United States District Court, W.D. Virginia, Roanoke Division
December 13, 2016
MERAL, INC., Appellant,
XINERGY, LTD., et al., Appellees.
Glen E. Conrad Chief United States District Judge
appeal from the United States Bankruptcy Court for the
Western District of Virginia, Meral, Inc. ("Meral")
seeks review of the bankruptcy court's order sustaining
an objection to a claim filed by Meral and denying
Meral's motion to lift the automatic stay. For the
reasons that follow, the bankruptcy court's decision will
a West Virginia Corporation, was the original lessee under a
coal mining lease with WPP LLC ("WPP"), dated
August 13, 2008, and a coal load-out facility lease, dated
November 30, 2009 (collectively, the "Leases"). On
January 31, 2011, Meral entered! into an asset purchase
agreement (the "APA") with South Fork Coal Company,
LLC ("South Fork"), a subsidiary of Xinergy, Ltd.
("Xinergy"), pursuant to which South Fork purchased
certain property from Meral, including all of Meral's
"rights, title and interest in . . . the Leases . . .
." A084. On May 5, 2011, a memorandum of the
original lease between Meral and WPP (the "Memorandum of
Lease") was recorded in the Greenbrier County
Clerk's Office in Lewisburg, West Virginia. The APA,
however, was not recorded.
the APA, subject to certain limited exceptions, South Fork
"assume[d] and be[came] responsible for . . . all
liabilities and obligations of [Meral] under the Leases, . .
." A085. The Leases were assigned to South Fork with the
permission of WPP, pursuant to a Consent, Assignment, and
Assumption Agreement (the "Assumption Agreement")
executed by Meral, South Fork, and WPP. In paragraph 8 of the
Assumption Agreement, WPP consented to the assignment and
assumption of the Leases, and "relieve[d], release[d],
and discharge[d] [Meral] ... from its obligations thereunder
exchange for the sale and assignment of the Leases, South
Fork agreed to make several cash payments to Meral, including
$1, 700, 000.00 on the closing date, $2, 500, 000.00 upon
issuance of certain required permits for conducting coal
mining operations on the property subject to the Leases, and
$1, 000, 000.00 eighteen calendar months thereafter. In
addition, South Fork agreed to make certain royalty payments
to Meral from the sale of coal.
3(a)(vii) of the APA provides certain remedies to Meral upon
default of South Fork's payment obligations.
Specifically, following an unsuccessful arbitration of any
Seller [Meral] shall have the right to declare all of the
rights of Purchaser [South Fork] in the Reserve Area created
by this Agreement and the Consent, Assignment and Assumption
Agreements terminated and Seller shall be entitled to enter
the premises of the Leases and to exclude Purchaser therefrom
and to hold the same, together with all machinery, equipment,
tools and other property therein and thereon which are free
and clear of any and all liens and encumbrances, including
permits (Purchaser agrees to transfer and assign all permits
to Seller), so that Seller can immediately maintain operating
the mines located on the premises of the Leases, if Seller so
elects. The maximum value of machinery, equipment, tools and
other property that Seller may claim any right, title and
interest to pursuant to this Section 3(a)(vii) is $5, 000,
A087. Section 3(a)(vii) goes on to provide as follows:
This Section 3(a)(vii) shall not be constructed as (i) a lien
upon any of the real, personal or mixed property of Purchaser
or its affiliates or a security interest granted by Purchaser
therein, or, (ii) a prohibition against the granting by
Purchaser or its affiliates of a lien or other security
interest in their real, personal or mixed property.
April 6, 2015, Xinergy and certain affiliated entities,
including South Fork, filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code. On July 31, 2015,
Meral filed a proof of claim (Claim No. 1232) in the
bankruptcy case, which it designated as a secured claim in
the amount of $671, 812.14. On November 6, 2015, the debtors
filed an omnibus objection to claims, in which they sought to
reclassify Meral's claim as a general unsecured claim. On
November 19, 2015, Meral filed a response to the omnibus
objection. Meral also filed a motion to lift the automatic
stay imposed by 11 U.S.C. § 362(a), citing a lack of
adequate protection. The debtors opposed that motion.
December 8, 2015, the bankruptcy court held a hearing on the
debtors' omnibus objection and Meral's motion to lift
the automatic stay. At the conclusion of the hearing, the
bankruptcy court ordered supplemental briefing on the issues
raised by the parties.
February 3, 2016, the bankruptcy court issued a memorandum
opinion and order sustaining the debtors' objection to
Meral's claim and reclassifying the claim as a general
unsecured claim. Additionally, based on its conclusion that
Meral does not have a security interest in the debtors'
property, the bankruptcy court denied Meral's motion to
lift the automatic stay.
February 15, 2016, Meral filed the instant appeal. The
parties' briefing was completed on July 8, 2016. Since
that time, the bankruptcy court has issued a final decree and
order closing the debtors' Chapter 11 cases.
appeal has been fully briefed, and the court heard oral
argument on November 29, 2016. Accordingly, the matter is
ripe for review.
court has appellate jurisdiction over the matter pursuant to
28 U.S.C. § 158(a). On appeal, the court reviews the
bankruptcy court's factual findings for clear error and
its legal conclusions de novo. In re Kielisch, 258
F.3d 315, 319 (4th Cir. 2001).
preliminary matter, the appellees urge the court to dismiss
Meral's appeal as moot on the grounds that Meral did not
seek a stay of the bankruptcy proceedings pending appeal, and
the bankruptcy plan has been substantially consummated.
Although it is true that this court "may dismiss an
appeal as equitably moot when it becomes impractical and
imprudent to upset the plan of reorganization at [a] late
date, " Behrmann v. Nat'l Heritage Found..
Inc., 663 F.3d 704, 713 (4th Cir. 2011) (citation and
internal quotation marks omitted), the equitable mootness
doctrine is prudential rather than jurisdictional.
Id.; see also In re Vineyard Bay Dev. Co.,
132 F.3d 269, 271 (5th Cir. 1998). Because the court
concludes that the decision of the bankruptcy
i court should be affirmed, and no
interference with the confirmed plan will result from the
disposition of this appeal, the court proceeds to address the
Objection to Meral's Claim
501 of the Bankruptcy Code authorizes any creditor of an
estate to file a proof of i claim. See 11
U.S.C. § 501(a). Section 502 provides that a proof of
claim "is deemed allowed, unless a party in interest. .
. objects." 11 U.S.C. § 502(a). If such party
objects, the court, after i notice and a
hearing, must determine the amount and validity of the claim.
11 U.S.C. § 502(b).
Bankruptcy Code establishes a burden-shifting framework for
proving the amount and validity of a claim." In re
Hartford Sands Inc., 372 F.3d 637, 640 (4th Cir. 2004).
When a claimant files a proof of claim with all of the
required supporting documentation, it is prima facie evidence
of the claim's validity and the amount owed by the
debtor. In re Falwell, 434 B.R. 779, 783 (Bankr.
W.D. Va. 2009); see also Fed.R.Bankr.P. 3001(f)
("A proof of claim executed and filed in accordance with
these rules shall constitute prima facie evidence of the
validity and amount of the claim."). "The burden
then shifts to the debtor to object to the claim, " and
to "introduce evidence to rebut the claim's
presumptive validity." Hartford Sands, 372 F.3d
at 640. Such evidence "must be sufficient to demonstrate
the existence of a true dispute and must have
probative force equal to the contents of the claim."
Falwell 434 B.R. at 784 (emphasis in original).
"If the debtor offers such evidence, the burden shifts
back to the creditor to produce evidence meeting the
objections and establishing the claim." Id., In this
case, Meral filed Claim No. 1232, in the amount of $671,
812.14, on July 311, 2015. Meral designated the claim as a
secured claim based on the APA. However, Meral did not
provide a copy of the APA as supporting documentation.
Consequently, the claim Was not entitled to a presumption of
validity, and the burden remained on Meral to prove the
validity of its alleged security interest by a preponderance
of the evidence. Hartford Sands, 372 F.3d at 640;
see also In re Andrews, 394 B.R. 384, 389 (Bankr.
E.D. Va. 2008).
sides agree that for a security interest to be valid and
enforceable against a debtor, the agreement or other document
intended to establish a security interest must contain a
"written expression by the debtor granting a security
interest." In re Modafferi. 45 B.R. 370, 373
(Bankr. S.D.N.Y. Jan. 9, 1985). This required
"granting" language must "demonstrate a
present intent to pledge collateral." Id; see also
Transp. Equip. Co. v. Guaranty State Bank, 518 F.2d 377,
380 (10th Cir. 1975) (noting that courts "almost
uniformly come to the conclusion that in order for a security
agreement to be effective it must contain language which
specifically creates or grants a security interest in the
collateral described"); In re Rowe, 369 B.R.
73, 77 (Bankr. D. Mass. 2007) ("Even where a document
lists something as 'collateral, ' . . . there must be
some granting language to find that the creditor holds a
security interest in it.")- "While there are no
magic words which create a security interest[, ] there must
be language in the instrument which leads to the logical
conclusion that it was the intention of the parties that a
security interest be created." Mitchell v. Shepherd
Mall State Bank, 458 F.2d 700, 703 (10th Cir. 1972)
(citation and internal quotation marks omitted); see also
In re Hovt's, Inc., 117 B.R. 226, 230 (Bankr. N.D.
W.Va. 1990) ("In the absence of a writing evidencing the
intent of the debtor to grant a creditor a security interest
in certain property to secure a specific obligation, the
Court cannot infer a security agreement.").
parties also agree that under West Virginia law, which
governs the interpretation of the APA, it is for the court to
determine whether the terms of an agreement are unambiguous
and, if so, to construe the agreement according to its plain
meaning. Fraternal Order of Police, Lodge No. 69
v. City of Fairmont, 468 S.E.2d 712, 715 ( W.Va. 1996).
"[The court's] task is not to rewrite the terms of
the contract between the parties; instead, [the court is] to
enforce it as written." Id. at 716. "If
language in a contract is found to be plain and unambiguous,
such language should be applied according to such
present appeal, Meral argues, as it did before the bankruptcy
court, that language in § 3(a)(vii) of the APA, which
provides certain remedies upon default, grants Meral a
security interest. Meral specifically cites to the portion of
the section that grants it the right to "enter the
premises of the Leases and to exclude [the Debtors] therefrom
and . . . immediately maintain operating the mines located on
the premises of the Leases . . . ." A087.
carefully considering the contractual language at issue and
the parties' arguments, the court agrees with the
appellees that the language cited by Meral does not
"lead to the logical conclusion that it was the
intention of the parties that a security interest be
created." Mitchell, 458 F.2d at 703.
Additionally, and perhaps most importantly, the same section
of the APA contains language that clearly and unambiguously
leads to the opposite conclusion: "This Section
3(a)(vii) shall not be constructed as ... a lien upon any of
the real, personal or mixed property of [South Fork] or its
affiliates or a security interest granted by [South Fork]
therein . . . ." A087 (emphasis added). Based on the
plain language of this subsequent clause, the court is of the
opinion that the bankruptcy court correctly concluded that
§ 3(a)(vii) of the APA does not grant Meral a security
interest in the debtors' property. Likewise, the
bankruptcy court properly declined to rewrite the APA to
provide such interest. See Faith United Methodist
i Church v. Morgan, 745 S.E.2d 461,
482 (W.Va. 2013) ("We have emphasized that courts cannot
rewrite a contract or deed that plainly expresses the
parties' intent[.]"); Fraternal Order of
Police, Lodge No. 69, 468 S.E.2d at 717
("[Courts] cannot rewrite the language of the contract
under the pretense of construction for the defendants to
receive a more favorable result.").
even if the APA could be construed to grant Meral a security
interest, the ! record is devoid of any
evidence establishing that Meral perfected such interest, as
required by Federal Rule of Bankruptcy Procedure 3001(d).
Rule 3001(d) provides that "[i]f a security interest in
property of the debtor is claimed, the proof of claim shall
be accompanied by evidence that the security interest has
been perfected." Fed.R.Bankr.P. 3001(d). To determine
whether a security interest has been perfected, courts look
to the applicable state law. In re DBS Inc., 432 B.R. 126,
132 (D. Del. 2010). Under West Virginia law, to perfect a
security interest in real property, including an interest in
leases, the purported holder of the security interest must
record documentation evidencing its interest "in the
county wherein the property . . . may be." W.Va. Code
§ 40-1-9. In the instant case, the record contains no
evidence that Meral made such filing. Although Meral
correctly points out that the Memorandum of Lease
memorializing the original lease between Meral and WPP was
recorded in the Greenbrier County Clerk's Office, that
document does not reference any purported security interest
granted to Meral by South Fork. In the absence of any other
evidence, the court concludes that Meral failed to establish
that it holds a perfected security interest under applicable
these reasons, the bankruptcy court did not err in sustaining
the debtors' objection to Proof of Claim No. 1232. The
bankruptcy court's decision to reclassify Claim No. 1232
as an unsecured claim must be affirmed.
Motion to Lift the Stay
also appealed the bankruptcy court's decision to deny
Meral's motion to lift the automatic stay. Under the
Bankruptcy Code, the filing of a bankruptcy petition operates
to stay "the commencement or continuation ... of a
judicial, administrative, or other action or proceeding
against the debtor that was or could have been commenced
before the commencement of the [bankruptcy proceeding], or to
recover a claim against the debtor that arose before the
commencement of the [bankruptcy proceeding.]" 11 U.S.C.
§ 362(a)(1). However, the Code also provides that a
party in interest may move for relief from the stay; under
certain circumstances. Under § 362(d)(1), the bankruptcy
court has the discretion to lift the i
automatic stay "for cause, including the lack of
adequate protection of an interest in property of such party
in interest." 11 U.S.C. § 362(d)(1).
seeking relief from the automatic stay under subsection
(d)(1) "has the burden of showing the existence, the
validity, and the perfection of its secured claim against the
property." In re Keen, No. 13-71705, 2014 U.S.
Bankr. LEXIS 4896, at *19 (Bankr. W.D. Va. Dec. 3, 2014)
(citation and internal quotation marks omitted); see also
In re Utah Aircraft Alliance, 342 i B.R. 327, 337
(B.A.P. 10th Cir. 2006) (noting that "the majority of
courts have concluded that Section 362(d)(1) . . . addresses
only the rights of secured creditors"). Because the
bankruptcy court correctly held that Meral lacked a perfected
security interest, it follows that the bankruptcy court did
not abuse its discretion in denying Meral's motion to
lift the automatic stay.!
reasons stated, the court concludes that the bankruptcy
court's decision must be affirmed. The Clerk is directed
to send certified copies of this memorandum opinion and the
accompanying order to all counsel of record.
Citations to "A" are to the
appendix submitted by the appellees, which contains both
documents that the appellant intended to include in its own
appendix. See Appellant's Br. at iii.
 During oral argument, Meral argued for
the first time that the bankruptcy court should have used its
equitable powers under 11 U.S.C. § 105(a) to afford the
relief sought by Meral. Even assuming that Meral properly
raised the issue, the argument is without merit. Section
105(a) authorizes a bankruptcy court to "issue any
order, process, or judgment that is necessary to carry out
the provisions of [the Bankruptcy Code]." 11 U.S.C.
§ 105(a). "While the equitable powers emanating
from § 105(a) are quite important in the general
bankruptcy scheme, ... these equitable powers are not a
license for a court to disregard the clear language and
meaning of the bankruptcy statutes and rules."
Official Committee of Equity Sec. Holders v. Mabey,
832 F.2d 299, 302 (4th Cir. 1987). Instead, the powers
granted by § 105(a) must be exercised in a manner that
is consistent with the Bankruptcy Code. See In re Oxford
Mgmt., 4 F.3d 1329, 1334 (5th Cir. 1993) ("[Section
105] does not authorize bankruptcy courts to create
substantive rights that are otherwise unavailable under
applicable law, or constitute a roving commission to do
equity.") (citation and internal quotation marks
omitted). Because Meral failed to establish the existence of
a perfected security interest under the applicable provisions
of the bankruptcy statutes and rules, neither this court nor
the bankruptcy court has the authority under § 105(a) to
elevate Meral's status over other unsecured creditors.
See Id. ("By commanding payment, the bankruptcy
court elevated the status of the appellees above that of the
other general unsecured creditors and deviated from the pro
rata scheme of distribution envisioned by the Code. This
order effectuated an impermissible substantive alteration of
the Code's provisions. For this reason, we find that the
bankruptcy court was in error when it used its equity powers
to command the payment of the appellees'