David J. Pierce Trust v. Alpha Natural Res., Inc. (In re Alpha Natural Res., Inc.)

• Decision Date: 21 February 2017
• Docket Number: Case No. 15–33896–KRH (Jointly Administered), Case No. 3:16–cv–709–HEH
• Citation: 237 F.Supp.3d 369
• Parties: IN RE: ALPHA NATURAL RESOURCES, INC., et al., Debtors. The David J. Pierce Trust U/A Dated February 23, 2011, et al., Appellants, v. Alpha Natural Resources, Inc., et al., Appellees.
• Court: U.S. District Court — Eastern District of Virginia

237 F.Supp.3d 369

IN RE: ALPHA NATURAL RESOURCES, INC., et al., Debtors.

The David J. Pierce Trust U/A Dated February 23, 2011, et al., Appellants,

v.Alpha Natural Resources, Inc., et al., Appellees.

Case No. 15–33896–KRH (Jointly Administered)

Case No. 3:16–cv–709–HEH

United States District Court, E.D. Virginia, Richmond Division.

Signed February 21, 2017

Peter Marshall Pearl, Spilman Thomas & Battle PLLC, Roanoke, VA, for Appellants.

Tyler Perry Brown, Henry Pollard Long, III, Justin Fielder Paget, Hunton & Williams LLP, Richmond, VA, Carl E. Black, Jones Day, Cleveland, OH, John Ronald Smith, Jr., Hunton & Williams, Norfolk, VA, for Appellees.

MEMORANDUM OPINION

(Affirming the Decision of the United States Bankruptcy Court)

Henry E. Hudson, United States District Judge

THIS MATTER is before the Court on appeal from the United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court"). It evolves from a dispute as to whether an agreement for royalty payments from coal mined on certain tracts of land is an executory contract that the debtors may reject under § 365 of the Bankruptcy Code.¹ Appellants objected to the debtors' rejection of the agreement, arguing that it conveyed an interest in real property and, therefore, that it could not be construed as an executory contract. (App. 515–556.)

On August 11, 2016, Judge Huennekens of the Bankruptcy Court entered a Memorandum Opinion and Order overruling Appellants' objections. See In re Alpha Natural Res., Inc., et al. , 555 B.R. 520 (Bankr. E.D. Va. 2016). Appellants filed their notice of appeal to this Court on August 26, 2016. (ECF No. 1.) Both sides filed memoranda in support of their positions, and oral argument followed on February 1, 2017.

For the reasons stated below, this Court will affirm the decision of the Bankruptcy Court.

I. JURISDICTION AND LEGAL STANDARD

As an initial matter, the Court finds that it has jurisdiction over this case pursuant to 28 U.S.C. § 158(a)(1) as this is an appeal from a final decision of the Bankruptcy Court. Appellants filed their notice of appeal within the time provided by Bankruptcy Rule 8002(a).

The standard of review applied by this Court is well-settled. The Bankruptcy Court's legal conclusions are reviewed de novo and its factual findings for clear error. In re Harford Sands Inc. , 372 F.3d 637, 639 (4th Cir. 2004).

II. FACTUAL FINDINGS AND LEGAL CONCLUSIONS OF THE BANKRUPTCY JUDGE

In order to fully grasp the Bankruptcy Court's analysis, some back story is necessary to provide context. The following narrative represents the underlying facts, as found and described in Judge Huennekens's Memorandum Opinion.²

The Organs and Ayrshire entered into [an] Agreement titled "Letter of Proposed Settlement" [ (the "Agreement") ] on January 22, 1969 (the "Acceptance Date"). The settlement addressed "certain differences between Ayrshire Collieries Corporation and [the Organs] respecting certain coal interests" involving coal seams in three areas.^[3] The Agreement, as drafted by John Organ, states that "Mrs. Organ and I will accept the interests set out hereinafter as full settlement of our claims." The Agreement obligated Ayrshire to pay the Organs an amount calculated based upon a percentage of the coal mined and subsequently sold from each of ... three separate areas. At issue in the case at bar is the area comprised of North and South Gillette in the state of Wyoming (the "North and South Gillette Areas"). Ayrshire was obligated to make monthly installment payments at the rate of one-half of one percent of the net realization (as defined in the Agreement) from coal mined and sold from the North and South Gillette Areas until December 31, 2019 (the "Payment Obligation").^[4] John Organ agreed to assist Ayrshire in the use of coal across the three separate areas, and the Organs agreed to waive all claims against Ayrshire. Ayrshire also agreed to cancel an outstanding note made by John Organ, which note had an unpaid balance of $22,692.38.

On the Acceptance Date of the Agreement, Ayrshire mined coal in the North and South Gillette Areas as a tenant under two federal leases between Ayrshire and the United States Department of Interior Bureau of Land Management (the "Federal Leases"). The Federal Leases are nowhere referenced in the Agreement. More than five years after the Acceptance Date, the Organs unilaterally recorded a document titled "Memorandum of Understanding" in the Campbell County, Wyoming, clerk's office (the "Memorandum["] ).^[5] The Memorandum summarizes pertinent terms of the Agreement between Ayrshire and the Organs, including the Payment Obligation.

The Memorandum also includes a description of the underlying real property. The Memorandum notes that the described property is subject to "U.S. Government coal leases," but it does not identify the Federal Leases. Both of the Federal Leases were readjusted effective September 1, 2015. Alpha Wyoming Land Company LLC is the current lessee under the Federal Leases ("Alpha Wyoming Land Company"). The readjusted Federal Leases do not contain any reference to the Agreement between Ayrshire and the Organs.

On August 3, 2015, Alpha Natural Resources, Inc., and 149 ^[6] of its direct and indirect subsidiaries, including Alpha Wyoming Land Company, (the "Debtors") commenced bankruptcy cases by each filing a separate voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. As the current lessee under the Federal Leases, and as successor in interest to Ayrshire, Alpha Wyoming Land Company [sought] to assume and assign the Federal Leases in connection with the debtors' reorganization. See 11 U.S.C. § 365(a). In connection with that transaction, the Debtors want[ed] to reject the Agreement with the Organs.

The [Appellants, who are successors in interest to and descendants of the Organs,] argue[d] that the Agreement cannot be rejected as an executory contract under § 365 of the Bankruptcy Code. The [Appellants] maintain[ed] that the Payment Obligation due under the Agreement is not a contractual obligation owed by Ayrshire, but instead constitutes an interest in real property to which they have become seized. The [Appellants] argue[d] that the Agreement must be assumed and assigned as part of the Federal Leases.

In re Alpha Natural Res., Inc. , 555 B.R. at 524–25.

In a well-reasoned and thorough opinion, the Bankruptcy Court found that the Agreement did not create a real property interest, but rather a contractual obligation, tied to the amount of coal mined and sold from the North and South Gillette Areas. Id. at 526. Judge Huennekens articulated three justifications to support his finding that the Agreement did not show a clear intent to transfer real property, as required by Wyoming law. First, the Bankruptcy Court found that the Agreement lacks any words indicating the conveyance of real property. Id. at 526–28. Second, it determined that Ayrshire's interest in the North and South Gillette Areas was solely a leasehold interest, yet the Agreement conspicuously failed to mention the underlying lease. Id. at 528. Moreover, the Bankruptcy Court determined that the time period for payments under the Agreement extended beyond the term of the then-existing lease. Id. And third, Judge Huennekens determined that Ayrshire would have been required to obtain Bureau of Land Management approval prior to assigning any interest in its lease. Id. at 528–29. The Bankruptcy Court concluded that Ayrshire's failure to do so further evidences the parties' intent for the Agreement to merely convey a contractual right. See id.

III. ASSIGNMENTS OF ERROR

The Appellants have posed the following assignments of error for review:

1. Did the Bankruptcy Court err in concluding that under Wyoming law the Agreement created only contractual rights personal to the parties and did not intend to convey and it did not convey an overriding royalty interest or any other interest to the Organs in the North and South Gillette Areas?

2. Did the Bankruptcy Court err in concluding that under Wyoming law the conveyance of a mineral royalty interest must identify an underlying mineral lease and must be tied to the terms of the underlying lease?

3. Did the Bankruptcy Court err in concluding that the lack of approval by the Bureau of Land Management ("BLM") of the assignment or transfer of any interest to the Organs affects the validity, enforceability, or nature of the conveyance of a mineral royalty interest with respect to land leased from the BLM?

4. Did the Bankruptcy Court err in concluding that under Wyoming law a memorandum recorded in the land records must be signed by a party other than the holder of the overriding mineral royalty interest that is the subject of the memorandum?⁷

IV. ANALYSIS

Although the underlying facts are a bit convoluted, this appeal turns on well-established principles of Wyoming real property and contract law. "Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ; see Tidewater Fin. Co. v. Kenney , 531 F.3d 312, 318–19 (4th Cir. 2008). This Court should apply the underlying substantive law that gave rise to the obligation in question. Raleigh v. Illinois Dept, of Rev. , 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).

Wyoming law is clear that a royalty interest—which is analogous to a net profit interest⁸ —can take many forms. See Ferguson v. Coronado Oil Co. , 884 P.2d 971, 976–77 (Wyo. 1994). It can be: (1) "a contractual right that is personal to the parties"; (2) "a covenant running with the land or with a lease"; (3) "a charge on the land"; (4) "a separately identifiable property interest with its own...