Opinion
19-56885
09-30-2022
In re: MURRAY ENERGY HOLDINGS CO., et al., Debtors.
Chapter 11
(Jointly Administered)
MEMORANDUM OPINION AND ORDER GRANTING MOTIONS FOR SUMMARY JUDGMENT FILED BY OHIO-WEST VIRGINIA EXCAVATING CO AND FRONTIER-KEMPER CONSTRUCTORS, INC.
JOHN E. HOFFMAN JR. UNITED STATES BANKRUPTCY JUDGE
I. Introduction
Before confirmation of their plan of reorganization, Murray Energy Holdings Co. and its affiliated debtors and debtors in possession ("Debtors") filed their First Omnibus Objection to Certain Mechanic's Lien Claims ("Objection") (Doc. 1749). The Objection sought an order reclassifying as general unsecured claims the claims of mechanic's lienholders that supplied goods and services to the Debtors' coal mining operations in Ohio, Kentucky, West Virginia and Pennsylvania. All of the claims at issue were filed as secured claims by the holders of the mechanic's liens. The Objection was followed by the Debtors' motions for summary judgment, 1 filed on various grounds, against each of the lienholders. The Court has conducted hearings on legal issues common to many of the lienholders and issued two opinions adjudicating those issues:
The summary judgment motions are now being prosecuted by Drivetrain, LLC, ("Drivetrain") in its capacity as the plan administrator under the Debtors' confirmed Chapter 11 plan. Thus, the Court will refer to Drivetrain when discussing positions taken by either Drivetrain or the Debtors.
• In re Murray Energy Holdings Co., 638 B.R. 588 (Bankr. S.D. Ohio 2022) (holding that an entity owning a subsurface estate along with the right to use the surface for mining purposes does not have the right to mortgage the surface estate.) ("Murray I"); and
• In re Murray Energy Holdings Co., 639 B.R. 463 (Bankr. S.D. Ohio 2022) (holding that certain lienholders in West Virginia were eligible to file liens under the laborer's lien statute and determining the extent to which those liens were entitled to priority) ("Murray II").Murray I affected the rights of two lienholders-Frontier-Kemper Constructors, Inc. ("Frontier") and Ohio-West Virginia Excavating Co. ("Ohio-WV")-that have filed cross-motions for summary judgment. The Court now addresses those cross-motions. 2
In Murray II, the Court granted partial summary judgment in favor of mechanic's lienholders as to Drivetrain's request for a ruling invalidating the claimants' liens based on their purported ineligibility to file under a particular West Virginia statute. The Court held that the claimants were eligible to file liens under that statute. But the Court granted partial summary judgment in favor of Drivetrain on two mechanic's lienholders' requests for a ruling that another West Virginia statute repealed by implication the limitation on priority set forth in the first statute. It held that the one-month limitation set forth in the statute was valid and enforceable. The Court also held that Drivetrain's request to invalidate most of the claimants' liens based on their purported noncompliance with yet another West Virginia statute would be held in abeyance pending the outcome of the parties' attempt to determine the amounts for which priority may be claimed. See Murray II, 639 B.R. at 490.
II. Jurisdiction
The Court has jurisdiction to hear and determine this matter under 28 U.S.C. § 1334(b) and the general order of reference entered in this district in accordance with 28 U.S.C. § 157(a). The allowance or disallowance of claims against the estate is a core proceeding. 28 U.S.C. § 157(b)(2)(B). Because the dispute "stems from the bankruptcy itself," the Court also has the constitutional authority to enter a final order. Stern v. Marshall, 564 U.S. 462, 499 (2011). See also Waldman v. Stone, 698 F.3d 910, 920 (6th Cir. 2012) ("[D]isallowance [of] claims [is] part and parcel of the claims-allowance process in bankruptcy. Under Stern, therefore, the bankruptcy court was authorized to enter final judgment as to these claims." (citation omitted)).
III. Background
A. Objection to Claims
By its Objection, Drivetrain seeks to "reclassify" the mechanic's lien claims of Frontier and Ohio-WV from their status as secured claims to that of general unsecured claims. It does so based on its contention that: (1) mortgages granted by certain Debtors were recorded on the real property to which the mechanic's liens filed by Frontier and Ohio-WV attach; and (2) those mortgages were recorded ahead of the mechanic's liens.
Reclassification is a bankruptcy term of art describing the process by which a claim filed by a creditor as a secured claim under § 506(a) of the Bankruptcy Code or a priority claim under § 507(a) is reassigned the status of an unsecured, nonpriority claim. A proof of claim is "deemed allowed, unless a party in interest . . . objects," 11 U.S.C. § 502"(a), so the process of reclassification begins with an objection to a claim-in a Chapter 11 case typically by the debtor. Here, Drivetrain objects to the claims of the mechanic's lienholders on the grounds that their 3 claims, which they filed as secured claims, should be reclassified as unsecured claims. Secured claims are delineated by § 506(a)(1), which provides that:
[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.11 U.S.C. § 506(a)(1).
Under § 506(a)(1), claims are secured to extent of the value of the creditor's interest in the collateral. Drivetrain contends that there is insufficient collateral coverage for the mechanic's lienholders' claims to be secured, because Frontier's and Ohio-WV's claims
did not arise until after prior liens had been granted by the Debtors and perfected in 2018 on all affected assets by holders of [a] certain superpriority term loan facility . . ., or after the Court's approval of the Debtors' postpetition financing . . . in these chapter 11 cases on December 12, 2019, where applicable.Obj. at 6. Drivetrain further argues that the collateral value to which the mechanic's liens attached is insufficient to cover the Senior Term Loan and the Court-approved debtor in possession financing facility ("DIP Facility") in full. So, the argument goes, because there is no value cushion, the mechanic's lien claims are allowable only as general unsecured claims. Id. The Objection cited no other bases for disallowance or reclassification of the mechanic's lien claims.
When citing documents in the record, the Court will cite the .pdf page number.
Frontier and Ohio-WV filed responses in opposition to the Objection ("Ohio-WV Response" and "Frontier Response," Docs. 1805 and 1870 respectively) countering Drivetrain's arguments. In further response to the Objection, Ohio-WV filed a motion for summary judgment 4 ("Ohio-WV Motion") with exhibits (Doc. 2522, 2523 and 2524), arguing, among other things, that it is entitled to a judgment as a matter of law determining that its lien was properly perfected and enforceable and that the Senior Term Loan mortgages did not encumber the same property to which Ohio-WV's mechanic's lien attached. Ohio-WV Mot. at 1. Drivetrain then filed its own motions for summary judgment against Frontier (Docs. 2530) and Ohio-WV (Doc. 2534), and Frontier filed a cross-motion for summary judgment ("Frontier Motion") (Doc. 2541) that echoed the arguments put forth by Ohio-WV in its summary judgment motion. In its summary judgment motions, Drivetrain made the same arguments contained in the original Objection, namely: (1) that the claims of both mechanic's lienors were junior in priority to its previously perfected liens on the Debtors' assets under the Senior Term Loan; (2) that there is insufficient collateral to cover the Debtors' secured lenders' claims under the loan agreement; and (3) for these reasons, the mechanic's liens should be reclassified as general unsecured claims. Doc. 2530 at 1; Doc. 2534 at 1. Notably, neither the Objection nor either of Drivetrain's summary judgment motions disputed the amount claimed in the Affidavits for Mechanic's Liens, nor the perfection of those liens. The only issue raised is whether the liens held by the Senior Term Loan lenders were first in time relative to Frontier's and Ohio-WV's mechanic's liens.
Drivetrain filed responses in opposition to Ohio-WV's motion for summary judgment (Doc. 2577) and Frontier's motion for summary judgment (Doc. 2591).
B. Debtors' Mortgages/Security Interests
On June 29, 2018, some sixteen months prepetition, the Debtors executed the Senior Term Loan under which they granted liens to their secured lenders on real property, fixtures and personalty through mortgages filed in Ohio, Kentucky, West Virginia and Pennsylvania, and on other assets through financing statements filed with the Secretaries of State of Ohio, Kentucky, 5 Pennsylvania and Delaware. See Decl. of Ernest C. Banks, Jr. in Supp. of Plan Administrator's Resp. to Frontier-Kemper Constructors, Inc.'s and Ohio-West Virginia Excavating Co.'s Mots. for Summ. J. Overruling Debtors' First Omnibus Obj. to Certain Mechanic's Lien Claims ("Banks Declaration"), Doc. 2591-3 at 3-4; Doc. 2591 at 4. On December 12, 2019, the Court entered an order approving the DIP Facility ("DIP Financing Order") (Doc. 431), which, among other things, granted the Senior Term Loan lenders and another lender that provided DIP financing a perfected security interest in their tangible and intangible pre- and postpetition assets, aside from certain carve-outs. Id. at ¶ 14(a)(i). One of those carve-outs was for liens denominated as Permitted Liens in the credit agreement governing the DIP Facility (Doc. 28-2). Permitted Liens were further defined, in part, as including mechanic's liens. Id. at 47, 118.
American Energy Corp. ("American Energy") is one of the Debtors. See Case No. 19-56897. On July 2, 2018, American Energy filed a UCC Financing Statement with the Ohio Secretary of State granting a security interest to "U.S. Bank, National Association, as Superparity Lien Collateral Trustee" in "all assets of the debtor whether now existing or hereafter arising," thereby granting a lien on its personal property to secure its obligations under the Senior Term Loan. Banks Decl., Doc. 2591-3 at 3-4; Doc. 2591-3, Ex. C at 11. Also, the Debtors granted a lien on certain real property, including real estate located in Belmont County, Ohio, that American Energy acquired ownership of by virtue of a general warranty deed dated June 6, 2013, conveying certain parcels of land from Robert H. McFarland, Mark R. McFarland and Jodi L. McFarland to American Energy ("Premises"). This conveyance was recorded in Belmont County on June 11, 2013. Frontier Mot., Doc. 2541-5, Ex. D-Notice of Commencement at 3.
Consolidated Land Company ("Consolidated"), another of the Debtors (see Case No. 19-56894), holds title to the coal estates and support rights for two of the tracts within the Premises 6 by virtue of coal severance deeds from the early 1900s granting those rights to Consolidated's predecessors-in-interest. Banks Decl., Doc. 2591-3 at 2-7. While Consolidated filed and recorded mortgages in Belmont County perfecting liens under the Senior Term Loan in July 2018, nothing in the record reflects that Consolidated has or had a fee interest in the American Energy surface tracts, or that it transferred any interest in the Premises as part of the Senior Term Loan. See Open-End Mortgage (Superpriority), Security Agreement, Assignment of Rents and Leases and Fixture Filing from Consolidated to U.S. Bank National Association, filed in the office of the Recorder of Belmont County, Ohio at OR Book 778, Page 742-826. Frontier Mot., Doc. 2541-10, Ex. I- Mortgages. "Title to the surface estate of the Premises, which was subject to the coal and support rights owned by [Consolidated], belonged to [Consolidated's] sibling subsidiary, [American Energy], at all relevant times." Banks Decl., Doc. 2591-3 at 5. Thus, at best, the loan agreements made by American Energy in connection with the Senior Term Loan covered American Energy's personal property but did not grant a mortgage in the surface estate in connection with the Senior Term Loan financing arrangement.
C. Frontier
On March 1, 2019, Frontier contracted with American Energy to furnish materials and labor for the installation of an elevator and related structures at American Energy's coal mine in Belmont County, Ohio. The original contract price was $1,236,580; after change orders, the final amount owed was $1,435,533. Frontier Mem. In Supp., Doc. 2541-1 at 3. On July 19, 2019, American Energy filed and recorded a "Notice of Commencement" for the project which, under Ohio Revised Code § 1311.04 included a copy of the deed for the real property to be improved, 7 along with the following description of the proposed improvement: "An elevator, and related structures will be installed for the Century Mine, Bethesda Portal. The total area for this location is approximately eighty (80) acres." Frontier Mot., Doc. 2541-5, Ex. D at 1. The Notice of Commencement and accompanying deed were recorded in OR Book 849, Pages 854-859. Id.; Frontier Mem. in Supp., Doc. 2541-1 at 3. Frontier commenced work on June 18, 2019 and completed the work under the contract on October 19, 2019 (but for turning on the elevator which could not be completed due to lack of permanent power). Frontier Mem. In Supp. Doc. 2541-1 at 3-4. Frontier invoiced American Energy for the work done, and American Energy paid all but $233,585.08, which remains outstanding. Id. at 4.
Section 1311.04 provides that a notice of commencement shall contain the legal description of the property on which the improvement is to be made. "For purposes of this division, a description sufficient to describe the real property for the purpose of conveyance, or contained in the instrument by which the owner, part owner, or lessee took title, is a legal description." Ohio Rev. Code Ann. § 1311.04(B)(1) (West 2022).
It is not clear why the Premises is described as containing 80 acres. The actual legal description in the deed attached to the Notice of Commencement and the legal descriptions attached as exhibits to Frontier's and Ohio-WV's Affidavits for Mechanic's Liens describe the property as "80 acres more or less," "[s]ituate in the State of Ohio, Belmont County, Goshen Township, Section 15, T7N, R5W and being part of a 45.9675 acre parcel conveyed to Robert H. McFarland and Mark R. McFarland recorded in Official Record Volume 753, Page 142, a 59.9978 acre parcel and a 28.8401 acre parcel conveyed to Robert H. McFarland and Mark R. McFarland recorded in Official Record Volume 764, Page 839 of the Belmont County Recorder's Office[.]" Frontier Mem. in Supp. Doc. 2541-1 at 3; Frontier Resp., Doc. 1870-3, Aff. for Mechanic's Lien; Ohio-WV Proof of Claim No. 1196 at 78. While "being part of a parcel," is not a particularly helpful measurement without a description of the metes and bounds of the property, the size of the liened property looks to exceed 80 acres no matter how the language is parsed. The parties all appear to agree on the "80 acre" description, however, so the Court will assume that is the extent of the area liened. The legal description also contains the following limitations on the conveyance: "[s]ubject to all legal leases, easements and rights of way of record," and "[e]xcepting all coal in all veins in and underlying the above described premises, together with the mining rights, privileges and options appurtenant thereto, heretofore sold and conveyed. Grantor reserves all oil and gas and other minerals." Frontier Mot., Doc. 2541-5, Ex. D. at 4; Ohio-WV Proof of Claim 1196 at 79.
Less than a week after completing the contract work, Frontier recorded an Affidavit for Mechanic's Lien ("Frontier Affidavit") in the Belmont County Recorder's office, asserting a lien 8 in the amount of $233,585.08 on the "land, buildings, and machinery of which American Energy Corporation is or was the owner," including the real property described in the general warranty deed attached to the Frontier Affidavit, "which is also contained in the certain Notice of Commencement." Frontier Resp, Doc. 1870-1, Proof of Claim, Ex. A at 8. The legal description of the property attached to the Frontier Affidavit is the same as the property identified in and attached to American Energy's Notice of Commencement. Frontier Mot. Doc. 2541-5, Ex. D. at 1. It is also the same as the language set out in Footnote 6. The Affidavit of Mechanic's Lien was filed on October 24, 2019, more than before the DIP Financing Order was entered by the Court.
Copies of proofs of claim cited in this opinion are available at https://cases.ra.kroll.com/murrayenergy/Home-ClaimInfo.
D. Ohio-WV
On November 6, 2019, Ohio-WV recorded a mechanic's lien in the Belmont County, Ohio Recorder's office against land owned by American Energy in Belmont County in connection with the installation of a wastewater treatment plant and associated grading, site preparation, piping and other related work. Ohio-WV Statement of Material Facts, Doc. 2522-1 at 2-4; Doc. 2522-2, Ex. A. Decl. William V. Busick at 2. American Energy did not pay for the work, Doc. 2522-1 at 4, and Ohio-WV filed a proof of claim for $397,759.73, of which $394,559.73 was claimed secured by virtue of its Affidavit for Mechanic's Lien. Ohio-WV Proof of Claim No. 1196, at 2, 77. The General Warranty Deed attached to Ohio-WV's Affidavit for Mechanic's Lien describes the same Premises as referred to in Exhibit A to the Frontier Affidavit and provides that Robert H. McFarland, Mark R. McFarland and Jodi L. McFarland granted American Energy all of their right, title and interest in all of the real property located and situated in Goshen Township, Belmont 9 County, Ohio. Id. at 77, 78. As with the Frontier Affidavit, Ohio-WV's Affidavit for Mechanic's Lien, which was filed on November 6, 2019, id. at 77, predated the DIP Financing Order.
IV. Arguments of the Parties
This dispute is relatively straightforward, despite the best efforts of Drivetrain to complicate it. The issue may be framed this way: Are the properly filed and perfected mechanic's liens of Frontier and Ohio-WV secured by the surface estate in the Premises? Or did Consolidated's ownership of the subsurface estate, which gives it the right to use the surface for mining operations, allow Consolidated to grant to the Senior Term Loan lenders a mortgage by proxy over the Premises under Drivetrain's "bundle-of-sticks" legal argument (which was the subject of the Murray I opinion)? Frontier and Ohio-WV believe their liens are first in time and entitled to priority and that the claims arising from the liens are not subject to reclassification as unsecured claims. For its part, Drivetrain argues that Consolidated's rights to use the surface estate to support its mining activities gave it sufficient sticks in its bundle of property rights to include American Energy's surface estate in its first-in-time mortgage to the Senior Term Loan lenders. And that, it says, renders the mechanic's lienholders' claims unsecured.
V. Legal Analysis A. Summary Judgment Standard
Under Federal Rule of Civil Procedure 56, made applicable in this contested matter by Federal Rules of Bankruptcy Procedure 7056 and 9014(c), a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "On a motion for summary judgment, facts must be viewed in the light most favorable to the nonmoving party only if there is a genuine dispute as to those facts." Ricci v. DeStefano, 557 U.S. 557, 586 (2009) (internal 10 quotations marks omitted). "A dispute is 'genuine' only if based on evidence upon which a reasonable [finder of fact] could return a judgment in favor of the non-moving party." Gallagher v. C.H. Robinson Worldwide, Inc., 567 F.3d 263, 270 (6th Cir. 2009). And a "factual dispute concerns a 'material' fact only if its resolution might affect the outcome of the suit under the governing substantive law." Id.
B. Drivetrain's Bundle-of-Sticks Theory
As discussed fully in Murray I, Drivetrain's arguments rely on the concept that property is a collection of individual legal rights-a bundle of sticks-that collectively constitutes property. According to Drivetrain, the owner of a subsurface estate, in this instance Consolidated, having the right to use a surface estate as necessary to conduct its mining operations, has enough "sticks" to bring that surface estate-here, the Premises- within the ambit of the first-in-time Senior Term Loan mortgage.
The Ohio statute governing mechanic's liens against mining operations states in its entirety:
A person who performs labor or work in mining coal or removing it from the mines, or other labor or work connected therewith, for a coal or mining company or corporation owning, operating, or leasing coal mines within this state, by virtue of a contract with the company or corporation or its authorized agent, has a lien to secure payment therefor upon the mine thereof, on all its rights as the owner or lessee of the mines, and on all its personal property used in conducting the business of mining coal, whether located at or near the mines or elsewhere.Ohio Rev. Code Ann. § 1311.23 (West 2022). The undisputed facts in the summary judgment record reflect that both mechanic's lienholders performed labor or work in connection with coal mining under contracts with American Energy. Ohio-WV Mot., Doc. 2522, Ex. 4 - Intermittent Work Contract; Frontier Mot., Doc. 2541-3, Ex. B - Construction Contract. At no point has 11 Drivetrain challenged the nature of the work performed, the amount owing, or the validity or perfection of the liens.
The Court analyzed and rejected Drivetrain's bundle-of-sticks theory in Murray I. After addressing the arguments of the parties and discussing the relevant case law, it denied Drivetrain's motions for summary judgment against Frontier; Ohio-WV; Laurel Aggregates of Delaware, LLC; Miller Contracting Services, Inc.; GMS Mine Repair & Maintenance; and Pillar Innovations, LLC. Finding no merit in Drivetrain's bundle-of-sticks argument, the Court ruled that a Debtor holding a severed mineral estate, like Consolidated here, cannot extend a mortgage on that subsurface estate to encumber the surface estate whether that surface estate is owned by an unrelated third party or an affiliated Debtor. Id. at 12.
Thus, because Drivetrain has not disputed the validity or amount of Frontier's and Ohio-WV's mechanic's liens, but only their priority, and the Court's Murray I decision ruled that an entity owning a subsurface estate along with the right to use the surface for mining purposes does not have the right to mortgage the surface estate, the Court finds that the cross-motions for summary judgment of Frontier and Ohio-WV are well-taken and are GRANTED.
Frontier's Claim No. 1810 is allowed as a secured claim in the amount of $233,585.08, and shall not be reclassified as a general, unsecured claim. Likewise, that portion of Ohio-WV's Claim No. 1196 filed as secured, i.e., $394,559.73, is allowed as filed and shall not be reclassified as a general, unsecured claim.
IT IS SO ORDERED.