Rhino Energy LLC v. C.O.P. Coal Development Co. (In re C.W. Mining Co.)

534 B.R. 800, 2015 U.S. Dist. LEXIS 90123
CourtDistrict Court, D. Utah
DecidedJuly 10, 2015
DocketBankruptcy No. 08-20105; Adversary No. 11-2250; No. 2:13-CV-924-TC
StatusPublished

This text of 534 B.R. 800 (Rhino Energy LLC v. C.O.P. Coal Development Co. (In re C.W. Mining Co.)) is published on Counsel Stack Legal Research, covering District Court, D. Utah primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Rhino Energy LLC v. C.O.P. Coal Development Co. (In re C.W. Mining Co.), 534 B.R. 800, 2015 U.S. Dist. LEXIS 90123 (D. Utah 2015).

Opinion

MEMORANDUM DECISION AND ORDER ON BANKRUPTCY APPEAL

TENA CAMPBELL, District Judge.

This appeal arises out of the Chapter 7 involuntary bankruptcy of C.W. Mining Company, former operator of the Bear Canyon coal mine in Utah.

INTRODUCTION

Appellees C.O.P. Coal Development Company (COP Coal) and ANR Company, Inc. (ANR) (collectively COP) are owners of land on which the coal mine is situated. C.W. Mining Company (the Debtor) had Operating Agreements with COP Coal and ANR before the bankruptcy petition was filed. Paragraph 5 of those agreements sets forth a standard for operating the mine.

After the bankruptcy petition was filed, the Chapter 7 Trustee took possession of the Debtor’s mine assets, including the two [804]*804Operating Agreements. Appellants Rhino Energy LLC (Rhino Energy) and Castle Valley Mining LLC (Castle Valley) (collectively, Rhino) acquired mine assets from the Trustee through a sale order issued by the bankruptcy court. As part of that sale, Rhino assumed the Debtor’s Operating Agreements with COP Coal and ANR as they were interpreted by the bankruptcy court (in particular, Paragraph 5).

After Rhino began using a mining technique different than the one used by its predecessor, COP Coal and ANR sent Notices of Default to Rhino seeking termination of the Operating Agreements on the basis that Rhino was operating in violation of Paragraph 5. In response, Rhino Energy and Castle Valley filed an adversary action in the bankruptcy matter seeking a declaration that no default had occurred. The bankruptcy court, after reviewing Rhino’s motion for partial summary judgment concerning the alleged default, held that it did not have jurisdiction over the default dispute, denied the motion, and dismissed the relevant claims. Rhino now appeals that decision.

For the reasons set forth below, the court reverses the bankruptcy court order and remands with instructions.

FACTUAL AND PROCEDURAL BACKGROUND 1

Previous Rulings and Law of the Case

Although this adversary proceeding between the parties originated in 2011, a series of earlier adversary proceedings, court rulings, and appeals in the underlying bankruptcy proceeding shapes the issues raised in this appeal. To help the reader understand the court’s decision, the court describes certain portions of the bankruptcy proceedings’ lengthy and complicated procedural background that led to the decision on appeal. This will provide necessary context and set forth the law of the case.

1. 2009 Dispute Between Trustee and COP about Paragraph 5 in the Operating Agreements.

The dispute over the correct standard for performance under Paragraph 5 of the Operating Agreements was percolating by at least 2009.2 At that time, the Trustee had assumed the Debtor’s obligations under those agreements and was sparring with COP over the proper interpretation of Paragraph 5 of the Operating Agreements.3 (Rhino did not come into the picture until later.) Paragraph 5 provides that:

Operator shall diligently and continuously operate the subject property for the term hereof [with limited exceptions]. Operator shall conduct all operations hereunder in a good and minerlike manner and in a manner which will result in the ultimate maximum economic recovery [MERJ of coal from the property....
[805]*805Operator shall, in the operation and development of the premises, comply with all applicable Federal, State, and local laws that apply to Operator’s mining operation and shall conduct its mining operations and take all actions and perform all duties required to maintain the Federal and State mining permits and approvals relating to the Premises.

(ANR Operating Agreement ¶ 5; COP Coal Operating Agreement ¶ 5 (emphasis added).) Paragraph 5 is sometimes referred to as the “Continuous Operations Clause.”

To resolve that dispute, the Trustee filed an adversary proceeding in -2009 seeking a determination of the meaning of the phrases “diligently and continuously operate” and “maximum economic recovery” in Paragraph 5.4 The Operating Agreements do not define those terms.

In November 2009, the bankruptcy court5 held a trial and, in December 2009, issued Findings of Fact and Conclusions of Law. The court framed the issue before it as follows:

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 fulfíll its requirements under [Paragraph 5 of] the operating agreements to “diligently and continuously operate” in a fashion that will realize the “ultimate maximum economic recovery” or, ire other words, whether the landlords have discretion to impose their own standards for the safe, efficient and non-wasteful operation of the mine.

(Findings of Fact and Conclusions of Law Arising from Trial on November 16, 17, 23, and 24, 2009 (Appellant App. 2855-2874) (“November 2009 Trial Order”) ¶7 (emphasis added).)

The Trustee asserted that the Code of Federal Regulations, as interpreted by the Bureau of Land Management (BLM), provided the standard for determining whether default had occurred under Paragraph 5. Those regulations define “continued operation” and “maximum economic recovery” (MER is a term of art in the mining industry). The definitions are different than what COP Coal and ANR advocated; indeed, those parties contended that they, not the BLM, had authority to determine whether default had occurred under Paragraph 5.

The bankruptcy court rejected the standard offered by COP. In the bankruptcy court’s search for an answer to the question of whether the Trustee would be able to provide “adequate assurance of future performance” of the Operating Agreements, the court stated that it had “no choice but to interpret the Continuous Operations Clause in the manner suggested by the Trustee.” (November 2009 Trial Order ¶ 13.) The court noted that the BLM regulations closely paralleled the [806]*806content of Paragraph 5, and that COP Coal and ANR did not present a

coherent alternative standard for the Continuous Operations Clause ... to the Court. Essentially, [COP Coal] and ANR argue that the Continuous Operations Clause is subject to the whim and caprice of those entities.... Joseph Kingston even testified that “ultimate maximum economic recovery” could require an operator to mine even if such operations were physically possible but economically unprofitable and that he would interpret the phrase “diligently and continuously operate” differently if a new entity were to take over the Bear Canyon Mine.

(/¿.¶¶ 16-17.) Expressing concern, the court continued:

Thus, under the standard argued by [COP Coal] and ANR apparently depends on whatever may be in Joseph Kingston’s head at any particular point in time, which of course is no standard at all.

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Bluebook (online)
534 B.R. 800, 2015 U.S. Dist. LEXIS 90123, Counsel Stack Legal Research, https://law.counselstack.com/opinion/rhino-energy-llc-v-cop-coal-development-co-in-re-cw-mining-co-utd-2015.