Rhino Energy LLC v. C.O.P. Coal Dev. Co. (In re C.W. Mining Co.)
| Decision Date | 15 October 2012 |
| Docket Number | Case No. 2:12-CV-418 TS,Bankruptcy No. 08-20105 |
| Parties | In re: C.W. MINING COMPANY, Debtor. RHINO ENERGY LLC and CASTLE VALLEY MINING LLC, Plaintiffs, v. C.O.P. COAL DEVELOPMENT COMPANY and ANR COMPANY, INC., Defendants. |
| Court | U.S. District Court — District of Utah |
This matter is before the Court on Defendants C.O.P. Coal Development Company ("COP Coal") and ANR Company, Inc.'s ("ANR") Joint Motion to Withdraw the Reference of Adversary Proceeding 11-2250.1 Also before the Court is Plaintiffs Rhino Energy LLC andCastle Valley Mining LLC's Motion for Leave to File Surreply.2 For the reasons discussed more fully below, the Court will deny Defendants' Motion without prejudice and grant Plaintiffs' Motion.
This dispute arises out of the involuntary Chapter 7 bankruptcy proceedings of C.W. Mining Company ("CWM"). Before entering bankruptcy, CWM was in the business of mining coal. CWM's primary asset was an underground coal mine located in Emery County, Utah—the Bear Canyon mine. The Bear Canyon mine is located on property owned by Defendant COP Coal.
In March of 1997, COP Coal and CWM entered into a coal mining agreement (the "COP Agreement"). Pursuant to the COP Agreement, COP Coal granted CWM the right to "operate and control" the Bear Canyon mine for purposes reasonably incidental to mining. In September of 1999, ANR also entered into a Coal Operating Agreement (the "ANR Agreement") with CWM. Pursuant to the ANR Agreement, ANR gave CWM the right to mine coal on ANR's property located adjacent to the Bear Canyon mine.
Section 5 of both the ANR and COP Agreements contain the following "Continuous Operation" and "Maximum Economic Recovery" clause:
Operator (CWM) shall diligently and continuously operate the subject property for the term hereof unless the operation thereof prevented by strike, car shortages, government regulation, any act of God, or similar cause beyond the control of Operator, or unless all of the merchantable coal in said premises is sooner extracted, mined and removed. Operator shall conduct all operations hereunder ina good and minerlike manner and in a manner which will result in the ultimate maximum economic recovery of coal from the property.3
During the underlying bankruptcy proceedings the bankruptcy court made the following statement regarding this clause:
At the heart of the dispute between the parties is the amount of discretion granted to the landlords, COP [Coal], and ANR, to determine how and when the operator must operate in order to fulfill its requirements under the operating agreements to "diligently and continuously operate" in a fashion that will realize the "ultimate maximum recovery" or, in other words, whether the landlords have discretion to impose their own standards for the safe, efficient, and non-wasteful operation of the mine.4
Additionally, COP Coal and ANR previously argued before the bankruptcy court that the "Resource Recovery and Protection Plan . . . submitted by the Debtor to the BLM in 2006 (the '2006 R2P2') and subsequently approved by the BLM amount in substance to an amendment of the COP Mine Operating Agreement or otherwise somehow have become unalterable obligations of the Operator under that agreement."5 "COP [Coal] contend[ed] that [Plaintiffs'] decision not to use longwall mining equipment to extract coal from the Tank Seam renders it impossible for [Plaintiffs] to mine out the entire reserves . . . within the remaining part of the 40-year mine-out period."6
Upon consideration of these issues, the bankruptcy court found that "[t]he uncontested evidence is that the BLM determines whether an operator is in compliance with the 'continuedoperation' and 'maximum economic recovery' requirements contained in the Code of Federal Regulations."7 The bankruptcy court further noted that:
The stipulations imposed by the BLM and accepted by the Trustee . . . require in part that '[p]rior to commencement of mining of the Bear Canyon LMU, an update to the 2006 R2P2 shall be required . . . . Neither COP [Coal] nor ANR has any veto power or other right of control as to the contents or approval of such plans.8
Based on these findings, the bankruptcy court held that the Continuous Operations and Maximum Economic Recovery clause required only that CWM comply with state and local law and mine in accordance with the continuous operation standards required by the BLM. The continuous operation standards of the BLM require that CWM mine at least 1% of the estimated recoverable coal reserves each year on a three-year rolling average. Under this standard, the bankruptcy court found that CWM was in full compliance with the obligations imposed on it by the relevant agreements.
Plaintiffs then purchased the majority of CWM's mining assets—including the Bear Canyon mine—for $15 million. On August 4, 2010, the bankruptcy court entered a sale order (the "Sale Order") approving the sale of CWM's mining assets to Plaintiffs. As part of the Sale Order, the bankruptcy court specifically adopted and incorporated its findings of fact and conclusions of law relating to the Continuous Operation and Maximum Economic Recovery clause.9 The Sale Order closed on August 25, 2010.
On January 7, 2011, Defendants issued default notices to Plaintiffs to terminate the COP and ANR Agreements. Receipt of the default notices prompted Plaintiffs to file the adversary proceeding which Defendants now seek to withdraw. Defendants subsequently withdrew their original default notices on the eve of a preliminary injunction hearing before the bankruptcy court. Defendants issued additional default notices on January 26, 2012.
In their default notices, Defendants provide Plaintiffs sixty-days notice of default under the COP and ANR Agreements. Defendants assert that Plaintiffs defaulted under the relevant agreements by not seeking COP Coal and ANR's approval before obtaining an amended R2P2 from the BLM. Defendants' principal objection to the amended R2P2 involves: (1) the time frame for removal of coal from the Bear Canyon mine—the amended R2P2 contemplates removal of coal after the termination of the COP Coal and ANR Agreements and will thereby limit the amount of royalties owed to Defendants during the term of the lease; and (2) the method of coal removal—the amended R2P2 approves the use of the "continuous mining method" in lieu of the "longwall method" preferred by COP Coal and ANR.
Defendants' notices also contain an exhaustive list of alleged violations of federal regulations and state and local law allegedly committed by Plaintiffs in the course of mining the Bear Canyon mine. Lastly, Defendants allege that Plaintiffs have failed to pay royalties on all coal extracted and removed from the premises of the Bear Canyon mine. Defendants assert that Plaintiffs' violations and submission of the amended R2P2 constitute a breach of the COP and ANR Agreements. Defendants close their default notices with the following ultimatum:
If any of the defaults identified above continue for a period of 60 days after service of this Notice, [Defendants] will immediately terminate the OperatingAgreement, together with all of [Plaintiffs'] rights thereunder, and may at its sole option elect to take immediate possession of the property as permitted under the Operating Agreement[s].10
Plaintiffs filed their Second Amended Complaint in the adversary proceeding on February 24, 2012.11 In their Second Amended Complaint, Plaintiffs bring the following causes of action: (1) declaratory judgment as to the royalties owed under the COP Agreement; (2) declaratory judgment as to the royalties owed under the ANR Agreement; (3) declaratory judgment as to alleged default for amending and mining under the R2P2 plan; (4) declaratory judgment as to notice of default of continuous operations clause and other miscellaneous alleged defaults; (5) issuance of an injunction against COP Coal and ANR from issuing notice of termination or forfeiture; and (6) declaratory judgment against ANR and COP Coal as to claims for damages based on R2P2 plans.
On April 9, 2012, COP Coal and ANR filed their Answer to Plaintiffs' Second Amended Complaint and Counterclaims.12 Based on the alleged violations contained in their default notices, Defendants assert the following counterclaims: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) alternative claim of unjust enrichment; (4) conversion; (5) negligence; (6) trespass; and (7) intentional interference with economic relations. On April 30, 2012, Defendants filed the instant Motion to Withdraw.
Twenty-eight U.S.C. § 157(d) provides that this Court "may withdraw, in whole or in part, any case or proceeding referred under this section . . . on timely motion of any party, for cause shown." The local rules for the District of Utah provide a clear deadline for a "timely" filed motion. Under DUCivR 83-7.4(c)(2) "an original defendant, intervenor, or an added party, seeking to withdraw the reference of an adversary proceeding, must file a Withdrawal Motion within twenty-one (21) days after entering an appearance in the adversary proceeding."
Defendants entered their original appearance in the underlying adversary proceeding more than a year before filing their Motion to Withdraw. Thus, under the clear language of the local rule, Defendants' Motion is untimely. Nevertheless, Defendants argue that this Court should consider their Motion timely filed because they filed their Motion to Withdraw within twenty-one days of filing their Counterclaims against Plaintiffs. According to Defendants, their action in filing for withdrawal after filing counterclaims fills in the "hole" in the Rule. The Court is not persuaded that such a "hole" exists in the local rule.
The local rule unambiguously provides that an...
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