Spradlin v. E. Coast Miner, LLC (In re Licking River Mining, LLC)

• Decision Date: 19 July 2019
• Docket Number: CASE NO. 14-10201 JOINTLY ADMINISTERED,ADV. PROC. NO. 15-1004
• Citation: 603 B.R. 336
• 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: U.S. Bankruptcy Court — Eastern District of Kentucky

603 B.R. 336

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

CASE NO. 14-10201 JOINTLY ADMINISTERED

ADV. PROC. NO. 15-1004

United States Bankruptcy Court, E.D. Kentucky, Ashland, London, and Lexington Divisions.

Filed July 19, 2019

T. Kent Barber, Barber Law PLLC, Lexington, KY, Robert S. Bressler, Geoffrey S. Goodman, David B. Goroff, Foley & Lardner LLP, Chicago, IL, for Plaintiff.

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.

AMENDED MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT

Tracey N. Wise, Bankruptcy Judge

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 and Defendants East Coast Miner, LLC ("ECM") [ECF No. 189 ("ECM's Motion") ], East Coast Miner II, LLC ("ECM II") [ECF No. 190 ("ECM II's Motion") ], Keith Goggin [ECF No. 191 ("Goggin's Motion") ] and Michael Goodwin [ECF No. 192 ("Goodwin's Motion") ].² The Motions were fully briefed and supported by voluminous exhibits. The Court heard oral argument on October 18 and November 8, 2018, and thereafter ordered supplemental briefing. This Amended Memorandum Opinion and Order pertains to the Motions seeking summary judgment on Trustee's fraudulent transfer claims (Counts 5, 6, 8, 9, 10, 13, 14, 15, and 17), preferential transfer claim (Count 18), recharacterization claim (Count 12), and equitable subordination claims (Counts 11 and 16) in the First Amended Complaint [ECF No. 63 ("Amended Complaint") ].³

JURISDICTION

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, they cannot finally resolve them and must submit proposed findings of facts and conclusions of law to the district court. 28 U.S.C. § 157(c)(1)-(2). The parties agree that all claims addressed herein are core proceedings under 28 U.S.C. § 157(b). The parties also have consented to this Court's entry of final orders on those claims.

PERTINENT UNDISPUTED FACTS

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.

1. General Background.

U.S. Coal, a Delaware corporation, was formed on June 23, 2006. Goggin and Goodwin were both directors of U.S. Coal. Their terms on U.S. Coal's Board of Directors ("Board") began on or about October 1, 2009. Goodwin's term ended on October 23, 2012, and Goggin's term ended on February 3, 2014.

Shortly after its formation, U.S. Coal acquired a mining operation referred to as the "Licking River Division" from John Whitt, Kenneth Whitt, John Collins ("Collins"), and their families (collectively, "LR Sellers"). Located in Magoffin County, Kentucky, the Licking River Division is comprised of LR Mining, LR Resources, SMJ, and Oak Hill (collectively, "LR Debtors"). U.S. Coal financed the acquisition in part by issuing promissory notes totaling $ 10 million to the LR Sellers.

In early June 2007, two investment funds, CAMOFI Master LDC and CAMHZN Master LDC (together, 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" and owned by the Dean and McAfee families (together, the "JAD Sellers"). The JAD Division includes JAD, Harlan, Fox Knob, and Sandlick (collectively, "JAD Debtors"). As of April 15, 2008, U.S. Coal acquired the stock of the JAD Debtors. JAD issued convertible notes to the JAD Sellers totaling $ 7 million ("JAD Seller Notes"), with $ 6 million secured by a lien on the JAD Debtors' assets.

In connection with the JAD Division acquisition, the CAM Entities made two loans. The first was a $ 4.8 million loan for equipment purchased from the CAM Entities by U.S. Coal and JAD Debtors, in return for which CAMOFI Master LDC received a convertible promissory note issued by JAD ("CAM Equipment Note"). The second was a $ 5 million bridge loan comprised of several notes issued by JAD, Fox Knob, and Sandlick to Lawrence Kaplan, Michael Miller, Futurtec, L.P., and the CAM Entities, all dated April 15, 2008 ("CAM JAD Bridge Notes"). U.S. Coal guaranteed the CAM JAD Bridge Notes. U.S. Coal also entered into a related Rights Agreement with Lawrence Kaplan, Michael Miller, Futurtec, L.P. and the CAM Entities, under which those parties could exercise a "put option" to require U.S. Coal to purchase their shares of U.S. Coal common stock.

2. Goodwin and Goggin Make Investments and Loans.

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 (collectively, the "2008 Bridge Notes"). The 2008 Bridge Notes included one $ 1 million unsecured note and one $ 450,000 unsecured note to each of Goodwin and Goggin. Only LR Resources, SMJ, and Oak Hill guaranteed the 2008 Bridge Notes.

3. ECM is Formed and Acquires U.S. Coal Debt.

In March 2008, JMB Capital Partners Master Fund ("JMB") acquired significant outstanding debt that U.S. Coal owed to another lender. In August 2008, U.S. Coal and JMB entered into a Second Amended and Restated Credit Agreement ("JMB Credit Agreement") and a separate Value Right Agreement effective as of 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 and Value Right Agreements.

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 U.S. Coal's CEO Robert Gabbard ("Gabbard") and CFO James "Jim" Wolff ("Wolff"), 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.] The "third party" was to be ECM, formed under Delaware law on September 28, 2009. Effective September 30, 2009, ECM paid $ 18 million to acquire JMB's interests under both the JMB Credit and Value Right Agreements. As part of that transaction, ECM, 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 ("ECM Credit Agreement"), which refinanced the amounts previously owed to JMB and terminated the Value Right Agreement. Also during September 2009, Goodwin and Goggin's respective 2008 Bridge Notes were amended and restated, including an extension of their maturity dates.

Goggin was ECM's sole manager at all relevant times. Goggin and Goodwin were among the direct investors in and members of ECM. U.S. Coal Director Dennis Koutsodimitropoulos ("Koutsodimitropoulos") was the designated representative of an entity that directly invested in ECM. In addition, several members of Debtors' management (including directors Collins, 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 (Gabbard, Wolff, Collins, Jeff Dean, Julia McAfee, Malcolm Thomas, John Whitt, Kenneth Whitt). All but McAfee and Dean also invested an additional $ 100,000 of their own funds into USCM, for a total of $ 600,000 from those individuals and $ 800,000 from U.S. Coal (combined $ 1.4 million). In turn, USCM invested $ 1.4 million into ECM.

At the time of the ECM transaction, the U.S. Coal Board had four directors: John Whitt, Karl Douglas, Gabbard, and 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, officers, and representatives of U.S. Coal regarding the ECM transaction. The Board also approved an expansion from four to five members and the addition of Goggin and Goodwin to the Board "effective upon the closing of the proposed transaction with ECM ... as the designees of ECM ...." [ECF No. 197-17 at 6.] At the next Board Meeting on October 13, 2009, Goggin moved to ratify and approve the $ 800,000 transfer from U.S....