In re Johnson

IN RE: DENNIS RAY JOHNSON, II, APPALACHIAN MINING AND RECLAMATION, L.L.C., DJWV1, LLC, DJWV2, LLC, ELKVIEW RECLAMATION & PROCESSING LLC, GREEN COAL, LLC, JOINT VENTURE DEVELOPMENT, LLC, THE LITTLE KENTUCKY ELK, LLC, MOUSSIE PROCESSING, LLC, PRODUCER'S COAL, INC., PRODUCER'S LAND, LLC, REDBUD DOCK, LLC, SOUTHERN MARINE SERVICES LIMITED LIABILITY COMPANY, SOUTHERN MARINE TERMINAL, LLC, and SABBATICAL, INC., Debtors

CASE NO. 3:16-bk-30227

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF WEST VIRGINIA IN HUNTINGTON

March 31, 2019

Joint Administration

CHAPTER 11

JUDGE FRANK W. VOLK

MEMORANDUM OPINION AND ORDER

Pending are the following matters: (1) Application for Administrative Expenses by Patrick S. Cassidy, Thomas M. Cunninghamn, and Martin P. Sheehan (the "Application") [dckt. 1037]; (2) Motion to Compromise or Approve Settlement filed by Trustee Thomas H. Fluharty (the "Fluharty Motion to Compromise") [dckt. 1212]; (3) Motion filed by Denise Johnson to Treat Trustee's Motion to Compromise as a Sale Motion Under 11 U.S.C. § 363 (the "Motion to Treat as Sale") [dckt. 1239]; (4) the Upset Bid filed by Denise Johnson (the "Upset Bid") [dckt. 1240]; and (5) Application for Interim Compensation filed by Lewis Glasser (the "LG Application") [dckt. 1237].

These matters came before the Court for hearing on November 20 and December 10, 2018. Following argument, the Court instructed the parties to file supplemental briefing. The deadline for objections to the LG Application was December 24, 2018, with Responses due by December 31, 2018. All parties who presented evidence at the December 21, 2018, hearing were to submit a joint stipulation of facts, along with post-hearing briefs and cross-responses, with the last deadline being January 23, 2019. The Joint Stipulation was filed on January 15, 2019, and all briefing deadlines have elapsed. The matter is ready for adjudication.

I.

A. Procedural Background

In May 2016, a number of related entities controlled by Dennis Johnson filed Chapter 11 bankruptcy petitions. Along with Mr. Johnson, individually, the filing entities are: Appalachian Mining and Reclamation, LLC, DJWV1, LLC, DJWV2, LLC, Elkview Reclamation and Processing, LLC, Green Coal, LLC, Joint Venture Development, LLC, Little Kentucky Elk, LLC, Moussie Processing, LLC, Producer's Coal, Inc., Producers Land, LLC, Redbud Dock, LLC, Southern Marine Services, LLC, Southern Marine Terminal, LLC, and Sabbatical, Inc. (excluding Joint Venture Development, LLC, the "Coal Enterprise"). All of the debtor entities, except for Joint Venture Development, LLC, were part of the Coal Enterprise controlled by Dennis Johnson. The Court ordered that the cases be jointly administered under the Dennis Johnson case (3:16-bk-30227) and appointed a Chapter 11 Trustee on November 7, 2016. Sabbatical, Inc. ("Sabbatical") was joined with the Coal Enterprise cases on March 24, 2017.

B. Factual Background

Between September 23, 2011, and April 23, 2013, Peoples Bank ("Peoples" or "Bank") made several loans to multiple debtor entities, one of which was guaranteed by Dennis Johnson and Mark Pinson. On June 30, 2015, Mr. Johnson and Peoples executed a forbearance agreement ("the Forbearance Agreement"). In the Forbearance Agreement, Mr. Johnson, on behalf of himself and other entities, pledged additional collateral for the Peoples' loans. Pursuant to the Forbearance Agreement, all of Mr. Johnson's assets identified therein had to be refinanced or sold by the end of 2015. Sabbatical was not a party to the Forbearance Agreement.

Just prior to the execution of the Forbearance Agreement, Peoples ordered appraisals of several Coal Enterprise assets, namely, the Ivel Wash Plant, the Logan Mine, and the Stonecoal Mine. Peoples received the preliminary appraisal on the Stonecoal Mine on April 16, 2015, and shared it with Mr. Johnson that day. Peoples obtained the final appraisals on June 19, 2015, which also included valuations of the Logan Mine and Ivel Wash Plant (the "Final Appraisals"). The Final Appraisals indicated that the combined conditional value of the three properties could reach as much as $69,000,000. The Final Appraisals were effective July 1, 2015.

During negotiations on the Forbearance Agreement, and before receiving copies of the Final Appraisals, Mr. Johnson emailed Peoples and threatened to declare bankruptcy should the Bank not offer him the terms he sought to be included in the draft Forbearance Agreement. Mr. Johnson, having pledged collateral for an anticipated Forbearance Agreement, was unaware of the aforementioned Final Appraisals and threatened to void the pledge of additional collateral through a bankruptcy filing if the desired Forbearance Agreement was not forthcoming. As noted, the Forbearance Agreement was eventually executed by the parties on June 30, 2015. Mr. Johnson, however, did not receive the Final Appraisals until July 2, 2015. When he asked Peoples aboutthe Final Appraisals prior to receiving them, the Bank allegedly misrepresented to him the valuations appearing therein.

After reviewing the Final Appraisals, Mr. Johnson signed an amendment to the Forbearance Agreement in August 2015 (the "Forbearance Amendment"). The Forbearance Amendment was signed by Mr. Johnson and lists Joint Venture Energy Associates, LLC, as an obligor ("Joint Venture Energy"). Joint Venture Energy was not an obligor on the original Forbearance Agreement. The Forbearance Amendment was not signed by Peoples, nor was it signed by any of the obligors on the original Forbearance Agreement.

After Peoples declared a default under the Forbearance Agreement and initiated state court litigation¹ against Mr. Johnson and several Coal Enterprise entities, the bankruptcy cases were filed on May 9, 2016. The Chapter 11 Trustee, Thomas Fluharty, was appointed thereafter. Almost immediately, the Trustee sought to sell the Coal Enterprise assets inasmuch as virtually no cash remained on hand and potentially disastrous environmental issues loomed large.

While the Trustee was in the process of soliciting interested buyers, he and Peoples initiated an adversary proceeding against Dewey Webb (the Dock Manager for the Lockwood Dock, owned by Sabbatical) and TJD&B, LLC (a company formed by Mr. Webb). The Trustee alleged that the defendants conspired with Mr. Johnson and converted assets of the Coal Enterprise estates by excavating and selling the coal base at the Lockwood Dock to Noble Americas Corp. Payment for the coal was remitted to TJD&B, LLC. According to Peoples' deposition of Mr. Webb, he acted at Mr. Johnson's direction. Mr. Fluharty further alleged that Mr. Johnson attempted to cover up the theft by claiming the sold coal was purchased from a company namedCalgon. Peoples asserts that Mr. Webb was pressured to sign a false affidavit and record fake phone calls to obfuscate Mr. Johnson's involvement in the scheme. At a hearing on March 1, 2019, the parties in the Webb adversary proceeding announced a compromise that awaits court review and approval.

Meanwhile, the Chapter 11 Trustee closed on the sale of Coal Enterprise assets in October 2017. In addition to payment, the buyer, Stella Natural Resources ("Stella"), assumed liability of the environmental permits to the tune of $1.6 million. From the sale proceeds, $2.6 million was distributed to Peoples, $200,000 went to Community Trust Bank, and $800,000 was paid to Prater Creek. Peoples agreed to carve out from its secured claim $450,000 to pay the Trustee's sale costs. A significant percentage of that carve-out was used by the Trustee to fund mining permit maintenance expenses. In the sale order, the Trustee reserved the right to seek recovery of funds paid to Peoples in case the Forbearance Agreement was ever adjudicated to be fraudulently induced.

Of the funds paid by the Trustee to Peoples pursuant to the sale, portions were based on a resolution between the two regarding the value of the assets and the bankruptcy claims Peoples asserted, as well as the sale of assets held by Producers Land WV, LLC, which is not a debtor in the Coal Enterprise. According to the underlying sale motion, the distribution of sale proceeds did not qualify as a release of claims.

Subsequently, the Trustee decided to investigate actions against Peoples and several other defendants on behalf of the Coal Enterprise estates. In May 2017, he employed for that purpose Patrick Cassidy of Cassidy, Cogan, Shapell & Voegelin, L.C., and Martin Sheehan of Sheehan & Nugent PLLC (collectively "Special Counsel"). In October 2017, Special Counsel instituted a civil action on behalf of the Trustee and several Coal Enterprise entities in the SouthernDistrict of West Virginia ("District Court Action") against Peoples, Peoples Insurance Agency LLC ("Peoples Insurance"), Great American Insurance Company of New York ("GAIC"), and Zachary B. Burkons.

The District Court Action centers on various loans from Peoples to the affected Coal Enterprise entities through loan officer Robert Van Nostrand from 2011 to 2014. The loans total approximately $19,000,000. The Coal Enterprise entities assert that Mr. Van Nostrand and Mr. Johnson enjoyed a confidential and special relationship which was exploited by Peoples. The case involves key appraisals that may have been withheld from Mr. Johnson, representations by Mr. Van Nostrand regarding long-term refinancing offers from Peoples to Mr. Johnson,² and potential fraudulent inducement by Peoples which caused Mr. Johnson to offer additional collateral on the loans and enter into what he believes was an "unfavorable" Forbearance Agreement.

The Coal Enterprise entities claim that Peoples did not follow through with Mr. Van Nostrand's promises of refinancing and thus required Mr. Johnson to pursue an asset sale, under Peoples' supervision and control, which Peoples' Board of Directors later rejected. Peoples also allegedly offset against insurance monies due to the Coal Enterprise entities and acted negligently in...