UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

ASHLAND DIVISION

IN RE:

W.E.C. COAL SALES, INC.

DEBTOR CASE NO. 90-00345

W.E.C. COAL SALES, INC. PLAINTIFF

VS. ADV. NO. 90-0325

STINNES COAL COMPANY, INC. DEFENDANT

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

This matter came on for trial before the Court on July 17, 1991, and concluded on July 19, 1991. Prior to the trial, on July 5, 1991, the Court conducted a hearing on the defendant's Motion for Summary Judgment. This matter has been determined to be a non-core proceeding, and pursuant to 28 U.S.C. §157(c)(1), a Report and Recommendation concerning disposition of the Motion for Summary Judgement and these Proposed Findings of Fact and Conclusions of Law will be submitted to the United States District Court for the Eastern District of Kentucky to consider for entry of judgment.

The Court having considered the testimony offered at trial, the joint stipulation of the parties, the briefs of the parties, and the documentary and other pertinent evidence of record in this case, and being otherwise fully advised, now, in accordance with Rule 52 of the Federal Rules of Civil Procedure, makes the following Proposed Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

The plaintiff herein, W.E.C. Coal Sales, Inc. ("W.E.C.") is a Kentucky corporation which has engaged in the business of buying and selling coal as a coal broker with its principal place of business in Ashland, Kentucky. Eric Charles was at all times the sole owner and president of W.E.C. The defendant herein, Stinnes Coal Company, Inc. ("Stinnes") is a Delaware corporation engaged in the coal brokerage business for the both the domestic and import markets. Its principal place of business is in Richmond, Virginia, and it is authorized to do business in Kentucky. During all times relevant to the issues in this action, Michael Madden was President, William Kotsko was Executive Vice-President, and George McClellan was Senior Vice-President of Stinnes.

In December 1989, W.E.C. began doing business with Hatburn Coal Co., Inc. ("Hatburn"), a contract coal producer and coal broker. Hatburn consists of three principals, Woodrow Hatfield, Ermal Hatfield, and Gary Blackburn. In February 1990, W.E.C. became the exclusive buyer of Hatburn coal. Pursuant to an oral agreement, W.E.C. agreed to buy all of Hatburn's output, and Hatburn agreed that it would not sell coal to any other broker. As of May 1990, W.E.C. was buying coal from a total of 52 producers. W.E.C. was buying more coal than it was selling, and it stockpiled the excess.

In addition to Hatburn, other producers that supplied coal to W.E.C., which in turn sold it to Stinnes, included Continental Fuels, Inc., Detherage Enterprises, Inc., Revelstone Coal Company, and Stephen F. Graves & Company. Continental Corporation was the exclusive provider of trucking services to W.E.C. during the period August 13 to September 12, 1990, hauling coal from various coal mines to various loading docks on the Big Sandy River.

Eric Charles on behalf of W.E.C., and George McClellan on behalf of Stinnes, began negotiations in the early part of August 1990 to determine whether the two companies might enter into an agreement. Negotiations were concluded in Stinnes' Richmond offices. On August 13, 1990, W.E.C. and Stinnes entered into an agreement drafted by Stinnes and dated August 9, 1990 ("the Agreement") under the terms of which W.E.C. agreed to supply coal for shipment via barge from docks on the Big Sandy River on coal sales orders of Stinnes that were to be assigned to the Agreement. Pursuant to the Agreement, W.E.C. was to supply and sell coal to Stinnes "FOB barge", and Stinnes was to pay W.E.C. upon the loading of coal onto a barge.

Pursuant to the Agreement, payment was to be made the next working day following the loading of coal onto a barge if weight and analysis reports for such coal had been timely received by Stinnes. During the period August 13 through September 12, 1990, Stinnes purchased approximately 59,236 tons of coal from W.E.C. under the Agreement, for which Stinnes paid W.E.C. approximately $1,433,032.00. The Agreement also contained a termination provision which provided in pertinent part as follows: "If either party deems the other party unable to perform under the terms and conditions outlined in this Agreement, then either party may cancel this Agreement with 48 hours notice." Eric Charles signed the Agreement without any objection to the 48 hour provision.

On September 9, 1990, George McClellan received two telephone calls, one from Don Sowards, a coal blender with W.E.C. with whom he was in the habit of conferring daily, and one from Eric Charles. On this date, in the course of their daily conversation, Sowards told McClellan that the prices W.E.C. was paying for coal were higher than what Charles had represented to Stinnes. Charles called McClellan to tell him that W.E.C. needed $300,000.00 to pay Hatburn by September 12. Hatburn needed this amount to pay royalties it owed. On September 10, McClellan, Charles, and Mike Madden met to discuss ways for W.E.C. to raise the money to pay Hatburn.

At this meeting McClellan and Madden advised Charles that Stinnes was willing to release approximately $45,000.00 that Stinnes was retaining under the terms of certain purchase orders between Stinnes and W.E.C., to advance W.E.C. approximately $77,000.00 in exchange for an assignment of payments owed to W.E.C. by Southpoint Ethanol for coal sold by W.E.C., and to purchase coal out of W.E.C.'s inventory at Debbie Jo Dock in order to fill certain Dayton Power & Light orders. Because Debbie Jo Dock had been decertified as a shipper by Dayton Power & Light, however, Stinnes suggested that the coal be moved to Marigold Dock, blended with higher quality coal and then loaded on Dayton Power & Light orders.

As of September 11, 1990, W.E.C. owed Hatburn approximately $632,000.00. On that date a meeting was held at the Holiday Inn in Prestonsburg, Kentucky, to work out the details of Hatburn's being paid the $300,000.00 it needed and continuing to ship coal to W.E.C. George McClellan, Eric Charles, Mike Litafik, Ermal Hatfield, Woodrow Hatfield and Gary Blackburn were present at this meeting.

At 6:00 p.m. on September 12, 1990, Charles telephoned Mike Madden. William Kotsko was present when he called, and Madden took the call on a speaker phone. Charles was agitated, and made remarks of a threatening nature directed at an unnamed individual they understood to be Kotsko. Madden and Kotsko testified that Charles stated in this conversation that he wanted out of the Agreement.

On September 13, 1990, McClellan met with Charles, Woodrow and Ermal Hatfield, Gary Blackburn, and attorney Joe Justice at the Heart O' Highlands Motel in Paintsville, Kentucky. At this meeting McClellan learned that W.E.C. had not paid Hatburn $300,000.00 on September 12. Also at this meeting, Charles offered to assign W.E.C.'s stockpile coal to Hatburn in order to reduce W.E.C.'s debt to Hatburn. The Hatburn representatives and Eric Charles agreed to meet at Charles's attorney's office in Huntington, West Virginia, later that day, but Charles allegedly received a telephoned death threat and went into hiding. The meeting never took place.

Woodrow Hatfield testified that he realized that Charles had reneged on his agreement to assign the stockpiled coal to Hatburn when he observed it being trucked from Debbie Jo Dock to Rail River Terminal in Ironton, Ohio, after the meeting on September 13. A worker at Rail River told him that Dusco Energy had bought the coal. Hatburn's last shipment of coal to W.E.C. was on September 12, 1990.

Eric Charles entered into an agreement dated September 13, 1990, with Hobart Anderson, as agent for Dusco Energy Corporation and Detherage Enterprises, Inc. (collectively, "Dusco Energy"), to sell all the coal which W.E.C. had in stockpile at various docks on the Big Sandy River. Charles and Anderson began their negotiations for the sale of this coal late in the evening on September 12, and they continued intermittently until their conclusion in the early morning of September 13. Under the terms of this agreement, W.E.C. assigned all right, title, and interest to all such coal then held in stockpile by W.E.C. and, in addition, assigned the right to Dusco Energy to ship coal to Dayton Power & Light Company under the terms of a Purchase Order held by W.E.C.

Anderson ordered trucks to start moving the coal from Debbie Jo Dock to Rail River early on September 13. Truck tickets entered into evidence show that Anderson moved 1931.39 tons of coal on September 13, 1990. Anderson testified that he moved a total of approximately 3000-3500 tons of coal before Hatburn Coal Company filed an injunction action in state court on September 14, 1990, restraining the sale or removal of the stockpile coal. Anderson testified that he would have taken all the coal if he had had the opportunity to do so. The September 13 agreement between W.E.C. and Dusco Energy rendered W.E.C. unable to fill further orders for the sale of coal by Stinnes, particularly any such orders that Stinnes had with Dayton Power & Light Company.

As of September 13, 1990, W.E.C. owed Hatburn approximately $877,000.00 for coal it had supplied, Continental Corporation approximately $320,000.00 for trucking services, and its other coal suppliers excluding Hatburn approximately $900,000.00. W.E.C.'s bank accounts were closed on September 12, 1990, by Pikeville National Bank; on September 13, 1990, by The Bank Josephine; and on September 18, 1990, by Star Bank.

The Court finds that Stinnes possessed reliable information as of September 13, 1990 that:

a. There was substantial doubt that W.E.C. would be able to continue to purchase coal from coal producers and other coal brokers because of W.E.C.'s failure to pay its coal suppliers on a timely basis.

b. The trucking company that hauled coal for W.E.C. from the mines to the dock, Continental Corporation, discontinued trucking services to W.E.C. on September 13, 1990, and notice of such action was communicated by telephone to Stinnes personnel in Richmond, Virginia.

c. The Marigold-North Dock, the principal loading dock used by W.E.C. to fill Stinnes orders under the Agreement, had, by September 13, 1990, refused to load any further coal for W.E.C. unless Stinnes guaranteed the throughput fee. Notice of such action was conveyed to a Stinnes employee in Ashland, who, in turn, communicated it to Stinnes' management.

d. In late August and early September 1990 Stinnes was made aware that W.E.C. paid its suppliers and other vendors on several occasions with checks which were returned for insufficient funds or because the bank account on which they had been drawn had been closed.

e. Several of W.E.C.'s suppliers and vendors had contacted Stinnes' management in Richmond to inquire whether Stinnes would pay the amounts due from W.E.C. In each instance, Stinnes informed the inquiring party that its contract was with W.E.C. and that it could not make payment directly to W.E.C.'s suppliers.

Invocation of the termination clause was based on this knowledge and information. As of September 13, 1990, there were no outstanding business commitments between Stinnes and W.E.C. under the terms of the Agreement which required performance by Stinnes.

W.E.C. filed a Chapter 11 petition in this Court on October 19, 1990. On August 28, 1991, W.E.C. filed a Motion for Appointment of Chapter 11 Trustee. Continental Corporation, a creditor of the debtor, filed an Objection to Debtor's Motion to Appoint Chapter 11 Trustee and Motion to Convert Case to Chapter 7 on September 4, 1991. A hearing was held in this Court on September 5, 1991, on the debtor's Motion and Continental's Objection, and an Order of Conversion was entered on September 6, 1991, converting the case to one under Chapter 7 of the Bankruptcy Code.

CONCLUSIONS OF LAW

This Court has jurisdiction of this matter pursuant to 28 U.S.C. §1334(b). It has been determined to be a non-core proceeding pursuant to 28 U.S.C. §157(c)(1).

The Agreement between W.E.C. and Stinnes was an agreement for the sale of goods (coal), and was a valid and binding contract between the parties. As a contract for the sale of goods, the Agreement was subject to the provisions of the Uniform Commercial Code. Since the contract was made and was to have been substantially performed in Kentucky, the rights of the parties and adjudication of claims thereunder are governed by Kentucky substantive law.

Under the Uniform Commercial Code, the parties are free to vary the provisions of the Code by agreement, except for the obligation of good faith. KRS 355.1-102(3). Here the parties agreed to a specific termination provision which the Court concludes was valid, enforceable, and agreed to by W.E.C. The obligation of good faith, set out at KRS 355.1-203, is imposed on contracting parties in the performance of a contract.

"Good faith" is defined in Section 1-201(19) as "honesty in fact in the conduct or transaction concerned." Merchants are required, in addition, to observe "reasonable commercial standards and fair dealing in the trade." KRS 355.2-103(b). W.E.C. did not establish that Stinnes did not comply with these standards. The Court concludes, therefore, that W.E.C. has not sustained its burden of proof that Stinnes' termination of the Agreement was not in good faith and such claim should be dismissed.

W.E.C.'s claim that Stinnes failed and refused to fulfill "outstanding business commitments" is refuted by the Court's finding that the September 13 agreement between W.E.C. and Dusco Energy rendered W.E.C. unable to fill further orders for the sale of coal by Stinnes. This claim should therefore be dismissed.

This matter having been determined to be a non-core proceeding pursuant to 28 U.S.C. §157(c)(1), this Court hereby submits these Proposed Findings of Fact and Conclusions of Law to the United States District Court for the Eastern District of Kentucky to consider for entry of judgment.

Dated:

By the Court -

__________________________________

Judge

Copies to:

Bill V. Seiller, Esq.

John Armstrong West, Esq.

Bruce Levy, Esq., Trustee

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