HBKY, LLC v. Elk River Export, LLC
6:21-cv-00101-GFVT-HAI
E.D. Ky.Jun 22, 2022Background:
- In 2016 Kingdom Energy and others borrowed funds and granted mortgages and security interests (including rents/royalties) to lenders; SHIP later became the successor and created HBKY as collateral agent.
- Prior to the mortgage, Kingdom had coal leases with Moe Coal, Cuz Coal, and JRL; those lessees were later involved in litigation with Kingdom that produced an Amended Lease (June 2018) and a subsequent Master Amendment between Kingdom and JRL releasing JRL’s royalty obligations in exchange for payments.
- Kingdom defaulted on its loan; a New York court entered a Consent Judgment, the loan documents and consensual remedies were assigned to SHIP/HBKY, and HBKY registered the judgment in the Eastern District of Kentucky.
- HBKY filed this foreclosure action seeking (inter alia) a declaration that the mortgaged parcels are free and clear of other interests, a declaration that HBKY is entitled to rents/royalties, and a declaration that certain lease amendments are void.
- Defendants (Moe, Cuz, and JRL) moved to dismiss under Rule 12(b)(6), arguing lack of standing/privity, failure to state viable claims, and failure to perfect HBKY’s asserted security interests.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether HBKY may enforce its mortgage lien and obtain sale free-and-clear of lessees’ interests (Count I) | HBKY alleges its mortgage is prior and that the lessees’ leases may have been terminated before the mortgage, and that the later amendments occurred without HBKY’s consent | Leases predate and were recorded before the mortgage, so lessees’ interests have priority and cannot be extinguished as a matter of law | Denied dismissal as to Count I: HBKY plausibly alleged the leases may have been terminated pre-mortgage and the Court cannot decide priority on 12(b)(6) pleadings |
| Whether HBKY’s asserted security interest in rents/royalties is perfected so it can collect them directly (Count II) | HBKY: UCC filing not required because coal leases/rents are interests in land outside the UCC; the mortgage assigned rents to HBKY | Defendants: not perfected — no UCC filing, recording chronology/notice/privity issues, and Kentucky law requires possession or a receiver to perfect an assignment of rents | Granted in part: Count II dismissed without prejudice as HBKY failed to plead it took possession or obtained a receiver to perfect rights to rents/royalties |
| Whether HBKY can void/reform the JRL lease amendments though it is not a party (Count IV) | HBKY alleges Kingdom lacked authority under the mortgage to execute the amendments and JRL had notice of the mortgage terms | JRL: HBKY is not in privity and cannot reform or void contracts to which it is not a party | Dismissed Count IV as to JRL: pleading legal conclusions and lacking privity are fatal on 12(b)(6) |
| Pleading standard: whether HBKY’s factual allegations suffice to survive 12(b)(6) | HBKY urges the Court accept factual allegations (including on information and belief) and deny dismissal | Defendants argue many assertions are legal conclusions and implausible under Twombly/Iqbal | Court applied Twombly/Iqbal: accepted plausible factual allegations (e.g., possible termination of leases) but rejected mere legal conclusions (e.g., conclusory priority or authority statements) |
Key Cases Cited
- DirecTV, Inc. v. Treesh, 487 F.3d 471 (6th Cir. 2007) (Rule 12(b)(6) review: accept well-pleaded factual allegations and draw inferences for plaintiff)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleadings must state a plausible claim to survive dismissal)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (Twombly plausibility standard for complaints)
- Courie v. Alcoa Wheel & Forged Prods., 577 F.3d 625 (6th Cir. 2009) (application of Twombly/Iqbal in the Sixth Circuit)
- In re Becknell & Crace Coal Co., 761 F.2d 319 (6th Cir. 1985) (Kentucky treats coal mining leases as conveyances of an estate or interest in land)
- Johnson v. Coleman, 288 S.W.2d 348 (Ky. 1956) (Kentucky precedent on coal leases constituting interests in land)
- In re Buttermilk Towne Ctr., 428 B.R. 700 (Bankr. E.D. Ky. 2010) (assignment of rents is a secondary security; action such as possession or receiver required to perfect)
- In re American Fuel & Power Co., 151 F.2d 470 (6th Cir. 1945) (assignment of rents generally requires steps to reduce income to possession)
- Rogan v. Vanderbilt Mortg. & Fin., Inc., 491 B.R. 464 (Bankr. E.D. Ky. 2013) (foreclosure practice: parties must assert rights to proceeds to share in sale)
- Gulf Life Ins. Co. v. Wal-Mart Stores, 972 F. Supp. 575 (M.D. Ala. 1997) (mortgagee typically must take further action—foreclosure/receiver—to require direct rent payments; noted in opinion as vacated/Alabama law)