UNITED STATES BANKRUPTCY COURT

    EASTERN DISTRICT OF KENTUCKY

    ASHLAND DIVISION

 

 

IN RE:

 

HNRC DISSOLUTION CO. CASE NO. 02-14261

 

DEBTOR

 

 

MEMORANDUM OPINION AND ORDER

 

Sovereign Pocahontas Company (“Sovereign”) has moved the court for an Order Determining the Status of Contracts and Leases and Enforcing Confirmed Plans and Sale Order (Doc. #5307).  In its motion, Sovereign seeks an order of the court determining that the debtor assumed, as part of its confirmed plans of reorganization herein, an agreement between debtor East Kentucky Energy Company (“Debtor”) and Sovereign.  An objection has been filed by First Century Bank, NA (“First Century”) who, as trustee for various individuals, was the successor party to a coal lease with Sovereign which was assigned by Sovereign to Debtor. That lease involves coal properties located in West Virginia and known as the Closterman Lease involving approximately 11,000 acres.  First Century has also filed an adversary proceeding and moved to continue the hearing on Sovereign’s motion contending that the issues before the court must be decided in an adversary proceeding.  Sovereign has filed its reply to the response of First Century. 


Memoranda have been filed by Lexington Coal Company (Doc. #5405) and International Coal Group (Doc. #5397).  Cotiga Development Company has filed a response (Doc. #5408) in opposition to Sovereign’s motion.  Sovereign contends that the Debtor expressed its intent to assume and assign the contract at issue pursuant to §365 of the Bankruptcy Code and that its contract is listed in the Amended and Restated Asset Purchase Agreement, the debtors’ reports of sale of their assets and the order approving those sales and that an amount to cure the default in the Debtor’s contract with Sovereign is listed in those documents indicating a clear intent to assume Sovereign’s contract with the Debtor.  The contract between Sovereign and the Debtor is an “override” contract wherein the Debtor undertook to mine the coal and make payments to First Century and pay an override to Sovereign for the coal mined.  Sovereign argues that, based upon these documents and its belief that its contract was being assumed by the Debtor to be assigned to the purchaser, it did not object to the proceedings which resulted in the sale of the Debtor’s assets and a final order confirming the debtors’ plans and recognizing the sale of debtors’ assets.

In response, First Century, as successor trustee to the lease (which was originally between Debtor and The First National Bank of Bluefield) contends that the Closterman Lease was not assumed by the Debtor because, after a series of orders extending the time for the debtors to assume or reject the Marrowbone Leases, the time on the final extension expired September 29, 2004 without assumption.

Sovereign’s Reply (Doc. #5405) points out that, prior to the September 29, 2004 expiration of the last extension to assume Marrowbone Leases, a sale was conducted and plans of reorganization were confirmed and are now final and provide for the assumption of the leases in question and the curing of defaults as required upon such assumption and assignment by the Debtor.  Sovereign contends that confirmation of the plans gives a res judicata effect to the terms of the plans and any matters that could have been raised.

International Coal Group (“ICG”) points out that the Closterman Heirs’ Lease property is located primarily in the Jennies Creek area of Mingo County, West Virginia and partially in the adjacent Marrowbone area.  ICG further argues that First Century raised no objection to the assumption and assignment of the lease in the confirmation and sale process and its only previous objection has been to the cure amount.  Apparently, First Century claims a “lost coal” claim that is contested but apparently does not contest certain other sums listed in the aforementioned documents which would be necessary to cure the lease when assumed.  ICG, Lexington Coal Company and one other purchaser were the prevailing bidders at the auction for the assets of all of the debtors.  ICG has attached to its memorandum the Newcoal APA Schedule B and points out that the Closterman Heirs’ Lease was identified for the area Jennies Creek and fell within the agreement’s definition of executory contracts which were assumed.  ICG contends that its agreement and the documents show that ICG purchased the portions of the Closterman Heirs’ Lease with respect to the Jennies Creek area only.  It contends that “Oldcoal, LLC”, now Lexington Coal Company, LLC (“Lexington Coal”) assumed any remaining balance of the Closterman Leases not assumed by ICG.

Lexington Coal supports the Sovereign motion and points out that Lexington Coal, as successor to Oldcoal, in its APA, assumed the balance of the Closterman Leases.  It points out to the court the importance of the assumption of these leases in the Marrowbone Complex to the debtors’ confirmed plans of reorganization.

Cotiga Development Company Limited Partnership and Twelvepole Limited Partnership (“Cotiga”) have filed their response in support of the position of First Century.  Although Cotiga is not involved in the Closterman Lease in question here, Cotiga points out that its situation is similar and its concern about the effect that the ruling of the court in the Closterman Lease matters may have upon its contracts.  It urges the court not to rule upon the matter and challenges the procedure used in bringing the question before the court and requests a continuance of the matter.  Cotiga argues that the Marrowbone leases were rejected as of September 29, 2004 at the expiration of the time provided in the Sixth Extension Order (Doc. #4025). 

First, with respect to the motions to continue the proceeding, the court has heard argument on the matter and believes the issues have been fully briefed and the court is prepared to decide the matter at this time.  The motions to continue will, therefore, be overruled.

With respect to the challenge to the jurisdiction and the procedure in deciding these matters, it appears that the court is being requested to interpret its own orders in the form of, inter alia, the orders extending time to assume or reject leases, the orders approving asset purchase agreements, and the orders confirming plans of reorganization.  As such, this court is in a better position than any other court to interpret and give effect to its own orders. 


The Newcoal APA (Doc. #3172) lists the contract with Sovereign as a non-executory contract in Schedule 2.1(a)(vii) attached thereto.  Schedule 2.1(b) to that Asset Purchase Agreement identifies the Closterman Heirs’ Lease as a lease being assumed and assigned to Newcoal and refers to the area as Jennies Creek.  The Oldcoal APA appears to entitle Oldcoal to any and all other portions of the Closterman Lease and require the assumption thereof by the Debtor.  Schedules 2.1(a)(vii) and 2.1(b) to the Newcoal APA identify an override agreement and assignment between the Debtor and Sovereign which is clearly the contract at issue herein.  As reflected by the debtors’ report of sale (Doc. #3824) and the order approving the sale (Doc. #4085), cure amounts are listed for Sovereign and for First Century.

This set of facts, in which the Debtors listed Sovereign as a contract that was not executory but provided for the cure amounts which Sovereign did not object to, were all adopted by and assumed in the plans of reorganization confirmed by the court in this matter.  Those plans of reorganization are final orders of this court and res judicata applies to prevent relitigating the terms thereof.  No contract between the Debtor and First Century (or its predecessor trustee) has been offered in evidence.  The only agreement by which the Debtor claimed an interest in the Closterman Lease was by virtue of its contract with Sovereign.  Any assumption of the Debtor’s contract relating to the Closterman Lease property necessarily involves the Sovereign assignment since that is the source of the Debtor’s interest in the Closterman Lease property.  The Debtor clearly expressed its intention to assume the First Century lease as part of the confirmation of the plans of reorganization in these cases and assumption, in these circumstances, means assumption of the Sovereign agreement and that assumption is, in absence of agreement to modify between the parties, cum onere. City of Covington v. Covington Landing Ltd. Partnership, 71 F. 3d 1221 (6th Cir. 1995).  The court holds that the unequivocal intent of the debtor to assume the coal lease in issue, the listing of cure amounts for the Sovereign Pocahontas agreement and the approval of the payment of those amounts by the Debtor to cure defaults in the agreement indicate Debtor’s intention to assume the Sovereign Agreement and Closterman Lease and assign that lease to Newcoal and Oldcoal.  As such, the parties should be directed to proceed to carry out the terms of the confirmed plans of reorganization.  It is therefore ORDERED AS FOLLOWS:

1)      The motions to continue the hearing on the motion of Sovereign Pocahontas Company are hereby OVERRULED;

2)      The request for relief by First Century Bank, NA, trustee, be, and the same hereby is, OVERRULED; and

3)      The motion of Sovereign Pocahontas Company is SUSTAINED to the extent set forth in the within Memorandum Opinion and the parties are ordered to proceed forthwith to comply with the terms of the confirmed plans of reorganization specifically with respect to assumption of the agreement with Sovereign Pocahontas Company and the Closterman Lease property.

COPIES TO:

Taft McKinstry, Esq.

Elizabeth Thompson, Esq.

Gregory Schaaf, Esq.

Patrick McLaughlin, Esq.

Joshua Taylor, Esq.

Michael Wiles, Esq.

Amy Purcell, Esq.