Redmond v. Jenkins

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Appellants William Karl Jenkins and M. Earlene Jenkins (collectively, Mr. Jenkins) appealed an order of the Bankruptcy Appellate Panel (BAP) that affirmed the bankruptcy court’s dismissal of their claim for the payment of certain secured promissory notes. Alternate Fuels, Inc. (AFI) was a Kansas corporation that formerly engaged in surface coal mining operations. On December 9, 1992, AFI filed a petition under Chapter 11 of the Bankruptcy Code in the District of Kansas. AFI briefly continued its coal mining operations under the terms of a confirmed plan of reorganization. At that time, John Warmack acquired 100% of the stock of AFI and assumed control. Mr. Warmack then formed Cimarron Energy Co., LLC to handle the mining operations for which AFI still held permits. Mr. Warmack owned 99% of Cimarron. Twenty-four certificates of deposit, valued at approximately $1.4 million, were pledged to secure multiple reclamation bonds. Then, Cimarron recommenced mining operations. AFI’s equipment was released to AFI’s secured creditors, who ultimately foreclosed and sold the equipment back to Cimarron. Mr. Jenkins entered into an agreement to purchase Mr. Warmack’s interest in AFI. Mr. Jenkins did not intend to resume mining operations or otherwise operate AFI. Instead, Mr. Jenkins believed that, through his political connections, he could fulfill AFI’s remaining reclamation obligations and obtain the proceeds of the release of the 24 certificates of deposit and the sale of Cimarron’s mining equipment. Mr. Jenkins testified that he knew AFI had no prospect of repaying two promissory noted from its own funds; his only prospects for future payment were the certificates of deposit. The bankruptcy court found that Mr. Jenkins’ claims were not allowed claims because the transfers alleged to be consideration for the notes should have been recharacterized as equity contributions. In the alternative, the court found that Mr. Jenkins failed to sustain his burden of proof as to the validity and amount of his claim, or that Mr. Jenkins putatively secured claim should have been subordinated to the status of an unsecured claim. The Tenth Circuit reversed, finding that Mr. Jenkins' transfers did not meet the criteria for either recharacterization or equitable subordination, and he satisfied his burden of proof as to the validity and amount of his claim. View "Redmond v. Jenkins" on Justia Law