CAMOFI Master LDCv. U.S. Coal Corp.

• Decision Date: 17 March 2015
• Docket Number: Adv. No. 14–02049 SHL
• Parties: CAMOFI Master LDC and CAMHZN Master, LDC, Plaintiffs, v. U.S. Coal Corp., East Coast Miner LLC, JAD Coal Company, Inc. Defendants. U.S. Coal Corp. and JAD Coal Company, Inc., Counterclaim Plaintiffs, v. CAMOFI Master LDC, CAMHZN Master, LDC, and Centrecourt Asset Management, LLC, Counterclaim Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

527 B.R. 138

CAMOFI Master LDC and CAMHZN Master, LDC, Plaintiffs

v.U.S. Coal Corp., East Coast Miner LLC, JAD Coal Company, Inc. Defendants.

U.S. Coal Corp. and JAD Coal Company, Inc., Counterclaim Plaintiffs

v.CAMOFI Master LDC, CAMHZN Master, LDC, and Centrecourt Asset Management, LLC, Counterclaim Defendants.

Adv. No. 14–02049 SHL

United States Bankruptcy Court, S.D. New York.

Signed March 17, 2015

AKIN GUMP STRAUSS HAUER & FELD LLP, By: Douglas A. Rappaport, Esq., Robert J. Boller, Esq., Rachel E. Albanese, Esq., Mili G. Desai, Esq., Arik Preis, Esq., One Bryant Park, New York, N.Y. 10036, Counsel for CAMOFI Master LDC, CAMHZN Master LDC, and Centrecourt Asset Management, LLC

LUSKIN, STERN & EISLER LLP, By: Michael Luskin, Esq., Stephan Hornung, Esq., Alex Talesnick, Esq., Eleven Times Square, New York, N.Y. 10036, Counsel for East Coast Miner LLC

NIXON PEABODY LLP, By: Dennis Drebsky, Esq., Abigail T. Reardon, Esq., Frank Penski, Esq., 437 Madison Avenue New York, N.Y. 10022, Counsel for U.S. Coal Corporation and JAD Coal Company, Inc.

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court is a motion by CAMOFI Master LDC, CAMHZN Master LDC, and Centrecourt Asset Management, LLC (the “CAM Entities”) to remand claims against East Coast Miner, LLC for tortious interference with contract back to the New York Supreme Court in New York County (the “Motion”). The Motion is opposed by East Coast Miner, LLC (“ECM”) and fellow defendants, U.S. Coal Corporation and JAD Coal Company, Inc., both of whom are debtors in a bankruptcy proceeding in Kentucky. For the reasons explained below, the Motion is denied.

BACKGROUND

The CAM Entities are two Cayman Island investment funds (the “CAM Funds”) and their investment advisor, Centrecourt Asset Management, LLC, which is a Delaware limited liability company.¹ Am. Compl. ¶¶ 10–11; Am. Answer ¶¶ 95, 99. The CAM Funds hold equity and debt in U.S. Coal, a Delaware corporation, and its wholly-owned major-operating subsidiary JAD Coal, a Virginia corporation, who are in the coal business. Am. Compl. ¶¶ 1, 16. ECM, a Delaware limited liability company, is an investment vehicle that owns debt in U.S. Coal and its subsidiaries that is subordinate to the debt held by the two CAM Funds. Am. Compl. ¶¶ 7, 14, 29. In 2009, directors, officers, and shareholders of U.S. Coal formed ECM. Am. Compl. ¶ 27. ECM was interested in recapitalizing U.S. Coal by purchasing a significant amount of its debt—at a discount—and investing in its equity. Am. Compl. ¶¶ 27, 29. The CAM Funds consented to those recapitalization transactions. Am. Compl. ¶ 29. After the recapitalization transactions, all of U.S. Coal's directors were ECM members. Am. Compl. ¶ 30.

In 2012, the CAM Funds filed a six-count amended complaint against U.S. Coal, JAD Coal, and ECM in the New York State Supreme Court in New York County (the “Amended Complaint”). See CAMOFI Master LDC v. U.S. Coal Corp., Index No. 650411/2012 (N.Y.Sup.Ct.N.Y.Cnty.2012) (the “New York Action”) (Decl. of Rappaport, Ex. 1) [ECF 5–1]. The Amended Complaint concerns three distinct agreements among the parties: (i) an April 2008 letter agreement where U.S. Coal gave the CAM Funds certain consent rights; (ii) an agreement giving the CAM Funds the right to make U.S. Coal repurchase their stock; and (iii) an equipment note given by JAD Coal to the CAM Funds. In claims one through three of the Amended Complaint, the CAM Funds allege that U.S. Coal and JAD Coal breached all three agreements. Am. Compl. ¶¶ 52–69. In claims four through six, the CAM Funds allege that ECM tortiously interfered with the three agreements by intentionally causing U.S. Coal or JAD Coal to breach the three agreements. Am. Compl. ¶¶ 70–85.

I. The April 2008 Letter Agreement

In June 2007, the CAM Funds acquired preferred stock in, and warrants to purchase common stock of, U.S. Coal. Am. Compl. ¶ 18. In connection with the acquisition, U.S. Coal agreed that it would obtain written consent from the CAM Funds before (a) borrowing money under certain conditions; (b) hiring or firing officers with an annual salary over $100,000; or (c) entering into affiliate transactions involving over $500,000. Am. Compl. ¶¶ 19–20. U.S. Coal reaffirmed its obligations to obtain the CAM Funds' written consent in the April 2008 letter agreement. Am. Compl. ¶¶ 19–20.

The CAM Funds allege that U.S. Coal breached this agreement by failing to obtain the CAM Funds' written consent for a variety of actions, including: (i) firing U.S. Coal's CEO and hiring a member of ECM; (ii) paying the outgoing CEO $1.2 million in severance; (iii) extending maturity dates on various debt instruments, causing significant additional interest payments; and (iv) issuing a $6,729,423 secured note in October 2014 to a newly formed insider entity called ECM II, which will pay over $3 million in interest through maturity. Am. Compl. ¶¶ 41–49.

II. The Rights Agreement

In April 2008, the CAM Funds received 425,000 shares of U.S. Coal common stock in exchange for purchasing a note from JAD Coal. Am. Compl. ¶ 21. The CAM Funds also obtained a conditional put right to require U.S. Coal to repurchase their 425,000 shares at $5.40 per share if U.S. Coal failed to either sell its common stock through an initial public offering or execute certain transactions with a public shell company by April 1, 2010. Am. Compl. ¶ 22. U.S. Coal allegedly failed to satisfy either condition and thereby triggered the CAM Funds' conditional put right. Am. Compl. ¶¶ 34–35. The CAM Funds sent a letter to U.S. Coal seeking to exercise their put option and require U.S. Coal to repurchase the 425,000 shares. Am. Compl. ¶ 36. U.S. Coal sent a letter acknowledging the exercise of the CAM Funds' put right. Am. Compl. ¶¶ 37–38. Nevertheless, U.S. Coal allegedly failed to repurchase the 425,000 shares at $5.40 per share. Am. Compl. ¶¶ 39–40.

III. The JAD Coal Equipment Note

Under an equipment purchase agreement, the CAM Funds transferred their interest in certain mining equipment to JAD Coal in exchange for purchasing the JAD Coal equipment note. Am. Compl. ¶ 24. The note includes a regular annual interest rate, a late-payment penalty interest rate, a fee on late payments, and entitles the CAM Funds to collection costs upon any event of default under the note. Am. Compl. ¶¶ 25, 26. The note matured in April 2012. Am. Compl. ¶ 33. JAD Coal allegedly owes the CAM Funds over $4,200,000 in outstanding principal, interest, and fees, which was repeatedly demanded by the CAM Funds. Am. Compl. ¶¶ 33, 62.

IV. Other Claims in the New York Action

In addition to their contract claims, the CAM Funds allege that ECM tortiously interfered with each of the three agreements. Am. Compl. ¶¶ 74, 79, 84. More specifically, the CAM Funds contend that ECM intentionally caused U.S. Coal to breach the April 2008 letter agreement, Am. Compl. ¶¶ 81–85, and the rights agreement, Am. Compl. ¶¶ 70–75, and also intentionally caused JAD Coal to default on the equipment note. Am. Compl. ¶¶ 76–80.

The New York Action also includes counterclaims by U.S. Coal and JAD Coal against the CAM Entities. Am. Answer ¶¶ 133–37. The current status of all the counterclaims is unclear, see Hr'g Tr. 5:1–6:20, Sept. 18, 2014 [ECF No. 22], but at least one counterclaim against Centrecourt remains pending. Id. That counterclaim alleges that Centrecourt breached an advisory services agreement with U.S. Coal by: (i) failing to act in the best interest of U.S. Coal; (ii) engaging in self-dealing; and (iii) failing to provide strategic advisory services in good faith, free of conflicts of interest and with full disclosure. Am. Answer ¶¶ 112, 114–37. In particular, “Centrecourt advised U.S. Coal and JAD [Coal] to enter into a series of transactions with the [CAM Funds] which were not fair and reasonable or in the best interests of U.S. Coal or JAD [Coal], and which actually benefitted Centrecourt ...” and the CAM Funds that “Centrecourt manages and controls.” Am. Answer ¶¶ 114, 122. These transactions include an equipment purchase agreement, as well as the equipment note, rights agreement, and April 2008 letter agreement described above. Am. Answer ¶¶ 115, 119, 123.

V. Procedural Posture

After the CAM Funds filed the Amended Complaint in the New York Action, creditors commenced involuntary bankruptcy cases against U.S. Coal and JAD Coal. These Chapter 11 cases are now jointly administered in the U.S. Bankruptcy Court for the Eastern District of Kentucky. See In re Licking River Mining, LLC, Case No. 14–10201 (Bankr.E.D.Ky.2014) (Decl. of Reardon, Ex. E) [ECF No. 15–5]. U.S. Coal and JAD Coal removed the New York Action to federal court pursuant to 28 U.S.C. § 1452(a) and 28 U.S.C. § 1334, asserting that all the claims in the New York Action relate to the same events, should be decided in one forum, and that the outcome of the New York Action could alter the Debtors' rights and liabilities. Notice of Removal at 3 (Decl. of Reardon, Ex. A) [ECF No. 15–1]. The removed matter was then referred to this Court under the Amended Standing Order of Reference of the United States District Court for the Southern District of New York, General Order M–431, dated Jan. 31, 2012 (Preska, C.J.).

The CAM Entities have already consented to transfer claims one through three of the Amended Complaint—alleging breaches of contract against U.S. Coal and JAD Coal—to the U.S. Bankruptcy Court for the Eastern District of Kentucky, where U.S. Coal and JAD Coal are proceeding with their Chapter 11 cases. See E–mails between Robert Boller and Abigail Reardon, dated Aug. 20–21, 2014 (Decl. of Reardon, Ex. B at 1) [ECF No. 15–2]. The Motion seeks to remand claims four through six—alleging tortious interference against non-debtor ECM—to the New York State Supreme Court in New York County. If the Motion is denied, the CAM Entities consent to transfer claims four through six to the U.S. Bankruptcy Court for the Eastern District of Kentucky, which would put...