As former Blackjewel LLC CEO Jeffery Hoops seeks to recover nearly $30 million from the bankrupt coal producer, the company is pushing back, alleging he mishandled and took money for his own benefit.
In a 48-page motion filed Thursday, Blackjewel lawyers claim the bankruptcy may not have been necessary without the alleged mismanagement and financial malfeasance by Hoops.
“This level of insolvency and inevitable bankruptcy filings were the result of a years-long effort by Mr. Hoops to transfer tens of millions of dollars of (Blackjewel’s) assets for his benefit and the benefit of his family and other Hoops-Related Entities,” the motion says.
Hoops, his family and other businesses he owns claim they are owed about $29 million from loans made to the company prior to filing for Chapter 11 bankruptcy protection July 1.
What has followed has been a disastrous, drawn-out and convoluted financial mess that saw Hoops forced out as CEO, an abrupt months-long closure of the nation’s fourth- and sixth-largest thermal coal mines (Eagle Butte and Belle Ayr) and questions about Hoops’ financial management and stewardship that led the company to bankruptcy.
Along the way, Hoops has been the target of federal fraud allegations and the Campbell County Commissioners even briefly considered filing criminal charges against the former company chief.
Now the stakes are being raised again as Blackjewel wants a federal bankruptcy judge to compel Hoops, his family and businesses to testify and produce a laundry list of documents.
In addition to asking for things that would prove Hoops’ claims about what he’s owed, he’s being asked to verify his accounts about when and why he loaned money to keep Blackjewel afloat.
One of the more startling allegations in the motion is that Hoops and one of his companies, Clearwater Investment Holdings, “received more than $41 million” in distributions from Blackjewel prior to filing for bankruptcy “just in 2019 alone.”
That money wasn’t subject to any properly executed loan agreements “or other writings or specific terms establishing these distributions as loan repayments,” according to the court filing. “These ‘arrangements’ were never presented to, reviewed by or approved by (Blackjewel’s) board of directors nor were they subject to any other independent, third-party review.”
The company also wants documents that could explain how and why the company’s nearly 600 Wyoming employees weren’t paid for hours and overtime worked, as well as why 401(k) and health savings account deductions from paychecks went missing.
While Hoops declined to address the allegations in the motion on advice of his lawyer, he previously has maintained he has done nothing wrong and instead went to great lengths at personal expense to try and save Blackjewel’s 32 operations and more than 1,700 employees.
“I REALIZE WE HAVE 1,800 HURTING PEOPLE OUT THERE RIGHT NOW AND NO ONE IS HURTING MORE THAN ME OVER WHAT HAS OCCURRED,” Hoops wrote in an all-caps statement addressed to Blackjewel workers. The statement was made July 4, the day after he was forced to resign as the company’s CEO.
He also was adamant that his financial handling of the company’s money was above-board.
“THERE HAS NOT BEEN ONE CENT TAKEN OUT OF THE MINING COMPANY,” he says in the statement. “THE EXACT OPPOSITE. I HAVE LOANED MORE MONEY TO TRY AND GET THIS COMPANY THROUGH THESE DIFFICULT TIMES.”
Over the ensuing months, times also became more difficult for 1,100 Blackjewel miners in Kentucky, Virginia and West Virginia, along with the nearly 600 Wyoming miners. Those in the East not only were out of jobs without notice, their final paychecks bounced. While the Wyoming workers received their last paychecks (two days late), the bankruptcy also brought to light that their employee retirement and health savings account contributions also were missing. While the money had been deducted from their paychecks, cumulatively about $1.8 million, it wasn’t passed through to the proper accounts.
Party for the ‘Hoops Parties’
It was all part of a systematic effort on the behalf of Hoops and what the motion refers to as the “Hoops Parties.”
“It appears that Hoops acted with one guiding principle: to use (Blackjewel) and their assets to improve his personal, and the Hoops Parties’, bottom line — despite the harm it caused (the company) and their creditors,” the motion says. “Altogether, Hoops caused tens of millions of dollars of cash and other assets to be transferred to the Hoops Parties in an attempt to move them beyond the immediate reach of the (company’s) creditors.”
In fact, the motion alleges that Blackjewel and its operations “suffered millions of dollars of losses annually and had not generated positive cash flow from operations for years.”
In Wyoming, Blackjewel took over the Eagle Butte and Belle Ayr mines from Contura Energy in a transaction that simply had Blackjewel assume Contura’s debt associated with the mines. Blackjewel didn’t pay Campbell County the ad valorem taxes it assumed from Contura, and also didn’t pay its own production taxes from December 2017 on.
It wasn’t until the county threatened to take action against Blackjewel that it agreed to a weekly installment plan to make up for the arrears as well as keep current on its ongoing production taxes. The company made a handful of payments, then filed for bankruptcy.
The court filing also claims that Hoops never expected to make any money from the mines and instead profited on the backs of workers and at the expense of local, state and federal entities entitled to fees, taxes and royalties on the coal that was being mined and sold.
“The Hoops Parties have taken improper actions to harm (Blackjewel), their creditors and the community at large,” according to the motion.
Blackjewel lawyers also say they attempted to “untangle this web … that must be investigated and, where appropriate, addressed.”
One instance in particular is used as an example in the motion, when 90 days prior to filing for bankruptcy, some entities with ties to Hoops received payments of about $7 million in cash or property from Blackjewel operations.
The payments raise concerns that “include, but are not limited to, whether there was appropriate consideration, whether agreements among the parties were properly authorized, whether payment (was) preferential in nature and whether such agreements are effectively enforceable.”
In the end, Blackjewel may have been unable to maintain its financial wherewithal because its assets “may have been depleted by paying bills and expenses on behalf of Hoops-related entities,” the court filing says. “For example, upon information and belief, (Blackjewel) paid invoices and expenses … relating to mobile equipment leases, information technology services, water treatment services, document storage services and employee health care claims, among other expenses.”
The extensive discovery sought by Blackjewel lawyers “is necessary to determine the extent the Hoops Parties enriched themselves to the financial detriment of (the company),” the motion says.
While the legal wrangling involving Blackjewel LLC continues in a courthouse more than 1,500 miles away in West Virginia, things seem to have settled down in Campbell County.
Under new management
Some of that’s because both the Eagle Butte and Belle Ayr mines have reopened, many of the former Blackjewel workers have been called back and are again mining Powder River Basin coal.
The mines also have a new owner in Eagle Specialty Materials, a subsidiary of Alabama-based FM Coal that bought the mines from Contura Energy and the Blackjewel estate. Officially the mines’ operator since Oct. 18, things have been quiet from ESM after a roller coaster summer that left many of Blackjewel’s former workers emotionally battered and financially broken.
Several Eagle Butte and Belle Ayr miners report that, so far, they believe things have been running smoothly since they returned more than two months ago. They asked not to be identified because, as one miner put it, “We’ve already been stranded in the lake, so now that we’re back in the boat, let’s not rock it.”
They report production is building up again and that they’ve been receiving paychecks and haven’t noticed any problems with their health insurance.
While many may see ESM as a new chapter for the mines and their place in the PRB, it’s still too early to know just what kind of operator the FM Coal affiliate will be, said Shannon Anderson, an attorney for the Powder River Basin Resource Council, a Sheridan-based advocacy group.
The company has secured more than $235 million in bonding to cover the reclamation obligations for the mines, but hasn’t yet reached an agreement with the federal government over royalty payments. Until that happens, ESM continues to operate on Contura’s permit, which has been in place since Contura first bought the mines in 2015. Contura also retained the reclamation obligations throughout Blackjewel’s tenure.
“Our biggest outstanding concern is what is the deal with the Department of the Interior and the tens of millions of dollars in unpaid royalties,” Anderson said.
That an agreement still hasn’t been made “could just be the sign of bureaucracy and it’s taking some time,” she said. “I don’t think you can really read one thing into another.”
A few early warning signs
Prior to the sale to ESM being approved to the court, there was considerable buzz between the company and Campbell County about how community-minded ESM would be. The company even agreed to pay its ad valorem taxes to the county monthly instead of on the 18-month delayed scheduled now allowed by Wyoming law.
One of the high-profile bills that will be debated during this year’s legislative session will be changing that to monthly across the board to coincide with the state’s schedule for collecting severance taxes.
While ESM has technically missed its first of those monthly payments already — October was due Dec. 25 — it’s too early to read too much into that, said Campbell County Commission Chairman DG Reardon.
“I want to give them the benefit of the doubt on those payments so far,” he said, adding that by the time the November payment comes due Jan. 25, “it would really be good if they’ve made a payment by then.”
Eagle Specialty Materials also hasn’t yet paid most of the back taxes owed to the county it agreed to pay in its deal to acquire the mines. Along with Contura paying $13.5 of the $15.1 million it owed, ESM agreed to pay 50% of Blackjewel’s back taxes, which comes to about $11 million, said Carol Seeger, the county’s administrative director.
The company has made one installment of just under $2 million, she said, and its agreement is to make either monthly or annual payments over five years.
While not delinquent, Seeger said she is concerned about a lack of communication since ESM’s deal closed. The company should at least be talking with the county about how and when those monthly production taxes are going to be paid, as well as committing to how the back tax installments will be handled.
So far, the level of communication has been “zero,” she said. “Once we entered that original agreement and we got our first installment, so far since it’s been crickets.”
Seeger said she plans to reach out to ESM “to remind them we need to work out a system to do this.”
Repeated messages and calls to FM Coal’s top executive Michael Costello and ESM Chief Operating Officer Joeffrey Pilon were not returned.
Less than three months into operating in the Powder River Basin, Eagle Specialty Materials already is facing a legal challenge.
Komatsu Mining Corp. and its parent company Joy Global Surface Mining Inc. have maintained in numerous motions to the bankruptcy court that ESM is using a pair of its industrial shovels at Eagle Butte and Belle Ayr. Because the shovels were not part of the bankruptcy sale, they still belong to Komatsu and ESM needs permission to use the equipment.
The companies haven’t been able to come to an agreement on paying about $1.5 million owed on contracts with Blackjewel and don’t have an agreement for ESM moving forward, according to Komatsu court filings.
Komatsu says it needs “an immediate hearing” on the matter “because the shovels in question are each being operated (by) ESM approximately 16 hours a day, including holidays, with no payment to Komatsu from ESM or (Blackjewel) for maintenance or use of the shovels.”
A Jan. 22 hearing is scheduled for a number of matters in the Blackjewel case, including the shovel dispute.
Neither ESM or FM Coal have filed an official response to Komatsu’s claims about the shovels. If a resolution can’t be found, Komatsu could ask the court for permission to go onto the mine properties and take back the equipment.
As if Blackjewel doesn’t have enough on its plate, and now gathering information about its former leadership, the judge presiding over the case, Frank Volk, has ordered the company to respond to allegations that it continues to break federal mine pollution rules.
A coalition of advocacy groups that includes the Powder River Basin Resource Council and Sierra Club submitted a letter to the court last month asking Volk to take judicial notice and not let Blackjewel close bankruptcy without addressing its environmental obligations.
“While the focus of the bankruptcy proceedings has been on the significant financial mismanagement of the debtor companies, the companies and their affiliated entities also entered the bankruptcy with severe environmental mismanagement problems,” the letter says.
Some of those have been severe enough to generate orders to shut down operations, but more importantly “are ongoing and have only been compounded by new violations” since filing for Chapter 11, it says. “In spite of the seriousness of these violations, there does not appear to be any movement on the part of (Blackjewel) … to address them.”
In a swift response, Blackjewel attorney Stephen Lerner disputed the letter as “simply incorrect in its assertion that (Blackjewel) and their representatives have not been addressing these violations.”
Lerner also points out that, except for some limited coal produced from the company’s Wyoming mines, it would be difficult to continue to pile up violations because there has been no activity at Blackjewel’s operations in the East.