A Delaware bankruptcy judge on Monday refused a bid by Heritage Coal for approval of its Chapter 11 liquidation plan, siding with the unsecured creditors committee on an objection over the plan's release provisions.

At a hearing begun Monday morning, U.S. Bankruptcy Judge Mary F. Walrath denied approval to Heritage's Chapter 11 plan and sustained an objection from the debtor's Official Committee of Unsecured Creditors arguing it shouldn't be approved with its current insider release provisions. Heritage had managed to put to rest comments from the U.S. Trustee's Office and environmental agencies in Pennsylvania and Maryland, but the creditor's committee held fast to the objection that the insider releases weren't necessary and shouldn't be given until there was an investigation to look into mismanagement allegations leveled against Heritage Coal's owners.

"I think considering all the factors I would sustain the committee's objection to the plan," Judge Walrath said. "I encourage the parties to talk about getting a plan that could be confirmed before me quickly."

The hearing was put on hold for a few hours after the decision to allow Heritage time to decide its next move. When the hearing resumed Monday afternoon, debtor's counsel said they believed they could have a decision by Thursday morning.

Heritage Coal, which ran coal mines in Maryland and Pennsylvania, and its owner, KTRV, filed for bankruptcy in March with an estimated $11.8 million in secured debt and some $2.5 million in unsecured trade claims.

Chief Restructuring Officer Brian Ryniker, in a first-day declaration, alleged that Heritage Coal's former owner, Angela Svonavec, and her husband improperly asserted liens on mining equipment that was pledged as collateral to and later foreclosed on by Heritage Coal's secured lender, Bedrock Industries Investco 1 LLC. Ryniker also accused Svonavec, who sold Heritage Coal to KTRV in February 2024, of trying to undermine the debtor's operations.

Heritage Coal filed an adversary action challenging the Svonavecs' asserted liens. The former owners, in response to the filings, alleged that KTRV had been unable to run a profitable business and accused it of downplaying familial connections between Bedrock and members of the Kestenbaum family who own KTRV.

Heritage Coal agreed to dismiss the lawsuit under a stipulation with the Svonavecs that was reached in July.

Since it filed for bankruptcy, Heritage Coal has sold some of its mining operation permits and equipment, bringing in $21.6 million. In early September, it proposed a Chapter 11 plan that would see a trustee liquidate its remaining assets and pursue litigation, including possible claims against the Svonavecs, to repay creditors.

Pennsylvania and Maryland asserted in their objections that Heritage Coal's Chapter 11 plan provides no details about how it will fund restoration of its remaining mining operations covered by state environmental laws, and said an injunction in the plan could interfere with enforcement of regulations. At Monday's hearing, debtor's counsel Jeffrey R. Waxman of Morris James LLP said the company had managed to use an adjournment to work out solutions to the states' issues, including amending proposed confirmation order language.

The creditors committee said in its objection the plan must remove proposed legal releases to parties tied to KTRV, including members of the Kestenbaum family. The committee said it was not able to independently investigate the KTRV claims made by the Svonavecs during the bankruptcy, which it said could be used to bring in money for creditors. The committee argued that the releases are not necessary to get the plan confirmed and that the parties would be receiving the releases for no consideration.

At the hearing, Waxman argued the committee did have a chance to look into the possibility of claims and was unable to articulate any. He also argued the insiders would be disincentivized to help the liquidation trustee without the releases.

He noted that members of the committee had voted for the plan and it had what he characterized as "overwhelming support" among creditors. He understood the desire to keep options open, but the committee was undercutting their own interests in the plan, he said.

"As much as the committee doesn't want to hamper the trustee, they're doing just that," he said.

Mark Platt of Frost Brown Todd LLP, speaking for the committee, disputed Waxman, saying the committee hadn't been able to perform discovery and shouldn't be precluded from objecting to a plan just because some of its members support the plan. And the debtor hadn't shown the insiders would provide the trustee enough help to justify the releases, he said.

Judge Walrath agreed the committee shouldn't be kept from objecting by the approval of some of its members and found the objection should be sustained. Weighing factors including whether the releases were necessary to the liquidating trustee's success, she told the debtor to return to the drawing board.

Waxman said that likely left three possibilities: to restart or pivot to Chapter 7, to strike the provisions to salvage the remainder of the plan, or revise their language to save the proposal. Judge Walrath set the hearing to resume at 4 p.m. Eastern time so the debtor could figure out which course to pursue.

When the hearing began again, Waxman said the parties had been in talks but the debtor needed a bit more time to make a final decision. He said he believed Heritage could inform the court of the decision at a status conference on Thursday morning.

Judge Walrath set such a hearing for 10 a.m. Eastern time.

Heritage Coal is represented by Jeffrey R. Waxman, Eric J. Monzo, Christopher M. Donnelly and Samantha L. Rodriguez of Morris James LLP.

The official committee of unsecured creditors is represented by Kimberly A. Brown, Matthew R. Pierce and Elizabeth A. Rogers of Landis Rath & Cobb LLP and Mark A. Platt, Jordan S. Blask, Ronald E. Gold and Bryan J. K. Sisto of Frost Brown Todd LLP.

The Commonwealth of Pennsylvania is represented by Brian L. Greenert, David N. Smith and Robert W. McAteer of Pennsylvania's Department of Environmental Protection Office of Chief Counsel.

Maryland is represented by Siobhan R. Keenan of the Maryland Office of the Attorney General's Department of the Environment.

The case is In re: KTRV LLC et al., case number 1:25-bk-10601, in the U.S. Bankruptcy Court for the District of Delaware.