October 7, 2019 - The unprecedented bankruptcy case involving coal operator Blackjewel showed signs of resolution last week when a federal judge approved the sale of two Wyoming coal mines to a new company called Eagle Specialty Materials. But a court document filed Saturday revealed the federal government has been investigating Blackjewel for fraud since before the company filed for bankruptcy, adding another possible wrinkle to a case that has rattled Wyoming’s coal country for over three months.

Haul trucks sit idle at Blackjewel's Eagle Butte coal mine on July 2. Court documents filed Saturday reveal that the federal government has for months been investigating the company for fraud.

Photo by Star-Tribune

“The United States was investigating potential violations of the False Claims Act by Debtor, Blackjewel, LLC, and had issued a subpoena to Blackjewel in connection with that investigation,” Fred Westfall, a U.S. attorney stated in court documents.

The federal government asked the West Virginia federal bankruptcy court to delay discharging Blackjewel of its debts, a move that would allow the federal government to continue investigating possible violations of the False Claims Act.

The False Claims Act holds corporations that defraud the government liable.

“The idea behind the law is (a company) should not be able to use bankruptcy to defraud the government out of debts owed to the government,” Joshua Macey, a law professor at Cornell University, studying bankruptcy laws, told the Star-Tribune.

Blackjewel owes the federal government about $50 million, according to court filings.

Once the sale of a handful of its coal mines are finalized, Blackjewel will liquidate, or cease to exist in the court’s eyes. The technical conclusion of the Chapter 11 reorganization case makes pursuing an ongoing investigation against the company much more difficult, Macey explained.

The complaint and ongoing investigation will not affect the purchase of Eagle Butte and Belle Ayr mines, approved by the court Wednesday, according to Macey. But the federal government will likely not be able to recover the money owed to it. According to the sales agreement, the new owner will acquire the mines free and clear of most outstanding debt obligations.

“I don’t really see repayment happening, but (the federal government) is leaving its options open,” Macey said. “If Blackjewel goes away, the government will not be able to recover money from Blackjewel and will have to try to get paid from (purchasers or creditors). This is very hard to do.”

Blackjewel filed for bankruptcy on July 1. After failing to obtain funding from a key creditor, the insolvent company shut down its mining operations, including two Wyoming facilities employing about 600 workers. In the ensuing months, Blackjewel struggled to find a long-term lender to front the cash to cover the mine operating costs throughout the bankruptcy proceedings. When the company pivoted to auction off its assets, it also hit roadblocks.

Coal company Contura Energy, the former owner and current permit holder of the Eagle Butte and Belle Ayr mines, claimed the winning bid. But negotiations with the federal government foundered, with disagreements over leasing terms and millions of dollars in unpaid mineral royalties.

As hundreds of out-of-work miners awaited news on a new employer to resurrect the mines to full operation, discussions between the companies stretched from days into weeks. On Sept. 18, Contura announced to stakeholders its intent to exit the Powder River Basin for good and find another buyer for the Wyoming coal mines.

Contura struck a deal with Eagle Specialty Materials, an affiliate of FM Coal. Contura agreed to pay the new company $90 million as start-up capital to take over the mines and assume any clean-up obligations. In turn, Eagle Specialty Materials will play Blackjewel $16.2 million for the mines.

A federal court approved the sale of the mines to Eagle Specialty Materials on Wednesday, but a closing date has not been announced.

Blackjewel and an attorney for the U.S. federal government did not immediately return requests for comment.

Given the ongoing nature of the investigation, the U.S. government has requested the court extend the window for complaints, and therefore the time before Blackjewel's debts are discharged, until Dec. 4, according to court documents filed Saturday.