James River Coal Files Lawsuits To Recover Alleged "Preference" Payments

Posted on by Neil E. McCullagh in Creditors' Rights, Bankruptcy and Insolvency

James River Coal Company and its related companies[1] (together, “James River Coal”) filed Chapter 11 bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division (the “Court”) on April 7, 2014. In March 2015, James River Coal filed hundreds of lawsuits (the “Preference Lawsuits”) against companies to which James River Coal had made payments in the 90 days before it filed bankruptcy. The Preference Lawsuits aim to claw back those 90-day payments, alleging that the payments were “preferences” since they were made while James River Coal was insolvent and resulted in the recipient being paid more than it would have as a creditor in the bankruptcy case had the payments not been made. The Court has approved a set of procedures for the Preference Lawsuits, which aim to streamline and reduce the cost of the process for resolving the lawsuits. In short, the procedures require mediation of each Preference Lawsuit - either in Richmond, Virginia, or New York, New York - once the recipient of the alleged preference has filed its answer to the lawsuit. Only if the mediation does not result in a settlement does the lawsuit proceed as traditional litigation, with the scheduling of a trial, discovery, etc.

The filing of hundreds of preference lawsuits in a large Chapter 11 bankruptcy case is not unusual. The preference law is well intended - it aims to compensate for the fact that powerful creditors can often extract large payments from a near-bankrupt company at the expense of other creditors, who don’t get paid at all before the company files bankruptcy (i.e., the preference law allows the payments that the powerful creditor received to be recovered so that the money can then be shared among all creditors). However, the preference law is broadly written, and in hindsight it is not always seen as fair. Sometimes the bankrupt company (or its bankruptcy trustee) files preference lawsuits against essentially everyone who received a substantial payment during the 90 days before bankruptcy. There have been incremental changes made to the preference law to try to limit the number of lawsuits filed. Nonetheless, many creditors who have done nothing wrong - they merely provided a good or service and were paid for it - still occasionally have to deal with a preference lawsuit.

The good news is that exposure to a preference lawsuit can often be significantly reduced, or even entirely eliminated, through a set of available defenses. The two most common of those defenses are the “subsequent new value” defense and the “ordinary course of business” defense. The subsequent-new-value defense, generally speaking, allows the recipient of the preference payment to offset the preference with the value of any goods or services that the recipient provided after receiving the preference. For example, if the near-bankrupt company made a $10,000 payment to a creditor on May 1, but the creditor then delivered $10,000 of new goods to the near-bankrupt company, then any preference exposure for the $10,000 payment is wiped out. Importantly, this may hold true even if the near-bankrupt company then also paid for the $10,000 of new goods.

The ordinary-course-of-business defense precludes recovery of a preference payment if either (a) the payment was consistent with payments that the bankrupt company had made to the recipient before the bankrupt company ran into financial trouble - “consistent” in terms of, for example, how long it took the payment to be made after invoice, and any extra steps the creditor took to obtain payment (e.g., phone calls) - or (b) the payment was consistent with industry practices (e.g., if coal companies often pay their creditors 60 days after invoice, then a payment that was received 57 days or 63 days after invoice might well be protected by the ordinary-course defense).

Effectively invoking these defenses often involves making nuanced distinctions - for example, how does one define the relevant “industry” or when the bankrupt company ran into financial trouble? - and presenting numerous and sometimes complicated facts in an easy-to-understand and persuasive manner. Also, using these defenses can potentially have ramifications for other important rights that the creditor might have in the bankruptcy case. A lawyer defending a preference lawsuit should understand the range of possible defenses, how to efficiently and effectively present them to opposing counsel, a mediator, and the bankruptcy court, how those defenses can affect other rights the creditor has in the bankruptcy case, and how any settlement of the case should be structured for maximum benefit to the creditor.

If James River Coal has sued your company to recover an alleged preference payment, you should strongly consider retaining experienced counsel to ensure that you file a timely response to the lawsuit - failing which a default judgment may be taken against your company - and to reduce your preference exposure as much as possible.

[1] Those related companies are BDCC Holding Company, Inc.; Bell County Coal Corporation; Bledsoe Coal Corporation; Bledsoe Coal Leasing Company; Blue Diamond Coal Company; Buck Branch Resources LLC; Chafin Branch Coal Company, LLC; Eolia Resources, Inc.; Hampden Coal Company, LLC; International Resource Partners LP; International Resources Holdings I LLC; International Resources Holdings II LLC; International Resources, LLC; IRP GP Holdco LLC; IRP Kentucky LLC; IRP LP Holdco Inc.; IRP WV Corp.; James River Coal Sales, Inc.; James River Coal Service Company; James River Escrow Inc.; Jellico Mining, LLC; Johns Creek Coal Company; Johns Creek Elkhorn Coal Corporation; Johns Creek Processing Company; Laurel Mountain Resources LLC; Leeco, Inc.; Logan & Kanawha Coal Co., LLC; McCoy Elkhorn Coal Corporation; Rockhouse Creek Development, LLC; Shamrock Coal Company, Incorporated; Snap Creek Mining, LLC; Triad Mining Inc.; and Triad Underground Mining, LLC.

About the Author

Neil E. McCullagh is an attorney who works with banks on a wide variety of issues, including lending, insolvency, workouts, creditors' rights, bankruptcy, and collections.

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