IN RE: CANADA COAL COMPANY, INC. CASE NO. 92-70129

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE

IN RE:

CANADA COAL COMPANY, INC. CASE NO. 92-70129

DEBTOR

MEMORANDUM OPINION

This case is submitted on the motion of the debtor for leave to voluntarily dismiss the case.

FINDINGS OF FACT

The debtor filed a petition for relief under chapter 11 of the Bankruptcy Code in this court on March 12, 1992.

Prior thereto, on November 22, 1991, in Civil Action No. 86-CI-637 in the Pike County, Kentucky Circuit Court, Gene A. Dauer, Donald Houston Duke, and Richard William Carey, d/b/a Dauer, Duke & Associates, obtained a judgment based on a jury verdict in the amount of $3,750,000 jointly and severally against the debtor Canada Coal Company, Inc. and others. The judgment was for $2,250,000 in compensatory damages and $1,500,000 in punitive damages. The other defendants against whom the judgment was rendered were Jack T. Page, individually and as executor and trustee of the estate of Claude S. Canada; K. B. Mims, individually and as trustee of the estate of Leona P. Canada, and Jack T. Page and K. B. Mims as co-guardians and co-trustees of the property of Roy Canada. Roy Canada, a son of Claude S. Canada and Leona P. Canada, and their principal heir, is a vice-president and director of the debtor.

On the date the judgment was entered Dauer, Duke & Associates caused notices of the judgment to be filed in the county clerks' offices in Pike, Rowan and Fayette Counties, Kentucky, thereby creating a judicial lien on the real properties of the debtor located in those counties. The debtor owned interests in several tracts of real property, including coal leases, in Pike County and a farm in Rowan County. The schedules to the petition do not indicate the debtor owns any interest in real estate in Fayette County.

The debtor and other defendants in the Pike Circuit Court action timely filed motions for judgment notwithstanding the jury verdict. The plaintiffs filed a motion to amend the jury verdict to include prejudgment interest on the compensatory damages award in the amount of $2,250,000. On March 9, 1992 the court overruled the motion of the defendants for judgment NOV and sustained the motion of the plaintiffs for prejudgment interest at the statutory rate on $2,250,000 from May 3, 1982. This had the effect of increasing the amount of the judgment to approximately $6.5 million.

Thereupon the debtor ceased its mining operations and filed this chapter 11 case. The indebtedness to Dauer, Duke & Associates is listed in the schedules to the chapter 11 petition as a disputed secured claim in the amount of $6.5 million. A detailed history of the debtor and the litigation with Dauer, Duke & Associates appears in the Disclosure Statement accompanying the debtor's Plan of Reorganization filed herein on September 8, 1992.

The debtor and most of the other defendants timely appealed from the aforementioned judgment to the Kentucky Court of Appeals. It seems evident that the chapter 11 petition has provided protection to the debtor in the same manner as a supersedeas bond. The appeal was permitted to proceed in an orderly manner in the state courts.

On September 2, 1994 the Kentucky Court of Appeals issued an opinion and order reversing the judgment of the Pike Circuit Court. The case was remanded to the Pike Circuit Court for retrial on the plaintiff's fraud claim as alleged in the second amended complaint. The Court of Appeals held that the debtor, Canada Coal Company, Inc., and the other defendants, were entitled to a directed verdict on Dauer, Duke & Associates' contract claim which may have been the basis of the award to the plaintiffs of a brokerage fee of $2,250,000. The court also ruled the evidence presented did not warrant an award of punitive damages against either Canada Coal Company or the estates of Claude or Leona Canada. The court remanded the case for trial on questions of against which of the defendants the plaintiffs may recover damages (measured by the value of their services and expenses incurred) on plaintiffs' allegations that they were fraudulently induced by Page and Mims to provide the services they rendered in attempting to sell the assets or stock of Canada Coal Company.

On August 18, 1995 the Kentucky Supreme Court denied discretionary review of the opinion and order of the Kentucky Court of Appeals reversing the judgment of the Pike Circuit court and remanding the case to that court for retrial on plaintiff's fraud claim.

Thereafter, the plaintiffs released their Notices of Judgment Lien on real estate of Canada Coal Company.

The Summary of Schedules submitted with the debtor's chapter 11 petition indicated the debtor had assets of $29,905,975.50, consisting of real property valued at $7,530,780.00 and personal property valued at $22,375,195.50. The debtor listed liabilities of $7,551.443.97, which included the disputed judgment lien claim of Dauer, Duke & Associates scheduled in the amount of $6.5 million.

Other than the $6.5 million disputed judgment lien claim of Dauer, Duke & Associates the debtor listed secured claims as follows: $407,813.25 owed to Citizens Bank of Pikeville secured by a security interest in a Joy Miner; $20,000 owed to Woody Black secured by a vendor's lien on a tract of real estate in Rowan County valued at $35,000, and $33,286.06 owed to Sparks-Terrell Lumber Company secured by a mechanic's lien on real estate in Rowan County. The debtor lists real estate and improvements located in Rowan County valued at $1,567,724.00. Thus the mechanic's lien claim appears to be fully secured by a lien on several tracts of real estate. The Joy Miner was surrendered to Citizens Bank of Pikeville. The bank has filed an amended unsecured deficiency claim in the amount of $54,076.46, the balance of the indebtedness owed to the bank after liquidation of its collateral.

The debtor listed creditors holding unsecured priority claims totaling $148,682.31. According to the report of the debtor all real property taxes and priority tax claims owed by the debtor have been paid, except for approximately $44,153.05.

The debtor listed creditors holding general unsecured claims totaling $441,662.35.

The present indebtedness of the debtor, excluding the contingent unliquidated claim of Dauer, Duke & Associates, appears to be less than $1 million.

During the pendency of the state court litigation the debtor in possession, pursuant to orders of this court, has reduced to cash the debtor's coal mining properties and facilities and certain other assets and is now holding in excess of $4 million in an escrow account. The liquidated and unliquidated assets of the debtor are reported as having a value of $15,711,413.94.

On these facts the court finds that the motion of the debtor to dismiss this case should be sustained. However, it does seem appropriate that as a condition of dismissal of the case the court should require the debtor to pay in full creditors holding undisputed priority and general unsecured claims. Payment of the claims of these creditors has been delayed during the pendency of this case by the litigation between the debtor and Dauer, Duke & Associates. There appears to be no justification for further delay in the payment of the claims of such creditors.

In the present state of the record Dauer, Duke & Associates has only an unliquidated fraud claim against the defendants Page and Mims and possibly against the debtor, depending on the validity of certain defenses which the debtor may assert. There are no extraordinary circumstances that suggest Dauer, Duke & Associates may be able to obtain a prejudgment attachment against the assets of the debtor in the state court litigation. The reversal of the judgment obtained by Dauer, Duke & Associates would entitle the debtor to release of a supersedeas bond had one been filed. There appears to be no basis for further sequestration of the assets of the debtor merely because of the unresolved litigation between Dauer, Duke & Associates and the debtor, especially in view of the fact the remaining assets of the debtor appear sufficient to satisfy any judgment that may be obtained by Dauer, Duke & Associates against the debtor in the Pike Circuit Court action. Payment of the claims of other creditors is not inconsistent with the distributional scheme of the Bankruptcy Code because Dauer, Duke & Associates does not at this time have an enforceable claim against the debtor. Continued sequestration of the debtor's assets, which is tantamount to a prejudgment attachment, in order to assure payment of any judgment Dauer, Duke & Associates may recover is not favored in law. Connecticut v. Doehr, 111 S.Ct. 2105 (1991).

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Joseph M. Scott, Jr., Esq.

J. Mel Camenisch, Jr., Esq.

Laura Day Delcotto, Esq.

James R. Cox, Esq.

T. Robin Cornette, Esq.

John T. Hamilton, Esq.

John H. Burrus, Esq.

Thomas E. Bulleit, Jr., Esq.

Solomon Van Meter, Esq.

Baird, Baird, Baird & Jones

Executron Credit Corp.

 

f:\opinions\1996\canada

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE

 

 

IN RE:

 

CANADA COAL COMPANY, INC. CASE NO. 92-70129

 

DEBTOR

 

 

 

 

ORDER

 

 

In conformity with the memorandum opinion of the court this day entered the motion of the debtor for leave to voluntarily dismiss this case is sustained.

It is further ordered that within 45 days from the date of this order the debtor file with the court a report showing that all undisputed priority and general unsecured debts of the debtor have been paid in full.

This is a final and appealable order.

Dated:

By the court -

 

____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

 

Joseph M. Scott, Jr., Esq. John H. Burrus, Esq.

J. Mel Camenisch, Jr., Esq. Thomas E. Bulleit, Jr., Esq.

Laura Day Delcotto, Esq. Solomon Van Meter, Esq.

James R. Cox, Esq. Baird, Baird, Baird & Jones

T. Robin Cornette, Esq. Executron Credit Corp.

John T. Hamilton, Esq.