In re Peabody Energy Corp., Case No. 16-42529-399

• Decision Date: 12 October 2017
• Docket Number: Case No. 16-42529-399
• Parties: In re: Peabody Energy Corporation, et al., Reorganized Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Missouri

In re: Peabody Energy Corporation, et al., Reorganized Debtors.

Case No. 16-42529-399

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MISSOURI EASTERN DIVISION

October 12, 2017

CHAPTER 11

Jointly Administered

MEMORANDUM OPINION REGARDING THE DMS CLAIM

This contested matter came before the Court at an August 31, 2017 evidentiary hearing regarding Reorganized Peabody Energy Corporation ("Reorganized PEC") and certain of its direct and indirect subsidiaries', as reorganized debtors and debtors in possession (collectively, the "Reorganized Debtors"), Sixteenth Omnibus Objection to Certain Claims (Zero Liability Claims) (the "Objection") [Docket No. 2910] solely as it relates to DMS Contracting, Inc.'s ("DMS") KCC Claim No. 6144; ECF Claim No. 23-1 (Debtor Peabody Gateway North Mining, LLC, Case No. 16-42624) (the "DMS Claim"). The dispute concerns whether DMS waived the DMS Claim under the terms of the Agreement Between Owner and Design-Builder, dated April 23, 2015, by and between Peabody Gateway North, LLC ("Peabody") and DMS [Reorganized Debtors Exhibit 2] (the "Contract").

At issue is whether DMS can seek an upward adjustment of the contract price based on the subsoil conditions at the construction site. DMS contends that the subsoil conditions at the construction site were concealed and unknown conditions, and that DMS provided sufficient notice of those conditions to assert a claim under the Contract. The Reorganized Debtors contend that DMS waived that claim under the Contract for three independent reasons. First, DMS' contention that the subsoil conditions were concealed or unknown is based solely on the allegation that those conditions were not disclosed in information regarding subsoil conditions that Peabody provided in the bidding process, and DMS expressly waived the right to assert such claims. Second, DMS did not provide timely or adequate notice of those alleged concealed and unknown conditions under the Contract. Third, DMS did not timely assert a claim under the Contract.

For the reasons that follow, the Court finds that DMS waived the DMS Claim under the Contract. As a result, the Court sustains the Objection as it relates to the DMS Claim, and disallows the DMS Claim.

FINDINGS OF FACT

Cell 5 Project

1. Peabody operates an underground coal mine in Coulterville, Illinois (the "Gateway North Mine").

2. As the coal is mined at the Gateway North Mine, it is loaded onto a conveyor, which takes the coal to a preparation plant where the coal is washed to remove non-coal refuse.

3. Peabody disposes of the fine and coarse refuse from the washing process in large cells created by building earthen embankments that cordon off an area.

4. In 2015, Peabody solicited bids to expand Peabody's existing refuse disposal site at the Gateway North Mine by building a new refuse disposal cell ("Cell 5").

5. The Cell 5 project involved excavating soils on an approximately 150-acre site adjacent to existing refuse cells and building three earthen embankment walls to close off a relatively rectangular area abutting existing cells at the Gateway North Mine. Reorganized Debtors Ex. 2 at Exhibits A-C.

6. Among other things, the Contract prohibited "[s]oil classified as SC (clayey sands) or coarser [from being] used directly for embankment construction" unless "mixed with clay soils," and required that all "[s]oil or soil mixtures used in embankment construction must have at least 17% (by weight) particles smaller than the No. 200 U.S. Sieve." Id. at Exhibit A § 4.2.

7. In addition, after placing the soil, the contractor would have to compact the soil with heavy machinery into 12-inch "lifts" that met contract specifications. See Contract at Exhibit B-2.

8. The Contract contained two principal compaction criteria. See id.

(a) The compacted soil had to have a dry density equivalent equal to at least 95% of the maximum dry density attainable by the standard proctor method. Seeid.

(b) The compacted soil had to have moisture content within +3% to -2% or +/-3%, depending on location, of that soil's optimal moisture content. Seeid.

Peabody selects DMS for the Cell 5 project

9. As part of the bidding process for the Cell 5 project, Peabody provided bidders with the April 20, 2011 Soil Borings and Laboratory Testing Slurry Cell #5 Gateway North Project - Coulterville, Illinois [Reorganized Debtors Ex. 1] (the "Holcomb Borehole Study").

10. The Holcomb Borehole Study contained the results of a variety of tests on subsoil conditions at the Cell 5 project site, including several soil borings and four proctor tests.

11. The Holcomb Borehole Study indicated, among other things: (a) the types of soil; (b) that there was sand at the site; and (c) the moisture content of the soil.

12. Other than its review of the Holcomb Borehole Study, DMS never conducted an investigation or examination of the subsoil conditions at the Cell 5 project site prior to entering into the Contract.

13. DMS submitted a bid for the Cell 5 project, and Peabody selected DMS as the winning bidder.

The Contract and its provisions

14. On April 23, 2015, Peabody and DMS entered into the Contract.

15. The Contract called for DMS to be compensated on a unit of work basis and not on a time and material basis. See Reorganized Debtors Ex. 2, Contract § 4.1 and Exhibit F.

16. The Contract defined the amount to be paid under the Contract as the Contract Sum. Id. § 4.1.

17. The units of work in the Contract were estimates, and the Contract provided a mechanism for the Contract Sum to be adjusted if fewer or more units of work were required than estimated. Id.

18. DMS, however, guaranteed the overall contract price would not exceed $5,985,937.59. See id. § 4.2.

19. Under the Contract, DMS agreed to fully complete the work by October 15, 2015. See id. § 3.3.

20. Prior to the final completion of the Cell 5 project, DMS agreed to certain interim deadlines, including substantially completing all of the work by October 1, 2015, and substantially completing other individual tasks by earlier dates. See id. § 3.2.

21. The Contract defined these and other deadlines as Contract Time. Id. § 3.4

22. Claims for adjustments to the Contract Sum and the Contract Time could only be made in limited circumstances. See generally id. at General Conditions Article 4.

23. For concealed or unknown conditions, the parties expressly agreed that certain claims were not allowed:

It is expressly agreed that no adjustment in the Contract Time or Contract Sum shall be permitted, however, in connection with a concealed or unknown condition which does not differ materially from those conditions disclosed or which reasonably should have been disclosed by [DMS's] (1) prior inspections, tests, reviews and preconstruction investigations for the Project, or (2) inspections, tests, reviews and preconstruction inspections which the [DMS] had the opportunity to make or should have performed in connection with the Project. [Peabody] assumes no responsibility for any conclusions or interpretations based upon information relating to subsurface or other Site conditions made available by [Peabody]. [Peabody] does not warrant the accuracy of any information relating to subsurface conditions contained in reports, documents and drawings made available to [DMS] and such documents are not Contract Documents. [DMS] may not rely upon the accuracy or completeness of such reports and drawings and should perform its own tests and investigations of the same. [DMS] shall make no Claim against [Peabody] for any inaccuracy of such information, reports, documents or drawings, including any Claim that the physical conditions are different than those indicated in such reports and drawings.

Id. at General Conditions § 4.2.2 (emphasis added).

24. Peabody disclaimed any representation or warranty that the information provided about the subsurface conditions "is accurate and complete." Id. at General Conditions § 1.2.5.

25. DMS "represent[ed] that it has performed its own investigation and examination of the Site and its surroundings and satisfied itself before entering into this Contract as to . . . the form and nature of the Site, including the surface and subsurface conditions based upon a reasonable investigation that Design-Builder made or had the opportunity to perform." Id. at General Conditions § 1.3.1.5.

26. To the extent a claim for adjustment to the Contract Sum and the Contract Time based upon an unforeseen or concealed condition was not waived under § 4.2.2, DMS had to promptly provide notice upon encountering such a condition to preserve its ability to later assert a claim. Section 4.2.1 of the General Conditions provides:

If conditions are encountered at the Site which are (1) subsurface or otherwise concealed physical conditions, other than Underground Facilities, which differ materially from those specifically indicated in the Contract Documents, or (2) unknown physical conditions, other than Underground Facilities, of an unusual nature, which differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, then notice by [DMS] shall be given to [Peabody] promptly before conditions are disturbed, and in no event later than three (3) days after first observance of the conditions. [Peabody] will promptly investigate such conditions. If such conditions differ materially, as provided for above and cause a material increase or decrease in the [DMS's] cost of, or time required for performance of the Work, an equitable adjustment in the Contract Sum or Contract Time, or both, shall be made, subject to the provisions and restrictions set forth herein. If [Peabody] determines that no change in the terms of the Contract is justified, [Peabody] will so notify [DMS] in writing. If [DMS] disputes the finding of [Peabody] that no change in the terms of the Contract terms is justified, [DMS] shall proceed with the Work, taking whatever steps are necessary to

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