IN RE:  LODESTAR ENERGY, INC.   CASES 01-50969  01-50972 03-70015  ORDER ON motion of Trustee determination allowance and final payment of Tier 3 allowed claims 

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

LODESTAR ENERGY, INC.                                                             CASE NO. 01-50969

LODESTAR HOLDINGS, INC.                                                  CASE NO. 01-50972 and

INDUSTRIAL FUELS MINERAL CO.                                               CASE NO. 03-70015

DEBTORS                                                                                                      CHAPTER 7

ORDER

Factual and Procedural Background

          This matter comes before the court on motion of the Trustee William D. Bishop (“Trustee”) for determination, allowance and final payment of Tier 3 allowed claims in the above-referenced Chapter 7 proceeding (Doc. 4149) and a notice to claimants (Doc. 4179) sent pursuant to said motion. As part of his motion, the Trustee asks that the court determine the allowed amount of an administrative claim held by Larry B. Pinson, Gayle Pinson and Robert B. Pinson (collectively “the Pinsons”) which was determined to exist by the U.S. District Court for the Eastern District of Kentucky in its reversal of this court’s conclusions of law dated July 30, 2002 and remand of the matter for further determination. The Pinsons filed an objection to the Trustee’s proposed treatment of their claim, arguing that they have a “final and non-appealable order reflecting that they are entitled to the sum of $1,000,000.00 from the [bankruptcy estate] for a settlement that was entered into post-petition and because the settlement allowed the [then] debtor in possession to mine the Pinson Heirs’ coal.” (Doc. 4213).

          In the appealed conclusions from July, 2002, this court held that the Pinsons’ claim for a set amount for coal already mined by the Debtor Lodestar Energy, Inc. (“LEI”), and subject to a settlement agreement between the Pinsons and LEI, was not an administrative expense and therefore not entitled to administrative priority pursuant to 11 U.S.C. 503(b)(1)(A) and 507(a)(1). The District Court, in an Order entered August 26, 2003, reversed this court, stating that LEI’s “debt under the settlement agreement qualifies as an actual and necessary administrative expense because it arose from a transaction with the bankruptcy estate when LEI chose to assume the lease.” The District Court further instructed that “the lease, executed post-petition and assumed post-petition, requires payment under the terms of the settlement agreement and is thus entitled to administrative priority in an amount determined consistent with the approach in In re United Trucking [Serv., Inc., 851 F.2d 159 (6^th Cir. 1988)].”

            A hearing was ultimately scheduled for July 24, 2006 regarding the Trustee’s notice and various objections to the treatment of certain Tier 3 claims. Before the hearing, the Trustee filed supplemental information regarding the contested amount of the Pinsons’ claim (Doc. 4270), which information also set forth Trustee’s rough estimate that approximately $1.5 million would be available for distribution to the pool of all finally allowed Tier 3 claims. The Trustee further indicated in his supplemental information that, based upon the known contested Tier 3 claims as of that date, the pool of Tier 3 claims could range anywhere from approximately $2.2 million to approximately $3.5 million or more. At the hearing, the court heard arguments of counsel and directed the Trustee and the Pinsons to propose a procedure for determination of the Pinsons’ claim, whereupon an order was entered in the record on August 1, 2006 allowing each party additional time within which to file any supplemental pleadings prior to submission of the matter to this court for determination.

          The court has reviewed the Trustee’s Memorandum in Support of Determination Regarding Tier Allowance and Amount of Pinson Heirs Claim (Doc. 4335) and the Pinsons’ Responsive Memorandum in Support of the Allowance of Their Administrative Claim. (Doc. 4336). Accordingly, based upon the record herein and in conformity with the District Court’s order reversing and remanding the matter, the court sets forth below the basis for its determination as to the allowed amount of the Pinsons’ administrative claim.

Analysis

          The District Court’s directive is that the amount of administrative priority to which the Pinsons’ claim is entitled is to be determined “consistent with the approach in In re United Trucking”, supra, 851 F.2d 159. United Trucking involves an analysis of whether entitlement to administrative priority has been established by the claimant seeking it and, if so, how to calculate the amount entitled to priority. The court finds the following language from United Trucking instructive:

The purpose of [sections 503(b)(1) and 507(a)(1)] is to facilitate the rehabilitation of insolvent businesses by encouraging third parties to provide those businesses with necessary goods and services. (citation omitted). Only those debts, however, that arise after the filing of the bankruptcy petition may be accorded administrative expense status. (citations omitted; emphasis original).

In order to qualify a claim for payment as an administrative expense a claimant must provide that the debt (1) arose from a transaction with the debtor-in-possession as opposed to the preceding entity (or, alternatively, that the claimant gave consideration to the debtor-in-possession); and (2) directly and substantially benefitted the estate.

Id., at 161-62. As was correctly pointed out by the Trustee, the District Court has finally determined that the Pinsons hold an allowed administrative claim. The court further agrees with the Trustee that United Trucking requires the additional determination of the actual value of the claim.

          The United Trucking court held that the appropriate analysis in valuing the asserted administrative claim before it was not based on the inducement exercised by the debtor to cause the creditor therein to supply goods or services. Instead, because the post-petition “use” of the leased equipment there in question differed from the terms of the pre-petition lease, the court looked to the “reasonable value of the benefits conferred.” Id., at 162. The court’s rationale was to fulfill the “equitable principle of preventing unjust enrichment of the debtor’s estate, rather than the compensation of the creditor for the loss to him.” Id. The unique circumstances of the instant case require a similar analysis of the “reasonable value of the benefits conferred” by the executory agreement between LEI and the Pinsons.

          The March 20, 2001 Settlement Agreement and accompanying Underground Coal Lease, attached to Trustee’s Memorandum as Exhibit 2 (Doc. 4335), were found by the District Court to be an “integrated” agreement. The facts are undisputed and the Underground Coal Lease terms are clear, however, that LEI could not begin to mine coal from the leased premises until April 18, 2001 and until the sum of $300,000.00 had been paid pursuant to the terms of the Settlement Agreement. Paragraph One of the parties’ Settlement Agreement provides that LEI agreed to pay the Pinsons the sum of One Million Two Hundred Fifty Thousand ($1,250,000.00) Dollars in consideration for the approximate Two Hundred Eighty Thousand (280,000) tons of coal previously mined on the property” of the Pinsons.

          Mining apparently commenced in May, 2001 and continued through September, 2001 whereupon LEI ceased to extract coal from the Pinsons’ tract and incurred only wheelage expenses through March 31, 2002. It is further undisputed that all amounts for mineral and wheelage royalties were paid on a current basis post-petition. The $300,000.00 that was paid by LEI to the Pinsons upon execution of the Settlement Agreement and prior to commencement of mining under the post-petition lease was obviously paid in consideration of the settlement of the Pinsons’ pre-petition claim for trespass and to induce the Pinsons to enter into the coal mining lease to take effect during the following month. The remainder of the Pinsons’ claim arising from the settlement agreement, in the sum of $950,000.00, can only logically be attributed to payment for the previously mined coal.

          Given the undisputed facts that all post-petition mineral and wheelage royalties were paid as they came due, the remaining amount of the Pinsons’ claim must be examined under the United Trucking standard in terms of the actual value conferred on the bankruptcy estate. The court finds that the coal mined pre-petition could not have provided any value to the bankruptcy estate post-petition. Furthermore, the record contains no evidence that the fact that LEI had the ability to mine coal pursuant to the unexpired Underground Coal Lease but did not do so after September, 2001 conferred any actual value on the bankrupt estate, as required by United Trucking, supra, to support priority under section 503. It is unquestionably the burden of the claimant to prove entitlement to administrative priority under 11 U.S.C. 503(b) and moreover, section 503 priorities should be narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors. United Trucking, supra, at 164, citing Otte v. United States, 419 U.S. 43, 53, 95 S.Ct. 247, 254, 42 L.Ed.2d 212 (1974). Accordingly, the court finds that any amount claimed beyond the $300,000.00 already paid to the Pinsons by LEI post-petition conferred no actual value on the bankruptcy estate and that the value of any such administrative claim under section 503(b) is $0.00. The remaining amounts owed pursuant to the Settlement Agreement were clearly to compensate the Pinsons for pre-petition claims and the Pinsons have not shown how any further post-petition consideration they provided LEI for which they were not paid under the Coal Lease actually benefitted the estate.

          The Pinsons reliance on In re Cook & Sons Mining, Inc., 2005 U.S. Dist, Lexis 21615 (E.D.Ky. 2005) is misplaced. The policy referred to in the portions of the Cook & Sons case cited by the Pinsons in support of their argument that all future rent under the Underground Coal Lease should be afforded administrative priority is not furthered in this instance. Cook & Sons and indeed In re Merry-Go-Round Enters., 180 F.3d 149 (4^th Cir. 1999) speak of the need to encourage reluctant landlords to enter into leases with Chapter 11 tenants. In the instant case, the full agreement between the Pinsons and LEI was negotiated and executed, partly pre-petition and partly post-petition, without any knowledge by either side that LEI was soon be a Chapter 11 debtor, much less that it was becoming one as the parties negotiated. Since neither party knew the other was, or was dealing with, a Chapter 11 debtor, the policy discussed in Cook & Sons, supra, and in In re Merry-Go-Rounds Enters., supra, is not implicated. The court further does not agree that the District Court finally determined that the Pinsons’ entire claim is entitled to administrative priority.

          Because the court hereby finds that the $950,000.00 claimed by the Pinsons is not entitled to administrative priority under section 503(b), it is unnecessary to address the Pinsons’ argument that the sum is entitled to Tier 2 status.

Conclusion

          For the reasons stated herein, the court, being sufficiently advised, HEREBY ORDERS that the Pinsons’ allowed administrative claim is determined to be $300,000.00, which sum was paid in full to the Pinsons immediately after the filing of the involuntary Chapter 11 proceeding on March 30, 2001. The remainder of the Pinsons’ claim for administrative priority is DENIED.

          This is a final and appealable order.

Copies to:

Laura Day DelCotto, Esq.

Robert T. Copeland, Esq.

Ryan R. Atkinson, Esq.