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Meral, Inc. v. Xinergy, Ltd.

United States District Court, W.D. Virginia, Roanoke Division

December 13, 2016

MERAL, INC., Appellant,
v.
XINERGY, LTD., et al., Appellees.

          MEMORANDUM OPINION

          Hon. Glen E. Conrad Chief United States District Judge

         In this 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 be affirmed.

         Background

         Meral, 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.[1] 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.

         Under 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 ...." A216.

         In 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.

         Section 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 payment dispute:

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, 000.00.

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.

Id.

         On 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.

         On 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.

         On 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' ...


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