UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT COLUMBUS
In re: : Chapter
11
:
Murray Metallurgical Coal : Case No. 20-10390
Holdings, LLC, et al., :
: Judge Hoffman
:
Debtors. : (Jointly Administered)
OPINION AND ORDER ON DEBTORS’ MOTION FOR ENTRY OF A FINAL ORDER (I) AUTHORIZING THE DEBTORS TO PAY
CERTAIN PREPETITION CLAIMS OF (A) CRITICAL VENDORS,
(B) LIEN CLAIMANTS, (C) SHIPPERS, AND (D) ROYALTY AND LEASEHOLD CLAIMANTS, (II) CONFIRMING
ADMINISTRATIVE EXPENSE PRIORITY STATUS
OF OUTSTANDING ORDERS, AND (III) GRANTING RELATED RELIEF (DOC. 8)
I. Introduction
Murray Metallurgical Coal Holdings, LLC (“Met Holdings”) and its affiliated debtors and debtors in
possession (collectively, the “Debtors”) have filed a motion—commonly known as a “critical vendors
motion”—seeking authority to pay the prepetition claims of certain creditors that supply them with
critical goods and services (the “Motion”) (Doc. 8). The Motion sets forth the criteria under which
the Debtors would assess which creditors should receive payments on their
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: March 18, 2020
prepetition claims early in the case rather than waiting for confirmation of a Chapter 11 plan. The
Debtors do not identify those creditors, arguing that doing so would create a “run on the bank”
while eliminating any leverage the Debtors have in their negotiations with the creditors.
Following the first-day hearing in the Debtors’ Chapter 11 cases, the Court entered an order (Doc.
124) granting the Motion on an interim basis over the objection of the UMWA 1974 Pension Plan and
Trust and the UMWA 1993 Benefit Plan (collectively, the “Funds”), a group of multi- employer plans
that provide health and pension benefits to retired coal miners and their eligible dependents.
Incorporating the issues they raised in their objection to interim approval of the Motion (Doc.
104), the Funds have filed an objection to the entry of an order approving the Motion on a final
basis (Doc. 200). The Funds do not question the Court’s authority to approve the payment of
prepetition claims of critical vendors before plan confirmation, nor do they suggest that the
Debtors have no critical vendors. Instead, they insist that the Debtors must present evidence
establishing on a vendor-by-vendor basis why payment is necessary. The evidence presented during
the interim and final hearings, however, demonstrated that the protocol proposed by the Debtors is
consistent with both the text of the Bankruptcy Code and its twin goals of promoting a successful
reorganization and maximizing the value of the bankruptcy estate. The Motion accordingly is granted
on a final basis to the extent set forth in this opinion and order.
II. Jurisdiction and Constitutional Authority
The Debtors seek authority to use property of their bankruptcy estates to pay the prepetition
claims of critical vendors under § 363(b) of the Bankruptcy Code. The Court has jurisdiction to
hear and determine the Motion under 28 U.S.C. § 1334(b) and the general order of reference that has
been entered in this district in accordance with 28 U.S.C. § 157(a). A dispute over the use of
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property of the estate is a core proceeding. See 28 U.S.C. § 157(b)(2)(A), (M), & (O). And because
such a dispute “stems from the bankruptcy itself,” the Court also has the constitutional authority
to enter a final order in this matter. Stern v. Marshall, 564 U.S. 462, 499 (2011).
III. Background
A. The Debtors
Met Holdings filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on
February 11, 2020, followed by the other Debtors on February 12, 2020. Along with their petitions,
the Debtors filed the declaration of Robert D. Moore (the “Moore Declaration”) (Doc. 4), the vice
president of four of the Debtors, and the president, chief executive officer, and chief financial
officer of Murray Energy Holdings Co. (“Murray Energy”), which is the ultimate parent company of
Met Holdings. The Debtors also filed the declaration of Amy Lee (the “Lee Declaration”) (Doc. 5),
a senior director at Alvarez & Marsal North America, LLC (“Alvarez”), the financial advisor to the
Debtors. The Lee Declaration and the Moore Declaration were admitted into evidence without
objection during the interim hearing on the Motion. Tr. of First-Day Hrg. at 5–6. Murray Energy and
98 of its affiliates (the “Murray Energy Debtors”) filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code on October 29, 2019. Moore Decl.
¶ 13. The Murray Energy Debtors together comprise the largest privately-owned coal company in the
United States, producing in 2018 alone approximately 53 million tons of thermal coal used by the
electric utility industry. Id. ¶ 12, 16. The Funds, as well as the United Mine Workers of America
(the “UMWA”), objected to the Murray Energy Debtors’ critical vendors motion, but the objection was
resolved after the Murray Energy Debtors agreed to provide certain information to the Funds and
others on a confidential basis as to each critical vendor. Expressing dissatisfaction
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with the information they have received in the Murray Energy Debtors’ cases, the Funds—which have
never sought relief in the Murray Energy Debtors’ cases based on their purported failure to obtain
the information they requested—now seek to force the Debtors to present evidence on a
vendor-by-vendor basis. The UMWA, however has not objected to the Motion.
The Debtors employ 529 individuals, including 389 employees covered by a collective bargaining
agreement with the UMWA. Id. ¶¶ 33, 36, 47. While the Murray Energy Debtors are engaged in the
mining and sale of thermal coal, the Debtors mine and sell metallurgical coal. Metallurgical coal
is used to produce coke, which in turn is used in the production of steel. Id.
¶¶ 16–17. The Debtors’ assets include a mine at Oak Grove in Alabama that employs 511 people and
contains approximately 40 million tons of recoverable coal. Id. ¶ 32–33. The Debtors also own a
mine known as the Maple Eagle No. 1 Mine in West Virginia that employs 18 workers and contains
approximately 18 million tons of recoverable coal. Id. ¶ 36.
B. Relief Requested in the Motion and the
Evidence Presented During the First-Day Hearing
The Debtors seek authority to pay up to $7.3 million to “Critical Vendors.” In her declaration, Lee
stated that the “Critical Vendors” fall into the following four categories: (1) Safety and
Regulatory Compliance Suppliers and Service Providers; (2) Equipment and Parts Suppliers and
Service Providers; (3) Materials Suppliers and Service Providers; and (4) Repair and Maintenance
Service Providers. Lee Decl. ¶ 107. She explained why the goods or services supplied by vendors in
these categories are critical to the Debtors’ operations. Id. ¶¶ 108–13. According to Lee,
“[p]aying targeted Critical Vendor Claims renders a benefit to the Debtors’ estates both monetarily
and operationally by preserving liquidity and enabling the Debtors to operate smoothly during the
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chapter 11 cases.” Id. ¶ 106. “The Debtors have every intention of using the relief requested to .
. . maximize earnings, which will benefit all of the Debtors’ stakeholders.” Id. ¶ 122.
Lee also described in detail the protocol that the Debtors would use to determine whether to make
payments to Critical Vendors if the Motion were approved by the Court:
[I]n identifying the Critical Vendors, the Debtors examined each of their vendor or service
provider relationships with the following five general criteria in mind: (a) whether a particular
vendor is a sole-source or limited-source supplier or service provider of the quality and quantity
required by the Debtors in a particular market;
(b) whether the Debtors would be unable to obtain comparable products or services from alternative
sources on a cost-effective basis within a reasonable timeframe; (c) whether a vendor is able or
likely to refuse providing essential products or services to the Debtors if their prepetition
balances are not paid; (d) whether an agreement or contract exists by which the Debtors could
compel the vendor to continue performing on prepetition terms; and (e) whether the Debtors’
inventory levels or service coverage is sufficient to meet customer demands while an alternative
vendor is located. In addition, the Debtors and their advisors examined the health of each vendor
relationship, their familiarity with the chapter 11 process, and the extent to which each vendor’s
prepetition claims could be satisfied elsewhere in the chapter 11 process.
Id. ¶ 105.
The Debtors also seek authority to pay the prepetition claims of “Lien Claimants,” “Shippers,” and
“Royalty and Leasehold Claimants,” categories of creditors that are not included in the defined
term “Critical Vendors.” The “Lien Claimants” are defined as “contractors, repairmen, and other
third-party service providers that repair, maintain, and otherwise service necessary equipment and
machinery used in the Debtors’ operations” and “vendors that provide contract labor for their
mining operations, as well as materials, such as roof bolts, equipment, machinery, consumables, and
other products used in the Debtors’ coal production.” Id. ¶ 114. The Debtors ask the Court to
authorize the payment of up to $6.2 million in prepetition debts to the Lien
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Claimants. Lee stated that “[a]bsent payment of the accrued prepetition claims of the Lien
Claimants, the Lien Claimants may cease to provide goods and services to the Debtors, and the
Debtors would be left with no alternative providers capable of satisfying the Debtors’ operational
needs.” Id. She added that “it is critical to the continuity of the Debtors’ operations that they
maintain their relationships with the Lien Claimants,” particularly given the Lien Claimants’
ability “to assert trade or mechanics’ liens over the Debtors’ leaseholds, as well as essential
parts, machinery, and other equipment.” Id. ¶¶ 114–15. “Absent payment of the outstanding
prepetition Lien Claims,” Lee declared, “the Debtors believe that Lien Claimants may refuse or
attempt to refuse to provide goods or service for or honor obligations under existing agreements
with the Debtors on a go-forward basis.” Id.
The Debtors next request to pay up to $100,000 of prepetition claims to trucking and transportation
service providers. Addressing the “Shippers Claims,” Lee said that
[t]
he services provided by the Shippers are essential to the Debtors’ day-to-day operations as the
Debtors rely on the Shippers to transport materials and equipment to the mines. In many cases, the
Shippers are irreplaceable and represent the only means of transportation. If these charges remain
unpaid, the Shippers may attempt to assert such possessory liens, and may refuse to deliver or
release goods in their possession until their claims are satisfied and their liens redeemed. The
Shippers’ possession (and retention) of the Debtors’ materials and equipment would disrupt the
Debtors’ operations and affect the Debtors’ ability to efficiently administer these chapter11
cases. The cost of such disruption to the Debtors’ estates would likely be greater than the amount
of Shippers Claims that the Debtors may pay if granted the requested authority. Moreover, the
inability to locate suitable replacements for the Shippers could result in the Debtors’ mining
operations coming to an immediate halt.
Id. ¶¶ 116–17.
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The Debtors also seek to pay up to $2.6 million to Royalty and Leasehold Claimants owed royalty
payments “in consideration for depleting coal reserves or for transporting mined coal across the
royalty owner’s property.” Id. ¶ 119. In support of this request, Lee represents that “[f]ailure to
make payments on account of the Royalty Agreements in the ordinary course of business would
directly and adversely impact the Debtors’ ability to mine coal related to the Royalty Agreements.”
Id. ¶ 120.1
In addition to admitting the Lee Declaration into evidence during the first-day hearing, the Court
received the following proffer of Lee’s testimony:
If called upon today to supplement her testimony in the declaration, [Lee] would tell the Court
that she’s had familiarity working on the Murray cases for several months, and that during that
time she’s gained familiarity with their operations and the relationships with their vendors.
She would further testify that during this time she’s become familiar with the critical need to get
these vendors paid on an emergent basis, in order to deal with certain concerns that the mines—that
the operations have with respect to employee safety, flooding, ventilation, and that there are
limited number of vendors who are available in the specific areas where these mines are located.
She would further testify that because of the relationships that they have with these certain
vendors now, it would be difficult and impractical to find replacements in the time necessary to
get the mines up and running.
1The Debtors also ask that administrative expense priority status be granted to creditors holding
undisputed claims arising from the postpetition delivery and acceptance of goods that they ordered
before commencing their bankruptcy cases (the “Outstanding Orders”). According to Lee, “in order to
avoid becoming general unsecured creditors of the Debtors’ estates with respect to such goods,
certain suppliers may refuse to ship or transport such goods (or may recall such shipments) with
respect to such Outstanding Orders unless the Debtors issue substitute purchase orders
postpetition.” Id. ¶ 18. The Debtors seek authority to satisfy such obligations “[t]o prevent any
disruption to the Debtors’ business operations.” Id. The Funds did not object to this relief, and
it is appropriate under the circumstances.
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She would testify that the vendors have specific expertise and familiarity with these particular
mines, and that these mines are in inaccessible locations. She would further testify that vendors
that they’ve been using historically would even—have even refused to take COD, and that in order to
get them to the mines, they would have to be paid for the amounts of money that are past due.
She would further testify . . . that vendors have already reached out to the company to request to
be put on the critical vendor protocol, the critical vendor list, and that at least one vendor has
said that they would not provide service needed at the mine, unless they were on the critical
vendor list, or they want to get that process started immediately.
In response to the characterization and the objection that the Debtors are seeking authority to pay
hundreds of creditors, Ms. Lee would testify that there are a limited number that’s much smaller
than that, of people who have been identified as critical vendors, and that those vendors—that the
Debtors are not seeking unfettered discretion to pay them, and in fact, as set forth in her
declaration, there is a specific protocol in place to deal with it, that has to do with whether or
not there are other sources, whether or not these vendors have a contract, whether they would
refuse to provide services in the absence of giving—being given the critical vendor status.
THE COURT: Is there any circumstance under which the Debtor would—Debtors-in-Possession would be
paying any vendor that has a contractual obligation to supply? I’d like to make that clear. I just
don’t think I should grant critical vendor status to a vendor that’s contractually bound to provide
goods or services post-petition.
MR. KARCHER: It’s my understanding that Ms. Lee would testify that there is no vendor that would
receive [payment] that would otherwise be required to provide goods or services under a contract
with the Debtors.
Tr. of First-Day Hrg. (Doc. 217) at 140–42.
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C. Additional Evidence Presented During the Final Hearing
A final hearing on the Motion was held on March 12, 2020. During the final hearing, the Debtors
made a proffer of the testimony of Robert A. Campagna, a managing director of Alvarez.2 In
addition, Campagna testified in response to questions posed by the Court. The Funds chose not to
cross-examine Campagna, and they presented no evidence of their own. Thus, the Funds did not
challenge—at either the interim or final hearing on the Motion—the factual predicate for the relief
sought by the Debtors.
The proffer of Campagna’s testimony established three things. First, as of the date of the final
hearing, the Debtors had not yet made any payments to critical vendors despite having interim
authority to do so. Second, the Debtors have negotiated several settlement agreements under which
they would pay less than 100% of certain critical vendors’ prepetition claims in installments over
time. And, third, the critical vendors have been willing to provide goods and services to the
Debtors while these negotiations were taking place with the understanding that the Debtors had
received the authority to pay prepetition claims of critical vendors. Hrg. on Mot. at
12:08:12–12:09:52.
The testimony Campagna offered in response to questioning by the Court provided additional support
for the Motion. Part of the basis for the Funds’ objection was that, because the Debtors’ mines had
been idled, there should be no need to pay critical vendors. But Campagna testified that the Oak
Grove mine resumed operations on February 18, 2020 and that from that date through March 7, 2020,
approximately 50,000 tons of coal had been extracted from the mine. Campagna also testified that
while the Maple Eagle mine continues to be “hot idled,” workers must enter the
2A transcript of the final hearing on the Motion has not yet been prepared. References to the
electronic recording of the hearing will be cited as “Hrg. on Mot. at [timestamp].”
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mine in order to maintain it, and that equipment and supplies are needed in order to maintain a
hot- idled mine in a manner that does not risk the health or safety of the miners. According to
Campagna, the Debtors need the authority provided by the Motion in order to properly maintain the
Maple Eagle mine so that its sale value is maximized for the benefit of the Debtors’ estates. Hrg.
on Mot. at 12:34:19–12:37:45.
D. The Position of the Official Committee of Unsecured Creditors
The Official Committee of Unsecured Creditors (the “Committee”) supports the entry of an order
approving the Motion on terms agreed to by the Debtors and the Committee (Doc. 211) (the “Revised
Order”). Indeed, the Committee filed a statement expressing its unequivocal support for the Motion:
Based on the Committee’s review of the record of the interim hearing on the Critical Vendor Motion
and its subsequent discussions with the Debtors and their professionals, the Committee is
supportive of the Debtors’ use of all allocated funds for Vendor Payments. Indeed, the Committee
lauds the Debtors for proposing to make the Vendor Payments and supports their efforts to avoid the
harms described in the Critical Vendor Motion if such claims are not satisfied (see Critical
Vendors Motion, ¶ 53).
The Committee recognizes that payment of the Critical Vendor Claims, Lienholder Claims, Shipper
Claims, and Royalty and Leasehold Claims is necessary to allow the Debtors to continue to safely
and efficiently run the Debtors’ mines, which in turn will maximize the value of the estates for
all stakeholders.
Accordingly, the Committee submits this statement to encourage the Debtors to pay the Claimants and
to utilize the full amount of Vendor Payments as authorized by the Court for the satisfaction of
Critical Vendor Claims, Lienholder Claims, Shipper Claims and Royalty and Leasehold Claims. Payment
of these claims will ensure that the Debtors, creditors and all parties in interest can benefit
from ongoing operations and the enhanced liquidity provided to the Debtors from the continued
operations at Oak Grove.
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Comm. Stmt. (Doc. 207) ¶¶ 9–11.
The Committee reiterated its strong support for the Motion during the final hearing. Counsel for
the Committee represented that the Debtors have been providing, and will continue to provide,
specific information to the Committee’s professionals regarding the creditors that the Debtors
intend to pay under the protocol described in the Motion.3 This information, however, is not being
shared with the members of the Committee, all of whom are trade vendors. The Committee’s
professionals have engaged in discussions with members of the Committee and other trade
creditors—again, without providing specific information to the creditors—so that the professionals
can understand the critical nature of the goods and services provided by the creditors who would be
paid under the Motion. According to counsel for the Committee, this due diligence has shown that
the goods and services provided by the critical vendors are necessary in order to preserve the
going concern value of the mines, to keep mine employees working in a safe manner, and to maximize
the value of the mines for the benefit of the Debtors’ creditors, including unsecured creditors. In
the Committee’s view, requiring the Debtors to present evidence on a vendor-by-vendor basis would
be value- destructive. Hrg. on Mot. at 12:25:59–12:28:18.
IV. Legal Analysis
A. The Authority for Approving Critical Vendor Motions
It is outside the “ordinary course of business” within the meaning of the Bankruptcy Code for
Chapter 11 debtors to pay prepetition claims before confirmation of a Chapter 11 plan. See, e.g.,
3At the final hearing, the Assistant United States Trustee stated that the UST, who is not opposing
the Motion, also is receiving periodic critical vendor reports from the Debtors and that the UST is
satisfied with the information it has received. Hrg. on Mot. at 12:28:30–12:31:03.
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In re Berry Good, LLC, 400 B.R. 741, 745–46 (Bankr. D. Ariz. 2008) (“Although the debtor in
possession or trustee may use property of the estate in the ordinary course of business, it does
not have the right to pay prepetition claims, which would violate the Code’s policy of equal
treatment of similarly situated creditors. Generally, payment of such claims must await
confirmation of the plan.”) (quoting Hon. Joan N. Feeney, Bankruptcy Law Manual § 11A:25
(Thomson/West 2008)). Section 363(b)(1) of the Bankruptcy Code, however, permits bankruptcy courts
to authorize debtors in possession to use property of the estate outside the ordinary course of
business after notice and opportunity for a hearing. The Sixth Circuit has held that § 363(b)(1)
gives bankruptcy courts the authority to approve non-ordinary course, pre-confirmation transactions
if they serve “a sound business purpose.” Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th
Cir. 1986). Stephens Industries was decided in the context of a debtor’s sale of substantially all
its assets before plan confirmation, a context in which courts consider factors such as whether the
terms of the proposed sale reflect the highest and best offer for the assets.
As discussed below, different factors are, of course, relevant in the critical vendor context. But
given that a transaction as significant as the pre-plan sale of substantially all assets can be
authorized under § 363(b)(1), there can be little doubt that the section also provides a mechanism
for debtors to obtain court authority to pay prepetition claims before confirmation if a sound
business purpose supports the payment. Without deciding the issue, the Seventh Circuit suggested as
much in the Kmart case. See In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004) (stating that
§ 363(b)(1) is a “more promising” source of authority for approving critical vendor motions than
§ 105(a) or other sections of the Code, “for satisfaction of a pre-petition debt in order to keep
‘critical’ supplies flowing is a use of property other than in the ordinary course of administering
an
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estate in bankruptcy”); see also In re Goodrich Quality Theaters, Inc., 2020 WL 1068147, at *5
(Bankr. W.D. Mich. Mar. 4, 2020) (holding that the statutory predicate for approving critical
vendors motions is “§ 363 because such payment obviously involves the use of estate property”); In
re RnD Eng’g, LLC, 556 B.R. 303, 309 (Bankr. E.D. Mich. 2016); In re Tropical Sportswear Int’l
Corp., 320 B.R. 15, 20 (Bankr. M.D. Fla. 2005) (“Bankruptcy courts recognize that section 363 is a
source for authority to make critical vendor payments[.]”).
It is not surprising that the Bankruptcy Code would allow this, because the power to “authorize the
payment of pre-petition debt when such payment is needed to facilitate the rehabilitation of the
debtor [was] not a novel concept” at the time the Bankruptcy Code was enacted:
It was first articulated by the United States Supreme Court in Miltenberger v. Logansport, C. &
S.W. R. Co., 106 U.S. 286, 1 S. Ct. 140, 27 L.Ed. 117 (1882) and is commonly referred to as either
the “doctrine of necessity” or the “necessity of payment” rule. This rule recognizes the existence
of the judicial power to authorize a debtor in a reorganization case to pay pre-petition claims
where such payment is essential to the continued operation of the debtor.
. . . .
Clearly, the “necessity of payment” doctrine is applicable to the instant dispute which is related
in some aspects to the Railway Labor Act. Even if this case is not directly covered by the Railway
Labor Act, the doctrine would still be applicable under the rationale of Judge Learned Hand who
applied this rule to a non-railroad debtor in Dudley v. Mealey, 147 F.2d 268 (2d Cir.1945), cert.
denied, 325 U.S. 873, 65 S. Ct. 1415, 89 L.Ed. 1991 (1945). In that case, Judge
Learned Hand held that a court was not “helpless” to apply the rule to non-railroad debtors where
the alternative was a cessation of operations. Thus, the rationale for the “necessity of payment”
rule,
i.e. facilitating the continued operation and rehabilitation of the debtor in railroad
reorganization cases, is also a paramount goal of Chapter 11.
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In re Ionosphere Clubs, Inc., 98 B.R. 174, 175–77 (Bankr. S.D.N.Y. 1989). As the Seventh Circuit
has held, “[a]lthough courts in the days before bankruptcy law was codified wielded power to
reorder priorities and pay particular creditors in the name of ‘necessity’—today it is the Code
rather than the norms of nineteenth century railroad reorganizations that must prevail.” Kmart, 359
F.3d at 871. Thus, the Court turns back to § 363(b)(1) and the “sound business purpose” analysis
that must be conducted under Sixth Circuit law.
A sound business purpose exists in the critical vendor context if two circumstances are present.
The first circumstance relates to the vendor. In order to be a critical vendor, a vendor must
(1) be in a position to cease providing goods or services to the debtor because it is not a party
to a contract with the debtor; and (2) refuse to provide goods and services unless its prepetition
claim remains unpaid. See, e.g., Kmart, 359 F.3d at 872–73.
The second circumstance that must be present in order for a creditor to be a critical vendor
relates to the effect of the payment. The Supreme Court has recognized with apparent approval the
practice of bankruptcy courts issuing “‘critical vendor’ orders that allow payment of essential
suppliers’ prepetition invoices,” noting that “these courts have usually found that the
distributions at issue would ‘enable a successful reorganization and make even the disfavored
creditors better off.’” Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 986 (2017). In doing so,
the Court was quoting Kmart, in which the Seventh Circuit held that a critical vendor motion could
not be approved unless the debtor showed that its “business will gain enough from continued
transactions with the favored vendors to provide some residual benefit to the remaining, disfavored
creditors, or at least leave them no worse off.” Kmart, 359 F.3d at 872. Other courts reviewing
critical vendor motions have examined whether “the disfavored creditors will be at least as well
off as they will be
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if the [motions are] denied.” In re GVM, Inc., 606 B.R. 220, 228 (Bankr. M.D. Pa. 2019); see also
In re News Pub. Co., 488 B.R. 241, 244 (Bankr. N.D. Ga. 2013) (requiring the debtor to demonstrate
“that disfavored creditors will be as well off with the critical vendor order than they would have
been without it”); Tropical Sportswear, 320 B.R. at 20 (holding that the court would “permit the
payment of pre-petition amounts to critical vendors . . . only if the court finds that the
disfavored creditors will be at least as well off as a result of the court’s granting critical
vendor status to the select vendors”). Thus, in conducting its sound-business-purpose analysis, the
Court will incorporate the requirement that the payments to critical vendors that the Debtors seek
to pay will leave the other creditors at least as well off as they were before.
Nothing the Funds say in their objection suggests that they disagree with any of this. In fact,
they acknowledge that “it is appropriate to pay the pre-petition debts of truly critical vendors
who would otherwise not perform” and that “bankruptcy courts have authority to authorize payments
to critical vendors.” Funds Initial Obj. (Doc. 104) at 1, 5. They do seem to take the hard line
that a vendor cannot be a critical vendor if there is any alternative at all to using that
particular vendor. See id. at 6. But it must be the case that a vendor who could cut off the debtor
is critical if the cost of the alternative would be greater after factoring in the payment of the
prepetition creditor’s claim. Indeed, even one of the cases on which the Funds rely appears to
acknowledge as much. See In re CoServ, L.L.C., 273 B.R. 487, 498–99 (Bankr. N.D. Tex. 2002) (“[A]
debtor must show that meaningful economic gain to the estate or the going concern value of the
business will result or that serious economic harm will be avoided through payment of the
prepetition claim, which itself is materially less than the potential loss to the estate or
business.”). It makes economic sense to consider the degree to which replacement costs would exceed
the amount of a vendor’s prepetition
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claim. It also makes sense to consider whether the debtor would be able to continue operating while
it transitions business to the new vendor.
The Funds’ primary argument against the Motion is that the Debtors “must advance particularized
proof that a particular vendor is critical to the Debtors’ operations and that it will not perform
post-petition but for payment of its pre-petition debts.” Funds Initial Obj. at 2. In other words,
there must be “direct evidence relating to each vendor.” Id. at 5. Some courts have taken this
approach. See, e.g., Goodrich, 2020 WL 1068147, at *3 (“There was no vendor-specific testimony to
persuade the court to permit the Debtor to depart from the usual practice in bankruptcy proceedings
that creditors must await payment until confirmation of a plan.”); CoServ, 273 B.R. at
- The Funds paint the Seventh Circuit’s Kmart decision as being in this camp. Funds Initial Obj.
at 5 (stating that “the Seventh Circuit has noted [that] a court may not enter a critical vendor
order granting debtor unilateral discretion to make payments in the absence of direct evidence
relating to each vendor”). But the Seventh Circuit did not hold that debtors must present evidence
on a vendor- by-vendor basis. Rather, the Kmart court held that “the debtor must prove, and not
just allege . . . that, but for immediate full payment, vendors would cease dealing[.]” Kmart, 359
F.3d at 868.
What the Seventh Circuit did not answer is how the debtor must go about proving that the vendor
would cease doing business with the debtor absent payment of its prepetition claim. To be sure, one
way to do so is to identify each critical vendor and establish that it will cease providing goods
or services to the debtor unless its prepetition claim is paid. But another way is for the debtor
to establish a protocol under which it will pay any particular creditor’s prepetition claim only
if, among other things, the creditor refuses to provide essential products or services to the
debtor if its prepetition balance is not paid. The Seventh Circuit did not purport to decide which
approach courts
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should require. See Tr. of Hrg. at 108, In re Windstream Holdings, Inc., Case No. 19-22312 (Bankr.
S.D.N.Y. Apr. 16, 2019) (noting that the Kmart decision “left it up to the [c]ourts to adopt a
proper evidentiary framework for making the determination” of whether critical vendor motions
should be approved). Since Kmart, courts have regularly approved critical vendor motions in cases
in which the debtors have used protocols similar to the one employed by the Debtors here without
their identifying the vendors or providing specific evidence as to each one. See, e.g., In re
Murray Energy Holdings Co., Case No. 19-56885 (Bankr. S.D. Ohio Dec. 9, 2019); Cloud Peak Energy,
Inc., Case No. 19-11047 (Bankr. D. Del. June 11, 2019); In re Windstream Holdings, Inc., Case
No.19-22312 (RDD) (Bankr. S.D.N.Y. Apr. 22, 2019); In re Mission Coal, LLC, Case No. 18-04177
(Bankr. N.D. Ala. Nov. 21, 2018); In re First Energy Sols. Corp., Case No. 18-50757 (Bankr. N.D.
Ohio May 8, 2018); In re Avaya Inc., Case No. 17-10089 (SMB) (Bankr. S.D.N.Y. Feb. 10, 2017); In re
Relativity Fashion, LLC, Case No. 15-11989 (MEW) (Bankr. S.D.N.Y. Aug. 27, 2015); In re Patriot
Coal Corp., Case No. 12-51502 (Bankr. E.D. Mo. Aug. 2, 2012).
The Court concludes that requiring proof on a vendor-by-vendor basis is not required by the
Bankruptcy Code and would be detrimental to the interests of the Debtors’ estates and creditors,
including the unsecured creditors. In fact, the Funds’ approach likely would result in the Debtors’
paying more to their critical vendors than they will pay if the Motion is approved. That is,
requiring evidence on a vendor-by-vendor basis would drain value from the bankruptcy estate to the
detriment of all creditors. This is true for several reasons. For one, in order to provide
particular evidence that each critical vendor would fail to do business with the Debtors, what are
the Debtors to do? Ask their creditors if they will cease doing business with them if they do not
pay their prepetition claims? If asked, most creditors will certainly say yes, increasing the
amount of critical vendor payments the
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Debtors would make. As the court stated in Windstream, “the reason [the debtors have] only paid 12
[creditors under the interim critical vendors order]
to date is because [the others] haven’t asked.
[The debtors are] only going to deal with them if they do ask. You want them to pay a blank check
for the full amount.” Windstream, Tr. of Hrg. at 92; see also id. at 106–07 (noting that this
approach would create a “run on the bank”). And if the Motion is not approved, are the Debtors to
wait until the critical moment when the creditors inform the Debtors that they are soon to be cut
off, filing motions on an emergency basis each time this happens? On top of all that, are the
Debtors, by filing a list of “critical vendors” and providing evidence regarding why each vendor is
critical, to deprive themselves of any leverage they have in negotiations with the vendors? Such an
approach would not only increase the costs incurred by the Debtors’ estates for professional fees,
but also would increase the risk of harm to the Debtors’ business.
As the bankruptcy court in Windstream aptly stated in overruling an objection to a critical vendor
motion that was based on the same argument the Funds are making here:
These are the very questions that I started asking of Debtors ten years ago, and that’s how this
process got developed. That was from bitter experience in practice, and in earlier cases, where
cases literally died because judges didn’t believe they had this authority, notwithstanding Section
363(b), which was perfectly clear to Judge Easterbrook, who cited 363(b) in K-Mart, but left it up
to the Courts to adopt a proper evidentiary framework for making the determination, which I believe
exists here. . . .
And if I granted th[e] [objection to the critical vendor motion], we would be back to the old days
of having to disclose information that precludes Debtors who actually do have good working
relationships with their vendors managing that situation, and creating the type of disruption that
this rule is intended to prevent. And 363(b), which allows Debtors to spend money to provide a net
benefit to their estate in their business judgment, as reviewed by the Court, and the Court can
review the process to determine that [it] is sufficient, particularly where the alternative kills
the process, and kills the relief that Courts
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see fit to grant, which is to protect the Debtor’s business for all constituents.
Based on the evidentiary record before me, the process that the Debtors have adopted here, which
has been adopted in numerous cases over the last 15 years at least, and is being implemented here
by sophisticated parties who understand the legal and business issues clearly supports the
determination that I am making that the flexibility that the Debtors have to make these payments is
critical to their ongoing operations and success, in a case where they have a relatively narrow
budget, where cash management is important, leaving them their judgment, as overseen by the
official committee of unsecured creditors, to make payments only where absolutely needed, and to
preserve their leverage in doing so, so that their identification of who is critical does not
become public, to ensure an immediate run on the bank is not only authorized, but a proper exercise
of judgment here.
Id. at 108–10.
Clearly, an evidentiary record formed the basis for the approval of the critical vendors motion in
Windstream. Thus, contrary to the Funds’ description of the Court’s characterization of the
Windstream ruling as “permitting payment of critical vendors on the basis of the debtors’
discretion, without need to present evidence in court,” Funds Supp. Obj. (Doc. 200) at 3, the Court
never described the Windstream order as not requiring evidence. Instead, relying on Windstream, the
Court stated at the interim hearing that “the protocol laid out [in the Lee Declaration] for
determining who is and who is not a critical vendor establishes the evidentiary threshold
necessary, and particularly with the . . . oversight of the Unsecured Creditors’ Committee and, in
the interim,
. . . the United States Trustee.” Tr. of First-Day Hrg. at 153.
Similarly, in Patriot Coal, counsel for the debtors began to explain the issues that would be
raised by “provid[ing] more information about who we think we’re going to need to pay,” and the
court quickly stated: “[T]hat I don’t want you to do.” Tr. of Hrg. at 51–52, In re Patriot Coal
Corp.,
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Case No. 12-51502 (Bankr. E.D. Mo. July 16, 2012). The bankruptcy court also noted that “what I’m
being assured is that the company’s going to do whatever it can to not pay as much of th[e] [amount
being authorized] as it can. And at the end of the day, I think we have to let the company do its
thing, so to speak, and make judgments on a case-by-case basis, as to when they have to pay and
when they can afford, if you will, to not pay.” Id. at 55.
In sum, as long as the protocol set forth in the critical vendor motion is sufficient, § 363 of the
Bankruptcy Code allows bankruptcy courts to authorize debtors to exercise their business judgment
to pay critical vendor claims. The Court finds that the protocol laid out in the Lee Declaration
for determining who is and who is not a critical vendor, the additional explanations provided by
her proffer, and the testimony provided during the final hearing by Campagna, together provide the
evidentiary basis necessary for approving the Motion. According to the Funds, approval of the
Motion would grant “unfettered discretion to the Debtors to pay up to $16.2 million on a final
basis to whichever of its pre-petition trade creditors it chooses.” Funds Supp. Obj. (Doc. 200) at
- That is simply not true. The Debtors’ discretion is cabined by the protocol being approved by
the Court. And the evidence shows that they are exercising their discretion in an appropriate
manner. As of the date of the final hearing, the Debtors had not yet made any payments to critical
vendors despite having had the authority to do so for nearly a month. Not only that, but the
Debtors have negotiated deals to pay certain critical vendors’ prepetition claims at a discount in
installments over time. Requiring the Debtors to present evidence on a vendor-by-vendor basis
almost certainly would result in their paying more than they will pay under the protocol set forth
in the Motion.
Moreover, the Debtors have filed motions to sell their Oak Grove and Maple Eagle mines, the goal
being to maximize the value of their bankruptcy estates for the benefit of creditors. Docs.
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60 & 247. Toward that end, the Debtors’ management team must devote their efforts over the next
several months to operating the restarted Oak Grove mine and maintaining the Maple Eagle mine in
its hot-idled state, while at the same time shepherding the Debtors, with the assistance of their
professionals, through both the sale process and the process of confirming a Chapter 11 plan. The
approach endorsed by the Funds would divert the attention of the Debtors and their professionals
from these critical tasks by forcing them to file emergency motions each time vendors threaten to
stop supplying goods or services to the Debtors—unless, that is, they were to weaken their
negotiating position by identifying the critical vendors now. Being required to file emergency
motions under these circumstances would serve only to disrupt and potentially derail these Chapter
11 cases. By contrast, the protocol that is being approved by the Court will avoid an interruption
of the Debtors’ access to the goods and services that are critical to the operation and maintenance
of their mines while helping preserve the Debtors’ cash.
In addition to arguing that evidence must be presented on a vendor-by-vendor basis, the Funds
contend that “[i]f the Debtors are granted the requested relief, the bulk, if not all, of the
potential assets to be received by unsecured creditors in these cases could be distributed under
this order, with nothing left for other unsecured creditors.” Funds’ Initial Obj. at 3. That
appears to be highly unlikely. The Committee, the body that the Bankruptcy Code designates to
represent all unsecured creditors, strongly supports the entry of an order approving the Motion on
terms agreed to by the Debtors, the Committee and the United States Trustee.
The Funds also argue that “[o]ther creditors, such as the claims of the Funds, are likely to
receive significantly less than these trade creditors will receive.” Id. But that is not the
relevant inquiry. As discussed above, the question is whether payment of the critical vendors’
claims will
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leave the creditors not being paid at least as well off as they were before. That is the case here.
As set forth in the Lee Declaration, “[p]aying targeted Critical Vendor Claims renders a benefit to
the Debtors’ estates both monetarily and operationally by preserving liquidity and enabling the
Debtors to operate smoothly during the chapter 11 cases.” Lee Decl. ¶ 106. And the Debtors will
“us[e] the relief requested to . . . maximize earnings, which will benefit all of the Debtors’
stakeholders.” Id.
¶ 122. Doing so is consistent not only with § 363(b), but also with the primary purposes of the
Bankruptcy Code. See Toibb v. Radloff, 501 U.S. 157, 163–64 (1991) (recognizing that two of the
primary goals of the Bankruptcy Code are “maximizing the value of the bankruptcy estate” and
“permitting business debtors to reorganize and restructure their debts in order to revive the
debtors’ businesses”); N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984) (holding that
“[t]he fundamental purpose of reorganization is to prevent a debtor from going into liquidation,
with an attendant loss of jobs and possible misuse of economic resources”). The evidence shows that
it is more likely than not that these Chapter 11 cases would be in danger of failing if the Motion
were not approved, in which case the Funds likely would recover nothing. By contrast, if the Motion
is approved, these Chapter 11 cases have a chance of succeeding and providing a recovery to the
Funds and other unsecured creditors. Given this, the Funds are certainly no worse off if the Motion
is approved than they would be if it were not.
B. The Prepetition Claims of Lien Claimants, Shippers, and Royalty and Leasehold Claimants
Lee did not expressly state that the protocol described in ¶ 105 of her declaration would be
applied to the claims held by the Lien Claimants, the Shippers, and the Royalty and Leasehold
Claimants. But as the Court pointed out during the first-day hearing on the Motion, it is not going
to “grant critical vendor status to a vendor that’s contractually bound to provide goods or
services
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post-petition.” Tr. of First-Day Hrg. at 142. The Court did not intend to limit this requirement to
only those creditors that are included in the category of “Critical Vendors” as defined in the
Motion, because paying creditors that are obligated to perform under a prepetition contract with
the Debtors would not be a proper exercise of the Debtors’ business judgment regardless of the
category into which the creditors fall. See, e.g., Kmart, 359 F.3d at 873 (“Some supposedly
critical vendors will continue to do business with the debtor because they must. They may, for
example, have long term contracts, and the automatic stay prevents these vendors from walking away
as long as the debtor pays for new deliveries.”). The order approving this Motion should provide
that the Debtors will apply the same protocol that they use for determining whether to pay Critical
Vendors—including, without limitation, the analysis of “whether an agreement or contract exists by
which the Debtors could compel the vendor to continue performing on prepetition terms”—to determine
whether to pay creditors in the category of Lien Claimants, Shippers, or Royalty and Leasehold
Claimants. During the final hearing on the Motion, Campagna stated that the Debtors would do so.
Hrg. on Mot. at 12:35:54–12:36:32.
C. Intercompany Claims
The Funds argue that payments to affiliates should not be authorized in connection with the
approval of a critical vendors motion. Funds’ Initial Obj. at 5. This point is well taken. Indeed,
the Revised Order provides:
Nothing in this Final Order shall (i) serve as a determination of the priority, validity, or
allowance of any prepetition Intercompany Claims; the resolution of which shall be addressed by a
separate order; and the rights of all parties with respect to such Intercompany Claims are reserved
or (ii) authorize the Debtors to make payments to Murray Energy or its affiliates under the
Management Services Agreement.
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Revised Order ¶ 10. The Revised Order defines “Intercompany Claims” to mean “receivables and
payables incurred in the ordinary course of business resulting from the Debtors’ business
relationships with each other and with non-debtor affiliates and related parties.” Revised Order
n.3. With these revisions, the Debtors have addressed some of the concerns raised by the Funds with
respect to the payment of the claims of the affiliates.
The order, however, should be further revised to provide as follows:
Notwithstanding anything else herein, the Debtors shall not make any payment or grant any priority
status to any claims pursuant to the relief provided in this Final Order to (a) any direct or
indirect holder, or relative of such holder, of any equity interests in Murray Energy Holdings Co.
(including Class A or Class B shares), or (b) any entity owned or controlled by any direct or
indirect holder, or relative of such holder, of equity interests in Murray Energy Holdings Co.
(including Class A or Class B shares), without the consent of the Committee and the Funds, which
consent, in each case, shall not be unreasonably withheld, conditioned, or delayed.
A similar provision was contained in the order approving the critical vendors motion filed in the
Chapter 11 cases of the Murray Energy Debtors, and there is no reason why such a provision should
not also be included in the final order in these cases. The Debtors agreed to do so during the
final hearing on the Motion.
D. Failure to Comply With this Order
Finally, the Funds represent that the Murray Energy Debtors “agreed to provide information to the
Funds (and others) with respect to each critical vendor. Although some information has been
provided to the Funds, the Murray Energy Debtors have failed to address the Funds’ concerns
regarding whether certain of those critical vendors actually satisfy the factors and requirements
set forth in the motion.” Funds Initial Obj. at 4. As the Court said during the first-day hearing,
“this isn’t a blank check, and if after the fact [the Funds] come[] back with evidence that there
hasn’t been
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a fulsome process to identify who is indeed critical, th[en] that will not be something that the
Court
would look kindly upon.” Tr. of First-Day Hrg. at 153. The Debtors should continue to keep this
admonition in mind. If the Funds believe that the Debtors are not complying with the protocol
approved by the Court, then they may file a motion seeking relief from the Court in order to
address the Debtors’ failings, a step they have not yet taken in the cases of the Murray Energy
Debtors. Given this, the Funds’ suggestion that the Debtors might not comply with the protocol
provides no basis to deny the Motion.
V. Conclusion
For all these reasons, the Motion will be GRANTED to the extent set forth above. Counsel
for the Debtors shall upload an order consistent with this opinion.
IT IS SO ORDERED.
Copies to: Default List
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