UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

ASHLAND DIVISION

IN RE:

HNRC DISSOLUTION CO., f/k/a

Horizon Natural Resources

Company, et al. CASE NO. 02-14261

DEBTOR

MEMORANDUM OPINION AND ORDER

Lexington Coal Company, LLC (“Lexington Coal”), one of the purchasers of assets of the former Debtors, filed an Objection to Claims for Royalty Payments (Doc. # 5718) in regard to a number of royalty claims (“the Disputed Claims”). Lexington Coal states that the Disputed Claims assert Class 3 Other Secured Claims pursuant to Section 4.3(b) of the Plans in force in this case, or Administrative Expense Claims, or both. Lexington Coal contends that the Disputed Claims are unsupportable as Other Secured Claims and/or as Administrative Expense Claims and asks the court to disallow them. Lexington Coal maintains that no claimant provided collateral documents to support a secured claim and that claims for administrative expense priority treatment are not supported by a demonstration that these expenses constituted a direct and substantial benefit to the estates.

Finally, Lexington Coal asserts that all cure claims that were to be paid were listed on the Cure Schedules or Cure Claims Notice. Without such listing there is no claim, and none of the claimants had any cure claim listed in the Cure Claims Notice. All the claims addressed in the Objection have been resolved except for Claim No. 1702 of Enterprise Mining Company, LLC (“Enterprise”) and Claim No. 20699 of Sovereign Pocahontas Company (“Sovereign”).

1. Enterprise Mining Company, Inc. - Claim No. 1702

Lexington Coal prepared a chart setting out the Disputed Claims. Enterprise’s claim is characterized as a secured claim in the amount of $171,800.64 and in the “Notes” section of the chart, the following is stated: “Pursuant to answer in Adversary Proceeding No. 02-1482 (Doc. No. 4) (sic), the underlying lease was assumed. Therefore, this claim should be paid. No collateral documentation provided.” In Adversary Proceeding No. 04-1482, the Liquidating Trustee filed a preference action against Coastal Coal Company, Inc., Enterprise’s predecessor in interest. The answer filed in that action asserted as an affirmative defense that a lease agreement between Coastal and one of the former Debtors was assumed and assigned per the terms of the Sale Order entered herein on September 16, 2004. The adversary proceeding was dismissed by an agreed order entered on January 18, 2005.

Enterprise’s Response to Objection to Claims for Royalty Payments (Doc. # 6209) states that its claim for $171,800.64 is an unsecured claim, consisting of an unpaid minimum royalty of $70,000.00 and unpaid taxes in the amount of $101,600.84. The additional $200.00 is represented to be an erroneous amount. Enterprise further states that it has been paid the $70,000.00 minimum royalty, pursuant to the assumption and assignment of the lease, and that it has received further payment of unpaid taxes in the total amount of $4,064.71. Enterprise maintains that it is therefore entitled to payment of its unsecured claim for taxes in the amount of $97,535.93 which includes pre-petition and post-petition amounts, although Enterprise does not apportion the amount. Enterprise asks the court to award it an administrative expense and/or cure claim in the amount of $97,535.93. This request is unsupported by documents or even reference to documents that may entitle Enterprise to an administrative expense.

Lexington Coal’s objection to Enterprise’s claim on the basis of its being a secured claim appears to be moot, since Enterprise has characterized its claim as unsecured. As concerns a claim for administrative expense, the court must agree with Lexington Coal that there is no support for the allowance of an administrative expense in regard to this claim. There is nothing in the record of this case to indicate that Enterprise filed an application for allowance of an administrative expense, nor has Enterprise proffered any evidence concerning the tax debt as an actual, necessary cost and expense of preserving the estate as required by Bankruptcy Code section 503(b)(1)(A). The court will therefore disallow Enterprise’s claim for an administrative expense.

2. Sovereign Pocahontas Company - Claim No. 20699

Lexington Coal’s chart characterizes Sovereign’s claim in the amount of $44,351.77 as administrative and in the Notes section it states: “The only support provided is a July 1, 2003 letter that refers to litigation. There is no proof the litigation involves a post petition claim or that it was necessary to the reorganization.” Sovereign’s detailed response (Doc. # 5989) sets out the history of its dealings with various entities including First Century Bank, N.A. (“First Century”), East Kentucky Energy, one of the former Debtors, and A.T. Massey Coal Company, Inc., and the execution of various documents collectively referred to as “the Contract,” concerning a portion of the so-called “Closterman Property” in West Virginia.

Sovereign filed its Application for Administrative Expense on December 29, 2004 (Doc. #5260). Sovereign’s claim form sets out the basis of the claim as “Lease obligations/property taxes,” referring to the payment of property taxes for 2002 that East Kentucky Energy had failed to pay. Under the Contract, Sovereign was liable to First Century for any obligation East Kentucky Energy failed to fulfill under the Lease, including the payment of property taxes. First Century sued Sovereign in June 2003 in Mercer County, West Virginia to recover these unpaid property taxes. Sovereign paid First Century $44,351.77 in July 2003. This court held in a Memorandum Opinion entered on March 4, 2005 (Doc. #5625) that it was East Kentucky Energy’s intent to assume the Contract documents and then assign the same to International Coal Group, LLC and Lexington Coal.

The claim form goes on to provide: “Documentation supporting the administrative claim is attached. Claimant will provide additional documentation upon request and reserves the right to amend, supplement, and/or recharacterize this claim pending further action in this matter, including disposition of any adversary proceeding and/or contested matter in which Claimant may be involved.” Attached to the claim are a copy of a letter from Sovereign’s president to counsel for First Century accompanying a check for $44,351.77 and a copy of the check. Sovereign represents that there is an ongoing dispute between itself and First Century with regard to the amount claimed.

Sovereign also maintains that “[p]ayment of these property taxes is an undisputed cure obligation of the Estate,” based on the requirement of Bankruptcy Code section 365(b)(1)(A) that a debtor either cure or provide adequate assurance of a future ability to cure any defaults in an executory contract or unexpired lease before the debtor can assume or assign the contract or lease. Further, pursuant to section 365(d)(3), a debtor is obligated “to timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, nothwithstanding section 503(b)(1) of this title.” 11 U.S.C. § 365(d)(3).

Sovereign requests that the court determine the merits of Lexington Coal’s objection to its administrative expense claim in the context of Adversary Proceeding 05-1013, Sovereign Pocahontas Company v. Lexington Coal Company, LLC, et al., which it has recently filed based on Lexington Coal’s objection, the disputed cure claim procedures, an April 6, 2005 lawsuit filed by First Century in West Virginia, and the court’s jurisdiction over the parties and the claims administration process. In view of the complexity and interrelationship of issues and parties, it appears to the court that Sovereign’s request is well taken, and the court will defer a decision on the allowance of Sovereign’s claim pending a decision in Adversary Proceeding 05-1013.

It is therefore ORDERED AS FOLLOWS:

1) The claim of Enterprise Mining Company, LLC for an administrative expense is hereby DISALLOWED; and

2) Determination of allowance of the claim of Sovereign Pocahontas Company for an administrative expense is deferred pending a decision in Adversary Proceeding 05-1013.

Copies to:

Gregory R. Schaaf, Esq.

Robert J. Brown, Esq.

Laura Day DelCotto, Esq.