Patriot asks bankruptcy court to let it pursue lawsuits over busted coal deals

When Patriot Coal sought Chapter 11 bankruptcy protection on July 9, that froze all litigation then-pending against it, but Patriot asked the bankruptcy court on July 23 to let it pursue two lawsuits it has filed against parties including West Virginia coal producer Keystone Industries LLC.

On June 1, Patriot Coal Sales LLC, one of the Patriot entities in protection at the U.S. Bankruptcy Court for the Southern District of New York, commenced an action for alleged breach of contract in the U.S. District Court for the Southern District of West Virginia against Keystone Industries. In the Keystone action, Patriot alleges that Keystone failed to take or pay for coal in breach of its contractual obligations under a December 2011 coal supply agreement between the parties.

On April 3, Patriot commenced an action for breach of contract, or in the alternative, for fraud, in the Circuit Court of Kanawha County, W.Va., against: Bridgehouse Commodities Trading Ltd., a corporation organized and existing under the laws of the Isle of Man with offices in London, England and Doha, Qatar; Donald Jordan, an alien currently residing outside of the United States; Sentrum Holdings Ltd., a corporation organized and existing under the laws of the British Virgin Islands with, upon information and belief, a principal place of business in London, England; and Bridgehouse Capital Ltd., a corporation organized and existing under the laws of England and Wales with a principal place of business in London, England.

In the Bridgehouse action, Patriot alleges that Bridgehouse failed to take or pay for coal in breach of its contractual obligations under a September 2011 coal supply agreement between the parties, and that Sentrum and Bridgehouse Capital  breached an October 2011 “comfort letter.” In the alternative, Patriot alleges fraud against each of the Bridgehouse defendants.

On July 13, W. Henry Jernigan Jr. of Dinsmore & Shohl LLP, counsel for Patriot, contacted Keystone’s counsel requesting that Patriot and Keystone enter into a stipulation to proceed with the Keystone claim. “Patriot’s counsel asked that Keystone respond to the proposed stipulation by July 20, 2012,” said the July 23 Patriot filing. “Keystone has not responded to this proposal.”

None of the Bridgehouse defendants have an attorney of record in connection with the Bridgehouse action, and service of all but one of the Bridgehouse defendants in connection with the Bridgehouse action is still pending. Thus, Patriot said it has not been able to contact the Bridgehouse defendants with respect to entering into a stipulation to proceed with the Bridgehouse claims.

Patriot said that it wants to proceed with both of these actions, which were not actually covered by the automatic stay the bankruptcy court granted at the beginning of this case on all pending litigation against Patriot. The bankruptcy court has recognized that the automatic stay is applicable only to proceedings “against” the Patriot companies, the filing noted.

“The Automatic Stay shall not bar Keystone from defending against the Keystone Claim in the Keystone Action,” Patriot noted. “In the event that Patriot chooses to continue litigating the Keystone Claim, Keystone shall be allowed to proceed with its own defense in the Keystone Action.” It said the same applies to the Bridgehouse defendants.

Keystone dispute involves high-vol met coal headed for export

West Virginia Secretary of State records shows the sole member of Keystone Industries as Tom Scholl. On or about Dec. 7, 2011, Patriot and Keystone entered into a contract under which Keystone agreed to purchase coal from Patriot, with that deal called the Coal Confirmation. Under the Coal Confirmation, Keystone was to take delivery of, and pay for, coal from Patriot upon certain specified terms and conditions during calendar 2012. Those terms and conditions required Keystone to take monthly delivery of its total purchase obligation on a pro rata basis, Patriot said in the June 1 lawsuit.

“It is Patriot’s understanding that Keystone intended to resell the Patriot coal to its own buyer,” Patriot wrote in the lawsuit. “Keystone’s obligations under the Coal Confirmation were not contingent, however, upon Keystone identifying or contracting with a buyer nor are Keystone’s obligations contingent upon the performance of its buyer. Keystone has not taken or paid for any coal as it is obligated to do under the Coal Confirmation.”

On May 11, Patriot said it sent a letter notifying Keystone that it was in breach and default of the Coal Confirmation. The notice provided Keystone 30 days to cure its default under the Coal Confirmation. “As of the date of this Complaint, Keystone has not cured its breach and default of the Coal Confirmation,” Patriot added. “Keystone failed to take or pay for a single ton of coal as it is obligated to do under the Coal Confirmation despite having contracted to take and pay for hundreds of thousands of tons of coal by the date of this Complaint. By its words and actions, Keystone has repudiated the Coal Confirmation in its entirety.”

Patriot is asking for: damages representing the present value of the loss of sales to Keystone in the quantities and prices specified in the Coal Confirmation, in an amount to be determined at trial, but in any event in excess of the jurisdictional minimum; pre- and post-judgment interest; and any further and additional relief as the court deems just and proper.

Incidentally, Patriot filed a June 27 amended version of the lawsuit with the District Court that includes a heavily-redacted version of the confirmation. It shows that this was high-vol metallurgical coal bound for either Gulf Coast export or Canada. There is the May 11 letter to Scholl from Patriot Senior Vice President and Chief Marketing Officer Robert Bennett attached to the amended lawsuit warning him of the alleged breach.

Keystone Industries had not filed a response to the lawsuit at the District Court as of July 24.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.