In re Murray Metallurgical Coal Holdings, LLC

• Decision Date: 22 April 2020
• Docket Number: Case No. 20-10390 (Jointly Administered)
• Citation: 614 B.R. 819
• Parties: IN RE: MURRAY METALLURGICAL COAL HOLDINGS, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

614 B.R. 819

IN RE: MURRAY METALLURGICAL COAL HOLDINGS, LLC, et al., Debtors.

Case No. 20-10390 (Jointly Administered)

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

Signed April 22, 2020

Thomas R. Allen, Rick L. Ashton, James A. Coutinho, Richard K. Stovall, Matthew M. Zofchak, Allen Stovall Neuman Fisher & Ashton LLP, Columbus, OH, for Debtor in Possession, Murray Metallurgical Coal Holdings, LLC.

OPINION AND ORDER DENYING THE MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING IT STANDING AND AUTHORIZING IT TO PROSECUTE AND SETTLE CERTAIN CLAIMS ON BEHALF OF THE DEBTORS' ESTATES (DOC. 361)

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

I. Introduction

The Chapter 11 cases of Murray Metallurgical Coal Holdings, LLC ("Murray Met") and its affiliated debtors and debtors in possession (collectively, the "Debtors") have devolved into a contest between warring camps. On one side of the present dispute are the Debtors and the holders of their funded debt, including one of the Debtors' affiliates, Murray Energy Corporation ("Murray Energy"), which is a debtor along with nearly 100 other affiliates in a separate group of Chapter 11 cases. On the other side is the Official Committee of Unsecured Creditors appointed in these cases (the "Committee"). The Committee seeks to recharacterize the secured lenders' debt as equity on the eve of the auction at which the lenders would serve as the stalking horse bidder for the Debtors' Oak Grove mine assets. To achieve its goal of having the funded debt recharacterized as equity, the Committee has filed a motion (the "Motion") (Doc. 361) requesting derivative standing to file a complaint against Murray Energy, secured lender MC Southwork LLC, and the entity that Murray Energy and MC Southwork have formed for the purpose of bidding for the Oak Grove assets¹ (collectively, the "Proposed Defendants"). The Committee would allege in the complaint that a prepetition take-back debt facility issued by Murray Met to MC Southwork (the "Take-Back Facility") and a prepetition bridge loan facility advanced by MC Southwork and Murray Energy (the "Bridge Loan Facility" and, together with the Take-Back Facility, the "Prepetition Funded Debt") should be recharacterized as equity. The Committee also would ask the Court to recharacterize as equity a roll-up of the Bridge Loan Facility (the "DIP Roll Up Facility") approved by the Court's final order authorizing the Debtors to obtain debtor in possession financing (the "Final DIP Order") (Doc. 248).

To obtain derivative standing to bring a claim on behalf of the bankruptcy estate, a committee must show, among other things, that it is proposing to bring "a colorable claim that would benefit the estate if successful ... based on a cost-benefit analysis performed by the court." Canadian Pac. Forest Prods. v. J.D. Irving, Ltd. (In re Gibson Grp., Inc.) , 66 F.3d 1436, 1438 (6th Cir. 1995). As explained below, the Committee's proposed claims are not remotely colorable, and the Committee has not carried its burden of demonstrating that the claims would benefit the estate even if they had any merit. The Motion accordingly is denied.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine the Motion 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). This dispute is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) & (O). And because the dispute "stems from the bankruptcy itself," the Court also has the constitutional authority to enter a final order in this matter. Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

III. Procedural History

By the Motion, the Committee requests derivative standing to bring the claims asserted in the complaint attached as Exhibit C to the Motion (the "Proposed Complaint"). The Proposed Complaint includes claims seeking to recharacterize the Prepetition Funded Debt and the debt under the DIP Roll Up Facility as equity and to limit the Proposed Defendants' credit bid on account of that debt to $0. The Proposed Complaint also includes a request to enjoin the Proposed Defendants from credit bidding that debt for the purchase of the Oak Grove assets.

The Committee filed both the Motion and a motion for an expedited hearing on April 9, 2020,² and the next day the Court entered an order scheduling a deadline to object to the Motion and an expedited hearing on it. Objections to the Motion were filed by the Debtors (Doc. 385), Murray Energy (Doc. 387), and the Ad Hoc Group of Prepetition Term Loan Lenders (the "Ad Hoc Group") (Doc. 388). In light of the emergency caused by COVID-19, the Court entered an agreed order establishing procedures for a virtual hearing on the Motion (Doc. 383), and the hearing was conducted in accordance with those procedures on April 14, 2020.

During the hearing, the parties stipulated to the admission into evidence, solely for the purpose of the Court's ruling on the Motion, of the Committee's Exhibits A–O, the Debtors' Exhibits 1–6, and the Ad Hoc Group's Exhibits A–O. Hr'g on Mot. at 12:45:08–12:45:36.³ Several of those exhibits are particularly relevant to the Court's disposition of the Motion:

• The Ad Hoc Group's Exhibit A: the credit agreement governing the Take-Back Facility (the "Take-Back Credit Agreement");

• The Committee's Exhibit N: an order (the "Sale Order") issued by the United States Bankruptcy Court for the Northern District of Alabama (the "Alabama Bankruptcy Court"), which made certain findings regarding the debt issued under the Take-Back Facility; and

• The Committee's Exhibit C: the declaration of Edwin N. Ordway, Jr., a managing director of Berkeley Research Group, the Committee's financial advisor (the "Ordway Declaration").

The Ordway Declaration was admitted in lieu of his direct testimony on behalf of the Committee. The Court also heard Mr. Ordway's testimony on cross-examination and re-direct. Counsel for the Committee represented during the hearing that the Committee was relying on the declaration and testimony of Mr. Ordway as well as the documents referenced in the Proposed Complaint. Hr'g on Mot. at 1:43:12–1:46:56. That would, of course include the Sale Order and the Take-Back Credit Agreement as well as the amendment to the Take-Back Credit Agreement that gave rise to the Bridge Loan Facility.

IV. Background

Murray Met filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 11, 2020 (the "Petition Date"), followed by the other Debtors on February 12, 2020. Unlike the Murray Energy debtors, which mine thermal coal that is used in the generation of electricity, the Debtors mine and sell metallurgical coal, which is used to produce coke, a product needed to produce steel. As stated above, the Debtors' assets include the Oak Grove in Alabama that employs more than 500 people.

Murray Met was formed in the spring of 2019 for the purpose of acquiring certain of the assets, including the Oak Grove mine, of a metallurgical coal producer known as Mission Coal Company, LLC. Ordway Decl. ¶ 3, 5. Several months earlier, in the fall of 2018, Mission Coal and certain of its affiliates (the "Mission Coal Debtors") had commenced Chapter 11 cases in the Alabama Bankruptcy Court. Id. ¶ 4. At the time they commenced those cases, the Mission Coal Debtors had approximately $175 million in secured debt, including about $104 million under a first lien secured term loan (the "First Lien Loans") and $71 million under a second lien secured term loan. Id. ¶ 6. The First Lien Loans arose under a credit agreement between Mission Coal and lenders MC Southwork and Coal Specialty Funding, II ("Coal Specialty Funding" and, together with MC Southwork, the "Mission Coal DIP Lenders"). Id. ¶ 7. The First Lien Loans were secured by senior liens on substantially all the assets of the Mission Coal Debtors. Id.

The Mission Coal DIP Lenders provided a debtor in possession financing facility to the Mission Coal Debtors, which the Alabama Bankruptcy Court approved on a final basis in November 2018. Id. ¶ 8. The Alabama Bankruptcy Court's final DIP financing order provided for the roll-up of the First Lien Loans into the Mission Coal DIP loan along with $54.4 million of additional new money commitments, for a total DIP credit facility of approximately $201 million. Id.

In connection with an auction for the sale of the assets of the Mission Coal Debtors, the Mission Coal DIP Lenders provided an opening bid for certain of those assets, including a credit bid of at least $145 million, plus additional cash consideration of $38 million, the assumption of certain liabilities, and the funding of certain wind-down escrow accounts. Id. ¶ 9. The auction for the Mission Coal assets did not generate a cash bid that would have fully satisfied the Mission Coal DIP Lenders' claims. Id. ¶ 12.

Together with an entity known as Javelin Global Commodities (UK) Ltd. (an affiliate of Murray Energy), MC Southwork and Murray Energy submitted a bid for the acquisition of the Oak Grove mine and other mining assets through an entity that ultimately became Murray Met. Id. ¶¶ 13–14. The bid provided for consideration of $264.7 million, including $160 million in the form of the Take-Back Facility payable to MC Southwork and Coal Specialty Funding and $42.8 million in cash payable to the bankruptcy estates of the Mission Coal Debtors. Id. ¶ 14. In addition, the bid would permit the payment of $31.7 million in estimated cure costs, tax liabilities, postpetition payables and other administrative expenses upon the closing of the sale. Id. The bid also provided for the infusion of $10 million of cash on Murray Met's balance sheet to fund the operation of the metallurgical mining complexes after the closing. Id.

The Mission Coal Debtors ultimately declared Murray Met to be the successful bidder for the Oak Grove mine and other...