A federal bankruptcy judge recently put eastern Kentucky coal producer M3 Energy Resources LLC into Chapter 7 bankruptcy dissolution, with one offer worth $45 million made recently to purchase company assets.

On March 31, M3 Energy Resources sought Chapter 11 bankruptcy protection at the U.S. Bankruptcy Court for the Eastern District of Kentucky. On Sept. 9, M3 Energy Resources filed a status report with the court that said the company received a letter of intent from Five Star Investments Ltd. to purchase company assets for $45 million. The attached letter of intent, addressed to Jim Miceli of M3 Energy Resources, shows that Five Star Investments is located in the West Indies.

The assets covered by the letter of intent include coal reserves, leases, mining equipment and unnamed coal prep plants. The letter of intent is signed by Five Star Investments Vice President Kevin Chambers.

Also, Covol Fuels No. 3 LLC filed a status report with the bankruptcy court on Sept. 9. Covol Fuels No. 3 is a unit of Headwaters Inc. that operates coal cleaning facilities.

The court had issued an April 22 order allowing Covol Fuels No. 3 to sell a coal stockpile at its facility that was at immediate risk of spontaneous combustion. The majority of the coal has been sold, Covol Fuels No. 3 noted. Thoroughbred Coal Sales LLC had asserted that it purchased all of the subject coal from M3 Energy Resources before the bankruptcy petition was filed, Covol Fuels No. 3 said.

On Sept. 22, Judge Joseph Scott Jr. signed an order converting the case to Chapter 7 dissolution, a process that entails the appointment of a court-approved trustee to supervise the liquidation of the company. James Lyon has been appointed by the court as the interim trustee.

The judge noted in the Sept. 22 ruling that on July 21, M3 Energy Resources entered into a settlement agreement with coal producer Mitco Enterprises Inc. and the "Aspen Parties." Among other things, M3 Energy Resources agreed that if it had not entered into an asset purchase agreement on or before July 31 that its Chapter 11 case would be dismissed. Another condition of the agreement was that M3 Energy Resources would continually maintain insurance during the remaining term of its Chapter 11 case.

Judge: M3 failed to meet commitments

"As a result of Debtor's failure to maintain insurance, multiple emergency motions for relief from stay and/or motions to dismiss were filed between July 25, 2011 and August 3, 2011," the judge said. "As of August 3, 2011, the date of the emergency hearing on the motions, Debtor had failed to meet multiple conditions of the July 21, 2011 agreement, including the provision to maintain insurance and the provision to have entered into an asset purchase agreement. However, Debtor's counsel again announced, as he had done at multiple hearings in the past, that Debtor had another party interested in purchasing Debtor's assets, and more time was needed for the potential purchaser to perform due diligence and enter into an asset purchase agreement. The Court granted the motions for relief from stay and entered the Order to Show Cause setting it for hearing on August 12, 2011, effectively giving the Debtor until then for the purchasers to enter into an asset purchase agreement."

On Aug. 12, M3 Energy Resources again advised the court that interested purchasers had been conducting due diligence of its assets. "Several creditors, including the Aspen Parties, North American Gem (US), Inc. and T&N Electric Motor Exchange, Inc. were in support of Debtor's request," the judge noted.

At a Sept. 9 hearing, counsel for M3 Energy Resources confirmed to the court that the debtor had ceased operations and that the debtor is insolvent, the judge wrote. M3 Energy Resources again promised the court there was an interested buyer and on Sept. 9 filed the letter of intent with Five Star Investments.

"If a sale of Debtor's assets does eventually take place, the Chapter 7 Trustee is in as good a position to complete such sale as the Debtor," the judge noted in the Sept. 22 ruling.

The "Aspen Parties" include Aspen Century LLC, Chas Coal LLC and Redbird Mountain Coal Co. LLC, which have coal operations in eastern Kentucky that they agreed in 2010 to sell to M3 Energy Resources. A May 27 court order addressed an effort by those companies to protect mining equipment that they had an interest in. M3 Energy Resources manages deep and strip mining operations in Bell, Clay, Knox and Leslie counties, Ky., according to the May 27 order.

There are eight operations, all in eastern Kentucky, listed with the U.S. Mine Safety and Health Administration under M3 Energy Resources. They are: the Alamo and Red Bird facilities; the Booger Mountain, Lick Fork, Highwall Miner No. 1 and Highwall Miner No. 2 strip jobs; and the Laurel Fork No. 2 and Butcher Branch deep mines. MSHA data shows M3 Energy Resources as controlled by Douglas McClain Jr. and Jim Miceli. McClain signed the March 31 bankruptcy petition as president of M3 Energy Resources.

There is a separate company in eastern Kentucky listed with MSHA, M3 Energy Mining Co., that is a unit of Alpha Natural Resources Inc. and is not to be confused with M3 Energy Resources.

Subject

INSOLVENCY & BANKRUPTCY (97%); COAL INDUSTRY (95%); INSOLVENCY & BANKRUPTCY COURTS (93%); US CHAPTER 7 BANKRUPTCY (91%); COAL MINING (91%); JUDGES (90%); INSOLVENCY & BANKRUPTCY LAW (90%); BUSINESS INSOLVENCY & BANKRUPTCY (90%); LITIGATION (89%); US CHAPTER 11 BANKRUPTCY (89%); APPOINTMENTS (78%); COMPANY LIQUIDATIONS & DISSOLUTIONS (78%); SETTLEMENT & COMPROMISE (78%); PETITIONS (78%); LIQUIDATIONS (78%); COAL FIRED PLANTS (78%) Deal Update/Other

Industry

NAICS325110 PETROCHEMICAL MANUFACTURING (69%); SIC3299 NONMETALLIC MINERAL PRODUCTS, NEC (69%)

Ticker

HW (NYSE) (69%)

Geographic

KENTUCKY, USA (96%) UNITED STATES (96%)