Spradlin v. E. Coast Miner, LLC (In re Licking River Mining, LLC)
| Decision Date | 27 March 2019 |
| Docket Number | ADV. CASE NO. 15-1004,CASE NO. 14-10201 JOINTLY ADMINISTERED |
| Parties | IN RE: LICKING RIVER MINING, LLC, et al., Debtors Phaedra Spradlin, Chapter 7 Trustee of the Debtors' Estates, Plaintiff v. East Coast Miner, LLC, et al., Defendants |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Kentucky |
T. Kent Barber, Barber Law PLLC, Lexington, KY, David B. Goroff, Robert S. Bressler, Geoffrey S. Goodman, Foley & Lardner, LLP, Chicago, IL, for Plaintiffs.
John C. Goodchild, III, Morgan, Lewis & Bockius LLP, Philadelphia, PA, Jay Edward Ingle, Chacey R. Malhouitre, Mary Elisabeth Naumann, Jackson Kelly PLLC, Lexington, KY, April Min, Jackson Kelly PLLC, Morgantown, WV, for Defendants.
This matter is before the Court on Motions for Summary Judgment filed by Plaintiff Phaedra Spradlin, Chapter 7 Trustee of the Debtors' Estates ("Trustee") [ECF No. 199 ("Trustee's Motion") ],1 Defendant Keith Goggin [ECF No. 191 ("Goggin's Motion)"], and Defendant Michael Goodwin [ECF No. 192 ("Goodwin's Motion") ].2 All three Motions were fully briefed and supported by voluminous exhibits, and the Court held lengthy oral argument. This Opinion pertains only to Trustee's breach of fiduciary duty claim against Defendants (Count 7 of Trustee's First Amended Complaint [ECF No. 63] ).
This Court has jurisdiction over this adversary proceeding. 28 U.S.C. § 1334(b). Venue is proper in this District. 28 U.S.C. § 1409.
Bankruptcy courts may "hear and determine ... all core proceedings arising under title 11 ... and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). Examples of "core proceedings" are set out in 28 U.S.C. § 157(b)(2). Bankruptcy courts also may hear non-core proceedings that are related to cases under title 11 but, absent party consent, may not finally resolve them. Instead, bankruptcy courts must submit proposed findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c)(1). Alternatively, parties may consent to a bankruptcy court's entry of final orders. 28 U.S.C. § 157(c)(2).
Defendants have not consented to this Court's entry of final orders. [ECF No. 137.] In addition, Trustee's breach of fiduciary duty claim against Defendants is not a core claim. See, e.g. , Kravitz v. Summersett (In re Great Lakes Comnet, Inc.) , 586 B.R. 718, 721 (Bankr. W.D. Mich. 2018) (); see also Official Comm. of Unsec'd Creds. of Appalachian Fuels, LLC v. Energy Coal Res., Inc. (In re Appalachian Fuels, LLC) , 472 B.R. 731 (E.D. Ky. 2012) (). Thus, to the extent that the Court concludes that a summary judgment should be awarded, the Court's disposition of Count 7 will constitute non-final proposed findings of fact and conclusions of law under 28 U.S.C. § 157(c)(1).
The following discussion identifies undisputed facts that provide preliminary information to introduce the parties and some of the challenged transactions. Most of the undisputed facts upon which the Court relies to resolve the Motions are set forth in the legal analyses below.
U.S. Coal, a Delaware corporation, was formed on June 23, 2006. In January 2007, Robert Gabbard became the Chief Executive Officer of U.S. Coal and joined its Board of Directors.3 U.S. Coal had many directors over time as reflected on the following chart:
U.S. Coal Board of Directors
Name Term Began Term Ended
Collins, John Sept. 30, 2011 March 11, 2015
Douglas, Karl 2007 Oct. 1, 2009
Gabbard, Robert Jan. 2007 May 6, 2011
Goggin, Keith Oct. 1, 2009 (on or about) Feb. 3, 2014
Goodwin, Michael Oct. 1, 2009 (on or about) Oct. 23, 2012
Koutsodimitropoulos, Dennis Aug. 2008 No earlier than Dec. 9, 2014
Whitt, John Jan. 5, 2007 No earlier than bankruptcy
Shortly after its formation, U.S. Coal acquired a mining operation referred to as the Licking River Division (the "LR Division"), comprised of LR Mining, LR Resources, SMJ, and Oak Hill and located in Magoffin County, Kentucky, from John Whitt, Kenneth Whitt, John Collins, and their families (the "LR Sellers"). U.S. Coal financed the acquisition in part by issuing a total of $ 10 million in promissory notes to the LR Sellers.
In early June 2007, two investment funds (CAMOFI Master LDC and CAMHZ Master LDC (the "CAM Entities") ) purchased about $ 4.5 million of U.S. Coal's preferred stock and warrants to purchase common stock. Shortly thereafter, via a preliminary agreement dated June 19, 2007, U.S. Coal contracted to purchase another group of companies referred to as the "JAD Division" (comprised of JAD, Harlan, Fox Knob, and Sandlick) and owned by the Dean and McAfee families (the "JAD Sellers"). As of April 15, 2008, U.S. Coal acquired the stock of the JAD Division entities. JAD issued convertible notes to the JAD Sellers totaling $ 7 million (the "JAD Seller Notes"), with $ 6 million secured by a lien on the JAD Division entities' assets.
In association with the JAD Division acquisition, the CAM Entities made two loans. The first was a $ 4.8 million loan for equipment that the CAM Entities owned and sold to U.S. Coal and the JAD Division, in return for which CAMOFI Master LDC received a convertible promissory note issued by JAD (the "CAM Equipment Note"). The second was a $ 5 million bridge loan ("CAM JAD Bridge Notes") comprised of several notes issued by JAD, Fox Knob, and Sandlick to Lawrence Kaplan, Michael Miller, Futurtec, and the CAM Entities, all dated April 15, 2008. U.S. Coal guaranteed all of these Notes.
Goggin and Goodwin became equity investors in U.S. Coal in 2008 by purchasing common and preferred stock. In December 2008 and January 2009, U.S. Coal borrowed $ 4.5 million from various parties, including Goodwin, Goggin, and CAMOFI Master LDC, and issued unsecured promissory notes totaling $ 4.5 million (the "2008 Bridge Notes").
In March 2008, JMB Capital Partners Master Fund ("JMB") acquired significant outstanding debt that U.S. Coal owed to another lender. Then, in August 2008, U.S. Coal and JMB entered into a Second Amended and Restated Credit Agreement (the "JMB Credit Agreement"), as well as a separate Value Right Agreement ("VRA") made effective April 15, 2008. U.S. Coal's obligations to JMB under those agreements matured on September 30, 2009, and March 31, 2010, respectively. From late 2008 into the third quarter of 2009, U.S. Coal sought replacement financing for the JMB Credit Agreement and VRA.
Goggin and Goodwin had interest in acquiring JMB's positions. They negotiated concurrently with JMB to acquire its positions and with U.S. Coal to enter into a new credit agreement. On September 11, 2009, Goggin sent an email to Gabbard and John Wolff, U.S. Coal's respective CEO and CFO at the time, and others, with the outline of a proposed transaction:
The JMB Notes and Value Right would be acquired by a third party in a transaction similar to the one currently proposed by [another potential lender]. The terms of the combined securities would be modified to suit the new owners. Face value on the amended note and value right would be the outstanding balance as of September 30, 2009. The model from last week listed this as $ 24.01 million....
[ECF No. 204-4 at 2.] To carry out this transaction, East Coast Miner, LLC ("ECM") was formed under Delaware law on September 28, 2009. Effective September 30, 2009, ECM acquired JMB's interests under both the JMB Credit Agreement and the VRA for $ 18 million. As part of that transaction, ECM and U.S. Coal, LR Resources, Oak Hill, SMJ, JAD, Fox Knob, and Sandlick entered into the First Amendment to Second Amended and Restated Credit Agreement and Value Right Agreement (the "ECM Credit Agreement"), which refinanced the amounts previously owed to JMB and terminated the VRA.
Goggin was ECM's sole manager at all relevant times. Goggin and Goodwin were among the direct investors in and members of ECM. Director Dennis Koutsodimitropoulos was the designated representative of an entity that directly invested in ECM. In addition, several members of Debtors' management (including directors John Collins, Robert Gabbard, and John Whitt) invested in ECM indirectly via ownership interests in a separate entity, U.S. Coal Management, LLC ("USCM"), which was organized in Kentucky on September 29, 2009. On September 30, 2009, U.S. Coal transferred $ 800,000 to USCM—$ 100,000 for each of eight members of Debtors' management and/or Board. All but two also invested an additional $ 100,000 of their own funds into USCM. USCM then invested this $ 1.4 million into ECM.
At the time of the ECM transaction, the Board had four directors: John Whitt, Robert Gabbard, Karl Douglas, and Dennis Koutsodimitropoulos. During its October 1, 2009 meeting, the Board approved Douglas' resignation, leaving Gabbard, Whitt, and Koutsodimitropoulos as directors. During that same meeting, the Board approved the ECM transaction and ratified all actions taken by the directors,...
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Spradlin v. E. Coast Miner, LLC (In re Licking River Mining, LLC)
...under Count 7 based on specific challenged transactions. See generally Spradlin v. E. Coast Miner, LLC (In re Licking River Mining, LLC) , No. 15-1004, 599 B.R. 552, 2019 WL 1430213 (Bankr. E.D. Ky. March 27, 2019). For example, because the Court previously found that Trustee may not furthe......