A Lease in Name Only: Manalapan’s Assignment of Leases under § 363

An Eastern District of Kentucky Bankruptcy Court recently held that mining leases did not constitute “true lease[s]” for the purposes of 11 U.S.C. § 365 and instead were “conveyance[s] of an interest in real property” governed by 11 U.S.C. § 363.[1] The court issued its decision in two companion chapter 7 cases: In re Manalapan Mining Co.[2] and In re Left Fork Mining Co.[3]

Manalapan Mining Co. Inc. and Left Fork Mining Co. Inc. filed their respective chapter 7 petitions on Nov. 22, 2013, and the same chapter 7 trustee was appointed to oversee the administration of the cases. The debtors each owned certain mining permits and were parties to certain mining leases. In March 2015, the bankruptcy court approved transfers of the mining permits free and clear of all liens pursuant to 11 U.S.C. § 363(f). The transfers of the mining permits were part of an overall agreement that would result in the release of bonds totaling approximately $1,750,000 for Manalapan and $56,000 for Left Fork. In conjunction with the transfers of the mining permits and as an additional requirement to the overall agreement, the chapter 7 trustee filed motions to approve the assignment of the mining leases. However, one of the parties to the mining leases, Black Star Land & Mining Ltd., objected to both motions.

While categorizing each of the motions as a “Motion to Approve Assignment of Lease,” the chapter 7 trustee argued that § 365 of the Bankruptcy Code did not apply and instead urged the court to authorize the transfers of the mining leases under § 363.[4] The bankruptcy court began its analysis by noting that Kentucky law treats coal leases as conveyances of interests in real property rather than leases or executory contracts, citing the Sixth Circuit’s decision in Sloan v. Hicks (In re Becknell & Grace Coal Co.).[5] The court then focused on the terms of the Manalapan mining leases[6] to evaluate whether the mining leases could similarly be characterized as conveyances of interests in real property.

The bankruptcy court acknowledged that some terms of the mining leases suggested that they were leases instead of conveyances of real property interests. For instance, the mining leases provided for improvements to accrue to the lessor, permitted the lessor to reserve other mineral and surface rights, and used the terms “demise” and “let” throughout. However, the court ultimately determined that these terms were not substantially different from terms found in coal leases and concluded that the mining leases did not constitute “true lease[s]” for the purposes of § 365 of the Bankruptcy Code. Additionally, the court found that the mining leases could not be characterized as executory contracts because, while the debtors had continuing obligations under the leases, the lessor did not have any continuing obligations. For these reasons, the court held that § 365 of the Bankruptcy Code did not apply to the motions.

The bankruptcy court proceeded to analyze whether the trustee’s transfer of the mining leases could be authorized under § 363 of the Bankruptcy Code. This analysis centered on two issues: whether the bankruptcy estates benefited from the transfers, and whether an anti-assignment provision could prevent the transfers. Due to the importance of the transfers of the mining leases to the overall agreement, which would result in the release of bonds totaling $1,750,000 for Manalapan and $56,000 for Left Fork, the court found that the transfers benefitted the bankruptcy estates. The court also rejected the argument that the anti-assignment provision could avert the transfers because the actual anti-assignment provision prevented the lessor from unreasonably withholding consent. The court found no legitimate reason to withhold consent. Nevertheless, the court also cited a number of cases permitting similar transfers regardless of anti-assignment provisions.[7]

The court concluded by granting the motions, providing us with the odd result of an order granting the assignment of a lease under § 363.