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Bankruptcy Hearing Averts Daily EPA Fines for D&L
YOUNGSTOWN, Ohio – D&L Energy Inc. dodged $37,500-a-day in penalties Friday as a U.S. Bankruptcy Court ordered that a creditor of the company complete an environmental report it was commissioned to finish and submit it to the U.S. Environmental Protection Agency by Monday.
Judge Kay Woods approved a short-term agreement between D&L, EnviroScience Inc. and the U.S. Trustee's office that would pay EnviroScience $10,000 to finish the report and pay the company through post-petition administrative claims afterward.
The deadline to file the report is Monday, and D&L faced fines of up to $37,500 per day for each day it wasn't filed, according to court documents.
"I think we're satisfied with the court order on this issue," said Kathryn Belfance, lead attorney for D&L after a day-long hearing of first day motions in D&L's Chapter 11 case concluded. "We look forward to selling our assets and paying off our creditors, and we have every intention of paying everybody."
D&L filed for Chapter 11 bankruptcy April 16, citing assets of more than $50 million and liabilities between $1 million and $10 million. In the filing, D&L said it faced mounting expenses related to the massive cleanup effort and litigation costs, and alleges that funds were misappropriated from the company under the leadership of its former president and CEO, Ben Lupo.
Woods heard first-day motions Friday and approved an interim cash-collateral agreement for operating expenses.
But it was an emergency motion filed by the debtors asking the court to approve D&L's assumption of an executory contract it says it held with EnviroScience proved to be the most contentious issue Friday.
EnviroScience, based in Stow, informed D&L two weeks ago that it would stop work on the report unless it was paid at least a portion of the $113,000 the company says D&L owes.
However, no written contract between the two parties exists, and it was unclear as to whether the parties even agreed on the terms that they say were part of an oral contract, to which Judge Woods expressed her disdain early in the proceedings.
"I have never had anything like that," she said. "I find this to be absurd. I'm quite appalled."
Woods noted this was the first time she has been asked to rule on the assumption of an executory contract without the contract or its terms attached.
At issue was whether EnviroScience was compelled to complete the report and whether an executory contract existed between the parties. Without the report, D&L would be fined $37,500 a day, which would place the estate at risk.
Woods found that were this an executory contract, then EnviroScience could not unilaterally stop work. And, she expressed her suspicion that the company was holding the report hostage in order to pressure D&L for payment.
"You seem to think you have D&L by the short hairs," Woods scolded Bruce Lowe, attorney for EnviroScience. To force D&L to pay a portion of what the company is owed in lieu of finishing the much-needed report amounted to "blackmail," she remarked.
The report verifies and details the cleanup activity commissioned after an employee of Hardrock Excavating, a related company to D&L, was discovered emptying contaminated drilling waste into a storm drain on D&L's property. That oilfield wastewater eventually found its way into the Mahoning River via a nearby tributary.
D&L's then president, Ben Lupo, Hardrock, and former Hardrock employee Michael Guesman, are charged with one count of violating the U.S. Clean Water Act. Both men have pleaded not guilty. Lupo resigned from the company following his indictment.
D&L's new president and CEO, Nicholas Paparodis, testified he wanted to pay creditors, including EnviroScience, with the sale of assets, such as its $3 million interest in wastewater injection wells it operates in the state.
Paparodis said a deal was close to sell the company's interest in an injection well in North Lima when another creditor, Sunpro Inc., filed a lawsuit in Mahoning County Common Pleas Court last month demanding $1.5 million in payment for services rendered. That complaint requested the court issue an injunction prohibiting D&L from selling any assets, specifically the North Lima well.
The court issued the temporary restraining order, and Paparodis said that the company could no longer pay its creditors for the cleanup work.
"We were working with limited cash," he told the court.
D&L made its last payment to EnviroScience in March, Paparodis said, and has paid $174,000 for its work from early February to date. However, EnviroScience continued to do work associated with the cleanup after payments stopped.
James Krejsa, executive vice president of EnviroScience, testified his company officially halted work on the report about a week ago. He said the EPA-required report is between 50% and 60% finished, and it would require another 40 man-hours to complete over the weekend.
Woods, at times exasperated, often sparred with Lowe during the day-long hearing as to the definition of an "executory contract," and refused to grant the debtor's motion to assume the contract.
The lack of information and contract terms in the motion, she noted, presented "a huge red flag for this court."
Instead, she ordered attorneys of all parties to come to a last-minute agreement that would benefit the estate and at least for the short-term, satisfy all parties involved.
"This is an unusual case," D&L’s attorney, Belfance, told the court. "We have $50 million in assets and $10 million in liabilities. It is our belief that we'll pay everybody."
Copyright 2013 The Business Journal, Youngstown, Ohio.
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