A federal bankruptcy court in Kentucky issued a Nov. 20 decision giving regulators a strong hand in enforcing environmental laws against bankrupt coal companies, said the law firm Bailey & Glasser in a Nov. 21 announcement.
As part of the decision, the U.S. Bankruptcy Court for the Eastern District of Kentucky awarded the West Virginia Department of Environmental Protection (DEP) over $2.7m to address reclamation of an abandoned coal mine in Fayette County, West Virginia.
Bailey & Glasser attorneys Kevin Barrett and Mike Hissam represented the DEP in pursuing claims from the bankruptcy estate of Appalachian Fuels LLC, a Larry Addington company that went bankrupt in 2009. The claims consisted of environmental penalties, as well as the costs of ongoing reclamation and water treatment at the abandoned site. The case went to trial in the bankruptcy court in Louisville in June 2014. After a three-day trial, the bankruptcy court issued a lengthy opinion on Nov. 20 granting DEP’s administrative expense application in full.
The bankruptcy court ruled that Appalachian Fuels had to perform the reclamation obligations of its subsidiary which held the permits, given that Appalachian Fuels had always performed the mining and reclamation obligations at the mine site. Second, the bankruptcy court held that DEP’s claims were entitled to “administrative expense priority,” despite the fact that DEP had not incurred any reclamation costs during the pendency of the bankruptcy case and would not incur significant reclamation costs until years later. In accordance with the decision, the court granted the DEP an administrative claim totaling more than $2.7m, including up to $1.9m in reclamation and water treatment costs and over $700,000 in penalties.
“With the rise of significant coal company bankruptcy cases in the past two years, and with others on the horizon in a tough coal market, the decision imposes broader corporate responsibility for environmental legacy liabilities. It also makes clear that the responsibility to remediate environmental issues doesn’t end upon the commencement of a bankruptcy case and, indeed, may give rise to significant priority claims that a coal company must satisfy as a condition to reorganizing in chapter 11. The combination gives federal and state environmental regulators a stronger hand in coal company bankruptcy cases,” said Barrett.
The court ruling noted that the property in question dated back to a property purchase from Pittston Coal, which has been out of the coal production business for many years. The involved permits, called the “KDC Permits” in the court ruling, were for the Alloy Mining Complex. A 2009 bankruoptcy sale of assets to Massey Energy included that mining complex, but specifically excluded the permits involved with this matter. Since these permits involved all liability and no upside benefit, the bankruptcy trustee for Appalachian Fuels was unable to find a buyer.
Said the ruling from Judge Thomas Fulton: “If it were necessary at this time to order the payment of a sum certain to WVDEP, the Courtwould be required to undertake a detailed examination of the reclamation plans themselves, whether through judicial notice or by ordering the record to be supplemented. But, the Court need not order funds to be paid to WVDEP at this time. The Court need only establish an ‘outside’ estimate of costs be established, so that the Trustee can set aside funds for the same to be paid at a later time. WVDEP has begun little, if any, of the necessary reclamation work. Prudence dictates that the Court order the Trustee to make payments to WVDEP only as work is completed, subject to Court final review for reasonableness and consistency with the KDC Permit reclamation plans. That way, funds will only be distributed to WVDEP as, and if, needed. Although perhaps unnecessary, this will also provide an extra layer of discipline to WVDEP to keep reclamation costs as low as possible. More practically, the Court anticipates that the Trustee will appeal the Court’s decision here and it is possible, given the complexity of the issues in these cases, that this Court’s decision might be reversed. Rather than having the Trust make a large distribution to WVDEP only to have to pull it back later, with possible complications from the fact that WVDEP is a governmental entity, it is better that distributions, if any, be made in relatively small amounts only as needed. On the other hand, the Court also believes that the Trustee should maintain a reserve of funds sufficient to pay WVDEP’s estimated costs so that such funds will be available if WVDEP ultimately prevails on appeal.”