1992-08-13_GENERAL DOCUMENTS - C1981017 (2)

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3. Many of the reclamation costs probably can be justified as necessary costs of preserving or disposing of the property secured to Sanwa. Resources may be able to surcharge Sanwa for most, if not all, of the costs of reclaiming the mine, pursuant to § 506(c) of the Bankruptcy Code. If Resources declines to seek a surcharge, the state could undertake the cleanup, become subrogated to Resources position as debtor in possession, and seek the surcharge. 4. There may be some risk that reclamation costs not paid by Resources might become the responsibility of Minerals and Coal & Coke on an agency or similar theory. These conclusions have considerable impact on the overall strategy in Resources' bankruptcy case. Until recently, we were hopeful that Resources' mine could be sold to a new operator, who would reopen the mine. Reclamation liabilities would be deferred for many years, and the new operator would be substituted for Resources as the financial warrantor with the Mined Land Reclamation Board. It has been anticipated that a sale to a new operator would not yield sales proceeds in excess of the amounts owed to Sanwa. A bankruptcy judge would be likely to balk at approving a sale in which all proceeds would go to the senior secured creditor, because Sanwa theoretically could get the same result by foreclosing outside of bankruptcy. In all probability, Sanwa would have to "trade down" some value to the junior creditors in order to justify bankruptcy administration. The amount of value which would need to be traded to junior creditors in connection with a sale to a new operator is impossible to predict with any precision. I assume that Sanwa would need to deliver a meaningful payment to junior creditors. In recent correspondence to counsel to Geneva Steel, I suggested the following to illustrate the "trade down" concept: If Sanwa, Pitkin Iron, and Carbondale voluntarily subordinated their unsecured claims, the class of general unsecured creditors would shrink from $36,000,000 to about S8,900,000. If one hypothesizes (i) a $6,000,000 sale price (the price offered and withdrawn by A. T. Massey Coal Company in the Fall of 1991), (ii) a net to Sanwa of $4,500,000 after payment of taxes and lease cures, and (iii) an agreement between Sanwa and the unsecured creditors in which Sanwa agreed to leave $1,000,000 on the table for unsecured creditors, Sanwa would net about $1,500,000 after its mothball expenditures and the distribution to