Exhibit 10.3
SETTLEMENT MEMORANDUM OF UNDERSTANDING
     This Settlement Memorandum of Understanding (“Memorandum”) is made this
13th day of June, 2006, by and among BPI Energy, Inc., for itself and as
successor by merger or otherwise to Methane Management, Inc. and BPI Industries,
Inc., (“BPI”), Colt LLC (“Colt”), AFC Coal Properties, Inc. (“AFC”), American
Premier Underwriters, Inc. (“APU”), and Central States Coal Reserves of
Illinois, LLC (“Central States”) (collectively, the “Parties”), to memorialize
and evidence their agreement in principle for the settlement of the lawsuit
filed in the United States District Court for the Southern District of Ohio,
styled as BPI Energy, Inc. v. Colt LLC, et al., Case No. 06-cv-144 (the
“Lawsuit”) and the interlocutory appeal arising therefrom pending before the
United States Court of Appeals for the Sixth Circuit, Appeal No. 06-3559 (the
“Appeal”) (the Lawsuit and the Appeal referred to collectively as the “Action”).
The Parties have agreed to use commercially reasonable efforts to execute by
June 19, 2006 (the target “Closing Date”) a mutually agreeable final settlement
agreement and mutual release (the “Settlement Agreement”) and such other
mutually agreeable documentation as may be necessary to memorialize and
effectuate all the terms embodied in their settlement. This Memorandum
summarizes the principal terms of the Parties’ settlement.
     1.     Prior to the Closing Date, Colt shall obtain any and all of the
Methane Assets (as defined in Section 3(c) below) that it has conveyed to any of
its affiliates.
     2.     Prior to the Closing Date, Colt shall obtain, by Quit Claim deed,
with covenant of after acquired title to the extent of the purported paper title
conveyed to APU and within the chain of title to APU, all of APU’s right, title
and interest to all coal bed methane gas (“CBM”) and coal mine methane gas
(“CMM”) in an area more specifically described in Exhibit C.

 

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     3.     Subject to Colt’s ability to obtain the assets described in
Sections 1 and 2, on the Closing Date:

        (a) the Parties shall execute the Settlement Agreement under which each
of the Parties shall release and forever discharge each of the other Parties for
any and all claims arising out of or in any way related to the Methane Lease (as
defined in Section 3(d) below), the Action, or any other claims arising from the
beginning of time up to the Closing Date except for those rights and obligations
contained in the Settlement Agreement;           (b) BPI shall make a lump sum
cash payment of Three Million and 00/100 Dollars ($3,000,000.00) (the
“Settlement Sum”) by way of wire transfer to Colt, and deliver said Settlement
Sum to Colt’s attorney, Brian A. Glasser, Bailey & Glasser, LLP, 227 Capitol
Street, Charleston, West Virginia, 25301 (or such other person or entity as may
be designated by Colt). Wire transfer instructions are attached as Exhibit A;  
        (c) Colt and BPI shall execute a Purchase and Sale Agreement under which
Colt shall provide Quit Claim Deeds without covenants of warranty of title of
any kind (provided, however, Colt shall represent and warrant that it has not
conveyed or impaired the title conveyed to Colt, that Colt will convey the Land
free and clear of all liens or other encumbrances that have come into existence
during its period of ownership and with covenant of after acquired title to the
extent of the paper title conveyed to Colt and within the chain of title to Colt
and subject to all easements, restrictions and encumbrances of record or
otherwise,) conveying to BPI all of Colt’s respective rights, title and
interests in and to the CBM and CMM (associated with the 16 sections described
in Exhibit B (hereinafter the 16 sections referred to as the “Land”) (the CBM
and CMM in the Land, collectively, the “Methane Assets”), in the form of a deed
that substantially conforms to Exhibit H. Colt agrees, except for the rights set
forth in

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Sections 7 and 8 below, that CBM or CMM operations shall take priority over
other operations (including coal mining operations) for as long as CBM or CMM is
produced anywhere on the Land. The Methane Assets shall be conveyed “as is” and
“where is” with all faults, without any warranty whatsoever by Colt as to their
physical condition, the extent of CBM and CMM reserves in situ or the commercial
feasibility of the mining thereof, the condition of title (provided, however,
Colt shall represent and warrant that it has not conveyed or impaired the title
conveyed to Colt, that Colt will convey the Land free and clear of all liens or
other encumbrances that have come into existence during its period of ownership
and with covenant of after acquired title to the extent of the paper title
conveyed to Colt and within the chain of title to Colt,) and the existence of
hazardous perils of operations thereon. BPI shall be responsible for recording
the Quit Claim Deeds, and BPI shall be responsible for paying any associated
transfer taxes. Other than the Methane Assets, Colt is expressly reserving all
other mineral rights or other interests it may possess in the Land; and
     (d) the Parties shall execute a Termination Agreement under which each of
the Parties acknowledges the termination of that certain Oil, Gas and Coal Bed,
Methane Gas Lease dated April 3, 2001, as amended (the “Methane Lease”), and
forever discharges and releases each of the Parties from any and all obligations
thereunder.
     4.     Each of the documents described in Sections 3(a), (c), and (d) shall
be acceptable in form and substance to each of the Parties, provided that the
Quit Claim Deeds described in Section 3(c) must substantially conform to
Exhibit H.
     5.     BPI agrees that it will not drill any additional CBM or CMM wells in
Sections 10 and 15 of Township 9 South, Range 5 East, Saline County, Illinois.
This does not affect BPI’s right to drill any new CBM and CMM wells (as
permitted by law) in any other acreage in the

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remaining portion of the Land, nor does it affect BPI’s right to produce CBM or
CMM from the 15 wells identified in Exhibit D, which have already been drilled
in Sections 10 and 15, provided that BPI does not perforate any casing passing
through the No. 5 coal seam and all seams or other coal strata above the No. 5
coal seam to produce any CBM or CMM from the No. 5 coal seam or any coal seam
above the No. 5 coal seam, or to otherwise stimulate, by hydraulic fracture or
other method, said coal seams in Sections 10 or 15. BPI agrees, at its cost, to
plug and otherwise reclaim, as and when required by law, the 15 CBM wells
identified in Exhibit D.
     6. Colt agrees that it will not object to any current or future
applications by BPI or its designees for permits to develop CBM or CMM on the
Land provided, however, that such applications and their content comply with
Illinois laws and regulations. This does not alter or affect BPI’s promise not
to drill new wells described in Section 5 of this Memorandum.
     7. At any time, Colt or its designees (not including Central States) may be
permitted, by mere delivery of written notice to BPI, to move gas gathering or
gas transportation lines or roads, water disposal systems, equipment, or power
lines servicing BPI’s wells, subject to (i) compliance with any applicable
surface agreements and (ii) any applicable law. Colt shall cause the work to be
performed under its direction and control and shall bear the cost and expense
associated with the work. Colt acknowledges on its behalf and on behalf of its
designees that such cost and expense may include payments to BPI for any costs
incurred and revenue lost as a result of its CBM and/or CMM production being
interrupted.
     8. Subject to the obligation to immediately plug the well, Colt or its
designees (not including Central States) shall have the right to buy any CBM or
CMM well located anywhere on the Land. Colt shall be wholly and principally
liable for amounts due under this Section. The payment to be made for the
purchase of any well under this Section shall be calculated at the Fair

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Market Value of the well taken, which will be determined in the sole discretion
of an appraiser who shall be a mutually agreeable petroleum reserve engineer who
has expertise in CBM production and reserve analysis and is a member of the
Society of Petroleum Engineers (“Appraiser”). In the event Colt and BPI are
unable to agree on an individual to serve as the Appraiser then either party may
petition the Energy Section of the American Arbitration Association for the
appointment of the Appraiser pursuant to Rule 11 of the Rules of Commercial
Arbitration of the American Arbitration Association. The American Arbitration
Association must appoint an experienced petroleum engineer who has expertise in
CBM production and reserve analysis and is a member of the Society of Petroleum
Engineers. The Appraiser’s determination of the payment amount for the well
purchased shall be final and not appealable in any way by any Party. The cost,
if any, of the appointment of the Appraiser and of the Appraiser’s determination
shall be at Colt’s expense.
     9. Colt agrees, at its cost, to plug and otherwise reclaim, as required by
law, the following four CBM wells located in Williamson County, Illinois:
(a) Delta #4 (located in Section 1, Township 9 South, Range 4 East); (b) DDH #4
(located in Section 27, Township 8 South, Range 4 East); (c) DDH #5 (located in
Section 10, Township 8 South, Range 4 East); and (d) Delta H1A (located in
Section 9, Township 8 South, Range 4 East).
     10. Other than the four wells listed in Section 9 above, BPI agrees, at its
cost, to plug and otherwise reclaim, when required by law, all CBM and CMM wells
owned and/or operated by BPI on the Land. BPI acknowledges that it will abandon
wells Delta Mine #14 (D6) and Delta #003, both located in Williamson County, and
BPI agrees to plug both of these wells within 6 months of the Closing Date.

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     11.     With respect to all existing and future CBM and CMM wells on the
Land that pierce mineable No. 5 or No. 6 coal including, without limitation,
those wells listed on Exhibit E, BPI shall, when required by law, plug such
wells in accordance with then existing legal standards designed by appropriate
regulatory agencies to allow mining through the plug and well-bore. By way of
illustration and not limitation, today’s standards are set forth on Exhibit F,
attached hereto.
     12.     BPI expressly represents and warrants that it will continue to
honor its obligations in relation to the Settlement Agreement and Mutual Release
between BPI and Delta Mine Holding Company and Peabody Development Land
Holdings, LLC dated April 15, 2005 (hereinafter the “Peabody Agreement”)
including, but not limited to, Prohibited Area (i.e., the “no fly zone”) as
described in Section 4 of the Agreement, a copy of which is attached Exhibit G.
The Peabody Agreement shall remain in full force and effect and shall not be
deemed modified or amended in any manner as a result of the Parties entering
into this Memorandum and the final Settlement Agreement. The execution of the
Settlement Agreement and performance of the terms and provisions contained in
the Settlement Agreement shall not constitute a waiver of any breach of the
Peabody Agreement.
     13.     By June 29, 2006, subject to the occurrence of all of the events
described in paragraph 3 above, the Parties, through counsel, shall cause the
Lawsuit and Appeal to be dismissed with prejudice by tendering the appropriate
entries of dismissal.
     14.     The Parties shall bear their own costs, expenses and attorney’s
fees relating to the Lawsuit and Appeal.

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     15. The Parties agree that BPI has the right to publicly disclose the terms
of this Memorandum and the terms of the final Settlement Agreement as required
by federal securities laws.
     16. The Parties represent that no right, action or cause of action that one
may have against the other arising out of the Methane Lease and/or the Lawsuit,
or any portion of recovery or settlement to which they may be entitled, has been
assigned or transferred by or for in any manner, including by way of subrogation
or operation of law.
     17. This Memorandum and the Settlement Agreement shall be governed by the
laws of Illinois and that any action or proceeding to enforce or arising out of
this Memorandum or the Settlement Agreement shall be maintained in the United
States District Court for the Southern District of Illinois or the Circuit Court
of Saline County, Illinois.
     18. Neither the existence of this Memorandum or the Settlement Agreement
nor anything contained therein shall be construed as an admission of liability
of the Parties.
     19. This Memorandum may be executed in multiple counterparts, all which
together shall constitute one instrument. The Parties shall accept facsimile
signatures to this Memorandum.

  Agreed to and acknowledged by:     /s/ James Morris
_______________________________________
James Morris
Authorized Representative of Colt, LLC       /s/ James Azlein
_______________________________________
James Azlein
Chief Executive Officer and President
BPI Energy, Inc.     /s/ Joseph D. Stelzer
_______________________________________
Joseph D. Stelzer

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  Authorized representative for AFC
and APU     /s/ James C. Sevem
_______________________________________
Authorized Representative for
Central States

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