Spradlin v. Whitt (In re Licking River Mining, LLC)

• Decision Date: 29 June 2017
• Docket Number: Adv. No. 16–1040,Case No. 14–10201 Jointly Administered
• Citation: 572 B.R. 812
• Parties: IN RE: LICKING RIVER MINING, LLC, et al., Debtors Phaedra Spradlin, not individually but as Chapter 7 Trustee for Debtors Licking River Mining, LLC, Licking River Resources, Inc., S.M & J., Inc., Fox Knob Coal Co., Inc., J.A.D. Coal Company, Inc., U.S. Coal Corporation, Harlan County Mining, LLC, Oak Hill Coal, Inc., Sandlick Coal Company, LLC, and U.S. Coal Marketing, LLC, Plaintiffs v. Linda Whitt, Stephanie Lacy, and Melissa Lewis, Defendants
• Court: U.S. Bankruptcy Court — Eastern District of Kentucky

572 B.R. 812

IN RE: LICKING RIVER MINING, LLC, et al., DebtorsPhaedra Spradlin, not individually but as Chapter 7 Trustee for Debtors Licking River Mining, LLC, Licking River Resources, Inc., S.M & J., Inc., Fox Knob Coal Co., Inc., J.A.D. Coal Company, Inc., U.S. Coal Corporation, Harlan County Mining, LLC, Oak Hill Coal, Inc., Sandlick Coal Company, LLC, and U.S. Coal Marketing, LLC, Plaintiffs

v.Linda Whitt, Stephanie Lacy, and Melissa Lewis, Defendants

Case No. 14–10201 Jointly Administered

Adv. No. 16–1040

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

Signed June 29, 2017

Entered June 30, 2017

Claude R. Bowles, Jr., April A. Wimberg, James R. Irving, Louisville, Daniel J. Donnellon, Alex S. Rodger, Bingham Greenebeaum Doll LLP, Cincinnati, OH, for Plaintiffs.

Brian H. Meldrum, Brian R. Pollock, Louisville, KY, for Defendants.

MEMORANDUM OPINION GRANTING MOTION TO DISMISS FIRST AMENDED COMPLAINT

Tracey N. Wise, Bankruptcy Judge

This matter is before the Court on Defendants' Motion to Dismiss the Trustee's First Amended Complaint. [ECF Nos. 30 and 30–1 (memorandum in support, hereafter the "Motion").] In her First Amended Complaint [ECF No. 29 ("Amended Complaint") ], Plaintiff Phaedra Spradlin, chapter 7 trustee ("Trustee"), on behalf of debtor U.S. Coal Corporation ("U.S. Coal") and its nine co-debtor subsidiaries,¹ asserts claims against Defendants Linda Whitt ("Linda"), Melissa Lewis ("Melissa"), and Stephanie Lacy ("Stephanie") (collectively "Defendants") in connection with the issuance of and payments made under promissory notes. Debtors seek to (a) subordinate or recharacterize Defendants' claims under § 510 of the Bankruptcy Code ;² (b) avoid fraudulent transfers under chapter 5 of the Code and under Kentucky Revised Statutes §§ 378.010 and 378.020 ;³ (c) avoid preferential payments under chapter 5 of the Code; (d) recover all avoided transfers; and (e) disallow Defendants' claims against the Debtors' estates. Defendants move to dismiss the Amended Complaint in its entirety with prejudice under Civil Rule 12(b)(6), made applicable to adversary proceedings by Bankruptcy Rule 7012(b). The Court having reviewed the record, heard the arguments of counsel, and being otherwise sufficiently advised, finds that Defendants' arguments are well-founded and, for the reasons set forth herein, will grant the Motion.

JURISDICTION

The Court has jurisdiction over this adversary proceeding. 28 U.S.C. § 1334(b). Venue is proper in this District. 28 U.S.C. § 1409. This is a core proceeding. 28 U.S.C. § 157(b)(2)(F), (H). Trustee pleads that this "is a ‘core’ proceeding to be heard and determined by the Court" and "the Court may enter final orders for matters contained herein." [Am. Compl. ¶ 3.] Defendants consent to the entry of final orders by this Court. [ECF No. 33.]

PROCEDURAL HISTORY

Trustee filed a complaint commencing this proceeding on June 12, 2016. The original complaint asserted ten counts against Defendants under the same legal theories in the Amended Complaint. On August 9, Defendants moved to dismiss all of the claims in Trustee's original pleading under Civil Rule 12(b)(6). After mediation did not resolve the matter, and rather than oppose the pending motion to dismiss, Trustee filed the Amended Complaint on October 19. In response, Defendants moved to dismiss Trustee's amended pleading based on its failure to state viable claims against Defendants, raising the same arguments made in the original motion to dismiss, while also addressing a new claim plead in the Amended Complaint under § 510(c). Counsel argued the Motion on February 16, 2017.

STANDARD OF REVIEW

Civil Rule 12(b)(6) contemplates a defense on the basis that a complaint "fail[s] to state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). Civil Rule 8, made applicable in adversary proceedings by Bankruptcy Rule 7008(a), requires "a short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a)(2). In analyzing this pleading requirement in connection with a motion to dismiss, the United States Supreme Court has stated that "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ "

Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do’ .... [n]or does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’ " Id. (quoting Twombly , 550 U.S. at 555, 557, 127 S.Ct. 1955 ).

As to each count, the Court must determine whether the Amended Complaint contains sufficient factual matter as to each element necessary to state a claim for relief that is plausible on its face. The Court accepts all well-pleaded factual allegations in the Amended Complaint as true and construes them liberally in Trustee's favor. Lawrence v. Chancery Court of Tenn. , 188 F.3d 687, 691 (6th Cir. 1999) (citations omitted). In evaluating whether the pleading states a plausible claim, the Court may consider the allegations in the pleadings, documents attached to or incorporated by reference in the pleadings, and adjudicative facts about which the Court may take judicial notice under Federal Rule of Evidence 201. Spradlin v. Pryor Cashman LLP (In re Licking River Mining, LLC) , 565 B.R. 794, 801 (Bankr. E.D. Ky. 2017) (citations omitted).

BACKGROUND AND FACTS ALLEGED IN THE AMENDED COMPLAINT AND ITS EXHIBITS

I. Defendants sold stock in SM & J to U.S. Coal as Part of a Series of Transactions that Created the U.S. Coal Family of Entities.

"U.S. Coal was formed in 2006 to use funds raised through various equity and debt issuances to acquire coal companies in the coal mining industry." [Am. Compl. ¶ 25.] U.S. Coal operated two subsidiary business groups called the Licking River Division and the J.A.D. Division. The Licking River Division ("LRR Division")

was formed through the acquisition of Debtors [LR Mining], [LR Resources], Oak Hill, and SM & J (collectively, the "Licking River Debtors") in January 2007 for approximately $33 million. Of the $33 million of consideration paid for the stock of the LRR Division, $10 million was in the form of unsecured notes ("LR Seller Notes"). The sellers of the LRR Division to U.S. Coal included the Defendants [Linda, Melissa and Stephanie]. The LR Seller Notes are unsecured obligations of U.S. Coal.

[Id. ¶ 27.⁴ ] Debtors produced and sold thermal and stoker coal.

Linda "was an owner of one of the Debtors and officer of" SM & J and "is married to John Whitt who is a former member of the U.S. Coal Board, principal equity holder and alleged lender to" LR Mining. [I d. ¶ 22.] Stephanie is "a former owner of one or more of the Debtors," "daughter to John Whitt," and "married to William Christopher Lacy, Executive Vice President of" LR Resources. [Id. ¶ 23.] Melissa "was an owner of one of the Debtors and officer of [SM & J]," "daughter to John Whitt," and "had regular communication with employees of the Debtors." [Id. ¶ 24.]

Trustee attached certain executed and unexecuted transaction documents to her original complaint related to the LRR Division acquisition. [ECF Nos. 1–3 through 1–10.⁵ ] The documents reflect that, when the companies in the LRR Division were acquired, Defendants each owned an equity interest in SM & J; Linda owned 40.625%, Stephanie owned 6.25%, and Melissa owned 6.25%. [ECF No. 1–8.] The transaction documents do not reflect that Defendants owned equity interests in LR Mining, LR Resources, or Oak Hill when U.S. Coal acquired them.

U.S. Coal (then known as U.S. Coal Acquisition Corp. [ECF No. 1–11] ) entered into a Stock Purchase Agreement as of October 24, 2006 (the "SPA") to acquire all of the stock of SM & J from its stockholders (including John Whitt, Linda, Stephanie, and Melissa) for $14,130,000.00. [ECF No. 1–8, ¶ 2.1.] Of this amount, $9,420,000.00 (less a hold-back) was paid at closing, and $4,710,000.00 was "payable in three annual installments pursuant to Promissory Notes." [Id. ] The unsigned, undated "Form of Promissory Note" filed with the original complaint (and apparently attached to the SPA) reflected that the entire $4,710,000.00 note attributable to the acquisition of SM & J would be payable to John Whitt, though it stated at the top "[Principal Amount to be allocated at closing among all SMJ Sellers] ." [ECF No. 1–9.]

Stock also transferred in the other direction under the SPA: "As additional consideration, [U.S. Coal Acquisition Corp.] shall deliver to the Sellers [defined to include Defendants] an aggregate of 470,000 shares (the "Acquired Shares") of Purchaser Common Stock." [ECF 1–8 ¶ 2.1.] In other words, the SM & J shareholders (including Defendants) collectively sold their shares in that entity via the SPA and also received stock in U.S. Coal Acquisition Corp. (now known as U.S. Coal) under that same contract. The Amended Complaint, however, does not allege that Defendants owned any shares of U.S. Coal stock at any time, nor do Trustee's claims appear to relate to Defendants' ownership of U.S. Coal stock.

II. Trustee Pleads in Confusing Fashion that Defendants "Forced a Repurchase of their Equity."

As stated above, well-pleaded factual allegations are accepted as true; however, the facts alleged must be specific enough to be comprehensible both for a party to answer and for the Court to apply a Civil Rule 12(b)(6) standard. Trustee's Amended Complaint goes awry at Paragraph 28, a paragraph that was not in her original pleading:

28. Defendants became aware that their equity investment in the Debtors was becoming less valuable as the Debtors became further and further insolvent. On information and belief, in order to monetize their

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