GLEN E. CONRAD, District Judge.
In this appeal from the United States Bankruptcy Court for the Western District of Virginia, Meral, Inc. ("Meral") seeks review of the bankruptcy court's order sustaining an objection to a claim filed by Meral and denying Meral's motion to lift the automatic stay. For the reasons that follow, the bankruptcy court's decision will be affirmed.
Meral, a West Virginia Corporation, was the original lessee under a coal mining lease with WPP LLC ("WPP"), dated August 13, 2008, and a coal load-out facility lease, dated November 30, 2009 (collectively, the "Leases"). On January 31, 2011, Meral entered into an asset purchase agreement (the "APA") with South Fork Coal Company, LLC ("South Fork"), a subsidiary of Xinergy, Ltd. ("Xinergy"), pursuant to which South Fork purchased certain property from Meral, including all of Meral's "rights, title and interest in . . . the Leases. . . ." A084.
Under the APA, subject to certain limited exceptions, South Fork "assume[d] and be[came] responsible for . . . all liabilities and obligations of [Meral] under the Leases . . . ." A085. The Leases were assigned to South Fork with the permission of WPP, pursuant to a Consent, Assignment, and Assumption Agreement (the "Assumption Agreement") executed by Meral, South Fork, and WPP. In paragraph 8 of the Assumption Agreement, WPP consented to the assignment and assumption of the Leases, and "relieve[d], release[d], and discharge[d] [Meral] . . . from its obligations thereunder. . . ." A216.
In exchange for the sale and assignment of the Leases, South Fork agreed to make several cash payments to Meral, including $1,700,000.00 on the closing date, $2,500,000.00 upon issuance of certain required permits for conducting coal mining operations on the property subject to the Leases, and $1,000,000.00 eighteen calendar months thereafter. In addition, South Fork agreed to make certain royalty payments to Meral from the sale of coal.
Section 3(a)(vii) of the APA provides certain remedies to Meral upon default of South Fork's payment obligations. Specifically, following an unsuccessful arbitration of any payment dispute:
A087. Section 3(a)(vii) goes on to provide as follows:
On April 6, 2015, Xinergy and certain affiliated entities, including South Fork, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. On July 31, 2015, Meral filed a proof of claim (Claim No. 1232) in the bankruptcy case, which it designated as a secured claim in the amount of $671,812.14. On November 6, 2015, the debtors filed an omnibus objection to claims, in which they sought to reclassify Meral's claim as a general unsecured claim. On November 19, 2015, Meral filed a response to the omnibus objection. Meral also filed a motion to lift the automatic stay imposed by 11 U.S.C. § 362(a), citing a lack of adequate protection. The debtors opposed that motion.
On December 8, 2015, the bankruptcy court held a hearing on the debtors' omnibus objection and Meral's motion to lift the automatic stay. At the conclusion of the hearing, the bankruptcy court ordered supplemental briefing on the issues raised by the parties.
On February 3, 2016, the bankruptcy court issued a memorandum opinion and order sustaining the debtors' objection to Meral's claim and reclassifying the claim as a general unsecured claim. Additionally, based on its conclusion that Meral does not have a security interest in the debtors' property, the bankruptcy court denied Meral's motion to lift the automatic stay.
On February 15, 2016, Meral filed the instant appeal. The parties' briefing was completed on July 8, 2016. Since that time, the bankruptcy court has issued a final decree and order closing the debtors' Chapter 11 cases.
The appeal has been fully briefed, and the court heard oral argument on November 29, 2016. Accordingly, the matter is ripe for review.
This court has appellate jurisdiction over the matter pursuant to 28 U.S.C. § 158(a). On appeal, the court reviews the bankruptcy court's factual findings for clear error and its legal conclusions de novo.
As a preliminary matter, the appellees urge the court to dismiss Meral's appeal as moot on the grounds that Meral did not seek a stay of the bankruptcy proceedings pending appeal, and the bankruptcy plan has been substantially consummated. Although it is true that this court "may dismiss an appeal as equitably moot when it becomes impractical and imprudent to upset the plan of reorganization at [a] late date,"
Section 501 of the Bankruptcy Code authorizes any creditor of an estate to file a proof of claim.
"The Bankruptcy Code establishes a burden-shifting framework for proving the amount and validity of a claim."
In this case, Meral filed Claim No. 1232, in the amount of $671,812.14, on July 31, 2015. Meral designated the claim as a secured claim based on the APA. However, Meral did not provide a copy of the APA as supporting documentation. Consequently, the claim was not entitled to a presumption of validity, and the burden remained on Meral to prove the validity of its alleged security interest by a preponderance of the evidence.
Both sides agree that for a security interest to be valid and enforceable against a debtor, the agreement or other document intended to establish a security interest must contain a "written expression by the debtor granting a security interest."
The parties also agree that under West Virginia law, which governs the interpretation of the APA, it is for the court to determine whether the terms of an agreement are unambiguous and, if so, to construe the agreement according to its plain meaning.
In the present appeal, Meral argues, as it did before the bankruptcy court, that language in § 3(a)(vii) of the APA, which provides certain remedies upon default, grants Meral a security interest. Meral specifically cites to the portion of the section that grants it the right to "enter the premises of the Leases and to exclude [the Debtors] therefrom and . . . immediately maintain operating the mines located on the premises of the Leases . . . ." A087.
After carefully considering the contractual language at issue and the parties' arguments, the court agrees with the appellees that the language cited by Meral does not "lead[] to the logical conclusion that it was the intention of the parties that a security interest be created."
Moreover, even if the APA could be construed to grant Meral a security interest, the record is devoid of any evidence establishing that Meral perfected such interest, as required by Federal Rule of Bankruptcy Procedure 3001(d). Rule 3001(d) provides that "[i]f a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected." Fed. R. Bankr. P. 3001(d). To determine whether a security interest has been perfected, courts look to the applicable state law.
For these reasons, the bankruptcy court did not err in sustaining the debtors' objection to Proof of Claim No. 1232. The bankruptcy court's decision to reclassify Claim No. 1232 as an unsecured claim must be affirmed.
Meral also appealed the bankruptcy court's decision to deny Meral's motion to lift the automatic stay. Under the Bankruptcy Code, the filing of a bankruptcy petition operates to stay "the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy proceeding], or to recover a claim against the debtor that arose before the commencement of the [bankruptcy proceeding.]" 11 U.S.C. § 362(a)(1). However, the Code also provides that a party in interest may move for relief from the stay under certain circumstances. Under § 362(d)(1), the bankruptcy court has the discretion to lift the automatic stay "for cause, including the lack of adequate protection of an interest in property of such party in interest." 11 U.S.C. § 362(d)(1).
A party seeking relief from the automatic stay under subsection (d)(1) "has the burden of showing the existence, the validity, and the perfection of its secured claim against the property."
For the reasons stated, the court concludes that the bankruptcy court's decision must be affirmed. The Clerk is directed to send certified copies of this memorandum opinion and the accompanying order to all counsel of record.