IN RE: COOK AND SONS MINING, INC., et al. CASE NO. 03-70789
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
PIKEVILLE
IN RE:
COOK AND SONS MINING, INC., et al. CASE NO. 03-70789
DEBTORS
COOK AND SONS MINING, INC. PLAINTIFF
VS. ADV.
NO. 04-7076
KWVA ENERGY, INC. DEFENDANT
JUDGMENT
The court having taken “Debtor’s Motion to
Reconsider or to Clarify Opinion or to Make Additional Findings and Conclusions
of Law and Notice” (Document # 18) and “KWVA’s Response to Motion to Reconsider
and Objection to Tendered Summary Judgment Order” (Document # 19) under
submission (Document # 20) and being sufficiently advised, makes the following
Findings of Fact and Conclusions of Law pursuant to Federal Rule of Bankruptcy
Procedure 7052.
FINDINGS OF FACT:
The parties’ agreed
stipulations as to facts and exhibits (Document # 9) are incorporated herein as
if set forth in their entirety.
Furthermore, references used in the stipulations will be used here, for
example “KWVA” for “KWVA Energy, Inc.”
A hearing was conducted December 3, 2004 (See
Documents # 16 & 17) on the parties’ dueling motions for summary judgment
(Documents # 10 & 13), which had been briefed prior to the hearing as
required by the court’s scheduling orders (Documents # 11 & 14).
The court takes judicial notice of “Chapter
11 Operating Order” entered in the main case (Document # 3, main case),
specifically the following provision:
TRANSFERS TO OR COMPENSATION OF DEBTOR OR
INSIDERS
During the pendency of this action, neither
the debtor nor any insider shall receive any increase in compensation, whether
in salary or fringe benefits or in any other form, without prior court approval
after notice and hearing. This
prohibition includes transfers of property to the individual debtor or to any
insider. Unless and until the debtor in
possession has obtained court approval after notice and hearing, the debtor in
possession shall make no payments in payment of any debt, whether secured or
unsecured, owed to an insider or to a creditor whose claim is either co-signed
by or guaranteed by an insider.
Counsel for the debtor acknowledged at the
hearing, and conceded in agreed stipulations, that the defendant is owed
$135,891.51 as an actual and necessary expense of the estate.
CONCLUSIONS OF LAW:
The contracts with KWVA Energy, Inc. which are the subject of this adversary
proceeding[1]
were not in the ordinary course of business of the debtor. As such they were not excepted from notice
and hearing as provided by 11 U.S.C. § 363(c)(1).[2] The Chapter 11 Operating Order, entered in
the main bankruptcy case as Document # 3, is a clear indication that this court
will not look favorably upon transactions between the debtor and insiders
unless there is “court approval after notice and a hearing.” Whether seen as a blanket prohibition, that
is, an injunction against any insider transaction with the debtor, or seen as a
prohibition under certain circumstances, the section of the Chapter 11
Operating Order titled “Transfers to or Compensation of Debtor or Insiders”
should have been a red flag, an alarm, to the parties that contractual
obligations between them would be at risk if they did not have prior court
approval. See Brewer v. Erwin &
Erwin, P.C. (In re Marquam Inv. Corp.), 942 F.2d 1462 (9th Cir.
1991) (establishing that in bankruptcy setting, insider transactions are
subject to rigorous scrutiny by the court).
The arrangement between the parties, which
involved cross-leasing of assets of two companies, was not in the ordinary
course of business of Cook and Sons Mining, Inc. Although coal truck hauling agreements, including refuse and
compaction agreements, are common in the coal mining industry, before the
transaction between these parties, the debtor had done all of its own such
hauling. Therefore, the arrangement not
only was new between the debtor and KWVA, it also was an entirely new way for
the debtor to do business. See In re
Century Brass Products, Inc., 107 B.R. 8 (Bankr. Conn. 1989) (establishing
“radical departure from prior transactions” standard).
In sum, there is no single fact which takes a
contract outside the ordinary course of business, not the length of time,
nature, or size of the contract, including the amount of debt incurred if a
breach is found, not a bidding process or recommendation by independent
consultants. Rather, the court must
view all of the facts together to reach its conclusion. Based on the facts of this case, the “Coal
Refuse Hauling and Compaction Agreement”[3]
cannot be seen as being within the ordinary course of business of the
debtor. It was a long-term contract,
which outsourced services previously handled by the debtor and was accomplished
by cross-lease of the debtor’s assets with insiders, and although awarded as
the best bid and recommended by the debtor’s consultants, was without
consideration to the court’s Chapter 11 Operating Order which required prior
court approval of transfers to or compensation of the debtor or insiders.
IT IS HEREBY ORDERED:
(1) The debtor’s motion for summary judgment
is sustained (Document # 10), and KWVA’s motion for summary judgment is
overruled (Document # 13). Pursuant to
11 U.S.C. § 549(a)(1)(B), the KWVA contracts are avoided as not authorized
under this title or by the court.
(2) Pursuant to 11 U.S.C. § 503(b)(1)(A),
KWVA Energy, Inc. is entitled to an administrative expense claim in the total
amount of $135,891.51, as an actual and necessary expense of preserving the
bankruptcy estate.
Copy to:
W. Thomas Bunch,
Esq.
Frank T. Becker,
Esq.
[1] The
contracts must be viewed as one, particularly since 11 U.S.C. §§ 363 and 549
concern only “property of the estate.” See
11 U.S.C. § 541.
[2] It
could be argued that the language “unless the court orders otherwise”
encompasses the court’s Operating Order, thus rendering the KWVA contracts not
exempt under this section.
[3] The
parties have agreed that only this contract is germane here.