In re Midway Gold United States, Inc.

575 B.R. 475

IN RE: MIDWAY GOLD US, INC., et al.,¹ Debtors.

Case No. 15–16835 MER

United States Bankruptcy Court, D. Colorado.

Signed October 6, 2017

Aaron J. Conrardy, Harvey Sender, Denver, CO, Nava Hazan, New York, NY, Scott A. Kane, Stephen D. Lerner, Andrew Michael Simon, Elliot M. Smith, Cincinnati, OH, Peter R. Morrison, Cleveland, OH, for Debtors.

ORDER

Michael E. Romero, Chief Judge United States Bankruptcy Court

These jointly-administered cases present, among other disputed confirmation issues, the question of whether Tenth Circuit law categorically forbids third-party releases in Chapter 11 plans, or whether prospective releases of inchoate third-party claims may be allowed in appropriate circumstances. The Court has considered the evidence and legal argument submitted by the parties in connection with confirmation of the Debtors' Second Amended Joint Chapter 11 Plan of Liquidation ("Plan") and the objections thereto by the United States Trustee, and makes the following findings of fact and conclusions of law.²

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (L) as it involves the administration of the estate and confirmation of the Debtors' Plan.

BACKGROUND FACTS

I. Overview.

Prior to filing their Chapter 11 petitions, the Debtors engaged in the business of exploration and mining of gold reserves. The Midway Gold Pan Mine, in White Pine County, Nevada, was the only project commercially mined. Other projects were in various stages of exploration and permitting.³

On June 22, 2015 ("Petition Date"), each of the fourteen Debtors filed a voluntary Chapter 11 petition for relief under Chapter 11 of the Bankruptcy Code.⁴ The Chapter 11 Cases are jointly administered for procedural purposes only under Case No. 15–16835 MER.

The following nine cases are non-asset cases: a) Golden Eagle Holding, Inc., 15–16837–MER; b) MDW GR Holding Corporation, 15–16838–MER; c) RR Exploration, LLC, 15–16839–MER; d) Midway Services Company, 15–16840–MER; e) Nevada Talon, LLC, 15–16841–MER; f) MDW Pan Holding Corporation, 15–16842–MER; g) MDW Mine, ULC, 15–16846–MER; h) GEH (BC) Holding, Inc., 15–16847–MER; and i) GEH (U.S.) Holding, Inc., 15–16848–MER.

The following five cases are asset cases: a) Midway Gold US Inc., 15–16835–MER; b) Midway Gold Corporation, 15–16836–MER; c) MDW Pan, LLP, 15–16843–MER; d) MDW Gold Rock, LLP, 15–16844–MER; and e) Midway Gold Realty, LLC, 15–16845–MER.

II. Corporate Structure.

As of the Petition Date, Midway Mine, ULC, a British Columbia corporation, owned 100% of Debtor Midway Gold Corporation, another British Columbia Corporation. Midway Gold Corporation owns 100% of Debtor Midway Gold US, Inc. ("MGUS"), a Nevada Corporation which in turn owns 100% of the following Nevada corporations: 1) Debtor MDW Pan Holding Corporation; 2) Debtor MDW–GR Holding Corporation; 3) Debtor Midway Services Company; 4) Midway Pan Mine Company; 5) Midway Gold Rock Mining Company; 6) RR Exploration, LLC; 7) Debtor Nevada Talon, LLC; 8) Debtor Midway Gold Realty, LLC; 9) Mine Services, LLC; and 10) Midway Exploration, LLC.

Midway Gold Corporation also owns 100% of another British Columbia corporation, GEH (BC) Holding, Inc., which in turn owns 100% of Debtor GEH (US) Holding, Inc., a Nevada corporation, and 100% of Debtor Golden Eagle Holding, Inc., a Washington corporation.

Debtor MDW Pan, LLP ("MDW Pan"), a Delaware corporation, is owned 87.5% by Debtor MDW Pan Holding Corporation, 12.5% by Midway Gold Corporation, and 1% by the above-noted Canadian company, Midway Mine, ULC. A Delaware limited partnership, Debtor MDW Gold Rock, LLP, is owned 75% by Debtor MDW GR Holding Corporation, 25% by Midway Gold Corporation, and 1% by Midway Mine, ULC.

Non-debtor affiliates include Midway Pan Mine Company, Midway Gold Rock Mine Co., Mine Services, LLC, and Midway Exploration, LLC. Each of these non-Debtors has no material property or operations.⁵

The principal business of Debtor Midway Gold Corporation, the parent company of MGUS, is the acquisition, exploration and development of mineral properties located in Nevada and Washington. Midway Gold Corporation's stock trades on the New York Stock Exchange and the Toronto Stock Exchange. Midway Gold Corporation's executive offices are located in Englewood, Colorado, and its senior management, including its Chief Executive Officer, Chief Financial Officer and General Counsel, work in the Englewood headquarters. All the Debtors in these jointly administered cases operate primarily through MGUS.

As of the Petition Date, the Debtors owed approximately $47.5 million under their Senior Debt Facility, described below. They also owed approximately $7.85 million under their Subordinated Debt Facility, described below.

III. Major Parties in Interest.

A. Commonwealth Bank of Australia, Senior Agent for Senior Debt Facility.

The Senior Debt Facility consists of senior lenders, with Commonwealth Bank of Australia ("CBA") serving as the Senior Agent. These creditors loaned $55 million to MDW Pan through a three-year senior secured project finance facility, intended to fund the development and construction of the Pan gold mine project. As of the Petition Date, the outstanding principal balance of the Senior Debt Facility was $47.5 million.⁶

MDW Pan's obligations under the Senior Credit Agreement were guaranteed by each of the other Debtors and the four non-Debtor affiliates. The Senior Secured obligations are secured by substantially all of the assets of MDW Pan, as described in detail in the Cash Collateral Order. In addition, each of the Debtors and the four non-debtor affiliates pledged 100% of the common stock they own in the other Debtors and non-debtors to secure the Senior Secured Obligations.

The Debtors drew down $47.5 million under the Senior Credit Agreement prior to the Petition Date. The Debtors' ability to draw additional amounts was contingent on various conditions precedent, including funding expected cost overruns and the establishment of an un-margined hedging program through the Senior Agent. The Debtors satisfied the gold hedging requirements on October 7, 2014, by entering into commitments to deliver to the Senior Agent, at a flat forward price of $1,200 per ounce, 80,500 ounces of gold over a 23–month period commencing in May 2015.

However, the Debtors lacked sufficient funds to complete construction of the Pan gold mine, fund operating and reserve accounts, and satisfy other requirements under the Senior Credit Agreement. On March 13, 2015, MDW Pan and CBA entered into a waiver which granted MDW Pan until April 20, 2015, to meet certain covenants set forth in the Senior Credit Agreement.

As consideration for the waiver, MDW Pan agreed to pay to the Senior Agent a non-refundable waiver fee equal to $0.2 million by June 30, 2015. The Debtors were unable to comply with their obligations under the waiver, resulting in an event of default under the Senior Credit Agreement on May 20, 2015.⁷

MDW Pan and CBA also entered into an ISDA Master Agreement dated October 3, 2014 ("Secured Hedge Agreement"), modified by a Letter Agreement dated May 21, 2015 ("Secured Hedge Termination"). Under the Secured Hedge Termination, MDW Pan was permitted to terminate all Secured Hedge Agreements and all transactions thereunder. In addition, MDW Pan's obligations to execute and maintain mandatory derivative transactions under the Risk Management Program (as defined in the Senior Creditor Agreement) were waived.

Upon achieving economic completion and meeting certain other requirements under the Senior Debt Facility, the Senior Agent's collateral was to be limited to the assets of MDW Pan and a guaranty from Midway Gold. However, as of the Petition Date, these requirements had not been met.

The cash collateral budget negotiated with the Senior Agent in connection with the Final Cash Collateral Order expired on June 3, 2016. Given the sale of substantially all of the assets of MDW Pan, resulting in the cessation of revenue generation for the Debtors and the availability of substantial unencumbered cash held by MGUS as a result of the sale of the Spring Valley property,⁸ the Debtors no longer required the use of cash collateral. However, the technical failure of the Debtors and the Senior Agent to agree on an Amended Budget by June 6, 2016, constituted an automatic Termination Event under paragraph 15(a) of the Final Cash Collateral Order.

On June 10, 2016, counsel for the Senior Agent delivered a notice by email to counsel for the Debtors, counsel for the Committee, counsel for the Subordinate Agent, and the Office of the United States Trustee ("UST"). This notice constituted i) a Carve–Out Trigger Notice pursuant to paragraph 10(e) of the Final Cash Collateral Order and ii) an Enforcement Notice pursuant to paragraph 17 of the Final Cash Collateral Order. Pursuant to the Enforcement Notice, the Senior Agent, among other things, invoked the Post–Carve–Out Trigger Notice Cap with immediate effect and reserved its rights to exercise available remedies following expiration of the Notice Period on June 17, 2016.

On August 29, 2016, the Senior Agent swept cash totaling approximately $5.7 million, held in MDW Pan's bank account at Wells Fargo Bank. This cash represented the remaining proceeds from the sale of gold prior to the sale of MDW Pan's assets to GRP Minerals and does not include any of the proceeds of that sale. The sale proceeds are maintained in a separate account and were not swept by the Senior Agent. The Senior Agent has since swept additional MDW Pan Cash Collateral, bringing the total amount swept to approximately $5.89 million.

MDW Pan also has a post-petition intercompany obligation owed to MGUS in excess of $2 million with respect to allocated professional fees and other administrative obligations. According to the Debtors, CBA's collection of MDW Pan's cash is subject to offset for...