STATES BANKRUPTCY COURT
THE EASTERN DISTRICT OF KENTUCKY
TONY SLOAN, NED T.
SLOAN, BRUCE R. SLOAN,
and RUBEN G. HICKS,
Becknell & Crace
Coal Company DEFENDANTS
This matter is before the
court on a motion of the defendants Lola Bettye Sloan, Jimmie Sloan, Tony Sloan,
Ned T. Sloan, Margaret Sloan, Bruce R. Sloan, and John Sloan (hereinafter
collectively referred to as the "Sloans") and a motion of defendant
Ruben G. Hicks, trustee for the debtor Becknell & Crace Coal Company, to
dismiss the complaint of the plaintiff Shamrock Coal Company, Inc. in this
Also before the court is a
motion of the plaintiff Shamrock Coal Company, Inc. for an order enjoining the
Sloans from taking further action or initiating any further proceedings against
Shamrock in the Jefferson Circuit Court or in any other court pending a
resolution of this adversary proceeding.
This is but another episode
in tortuous litigation between the Sloans and the bankruptcy estate of Becknell
& Crace concerning ownership of coal in place under lands owned by the
Sloans. Prior to its bankruptcy, Becknell & Crace acquired from the Sloans
title to the coal in question, despite the Sloans' continued assertions to the
contrary. The trustee, as successor in interest to Becknell & Crace, leased
the coal to Shamrock, which conducted mining operations on the property. The
Sloans have steadfastly maintained that they own the coal in place and
consequently that Shamrock had no legal right to mine the coal. The Sloans'
quest for a sympathetic forum has traversed, on more than one occasion, this
court, the United States District Court for the Eastern District of Kentucky,
the United States Court of Appeals for the Sixth Circuit, the United States
Supreme Court, the Clinton Circuit Court, the Kentucky Court of Appeals, the
Kentucky Supreme Court, and most recently the Jefferson Circuit Court. Shamrock
commenced this adversary proceeding--albeit belatedly--to restrain the Sloans
from pursuing an action they commenced in the Jefferson Circuit Court to recover
damages from Shamrock for trespass and waste resulting from Shamrock's mining of
the subject coal. A review of the history of the bankruptcy case and related
proceedings is necessary to an informed ruling in this adversary proceeding.
FINDINGS OF FACT:
Findings of fact set forth
in this court's memorandum opinion entered on April 22, 1991 in Hicks v.
Sloan, adversary no. 14, are incorporated herein by reference. Additional
findings of fact are as follows.
The Lease Purchase
On January 22, 1970, Becknell & Crace Coal Company and the Sloans executed a
Lease Purchase Agreement, which was amended by agreements dated January 31, 1971
and August 2, 1971 (the agreement as amended shall be referred to as the
"Lease Purchase Agreement"). Pursuant to the terms of the Lease
Purchase Agreement, the debtor acquired title to and commenced mining of coal
under lands owned by the Sloans. Becknell & Crace filed a petition for
arrangement under chapter XI of the Bankruptcy Act on May 18, 1972. The case was
converted to a straight bankruptcy case on September 18, 1972. Ruben G. Hicks, a
defendant herein, was appointed trustee of the estate of the debtor, Becknell
& Crace, on October 12, 1972 and as trustee succeeded to the debtor's
interest in the Lease Purchase Agreement.
Early in the case the
Sloans sought an order of the court directing the trustee to reject the Lease
Purchase Agreement as an executory contract. In November of 1972 the trustee
timely filed a motion for an extension of time in which to assume or reject the
Lease Purchase Agreement.
On July 19, 1976, this
court entered a memorandum opinion and order adjudging that the trustee as
successor in interest to the debtor acquired title to the coal subject to a
vendor's lien in favor of the Sloans to secure payment of the balance due on the
purchase price. This court also held that the Lease Purchase Agreement was not
an executory contract. Consequently the court overruled as moot the motion of
the trustee for an extension of time in which to assume or reject the Lease
Purchase Agreement. The Sloans appealed the order ultimately to the United
States Court of Appeals for the Sixth Circuit.
On May 8, 1985, the Sixth
Circuit Court of Appeals rendered an opinion in which it agreed with this
court's determination that the Lease Purchase Agreement granted to Becknell
& Crace a fee simple interest in the coal. In re Becknell & Crace
Coal Co., Inc. (Sloan v. Hicks), 761 F.2d 319, 321-22 (6th Cir. 1985), cert.
denied, Sloan v. Hicks, 474 U.S. 1006 (1985). However, the Sixth
Circuit overruled this court on the question of whether the Lease Purchase
Agreement is an executory contract. Id. The Sixth Circuit remanded the
case to this court with directions that the trustee be given the opportunity to
assume or reject the Lease Purchase Agreement. Id. at 322.
The trustee's lease
On November 15, 1982, while the Sloans' appeal to the Sixth Circuit Court of
Appeals was pending, the trustee commenced adversary proceeding no. 14 by filing
a complaint in this court against the Sloans. The trustee sought leave of court
to grant to Greenwood Land and Mining Company, a subsidiary of Shamrock Coal
Company (hereinafter "Shamrock"), an option to lease or purchase
(hereinafter "Option to Lease") the coal described in the Lease
Purchase Agreement. The adversary proceeding was held in abeyance pending a
resolution of the appeal by the Sixth Circuit.
On May 7, 1986, subsequent
to the opinion of the Sixth Circuit Court of Appeals referred to above, but
prior to trial in adversary no. 14 on the complaint of the trustee, this court
heard and overruled the Sloans' motion for an order allowing them to file in an
appropriate state court a declaratory judgment suit or quiet title action
against the debtor to determine whether the debtor has a fee simple interest in
the coal remaining under surface rights owned by the Sloans. By order entered on
May 19, 1986, this court held: "In view of the fact that three levels of
courts in the federal system, the bankruptcy court, the district court and the
court of appeals, have ruled on this issue, these rulings are res judicata with
respect to the parties, and further litigation of this issue in the state court
Trial on the trustee's
complaint in adversary no. 14 was held on May 19, 1986. By order entered on June
11, 1986, and in conformity with findings of fact and conclusions of law entered
therewith, this court found that the issue of whether the Sloans had theretofore
terminated the Lease Purchase Agreement was necessarily decided by the Sixth
Circuit in the trustee's favor and was res judicata. This court authorized the
trustee to grant the Option to Lease to Shamrock. The term of the Option to
Lease was for 90 days from the date of its execution, during which period
Shamrock was granted the right to prospect for coal upon the premises. If
Shamrock exercised the Option to Lease, the parties would execute the lease
attached to and incorporated by reference in the Option to Lease. The order
entered on June 11, 1986 also extended the time within which the trustee may
assume or reject the Lease Purchase Agreement to give the trustee an opportunity
to base his decision on Shamrock's course of action.
On August 29, 1986, the
trustee filed with this court and served on the Sloans or their counsel a notice
that Shamrock, by letter dated August 22, 1986, had exercised the Option to
Lease. On September 9, 1986, the trustee and Shamrock entered into the lease.
The trustee and Shamrock
agreed in the lease as follows. The Sloans would be paid from an escrow account
advanced minimum royalties and earned royalties up to the sum of $1,000,000.00
as required by the Lease Purchase Agreement. If it is determined that the Sloans
have no further interest in the coal, payment to the Sloans of the sum of $1
million will be deemed complete payment for all remaining coal in place as
provided in the Lease Purchase Agreement. Any funds in the escrow account,
including accrued interest, in excess of $1 million shall be paid to the trustee
for distribution pursuant to orders of this court. On the other hand, if it is
determined that the trustee has no rights to the coal or that the Sloans are
entitled to royalties in excess of the sum of $1 million, funds in escrow shall
be used to pay the Sloans. Thereafter any funds remaining in escrow, including
accrued interest, shall be paid to Shamrock, and "the trustee shall be
relieved of any and all liability to [Shamrock] for damages from execution of
the Lease." The lease further provides that it shall be binding upon and
inure to the successors and assigns of the parties thereto. Shamrock agreed to
abide by the terms of the Lease Purchase Agreement until the rights of the
Sloans and the trustee under the Lease Purchase Agreement are adjudicated.
Shamrock commenced mining
operations on the subject property in June of 1987 and continued to mine the
property until August 1988. Shamrock removed approximately 450,000 tons of coal
for which it paid to the trustee $2.50 per ton, or $1,125,000. That sum was
placed in escrow at interest. As coal was mined, the trustee tendered to the
Sloans royalties in the amount of 33-1/3 cents per raw ton of coal removed. The
Sloans routinely refused the tendered payment.
against the Sloans.
Soon after this court approved the Option to Lease, and despite this court's
ruling that further action on the question of ownership of the coal was
unwarranted, the Sloans initiated a civil action in Clinton Circuit Court,
Albany, Kentucky, civil action 86-CI-080, against Shamrock Coal Company and the
Commonwealth of Kentucky, Cabinet for Natural Resources and Environmental
Protection. In their complaint the Sloans challenged the grant of a coal
exploration permit to Shamrock by the Cabinet for Natural Resources and
Environmental Protection. The Sloans alleged that Shamrock submitted false
information on its application for a coal exploration permit in that Shamrock
did not identify the Sloans as owners of both surface and mineral rights.
On June 16, 1986, on motion
of the trustee, after hearing, this court issued a temporary restraining order
enjoining the Sloans, their agents, attorneys, employees and successors from
proceeding with any action in the Clinton Circuit Court, specifically with civil
action 86-CI-080, with respect to the subject property, or in any other way
interfering with the actions of the trustee, Shamrock Coal Company, their
agents, attorneys, employees and successors with respect to the property.
On June 18, 1986, after
hearing, the court issued a preliminary injunction and ordered -
the Defendants, their agents, attorneys, employees, successors and each of them
be, and the same hereby are restrained and enjoined from taking any action to or
in any manner terminating the Lease Purchase Agreement dated January 22, 1970
between the Defendants and Becknell & Crace Coal Company, Inc. except as
authorized by this Court and from interfering with the Trustee, his agents,
assigns, attorneys or Shamrock Coal Company, its agents, assigns or attorneys in
proceeding to go on to the property which is the subject of this action and
explore it for coal pursuant to the terms of the Option to Lease agreement
approved by this Court on May 19, 1986 and Judgment entered June 11, 1986 and
from proceeding in the Clinton Circuit Court with that certain action pending
there against Shamrock Coal Company and others, being Civil Action No.
86-CI-080, or any other action in any Kentucky court to enjoin or otherwise
interfere with the use of the property by the Trustee and Shamrock Coal Company
or in any other manner attempting to interfere with or defeat the exploration of
such property under the terms of the orders of this Court.
On June 27, 1986, the
Sloans filed a motion for leave to appeal the June 18, 1986 injunction, and in
that motion requested a stay of the June 11, 1986 judgment pending appeal. The
motion was directed to the district court. By memorandum opinion and order
entered on March 15, 1988, the district court affirmed the June 11, 1986
judgment and the June 18, 1986 injunction entered by this court. No stay pending
appeal was granted by the district court or by this court.
The Clinton Circuit Court
action was abated because of the injunction. Thereafter the Clinton Circuit
Court dismissed the action for want of prosecution pursuant to Kentucky Rule of
Civil Procedure 77.02(2). The Kentucky Court of Appeals affirmed the order of
dismissal. Sloan v. Shamrock Coal Company, Inc., No. 89-CA-2691-S and No.
90-CA-114-S (Ky. Ct. App. Dec. 21, 1990), discretionary review denied,
No. 91-SC-264-D (Ky. Oct. 16, 1991).
Trustee's motion to
assume the Lease Purchase Agreement.
On May 11, 1987, after Shamrock exercised the option to lease, the trustee
requested this court to authorize him to assume the Lease Purchase Agreement.
The motion was heard on February 19, 1988 and set for trial in May.
On March 23, 1988, the
trustee tendered to the Sloans payment in the amount of $710,777.71,
representing the difference between $1,000,000 owed to the Sloans pursuant to
the Lease Purchase Agreement and $289,222.29 previously paid to the Sloans by
the debtor. The Sloans, contending they were owed a greater sum, refused to
accept the tendered payment.
Trial was continued to
August 4, 1988. At the conclusion of the trial the court took the matter under
The Jefferson Circuit
Court action: abated.
Unbeknownst to this court, on October 16, 1989, after the Clinton Circuit Court
action was dismissed, and while this court had under advisement the issue of
whether to grant the trustee's motion to assume the Lease Purchase Agreement,
the Sloans commenced a civil action in the Jefferson Circuit Court, Louisville,
Kentucky, against Shamrock Coal Company to recover damages for trespass and
waste. The action is predicated on the theory, clearly rejected by the Sixth
Circuit, that the Sloans own the coal mined by Shamrock. In Count I of the
complaint the Sloans alleged that they are co-tenant owners of real property,
most or all of which is located in Clinton County; that on or soon after June
11, 1986, Shamrock, without the permission of the Sloans and over their
objections, entered upon the property, commenced exploration activities and
ultimately removed coal from the property; that Shamrock did so prior to the
bankruptcy trustee having assumed or any court granting the trustee authority to
assume the Lease Purchase Agreement; that the actions of Shamrock constitute a
trespass or a waste of the subject property which caused the Sloans to suffer
loss of the use and reduction in value of their property.
In Count II of the
complaint the Sloans alleged that the trustee of the estate of Becknell &
Crace has petitioned the bankruptcy court for leave to assume the Lease Purchase
Agreement; that Shamrock has contracted with the trustee to mine coal on the
subject property in accordance with the terms of the Lease Purchase Agreement;
that Shamrock either is the alter ego of the trustee or is liable as lessee
under the terms of the Lease Purchase Agreement; that the Sloans are owed
minimum royalties of $100,000 per year from the date of last payment by Becknell
& Crace, plus royalties for coal mined since June 11, 1986, plus interest
thereon, all in excess of $3,000,000.00; and that in the event a court of final
and competent jurisdiction authorizes the trustee's assumption of the Lease
Purchase Agreement, Shamrock is liable to the Sloans for all royalties due.
By Count III of the
complaint the Sloans sought to have declared void the permit to explore and the
permit to mine issued to Shamrock by the Natural Resources and Environmental
Protection Cabinet. Count III has been dismissed.
The Sloans requested
judgment against Shamrock for actual damages, treble damages, and punitive
On November 8, 1989,
Shamrock filed a motion to dismiss the complaint. Shamrock argued that the
bankruptcy court's exclusive jurisdiction of all property of the estate
precludes the exercise of jurisdiction by the Jefferson Circuit Court of an
action involving "the right of the Bankruptcy Court to authorize Shamrock
Coal Company to mine coal, title to which is presently held by the Trustee in
Bankruptcy. . . ." Shamrock also argued that the filing of the action in
the Jefferson Circuit Court violated the preliminary injunction issued by this
court in adversary proceeding no. 14. Shamrock argued in the alternative that
because an identical action had been commenced by the Sloans against Shamrock in
the Clinton Circuit Court and was pending at the time the Jefferson Circuit
Court action was commenced, the Clinton Circuit Court had exclusive jurisdiction
of the matter.
The Sloans countered that
the bankruptcy court's injunction, which prohibits the Sloans from "interfer[ing]
with the use of the property by the Trustee and Shamrock Coal Company . .
.," did not prohibit the action filed in the Jefferson Circuit Court, which
is designed "merely to obtain [from Shamrock] money owed [to the Sloans]
under the Lease Purchase Agreement."
By order entered on May 30,
1990, the Jefferson Circuit Court noted that the Clinton Circuit Court's order
of dismissal was on appeal to the Kentucky Court of Appeals and that the
bankruptcy court had under consideration the issue of whether the trustee should
be authorized to assume the Lease Purchase Agreement and thus ordered that the
Jefferson Circuit Court action be held in abeyance pending a ruling by either
the Kentucky Court of Appeals or the Bankruptcy Court.
The ruling on
trustee's motion to assume or reject.
By memorandum opinion and order entered on April 22, 1991, this court ruled on
the pending motion of the trustee for authorization to assume the Lease Purchase
Agreement. This court concluded that if the trustee assumed the Lease Purchase
Agreement, the Sloans would be entitled to payment not only in the principal
amount of $710,777.71 as conceded by the trustee, but of interest in the amount
of $570,348.40 as well, for a total of $1,281,126.11, but that if the trustee
rejected the Lease Purchase Agreement, he would be required to pay to the Sloans
the sum of $149,850.00, representing royalties on 450,000 tons of coal mined at
$.333 per ton, and to surrender the premises to the Sloans, reserving payment of
additional sums to the Sloans until such time as they foreclose their vendor's
lien and file a claim for the deficiency balance. The trustee objected to the
order only insofar as it required the payment of interest upon assumption of the
lease. The Sloans contended they were entitled to payment in the principal
amount of approximately $1.6 million plus interest thereon if the trustee
assumed the Lease Purchase Agreement. Both the trustee and the Sloans appealed
to the district court.
On appeal the Sloans, who
had previously maintained that the trustee had no interest in the Lease Purchase
Agreement to assume, or that the trustee should reject or had rejected the Lease
Purchase Agreement, took the position, apparently for the first time, that upon
executing the lease with Shamrock the trustee had in fact assumed the Lease
Purchase Agreement. By memorandum opinion and order entered on October 25, 1991,
the district court agreed with the Sloans and held that execution by the trustee
of the lease with Shamrock constituted a de facto assumption of the Lease
Purchase Agreement. The district court directed this court to enter an order
granting the trustee's motion to assume the Lease Purchase Agreement. The
district court agreed the amount owing to the Sloans was $1,281,126.11. Again,
the trustee and the Sloans appealed.
During the pendency of the appeal to the Sixth Circuit on the issue of whether
the trustee had already assumed the Lease Purchase Agreement, the trustee and
the Sloans reached an agreement. On October 6, 1992, the trustee filed in this
court a motion for authority to compromise the controversy with the Sloans, an
application to abandon the Lease Purchase Agreement, and, concerned that a
ruling by the Sixth Circuit was imminent, a request that this court approve
shortened notice of the hearing on the motion. Notice of the hearing was
provided telephonically by counsel for the trustee. The motion and application
were sustained by order entered October 6, 1992.
Shamrock was not a party to
the settlement agreement. It does not appear from the certificates of service
that Shamrock was served with notice of the hearing on the motion to approve the
settlement, nor was it served with a copy of the executed settlement agreement.
The settlement agreement
was executed on October 7, 1992, and filed on October 8, 1992. The settlement
agreement provides in pertinent part as follows.
The Lease Purchase Agreement of January 22, 1970, is abandoned.
The Trustee holds approximately $1,480,000.00 in escrow, pursuant to the
September 9, 1986 Option, which consists of royalties received under the
Shamrock Option and interest on said royalties, which is not nor has it been
property of the bankruptcy estate, but is and has been property of the Sloans.
Concurrent with the date of entry of an Order or Judgment approving this
Settlement Agreement, the Trustee shall return said property to the Sloans as
The realty, all personalty, and all interest of the Trustee related to or
derived from the Lease Purchase Agreement is deemed to revert to the Sloans by
operation of law, as of the date of the filing of the bankruptcy petition
. . .
For and in consideration of the foregoing, the Trustee shall retain all sums in
the above-referenced escrow, except the total sum of $1,100,000.00 which is
property of the Sloans and shall be paid over to the Sloans.
. . .
No orders, opinions, judgments, findings of fact shall become final, non-appealable
or binding, except this Settlement Agreement and any Agreed Order or Judgment
approving or enforcing it, and the Opinion of the United States Court of Appeals
for the Sixth Circuit as may be found at 761 F.2d 319 (1985).
The Sloans covenant not to sue or make any claims against the Trustee, his
former counsel, or present counsel as a result of any actions taken in either
Case Number 72-650 or Adversary Proceeding No. 14 filed therein and the Trustee
covenants not to sue or make any claims against the Sloans or their former or
present counsel as a result of any actions taken in either Case Number 72-650 or
Adversary Proceeding 14 filed therein.
. . .
During the pendency of Adversary Proceeding 14, the Court entered injunctive
relief against the Sloans. The parties agree that said relief should be vacated
and will upon approval hereof do all that is necessary to have said injunctive
. . .
This Agreement is a full, final and complete expression of the Agreement of the
parties and constitutes a full settlement of all claims each party may have
against the other, past or present but shall not operate to settle or
compromise claims against third parties. . . .
Following this court's
approval of the settlement agreement, the parties filed in the Sixth Circuit
Court of Appeals a joint motion to adopt the settlement agreement. In reliance
thereon, on November 10, 1992 the Sixth Circuit entered an order dismissing the
appeal. Subsequently the Sloans filed a petition for rehearing and thereby
requested the Sixth Circuit to vacate its order of dismissal and in lieu thereof
adopt the settlement agreement as its judgment and mandate. The trustee did not
oppose the Sloans' petition. By order entered January 8, 1993, the Sixth Circuit
adopted the settlement agreement as its order disposing of the appeal. The
settlement agreement became the mandate of the Sixth Circuit Court of Appeals on
February 1, 1993.
On August 25, 1993, the
Sloans filed a motion in adversary no. 14 asking this court to vacate the
temporary restraining order and preliminary injunction entered on June 16, 1986
and June 18, 1986, respectively, on the grounds that the trustee abandoned the
estate's interest in the coal upon execution of the settlement agreement. The
injunctions were vacated by order entered on September 1, 1993.
The Jefferson Circuit
Court action: revived.
Sometime in 1994, on motion of the Sloans, the Jefferson Circuit Court vacated
its order of May 30, 1990 holding in abeyance the Sloans' action against
Shamrock. On October 19, 1994, the Jefferson Circuit Court overruled Shamrock's
motion to dismiss, which was pending when the case was abated, concluding that
the settlement rendered moot the reasons cited by Shamrock in support of its
motion to dismiss. Shamrock filed an answer on November 7, 1994.
On June 16, 1995, Shamrock
filed a motion for summary judgment. Shamrock argued that the Sloans are
precluded from pursuing any action for damages against Shamrock arising from
mining operations conducted under the lease primarily for three reasons. First,
the Sloans failed to obtain a stay of the order of the bankruptcy court
approving the trustee's lease with Shamrock pending the Sloans' appeal of that
order. Consequently, although the adoption of the settlement agreement as the
mandate of the Sixth Circuit effectuated a reversal of the order aproving the
lease, Shamrock is protected by former Bankruptcy Rule 805, which provides in
part: "Unless an order approving a sale of property or an issuance of a
certificate of indebtedness is stayed pending an appeal, the sale to a good
faith purchaser or the issuance of a certificate of indebtedness shall not be
affected by the reversal or modification of such order on appeal, whether or not
the purchaser or holder knows of the pendency of the appeal." Second, the
holding of the Sixth Circuit that the trustee owns the coal is binding on the
Sloans under the doctrine of res judicata and precludes the Sloans from
asserting a cause of action against Shamrock for trespass. Third, the Sloans had
successfully argued on appeal to the district court that the trustee, by leasing
the coal to Shamrock, had assumed the Lease Purchase Agreement. The doctrine of
judicial estoppel precludes the Sloans from now asserting that the lease with
Shamrock is invalid because the trustee had not assumed the Lease Purchase
Agreement prior to executing the lease with Shamrock.
In response, the Sloans
asserted that pursuant to the settlement agreement, which was issued as the
mandate of the Sixth Circuit Court of Appeals, the trustee abandoned the
estate's interest in the coal effective as of the date of the filing of the
bankruptcy petition. Thus, the trustee's lease with Shamrock is invalid because
the trustee had no interest to convey to Shamrock. The Sloans also challenged
the applicability of Rule 805 because Shamrock is a lessee, not a purchaser, and
because the trustee's failure to obtain an appraisal of the coal and an order
approving or confirming the lease pursuant to section 70(f) of the Bankruptcy
Act meant there was no valid "order approving a sale of property" to
be stayed under Rule 805 pending appeal. The Sloans argued that Shamrock is not
entitled to the protection afforded by Rule 805 because Shamrock did not act in
good faith. The Sloans also stated that Shamrock was in privity with the trustee
by reason of the lease agreement and as a privy to the contract is bound under
the principle of res judicata by the terms of the settlement agreement.
On March 18, 1996, the
Jefferson Circuit Court granted summary judgment in favor of Shamrock. The
court's opinion follows:
is the Opinion of this Court that Defendant is entitled to a Summary Judgment as
a matter of law. This matter is resolved very simply on the facts. The
Bankruptcy Court's initial determination that Becknell & Crace had a fee
interest in the coal is crucial. That interest passed to the Trustee, who
stepped into their shoes. He was free to dispose of the interest in coal in any
way he so chose by authority set forth in 11 U.S.C. ' 110, limited only by the
terms of what would best serve the estate and pay the most creditors of Becknell
& Crace. The Bankruptcy Court determined that the proposed agreement with
Shamrock was the best way to accomplish those aims. By entering into that
agreement, the Trustee did, in fact, assume the executory contract by his
conduct. At that point, Plaintiff's only status was that of a creditor in the
Becknell & Crace bankruptcy and their only right was to be paid as other
creditors in their class were being paid. The Plaintiffs, by entering the
agreement with the Trustee, then were ceded the Trustee's interest in the coal
and the proceeds of his agreement with Shamrock. No contract exists between
Shamrock and Plaintiffs. Shamrock has never stood in the shoes of Becknell &
Crace and any reference to the terms of the 1970 agreement is completely
as Shamrock had every right to go upon the land and mine the coal, pursuant to
its agreement with the Trustee and Plaintiff's failure to obtain a stay, there
is no cause of action for trespass. 11 U.S.C.' 805 [sic] is dispositive as to
the rights of a good faith purchaser.
Adversary no. 95-6026.
On July 20, 1995, during the period in which the parties were briefing their
motions for summary judgment in the Jefferson Circuit Court, Shamrock commenced
this adversary proceeding against the Sloans and the trustee. The complaint, as
amended on July 27, 1995, requests this court: (1) to reinstate the judgment of
June 11, 1986 in which the court approved the Option to Lease between the
trustee and Shamrock; (2) to reinstate the injunction issued on June 18, 1986
and extend it to bar the Sloans from pursuing any action against Shamrock
arising out of the lease between the trustee and Shamrock; (3) to set aside any
parts of the settlement agreement which materially affect Shamrock's rights; (4)
to award to Shamrock a judgment against the trustee for indemnification to the
extent Shamrock may be adjudged liable to the Sloans for damages.
On August 28, 1995, the
Sloans filed a motion to dismiss the adversary proceeding, or in the alternative
to abstain, on the grounds that: (1) the court lacks subject matter
jurisdiction; (2) the court lacks personal jurisdiction over the Sloans; (3) the
settlement agreement, as adopted as the mandate of the Sixth Circuit, authorizes
the Sloans to pursue this action against Shamrock; and (4) Shamrock did not
allege and cannot show grounds under Rule 60 of the Federal Rules of Bankruptcy
Procedure to set aside the order approving the settlement agreement. Shamrock
responded on September 18, 1995 and claimed protection under Rule 805. The
matter was heard and taken under advisement on September 20, 1995.
On January 9, 1996 the
court directed the plaintiff to file a certified copy of the record of the
Jefferson Circuit Court action. The record was filed on January 29, 1996.
On April 23, 1996, Shamrock
filed a motion for a preliminary injunction to enjoin the Sloans from taking any
further action or instituting any further proceedings against Shamrock in the
Jefferson Circuit Court or any other court, pending this court's ruling on the
issues presented in this adversary proceeding. An evidentiary hearing was
conducted on May 30, 1996.
CONCLUSIONS OF LAW:
This case is governed by
the provisions of the Bankruptcy Act and Rules of Bankruptcy Procedure in effect
prior to the October 1, 1979 effective date of the Bankruptcy Reform Act of
1978. Pub. L. 95-598, Part IV, ' 403.
Jurisdiction of the
At the time the Sloans commenced their civil actions against Shamrock in the
Clinton Circuit Court and in the Jefferson Circuit Court, the bankruptcy court
had exclusive jurisdiction over property of the debtor, including the trustee's
interest in coal under the Lease Purchase Agreement.
adjudication, title to the bankrupt's property vests in the trustee with actual
or constructive possession, and is placed in the custody of the bankruptcy
court. Mueller v. Nugent, 184 U. S. 1, 14, 22 S. Ct. 269, 46 L. Ed. 405.
The title and right to possession of all property owned and possessed by the
bankrupt vests in the trustee as of the date of the filing of the petition in
bankruptcy, no matter whether situated within or without the district in which
the court sits. Robertson v. Howard, 229 U. S. 254, 259, 260, 33 S. Ct.
854, 57 L. Ed. 1174; Wells & Co. v. Sharp (C. C. A.) 208 F. 393; Galbraith
v. Robson-Hilliard Grocery Co. (C. C. A.) 216 F. 842. It follows that the
bankruptcy court has exclusive jurisdiction to deal with the property of the
bankrupt **272 estate. It may order a sale of real estate lying outside the
district. Robertson v. Howard, supra; In re Wilka (D. C.) 131 F.
1004. When this jurisdiction has attached, the court's possession cannot be
affected by actions brought in other courts. White v. Schloerb, 178 U. S.
542, 20 S. Ct. 1007, 44 L. Ed. 1183; Murphy v. John Hofman Co., 211 U. S.
562, 29 S. Ct. 154, 53 L. Ed. 327; Dayton v. Stanard, 241 U. S. 588, 36
S. Ct. 695, 60 L. Ed. 1190. This is but an application of the well-recognized
rule that, when a court of competent jurisdiction takes possession of property
through its officers, this withdraws the property from the jurisdiction of all
other courts which, though of concurrent jurisdiction, may not disturb that
possession; and *738 that the court originally acquiring jurisdiction is
competent to hear and determine all questions respecting title, possession, and
control of the property. Murphy v. John Hofman Co., supra; Wabash
R. R. Co. v. Adelbert College, 208 U. S. 38, 28 S. Ct. 182, 52 L. Ed. 379; Harkin
v. Brundage, 276 U. S. 36, 48 S. Ct. 268, 72 L. Ed. 457.
Isaacs v. Hobbs Tie
& Timber Co.,
282 U.S. 734, 737-38; 51 S. Ct. 270, 271-72 (1931). In Mueller v. Nugent,
184 U.S. 1, 14 (1901), the Supreme Court declared that a petition in bankruptcy
is "a caveat to all the world, and in effect an attachment and
injunction." As suggested by the above-quoted passages, the cases of Mueller
v. Nugent and Isaacs v. Hobbs Tie & Timber Co. can be considered
the genesis of the principle now embodied in 28 U.S.C. ' 1334(d), that the
bankruptcy court has exclusive jurisdiction over all property, wherever located,
of the debtor as of the commencement of the case and of property of the estate,
as well as the genesis of the concept of the automatic stay, now codified at 11
U.S.C. ' 362.
Under the doctrine set
forth in Isaacs v. Hobbs Tie & Timber Co., the Sloans could not have
initiated a civil action outside the bankruptcy court for the purpose of
determining whether or to what extent the debtor held or the trustee acquired an
interest in the coal pursuant to the Lease Purchase Agreement. By order entered
on May 19, 1986, this court expressly overruled a motion of the Sloans for
authorization to commence an action in state court to determine the extent of
the debtor's interest in the coal, yet in disregard of that order the Sloans
commenced such an action in the Clinton Circuit Court. When this court enjoined
them from proceeding with that action, the Sloans thereafter initiated an action
in the Jefferson Circuit Court against Shamrock for damages for trespass. As the
Jefferson Circuit Court recognized, a finding of trespass hinges on the issue of
ownership, an issue reserved exclusively to the bankruptcy court.
The court concludes it has
jurisdiction pursuant to the case of Isaacs v. Hobbs Tie & Timber Co.
to entertain this adversary proceeding commenced by Shamrock.
This court has jurisdiction
of an action to interpret, enforce or modify a prior order or judgment of the
court. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S. Ct. 695, 78 L. Ed.
1230, 93 A.L.R. 195 (1934); Sarabia v. Toledo Police Patrolman's Assoc.,
601 F.2d 914 (6th Cir. 1979); Harris v. Manufacturers National Bank of
Detroit, 457 F.2d 631 (6th Cir. 1972); 28 U.S.C. ' 1334(b).
Interpretation of the
Sixth Circuit's Opinion.
Throughout the course of the bankruptcy case the Sloans generally have
maintained that they, not the trustee, hold title to the coal (the exception:
when the Sloans argued the trustee had by his actions assumed the Lease Purchase
Agreement). At times the Sloans have argued that the Lease Purchase Agreement
conveyed to the debtor only a leasehold interest in the coal, not a fee simple
interest, or that the fee simple interest conveyed was something less than fee
simple absolute. At times the Sloans have contended that the Lease Purchase
Agreement was terminated prior to the bankruptcy of Becknell & Crace; thus
on the date of bankruptcy the debtor had no interest in the Lease Purchase
Agreement to which the trustee could succeed. At times the Sloans have suggested
that a state court must determine whether the Sixth Circuit meant that the
debtor had a fee simple interest in coal remaining in the ground or a fee simple
interest only in the coal removed prior to bankruptcy. At times the Sloans have
conceded that as of the commencement of the bankruptcy case Becknell & Crace
had an interest in coal under the Lease Purchase Agreement to which the trustee
succeeded but have argued that the trustee "lost" the interest by
failing to timely assume the Lease Purchase Agreement. At times the Sloans have
asserted that the Lease Purchase Agreement preserved for them the right to
terminate the Lease Purchase Agreement, which right was exercisable - and was
exercised - after bankruptcy intervened. In any event it is safe to say that the
Sloans are dissatisfied with the conclusion reached by every court which has
been presented with the issue: that the trustee acquired ownership of the coal
in the ground pursuant to the Lease Purchase Agreement.
Pending before the Sixth
Circuit at the time the settlement agreement was executed was an issue
respecting whether the Sloans had terminated the Lease Purchase Agreement after
bankruptcy. The Sloans based their argument on the following statements of the
believe further that Becknell's fee simple interest in the coal was not
disturbed by either of the amendments to the Lease-Purchase Agreement. Instead,
through the Agreement of January 31, 1971, Becknell gave two promissory notes in
lieu of a cash payment. Through the Agreement of August 2, 1971, Becknell
partially paid for its default in royalties, scheduled deferred payments for
that default, assigned the proceeds from its future sales of coal, and gave
an option to immediately terminate the Lease-Purchase Agreement in lieu of a
presently exercisable option to terminate the Lease-Purchase Agreement and a
presently exercisable demand on one of the two promissory notes.
In re Becknell &
Crace Coal Co., Inc.,
761 F.2d 319, 321 (6th Cir. 1985) (emphasis added). "We note that our
decision does not alter the provisions of the contract." Id. at 322.
The Sloans took the
position that the trustee's interest (if any) in the property is subject to the
Sloans' contractual right to terminate the Lease Purchase Agreement at any time
and in any manner. Accordingly, the Sloans construed the above-quoted passage as
authorization to exercise the option to terminate the Lease Purchase Agreement
or an acknowledgement that the Sloans had in fact terminated the Lease Purchase
The fallacies of the Sloans'
arguments here become apparent. A construction of the opinion of the Sixth
Circuit as suggested by the Sloans would render unnecessary that court's
conclusion that the Lease Purchase Agreement was an executory contract. If the
Sixth Circuit intended to hold that the Sloans terminated the Lease Purchase
Agreement prior to bankruptcy or that the Sloans retained an immediately
exercisable option to terminate the Lease Purchase Agreement, the Sixth Circuit
would not have needed to conclude that the Lease Purchase Agreement was
executory; that issue would have been moot. See also memorandum opinion, In
Becknell & Crace Coal Company (Sloan v. Hicks), civil actions no. 86-227
and no. 91-157 (consolidated) (E.D. Ky., October 25, 1991, Unthank, J.) at pages
8-11. Likewise, if the Sixth Circuit had intended to hold that the Lease
Purchase Agreement was deemed rejected upon the failure of the trustee to timely
assume the Lease Purchase Agreement, there would be no need for the Sixth
Circuit to authorize the Sloans to exercise an option to terminate the lease, as
the Sloans have argued.
A more appropriate
interpretation of the Sixth Circuit's opinion is that the above-quoted paragraph
constitutes a statement of fact, an acknowledgement that the Lease Purchase
Agreement provided the Sloans with an option to terminate it. However, the
Sloans could not, without first obtaining relief from the automatic stay,
exercise the option to terminate the Lease Purchase Agreement pending a decision
by the trustee to assume or reject the Lease Purchase Agreement and court
approval thereof. Recognizing that this court had overruled as moot the motion
of the trustee for an extension of time in which to assume or reject the Lease
Purchase Agreement, the Sixth Circuit thus remanded the case to this court with
directions that the trustee be given the opportunity to assume or reject.
Rule 805: Stay
This court approved a sale or lease of the estate's interest in coal to
Shamrock. The order approving the lease was not stayed pending appeal. Thus
Shamrock mined the coal in accordance with a court order permitting it to do so.
Subsequently the trustee agreed with the Sloans to set aside the order approving
the lease of coal to Shamrock. The trustee's agreement with the Sloans was
memorialized in a settlement agreement which was adopted as the mandate of the
Sixth Circuit Court of Appeals. On its face the settlement agreement had the
effect of reversing the order pursuant to which Shamrock engaged in mining
activities. However, the court is of the opinion that Shamrock is protected
under former Bankruptcy Rule 805 by the Sloans' failure to obtain a stay of the
order approving the lease pending the Sloans' appeal of that order.
The Sloans make much ado
about the fact that the trustee obtained court approval only of the option to
lease but did not return to this court for an order specifically authorizing him
to execute the lease. The importance of this fact, say the Sloans, is that
"an order approving a sale of property" was never entered by this
court; hence Rule 805 does not apply. The Sloans overlook the fact that the
lease was attached to and incorporated by reference in the option to lease. The
court's approval of the option to lease necessarily required approval of the
lease itself, given that the option required the trustee and Shamrock to execute
the lease if Shamrock exercised the option. The Sloans' reference to pages
170-172 of the transcript of the May 19, 1986 hearing in support of their
argument that the trustee was required to return to this court for an order
approving the lease itself is myopic. A review of the remainder of the
transcript refutes the Sloans' position. Moreover, Judge Unthank's adoption of
the Sloans' argument that the trustee had by his action asssumed the lease made
such an order by the bankruptcy court unnecessary.
The Sloans also argue that
no appraisal of the coal was ever performed. That simply is not true. See
Report of Appraiser Robert R. Knight, filed in the main case, no. 72-650, on
September 15, 1972.
The court concludes
Shamrock is entitled to the protection provided by former Bankruptcy Rule 805.
On February 28, 1990, occasioned by the appointment to the bench of William S.
Howard, the trustee filed a motion to substitute Jerry D. Truitt as his counsel.
On March 8, 1990, Mr. Truitt filed an amended affidavit in support of his
request to be appointed as counsel for the trustee in which he stated:
That subsequent to my affidavit of February 27, 1990 I learned my law partner
John T. Ballentine is co-counsel with Charles C. Adams, Esq. of Somerset,
Kentucky defending Shamrock Coal Co. in an action filed in the Jefferson Circuit
Court by the Sloans wherein the Sloans are alleging trespass damages and/or full
compensation under a lease.
At the hearing conducted on
May 30, 1996, the Sloans presented the above-referenced affidavit as evidence
that this court had knowledge of the action pending in Jefferson Circuit Court
prior to approving the settlement agreement. The affidavit was filed in
connection with a matter unrelated to the dispute between the Sloans and the
trustee, and was filed more than two years before the settlement agreement was
presented to this court for approval. The existence of the affidavit does not
alter the fact that the Sloans and their counsel did not disclose the pending
litigation to this court at the time they sought approval of the settlement
It is now apparent that the
Sloans and their counsel crafted the settlement agreement and obtained this
court's approval thereof by concealing from the court the Sloans' pending cause
of action against Shamrock for trespass, a cause of action predicated on a
theory of ownership that had been previously rejected by this court, the
district court (on three separate occasions), and the Sixth Circuit Court of
Appeals. This court can state unequivocally that it would not have approved the
settlement agreement had it known that the agreement was intended to authorize
the Sloans to proceed with their cause of action against Shamrock for trespass.
The Sloans have attempted
to structure the settlement agreement in such a way as to foreclose this court
from revisiting the agreement. They argue that in accordance with the settlement
agreement all interest of the trustee related to or derived from the Lease
Purchase Agreement reverted to the Sloans as of the date of bankruptcy; hence
the trustee had no interest to convey to Shamrock, and Shamrock's subsequent
entry upon and mining from the property constituted a trespass. The Sloans
further argue that the settlement agreement, which was adopted as the mandate of
the Sixth Circuit, is the law of the case and cannot be modified by this court.
The settlement agreement was adopted as the mandate of the Sixth Circuit at the
behest of the Sloans, who requested the Sixth Circuit to vacate its order
dismissing the appeal as having been settled and to adopt the settlement
agreement as its mandate. Again, this court was not made aware of this ploy or
its effect on the rights of Shamrock, which had mined coal in reliance on orders
of this court. The conduct of counsel for the Sloans is hardly that of an
officer of the court.
Upon the commencement of
and following bankruptcy the trustee, not the Sloans, owned the coal in question
and had the right to lease the coal to Shamrock. This court approved the
trustee's lease with Shamrock. The district court affirmed. Shamrock mined in
reliance on court approval. The Sloans had to know that this court would not
have approved a settlement agreement - to which Shamrock was not a party - that
preserved for the Sloans the right to seek damages from Shamrock for trespass
arising from mining activities which Shamrock conducted under a lease which this
court had approved.
The considerations which
persuaded the court to approve the settlement agreement were:
1. During the course of the
protracted litigation in this case between the trustee in bankruptcy and the
Sloans over ownership of the coal underlying the Sloan property, the court has
been made aware the coal has decreased in value and has become less merchantable
due to the high sulfur content of the coal. Environmental protection laws and
state and federal regulations promulgated in conformity therewith have limited
the marketability of the coal and have made mining the coal an uneconomic
2. The court understood the
language in the settlement agreement to the effect that the escrowed royalty
money realized from the sale of the coal to Shamrock "is not nor has it
been property of the bankruptcy estate, but is and has been property of the
Sloans" was intended to exonerate the bankruptcy estate from and to pass to
the Sloans any liability for any income taxes that might be owed on the money.
3. If both parties were to
dismiss their appeals, Judge Unthank's opinion would become the law of the case.
He held that the action of the trustee in executing the lease with Shamrock
constituted a de facto assumption of the Lease Purchase Agreement by the trustee
with the result that the trustee owed the Sloans $1,281,126.11.
However, when this court
approved the settlement agreement the court was not apprised at the expedited
hearing on the motion to approve the agreement that there was pending in the
Jefferson Circuit Court an action by the Sloans against Shamrock for trespass
and damages for the mining conducted by Shamrock on the Sloan properties under
the aegis of this court. Had the court been made aware of that action and of the
impact the settlement agreement might have on Shamrock, the court would not have
approved the settlement agreement without involving Shamrock in the settlement
hearing. This court is confident that neither the district court not the court
of appeals for this circuit would condone ambushing of Shamrock by the
Rule 60(b)(6) of the
Federal Rules of Bankruptcy Procedure, as made applicable by former Rule 924
(now Rule 9024) of the Federal Rules of Bankruptcy, provides ample authority for
this court to revisit the orders of October 6, 1992 and September 1, 1993.
Surely, concealment of pertinent facts, which rises to the level of a fraud upon
the court, is sufficient reason for granting Shamrock relief from the operation
of those orders. The fact the Sixth Circuit was persuaded to adopt the
settlement agreement as its mandate does not diminish the power of this court to
grant relief from an order obtained in a manner that denied Shamrock due process
of law and moreover by concealment of relevant facts and artifice which
permeates the mandate obtained from the Sixth Circuit.
Their most recent appeal to
the Sixth Circuit afforded the Sloans an opportunity to convert that court to
their point of view as to the nondispositive nature of that court's prior
opinion in Sloan v. Hicks, 761 F.2d 319 (6th Cir. 1985) with respect to
the ownership of the coal underlying their property. Instead, the Sloans
voluntarily dismissed the appeal. Thereafter, as a means of preserving their
arguments as to the nondispositive nature of the Sixth Circuit's holding in that
case, the Sloans have attempted by agreement with the trustee to expunge all
prior rulings of the bankruptcy court and the district court interpreting the
opinion. The Sloans are now attempting to relitigate in the Jefferson Circuit
Court their coal ownership claim that has been rejected by the federal courts at
all levels in the bankruptcy proceeding. As this court indicated from the bench
at the hearing conducted in this matter on May 30, 1996, enough is enough.
The Kentucky courts adhere
to the rule that an action filed in violation of the automatic stay provided for
by 11 U.S.C. ' 362 is void and cannot be retroactively validated after the stay
is terminated. Raikes v. Langford, 701 S.W.2d 142 (Ky. Ct. App. 1986). It
seems reasonable to assume the Kentucky courts would reach the same conclusion
with respect to an action commenced in blatant disregard of an injunction
entered by the bankruptcy court pursuant to its powers under section 2a(7) and
(15) of the Bankruptcy Act, 11 U.S.C. ' 11a(7) and (15), and Rule 65 of the
Federal Rules of Civil Procedure, as made applicable by Rule 765 (now Rule 7065)
of the Federal Rules of Bankruptcy Procedure.
The court finds that it
should set aside its order of October 6, 1992 approving the settlement agreement
and its order of September 1, 1993 vacating its injunction against the Sloans.
This court will also order the Sloans to dismiss and to refrain from further
prosecution of the Jefferson Circuit Court action.
As the court announced from
the bench it will conduct a subsequent hearing for the purpose of considering
and recommending to the district court the imposition of sanctions against the
Sloans and their counsel for their conduct in this case.
By the court -
Joe Lee, Chief Judge
John T. Hamilton
Jerry D. Truitt
Douglas Gene Sharp