Murray Oak Grove Coal, LLC v. Bay Point Capital Partners Ii, LP (In re Murray Metallurgical Coal Holdings, LLC)

• Decision Date: 08 August 2020
• Docket Number: Adv. Pro. No. 20-1008,Case No. 20-10390 (Jointly Administered)
• Citation: 618 B.R. 220
• Parties: IN RE: MURRAY METALLURGICAL COAL HOLDINGS, LLC, et al., Debtors. Murray Oak Grove Coal, LLC, Plaintiff and Counter-Defendant, v. Bay Point Capital Partners II, LP, Defendant and Counter-Claimant
• Court: U.S. Bankruptcy Court — Southern District of Ohio

618 B.R. 220

IN RE: MURRAY METALLURGICAL COAL HOLDINGS, LLC, et al., Debtors.Murray Oak Grove Coal, LLC, Plaintiff and Counter-Defendant,

v.Bay Point Capital Partners II, LP, Defendant and Counter-Claimant

Case No. 20-10390 (Jointly Administered)

Adv. Pro. No. 20-1008

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

Signed August 8, 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 Plaintiff and Counter-Defendant.

John Christopher Allerding, Alan R. Lepene, Thompson Hine LLP, Cleveland, OH, for Defendant and Counter-Claimant.

OPINION AND ORDER ON COMPLAINT AND COUNTERCLAIM

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

I. Introduction

This adversary proceeding arises in the Chapter 11 cases of Murray Metallurgical Coal Holdings, LLC and its affiliated debtors and debtors in possession (collectively, the "Debtors"). One of the Debtors, Murray Oak Grove Coal, LLC ("Murray Oak Grove"), seeks to recharacterize its equipment lease with Bay Point Capital Partners II, LP ("Bay Point") as a disguised security agreement. Conceding that the lease is indeed a disguised security agreement, Bay Point requests a declaratory judgment that it has a first priority, properly perfected security interest in the collateral, which is comprised of certain longwall shields and their affixed electronic controls (collectively, the "Collateral") located at the mine operated by Murray Oak Grove in Jefferson County, Alabama (the "Oak Grove Mine"). Murray Oak Grove, in turn, concedes this point, stipulating that Bay Point does in fact hold a first priority, properly perfected security interest in the Collateral.

With those preliminaries out of the way, the parties turned to the main event—litigating the amount of Bay Point's allowed secured claim under § 506(a) of the Bankruptcy Code. Under § 506(a) the allowed amount of a creditor's secured claim is equal to the value of the property securing the claim. Thus, the outcome of the parties' dispute hinges on a determination of the value of the Collateral. Bay Point asserts that the Collateral's value is at least $13,347,231.80, plus the amount of any accrued interest, late charges, and reasonable costs, expenses and legal fees. According to Bay Point, the Court's valuation of the Collateral must be based on a replacement-value standard—that is, the amount that Murray Oak Grove would need to pay to replace the Collateral with comparable property. For its part, Murray Oak Grove contends that the Collateral should be valued at the amount it could obtain for the Collateral if it were removed from the Oak Grove Mine and sold to a third party. And it also contends that the valuation should reflect the possibility that the purchaser of the Oak Grove Mine, Hatfield Metallurgical Company ("Hatfield"), might decide to stop using the Collateral at some point after confirmation of the Debtors' Chapter 11 plan (the "Plan"). On the basis of these considerations, Murray Oak Grove urges the Court to fix the value of the Collateral at $2,985,000.

Because the Collateral is not being surrendered to Bay Point, the Court concludes that Supreme Court precedent requires application of the replacement-value standard. Under this standard, the price for which Murray Oak Grove could sell the Collateral if it were removed from the Oak Grove Mine is legally irrelevant. Nor is it legally relevant whether Hatfield in the future opts not to use the Collateral for its full remaining useful life. Applying the replacement-value standard, and for the reasons explained below, the Court concludes that the value of the Collateral is $12,682,933.

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). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (K) & (O). Because a dispute over the valuation of collateral for purposes of plan confirmation "stems from the bankruptcy itself," the Court also has the constitutional authority to enter a final judgment in this adversary proceeding. Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In addition, in Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, ––––, 135 S. Ct. 1932, 1942, 191 L.Ed.2d 911 (2015) the Supreme Court held "that litigants may validly consent to adjudication by bankruptcy courts," which Murray Oak Grove and Bay Point have done here, Am. Joint Prelim. Pretrial Statement (Doc. 9) at 2.

III. Procedural History

Murray Metallurgical Coal Holdings, LLC ("Met Holdings") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 11, 2020, followed by Murray Oak Grove and the other Debtors on February 12, 2020 (the "Petition Date"). In the complaint commencing this adversary proceeding, Murray Oak Grove seeks a declaratory judgment that an Equipment Lease Agreement (the "Agreement") is not a true lease but rather a disguised financing arrangement. Compl. (Doc. 1) at 8–9. Bay Point does not contest this point. Am. Joint Prelim. Pretrial Statement (Doc. 9) at 2. Murray Oak Grove also requests a declaratory judgment under § 506(c) of the Bankruptcy Code that the amount of Bay Point's allowed secured claim, if any, should be reduced by the amount of the reasonable and necessary costs and expenses that Murray Oak Grove has incurred and will incur to preserve, maintain and dispose of the Collateral. Compl. at 9–10. Bay Point answered, denying that Murray Oak Grove has any right to surcharge Bay Point's interest in the Collateral. Doc. 4 at 3. Bay Point also asserted a counterclaim in which it seeks a judgment declaring that it has a first priority, properly perfected security interest in the Collateral and an allowed secured claim in the amount of $13,347,231.80, plus accrued interest, late charges, reasonable costs and expenses and legal fees. Id. at 13. The Debtors answered Bay Point's counterclaim by contending, among other things, that Bay Point's secured claim is limited to the value of Bay Point's interest in the longwall shields that comprise part of the Collateral, Doc. 6 at 7. As already stated, the Debtors now concede that the Collateral includes not only the shields but their affixed electronic controls as well, yet they contend that the Collateral's value is $2,985,000—roughly 75 percent less than the allowed secured claim amount asserted by Bay Point.

After the parties filed an amended joint preliminary pretrial statement (Doc. 9), the Court entered an agreed order setting trial dates and establishing procedures under which the trial would be conducted virtually in light of the emergency caused by COVID-19 (Doc. 10). The trial was held over the course of three days, concluding on July 2, 2020. The transcript of the first day of the trial is docketed at Doc. 24 ("Transcript I"), the transcript of the second day at Doc. 26 ("Transcript II"), and the transcript of the third at Doc. 28 ("Transcript III").

The exhibits that were admitted into evidence during the trial are: Joint Exhibits VI through VII, XIV through XX, XXV, XXVIII, XXXII and XXXIII; Bay Point Exhibits F, R, S, V, W, FF, SSS and YYY; and Murray Oak Grove Exhibits 18, 22 through 25, 31 through 33, and 35. Tr. III at 88, 144–45. In addition, Murray Oak Grove filed a motion (Doc. 17) to admit Joint Exhibit X and Bay Point a motion (Doc. 18) to admit Joint Exhibit VIII, both of which are granted. During the trial, the Court heard from six witnesses—James Turner, Eric Koontz, Adam Stump, John Startin, Mark Bartkoski, and Ronald Lewis—whose relevant testimony is summarized below in the Court's findings of fact.

The parties submitted a joint stipulation of facts after the trial (the "Stipulations") (Doc. 20). The parties agreed in the Stipulations, among other things, that the Agreement constitutes a secured financing arrangement rather than a true lease and that Bay Point perfected a first priority security interest in all of the Collateral, both the longwall shields and their electronic controls. Stips. ¶¶ 2–3. At the suggestion of the parties, the Court agreed at the end of the trial to defer a ruling on the issue of Murray Oak Grove's right to surcharge the Collateral under § 506(c). Tr. III at 141. In light of the parties' stipulations and the deferral of the Court's ruling on the § 506(c) issue, the only issue before the Court in this opinion is the value of the Collateral.

IV. Findings of Fact

Based on the parties' stipulations and the evidence adduced at trial, including the documentary evidence and the testimony presented, and having considered the demeanor and credibility of the witnesses, the Court makes the findings of fact set forth below.

A. Murray Oak Grove, Its Longwall Mining Operation, and the Secured Financing with Bay Point

Murray Oak Grove is owned by Murray Alabama Coal, LLC, which in turned is owned by Met Holdings, an entity formed for the purpose of acquiring certain assets from Mission Coal Company, LLC and its affiliated Chapter 11 debtors ("Mission") in April 2019. Ex. VIII (Disclosure Statement for Second Amended Joint Chapter 11 Plan of Murray Metallurgical Coal Holdings ("Disclosure Statement")) at 20. One of the assets that the Debtors acquired from Mission is the Oak Grove Mine in Alabama (the "Oak Grove Mine"). Id. at 21; Tr. I at 155. The Debtors are proposing to sell the Oak Grove Mine to Hatfield, the winning bidder for substantially all the assets of Murray Oak Grove. Disclosure Statement at 2–4, 41–42; Tr. I at 90.

The Oak Grove Mine is an underground longwall mining operation. Tr. I at 41–42. A longwall mine is developed by digging two parallel tunnels through the surface of the earth. The parallel tunnels, which are the entry and exit points for the mine, are known as the "headgate" and "tailgate" sides. They are connected...