Alliance WOR Props., LLC v. Ill. Methane, LLC (In re HNRC Dissolution Co.)

• Decision Date: 12 July 2021
• Docket Number: No. 20-5396,20-5396
• Parties: IN RE: HNRC DISSOLUTION CO., Debtor. Alliance WOR Properties, LLC, Appellant, v. Illinois Methane, LLC, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

3 F.4th 912

IN RE: HNRC DISSOLUTION CO., Debtor.

Alliance WOR Properties, LLC, Appellant,

v.Illinois Methane, LLC, Appellee.

No. 20-5396

United States Court of Appeals, Sixth Circuit.

Argued: April 22, 2021

Decided and Filed: July 12, 2021

ARGUED: Thomas C. Scherer, DENTONS BINGHAM GREENEBAUM LLP, Indianapolis, Indiana, for Appellant. James L. Van Winkle, ILLINOIS METHANE, LLC, McLeansboro, Illinois, for Appellee. ON BRIEF: Thomas C. Scherer, DENTONS BINGHAM GREENEBAUM LLP, Indianapolis, Indiana, Christopher B. Madden, DENTONS BINGHAM GREENEBAUM LLP, Louisville, Kentucky, for Appellant. James L. Van Winkle, ILLINOIS METHANE, LLC, McLeansboro, Illinois, Elizabeth Lee Thompson, Katie M. Glass, STITES & HARBISON PLLC, Lexington, Kentucky, for Appellee.

Before: GIBBONS, COOK, and LARSEN, Circuit Judges.

LARSEN, Circuit Judge.

In 1998, the Old Ben Coal Company (Old Ben) conveyed its rights to the methane gas in various coal reserves to the appellee in this case, Illinois Methane, LLC (Methane). As part of that $2.6 million transaction, Old Ben agreed to a "Delay Rental Obligation" that required the owner of the coal estate to pay rent to Methane while it mined the coal in areas that Methane had not yet exploited. A deed memorializing this conveyance (and setting forth the Delay Rental Obligation) was then recorded with the county treasurer.

A few years later, Old Ben filed for bankruptcy protection. As part of the proceedings, Old Ben purported to sell its coal interests "free and clear of any and all Encumbrances" to the Lexington Coal Company, a buyer who stands in privity with the appellant, Alliance WOR Properties, LLC (Alliance). Old Ben did not, however, notify Methane prior to the bankruptcy sale. It merely circulated notice by publication in several newspapers.

Alliance's predecessor-in-interest later sought a permit to mine coal; and Methane eventually sought to collect the amount due under the Delay Rental Obligation in Illinois state court. Alliance responded by filing in the bankruptcy court a motion to enjoin the state-court lawsuit, arguing that Old Ben's "free and clear" sale had extinguished Methane's interest in the land. This was the first time Methane had learned of the bankruptcy proceedings.

The bankruptcy court held that Old Ben's publication notice had been insufficient to satisfy due process as to Methane. Accordingly, the court ruled that the sale had not erased Methane's interest and that Alliance was not entitled to an injunction barring the State Court Action. The district court affirmed. For the reasons stated below, we AFFIRM as well.

I.

A.

Several decades ago, Old Ben acquired a block of coal reserves and leases in several Illinois counties. The coal reserves also contained a rich supply of natural gas. Though simultaneous extraction of this coalbed gas and the coal itself was not yet "technologically feasible," Old Ben had not engaged in active coal mining operations for some time. So, on June 12, 1998, Old Ben conveyed the rights to "all of the methane gas" in its coal estates to Methane in exchange for $2.6 million. Old Ben retained the coal rights. And the deed memorializing this transaction was recorded in the Hamilton County Recorder's official records.

Old Ben's conveyance was made "[s]ubject to" a number of covenants "running with the ownership of the coal and methane gas." One of the covenants in the Old Ben Deed—the "Delay Rental Obligation"—is at the heart of this case. It provides that:

If [Old Ben] applies to open a new mine, expand an existing mine, or reopen a closed or inactive mine, after notice to [Methane], [Methane] will not grant any additional leases or contracts for the exploration or production of methane gas within the area encompassed in the application .... If there are no outstanding leases of methane gas, or permits issued for the drilling of new methane gas wells within [the application area], then [Old Ben] shall pay [Methane] an adjusted delay rental[.]

The amount of this "adjusted delay rental" varied with "the number of acres [made] unavailable to [Methane] for methane gas production" and the prevailing price of light sweet crude oil. And the idea was that Methane would receive compensation until it could exercise its rights to commence "methane gas exploration and production from [the unexploited] area." Once again, the Old Ben Deed reiterated that if either party "convey[ed] the surface, coal[,] or methane gas, the above agreements, terms, and restrictions shall be covenants running with the land." Just a few months after the execution of the deed, Old Ben and its parent company, Ziegler Coal Holding Company, merged into AEI Resources.

B.

In 2002, AEI, Old Ben, and a number of other affiliates (collectively, the "Debtors"), filed a Chapter 11 bankruptcy petition. The Debtors moved for an order pursuant to 11 U.S.C. § 363 authorizing the sale of substantially all of their assets "free and clear of all Liens, Claims, encumbrances and other interests." That included Old Ben's coal reserves in Hamilton County. The Debtors published notice of the impending bankruptcy sale in several regional and national newspapers. But they did not provide or attempt to provide direct notice to Methane. Presumably unaware of Methane's interest, the bankruptcy court found that the Debtors’ publication notice was sufficient and that "no other or further notice [was] required." It granted the Debtors’ motion and ordered that, with the exception of certain permitted liens, the purchasers would take title and possession of the Debtors’ assets "free and clear of all Liens, Claims, interests, and other encumbrances." The court furthermore ordered that, "[n]otwithstanding any otherwise applicable law to the contrary," "all entities" that held "interests in [the Debtors’] property" were permanently barred from "commencing ... any action or other proceeding of any kind with respect to any such ... interest."

As part of the bankruptcy sale, Old Ben then conveyed its Hamilton County coal reserves to the Lexington Coal Company through a special corporate warranty deed. It is undisputed that Alliance is in privity with Lexington Coal as to its interest—whatever that may be—in the Hamilton County coal reserves once owned by Old Ben.

C.

Eventually, one of Alliance's predecessors-in-title applied for a permit to mine coal from a portion of the Hamilton County reserves. Several years later, Methane filed an action against Alliance in Illinois state court (hereinafter, the "State Court Action"). In short, the complaint alleged that the predecessor's actions triggered the Delay Rental Obligation in the Old Ben Deed. Methane sought over $11 million in accumulated delay rentals and a declaration that the "covenants under the Old Ben Deed apply to all fee coal and leased coal acquired by Old Ben in Hamilton County." It also sought an equitable lien on Alliance's coal rights.

Soon thereafter, Alliance moved to reopen the bankruptcy case. It asked the bankruptcy court for "an order finding that [Methane]’s efforts to recover against Alliance violate the Sale ... and Confirmation Orders and enjoining [Methane] from proceeding with the State Court Action or any other claims against Alliance relating to the Old Ben Coal Estate." This was the first time Methane learned about the bankruptcy case or any sales resulting therefrom.

Following two rounds of briefing and a merits hearing, the bankruptcy court held that the Debtors’ notice by publication did not satisfy due process as to Methane, which had a "known" interest in Old Ben's coal reserves. Because the bankruptcy proceedings could "only enjoin Methane if Methane received notice of them sufficient to satisfy constitutional due process," the court concluded that its prior orders "ha[d] no [e]ffect on Methane's Interest." It therefore denied Alliance's motion for an injunction and allowed the State Court Action to proceed. Largely for the reasons set forth in the bankruptcy court's opinion, the district court affirmed. Alliance timely appealed.

II.

"We directly review a bankruptcy court's order when appealed from a district court." In re Patel , 565 F.3d 963, 967 (6th Cir. 2009). That is, "[w]e give no deference to the district court's decision." In re Cook , 457 F.3d 561, 565 (6th Cir. 2006). We review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Id.

This case turns on the constitutional sufficiency of the notice afforded to Methane. If the Debtors’ attempted notice by publication satisfied the Due Process Clause, then Old Ben could sell the coal reserves "free and clear" of Methane's interest, and the bankruptcy court could enjoin the State Court Action. But if the Constitution required more, then the bankruptcy court could conclude, as it did, that Methane is not "bound by the terms" of the court's previous orders. In re Johns-Manville Corp. , 600 F.3d 135, 158 (2d Cir. 2010).

A.

We begin with the basics. "An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Greene v. Lindsey , 456 U.S. 444, 449–50, 102 S.Ct. 1874, 72 L.Ed.2d 249 (1982) (emphasis omitted) (quoting Mullane v. Cent. Hanover Bank & Tr. Co. , 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950) ); see U.S. Const. amend. V. Therefore, the Supreme Court has long held that "property cannot be subjected to a court's judgment unless reasonable and appropriate efforts have been made to give the property owners actual notice of the action." Shaffer v. Heitner , 433 U.S. 186, 206, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977) ; see Baldwin v. Hale , 68 U.S. (1 Wall.) 223, 233, 17 L.Ed. 531 (1864).

"[W]hether a particular method of notice is reasonable," and can thereby pass constitutional muster, "depends on the particular circumstances."...