In re Eveleth Mines, LLC.

Decision Date30 July 2004
Docket NumberNo. 03-50641.,No. 03-50569.,03-50569.,03-50641.
PartiesIn re EVELETH MINES, LLC, dba Evtac Mining, and Thunderbird Mining Co., Debtors.
CourtU.S. Bankruptcy Court — District of Minnesota

Michael L. Meyer, Ravich, Meyer, Kirkman, McGrath & Nauman, Minneapolis, MN, for Debtors.

ORDER DENYING MOTION OF UNITED TACONITE, LLC FOR RELIEF IN CONNECTION WITH ORDER OF NOVEMBER 26, 2003

GREGORY F. KISHEL, Chief Judge.

This Chapter 11 case came on before the Court on March 17, 2004, for hearing on the motion of United Taconite, LLC ("United Taconite") for certain relief in connection with an order entered on November 26, 2003. United Taconite appeared by its attorney, Timothy D. Moratzka. The State of Minnesota, Department of Revenue ("MDOR") appeared by Jessica A. Palmer-Denig and Thomas K. Overton, Assistant Attorneys General. Other appearances were noted in the record. After the motion was taken under advisement, the record was reopened at MDOR's request to receive briefing on the issue of jurisdiction. The final submission on that issue was timely filed. Upon the relevant documents and the arguments of counsel, the Court makes the following order.

PARTIES

The Debtor is a Minnesota business corporation that mined taconite (low-grade iron ore) and beneficiated it into a concentrated pellet form suitable for the production of steel. Its mine and plant (for brevity, "the facility") were located in and near the city of Eveleth, on the Mesabi Iron Range of northeastern Minnesota.

The Debtor1 filed a voluntary petition for relief under Chapter 11 on May 1, 2003. On motion of the Debtor, the Court authorized the sale of the facility and most of the associated personalty to United Taconite. The sale closed, and United Taconite commenced production.

MDOR is responsible under Minnesota statute for the assessment of taxes on the production of beneficiated taconite and for the collection of those taxes.

FINDINGS OF FACT

The facts relevant to this motion all arose after the Debtor's Chapter 11 filing.

Within several weeks after the Debtor commenced this case, it ceased mining and production operations and laid off almost all of its employees. The reason was the Debtor's lack of contracts for the sale of finished taconite pellets. During the summer of 2003, the Debtor's management searched for a new investor or a buyer of the Debtor's assets. In the early fall of 2003, a Chinese concern, Laiwu Steel Group, Ltd., and an American mining concern, Cleveland-Cliffs, Inc., made an offer in consort for the Debtor's assets. On October 29, 2003, the Court approved a set of procedures for the soliciting of further bids. A second bidder came forward. The Debtor's counsel conducted an auction on November 25, 2003. The Court then approved the Debtor's sale of its operating assets to United Taconite, a new entity in which Laiwu and Cleveland-Cliffs were the participants. The order authorizing the sale was entered on November 26, 2003.2

The terms under which United Taconite proposed to purchase the Debtor's assets were set forth in a document entitled "Asset Purchase Agreement." That document was dated and filed with the Court on November 7, 2003, in connection with the Debtor's pending motion for approval of the sale. MDOR was among the entities served with this document.

In those provisions relevant to the motion at bar, the Asset Purchase Agreement provides:

2.4 Retained and Assumed Liabilities of Seller.

(a) Retained Liabilities. Except for [certain] Assumed Liabilities3 ..., [the Debtor] shall retain and Buyer4 shall not assume, pay, ... [or] succeed to ... any of [the Debtor's] Liabilities, expenses or other obligations (whether known, unknown, fixed, unliquidated, absolute, or contingent), ... or Claims, including, but not limited to, any Claim or Liability relating to: ... (viii) any taconite production tax attributable to the mining and beneficiation of taconite ore into enriched iron ore pellets that has been or may be assessed by any Taxing authority for any period, including but not limited to the Minnesota Department of Revenue (but excluding any taconite production tax that is attributable to the mining and beneficiation of taconite ore into enriched iron ore pellets by any Person other than [the Debtor] or its Affiliates) (a "Taconite Production Tax"); provided that nothing contained in this clause (viii) shall constitute an admission by [the Debtor] that any of [the Debtor] or its Affiliates are liable to any Taxing authority for any Taconite Production Tax...

In turn, the Asset Sale Order had relevant provisions of two sorts. Among its merged findings of fact and conclusions of law were:

17. The Buyer would not have entered into the [Asset Purchase] Agreement and would not consummate the sale contemplated by the [Asset Purchase] Agreement if the sale of the Mining Assets and the assignment of the Contracts were not free and clear of the [sic] all interests, liens, claims and encumbrances (other than those liabilities expressly assumed by the Buyer). This would impact materially and adversely on the Debtor's estates [sic] and would yield substantially less value for the Debtor's estate.

18. The Debtor may sell the Mining Assets free and clear of any and all liens, claims, interests or encumbrances in, upon or to the Mining Assets because all creditors claiming an interest in the Mining Assets either have not objected to the proposed sale or [have] withdrawn their objection and are deemed to have consented pursuant to § 363(f)(2) of the Bankruptcy Code or meet one of the conditions set forth in § 363(f) of the Bankruptcy Code.

Among the Order's dispositive terms were:

F. The Buyer shall not assume, and shall be deemed not to have assumed, any liabilities or obligations of the Debtor, except for ... (the "Assumed Liabilities"). The liabilities or obligations of [the] Debtor that represent Excluded Liabilities include, but are not limited to, any claims or liabilities relating to ...: ... (viii) any taconite production tax attributable to taconite ore or iron sulfides mined by [the] Debtor, to the mining of such taconite ore or iron sulfides by [the] Debtor, to the production of iron ore concentrate from that taconite ore or iron sulfides by [the] Debtor, or to the iron ore concentrate produced by [the] Debtor that has been or may in the future be assessed by any Taxing authority for any period pursuant to Minn.Stat. §§ 298.24-298.27...

G. Pursuant to §§ 105(a) and 363(f) of the Bankruptcy Code, the Debtor is authorized to transfer title to the Mining Assets to the Buyer free and clear of: (a) all interests, pledges, liens, judgments, demands, ... encumbrances, obligations for the payment of taconite production taxes related to the mining and production operations by [the] Debtor using the Mining Assets, on [sic] restrictions or charges of any kind or nature whatsoever (collectively, the "Liens"); and (b) all claims (as that term is defined in § 101(5) of the Bankruptcy Code), Liabilities, obligations, demands, options, rights, restrictions and interests, whether imposed by agreement, understanding, law, equity, any theory of successor liability of the Buyer to the Debtor, including de facto merger, substantial continuity under the WARN Act or any employee benefit plan, the Debtor's workers' compensation rating (which shall not apply to the Buyer), continued operation of the Mining Assets as the "taconite facility" (as that term is used in Minn.Stat. § 298.24) or continued operation of the Mining Assets as the "producer" (as that term is used in Minn.Stat. § 298.27) or otherwise, whether known or unknown, whether contingent, unliquidated, disputed, whether imposed by agreement, understanding, law, equity or otherwise, including without limitation those of a kind specified in §§ 502(g), 502(h) and 502(i) of the Bankruptcy Code, and whether arising before or after the commencement of this chapter 11 case (collectively, the "Claims"), except as any of the foregoing may constitute Assumed Liabilities.

The Debtor and United Taconite then closed the sale on December 3, 2003. After that, United Taconite took possession of the facility, recalled most of the mining and plant employees, and commenced taconite pellet production in its own right.

In late January, 2004, the Debtor and United Taconite each filed Taconite Production Reports with MDOR for the separate periods of their operations during 2003. The Debtor reported total production of 1,552,080 tons of finished taconite products during the months of January through May, 2003. United Taconite reported total production of 78,162 tons during the month of December, 2003, alone.

On February 13, 2004, MDOR issued a Notice of Taconite Production Tax to United Taconite. In that document, MDOR asserted that United Taconite was liable for $335,921.00 on account of its production during 2003. In an attached document entitled "Determination of the Taconite Production Tax," MDOR disclosed that it had calculated this amount as follows:

1. First, a "Taxable 3-year Avg. Tonnage" was obtained by totaling the reported annual production at the Eveleth facility during the years 2001, 2002, and 2003, then dividing that total by three, with the result being 3,331,611 tons in average annual production.

2. The statutory tax rate of $2.103 per ton was applied to this average figure to arrive at a "2003 Net Production Tax Liability" of $7,006,378.00.

3. This liability was then divided, "[due] to bankruptcy sale," between the Debtor and United Taconite based upon each company's fractional share of the facility's total production during 2003. The Debtor was assigned 95.2055% of the tax, for a liability of $6,670,457.00. United Taconite was assigned 4.7945% of the tax, for a liability of $335,921.00.

The "Determination" document set a due date of February 24, 2004, for payment of 50% of the full year's liability.

MOTION AT BAR

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