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 pending on the joint motion of Dauer, Duke & Associates and its counsel, Landrum & Shouse and Charles Tackett, pursuant to title 11 U.S.C. 503(b)(3)(D) and (b)(4), for allowance as an administrative expense in this matter out-of-pocket expenses incurred by Dauer, Duke & Associates in the amount of $1,775.99 and attorney fees incurred by Dauer, Duke & Associates in the amount of $15,092.90.

On March 9, 1992, Dauer, Duke & Associates was granted a judgment in the amount of $6.5 million against the debtor and other defendants jointly and severally in a civil action in the Pike Circuit Court. By filing appropriate notices of the judgment Dauer, Duke & Associates obtained judicial liens on the interest of the debtor in real properties in Pike and Rowan Counties. On March 10, 1992 the debtor ceased mining operations and on March 12, 1992 filed in this court a petition for relief under chapter 11 of the Bankruptcy Code.

On March 23, 1992 the debtor in possession filed a motion for permission to sell certain surplus mining equipment at public auction. The motion was sustained by order entered April 21, 1992. The equipment was auctioned by Forke Brothers Auction Company in Louisville. The debtor received approximately $295,000 from the sale, before payment of certain expenses of the sale.

On May 11, 1992 the debtor in possession moved for permission to sell at private sale a mobile home and a water truck. An agreed order authorizing the sale was entered June 12, 1992.

On August 12, 1992 the debtor in possession moved the court for permission to sell at private sale real property of the debtor and improvements thereon located in Pike County known as the Kemper tipple, including a coal preparation plant and load out facilities, designated as 84188 Orville Station, Kemper, Kentucky. The agreed upon purchase price to be paid by Jesse Branch Coal Company for the facility was $2,950,000 payable $1,700,000 in cash and $1,250,000 evidenced by a note payable over 10 years in annual equal installments of $125,000 each, with interest at a rate of 1% below the prime rate as stated in the Wall Street Journal. The motion indicated that the only lien on the facility was the judgment lien of Dauer, Duke & Associates. The motion was served on all creditors and parties in interest and was noticed for hearing on September 25, 1992.

In the interim on September 8, 1992, the debtor filed a Disclosure Statement and Plan of Reorganization which proposed liquidation of the assets of the debtor related to its coal mining operation in Pike County, but retention of the debtor's 1600-acre farm in Rowan County on which the debtor proposed to engage in a Charolais cattle raising business.

On September 21, 1992, Dauer, Duke & Associates filed a motion for appointment of a committee to disseminate information and to procure purchase offers for assets of the debtor, or alternatively, for authority for Dauer, Duke & Associates to do so, and for a reasonable time for it to attempt to obtain more favorable offers for the purchase of the Kemper coal tipple and related facilities. The motion alleged that in July 1992 appraisers had fixed the value of the coal preparation plant at $4,162,000, with a total value of coal-related assets of up to $11,919,000. This motion was noticed for hearing on September 25, 1992, in conjunction with the hearing on the debtor in possession's motion to sell the tipple facility to Jesse Branch Coal Company. The motion of Dauer, Duke & Associates indicated it had already discussed sale of the facility with several potential buyers.

At the conclusion of the hearing on September 25, 1992, the hearing on the motion of the debtor in possession to sell the Kemper coal tipple and related facilities to Jesse Branch Coal Company was continued until October 20, 1992. The court overruled the motion of Dauer, Duke & Associates for appointment of a committee to procure purchase offers for assets of the debtor but granted Dauer, Duke & Associates authority to disseminate information concerning and to seek purchasers for the coal-related assets of the debtor. See order of the court entered October 20, 1992.

On October 19, 1992, Pyxis Resources Company, a wholly-owned subsidiary of Pittston Coal Company, by counsel, filed notice of its intention to present a competing offer for the purchase of the debtor's Kemper coal tipple facility at the hearing on October 20, 1992. The notice stated the Pyxis offer to be $3,250,00 consisting of $2,000,000 in cash at closing and a note for $1,250,000 guaranteed by Pittston Coal Company.

At the hearing on October 20, 1992, the court ruled that the debtor in possession should entertain bids for the Kemper coal tipple and related facilities from Pyxis and Jesse Branch Coal Company, the only two bona fide bidders at the hearing. While the court was in recess the debtor in possession received bids and counterbids from these parties. Jesse Branch Coal Company increased its bid by $1,000,000 to $3,950,000 consisting of $2,700,000 cash and the $1,250,000 note and was declared the successful bidder at that price. See order of the court entered on October 20, 1992.

Pyxis was represented in court by William F. Dobbs, Jr. of the law firm of Jackson & Kelly, Charleston, West Virginia. However, Dauer, Duke & Associates claims it was responsible for finding the potential purchaser Pyxis whose participation in the bidding process enhanced the amount received by the bankruptcy estate for the Kemper coal tipple and related facilities by $1,000,000.

The minute sheet attached to the affidavit of Gene Dauer, accompanying the Supplemental Memorandum filed on November 16, 1995, in support of the motion of Dauer, Duke & Associates for reimbursement for expenses and counsel fees, indicates that the movant did act as a conduit for forwarding to potential purchasers information provided by counsel for the debtor in possession to counsel for Dauer, Duke & Associates.

Correspondence between counsel for the debtor in possession and counsel for Dauer, Duke & Associates confirms that it was understood by the parties that in attempting to market the debtor's coal tipple facility Dauer, Duke & Associates was acting in its own behalf and had not been engaged by the debtor in possession to pursue this activity. See correspondence attached as exhibits to the brief of the debtor in possession filed herein on November 17, 1995 in opposition to the motion of Dauer, Duke & Associates for allowance of expenses and attorney fees as an administrative expense.

The correspondence confirms that Dauer, Duke & Associates engaged in this activity on its own account and not as a professional entity employed by the debtor in possession.

The tipple facility was encumbered by Dauer, Duke & Associates' judicial lien, which appears to have been the only encumbrance thereon, and it was in the interest of Dauer, Duke & Associates to promote the sale of the facility for the highest price attainable. Clearly, Dauer, Duke & Associates was acting in its own interest, and the attorneys who obtained the $6.5 judgment for Dauer, Duke & Associates were acting in the interest of their client and in their own interest in encouraging others to submit bids for the tipple facility.

This is more apparent when it is noted that the scheduled indebtedness of the debtor, other than the $6.5 million indebtedness to Dauer, Duke & Associates, is only $1,030,780. A sale at the lower price would have resulted in payment of all other creditors in full.

The proceeds from the aforementioned sales of the coal related assets of the debtor and from subsequent sales of other properties of the debtor were ordered to be held in escrow pending the outcome of the debtor's appeal from the $6.5 million judgment obtained by Dauer, Duke & Associates in the Pike Circuit Court. Confirmation of the debtor's plan of reorganization was likewise delayed for this reason.

On September 2, 1994 the Kentucky Court of Appeals issued an opinion and order reversing the $6.5 million judgment of the Pike Circuit Court against the debtor and others. The Court of Appeals held that the debtor, Canada Coal Company, Inc., and other defendants were entitled to a directed verdict on Dauer, Duke & Associates' contract claim which may have been the basis for the award to the plaintiffs of a brokerage fee of $2,250,000. The court also ruled that the evidence did not warrant an award of punitive damages against either the debtor or the estates of Claude and Leona Canada. The case was remanded to the Pike Circuit Court for retrial on the plaintiffs' fraud claim as alleged in a second amended complaint.

On August 18, 1995 the Kentucky Supreme Court denied discretionary review of the opinion and order of the Kentucky Court of Appeals.

Thereafter, Dauer, Duke & Associates released its notices of judgment which operated as a lien on the real estate of the debtor, including the Kemper tipple facility. Dauer, Duke & Associates does not have a lien on the proceeds of the sale of this real estate or other real properties of the debtor or the proceeds thereof.

CONCLUSIONS OF LAW:

When, as under the facts in this case, the activities of a creditor acting in its own self interest result in an incidental benefit to the estate, the efforts of such creditor and its attorneys are not compensable under title 11 U.S.C. 503(b)(3)(D) and (b)(4). In re Lister, 846 F.2d 55 (10th Cir. 1986); In re Best Products Co., Inc., 173 B.R. 862, 865 (Bankr. S.D.N.Y. 1994); In re Public Service Co. of New Hampshire, 160 B.R. 404, 451 (Bankr. D.N.H. 1993); Matter of Cuisinart, 115 B.R. 744, 750 (Bankr. D. Ct. 1990); In re U.S. Lines, 103 B.R. 427, 430 (Bankr. S.D.N.Y. 1989).

Moreover, Dauer, Duke & Associates is not presently a creditor of the debtor with a "right to payment" of its disputed, unliquidated fraud claim against the debtor. 11 U.S.C. 101(5) and (10). The court is not aware of any cases that allow an administrative expense claim of a creditor before the creditor has established the validity of its underlying claim against the bankruptcy estate.

Accordingly, the joint motion of Dauer, Duke & Associates and its counsel for allowance of expenses and attorney fees as an administrative expense in this case is denied.

Dated:

By the court -

 

______________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Landrum & Shouse

Honorable Charles Tackett

Joseph M. Scott, Jr.,Esq.

J. Mel Camenish, 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.

U.S. Trustee

 

 

f:\opinions\1996\canada.fee

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, IT IS ORDERED that the joint motion of Dauer, Duke & Associates and its counsel, Landrum & Shouse and Charles Tackett, for allowance of expenses and attorney fees as an administrative expense is denied.

Dated:

By the court -

 

____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Landrum & Shouse

Honorable Charles Tackett

Joseph M. Scott, Jr.,Esq.

J. Mel Camenish, 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.

U.S. Trustee

 

 

f:\opinions\1996\canada.fee