Opinion
Case No. 20-10390
08-08-2020
IN RE: MURRAY METALLURGICAL COAL HOLDINGS, LLC, et al., Debtors.
Thomas R Allen, Rick L. Ashton, James A Coutinho, Richard K Stovall, Matthew M Zofchak, Allen Stovall Neuman Fisher & Ashton LLP, Columbus, OH, for Debtor In Possession.
Thomas R Allen, Rick L. Ashton, James A Coutinho, Richard K Stovall, Matthew M Zofchak, Allen Stovall Neuman Fisher & Ashton LLP, Columbus, OH, for Debtor In Possession.
OPINION AND ORDER ON DEBTORS' MOTION TO STRIKE NOTICE OF ELECTION OF BAY POINT CAPITAL PARTNERS II, LP UNDER 11 U.S.C. § 1111(b) (DOC. 561)
John E. Hoffman, Jr., United States Bankruptcy Judge
I. Introduction
This contested matter arises in the Chapter 11 cases of Murray Metallurgical Coal Holdings, LLC ("Met Holdings") and its affiliated debtors and debtors in possession (collectively, the "Debtors"). Bay Point Capital Partners II, LP ("Bay Point") has filed a proof of claim asserting a secured claim in an amount exceeding $13.6 million under an equipment lease with Debtor Murray Oak Grove Coal, LLC ("Murray Oak Grove"). In an adversary proceeding that Murray Oak Grove commenced seeking to recharacterize the equipment lease as a disguised security agreement, Bay Point conceded that the lease is in fact a secured financing arrangement. Bay Point also asserted, and Murray Oak Grove stipulated, that Bay Point has a perfected security interest in certain longwall shields and their fixed electronic controls (the "Collateral"), the value of which establishes the amount of Bay Point's secured claim under § 506(a) of the Bankruptcy Code. The Court concluded in the adversary proceeding that the Collateral's value is $12,682,933, meaning that Bay Point's $13.6 million claim is undersecured.
Seeking to have its claim treated as fully secured, Bay Point filed a notice "elect[ing] the application of 11 U.S.C. § 1111(b)(2) to treat its allowed claim against Murray Oak Grove ... as a fully secured claim." Doc. 479. The Debtors then filed a motion (the "Motion") (Doc. 561) requesting that the Court strike the election. They argue that Bay Point has no right to elect treatment under § 1111(b) because the Debtors' proposed Chapter 11 plan (Doc. 502) (the "Plan") provides for the sale of the Collateral and because § 1111(b) makes the election unavailable if the Collateral is "to be sold under the plan." 11 U.S.C. § 1111(b)(1)(B)(ii).
In its objection to the Motion (the "Objection") (Doc. 574), Bay Point relies on case law holding that a secured creditor may make the § 1111(b) election notwithstanding the sale of the creditor's collateral under a plan if the creditor's right to credit bid on the collateral is not being honored. Obj. at 3–6. And Bay Point takes the position that it had no ability to credit bid on the Collateral because it could not do so without also bidding for substantially all of the assets of Murray Oak Grove. Id. at 8. Bay Point further argues that the proposed sale of substantially all of Murray Oak Grove's assets under the Plan is not a true sale but in reality is a disguised reorganization. Id. at 9. In their reply to the Objection (the "Reply") (Doc. 588), the Debtors dispute this characterization, maintaining that the sale contemplated by the Plan is in fact a true asset sale, not a reorganization masquerading as a sale. Reply at 9–10. They also take issue with Bay Point's reading of § 1111(b) as preserving the right to make the election unless the creditor has the right to credit bid. Id. at 5. Furthermore, the Debtors point out that Bay Point had the right to credit bid on all of Murray Oak Grove's assets, id. at 5–6, and they argue that Bay Point waived any right it had to bid on the Collateral alone without also bidding for Murray Oak Grove's other assets, id. at 7–8.
For the reasons explained below, the Court concludes that the Collateral is being sold under the Plan and that, by entering into an agreed bidding procedures order with the Debtors, Bay Point forfeited any right it otherwise had to make a credit bid for the Collateral separate and apart from Murray Oak Grove's other assets. And based on that forfeiture, Bay Point cannot now argue that it is entitled to make an § 1111(b) election because of the Debtors' purported failure to honor its credit bidding rights. The Debtors accordingly are entitled to the relief requested in the Motion.
II. Jurisdiction and Constitutional Authority
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). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A) & (O). Because a dispute over the right to make an election under § 1111(b) "stems from the bankruptcy itself," the Court also has the constitutional authority to enter a final order adjudicating this matter. Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
III. Background
Met Holdings filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 11, 2020, followed by Murray Oak Grove and the other Debtors on February 12, 2020. The Debtors commenced their cases after entering into a restructuring support agreement (the "RSA") providing for, among other things, the sale of substantially all of the assets of Murray Oak Grove, including the Collateral. Mot. at 3. The RSA also contemplated that the stalking horse bidder for the assets would be formed by MC Southwork LLC and an entity to be identified by Murray Energy Corporation. Id. at 4.
On March 12, 2020, the Debtors filed a motion for approval of bidding procedures for the sale of Murray Oak Grove's assets (the "Bidding Procedures Motion") (Doc. 247). The proposed bidding procedures defined "Qualified Bidder" to mean a bidder who, among other things, "demonstrates the financial capability to consummate the Sale," Bidding Procedures Mot., Ex. 1 to Ex. A at 6, and "Sale" was defined to mean a sale "of substantially all of the assets of Murray Oak Grove," Bidding Procedures Mot. at 1–2. The proposed bidding procedures order further provided that credit bids could be made by "[a]ny Qualified Bidder who has a valid and perfected lien on any Assets." Bidding Procedures Mot., Ex. A ¶ 12. Thus, Bay Point rightly read the Bidding Procedures Motion to mean that only a bidder for substantially all of the assets of Murray Oak Grove could be a Qualified Bidder and that only Qualified Bidders could credit bid.
In its response to the Bidding Procedures Motion (the "Bidding Procedures Response") (Doc. 350), Bay Point argued that the Court should approve the proposed bidding procedures only if the Debtors addressed five issues. First, it asked that the Debtors "be required to provide evidence that the procedures and timeline they have proposed will promote a competitive and robust bid process." Bidding Procedures Resp. at 3. Second, Bay Point requested that the Debtors be required to accept joint bids, to permit bidders to communicate about possible joint bids, and to recognize the rights of secured parties participating in joint bids to credit bid their secured claims. Id. at 3–4. Third, it argued that the Debtors should be required to disclose to Bay Point and other secured creditors the identity of prospective purchasers. Id. at 4. Fourth, it requested that the parties entitled to attend the auction be expanded to include Bay Point and its advisors. Id. And fifth, Bay Point sought clarification regarding the deadline to object to the successful bid while also asking that objections to the ability of the successful bidder to provide adequate assurance of future performance of assigned contracts not be due until after the successful bidder was identified. Id. at 4–5.
Following negotiations over the Bidding Procedures Motion, on April 13, 2020, the Court entered an agreed order approving bidding procedures for the assets of Murray Oak Grove (the "Agreed Bidding Procedures Order") (Doc. 394). The Agreed Bidding Procedures Order approved bidding procedures providing that joint bids that otherwise satisfied the requirements for a Qualified Bid would be considered by the Debtors and that secured parties participating in joint bids would be permitted to credit bid their secured claims. Agreed Bidding Procedures Order, Ex. 1 at 4, 11. Bay Point signed on to the Agreed Bidding Procedures Order, which provided that the bidding procedures "are fair, reasonable and appropriate and represent the best available method for maximizing value for the benefit of the Debtors' estates." Id. at 4.
After an auction held on May 5, 2020, the Debtors designated Hatfield Metallurgical Coal Holdings, LLC ("Hatfield")—the stalking horse bidder formed by MC Southwork LLC and Murray Energy Corporation—as the successful bidder. Doc. 455 (Notice of Designation of Successful Bid and Backup Bid for Oak Grove Assets). The sale of Murray Oak Grove's assets will be made under the Plan. Plan at 34–35.
IV. Legal Analysis
A. The Collateral Is Being Sold Under the Plan.
The Bankruptcy Code affords an undersecured creditor the right to elect to have its entire claim treated as secured. 11 U.S.C. § 1111(b)(2). The election, however, is unavailable if the property securing the claim "is sold under section 363 of [the Bankruptcy Code] or is to be sold under the plan." 11 U.S.C. § 1111(b)(1)(B)(ii). Bay Point attempts to negate the import of this provision by arguing that "the transaction embodied in the Debtors' Plan, although denominated as a sale, is really a reorganization, with the assets being transferred to a new entity owned by Murray Energy Corporation and the Debtors' principal prepetition secured lender, MC Southwork LLC." Obj. at 9. It bases this argument on language in the retention application of the Debtors' investment banker, Evercore Group L.L.C., pointing specifically to Evercore's statement in the application that the "Debtors intend to effectuate a reorganization of their remaining operations, which is premised on the continued and future operation of the Oak Grove mining complex, through a sale of Oak Grove pursuant to a plan." Id. (quoting Evercore retention application) (emphasis added by Bay Point). But the reorganization of the Debtors' operations does not change the fact that their assets are in fact being sold, as Evercore's application recognizes when it states that the Debtors intended all along to conduct a sale of Murray Oak Grove's assets under a plan.
During a hearing on the Motion held on July 1, 2020, Bay Point's counsel argued that the sale to Hatfield is not the "type of sale that was contemplated by Congress when it enacted section 1111(b)" because, consistent with the RSA, "[t]he debt owed to the prepetition secured lenders remains in place, Murray Energy will continue to be responsible for the day-to-day operations, and the equity is split between the prepetition secured lenders and Murray Energy." Hr'g on Mot. at 10:39:28–10:39:36, 10:39:40–10:39:58. The argument essentially concedes that the Collateral is being sold but contends that the sale is not the "type" of sale that Congress had in mind when it used the language "sale under the plan." This argument has no merit because there is no support in the Bankruptcy Code or the case law for the notion that Congress intended to restrict the meaning of "sale" in the manner suggested by Bay Point. Moreover, the argument is inconsistent with the record in this case: The RSA provided for the sale of the assets of Murray Oak Grove under a Chapter 11 plan, and the Debtors obtained approval of bidding procedures for those assets, marketed the assets for sale, conducted an auction, designated the stalking horse bidder (Hatfield) as the winning bidder, and provided for the sale of the assets in the Plan. Plan at 34–35. In other words, the Debtors and other parties have been proceeding during this entire case as though the sale of Murray Oak Grove's asset under the Plan is indeed a sale. The same is true of the Court, which has entered an order approving bidding procedures for the assets and an order (Doc. 520) approving a disclosure statement for the Plan that, as discussed above, describes the sale as a sale. Moreover, Hatfield is a "newly formed entity [that] will ultimately have completely different equity holders" than the Debtors—"MC Southwork and the purchaser of Murray Energy Corporation in its separate chapter 11 cases." Reply at 10. For all these reasons, the Court concludes that the Collateral is being sold under the Plan, not transferred in a disguised reorganization.
A transcript of the hearing on the Motion has not been prepared. References to the electronic recording of the hearing will be cited as "Hr'g on Mot. at [timestamp]."
B. Bay Point Forfeited Any Right It Had to Credit Bid on the Collateral Alone and Thus Also Forfeited Any Right It Had to Elect Treatment of Its Claim Under § 1111(b).
Bay Point argues that it nonetheless is entitled to make the § 1111(b) election because it did not have the right to credit bid on the Collateral without also bidding for substantially all the assets of Murray Oak Grove. In making this argument, it relies on case law holding that secured creditors that do not have the right to credit bid may make the § 1111(b) election even if the collateral is being sold under a plan. Obj. at 3–7. The Debtors contend that those cases are inconsistent with the plain language of § 1111(b)(1)(B)(ii), which makes no mention of credit bidding. Reply at 4–5. They also counter with a case in which the Fifth Circuit held that a secured creditor with a lien on a subset of the debtor's assets that were being sold under the plan was not entitled to make the election because the creditor had the right to credit bid on all of the assets. Reply at 6 (citing Baker Hughes Oilfield Operations, Inc. v. Morton (In re R.L. Adkins Corp.) , 784 F.3d 978 (5th Cir. 2015) ). Under Adkins , Bay Point could not have been heard to complain in the first instance because it indisputably had the right to submit a credit bid, whether on its own or as part of a joint bid, for all of Murray Oak Grove's assets. But the Court need not parse § 1111(b)(1)(B)(ii) or analyze the case law interpreting it, because Bay Point clearly forfeited its right to credit bid on the Collateral without bidding on all of the assets of Murray Oak Grove.
As already discussed, Bay Point raised numerous issues with the Bidding Procedures Motion, and only one of those issues related to credit bidding. Specifically, Bay Point argued that secured parties participating in joint bids for substantially all of Murray Oak Grove's assets should be permitted to credit bid their secured claims. According to Bay Point's counsel, Bay Point raised this issue because "[w]e had thought that perhaps there were bidders ... that might be interested in having us participate in order to take advantage of [Bay Point's credit bid]." Hr'g on Mot. at 10:27:52–10:28:08. And that issue was addressed to Bay Point's satisfaction in the Agreed Bidding Procedures Order.
Notably, in responding to the Bidding Procedures Motion, Bay Point did not contend that it should be permitted to submit a credit bid for the Collateral alone. Indeed, Bay Point's counsel conceded that Bay Point "did not insist in addressing the [Bidding Procedures Motion] ... that they offer those assets for sale on a piecemeal basis" because "[t]hat would have invited potentially a liquidation scenario, and we knew there were reasons why they wouldn't want to do that ... [a]nd we understood those reasons." Id. at 10:29:23–10:30:04. Counsel also acknowledged that Bay Point understood "[t]hat the whole concept here was to sell [Murray] Oak Grove as a going concern, and therefore the only bids that would be entertained would be for all or substantially all of the assets." Id. at 10:30:04–10:30:20.
The time to object on the basis of a purported denial of the right to credit bid was in response to the motion that set the parameters for bidding—the Bidding Procedures Motion. To enter into the Agreed Bidding Procedures Order and then insist that Bay Point should have been permitted to credit bid only on the Collateral strikes the Court as a classic case of the type of "sandbagging" that the Supreme Court has previously disapproved of in no uncertain terms. Stern , 564 U.S. at 482, 131 S.Ct. 2594. In Stern , the Court addressed "the consequences of ‘a litigant ... "sandbagging" the court—remaining silent about his objection and belatedly raising the error only if the case does not conclude in his favor.’ " Id. (quoting Puckett v. United States , 556 U.S. 129, 134, 129 S.Ct. 1423, 173 L.Ed.2d 266 (2009) ). According to the Supreme Court, if a litigant has an objection, then it should raise it "promptly," and the consequence of not doing so is forfeiture of the right to make the objection. Id. ; see also United States v. Olano , 507 U.S. 725, 731, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993) ("No procedural principle is more familiar to this Court than that a ... right of any ... sort, ‘may be forfeited ... by the failure to make timely assertion of the right before a tribunal having jurisdiction to determine it.’ ") (quoting Yakus v. United States , 321 U.S. 414, 444, 64 S.Ct. 660, 88 L.Ed. 834 (1944) ); Jenkins v. Foot Locker Inc. , 598 F. App'x 346, 348 (6th Cir. 2015) (holding that a party that failed to respond to a motion "accordingly forfeited any objection to the motion"); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (holding that "the parties forfeited any objection to the bankruptcy court's adjudication of the contract claim by failing to object at any point during the litigation to the bankruptcy judge's adjudicating the claim"); Jamison v. McClendon , No. 3:16-CV-595-CWR-LRA, ––– F.Supp.3d ––––, ––––, 2020 WL 4497723, at *25 (S.D. Miss. Aug. 4, 2020) ("Officer McClendon's failure to raise the argument in his motions for summary judgment means he has forfeited its resolution at this juncture."); First Americans Ins. Serv., Inc. v. Fitch (In re First Americans Ins. Serv., Inc. ), No. ADV A11-4074-TLS, 2011 WL 6130530, at *5 (Bankr. D. Neb. Dec. 8, 2011) ("Having failed to object after being provided with notice of the trustee's motion to extend the statute of limitations, Defendant has forfeited ... its arguments regarding the validity of the extension."); Troost v. Kitchin (In re Kitchin) , 327 B.R. 337, 361–62 (Bankr. N.D. Ill. 2005) (holding that plaintiffs who did not to object to the defendant's failure to comply with Rule 11's safe harbor provision forfeited their right to oppose the defendant's motion for Rule 11 sanctions on the basis of the non-compliance).
"Waiver is different from forfeiture." Olano , 507 U.S. at 733, 113 S.Ct. 1770 (1993). "Whereas forfeiture is the failure to make the timely assertion of a right, waiver is the ‘intentional relinquishment or abandonment of a known right.’ " Id. (quoting Johnson v. Zerbst , 304 U.S. 458, 464, 58 S.Ct. 1019, 82 L.Ed. 1461 (1938) ); see also Hasse v. Rainsdon (In re Pringle) , 495 B.R. 447, 460–61 (B.A.P. 9th Cir. 2013) (discussing the difference between waiver and forfeiture).
Again, in the Court's view, the time for raising the issue of whether Bay Point had the right to credit bid solely for Collateral was when it asserted its objections to the Bidding Procedures Motion—and at the very least before it signed on to the Agreed Bidding Procedures Order (an order reciting that the bidding procedures "are fair, reasonable and appropriate and represent the best available method for maximizing value for the benefit of the Debtors' estates"). Because Bay Point did not assert the objection before entering into the Agreed Bidding Procedures Order, the Court concludes that it has been forfeited.
During the hearing on the Motion, Bay Point relied on three points in arguing against its forfeiture of the right to credit bid and thus the right to make the § 1111(b) election. It points out that, in a footnote to the Bidding Procedures Response, it had stated:
In the event the proposed sale is to be consummated under section 363 of the Bankruptcy Code free and clear of Bay Point's liens against the [Collateral], or through a plan of reorganization that does not recognize Bay Point's claim as being fully secured, Bay Point reserves all rights available to it under section 363(k) of the Bankruptcy Code.
Hr'g on Mot. at 10:28:49–10:29:20 (quoting Bidding Procedures Resp. at 4 n.4). The reservation referenced § 363(k), which affords secured creditors the right to credit bid. 11 U.S.C. § 363(k). Bay Point's consent to the Agreed Bidding Procedures Order, however, negated whatever effect this reservation of rights might have had absent its entry by the Court.
Bay Point also relies on a paragraph of the Agreed Bidding Procedures Order providing that "[n]othing in this Order shall prejudice the right of Bay Point Capital Partners II, LP to object to the Sale in accordance with the requirements and procedures set forth herein." Hr'g on Mot. at 10:32:02–10:32:14 (quoting Agreed Bidding Procedures Order ¶ 4). If this paragraph had provided that Bay Point had the right to object to the Sale "for any reason," then Bay Point might at least have an argument here. See In re ASPC Corp. , 601 B.R. 766, 772 (Bankr. S.D. Ohio 2019) (holding that the right to object to the designation of an agreement for assumption and assignment could not be restricted in light of an agreed provision reserving the right to object "for any reason"). But that is not what the Agreed Bidding Procedures Order said. And it is now too clever by half for Bay Point to argue that the reservation of rights language in the Agreed Bidding Procedures Order somehow preserved its right to object to the Sale based on a ground it could have—and should have—raised at the time Bay Point objected to the Bidding Procedures Motion. This is especially true given that Bay Point raised another issue related to credit bidding, obtained a provision in the Agreed Bidding Procedures Order addressing that issue, and then conceded that it had declined to assert any right it had to credit bid solely on the Collateral because it recognized that permitting credit bidding on a piecemeal basis would not maximize value for Murray Oak Grove's bankruptcy estate. Given all this, the Court construes Paragraph 4 of the Agreed Bidding Procedures Order as preserving Bay Point's right to object to the Sale based on issues other than the right to credit bid solely for the Collateral.
Finally, Bay Point relies on the fact that, before the auction, it filed an objection to the Sale (Doc. 421) in which it purported to reserve its rights to object to the Sale and confirmation of the Plan based on its inability to credit bid for the Collateral without bidding on all the assets of the Debtors. That reservation stated:
[B]ecause the bid procedures restrict bids to only those that are being made for all or substantially all of the Debtors' assets, Bay Point does not have the ability to submit a credit bid for the [Collateral] in which it holds a security interest. Bay Point hereby reserves, in connection with proceedings on confirmation of the Debtors' Plan and/or approval of the Sale to the Successful Bidder following the auction, if any, to be held on April 29, 2020, all of its rights that flow from the limitation on its ability to submit a credit bid for the [Collateral].
Doc. 421 (Bay Point's objection to the Sale) at 11. But yet again, this reservation of rights had no effect in light of Bay Point's decision to consent to the entry of the Agreed Bidding Procedures Order. If Bay Point wanted to preserve the right to credit bid on the Collateral without participating in a Qualified Bid for substantially all the assets, then it should not have signed on to the Agreed Bidding Procedures Order. Having done so, it forfeited its ability to assert the right to credit bid solely on the Collateral. And as a result, Bay Point also forfeited the argument that it is entitled to elect treatment under § 1111(b) because its credit bidding rights were not honored by the Debtors.
V. Conclusion
For all of these reasons, the Motion is GRANTED . Bay Point's election to have its claim treated as fully secured under § 1111(b)(2) is STRICKEN .