UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION ) ) ) ) ) ) )

Transcription

1 Main Document Page 1 of 15 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION IN RE: MISSION COAL COMPANY, LLC, et al. DEBTORS. ) ) ) ) ) ) ) Chapter 11 Case No (TOM) OBJECTION OF INDEMNITY NATIONAL INSURANCE COMPANY TO PROPOSED SALE OF ASSETS IN ACCORDANCE WITH BIDDING PROCEDURES ORDER Indemnity National Insurance Company (the Surety ), by and through its undersigned counsel, hereby files this objection (the Objection ) to the Debtors sale of all or substantially all of its assets (the Sale Transaction ) in accordance with that Order (I) Approving Bidding Procedures for the Sale of the Debtors Assets, (II) Scheduling Hearings and Objection Deadlines with Respect to the Sale, (III) Scheduling Bid Deadlines and an Auction, (IV) Approving the Form and Manner of Notice Thereof, (V) Approving Contract Assumption and Assignment Procedures, and (VI) Granting Related Relief (the Bidding Procedures Order ) [Docket No. 490]. In support of its Objection, the Surety respectfully states as follows: PRELIMINARY STATEMENT 1. The Surety, like the other parties-in-interest in this case, is in the peculiar position of being forced to object to a Sale Transaction without knowing the identity of the winning bidder(s) or any of the terms upon which this sale will purportedly be consummated. That, in and of itself, is likely a sufficient basis to sustain the Objection, but the Surety, in order to protect its rights, wishes to raise additional grounds for objection in the event that the Sale Transaction ultimately includes some or all of the provisions set forth in the Proposed APA (as defined

2 Main Document Page 2 of 15 below). The Surety reserves its right to file a supplemental objection upon the Debtors announcement of the successful bids(s) and the filing of the associated sale documentation. 2. The Debtors are subject to various federal and state environmental laws relating to the extraction and processing of coal. These laws place stringent requirements on the Debtors coal mining operations in order to protect the environment and human health. The Debtors bankruptcy filings do not eliminate their obligation to comply with these laws and the Debtors cannot confirm effectuate a sale that leaves the estate with insufficient assets to comply with its critical environmental obligations. 3. The proposed Sale Transaction would leave the Debtors estate with a number of problematic mine sites, but no funds to perform the required environmental cleanup. The Proposed APA, in concert with the Stipulation (as defined below), would instead direct all sale proceeds (a minimum of $1.5 million of unencumbered funds) to the payment of unsecured creditors, leaving the Surety and the Regulatory Authorities holding the bag, in contravention of the Supreme Court s decisions in both Midlantic and Jevic. 4. Furthermore, the permit transfer, bond replacement, and liability assumption provisions of the Proposed APA reflect a fundamental misunderstanding of the applicable regulatory environment and the consents and approvals necessary to effectuate the sale. The Sale Transaction will result in the abandonment of certain of the Debtors permits with outstanding violations and the forfeiture of more than $13 million of surety bonds (more than 1/3 of the Debtors total bond liability). These regulatory violations, however, will preclude the permit transfers and other regulatory approvals sought in the Proposed APA. Stated simply, the Sale Transaction, as both a legal and practical matter, must be one part of a global strategy to 2

3 Main Document Page 3 of 15 address the Debtors reclamation obligations. The Surety remains willing to negotiate with the Debtors, the buyer(s), and the Regulatory Authorities in this regard, but time is short and gets shorter with each day that the Debtors fail to announce the successful bidder(s). BACKGROUND A. Procedural Background 5. On October 14, 2018 (the Petition Date ), each of the Debtors filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code ) in the United States Bankruptcy Court for the Northern District of Alabama (the Bankruptcy Court ). 6. On October 25, 2018, the Bankruptcy Administrator for the Northern District of Alabama appointed the official committee of unsecured creditors (the Committee ) pursuant to section 1102 of the Bankruptcy Code. [Docket No. 147]. 7. On December 21, 2018, the Bankruptcy Court entered the Bidding Procedures Order which, among other things, scheduled an auction for February 27, 2019, established a deadline to object to the Sale Transaction of March 6, 2019, 1 and set a final sale hearing for March 20, On January 30, 2019, certain parties filed that Stipulation and Agreed Order Among the Official Committee of Unsecured Creditors and the DIP Lenders (the Stipulation ) [Docket No. 611]. Pursuant to the Stipulation, unsecured creditors will receive a minimum recovery of $1.5 million as a result of the Sale Transaction. 1 The Surety s objection deadline was extended to March 11, 2019, by agreement of Debtors counsel. 3

4 Main Document Page 4 of The auction was conducted, as scheduled, on February 27, No report of auction or asset purchase agreements have been filed in the record and the Surety has no information regarding the successful bidder(s) or the exact nature of the Sale Transaction. B. Permits and Reclamation 10. The Debtors are engaged in the mining and production of metallurgical coal and operate mining complexes in West Virginia and Alabama (the States and each a State ). In order to conduct these operations, the Debtors are required to obtain mining permits issued by, as applicable, the West Virginia Department of Environmental Protection ( WVDEP ) and the Alabama Surface Mining Commission ( ASMC and collectively with WVDEP, the Regulatory Authorities ). 11. The Regulatory Authorities are responsible for enforcing the various reclamation obligations that stem from each State s version of the Surface Coal Mining and Reclamation Act [W. Va. Code et. seq.; Ala. Code et. seq.] and the Clean Water Act (collectively, and including all applicable regulations, the Act ). 2 In general, reclamation... requires the surface of the land to be restored to its approximate original contour and water polluted by the mining operations to be properly treated before leaving the mine site. Cat Run Coal v. Babbitt, 932 F. Supp. 772, 774, n. 3 (S.D. W. Va. 1996). 2 In 1977, Congress enacted the Surface Mining Control and Reclamation Act (SMCRA), 30 U.S.C. 1201, et. seq., in order to establish a nationwide program to protect society and the environment from the adverse effects of surface coal mining operations and to assure that surface coal mining operations are so conducted as to protect the environment. 30 U.S.C. 1202(a), (d). Pursuant to 1253 of the SMCRA, a state may assume primary jurisdiction for regulation and enforcement of surface coal mining operations and reclamation within its borders, so long as its regulatory program is as stringent as the federal program and is approved by the Office of Surface Mining and Reclamation Enforcement. 30 U.S.C. 1253(a). Alabama and West Virginia both have approved state programs. 4

5 Main Document Page 5 of After each Regulatory Authority approves a permit, but before the permit is issued, a mine operator must post a penal bond payable to the applicable State to secure its reclamation obligations under the Act. [W. Va. Code ; Ala. Code ]. Notwithstanding this bond requirement, the permittee (and its owners and controllers) have the primary responsibility for the costs of reclamation and are solely responsible for any costs incurred in excess of the bond amount. [W. Va. Code St. R (d), (e); Ala. Admin. Code. R. 880-X-9E-.05(3)]. 13. If a permittee fails to comply with the Act s reclamation requirements, the Regulatory Authorities can, among other remedies, issue fines and penalties, order the cessation of mining activities, revoke the permittee s permits, and/or forfeit the applicable bonds. [See e.g. W. Va. Code , W. Va. Code St. R , ; Ala. Code , Ala. Admin. Code R. 880-X-9E.02-03, 880-X-11C-.04]. A bond forfeiture not only affects the specific permit at issue, but precludes the permittee (or any person or entity affiliated with the permittee) from conducting mining activities, transferring permits, or obtaining new permits in any state. [Id.]. It can also subject the permittee s owners and controllers to civil and criminal liability. See e.g. Ala. Code (f) ( Whenever a corporate permittee violates a condition of a permit... or fails or refuses to comply with any order [issued by ASMC]... any director, officer or agent of such corporation... shall be subject to the same civil penalties, fines and imprisonment... ). C. The Bonds 14. As of the Petition Date, the Surety had issued, on behalf of the Debtors, a total of 68 bonds in favor the Regulatory Authorities, in the combined face amount of $36,471,

6 Main Document Page 6 of 15 (the Bonds ). 3 The Bonds were issued in accordance with, and pursuant to, that Agreement for Coal Reclamation Bond and Performance Bonds, entered into by and among the Surety and the Debtors (the Bond Agreement ) Pursuant to the express language of the Bond Agreement, and the common law of suretyship, the Debtors indemnified the Surety for any and all costs incurred in connection with the issuance of the Bonds. [Docket No. 9, pg. 4, 10]. To secure these indemnity obligations, the Debtors have deposited $6,770, into an escrow account titled to, and controlled by, the Surety (the Escrowed Funds ). The Escrowed Funds secure the entirety of the Debtors obligations and no portion thereof is allocated to any particular Bond. 16. The Surety s payment obligations under the Bonds run only to the Regulatory Authorities and are only triggered by the Debtors default and the Regulatory Authorities forfeiture of the Bonds. The Bonds are not property of the Debtors estate and cannot be assumed and assigned without the Surety s consent. See e.g. In re Hallmark Builders, Inc., 205 B.R. 974, 976 (Bankr. M.D. Fla. 1996); Matter of Edwards Mobile Home Sales, Inc., 119 B.R. 857, 859 (Bankr. M.D. Fla. 1990). D. Permit Transfers and Bond Replacement 17. In general terms, the asset sale of a coal mining operation necessarily involves the proposed transfer of the debtor s mining permits. Any such transfer, however, is subject to the approval of the applicable regulatory authorities. See Ala. Admin. Code R. 880-X-8M-11, W. Va. Code (d). Therefore, in order to effectuate the transfer, the seller and the buyer are 3 The Surety has issued a single $100, on behalf of the Debtors in favor of the Alabama Oil & Gas Board. 4 In addition to the Debtors, non-debtor Lara Natural Resources, LLC is also a party to the Bond Agreement. 6

7 Main Document Page 7 of 15 required to submit, typically on a post-closing basis, permit transfer applications to the regulatory authorities. That permit transfer application must include new bonds which, upon approval of the transfer, will immediately be substituted for the existing bonds, at which time the existing bonds will be released. 18. This permit transfer approval process, however, requires public comment and extensive documentation and due diligence and can take a period of months. During this process, the seller is still obligated to perform its obligations under the permits that are the subject of the application and the existing bonds on those permits remain in place and are subject to forfeiture by the applicable regulatory authority. To deal with this delay, sellers and buyers frequently enter into interim operator or contract mining agreements, subject to the approval of any surety and all applicable regulatory authorities, pursuant to which the seller is authorized to operate on the permits prior to their transfer. The Proposed APA attempts to follow the above format. ARGUMENT A. The Sale Transaction Contemplates a De Facto Abandonment of the Debtors Permits in Violation of Environmental Law 19. The Proposed APA excludes a number of the Debtors more problematic mining permits and leaves these permits in the Debtors estate. Those permits are the following: Mine Name State Permit Number Bond Amount 5 Pinnacle WV E $244, Misc-PMC $75, O $558, O $145, There are multiple bonds that secure certain of the identified permits. The listed bond amount is the total of all bonds associated with each permit. The bond amount is not the total reclamation liability associated with that permit, but merely the face amount of the applicable bond. 7

8 Main Document Page 8 of 15 Mine Name State Permit Number Bond Amount 5 O $520, O $1,162, U $811, U $26, U $50, $3,593, North River AL P-3222 $6,667, Kellerman AL P-3199 $972, Mine No. 3 AL P-3257 $2,734, $13,968, The applicable sale documents do not provide that the proceeds of the Sale Transaction will be dedicated to perform reclamation activities on these permits and the Surety is unaware of any unencumbered funds of the Debtors that have been earmarked for this purpose. In short, the Debtors seek to effectively abandon these permits and to foist the costs of compliance on the Surety and the Regulatory Authorities. 20. The United States Supreme Court has held that a trustee or debtor-in-possession may not abandon property in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identifiable hazards. Midlantic Nat l Bank v. N.J. Dept. of Envt l Prot., 474 U.S. 494, 507 (1986). The United States Congress and the legislatures of Alabama and West Virginia have expressly declared that the Act was enacted in order to prevent the public from the identifiable risks of un-reclaimed mine sites. See 30 U.S.C. 1201(c) (Congressional declaration that unreclaimed surface mines result in disturbances that burden and adversely affect... the public welfare by, among other things causing erosion and 8

9 Main Document Page 9 of 15 landslides, polluting the water, damaging the property of citizens, and creating hazards dangerous to life and property. ); W. Va. Code (a) (same); Ala. Code (b)-(c) (same). The Bankruptcy Court for the Eastern District of Kentucky has previously ruled that West Virginia Act meets the Midlantic standard and that a debtor cannot abandon or maintain mine sites in violation of the West Virginia Act. See In re Appalachian Fuels, LLC, 521 B.R. 779, (Bankr. E.D. Ky. 2014). The same result should be reached in connection with the Alabama Act. As aptly stated by the Bankruptcy Court for the Southern District of Texas, [t]he Court need not make a determination whether the environmental hazard [at issue] presents an imminent or identifiable harm, it is enough that the... claim arises from a state law designed to protect the public from an identified hazard. It is not the Court s prerogative to replace the legislature s judgment with its own judgment as to what conduct constitutes a sufficient threat to the public. In re American Coastal Energy, Inc., 399 B.R. 805, 813 (Bankr. S.D. Tex. 2009). 21. Not only does the Sale Transaction purport to abandon the retained permits in violation of Midlantic, it, in connection with the Stipulation, affirmatively directs all of the unencumbered proceeds of the sale away from required environmental compliance (claims which are entitled to administrative expense priority) 6 towards payment of unsecured creditors. This payment mechanism, however, directly violates the absolute priority rule in contravention of the Supreme Court s recent holding in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) (absolute priority rule applies to non-plan distributions). The Debtors estates must fund environmental compliance and the unencumbered sale proceeds (which are the result of a 6 Concurrently with the filing of this Objection, the Surety has filed on its own behalf, and on behalf of the Regulatory Authorities, an application for allowance of administrative expense priority treatment for all reclamation costs required by the Act. [Docket No. 993]. 9

10 Main Document Page 10 of 15 settlement of derivative claims that belong to the estate in general, not merely unsecured creditors) cannot be distributed to unsecured creditors unless and until such compliance is ensured. B. The Permit Transfer, Bond Replacement and Liability Assumption Provisions of the Proposed APA are Not Feasible 22. As noted in 16 and 17 of this Objection, the Proposed APA, like most similar transactions, contemplates the transfer of the Debtors mining permits on a post-closing basis, subject to regulatory approval. [Docket No. 512, 7.7]. A permit amendment, revision, release or transfer cannot be approved, however, where any of the permittee s (or its affiliates ) permits are the subject of a cessation order or are in the process of bond forfeiture or have been forfeited. See e.g. Energy & Mineral Law 31 st Annual Institute, Permit Blocking and Ownership and Control, 31 EMLF 8.05 (2010). Upon information and belief, certain of the Debtors permits that are likely to be retained by the estate are the subject of cessation orders which are already noted as permit blocks in the federal applicant/violator system. Further, the Proposed APA [Docket No. 512, 2.3(k)] and the Debtors Plan contemplate the forfeiture of Bonds as a mechanism to fund reclamation of those permits. Thus, absent the consent of the Regulatory Authorities, the proposed permit transfers simply cannot be effectuated. Although the Surety does not speak for the Regulatory Authorities, it is aware of circumstances where Regulatory Authorities have consented to transfers of this type, but only where concrete plans were in place to address any existing violations and to avoid subsequent bond forfeitures. Thus, the Sale Transaction cannot be approved without a global resolution of the Debtors environmental 10

11 Main Document Page 11 of 15 liabilities, regardless of whether such liabilities are associated with the permits that are the subject of the Sale Transaction. 23. On a related point, the Proposed APA provides that the purchaser will post replacement surety bonds as part of the permit transfer process, but requires that the Surety s existing Bonds remain in place pending that transfer. [Docket No. 512, 7.7] The Proposed APA further provides that the Debtors and the purchaser will enter into a contract mining agreement that will allow the purchaser to mine on the permits, subject to approval of a change in operator by the Regulatory Authorities. [Id.]. The Proposed APA, however, does not contemplate the inclusion of the Surety as a party to that agreement or mandate the Surety s consent, nor does it provide for the indemnification of the Surety. Because the Surety s Bonds will remain in place and will be subject to forfeiture in the event that the purchaser fails to comply with its obligations under the contract mining agreement, the consent of the Surety, at a minimum, is required before the Debtors can execute any such agreement. Furthermore, the Regulatory Authorities are unlikely to approve any change in operator without this consent because it allows the Surety to argue that it is discharged from Liability under the Bonds because of the involuntary substitution of the Surety s principal. See e.g. Leila Hosp. & Health Ctr. v. Xonics Medical Sys., Inc., 948 F.2d 271, 275 (6th Cir. 1991) ( Surety law suggests that a substitution of obligors releases the surety because it creates a different contract on which they never intended to become liable. ). 24. Finally, in section 2.3(k) of the Proposed APA, the purchaser purports to assume the reclamation liability associated with certain of the excluded permits, but only to the extent that such Liabilities are not funded by the issuers of the Sellers surety bonds. [Docket No. 512, 11

12 Main Document Page 12 of (k)]. The Surety s obligations under the Bonds, however, run exclusively to the Regulatory Authorities and are only triggered by a forfeiture of the Bonds. Thus, absent a global deal, the Surety will only fund the reclamation obligations related to the excluded permits in connection with a bond forfeiture by the Regulatory Authorities. As noted above, however, bond forfeitures will preclude the transfer of all of the Debtors permits, will subject the Debtors to administrative expense liability for fines and penalties, and will subject the Debtors officers and directors to civil and criminal liability. See e.g. W. Va. Code , W. Va. Code St. R , ; Ala. Code , Ala. Admin. Code R. 880-X-9E.02-03, 880-X-11C-.04. See also Ala. Code (f) ( Whenever a corporate permittee violates a condition of a permit... or fails or refuses to comply with any order [issued by ASMC]... any director, officer or agent of such corporation... shall be subject to the same civil penalties, fines and imprisonment... ). 25. In sum, the transactions contemplated by the Proposed APA cannot be effectuated without the consent of, and accommodations by, the Surety and the Regulatory Authorities. Those accommodations are highly unlikely, however, absent a global plan to address all of the Debtors reclamation obligations, not merely those that are the subject of the Sale Transaction. Further, any Sale Transaction (even one that is ultimately approved) that results in the forfeiture of bonds and/or the failure to remedy outstanding violation on retained permits (i.e. the current plan) will still subject the Debtors officers, directors and agents to civil and criminal liability. C. The Proposed APA Purports to Transfer the Surety s Collateral 26. The Surety holds $6,770, in Escrowed Funds to secure the Debtors indemnity obligations under the Bond Agreement. The funds are not earmarked for particular 12

13 Main Document Page 13 of 15 Bonds or obligations, but stand as collateral for all such obligations. The Debtors have no possessory interest in the escrowed funds, but merely have a contingent reversionary interest therein. See e.g. In re Dolphin Titan, 93 B.R. 508, 512 (Bankr. S.D. Tex. 1988) ( An assurance fund where the debtor has no claim or interest in the fund until all prior claims have been paid in full, is not property of the estate. ). Upon release of all of the Bonds and extinguishment of all obligations, however, the Surety is required to remit any remaining funds to the Debtor. 27. As noted above, the Proposed APA does not contemplate the replacement of all of the Bonds. In fact, Bonds with facial liability of more than $13 million are excluded from the Sale Transaction. Despite the fact that the Surety will retain this liability (plus liability for all other indemnified obligations), section 2.1(q) of the Proposed APA purports to transfer any cash collateral used to secure surety bonds to the purchaser. This provision violates the Bond Agreement, applicable non-bankruptcy law and 363(f) of the Bankruptcy Code and cannot be enforced. CONCLUSION 28. The Surety remains willing to work with the Debtors, the purchaser(s), and the Regulatory Authorities to structure a Sale Transaction that maximizes value for the estates while ensuring the Debtors compliance with environmental law. A Sale Transaction, however, that merely abandons problematic mine sites and shifts liability to the Surety and the Regulatory Authorities is contrary to law and cannot be approved. The Surety looks forward to reviewing the terms of the actual Sale Transaction, as soon as possible, and working with all parties-in-interest to achieve a result that is consistent with the goals stated above. 13

14 Main Document Page 14 of 15 WHEREFORE, the Surety respectfully request that the Court deny approval of the Sale Transaction in its current form. Respectfully submitted, /s/ Daniel I. Waxman Daniel I. Waxman Admitted Pro Hac Vice WYATT, TARRANT & COMBS, LLP 250 West Main Street, Suite 1600 Lexington, Kentucky Telephone: (859) Facsimile: (859) Counsel for Indemnity National Insurance Company 14

15 Main Document Page 15 of 15 CERTIFICATE OF SERVICE This is to certify that a true and correct copy of the foregoing Objection of Indemnity National Insurance Company to Proposed Sale of Assets in Accordance With Bidding Procedures Order has been served electronically via the Court s CM/ECF system upon all parties designated to receive electronic service and upon those parties listed on the Master Service List maintained by Omni Management Group via electronic mail or U.S. mail as indicated on the Master Service List (which includes the Standard Parties as defined in the Order Implementing Certain Notice and Case Management Procedures [Docket No. 67]) on March 11, /s/ Daniel I. Waxman Daniel I. Waxman