Drummond Coal Sales Inc., an affiliate of Alabama-based coal producer Drummond Co., filed a Nov. 26 limited objection with Patriot Coal’s bankruptcy court to a Nov. 9 Patriot motion to reject a Bulk Coal Transfer and Storage Agreement.
Prior to Patriot’s July 9 petition for Chapter 11 protection at the U.S. Bankruptcy Court for the Southern District of New York, Drummond and Patriot entered into a Bulk Coal Transfer and Storage Agreement dated as of June 25, 2011, under which Drummond agreed to allow Patriot to ship and transport coal to and through the Pier IX rail-to-ship export facility at Newport News, Va., in which Drummond has certain rights.
Pier IX is a Kinder Morgan Terminals facility with direct access to the Atlantic Ocean through the lower Chesapeake Bay that is served by the CSX Transportation railroad and has a throughput capacity of 12 million tons per year.
Patriot agreed to make payments to Drummond based on the amount of coal that Patriot transported into and through the facility, with an annual “take or pay” minimum payment. The term of the agreement runs from Jan. 1, 2013, through Dec. 31, 2014.
By letter agreement dated July 25, 2012, Patriot agreed to treat Drummond as a “critical vendor” with respect to the services provided by Drummond to Patriot under the agreement and a prior agreement with a term that runs through Dec. 31, 2012, Drummond noted. On Oct. 2, 2012, under the terms of the agreement and consistent with the letter agreement, Patriot paid Drummond $1.25m, which had been due and payable as the first payment due under the agreement.
Patriot now wants to reject this agreement as of Nov. 12
The Nov. 9 notice filed by Patriot now seeks court authorization to reject the agreement. The notice was given under an Aug. 16 court order approving the procedure Patriot needs to go through to reject contracts and leases. Attached to the notice was a proposed order which authorized Patriot’s rejection of the agreement under Section 365(a) of the Bankruptcy Code, effective as of Nov. 12, 2012, and in it was a clause that would force Drummond to give up the October payment of $1.25m.
Drummond said the court rejection order doesn’t allow such a mandated refund and that rejection of this deal in this manner would constitute a material breach of the contract and would result in a Drummond damage claim. “While we do not calculate the Rejection Claim at this point in time, and hereby reserve all rights with respect thereto, it is clear to Drummond (and to Patriot) that the amount of the Rejection Claim will greatly exceed the amount of the October Payment,” said Drummond.
While Drummond said it does not object generally to the proposed rejection of the agreement by Patriot, Drummond does object to the attempt by Patriot to require Drummond to pay Patriot what amounts to a $1.25m refund. It wants the refund provision struck from Patriot’s rejection notice. Any attempt by Patriot to get this money back should be through an “adversary proceeding,” Drummond noted, which is basically a lawsuit pursued within the bankruptcy case.
“Based on the substantial size of the Rejection Damages and the losses being incurred by Drummond as a result of the rejection of the Agreement, it would be inequitable for this Court to order Drummond to pay in excess of $1 million to Patriot under the Agreement, adding ‘insult to injury’ and, essentially, harming Drummond more than it is already being harmed as a result of the rejection of the Agreement being requested in the Notice,” Drummond added. “The October Payment was not a ‘deposit’, as it was paid to Drummond for valuable consideration. The October Payment provided a substantial ‘benefit’ to Patriot, and resulted in a substantial ‘cost’ to Drummond, requiring Drummond to keep the Facility generally available for Patriot and its coal during the month of January 2013, although the rejection of the Agreement will relieve Drummond of the obligation to maintain any such capacity for Patriot.”