December 11, 2015, California Resources announced the expiration and final

results of the Exchange Offer. When the Exchange Offer finally closed, $3,653,296,000 in

aggregate principal amount of the Class Notes, representing 73 percent of the outstanding principal

amount of the Class Notes, had been tendered pursuant to the Exchange Offer. Thus, the

opportunity to exchange the Class Notes for the New Secured Notes, at a 20 percent discount¸

was so attractive that more than $840 million in aggregate principal amount of Class Notes above

the Maximum Exchange Amount tendered into the Exchange Offer.

Because the aggregate principal amount of Class Notes tendered during the Early

Participation Period exceeded the Maximum Exchange Amount, the Company accepted only the

Class Notes tendered prior to the Early Participation Period on a pro rata and did not accept any

Class Notes tendered after the Early Participation Period.

/

/

/

/



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The following table sets forth the principal amount tendered and accepted for each

series of Class Notes:

Title of

Class

Notes

Principal

Amount

Outstanding

(in millions)

Principal

Amount

Tendered

(in millions)

Class

Note

Opt-in

Rate

Principal

AmountAccepted

Pursuant to the

Exchange

Offer

(in millions)

Proration Factor

Applied to Class

Notes Tendered

5% Notes

$1,000 $693.54 69.3% $534.031 77%

5½% Notes

$1,750 $1,196.25 68.3% $921.243 77%

6% Notes

$2,250 $1,763.506 78.4% $1,358.077 77%

On December 15, 2015, California Resources completed the Exchange Offer, and

issued $2,250,000,000 aggregate principal amount of the New Secured Notes, pursuant to the New

Secured Notes Indenture.

In connection with the Exchange Offer, the Company recorded a deferred gain of

approximately $560 million, which will be amortized using the effective interest rate method over

the term of the 2022 notes.

Following the closing of the Exchange Offer, on December 21, 2015, Moody’s once

again downgraded the Company’s CFR to Caa1 from B1, downgraded the Probability of Default

Rating to Caa1-PD/LD from B1-PD, and assigned a Caa1 rating to the New Secured Notes. The

Company’s first lien revolving credit facility and term loan were downgraded to B1 from Ba1 and

the Class were downgraded to Caa3 from B2. The speculative grade liquidity rating was changed

to SGL-4 from SGL-3. The rating outlook remains negative. Moreover, Moody’s considered the

Exchange Offer a “distressed exchange,” which is an event of default under Moody’s definition of

default. Explaining its reasons for the downgrades, Moody’s stated:



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“The downgrade of CRC’s CFR reflects our expectations the oil and gas prices willremain weak in 2016, stressing the company’s liquidity and credit metrics,” saidJames Wilkins, a Moody’s Vice President. “The company will need to seek relieffrom its financial covenants under its credit agreement, as early as the first quarterof 2016.”

The downgrade of CRC’s CFR to Caa1 reflects weak industry conditions with oiland natural gas prices at multi-year lows that will pressure CRC’s liquidity,leverage and cash flow credit metrics. Moody’s expects that the company willrequire relief from its first lien leverage and interest coverage financial covenantsunder its credit facility in 2016.

***

Moody’s expects CRC to generate negative free cash flow in excess of $150 millionin 2016 and also believes that the company’s attempts to monetize assets to reducedebt will be difficult in the current commodity price environment. CRC’s high coststructure (production, SG&A and interest costs totaled $34.30 per boe for the third

quarter 2015, including Moody’s standard adjustments), relatively unhedged production volumes, weak commodity prices and term loan payments leave thecompany in a significant negative cash flow position, even with minimal capex.The recent notes exchange reduced the principal amount of outstanding notes by $563 million, but the increase in interest expense weakens the company’ s interest coverage. The company is operating one rig, down from a peak of 27 in October2014, and kept production for the first nine months of 2015 above 2014 levels,using three rigs. However, Moody’s expects production to decline in 2016. CRCgenerally has a more modest decline rate (around 10%-15%) than shale oil producers that have accounted for much of the oil production growth in the US overthe past five years.

CRC ’ s SGL-4 Speculative Grade Liquidity Rating reflects weak liquidity and Moody’ s expectation the company will have to seek a waiver or amendment of the two financial covenants under its revolving credit facility (a maximum firstlien debt leverage ratio of 2.25x and a minimum interest coverage ratio of 2.0x) as early as the first quarter 2016. CRC ’ s interest coverage ratio will suffer as it starts to pay an additional $21 million per year in interest expense as a result of the recent issuance of $2.25 billion of 8% second lien notes due 2022 in exchange for $2.813 billion of senior unsecured notes with coupon rates between 5% and6%.

***

The term loan and revolving credit facility are rated three notches above the Caa1CFR, reflecting their secured first lien priority of claim on assets ahead of the $2.25 billion of second lien notes and $2.187 billion of unsecured debt, in accordancewith Moody’s Loss-Given-Default rating methodology. The second lien notes (atCaa1) are rated at the same level as the CFR and the senior notes (at Caa3) are nowrated two notches below the CFR, as a result of being contractually subordinated inclaim to the secured debt.



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The negative outlook reflects uncertainty surrounding CRC’s ability to maintaincompliance with its financial covenants and improve its liquidity cash flow andleverage metrics to levels supportive of the Caa1 CFR. The ratings could bedowngraded if CRC appears unable to maintain an interest coverage ratio greaterthan 1x or if its revolver availability diminishes materially. The ratings could be

upgraded if Moody’s expects CRC to maintain retained cash flow to debt above10% and interest coverage above 1.5x on a sustainable basis.

(Emphasis added.)

Accordingly, as a result of the Exchange Offer, from which non-QIBs were

excluded from participating in, non-QIB holders of the Class Notes were injured due to a

subsequent Moody’s downgrade of the Class Notes that they alone were left holding, and by the

subordination of their notes to the New Secured Notes.

An article published by Bloomberg commented on the rush of QIBs seeking to

tender their Class Notes into the Exchange Offer, stating “[b]ondholders are eager to exchange

their debt because they don’t want to own securities that will be subordinated to the notes created

by the exchange[.]” An analyst at Bloomberg Intelligence explained: “You will be incentivized to

offer as many of the bonds as you have in hopes you get as much of the new secured debt as you

possibly can, because that’s going to help mitigate your losses…. If you don’t go along with it,

you know you’re going to take a hit. You might as well go along with it to minimize whatever that

hit is going to ultimately be.”

Pertinent Terms of the Indenture and Rights Provided Therein

The Indenture is a binding contract entered into between the Company and Wells

Fargo, as Trustee on behalf of the noteholders, which delineates the rights of the holders and the

obligations of the issuer.



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The Indenture repeatedly provides for the right of holders of the Class Notes to be

treated equally and the Company’s obligation to obtain noteholders’ consent to take action that

affects the holders’ rights. Such provisions include the following:

(i) Section 3.02. Selection of Notes to Be Redeemed. (a) If less than all of the Notes of a series are to be redeemed at any time, the Trustee shall select the Notes of such series to be redeemed among the Holders of the Notes on a pro rata basis, by lot or in accordance with any other method theTrustee deems fair and appropriate (subject to the procedures of DTC orany other Depositary and by maintaining the authorized denominations forthe Notes), or, if the Notes of such series are listed on any securitiesexchange, by any other method that complies with the requirements of suchexchange. In the event of partial redemption by lot, the particular Notes ofsuch series to be redeemed shall be selected prior to giving a notice of such

redemption by the Trustee from the outstanding Notes of such series not previously called for redemption.

(ii) Section 4.09. Offer to Repurchase Upon a Change of Control.

(a) If a Change of Control Triggering Event occurs with respect to a seriesof Notes, each Holder of Notes of such series will have the right to require that the Company purchase all or any part (in amounts of $1,000 or whole multiples of $1,000 in excess thereof) of such Holder’ s Notes pursuant to the offer described below (the “Change ofControl Offer ”)….

(b)

Not later than 30 days after the date upon which any Change of ControlTriggering Event occurred with respect to a series of Notes or, at theCompany’s option, prior to a Change of Control but after it is publiclyannounced, the Company must notify the Trustee in writing and givewritten notice of either such event to each Holder of Notes of such series, at such Holder’ s address appearing in the security register or otherwise deliver notice in accordance with the Applicable Procedures (the “Change of Control Purchase Notice”)…

(iii) Section 9.02. With Consent of Holders of Notes.

(a) Except as provided below in this Section 9.02, the Company, theGuarantors, any other obligor under the Notes of a series and the Trusteemay amend or supplement this Indenture or the Notes of such series withthe consent of the Holders of at least a majority in aggregate principalamount of all Notes (taken together as a single class) then outstanding andaffected by such amendment or supplement; provided, however, that no



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such modification or amendment may, without the consent of the Holder of each outstanding Note of such series affected thereby:

(1) reduce the percentage of principal amount of Notes of such series whoseHolders must consent to an amendment, supplement or waiver of any

provision of this Indenture or the Notes of such series;

(7) impair the right of Holders of Notes of such series to receive paymentof the principal of and interest on Notes on the respective due dates thereforand to institute suit for the enforcement of any such payment; or

(8) make any change in the percentage of principal amount of Notes of suchseries necessary to waive compliance with certain provisions of thisIndenture.

(Emphasis added.)

Section 9.03 of the Indenture provides that “[e]very amendment or supplement to

this Indenture or the Notes shall be set forth in an amended or supplemental Indenture that complies

with the TIA as then in effect.”

Among the various rights provided to holders of the Class Notes, in accordance

with Section 316(b) of the TIA, Section 6.07 of the Indenture provides:

Rights of Holders of Notes to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, or interest on such Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder.

(Emphasis added.)

As is commonplace in bond indentures, the Indenture includes a “no action clause,”

which places a limitation and procedural requirements for noteholders to enforce certain claims

under the Indenture. Specifically, Section 6.06 of the Indenture provides:

(a) No Holder of any of the Notes of any series has any right to pursue any remedywith respect to this Indenture unless (1) the Trustee shall have received writtennotice that an Event of Default has occurred and is continuing, (2) the Trustee shallhave received a written request from Holders of at least 25% in aggregate principal



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amount of the outstanding Notes of such series to pursue such remedy, (3) theTrustee shall have received indemnity from the Holders reasonably satisfactory toit against loss, liability or expense to pursue such remedy as Trustee under the Notesof such series and this Indenture, (4) the Trustee shall have failed to act for a period of 60 days after receipt of such written notice, request and such offer of

security or indemnity, and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the outstanding Notes of such series.

(b) The limitations set forth in paragraph (a) of this Section 6.06 do not, however,apply to a suit instituted by a Holder of a Note of such series for the enforcementof the payment of the principal of, premium, if any, or interest on such Note on orafter the respective due dates expressed in such Note.

(Emphasis added.)

Notwithstanding Section 6.06 of the Indenture, Plaintiff is not barred from asserting

his, and those of all holders of Class Notes, under the Indenture for two reasons. First , compliance

with the requirements of Section 6.06 was not possible due to the time restraints of the Exchange

Offer. The Exchange Offer was first announced on November 12, 2015, was closed on December

10, 2015, and the New Secured Notes were issued on December 15, 2015. Thus all of the

complained of events at issue in this Complaint occurred well within the 60 day period in Section

6.06. Second , Plaintiff had good reason to doubt the impartiality any written notice provided to the

Trustee would receive. As mentioned above, the Indenture appoints Wells Fargo as Trustee of the

Indenture. (Ex. A, § 1.1.) Timothy Sloan (“Sloan”), a member of California Resources’ Board of

Directors, is President and Chief Operating Officer at Wells Fargo. Thus, Sloan was on the Board

when the Exchange Offer was offered to the exclusion of non-QIBs and as a result he and Wells

Fargo were seriously conflicted in the transaction.

Section 7.01 of the Indenture details the numerous duties and liabilities of the

Trustee. The Indenture explicitly prohibits relief from liability for the Trustee as a result of its



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“own negligent action, its own negligent failure to act, or its own willful misconduct, ” subject to

limited exceptions.

Lastly, Section 12.08 of the Indenture states: “THIS INDENTURE, THE NOTES

AND THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN

ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.” (Capitalization in

original.)

Federal Protections for Noteholders under Section 316(b) of the TIA

TIA provides a federally protected right for noteholders to receive payments due to

them, which may not be impaired without their consent.

Section 316(b) of the TIA states:

Notwithstanding any other provision of the indenture to be qualified, the right of any holder of any indenture security to receive payment of the principal of andinterest on such indenture security, on or after the respective due dates expressedin such in denture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affectedwithout the consent of such holder, except as to a postponement of an interest payment consented to as provided in paragraph (2) of subsection (a), and exceptthat such indenture may contain provisions limiting or denying the right of any suchholder to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicablelaw, result in the surrender, impairment, waiver, or loss of the lien of such indentureupon any property subject to such lien.

(Emphasis added.)

CLASS ACTION ALLEGATIONS

Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons or entities who held Class

Notes during the period from November 12, 2015 to the present. Excluded from the Class are

Directors and the Officers of California Resources and Trustees of the Class Notes, members of

their immediate families and their legal representatives, heirs, successors or assigns; any entity in



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which Defendant have or had a controlling interest; and any holders of the Class Notes that are

non-U.S. persons within the meaning of Rule 902(k) of Regulation S of the Securities Act or QIBs

within the meaning of Rule 144A of the Securities Act.

The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to Plaintiff at this time and

can only be ascertained through appropriate discovery, Plaintiff believes that there are at least

hundreds of members in the proposed Class. Record owners and other members of the Class may

be identified from records maintained by the Trust or its transfer agent and may be notified of the

pendency of this action by mail, using the forms of notice similar to that customarily used in

securities class actions. The Company has billions of dollars in the aggregate principal amount of

outstanding Class Notes that were not tendered into the Exchange Offer.

Plaintiff ’s claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendant’s wrongful conduct alleged herein.

Plaintiff will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class and securities litigation.

Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether the TIA was violated by Defendant’s acts as alleged herein:

b. whether Defendant’s acts as alleged herein breached the terms of the Indenture;

c. whether Defendant’s acts as alleged herein breached the implied covenant of good

faith and fair dealing;



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d. whether Defendant’s acts as alleged herein caused them to unjustly enrich itself;

and

e. the extent of damages sustained by Class members, and the appropriate measure of

damages or declaratory relief.

A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden

of individual litigation make it impossible for members of the Class to individually redress the

wrongs done to them. There will be no difficulty in the management of this action as a class action.

CAUSES OF ACTION

COUNT ONE

For Violations of § 316 of the TIA,

15 U.S.C. § 777ppp(b)

Plaintiff incorporates by reference each and every preceding paragraph as though

fully set forth herein.

This Count is brought pursuant to Section 316(b) of the TIA, 15 U.S.C. §

777ppp(b), against the Company.

As acknowledged by, inter alia, Sections 1.03, and 9.03 of the Indenture, the Class

Notes fall within the protection and purview of the TIA.

Section §316(b) of the TIA explicitly provides that all holders of an indenture

security has an unconditional right to receive payment of the principal and interest due on such

indenture security. Moreover, Section §316(b) of the TIA protects the noteholder from any

impairments or negative affects without the explicit consent of such holder.



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By creating and issuing a new series of notes that are secured and senior to the Class

Notes in the Exchange Offer, the Company impaired the value of the Class Notes and affected the

likelihood of full repayment of principal and interest in the event of a default.

Non-QIB holders of the Class Notes did not provide, and were not asked for, their

consent for the impairment of their holdings in Class Notes that resulted from the creation of the

New Secured Notes.

Accordingly, Plaintiff and the Class are entitled to the declaratory relief sought in

Count Five.

COUNT TWOBreach of Contract, Indenture, Section 6.07



The Indenture was entered into, between California Resources, the Company’s

subsidiaries, as guarantors, and Wells Fargo Bank, N.A., as Trustee, dated October 1, 2014, and

remains in effect to this day.

The Indenture is a binding and valid contract, which governs the Class Notes.

Section 6.07 of the Indenture provides all holders of Class Notes, including Non-

QIBs, the right to receive payment due on the Class Notes, to bring suit to enforce such rights and

to be protected from any impairment or affect without their consent.

By creating and issuing a new series of notes that are secured and senior to the

Class Notes in the Exchange Offer, the Company impaired the value of the Class Notes and

affected the likelihood of full repayment of principal and interest in the event of a default.



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Non-QIB holders of the Class Notes did not provide, and were not asked for, their

consent for the impairment of their holdings in Class Notes that resulted from the creation of the

New Secured Notes.

Accordingly, Plaintiff and the Class are entitled to the declaratory relief sought in

Count Five.

In addition, as a result of the Defendant’s breach of the Indenture, Plaintiff and the

Class have suffered damages in an amount to be determined at trial.

COUNT THREE

For Breach of the Covenant of Good Faith and Fair Dealing



The Indenture was entered into, between California Resources, the Company’s

subsidiaries as guarantors, and Wells Fargo Bank, N.A., as Trustee, dated October 1, 2014, and

remains in effect to this day.

The Indenture is a binding and valid contract, which governs the Class Notes.

By virtue of this contract, the Company, as a party to the Indenture, were at all

times bound by the covenant of good faith and fair dealing implied by this contractual obligation.

The Company violated the covenant of good faith and fair dealing by unfairly

discriminating against non-QIB holders of the Class Notes and subordinating their claims to the

New Secured Notes without consent.

As a direct and proximate result of this violation, Plaintiff and the Class have

sustained damages

/

/



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COUNT FOUR

Unjust Enrichment



Through the issuance of the New Secured Notes, Defendant has unjustly enriched

itself by recording a gain of approximately $560 million on the Exchange Offer. This ill-gotten

gain came at the expense of Plaintiff and members of the Class that held Class Notes that were

subordinated to the improperly created New Secured Notes.

Retention of the gain obtained as a result of the issuance of the New Secured Notes

is unjust and inequitable because it was the result of Defendant’s violations of the TIA and a breach

of the Indenture.

Because Defendant’s retention of the non-gratuitous benefits conferred on it by

Plaintiff and members of the Class is unjust and inequitable, Defendant must pay restitution to

Plaintiff and members of the Class for its unjust enrichment, as ordered by the Court.

COUNT FIVE

Declaratory Judgment



As alleged above, Plaintiff and the Class have stated claims against Defendant

based on violations of the TIA, breach of contract, and unjust enrichment.

Defendant has violated the terms of the TIA by improperly impairing the Class

Notes and subordinating them to the New Secured Notes without consent. Additionally,

Defendant’s actions in connection with the Exchange Offer breached the terms of the Indenture.

Defendant’s violations of the TIA and breach of the Indenture caused it to unjustly enrich itself to

the tune of $560 million at the expense of Plaintiff and the Class.



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Dated: April 21, 2016 By: /s/ Eduard KorsinskyEduard KorsinskyLEVI & KORSINSKY LLP30 Broad Street, 24th Floor New York, NY 10004

Tel: (212) 363-7500Fax: (212) 363-7171

Attorney for Plaintiff


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