Kaiser Steel Corp., In re

• Decision Date: 06 July 1993
• Docket Number: No. 92-1231,92-1231
• Citation: 998 F.2d 783
• Parties: In re KAISER STEEL CORPORATION, Debtor. VERMEJO PARK CORPORATION, Vermejo Minerals Corporation, Pittsburg & Midway Coal Mining Company, Appellants, v. KAISER COAL CORPORATION, Kaiser Steel Resources, Inc.; Kaiser Steel Corporation, Southwestern Public Service Company, a New Mexico corporation; Quixx Corporation, a Texas corporation, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 783

998 F.2d 783

26 Fed.R.Serv.3d 179

In re KAISER STEEL CORPORATION, Debtor VERMEJO PARK CORPORATION, Vermejo Minerals Corporation Pittsburg & Midway Coal Mining Company, Appellants, v. KAISER COAL CORPORATION, Kaiser Steel Resources, Inc. Kaiser Steel Corporation, Southwestern Public Service Company, a New Mexico corporation; Quixx Corporation, a Texas corporation Appellees.

No. 92-1231.

United States Court of Appeals, Tenth Circuit.

July 6, 1993.

Keith P. Ellison (Gregory R. Danielson of Poulson, Odell & Peterson and Glen E. Keller, Jr. of Davis, Graham & Stubbs, Denver, CO, with him on the briefs), of Baker & Botts, L.L.P., Houston, TX, for Vermejo Park Corp.

James G. di Zerega and Ray Gardner, Englewood, CO, for Pittsburg & Midway Coal Min. Co.

Harrie F. Lewis (Craig A. Christensen with him on the brief), of Lindquist, Vennum & Christensen, Denver, CO, for Kaiser Steel Corp.

Marvin W. Jones of Peterson, Farris, Doores & Jones, Amarillo, TX, for Southwestern Public Service Co. and Quixx Corp.

Before TACHA and BARRETT, Circuit Judges, and BROWN ^*, District Judge.

BARRETT, Senior Circuit Judge.

Appellants Vermejo Park Corporation and Vermejo Minerals Corporation (Vermejo) and the Pittsburg & Midway Coal Mining Co. (P & M) appeal from an order and judgment of the district court affirming the bankruptcy court and dismissing their appeals.

In February, 1987, Kaiser Steel Corporation and Kaiser Coal Corporation, hereinafter collectively referred to as Kaiser, filed reorganization petitions under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., in the United States Bankruptcy Court for the District of Colorado. In August, 1987, Kaiser initiated an Adversary Proceeding against Southwestern Public Service Company (SPS) and Quixx, SPS' wholly owned subsidiary, challenging the validity of a royalty claim by Quixx on Kaiser Coal's New Mexico coal mining property.

In January, 1989, Kaiser Coal filed an application for approval of the sale of its New Mexico coal mining property, whereby Kaiser Coal would convey its coal interest to P & M and its oil and gas interest and surface estate to Vermejo via two acquisition agreements. The Kaiser Coal/P & M Acquisition Agreement contained several provisions pertinent in this case:

Section 2.01, Sale of Assets, provided:

In reliance upon the representations and warranties of Buyer contained herein and subject to the terms and conditions set forth herein, at the Closing Seller shall sell to Buyer the Assets for the consideration set forth in Section 2.03.

(Appellees' Supplemental Appendix at 000086).

Section 3.01, Excluded Assets, provided:

Schedules 3.01 and 8.03 set forth any Assets that shall be retained by the Seller and not conveyed to Buyer pursuant to this Agreement.

* * * * * *

SCHEDULE 3.01

Any pending or threatened litigation in which Seller has an interest, excluding the action against Southwestern Public Service Co. and Quixx Corp. set forth in Section 2.05 of the Agreement.

(Id. at 000088-89).

Section 2.05, Quixx Corporation Royalty, provided:

Quixx ... claims a royalty interest in all minerals produced from the Real Property. Seller maintains that said royalty interest is invalid and has instituted legal proceedings against Quixx and Southwestern [SPS] to set aside said royalty interest. If Seller succeeds in extinguishing, on or before the second anniversary of the Closing Date all royalty interests claimed by Quixx and/or Southwestern to the minerals in the Real Property, Buyer shall, within thirty (30) days of a final non-appealable judgment or settlement extinguishing said royalty interest, pay to Seller or Seller's designee the sum of One Million Dollars ($1,000,000.00). In addition to the above, if Seller succeeds in extinguishing the above described royalty at any time, all royalty payments placed in escrow prior to the Closing Date shall be the property of Seller, and all royalty payments placed in escrow after the Closing Date shall be the property of Buyer.

(Id. at 000087).

SPS appeared in opposition at the hearing on Kaiser Coal's application for approval of the proposed sales to Vermejo and P & M and submitted its own bid for the property. At the conclusion of the hearing, the bankruptcy court approved the sale of the property to Vermejo and P & M for $60.5 million. The sale closed on February 1, 1989.

Kaiser and SPS subsequently engaged in negotiations to settle the Adversary Proceeding. On May 8, 1990, Kaiser filed an application for approval of a settlement agreement with SPS wherein Kaiser and SPS agreed that: the New Mexico coal mining property would continue to be subject to the Quixx royalty; SPS would pay $1,600,000.00 to the Kaiser bankruptcy estate; and Kaiser would dismiss the Adversary Proceeding with prejudice.

On May 31, 1990, Vermejo and P & M filed an objection to the proposed settlement agreement. Before the bankruptcy court ruled on their objection, Vermejo and P & M filed a motion to intervene in the Adversary Proceeding. On August 28, 1990, the bankruptcy court entered an order denying Vermejo's and P & M's objection, finding that they lacked standing to object to the settlement agreement:

The Objectors are not before this Court because of any asserted interest in Coal's bankruptcy estate. In fact, in none of their arguments do they suggest that the settlement will not benefit the Debtors' estates. The Objectors are before the Court only for the purpose of their self interest. They are not presently a creditor, but will only have an opportunity to arguably present a claim if the settlement is approved and the adversary proceeding is dismissed. Like the disgruntled purchaser in Karpe, these Objectors are not parties having an interest in Coal's estate and they are without standing in Coal's Chapter 11 proceeding to challenge the propriety of the settlement. In re Karpe, 84 B.R. 926 (Bankr.M.D.Pa.1988).

(Appellants' Appendix at 121).

On October 4, 1990, a hearing was conducted on the motion to intervene in the Adversary Proceeding. On October 29, 1990, the bankruptcy court denied Vermejo's motion to intervene, finding that Vermejo's Acquisition Agreement did not mention the Quixx royalty litigation. In the same order, the bankruptcy court found an ambiguity relative to P & M's ownership interest in the Quixx royalty litigation which had to be resolved in order to determine P & M's right to intervene as a party in interest in the Adversary Proceeding:

The contractual provisions leave the court with a host of unanswered questions. If the concept was that all rights in the Quixx litigation were being transferred to P & M, with Coal [Kaiser Coal] to continue the suit solely for P & M's benefit, then the agreement is missing the litany of provisions one would ordinarily expect to find such as undertakings by Coal to prosecute the case diligently and in good faith, rights retained by P & M to supervise, notice provisions, explicit provisions barring Coal from dismissing or settling the litigation absent P & M's approval, etc. On the other hand, if the intent of the agreement was to have all rights in the litigation remain with Coal, subject only to P & M's right to, in effect, buy the Royalty Interests from Coal for One Million Dollars if Coal succeeded, why was this restricted to only a two year period?

(Id. at 138).

Thereafter, the court set P & M's motion to intervene for hearing. During the evidentiary hearing, Donald F. Gottron, P & M's Vice-President of Engineering and Resource Development, testified:

Q. (Counsel for P & M): Mr. Gottron, would it be accurate to describe your role in both Kaiser transactions as the lead businessman on behalf of P & M?

A. I think that's correct.

Q. Now, in the course of preparing bids and entering into the transactions, did you make any assumptions regarding the Quixx royalty, any economic analysis of Kaiser I and II?

A. In both cases, we assumed that the royalty would have to be paid. We felt that we weren't able to predict for sure that the litigation would be successfully resolved in our favor and, consequently, we felt it was only prudent to put the value of those royalties as a cost against the mine in calculating its value for purposes of a bid, and that's what we did.

* * * * * *

Q. Okay. Mr. Gottron, you mentioned there that our bid assumed that the royalty is valid; is that correct?

A. Yes.

Q. And what did you mean by that, Mr. Gottron?

A. Well, the same thing that I answered to your question a while ago; we couldn't be sure of the outcome of the litigation and, consequently, we assumed that we were going to pay that royalty when we did the economics leading to this bid.

(Id. at 150-51).

During the same hearing, John Bachmann, P & M's lead counsel in relation to its purchase of the Kaiser Coal coal mining property and the person who drafted the Kaiser/Coal/P & M Acquisition Agreement "for the most part and negotiated it with representatives of Kaiser," (id. at 162), testified:

Q. (Counsel for P & M): Did Kaiser have any options, or did you intend for Kaiser to have any options with respect to the Quixx litigation under Section 2.05?

A. 2.05 is an incentive package, and the purpose of it was to get Kaiser to go forward with the action. The opportunities they had, as far as I was concerned, was, one, prosecute the litigation.... Secondly, our chief concern in that context was to get rid of the royalty. That was an asset; we wanted it free and clear.... So the idea was to get rid of it. They could have gotten rid of it then by settling, paid off part of the million, and bought out of it, but we wanted the royalty gone.

The third option they could have had if they didn't want to get into the million dollars or whatever, just walk away from it, leave the incentive and go home and say, no, I'm sorry, we don't want to be involved. Finally, and I didn't think about it at the time, but I suppose if they would have come back to us with some...