In re Sterling Mining Company, Case No. 09-20178-TLM (Bankr.Idaho 5/15/2009), Case No. 09-20178-TLM.
| Decision Date | 15 May 2009 |
| Docket Number | Case No. 09-20178-TLM. |
| Parties | IN RE STERLING MINING COMPANY, Chapter 11, Debtor in Possession. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho |
On March 3, 2009, Sterling Mining Company filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code.1
Two matters are before the Court for decision following hearing on May 5 and 6, 2009: the motion of the DIP for approval of assumption of lease under § 365 of the Code2 and the motion of the DIP for approval of post-petition financing under § 364. See Doc. Nos. 43, 67. The relief sought by the DIP is opposed by Sunshine Precious Metals, Inc. ("SPMI").
This Decision constitutes the Court's findings of fact and conclusions of law.3
In 2003, Sterling4 entered into a 15 year lease agreement with SPMI for real property, mineral rights, improvements and related assets generally known as the Sunshine Mine and Mill in Shoshone County, Idaho (the "Sunshine Mine"). Ex. 100 ("Lease"). Under the Lease, Sterling enjoyed the possession and use of the Sunshine Mine — including the right to all the ore, concentrates, metals and other minerals mined and produced from the property — in return for payment of monthly rental of $10,000 and performance of other terms and conditions as set out in the parties' agreement.5
From and after 2003, Sterling made capital investments on the leasehold, including replacement of inoperable equipment. While there are disputes as to the precise amount of funds invested, and as to whether certain of the items Sterling placed in the Sunshine Mine constituted equipment, machinery, fixtures or improvements, the investment was substantial.6
The Lease also contained an "option" under which Sterling could purchase the property from SPMI for $3,000,000 to $5,000,000 depending on the spot price for silver at the time of the exercise of the option. Ex. 100 at § 20.3.
By the fall of 2008, Sterling's mining had ceased and its operations were limited to keeping the Sunshine Mine in a "ready" condition, so that it could be brought back into production. Keeping the mine in such an "operation ready" or potential "turn-key" condition, and protecting the mine infrastructure and equipment from being damaged by water, required ongoing ventilation and other maintenance. It was not inexpensive; some testimony placed the expense, just to maintain the mine in this condition, at as much as $250,000 per month.
Sterling had run into other difficulties. At least two of Sterling's creditors had placed mechanics' liens on the property. This was a breach of a covenant of the Lease. See Ex. 100 at § 13.3, § 17.1(b). SPMI issued notices of Sterling's default based on these liens, and for other alleged violations of the Lease's conditions and covenants.
In response to SPMI's declaration of defaults, Sterling countered with a demand for mediation in the fall of 2008 as provided for in the Lease. Ex. 100 at § 17.4. That mediation was unsuccessful.
Sterling's financial condition in 2008 went from poor to worse. Financing even the limited amount of required maintenance operations became increasingly difficult. By the end of that year, Sterling had discussions with John Ryan of U.S. Silver Corporation concerning these financial difficulties, and about resolution of disputes between Sterling and SPMI and Minco Silver.
By mid-January, 2009, Ryan had joined Sterling's board and become Sterling's president and CEO.7 His tenure was brief; Ryan resigned just prior to Sterling's bankruptcy on March 3. He is presently CEO of Presidium Energy, and testified that he is working with a group that might be interested in acquiring Sterling.8
The same day that Ryan joined Sterling's board of directors, Andrew Grundman and David Greenway also joined its board.9
Ryan testified that discussions resulted in a letter of interest regarding a possible joint venture of Sterling and SNS Silver, but that conditions to any such agreement would include convincing SPMI to waive the extant Sterling defaults of the Sterling-SPMI Lease, and required obtaining the consent of another company, Minco Silver.10
Grundman testified that he was the general manager of SPMI from 2002 through 2005, and that he was involved in the negotiation of the 2003 SPMI-Sterling Lease. A Sterling director, Roger Van Voorhees, approached Grundman in September, 2008, in an effort to resolve SPMI's assertions of Sterling's Lease defaults. Their discussions over the course of a week produced no resolution.11
Grundman, however, was later approached to join Sterling's board along with Ryan and Greenway. The reason, he stated, was that all three individuals had business relationships with SPMI's principal officer and owner, Robert Mori, and a knowledge of and a history with the Sunshine Mine.
Grundman indicated his first meeting as a Sterling director occurred on January 19, 2009.12 He, Greenway and Ryan joined Sterling directors Roger Van Voorhees, Ray DeMotte, Kevin Shiell, and Carol Stephan in that meeting. Sterling's interim president and CEO Ken Berscht participated by telephone.
Berscht had hired counsel (Tom Vasseur) to represent Sterling in its disputes with SPMI. Grundman indicated that, when the Sterling board discussed the SPMI issues with its counsel, he would excuse himself because of conflicts. Grundman otherwise participated in the meetings, discussions and decisions.
While numerous conversations took place among this cadre of Silver Valley mining professionals now sitting on Sterling's board, two of what Grundman said were nine board meetings in the first two months of 2009 dominated the testimony in the hearings before this Court.
On Tuesday, February 17, 2009, a board meeting of the Sterling directors occurred via a telephone conference. The minutes of that meeting, Ex. 206, reflect an update on Sterling's dismal financial outlook, including prospective termination of utility service.13 The board also discussed the need to terminate employees at the mine, as there were no funds to pay them. And the board discussed "the ongoing talks with SPMI to transfer back the lease as Sterling has no more money to operate the mine." Ex. 206 at 2. The minutes note:
Management requested the authority and ability to negotiate a final operating agreement with SPMI, SNS and Sterling so that operating control of the Sunshine Mine can be transferred in an orderly fashion to retain the current mine value and try to retain some value to Sterling shareholders.
Id. A motion was made and passed that would allow Sterling's management, including directors Grundman and Greenway, "to negotiate a final transition and operating agreement between SPMI, SNS and Sterling, subject to final approval of the Board." Id.14 The minutes also reflected that a bankruptcy proposal would be presented and discussed at a meeting two days later.15
On the following day, Wednesday, February 18, 2009, in an Idaho state court action brought by Minco Silver, the district court issued a temporary restraining order and order to show cause. Ex. 103; Ex. 203 (same).16 By its terms, this TRO:
ORDERED that Defendant Sterling Mining Company and its officers, directors, agents and employees are hereby temporarily restrained from removing, selling, destroying, disposing, or concealing . . . all assets of the business known as Sterling Mining Company and any of its subsidiaries, including, but not limited to, the sale, encumbering, transferring, or otherwise disposing of any interest in real property, leasehold rights, personal property, mining claims, bank accounts, stock and equity interests, and all other personal and real property.
Ex. 103 at 2-3. The TRO was issued at 4:00 p.m. on February 18.17
The TRO required provision of security by Minco Silver in the amount of $25,000 in the form of cash or surety bond. Id. at 3 ). The parties stipulated, at the hearing before this Court on May 6, that the bond was acquired on February 20.
Grundman testified that a telephone conference was held on February 18 in which he participated along with Mori, Greenway, Ryan and DeMotte. He stated that SPMI was willing to consider taking back the Sunshine Mine but only if Sterling would "walk away." He said there was no indication by SPMI of its intention that Sterling could potentially retain or later reacquire rights.
On February 19, 2009, another Sterling Board meeting occurred. Ex. 207.18 During this meeting, the Board discussed Sterling's deteriorating financial condition, and its inability to afford further payments on utilities, insurance, payroll and payroll taxes, and the Lease. Id.19 The minutes state:
Discussion was made regarding Sterling vacating the mine as Sterling does not have money to continue operating the mine. Members were told that Sunshine Precious Metals, Inc. ("SPMI") will likely be inspecting the premises to determine the state of the Sunshine Mine over the next few weeks.
Motion forwarded by J. Ryan to pass resolution to for [sic>] the officers to take all necessary steps to vacate the premises immediately and release the mine back into SPMI hands with final documentation to be completed on 3:00pm next Tuesday, February 24th. K. Shiell seconded, C. Stephan agreed, R. Vanvoorhees agreed, R. De Motte agreed, and A. Grundman abstained. UPON MOTION DULY MADE, SECONDED, FIVE IN FAVOR, ONE ABSTAINED AND NONE OPPOSED, motion carried. Discussion was made on the potential transaction with Sterling and SNS. Management will continue discussions with SNS to work out a transaction. Transaction details will be forwarded to the directors upon draft completion. Id.20
Consistent with the resolution of the Sterling board for its officers to commence this process, on February 19, 2009, Kenneth Rux, Sterling's CFO, met with Ed Short, general manager21 for SPMI,...
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