In re James River Coal Co.

Citation360 B.R. 139
Decision Date08 February 2007
Docket NumberBankruptcy No. 05-03550.,Adversary No. 06-03037-KRH.
CourtUnited States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re JAMES RIVER COAL COMPANY, et al., Debtors. Anthony H.N. Schnelling, as Trustee of the JRCC Unsecured Creditor Liquidating Trust, Plaintiff, v. James B. Crawford, James D. Dotson, William E. Macaulay, Ben A. Guill, John A. Hill, George S. Slocum, John C. Bumgarner, Jr., A. Hugh Ewing, III, Edward A. Snyder, John R. Tellmann, Derrick Varney, J.R. Coal Associates, First Reserve Corporation, American Gas & Oil Investors, AMGO II, First Reserve Fund V, L.P., First Reserve Fund V-2, L.P., and First Reserve Fund VI, L.P., Defendants.

Bryan J. Wick, Brant C. Martin, Wick Phillips LLP, Dallas, TX, Daniel Hays Puryear, David M. Anthony, Smythe & Puryear, Nashville, TN, for Plaintiff Anthony H.N. Schnelling.

Lynn L. Tavenner, Tavenner & Beran, PLC, Richmond, VA, Plaintiff Anthony H.N. Schnelling, as Trustee of the JRCC Unsecured Creditor Liquidating Trust.

James It. Kelley, Marc T. McNamee, Neal & Harwell, Nashville, TN, for Defendants James B. Crawford, James D. Dotson, George S. Slocum, John C. Bumgarner, Jr., A. Hugh Ewing, III, Edward A. Snyder, John R. Tellmann, Derrick Varney, J.R. Coal Associates.

Samuel W. Hixon, III, William H. Schwarzschild, III, Williams Mullen, Richmond, VA, for Defendants James B. Crawford, J.R. Coal Associates.

Eugene E. Derryberry, Harold David Gibson, Gentry Locke Rakes & Moore, Roanoke, VA, for Defendant James D. Dotson.

Gregory J. Kerwin, Gibson Dunn & Crutcher LLP, Denver, CO, Michael D. Mueller, Jennifer McLain McLemore, Christian & Barton, L.L.P., Richmond, VA, Randal Steven Mashburn, Baker Donelson Bearman & Caldwell, Nashville, TN, for Defendants William E. Macaulay, Ben A. Guill, John A. Hill, First Reserve Corporation, American Gas & Oil Investors, AMGO II, First Reserve Fund V, L.P., First Reserve Fund V-2, L.P., First Reserve Fund VI, L.P.

David J. Sensenig, Vernon E. Inge, Jr., E.G. Allen, Jr., LeClair Ryan, Richmond, VA, for Defendants George S. Slocum, John C. Bumgarner, Jr., A. Hugh Ewing, III, Edward A. Snyder, John R. Tellmann, Derrick Varney.

Robert B. Van Arsdale, Office of the United States Trustee, Richmond, VA.

AMENDED MEMORANDUM OPINION

KEVIN R. HUENNEKENS, Bankruptcy Judge.

Before the Court are the several motions to dismiss filed by the various defendants in this adversary proceeding. Hearing on the motions was held on October 12, 2006, at which time the Court took the matters under advisement. For reasons set forth below, the Court will deny the motions in part and grant the motions in part.

FACTS
Procedural History

In March 2003, Debtor James River Coal Company ("JRCC") and its twenty-one subsidiaries (collectively, "the Debtors") filed voluntary bankruptcy petitions (the "Petitions") under Chapter 11 of the Bankruptcy Code. Those Petitions were filed in the United States Bankruptcy Court for the Middle District of Tennessee (the "Tennessee Bankruptcy Court"). On April 22, 2004, the Tennessee Bankruptcy Court confirmed the Debtors' joint plan of reorganization (the "Reorganization Plan"). Pursuant to the Reorganization Plan, the estates of JRCC and its 21 subsidiaries were substantively consolidated.1 A liquidating trust was formed to hold and distribute the pooled assets (the "Trust"), and various causes of action, including claims against certain former employees, officers, directors and shareholders of the Debtors, were assigned and conveyed to the Trust.

On March 20, 2005, Plaintiff Anthony H. Schnelling, as Trustee of the Trust (the "Trustee"), filed .this adversary proceeding in the Tennessee Bankruptcy Court against certain former officers, directors and shareholders of the Debtors. In addition, the adversary complaint named as defendants J.R. Coal Associates ("J.R. Coal") and First Reserve Corporation, American Gas & Oil Investors, Limited, AMGO II Limited Partnership, First Reserve Fund V, L.P., First Reserve Fund V-2, L.P., and First Reserve Fund VI, L.P. On June 27, 2005, the complaint in this adversary proceeding was amended (the "Amended Complaint"). The Amended Complaint contains fifteen counts.

On or about July 18, 2005, several of the defendants filed motions to transfer the adversary proceeding to the Bankruptcy Court for the Eastern District of Virginia. The motions were granted by the Tennessee Bankruptcy Court on December 23, 2005. After the transfer, several defendants moved the District Court to withdraw the reference from the bankruptcy court. That motion was denied by the United States District Court for the Eastern District of Virginia on June 1, 2006.

The matter is now before this Court on motions to dismiss filed by the defendants listed below pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure.

The Defendants

James B. Crawford ("Crawford") was a founder and a major shareholder of JRCC. Crawford was also the chief officer of each of the Debtors and Chairman of each of the Debtors' Boards of Directors until March 18, 2003.

James A. Dotson ("Dotson") was a founder and a major shareholder of JRCC. Dotson was also an officer of each of the Debtors, including the president of the largest subsidiary of JRCC, McCoy Elkhorn, and a member of each of the Debtors' Boards of Directors through November 27, 2002.

William E. Macaulay ("Macaulay") was a member of the JRCC Board of Directors from 1994 until January of 2000. During that time, Macaulay was also an officer and/or director of defendant First Reserve Corporation.

Ben A. Guill ("Guill") was a member of the JRCC Board of Directors from 2000 until November 2002. During that time, Guill was also an officer and/or director of defendant First Reserve Corporation.

John A. Hill ("Hill") was a member of the JRCC Board of Directors from 1994 until November 2002. During that time, Hill was also an officer and/or director of defendant First Reserve Corporation.

The Amended Complaint refers to Guill, Hill and Macaulay as the "First Reserve Directors" and refers to Crawford, Dotson and the First Reserve Directors as the "Insiders."

George S. Slocum ("Slocum") was a member of the JRCC Board of Directors from 1994 through the filing of the Petitions.

John C. Bumgarner, Jr. ("Bumgarner") was a member of the JRCC Board of Directors from 1996 through early 2003. Bumgarner was allegedly an outside, but not independent, director. Bumgarner was also an officer of a company which had a preferred stock arrangement with JRCC.

A. Hugh Ewing, III ("Ewing") was a member of the JRCC Board of Directors from 1988 through the filing of the petitions. Ewing was allegedly an outside, but not independent, director. Ewing also provided investment banking services to the Debtors through his firm, Ewing, Monroe & Company.

Edward A. Snyder ("Snyder") was a member of the JRCC Board of Directors from 1999 through the filing of the Petitions.

The Amended Complaint refers to Slocum, Bumgarner, Ewing and Snyder as the "Outside Directors." The Insiders and the Outside Directors collectively comprise the "Directors."

John R. Tellmann ("Tellmann") was an officer and director of JRCC's subsidiary, James River Coal Sales, Inc., and was a shareholder of JRCC.

Derrick Varney ("Varney") was an officer of one or more of the Debtor corporations. Varney was also a shareholder of JRCC.

J.R. Coal Associates, LLC, ("J.R. Coal") was a partnership used by its general partners, Crawford and Dotson, to conduct various transactions with the Debtors.

The Amended Complaint refers to defendant American Gas & Oil Investors, Limited Partnership ("AMGO I"), defendant AMGO II, Limited Partnership ("AMGO II"), defendant First Reserve Fund V, L.P. ("Fund V"), defendant First Reserve Fund VI, L.P. ("Fund. VI"), and defendant First Reserve Fund V-2, L.P. ("Fund V-2") as the "First Reserve Funds."

First Reserve Corporation ("First Reserve Corp.") is a Delaware corporation with its principal place of business in Greenwich, Connecticut. The First Reserve Funds were major shareholders of JRCC. First Reserve Corp., as managing general partner of each of the First Reserve Funds, managed the relationship and communications between the First Reserve Funds and the Debtors on a consolidated basis. The Amended Complaint refers to First Reserve Corp. and the First Reserve Funds collectively as "First Reserve."

The Trustee's Allegations

The court must take as true the factual allegations in the Trustee's Amended Complaint. Bass v. E.I. DuPont de Nemours & Co., 324 F.3d 761, 764 (4th Cir.2003).

JRCC was a corporation organized under the laws of the Commonwealth of Virginia. JRCC was the holding company for the 21 affiliate Debtors. The Debtors were a Kentucky coal mining operation. The 21 subsidiaries of JRCC controlled all operational aspects of their respective mines, hired and fired employees, and contracted with vendors on an individual basis. The subsidiaries of JRCC held all of the assets of the Debtors and earned all of the revenue.

Through a series of investments during the period of time between 1994 and 1996, First Reserve Funds obtained the controlling shareholder interest in JRCC through the acquisition of 9,438 shares of JRCC. The controlling shareholder interest was managed by First Reserve Corp.

In connection with First Reserve's controlling shareholder investment in JRCC, First Reserve and JRCC entered into two put option agreements, the first in 1994 and the second in 1995. These agreements provided First Reserve with the option to "put" (sell) the 9,438 shares back to the Debtors within sixty days from issuance of the 1998, 1999 and 2000 year-end audited financials of the Debtors. Formulas for determining the price of the puts were set forth in the put...

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