In re Alpha Natural Res., Inc.

• Decision Date: 11 August 2016
• Docket Number: Case No. 15-33896-KRH Jointly Administered
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: Alpha Natural Resources, Inc., et al., Debtors.

555 B.R. 520

In re: Alpha Natural Resources, Inc., et al., Debtors.

Case No. 15-33896-KRH Jointly Administered

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

Signed August 11, 2016

Carl E. Black, David G. Heiman, Thomas A. Wilson, Jones Day, Cleveland, OH, Tyler P. Brown, Shannon Eileen Daily, Nathan Kramer, Henry Pollard Long, III, Justin F. Paget, Hunton & Williams LLP, Richmond, VA, Jeffrey B. Ellman, Jones Day, Atlanta, GA, Robert W. Hamilton, Jones Day, Columbus, OH, for Debtors.

MEMORANDUM OPINION

Kevin R. Huennekens

, UNITED STATES BANKRUPTCY JUDGE

The Court has before it the motion of the Debtors (the “Motion”) seeking authority to reject under § 365 of the Bankruptcy Code¹

an agreement between and John and Eunice Organ (the “Organs”) and Ayrshire Collieries Corporation (“Ayrshire”), a predecessor in interest to one of the Debtors (the “Agreement”). Successors in interest to the Organs (the “Objectors”)² filed an objection to the Motion claiming the Agreement conveyed to the Organs an interest in property which was not subject to termination under § 365 of the Bankruptcy Code (the “Objection”). On June 28, 2016, the Court conducted a hearing on the Objection to the Motion; at the conclusion of which, the Court took the matter under advisement.

After considering the applicable statutory authority, the case law, the pleadings, and the arguments of counsel, the Court now concludes that the Debtors can reject the Agreement under § 365 of the Bankruptcy Code

. This Memorandum Opinion sets forth the Court's findings of fact and conclusion of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.³

Jurisdiction and Venue

The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157

and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.

Factual Background

The Organs and Ayrshire entered into the Agreement titled “Letter of Proposed Settlement” 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.⁴ 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 the 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”).⁵ 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).⁶ 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 149⁷ 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 seeks 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 to reject the Agreement with the Organs.

The Objectors argue that the Agreement cannot be rejected as an executory contract under § 365 of the Bankruptcy Code

. The Objectors maintain 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 Objectors argue that the Agreement must be assumed and assigned as part of the Federal Leases.

Analysis

Section 365 of the Bankruptcy Code

allows a debtor in possession to assume, assign, or reject any lease or executory contract.⁸ 11 U.S.C. § 365(a). The Debtors seek to reject the Agreement under § 365 of the Bankruptcy Code in exercise of their business judgment as a burdensome executory contract that provides no value to the Debtors' estate. See Id. The rejection of an executory contract under § 365 of the Bankruptcy Code results in a breach. 11 U.S.C. § 365(g).

The Objectors claim that the Payment Obligation set forth in the Agreement constitutes an overriding royalty interest in the Federal Leases that Ayrshire conveyed to the Organs. The Debtors disagree. They characterize the Payment Obligation as contractual in nature. The Debtors argue that the periodic amount that Ayrshire was obligated to pay was calculated based upon the amount of coal mined and sold from the coal seams in the three areas referenced in the Agreement but did not convey a property interest in the land or minerals. The Court finds that the Agreement did not convey an overriding royalty interest or any other interest to the Organs in the North and South Gillette Areas. The Payment Obligation Agreement is a contractual one that can be rejected under § 365 of the Bankruptcy Code

.

Whether the Agreement conveyed an interest in real property or whether it constitutes a contractual right to periodic payments is a question of state 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) (“Creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.”). The Court will look to Wyoming law to determine the nature of the obligation in the Agreement.⁹

Under Wyoming law, the intent of the parties is the “prime focus in interpreting or construing a contract.” Boley v. Greenough, 22 P.3d 854, 858 (Wyo.2001)

. “If an agreement is in writing and its language is clear and unambiguous, the parties' intention is to be secured from the words of the agreement.” Id. Deeds in Wyoming are interpreted according to principles similar to those applicable to contracts. Gilstrap v. June Eisele Warren Tr., 106 P.3d 858, 862 (Wyo.2005). “The ultimate goal of ... interpretation of any contract, including a deed, is to discern the intention of the parties to the document.” Mullinnix LLC v. HKB Royalty Tr., 126 P.3d 909, 919 (Wyo.2006) ; Caballo Coal Co. v. Fid. Exploration & Prod. Co., 84 P.3d 311, 314 (Wyo.2004). Even when interpreting unambiguous mineral contracts, Wyoming courts are permitted to look to the “surrounding circumstances, facts showing the relations of the parties, the subject matter of the contract, and the apparent purpose of making the contract.” Id. ; see

Mathisen v. Thunder Basin Coal Co., LLC, 169 P.3d 61, 67 (Wyo.2007). “The language of the parties expressed in their contract must be given effect in accordance with the meaning which that language would convey to reasonable persons at the time and place of its use.” Sawyer v. Guthrie, 215 F.Supp.2d 1254, 1260–61 (D.Wyo.2002) (citing Klutznick v. Thulin, 814 P.2d 1267, 1271 (Wyo.1991) ).

For an instrument to convey an interest in real property such as an overriding royalty, it “must contain sufficient words to show an intention to convey.” DeWitt v. Balben, 718 P.2d 854, 860–61 (Wyo.1986)

(quoting Whalon v. North Platte Canal & Colonization Co., 11 11 Wyo. 313, 71 P. 995, 999 (1903) ). Operative words of conveyance, including such terms as transfer, sell, or assign, indicate an intent to transfer an interest of property. Id. (concluding an instrument that used the words “transfer” and “sell” demonstrated an intent to constitute a conveyance). Wyoming courts have held that “[a]...