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Coal loan dispute must be arbitrated, Ky. SC says

By Jessica M. Karmasek | Sep 29, 2010


FRANKFORT, Ky. (Legal Newsline) - The Kentucky Supreme Court has ordered that two coal companies, arguing over who should pay a $6.3 million loan, must arbitrate.

In an opinion filed Thursday, the Court reversed a ruling by the state's Court of Appeals and remanded the case to a circuit court for entry of an order granting a motion to stay litigation so that the claims asserted by the plaintiffs may be submitted to arbitration.

North Fork Collieries LLC, a Delaware corporation with its principal place of business in Hazard, Ky., moved for relief from an order of the Pike Circuit Court denying North Fork's motion to stay litigation brought against it and to compel arbitration.

The Court of Appeals denied relief on the ground that the trial court's ruling did not amount to an abuse of discretion and that North Fork had failed to show that an erroneous ruling would subject it to irreparable injury.

The Court said the "underlying controversy" concerns a February 2008 transaction between North Fork and the plaintiffs, Barry Hal and Traveler Coal LLC, a Kentucky corporation headquartered in Pikeville. Traveler is a coal mining business and Hall was its initial sole owner and manager.

In November 2006, Traveler and Hall obtained a $6.3 million business loan from Community Trust Bank, Inc., of Pikeville.

In 2007, representatives of Prospect Capital Corporation, described by the parties as a New York-based private equity firm, approached Hall with an offer to buy his business and employ him as its manager.

Following negotiations, the parties agreed that Hall would sell his business and its assets to Prospect's affiliate, North Fork, in exchange for North Fork's assumption of certain business debts, including the outstanding debt to Community Trust Bank, and North Fork's agreement to employ Hall as its manager.

The parties' agreements were memorialized in two writings: an "Employment Agreement" and an "Asset Purchase Agreement."

To obtain Community Trust Bank's approval of the transfer of its collateral, North Fork, Hall and Traveler also entered into an agreement with the bank, the "Assumption Agreement," whereby Hall and Traveler agreed that they would continue to be bound under the original loan as guarantor and primary obligor, respectively, and North Fork agreed that the loan was to be amended so as to
add it as an additional primary obligor.

Under the Assumption Agreement, North Fork and Traveler both promised the bank, "absolutely, fully, irrevocably, personally, (and) unconditionally," to "jointly and severally assume (or remain) and be bound as... joint and several primary obligor along with (the other)."

Then, in August 2009, North Fork notified Community Trust Bank of its intent to default on the loan, and later that month, as soon as the default became official, Hall, his wife and Traveler brought suit in Pike Circuit Court against North Fork and the bank, alleging breaches by North Fork of the Assumption Agreement and the Employment Agreement and seeking damages and declaratory relief.

Citing choice of forum and arbitration provisions in both the Employment Agreement and Asset Purchase Agreement, North Fork moved to have the complaint dismissed or stayed pending arbitration. The trial court denied those motions by an order entered Oct. 13, 2009.

North Fork then sought an interlocutory review by the appeals court. While the matter was pending before that court, Hall filed notice of his intent to dismiss without prejudice his employment-related
claims. The central issue remaining before the trial court was "who -- as between North Fork and the Respondents (Hall) -- is responsible for paying the CTB debt."

The appeals court ruled that the trial court did not abuse its discretion by allowing Hall to go forward in circuit court on the purported Assumption Agreement claim because that agreement "arguably superseded the documents which did contain arbitration clauses." Thus, according to the appeals court, North Fork will not be irreparably injured by having to litigate Hall's claim.

The Court, in its opinion authored by Justice Lisabeth Hughes Abramson, disagreed.

"Because the Assumption Agreement cannot reasonably be thought to have superseded the detailed agreements made contemporaneously with it, and because it cannot settle the issue which Hall has raised in the complaint, the trial court abused its discretion by relying on that agreement to deny North Fork's demand for arbitration," the Court wrote.

The Court said the appeals court erred by treating the issue as though review of it could be postponed "until a final appeal without irreparably injuring North Fork's rights."

The Court also took issue with the application of the Assumption Agreement. The agreement, it said, concerns North Fork and Hall's relationship with the bank, not with each other.

"It has nothing to say about which of them, if either, is responsible to the other for the bank debt and thus it cannot resolve the issue Hall seeks to litigate," Abramson wrote for the Court.

The Court wrote that if an arbitration agreement is applicable, the motion to compel arbitration should be granted.

It concluded, "By exalting the form of the complaint over its substance, the trial court deviated from the Federal Arbitration Act's mandate that arbitration agreements be enforced and, consequently, abused its discretion. The Court of Appeals erred by ruling otherwise."

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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