Consol Energy Inc. v. Murray Energy Holdings Co. (In re Murray Energy Holdings Co.)

In re: MURRAY ENERGY HOLDINGS CO., et al., Debtors.

CONSOL Energy Inc., Plaintiff, v. Murray Energy Holdings Co., et al., Defendants.

Case No. 19-56885

Adv. Pro. No. 20-2036

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION

July 14, 2020

Chapter 11

Judge Hoffman

Jointly Administered

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS AMENDED COMPLAINT (DOC. 6)

I. Introduction

In this adversary proceeding, CONSOL Energy Inc. seeks relief against Murray Energy Holdings Co. and its affiliated debtors and debtors in possession (collectively, the "Debtors"). The Debtors intend to assume and assign a subset of their agreements with CONSOL and reject the rest. CONSOL contends that the agreements constitute a single integrated agreement and that the Debtors therefore must either assume and assign all of the agreements or reject them all. In addition, CONSOL argues that it has interests in real property under certain of the agreements that cannot be eliminated through rejection. It also asserts claims for breach of contract. The Debtors argue that an adversary proceeding is not the proper procedural vehicle for some of CONSOL's claims, and they seek to dismiss the entire adversary proceeding for failure to state a claim upon which relief can be granted. For the reasons explained below, the Debtors' request for dismissal is granted in part and denied in part.

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). There is no constitutional impediment to the entry of this opinion and order because "both before and after Stern v. Marshall, it is clear that the bankruptcy court may handle all pretrial proceedings, including the entry of an interlocutory order dismissing fewer than all of the claims in an adversary complaint[.]" O'Toole v. McTaggart (In re Trinsum Grp., Inc.), 467 B.R. 734, 738 (Bankr. S.D.N.Y. 2012).

III. Procedural History

The Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on October 29, 2019 (the "Petition Date"). After CONSOL commenced this adversary proceeding andbrought an amended complaint (the "Amended Complaint") (Doc. 4), the Debtors filed a motion to dismiss (the "Motion to Dismiss") (Doc. 6). CONSOL filed an objection (the "Objection") (Doc. 13) and the Debtors a reply (the "Reply") (Doc. 15).

IV. Background

In 1959, Consolidation Coal Company entered into a lease (the "Tetrick Lease") with various parties (the "Tetrick Lessors") under which the Tetrick Lessors leased certain seams of coal to Consolidation Coal and granted it "mining rights and privileges appurtenant to said leased coal, and incident to the ownership thereof." Am. Compl. ¶¶ 56, 65. The term of the Tetrick Lease (20 years) would be automatically renewed and extended "so long as may be necessary to mine and remove all the merchantable or practicably and economically minable coal herein leased." Id. ¶ 66. In exchange for the conveyance and mining rights described in the Tetrick Lease, Consolidation Coal agreed to pay the Tetrick Lessors rent for the net acreage of leased coal and royalties for mined coal. Id. ¶ 67.

In 1989, Consolidation Coal assigned its leasehold interest "in a certain area of coal subject to the Tetrick Lease" (the "Tetrick Southern Assignment") to Reserve Coal Properties Company. Id. ¶ 57. Consolidation Coal retained that portion of the Tetrick Lease that was not included in the Tetrick Southern Assignment. Id. ¶ 58. In 2013, Reserve was merged with and into CNX RCPC LLC, and CNX assigned the Tetrick Southern Assignment to CCC RCPC LLC, which, along with Consolidation Coal and subsidiaries of Consolidation Coal (the "Consolidation Coal Debtors"), are debtors in these Chapter 11 cases. Id. ¶ 59.

Also in 2013, Murray Energy Corporation and one of its subsidiaries, Ohio Valley Resources, Inc., entered into a stock purchase agreement (the "Purchase Agreement") (Ex. A to theAm. Compl.)¹ under which Ohio Valley would purchase 100% of the shares of common stock of Consolidation Coal, which at that time was a CONSOL subsidiary. Consolidation Coal's business as of the closing was to be the "Mining Transferred Business"² and the "Related Transferred Business"³ (collectively, the "Consolidation Coal Business"). Am. Compl. ¶¶ 1-2, 25, 28-30.

The parties also entered into several other agreements that the Purchase Agreement denominated the Ancillary Agreements. The Ancillary Agreements were the Cooperation and Safety Agreement, the Escrow Agreement and Escrow Release Letter, the AMD Services Agreement, the Master Salaried Employee and Employee Benefit Agreement, the CNX Marine Shipping Agreement, the Eighty Four Mining Company Lease Agreement, the Surface Use Agreement, the Transition Services Agreement, and both the Overriding Royalty Agreement and the Second Overriding Royalty Agreement (collectively, the "Overriding Royalty Agreements") (Exs. E & F to the Am. Compl.). Id. ¶ 34.

As of the time of the closing, the Consolidation Coal Debtors owned interests in the deeds, or controlled the leasehold interests in the leases, set forth in Exhibit D to the Overriding Royalty Agreements (the "Other Interests"). Id. ¶ 60. As additional consideration for the Purchase Agreement, the Consolidation Coal Debtors agreed to grant CONSOL an overriding royalty interest in, and to pay CONSOL annual minimum payments for, coal that was subject to the Tetrick Leaseand the Other Interests and that was located in an area outside the boundaries of the Robinson Run Mine. Id. ¶ 61.

The Overriding Royalty Agreements stated that they were "being entered into in connection with the transactions contemplated by" the Purchase Agreement and that the overriding royalties were being granted "as additional consideration for the Purchase Agreement." Id.; Overriding Royalty Agreements at 1-2. The Consolidation Coal Debtors acknowledged in the Overriding Royalty Agreements that they held a leasehold interest in the coal that is subject to the Tetrick Lease and that they also held the Other Interests. Am. Compl. ¶ 102.

By the Overriding Royalty Agreements, the Consolidation Coal Debtors agreed to "grant, convey and assign an overriding royalty interest in the coal within" the land subject to the Tetrick Lease and the Other Interests. Id. ¶ 71. The Overriding Royalty Agreements granted an overriding royalty in the unmined coal itself and also obligated the Consolidation Coal Debtors to make payments to CONSOL for the coal they actually mined and removed or sold. Id. ¶ 73. Paragraph 5(b) of each Overriding Royalty Agreement provided that it "constitutes a covenant running with all the land" that is subject to the overriding royalty interests. Id. ¶ 72.

The Purchase Agreement provided for the parties' delivery of executed counterparts of the Overriding Royalty Agreements and the other Ancillary Agreements at closing. Ex. A at 17-18. It also stated that the Purchase Agreement, the Ancillary Agreements and a Confidentiality Agreement together "constitute[d] the entire agreement of the parties [to the Purchase Agreement] with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, between the parties hereto with respect to the subject matter hereof and thereof." Id. at 64.

The transactions contemplated by the Purchase Agreement closed on December 5, 2013. Am. Compl. ¶ 27. That same day, the parties entered into a Closing Letter Agreement (Ex. L). Id. ¶ 35. The purpose of the Closing Letter Agreement was "to effect the transactions contemplated by the [Purchase Agreement]" and to "clarify the treatment of certain contracts." Am. Compl. ¶ 36. The Closing Letter Agreement incorporated Article XI of the Purchase Agreement. Ex. L at 9. The agreements that are the subject of the Closing Letter Agreement were the Coal Sale Agreements, the Coal Handling Processing Agreement, the Virginia Coalfield Credit Agreement, the Emission Rights Project Development Agreement, the Buchanan Letter of Credit Agreement, the Finance Equipment Lease, the Transferred Mine Vehicle Leases and certain software licenses. Am. Compl. ¶¶ 37-45.

The parties also entered into a Closing Land Letter Agreement (Ex. N) to "supplement and revise" the Purchase Agreement. Id. ¶¶ 46-47. The Closing Land Letter Agreement stated that "the terms and conditions of the [Purchase Agreement] shall apply and are incorporated" into the Closing Land Letter Agreement. Id. ¶ 48. The Closing Land Letter Agreement also provided that the "Closing Deliveries by the Seller" under Section 2.04 of the Purchase Agreement and the "Closing Deliveries by the Purchaser" under Section 2.05 would include the Surface Use Agreement, the Cooperation and Safety Agreement, the Overriding Royalty Agreements, the Office Facilities Lease Agreements, the Substation and Power Line Agreement, and the Substation and Power Line Rights-of-Way. Ex. N at 2-3; Am. Compl. ¶ 49-50. The Closing Land Letter Agreement further provided for the assignment and conveyance of "certain parts of the Tetrick South Reserves (which includes the Tetrick Lease)" to CCC RCPC LLC and CCC Land Resources LLC, which are two of the Consolidation Coal Debtors (Case Nos. 19-56956 & 19-56953). Ex. N at 3-4.

The Court will refer to the Purchase Agreement, the Ancillary Agreements, the Closing Letter Agreement, the Closing Land Letter Agreement, and the agreements that are the subject of the Closing Letter Agreement and the Closing Land Letter Agreement as the "Agreements."

The Debtors concede that the Purchase Agreement, the Closing Letter Agreement, and the Closing Land Letter Agreement constitute a single, integrated contract, Reply at 3, but they contest CONSOL's allegation that the other...