IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: PACIFIC ENERGY RESOURCES LTD, et al.

, Debtors. Chapter 11 Case No. 09-10785 (KJC) Jointly Administered

Hearing Date: August 24, 2010 at 1:00 p.m. (ET) Objections Due: August 17, 2010 at 4:00 p.m. (ET)

MOTION OF MARATHON OIL COMPANY FOR AN ORDER GRANTING RELIEF FROM THE AUTOMATIC STAY TO PERMIT MARATHON OIL COMPANY TO EXERCISE ITS RIGHT OF SETOFF WITH RESPECT TO PRE-PETITION CLAIMS UNDER 11 U.S.C. 4 553 Marathon Oil Company ("Marathon"), by and through undersigned counsel, hereby moves (the "Motion") for an Order Granting Relief from the Automatic Stay to Permit Marathon to Exercise its Right of Setoff with Respect to Pre-petition Claims Under 11 U.S.C. 553. In support of the Motion, Marathon states as follows: JURISDICTION AND VENUE 1. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. 157

(a) and (b) and 1334 (b). This is a core proceeding arising under chapter 11 of title 11 of the United States Code, 11 U.S.C. 101-1532 (as amended, the "Bankruptcy Code"), pursuant to 28 U.S.C. 157(b)(2)(A) and (G). 2. The statutory predicates for relief requested are Bankruptcy Code sections

105(a), 362(d), and 553. Venue in this Court is proper pursuant to 28 U.S.C. 1408 and 1409. BACKGROUND 3. On March 9, 2009 (the "Petition Date"), the above-captioned debtors (the

"Debtors") each filed a petition for relief under chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the "Court"). The Debtors continue in

possession of their property and are operating and managing their businesses as debtors in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. 4. Marathon and Forest Oil Corporation ("Forest"), a predecessor in interest

to the Debtors, were parties to that certain Fuel Gas Agreement dated December 30, 1996 (as amended on July 1, 2007, the "Fuel Gas Agreement"). The Fuel Gas Agreement is attached to this Motion as Exhibit A. Pursuant to the Fuel Gas Agreement, Marathon made available, exchanged, and sold natural gas to Forest (and then the Debtors), and Forest (subsequently the Debtors) took and purchased natural gas from Marathon. 5. Pursuant to the Fuel Gas Agreement Amendment dated July 1, 2007,

Forest made a prepayment to Marathon for natural gas in the amount of $300,000.00 (the

"Prepayment"). Marathon never offset the Prepayment against amounts owed under the Fuel
Gas Agreement by either Forest or the Debtors, as Marathon is permitted to do but for the automatic stay. 6. To date, Marathon has not received payment from the Debtors for

outstanding invoices (the "Invoices") totaling $3,120,286.94 for fuel gas provided in December 2008, January 2009, and February 2009. 7. On June 22, 2009, the Debtors' claims and processing agent received two

proofs of claim filed by Marathon relating to Marathon's unpaid Invoices. In these proofs of claim, Marathon expressly reserved its right to setoff the Prepayment against amounts owed under the Fuel Gas Agreement.

RELIEF REQUESTED
8. To the extent that stay relief is required for Marathon to exercise setoff

rights, Marathon requests that the Court, pursuant to 11 U.S.C. 553, preserve Marathon's setoff

rights and lift the automatic stay to permit Marathon to setoff the pre-petition debt the Debtors owe Marathon under the Fuel Gas Agreement against the Prepayment.

ARGUMENT
9. Marathon is entitled to preservation of its setoff rights pursuant to 11

U.S.C. 553. The Bankruptcy Code permits a creditor to offset a mutual pre-petition debt owed by such creditor to the debtor against a claim of such creditor against the debtor.

See 11 U.S.C.

553. Section 553 allows parties that owe mutual debts to subtract one from the other and pay only the remaining balance. The rule is premised on the "absurdity of 'making A pay B when B owes A." Cohen v. Savings Building Loan Co. (In re Brevill, Bresler & Schulman Asset

Management Corp.), 896 F.2d 54, 57 (3d Cir. 1990) (quoting Studley v. Boylston Nat'l Bank,
229 U.S. 523, 528 (1913)). 10. While the automatic stay prevents Marathon from exercising its right to

offset the mutual prepetition claims between Marathon and the Debtors during the bankruptcy case, Bankruptcy Code section 362(d)(1) authorizes the Court to grant relief from the automatic stay "for cause." 11 U.S.C. 362(d)(1). The existence of a valid setoff right constitutes cause for relief from the automatic stay. (Bankr. E.D. Mich. 2002). 11. Bankruptcy Code section 553(a) states that "[e]xcept as otherwise

See In re New Haven Foundry, Inc., 285 B.R. 646, 650-51

provided in this Section and in Section 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing such creditor to the debtor that arose before the commencement of this case under this title against a claim of such creditor against the debtor that arose before the commencement of the case." 11 U.S.C. 553.

12.

Bankruptcy Code 553 provides three conditions must be satisfied before

a right of setoff is recognized in bankruptcy: (1) the creditor must hold a claim against the debtor that arose pre-petition; (2) the creditor must owe a debt to the debtor that arose pre-petition; and (3) the claim and the debt must be mutual. See In re University Medical Center, 973 F.2d 1065, 1079 (3d Cir. 1992). In short, the primary requirements are that "the elements of timing and mutuality must be established." In re Glaze, 169 B.R. 956, 964 (Bankr. D. Ariz. 1994); See also

Braniff Airways, Inc. v. Exxon Co., 814 F.2d 1030, 1035 (5th Cir. 1987). To be mutual, the
claim and debt must exist between the same parties, the parties must owe each other something in the same capacity, and the obligations must be owed in the same right.

See Cohen v. Savings

Building Loan Co. (In re Brevill, Bresler & Schulman Asset Management Corp.), 896 F.2d 54,
59 (3d Cir. 1990). Furthermore, setoffs in bankruptcy are generally enforced, unless compelling circumstances dictate otherwise. 1991). 13. In the present case, Marathon holds a deposit provided by the Debtors'

See In re Buckenmaier, 127 B.R. 233, 237 (9th Cir. B.A.P.

predecessor in interest under the Fuel Gas Agreement, and the Debtors owe Marathon $3,120,286.94 under the same agreement. The claims are mutual in that they arise between the same parties, under the same contract, and in the same capacity. Thus, Marathon is entitled to setoff the Prepayment against the pre-petition debt the Debtors owe to Marathon. 14. Marathon requests that the order granting relief become immediately

effective notwithstanding the provisions of Fed. R. Bankr. P. 4001(a)(3). WHEREFORE, for the reasons set forth above, Marathon requests that the Court enter an order (i) granting immediate relief from the automatic stay, to the extent necessary, to

permit Marathon to setoff the Prepayment against the pre-petition debt the Debtors owe to Marathon and (ii) granting such further relief as this Court deems just and proper.

Dated: Wilmington, Delaware August 6, 2010

WOMBLE CARLYLE SANDRIDGE & RICE

Francis A. Monaco, . (DE Bar No. 2078) Kevin J. Mangan (DE Bar No. 3810) Ericka F. Johnson (DE Bar No. 5024) 222 Delaware Avenue, Suite 1501 Wilmington, Delaware 19801 Telephone: (302) 252-4320 Facsimile: (302) 252-4330 E-mail: fmonaco@wcsr.corn E-mail: kmangan@wcsr.com E-mail: erjohnson@wcsr.com
Counsel for Marathon Oil Company

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