In re Murray Energy Holdings Co.

• Decision Date: 31 March 2022
• Docket Number: Case No. 19-56885 (Jointly Administered)
• Citation: 638 B.R. 588
• Parties: IN RE: MURRAY ENERGY HOLDINGS CO., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

638 B.R. 588

IN RE: MURRAY ENERGY HOLDINGS CO., et al., Debtors.

Case No. 19-56885 (Jointly Administered)

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed March 31, 2022

Todd Goren, Benjamin Butterfield, Jennifer Marines, Lorenzo Marinuzzi, Erica Richards, Allison B. Selick, Morrison & Foerster LLP, New York, NY, Melissa S. Giberson, Thomas Loeb, Vorys, Sater, Seymour and Pease LLP, Columbus, OH, Tiffany Strelow Cobb, Columbus, OH, Brenda K. Bowers, Columbus, OH, for Creditor Committee.

Roma N. Desai, Bernstein Shur Sawyer & Nelson PA, Portland, ME, for Special Counsel.

Benjamin A. Sales, Office of the United States Trustee, Cincinnati, OH, Monica V. Kindt, John W. Peck Federal Building, Cincinnati, OH, Jeremy Shane Flannery, Office of the United States Trustee, Columbus, OH, U.S. Trustee.

MEMORANDUM OPINION AND ORDER

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

This matter arises out of the Chapter 11 cases of Murray Energy Holdings Co. and its affiliated debtors and debtors in possession ("Debtors"). The dispute is over the status of mechanic's lien claims secured by real property that the Debtors sold as part of their Chapter 11 plan ("Plan") (Doc. 2082, Ex. 1). Drivetrain, LLC, in its capacity as the plan administrator appointed by the Plan, contends that the lenders under the Debtors’ prepetition superpriority credit agreement ("Credit Agreement") hold first-in-time liens on the real property as the result of mortgages certain Debtors granted in connection with the Credit Agreement. Based on these liens and the valuation of the property securing them, Drivetrain argues that the claims of certain mechanic's lienholders should be reclassified as unsecured claims. The mechanic's lien claimants counter that their claims are secured, asserting first-in-time status based on their liens on the surface estates of the real property. The parties agree that the mortgages pre-dated the filing of the mechanic's liens. But the Debtors that granted the mortgages held only title to the subsurface estates and the right to use the surface for mining purposes and did not hold title to the surface estates. Title to the surface estates was held either by a non-debtor or another Debtor that did not grant a mortgage to the lenders. The parties do not agree as to the import of this lack of surface estate ownership.

The issue, then, is whether an entity that has title to the subsurface estate and the right to use the surface for mining purposes may mortgage the surface estate. Drivetrain relies on the bundle of sticks concept from property law, leading to the parties’ characterization of the dispute as the "bundle of sticks" issue. Relying on this concept, Drivetrain argues that ownership of the subsurface estate together with the concomitant right to use the surface estate for mining purposes affords sufficient "sticks" to give rise to the right to mortgage the surface estate. The holders of the mechanic's liens take the contrary view, and they have the better argument. An entity that owns the subsurface estate along with the right to use the surface for mining purposes has no right to mortgage the surface estate.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this matter under 28 U.S.C. § 1334(b) and the general order of reference entered in this district in accordance with 28 U.S.C. § 157(a). The allowance or disallowance of claims against the estate is a core proceeding. 28 U.S.C. § 157(b)(2)(B). Because the dispute "stems from the bankruptcy itself," the Court also has the constitutional authority to enter a final order. Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). See also Waldman v. Stone , 698 F.3d 910, 920 (6th Cir. 2012) ("[D]isallowance [of] claims [is] part and parcel of the claims-allowance process in bankruptcy. Under Stern , therefore, the bankruptcy court was authorized to enter final judgment as to these claims." (citation omitted)).

III. Background

A. The Plan

This dispute matters because of the Plan's different treatment of secured and unsecured claims. While the Plan is a joint plan of reorganization, it "constitutes a separate plan for each Debtor," Plan at 6,¹ and "the classification of Claims and Interests set forth in the Plan [applies] separately to each of the Debtors." Disclosure Statement for the Debtors’ First Am. Joint Plan Pursuant to Chapter 11 of the Bankruptcy Code ("Disclosure Statement") (Doc. 1344-1) at 15. Secured claims under the Plan were classified as "Class 2 Other Secured Claims." Plan at 29, 30. Class 2 claimants, unless they agreed to less favorable treatment, were to receive, on the effective date of the Plan, payment of their allowed secured claims in full in cash or such other treatment as would render their claims unimpaired. Id . at 30.

More than a dozen mechanic's lienholders objected to confirmation of the Plan. They argued that their liens were being released, and then possibly reinstated, which they said could allow the attachment of intervening liens. The mechanic's lienholders also argued that the Plan's injunction eliminated their in personam rights against the Debtors. The Debtors resolved these objections with most of the objectors by including a provision in the order confirming the Plan ("Confirmation Order") (Doc. 2135) stating:

Notwithstanding anything to the contrary in this Confirmation Order, the Plan, or the Stalking Horse APA, until a Disputed Other Secured Claim is Allowed or disallowed by Final Order or an agreement of the claimant with the Debtors (prior to the Effective Date) or the Stalking Horse Bidder (after the Effective Date), the lien or liens on property securing such Disputed Other Secured Claim shall remain on such property in the same priority that such lien or liens held prior to entry of the Confirmation Order. Notwithstanding the foregoing, the holder of a Disputed Other Secured Claim may not seek, and shall not have any rights, to enforce such lien or liens unless and until the corresponding Disputed Other Secured Claim is Allowed in an amount greater than zero. To the extent that an Other Secured Claim is Allowed and the Debtors (with the consent of the Stalking Horse Bidder) or the Plan Administrator, as applicable, elect for the holder of such Allowed Other Secured Claim to receive the treatment set forth in section III.B.2(b)(ii) of the Plan, (a) the lien or liens on property securing such Allowed Other Secured Claim shall remain on such property in the same priority that such lien or liens held prior to entry of the Confirmation Order, as established by order of the Bankruptcy Court (including an agreed order by and among the Debtors (with the consent of the Stalking Horse Bidder) or the Plan Administrator, as applicable, and the holder of such Allowed Other Secured Claim), and, to the extent the property subject to such liens constitutes an Acquired Asset, such liens shall constitute Permitted Encumbrances under the Stalking Horse APA and (b) notwithstanding anything to the contrary in this Confirmation Order or the Plan, any in personam rights that such Allowed Other Secured Claim may entitle such holder to have against any applicable Debtors shall be preserved and not released, discharged, or extinguished, and the holder of any such Claim shall not be enjoined from exercising any such rights against any applicable Debtors or the Wind-Down Trust. If a Disputed Other Secured Claim is either disallowed, Allowed in an amount of zero, or reclassified as a General Unsecured Claim by a Final Order or an agreement of the claimant with the Debtors (with the consent of the Stalking Horse Bidder), the lien or liens on property securing such claim shall be deemed released and extinguished. Nothing herein shall prejudice any party's rights with respect to the Debtors’ First Omnibus Objection to Certain Mechanic's Lien Claims [Docket No. 1749] or any of the responses, replies, objections, or oppositions filed or other litigation related thereto.

Confirmation Order at 55–56.

Following negotiations with the mechanic's lienholders, four parties maintained their objections, including one—GMS Mine Repair & Maintenance, Inc.—that is involved in this dispute. The Court overruled the objections, finding, based on the paragraph quoted above, that the Plan left the claims of the mechanic's lienholders unimpaired. Conf. Hr'g Tr. Aug. 31, 2020 (Doc. 2331) at 19–23.

If the claims of the holders of the mechanic's liens are unsecured, they will be reclassified as Class 9 general unsecured claims and will receive at best a minimal recovery. See Suppl. Disclosure Statement for Debtors’ Second Am. Plan (Doc. 1934-2) at 12 (estimating the recovery on general unsecured claims to be 0%–1%). But if the claims are secured, they will be treated as Class 2 Other Secured Claims and will be satisfied in full. Plan at 30.

B. The Omnibus Objection, the Responses and the Reply

Before confirmation of their Plan, the Debtors filed their First Omnibus Objection to Certain Mechanic's Lien Claims. See Doc. 1749. In this omnibus objection, the Debtors argued that certain mechanic's lien claims that were filed as secured claims should be reclassified as unsecured. Id . at 5–7. The holders of the mechanic's liens responded to the Debtors’ Omnibus Objection, and the Debtors filed an omnibus reply (Doc. 2068) in which they explained that the omnibus objection applied to two categories of claims: (1) claims that rely on liens that were filed under the wrong West Virginia mechanic's lien statutes or had defective notices, thus making the liens invalid and the corresponding claims unsecured; and (2) claims that must be reclassified as unsecured claims because they are junior in priority to claims arising under the Credit Agreement, for which there is insufficient collateral value to satisfy the claims in full. Reply in Supp. of Debtor's First Omnibus Obj. to Certain Mechanic's Lien...