The conversion of the personal bankruptcy case of coal operator Larry Addington from Chapter 11 reorganization to Chapter 7 dissolution could cause various levels of harm, including to a pending coal property transaction in Illinois, said Addington in an April 10 filing at the bankruptcy court.
Addington and a long list of his companies sought Chapter 11 protection on Jan. 26 at the U.S. Bankruptcy Court for the Eastern District of Kentucky. The U.S. Trustee for this court has since asked for a conversion to Chapter 7. The judge on April 13 issued an order giving the parties an April 27 deadline to get a proposed order to him on a schedule for discovery related to the conversion motion.
In April 10 arguments against that conversion, Addington said that while he is not an officer of Ultra Energy Resources LLC (UER) or Illinois Fuel Co. (IFC), his considerable experience and contacts have been and continue to be instrumental in certain operational matters for which his advice is sought by such entities.
“The Debtor is currently working with UER in a land sale transaction with its wholly owned subsidiary, Carbon Fuels Properties, the result of which, would likely contribute significantly to the estate via collection of the debt owed to Debtor by UER,” said the filing. “Likewise, the Debtor is working with IFC on another sale of land within IFC that would generate a further significant reduction in estate liabilities by the payment in full of the debts owing to GATX, Deere Credit and Republic Bank which in turn, would moot the personal guaranties giving rise to the debt in the instant case. Further, the debt owing to CAT Finance would also be substantially reduced by the IFC transaction with the balance contemplated to be paid though a plan or by other means.”
Without the involvement of Addington in these pending deals, it is unlikely that the contemplated transactions would be consummated, the Addington argument said. With the debtor’s active input into this case, Addington said he believes it is possible that a plan would be able to be completed that would provide a potential 100% payout to the creditors in this case holding allowed claims.
Also, the U.S. Trustee fails to consider the additional expenses that would be incurred if the case was converted and/or a trustee was appointed by the court, Addington added. Such additional costs include trustee fees (whether a Chapter 7 trustee or costs with the appointment of a Chapter 11 trustee), costs for counsel and accountants for the trustee, as well as a protracted amount of time to get the relevant parties up to speed on this case.
Throat cancer and pain killers the start of all this
In approximately 2006, Addington, once one of the most prominent independent coal operators in the U.S., was diagnosed with throat cancer and underwent multiple surgeries and endured “vast” treatments for this disease, the filing said. During his illness and ensuing treatment, he was approached by Appalachian Fuels LLC personnel and asked to sign many personal guarantees for equipment purchases by Appalachian Fuels.
Addington and his brothers had founded Appalachian Fuels, which went bankrupt in June 2009 in the same court that is now handling the Addington bankruptcy case.
Up until this point in his 30-year career, Addington had always refused to sign any personal guarantees. “However, during this vulnerable time, he signed several personal guarantees totaling millions of dollars of exposure,” said the filing.
When Appalachian Fuels and related companies filed for bankruptcy protection in 2009, the many creditors holding the personal guarantees of Addington focused their attention on him and began numerous collection proceedings involving millions of dollars of claims. “Despite his best efforts in working with creditors, and due to the shear size and quantity of the claims and the expenses associated with the litigation of same, Debtor was unable to address the claims on an ad hoc basis,” the filing said.
Addington filed this Chapter 11 case in an effort to obtain a “breathing period” to address the claims alleged against him and halt the asset “free-for-all” that ensued, the Addington filing said. As with any Chapter 11 case, the goal of the instant case will be to formulate a confirmable plan of reorganization with hopes of the best possible recovery to all creditors of the estate holding valid claims, he added.
App Fuels liquidating trustee argues for Chapter 11 trustee
On April 10, the liquidating trustee of the Appalachian Fuels Creditors Trust, told the court that while it agrees that Addington should not remain in possession of his bankruptcy estate, the appointment of a Chapter 11 trustee, as opposed to conversion of this case to a Chapter 7, is clearly in the best interest of creditors of the debtor.
The liquidating trustee said that at a recent creditors meeting, Addington stated that a fraudulent transfer action against his brothers was “totally ludicrous,” even though he had yet to read a complaint related to that potential action. “Mr. Addington has shown that he will not make decisions regarding the pursuit of litigation against his family on an informed basis, in good faith, and in the best interest of his estate, and as such, cannot remain in possession of his estate,” the liquidating trustee added.
The liquidating trustee later added: “The Debtor’s bankruptcy schedules are rife with insider transactions and claims that must be investigated. Of course, Mr. Addington as Debtor cannot be expected to pursue such claims with the best interest of the estate in mind.” The liquidating trustee noted that Addington himself has admitted mental incapacity on his part, making proper handling of his own estate an impossibility.
Addington says he’s clear-headed now
“The practical realties and necessities of the instant case demonstrate that there is no other party with the likelihood of providing a substantial recovery to creditors of the estate other than the Debtor,” said an April 12 Addington response to the App Fuels liquidating trustee. “In fact, the Debtor’s ability to formulate a plan that is approved by the creditor constituency will almost certainly lead to higher recovery to creditors than would protracted litigation whereby the only parties who would benefit would be the respective counsel.”
The liquidating trustee attempts to argue that since Addington made certain payments to family members and or related entities as loans, such payments automatically warrant the appointment of a trustee. However, many individuals enter into such transactions every day, Addington argued.
The absence of a “note” for certain of the liabilities that are listed on the bankruptcy schedules should not be cause for alarm “but should ring loudly as an indicator of the Debtor’s honesty in the ear of the court,” Addington’s lawyers wrote. “The Debtor disclosed the loans made by the Debtor to family members and/or related parties as he was required to do. While the Liquidating Trustee may not agree with the label of the transactions as loans, the essential fact is that they were disclosed as assets of the estate. Nothing in the law requires the Debtor to agree with the labels other parties attach to particular transactions. The essential point is that the transactions are disclosed.”
The fact that Addington has said he was under heavy medication due to the throat cancer means he was “incapacitated” at that time, not incompetent, Addington argued. “The clear distinction being that while he was being prescribed narcotic medication as part of his medical treatment (including cancer treatment in 2006), he entered into personal guaranties and at such time, did not have the requisite capacity to enter into contracts etc.,” Addington added. “In support of this allegation, the Liquidating Trustee utilizes the illogical premise that because Debtor is receiving continuing follow-up care, as anyone who has previously had cancer does, he is on the same medial regimen. The Debtor is no longer suffering any impairment as a result of medication which would impair or cloud his mental facilities in administering this estate. As the 341 [creditor’s] meeting transcript indicates, the Debtor is fully coherent and capable of answering the questions posed to him.”