Hazard Coal Corp. v. Am. Res. Corp. (In re Cambrian Holding Co.)

110 F.4th 889

IN RE: CAMBRIAN HOLDING COMPANY, INC., Debtor.

Hazard Coal Corporation, Lessor-Appellant, v. American Resources Corporation; Perry County Resources LLC, Lessees-Appellees.

No. 23-5507

United States Court of Appeals, Sixth Circuit

Argued: March 21, 2024

Decided and Filed: August 6, 2024

Appeal from the United States District Court for the Eastern District of Kentucky at Lexington; No. 5:21-cv-00040—Karen K. Caldwell, District Judge.

United States Bankruptcy Court for the Eastern District of Kentucky at Lexington; No. 5:19-bk-51200—Gregory R. Schaaf, Bankruptcy Judge.

ARGUED: Stanton L. Cave, STAN CAVE LAW OFFICE PLLC, Lexington, Kentucky, for Appellant. Michael J. Gartland, DELCOTTO LAW GROUP PLLC, Lexington, Kentucky, for Appellees. ON BRIEF: Stanton L. Cave, STAN CAVE LAW OFFICE PLLC, Lexington, Kentucky, Douglas T. Logsdon, MCBRAYER PLLC, Lexington, Kentucky, for Appellant. Michael J. Gartland, DELCOTTO LAW GROUP PLLC, Lexington, Kentucky, Billy R. Shelton, SHELTON, BRANHAM & HALBERT, PLLC, Lexington, Kentucky, for Appellees.

Before: GIBBONS, BUSH, and MURPHY, Circuit Judges.

OPINION

MURPHY, Circuit Judge.

This case pits a party that potentially committed negligence (by sitting on its rights) against a party that potentially committed fraud (by making false statements to a court). An affiliate of Cambrian Holding Company held a lease to mine coal on land owned by Hazard Coal Corporation. During its bankruptcy, Cambrian proposed to sell its interest in the lease to American Resources Corporation. American Resources falsely warranted that it could obtain a mining permit. The bankruptcy court approved the lease assignment on this mistaken understanding. Hazard Coal learned later that American Resources could not lawfully mine coal. It has repeatedly tried to unwind this assignment ever since. The bankruptcy court has rebuffed every attempt. This appeal grows out of Hazard Coal's challenge to the assignment in a separate suit. In response to that challenge, American Resources returned to Cambrian's bankruptcy case and asked for a "declaration" that the court's prior orders had already rejected Hazard Coal's claims. The bankruptcy court issued this declaration clarifying its orders, and Hazard Coal asks us to review its declaration order on appeal. Although we find American Resources' conduct troubling, we must evaluate the bankruptcy court's order under a deferential abuse-of-discretion standard. Given that court's closer proximity to the events, we see no such abuse. We thus affirm.

I

Hazard Coal owns a coal mine in eastern Kentucky. Decades ago, it leased its interest in this mine to another entity. The lease allowed this lessee to extract coal from the mine in exchange for paying royalties to Hazard Coal. At some point, a subsidiary of Cambrian Holding Company obtained the lessee's interest in the lease. In 2019, however, Cambrian fell on hard times. It filed for bankruptcy along with 18 affiliates, including its leaseholder subsidiary. Because the differences between these affiliated debtors do not matter to this appeal, we will refer to them all as "Cambrian." This case concerns the way that Cambrian transferred its interest in the Hazard Coal lease to American Resources Corporation during the bankruptcy proceedings.

A

To understand the facts, one must understand the basics of bankruptcy law. When a debtor like Cambrian files for bankruptcy, the filing creates an "estate" made up of the debtor's property interests. 11 U.S.C. § 541(a). These interests can include a debtor's rights in a contract like Cambrian's rights in the Hazard Coal lease. See Mission Prod. Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370, 373, 139 S.Ct. 1652, 203 L.Ed.2d 876 (2019). If, as in this case, a debtor reorganizes under Chapter 11 of the Bankruptcy Code, the debtor may act as a "debtor in possession" by continuing to run its business while negotiating a reorganization plan with its creditors. See 11 U.S.C. §§ 1101(1), 1107(a); MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 292, 143 S.Ct. 927, 215 L.Ed.2d 262 (2023).

A debtor in possession generally obtains the same "rights" that a bankruptcy trustee would possess over the estate. 11 U.S.C. § 1107(a). Among other things, the debtor may "sell" "property of the estate" "other than in the ordinary course of business[.]" Id. § 363(b)(1). Such a sale, though, must satisfy § 363's rules. The bankruptcy court must provide "notice and a hearing" for the sale. Id. And if another party has an interest in the property, this party may ask the court to ensure that the sale's terms "provide adequate protection of such interest." Id. § 363(e). Another section reinforces that a debtor may not "assign" its interest in an "unexpired lease" unless the debtor gives "adequate assurance of future performance by the assignee[.]" Id. § 365(f)(2).

Courts have treated a bankruptcy court's order approving a sale of the debtor's property under § 363 as a "final" order. This treatment has meant that a disgruntled party can immediately appeal a sale order. 28 U.S.C. § 158(a)(1); see 1 Collier on Bankruptcy ¶ 5.08 (16th ed. 2023); Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 543 (7th Cir. 2003). And it has meant that a sale order can trigger the doctrines of issue and claim preclusion in other cases. See Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 578 (6th Cir. 2008).

Yet parties who disagree with the sale order must move fast. Section 363(m) provides that a reviewing court's reversal of an order approving a property sale will "not affect the validity of" the sale "to an entity that purchased ... such property in good faith" unless the challenger obtains a stay "pending appeal" of the order. 11 U.S.C. § 363(m). So if a buyer acted in good faith and a challenger fails to obtain a stay, a reviewing court cannot unwind the sale even if the bankruptcy court erred. See In re Made in Detroit, Inc., 414 F.3d 576, 580-81 (6th Cir. 2005).

B

As part of its reorganization plan, Cambrian proposed to sell most of its assets, including its interest in the Hazard Coal lease, under § 363. In August 2019, the bankruptcy court approved "Bidding Procedures" for an auction of these assets. The court set a speedy pace. It scheduled the auction for September 18. It gave parties two days to object to any sale. And it scheduled a hearing on the sale for September 24. The Bidding Procedures warned that, if a counterparty to a contract with Cambrian (such as Hazard Coal) did not timely object to a contract assignment, the counterparty would be "estopped and permanently enjoined" from challenging the assignment. Order, B.R. 339, at 11.

After Cambrian held the auction, the first successful bidder dropped out. So Cambrian held a second auction days later. This time, American Resources prevailed. Critically, however, the Bidding Procedures explained that Cambrian could consider a bid to buy its interest in the Hazard Coal lease only if the bidder verified that it was not "permit blocked"—meaning that government authorities had not blocked the bidder from obtaining a permit to mine coal. Procedures, B.R.339, at 5. Yet American Resources was permit blocked, and both companies knew as much. They proceeded with the sale anyway. To make matters worse, their proposed agreement (what we will call the "Original Agreement") falsely warranted that American Resources was not permit blocked.

Worse still, Cambrian and American Resources did not tell the bankruptcy court at the hearing about the sale that American Resources was permit blocked. On September 25, the bankruptcy court issued a "Sale Order" that approved the sale of Cambrian's lease interest to American Resources. This order identified American Resources as a "good faith purchaser" entitled to protection under § 363(m) and reiterated that Hazard Coal was now "barred from objecting" to the assignment. Order, B.R.534, at 5-6, 10, 20. The Sale Order also approved the Original Agreement, including its false warranty that American Resources was not permit blocked. The order allowed Cambrian and American Resources to modify the agreement without further court approval if any change did "not have a material effect" on Cambrian or its estate. Id. at 20. If, by contrast, "[a]ny material" change would have "an adverse effect" on Cambrian and its estate, the bankruptcy court had to approve it after notifying all parties. Id. at 21. The deal closed days after the hearing.

For reasons known only to Hazard Coal, the company sat on its rights throughout this time. It received written notice of Cambrian's intent to transfer the lease, the Bidding Procedures, and the deadlines to object. Before the auction, however, it did not object to any assignment of the lease. It also did not attend the auction. And it did not attend the bankruptcy court's later hearing over the sale. Lastly, it did not appeal the Sale Order.

Hazard Coal instead showed up later. On October 9, it asked the court to reconsider, alter, amend, or vacate the Sale Order. This motion originally raised challenges that do not matter now. In a later "response," though, Hazard Coal added a new argument in support of the motion: its research showed that Kentucky had permit blocked American Resources. This fact allegedly made it "impossible" for the parties to execute the Original Agreement. Resp., B.R.810, at 18. And American Resources' false statements allegedly showed that it was not a good-faith purchaser under § 363(m).

The bankruptcy court considered Hazard Coal's motion at a hearing on December 19. The day before, Cambrian filed a "notice" that announced it had completed the lease assignment to American Resources and attached the final agreement. These parties had completed the deal back on September 27. But the contract contained different terms from the Original Agreement. Their "Revised Agreement" disclaimed any suggestion that American Resources was not permit blocked. The...