In re CS Mining, LLC, Bankruptcy No. 16–24818

• Decision Date: 27 July 2017
• Docket Number: Bankruptcy No. 16–24818
• Citation: 574 B.R. 259
• Parties: IN RE: CS MINING, LLC, Debtor.
• Court: U.S. Bankruptcy Court — District of Utah

574 B.R. 259

IN RE: CS MINING, LLC, Debtor.

Bankruptcy No. 16–24818

United States Bankruptcy Court, D. Utah.

Signed July 27, 2017

Troy J. Aramburu, David E. Leta, Jeff D. Tuttle, Snell & Wilmer L.L.P., Joseph M.R. Covey, Parr Brown Gee & Loveless, Salt Lake City, UT, Joanna J. Cline, Donald J. Detweiler, John H. Schanne, II, Pepper Hamilton, LLP, Wilmington, DE, Francis J. Lawall, Pepper Hamilton, Philadelphia, PA, for Debtor.

Laurie A. Cayton tr, Peter J. Kuhn tr, US Trustees Office, Salt Lake City, UT, for U.S. Trustee.

Martin J. Brill, Philip A. Gasteier, Krikor J. Meshefejian, Beth Ann R. Young, Levene, Neale, Bender, Yoo & Brill L.L.P., Los Angeles, CA, George B. Hofmann, Adam H. Reiser, Cohne Kinghorn PC, Salt Lake City, UT, for Creditor Committee.

Pedro A. Jimenez, Robert W. Hamilton, Cristina Pérez Soto, Jones Day, Miami, FL, for Waterloo Street Limited, DXS Capital (U.S.) Limited, PacNet (U.S.) Capital Limited, and Tamra Mining Company.

MEMORANDUM DECISION DENYING MOTION TO APPROVE SETTLEMENT

WILLIAM T. THURMAN, U.S. Bankruptcy Judge

The matter before the Court is the Motion Pursuant to Federal Rule Of Bankruptcy Procedure 9019 to Approve Settlement Agreement By and Between CS Mining, LLC and David J. Richards, LLC d/b/a Western US Mineral Investors, LLC (the "WUMI Motion") filed by the Debtor and debtor-in-possession, CS Mining, LLC (the "Debtor" or "CSM").¹

Through the WUMI Motion, the Debtor seeks approval of a settlement proposal² and settlement agreement³ (the "WUMI Settlement Agreement" or "WUMI Settlement") by and between the Debtor and David J. Richards, LLC d/b/a Western US Mineral Investors, LLC, an Ohio limited liability Company ("WUMI" and together with the Debtor, the "Parties").

The Court received and thoroughly reviewed the responses to the WUMI Motion filed by the Official Committee of Creditors Holding Unsecured Claims (the "UCC");⁴ Caterpillar Financial Services Corporation ("Caterpillar") and Komatsu Financial Limited Partnership ("Komatsu");⁵ Brahma Group, Inc. ("Brahma");⁶ Noble Americas Corp. ("Noble");⁷ and Waterloo Street Limited, a British Virgin Islands Company ("Waterloo") and DXS Capital (U.S.) Limited ("DXS") (the "Waterloo Objection").⁸ The Court also received and thoroughly reviewed Debtor's reply to the Waterloo Objection⁹ and WUMI's memorandum in support of the WUMI Motion.¹⁰

On July 21, 2017, the Court conducted an evidentiary hearing on the WUMI Motion (the "Hearing"). At the Hearing, Donald J. Detweiler, Francis J. Lawall, Joanna J. Cline, Jeff Tuttle, and Troy Aramburu appeared on behalf of the Debtor; Ralph R. Mabey, Adelaide Maudsley, Pedro A. Jimenez, Robert W. Hamilton, and Cristina Pérez Soto appeared on behalf of Waterloo, DXS, Tamra Mining Company, LLC, a Delaware limited liability company ("Tamra"), and PacNet Capital (US) Limited, a Delaware limited liability company ("PacNet" and together with Waterloo and DXS are referred to collectively, as the "Waterloo Parties" or "Waterloo"); Martin J. Brill and Philip A. Gasteier appeared on behalf of the UCC; David L. Pinkston and P. Matthew Cox appeared on behalf of WUMI; James W. Anderson and Walter A. Romney, Jr. appeared on behalf of Noble; Mona L. Burton appeared on behalf of Brahma; Kenneth L. Cannon appeared on behalf of Wellington Financing Partners, LLC ("Wellington"), St. Cloud Capital Partners II, L.P. ("St. Cloud"), Broadbill Partners, L.P., ("Broadbill") and Oxbow Carbon LLC ("Oxbow" and together with Wellington, St. Cloud and Broadbill, the "DIP Lenders"); David H. Leigh appeared on behalf of Caterpillar and Komatsu; Steve Alder appeared on behalf of the State of Utah Division of Oil, Gas and Mining; Vincent Cameron appeared on behalf of the Office of The United States Trustee; and any other appearances were noted on the record.

At the Hearing, the Debtor orally withdrew its Motion Pursuant to Federal Rule Of Bankruptcy Procedure 9019 to Approve Settlement Agreement By and Between CS Mining, LLC and Waterloo Street Limited ,¹¹ amended by ,¹² (the "Waterloo Motion"), which was also set for consideration at the Hearing. Through the Waterloo Motion, the Debtor sought approval of a settlement agreement (the "Waterloo Settlement Agreement") by and between the Debtor, on one hand, and the Waterloo Parties and Tamra on the other hand, which related to an Asset Purchase Agreement (the "Tamra APA") by and among the Debtor and Tamra. Although withdrawn, the Debtor's consideration of the Waterloo Motion and Tamra APA is relevant to the WUMI Motion, as discussed further herein.

The Court has considered the relevant pleadings filed in connection with the WUMI Motion, the arguments of the parties, testimony of witnesses, evidence presented at the Hearing, and the Court has conducted an independent review of the applicable law. In addition, the Court takes notice of the docket in this case, as of the date of the Hearing. After the Hearing, the Court took the matter under advisement. The Court issues this Memorandum Decision, making its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure ("FRCP") 52(a) and Federal Rule of Bankruptcy Procedure ("FRBP" or "Rule") 7052.¹³

The Waterloo Parties argue that the WUMI Motion should be denied because the WUMI Settlement Agreement lacks good faith, benefits insiders, abridges Waterloo's rights to be heard on its claims against WUMI, and was not properly approved by the Debtor's board of managers. The Debtor and WUMI assert that the WUMI Settlement Agreement meets the Kopexa standards, is a result of good faith and fair dealings, and will facilitate any upcoming sale of the Debtor's assets. The Court agrees with the Waterloo Parties, in part. For the reasons that follow, the Court denies the WUMI Motion.

I. JURISDICTION, VENUE AND STATUTORY PREDICATES

This Court has jurisdiction over the WUMI Motion pursuant to 28 U.S.C. §§ 157(b)(2) and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(O). The statutory bases for the relief requested by the WUMI Motion are 11 U.S.C. § 105, Federal Rule of Bankruptcy Procedure 9019 and Local Rule 9019–1.¹⁴

II. BACKGROUND

This Memorandum Decision is detailed, but necessarily so, in the Court's opinion. The WUMI Motion brings to the forefront the dynamics of corporate authority, alleged insider dealings, the competing interests of various secured creditors vying for limited resources, claims amongst the secured creditors as to priority, recharacterization, equitable subordination, and the interpretation of the law of the case. A review the history of the case from the outset and how the Debtor got here is necessary to give the ruling the proper context.

A. CSM's Corporate Structure

A brief overview of the Debtor's corporate structure and relevant parties thereto is important as it relates to the WUMI Motion.

The Debtor is a limited liability company organized on June 20, 2011, and existing under the laws of the State of Delaware. Three members, all of whom are parties to a limited liability company agreement (the "CSM Operating Agreement") own the Debtor.¹⁵ Those members include: (i) Skye Mineral Partners, LLC ("SMP"); (ii) Robert Reynolds, as representative of certain former first lien lenders; and (iii) Copper King Mining Corporation ("Copper King"). SMP is the majority-controlling member of the Debtor, owning approximately 99.25% of the overall units of the Debtor. Copper King owns approximately 0.13% of the overall units of the Debtor, and Robert Reynolds represents 0.62% of the overall units of the Debtor.

SMP is owned by DXS; PacNet; Skye Mineral Investors, LLC ("SMI"); and Clarity Copper, LLC ("Clarity Copper").

B. CSM Board

Prior to June 1, 2017, the Debtor's board of managers (the "Board") consisted of three people: (1) Marshall Cooper ("Cooper"), the DXS and PacNet designee; (2) Clinton Walker ("Walker"), the designee of Clarity Copper ; and (3) David J. Richards ("Richards"), the designee of SMI. Additional members on the Board were appointed after June 1, 2017. Clarity Copper appointed John Bryan, SMI appointed Sturges Karban, and DXS and PacNet appointed Thomas K. Reilly.

C. Brief Overview of CSM's Lending Structure

The Court will briefly discuss the Debtor's lending structure, as it is relevant to the WUMI Settlement Agreement and disputes amongst the Board managers. The Debtor has three primary pre-petition secured lenders: SMP, WUMI and Noble/Waterloo.

1) The SMP Loan

On November 10, 2011, CSM, as borrower, and SMP, as lender, entered into a loan modification agreement (the "SMP Loan"). In connection with the SMP Loan, SMP was granted a security interest in all of the Debtor's assets. In its schedules, the Debtor lists an obligation to SMP in a disputed amount of $27,309,249.78 and an undetermined collateral value.¹⁶

2) The WUMI Loan

On August 10, 2012, CSM, as borrower, and WUMI, as lender, entered into a loan and security agreement (the "WUMI Loan"). The WUMI Loan gave WUMI a senior-lien on substantially all of the Debtor's assets. On August 10, 2012, CSM and SMP entered into a debt subordination agreement in favor of WUMI (the "SMP Subordination Agreement"). Per the SMP Subordination Agreement, SMP agreed to subordinate its debt and lien to WUMI's debt and lien under the WUMI Loan.

In its schedules, the Debtor lists an obligation to WUMI in a disputed amount of $24,407,274.00 and an undetermined collateral value.¹⁷ In connection with its pre-petition loan, on February 15, 2017, WUMI filed proof of claim no. 61–1 in this case (the "WUMI Claim"). Pursuant to the WUMI Claim, WUMI asserts a secured claim in the amount of $24,926,036.00 against Debtor's bankruptcy estate.

a) WUMI Managers and Members

Richards is the founder of WUMI. WUMI was previously managed by three individuals: Robert Lautz ("Lautz"), controlling three manager positions; and Richards and Walker, each controlling one manager position. Lautz represents WUMI majority member St. Cloud and...