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Armstrong creditors call transactions improper, ask judge for subpoena power

Some of Armstrong Energy Inc.'s unsecured creditors are asking a federal bankruptcy judge to allow them to investigate transactions the coal producer made before filing for Chapter 11 bankruptcy reorganization.

According to a Dec. 19 filing in the U.S. Bankruptcy Court for the Eastern District of Missouri, the Official Committee of Unsecured Creditors of the debtors and debtors-in-possession requested authority to examine a series of prepetition transactions it identified as appearing to have resulted in "significant and improper transfer of value" from Armstrong to its affiliate Thoroughbred Resources, L.P. during the months before Armstrong filed Chapter 11 bankruptcy.

"On information and belief, these transactions were orchestrated by private equity sponsor Yorktown Partners LLC, which directly or indirectly holds a majority of the equity interests in both [Armstrong] and the Thoroughbred Group and, through its power to appoint and remove directors and officers, controls their respective corporate decision-making processes," the document said.

The committee said it had "worked diligently" to find estate claims and causes of action that could serve as a source of recovery for unsecured creditors "who are expected to receive next to nothing" under Armstrong's proposed reorganization plan. It said that further examination of the prepetition transactions is warranted, especially because Armstrong's plan would grant it, Thoroughbred and Yorktown broad release.

"The debtors have filed a proposed plan that, if confirmed, would release virtually any and all claims and causes of action arising from the prepetition transactions and have proposed, and obtained entry of an order granting, an extremely truncated confirmation timeline" under which objections to confirmation of the plan are due Jan. 19, 2018, and the confirmation hearing is to be held on Feb. 2, 2018, the unsecured creditors said in the filing.

The committee asked the court to grant it authority to "issue document requests, notices, and subpoenas compelling the production of documents and the provision of testimony by the debtors and certain other entities and persons" to further investigate the transactions.

Armstrong's finances were negatively affected by a settlement agreement with Thoroughbred Holdings GP LLC related to the valuation of property on jointly owned land and mineral reserves in Kentucky. Armstrong began paying Thoroughbred all production royalties earned on or after Jan. 1 in cash as part of the agreement.

The committee said both Thoroughbred and Armstrong are under the common control of Yorktown, and many individuals simultaneously held director, officer and executive management positions with Yorktown, Thoroughbred and Armstrong.

"The committee believes that the sale-leaseback transactions may have benefited the Thoroughbred Group and Yorktown to the debtors' detriment. The committee is accordingly investigating, among other things, whether the debtors received fair consideration in exchange for the mineral reserves and other property interests that they sold to the Thoroughbred Group and whether the royalty rate that the Thoroughbred Group charged the debtors exceeded fair market value," the filing said.

It added that the agreement is "particularly concerning" since Yorktown stood on both sides of a deal that appears to transfer valuable assets from Armstrong to Thoroughbred for less than fair consideration at a time when Armstrong was insolvent.

The transfer, which was to settle a dispute between Armstrong and Thoroughbred over the calculation of deferred royalties and the valuation of property they jointly held, included all of Armstrong's remaining property interests in the jointly held property, a payment of $2.65 million for royalties due, a waived right of $314,000 in fees that Thoroughbred owed Armstrong under an administrative services agreement, and a waived right to a credit for an alleged $2.2 million overpayment for prior production royalties, the filing said.

Armstrong did not respond to a request for comment.

The coal producer cited a glut of coal and depressed prices as factors in its bankruptcy filing. It initially planned to sell its assets to Knight Hawk Holdings LLC, though an Armstrong attorney said in a recent court hearing that it was also considering another offer from one of two other parties that expressed interest in the assets.

Armstrong affiliates gave notice recently for the impending possible layoffs of more than 500 workers at western Kentucky mines.