Exhibit 10.3**SETTLEMENT MEMORANDUM OF UNDERSTANDING**     This Settlement Memorandum of Understanding(“Memorandum”) is made this 13th day of June, 2006, byand among BPI Energy, Inc., for itself and as successor bymerger or otherwise to Methane Management, Inc. and BPI Industries, Inc.,(“BPI”), Colt LLC (“Colt”), AFC CoalProperties, Inc. (“AFC”), American PremierUnderwriters, Inc. (“APU”), and Central States CoalReserves of Illinois, LLC (“Central States”)(collectively, the “Parties”), to memorialize andevidence their agreement in principle for the settlement of thelawsuit filed in the United States District Court for theSouthern District of Ohio, styled as *BPI Energy, Inc. v. ColtLLC, et al.,*Case No. 06-cv-144 (the“Lawsuit”) and the interlocutory appeal arisingtherefrom pending before the United States Court of Appeals forthe Sixth Circuit, Appeal No. 06-3559 (the“Appeal”) (the Lawsuit and the Appeal referred tocollectively as the “Action”). The Parties have agreedto use commercially reasonable efforts to execute byJune 19, 2006 (the target “Closing Date”) amutually agreeable final settlement agreement and mutual release(the “Settlement Agreement”) and such other mutuallyagreeable documentation as may be necessary to memorialize andeffectuate all the terms embodied in their settlement. ThisMemorandum summarizes the principal terms of the Parties’settlement.     1.     Prior to the Closing Date, Coltshall obtain any and all of the Methane Assets (as defined inSection 3(c) below) that it has conveyed to any of itsaffiliates.     2.     Prior to the Closing Date, Coltshall obtain, by Quit Claim deed, with covenant of afteracquired title to the extent of the purported paper titleconveyed to APU and within the chain of title to APU, all ofAPU’s right, title and interest to all coal bed methane gas(“CBM”) and coal mine methane gas (“CMM”) inan area more specifically described in**Exhibit C**.
 

 
     3.     Subject to Colt’s abilityto obtain the assets described in Sections 1 and 2, on theClosing 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 shalltake priority over other operations (including coal miningoperations) for as long as CBM or CMM is produced anywhere onthe Land. The Methane Assets shall be conveyed “as is”and “where is” with all faults, without any warrantywhatsoever by Colt as to their physical condition, the extent ofCBM and CMM reserves *in situ*or the commercialfeasibility of the mining thereof, the condition of title(provided, however, Colt shall represent and warrant that it hasnot conveyed or impaired the title conveyed to Colt, that Coltwill convey the Land free and clear of all liens or otherencumbrances that have come into existence during its period ofownership and with covenant of after acquired title to theextent of the paper title conveyed to Colt and within the chainof title to Colt,) and the existence of hazardous perils ofoperations thereon. BPI shall be responsible for recording theQuit Claim Deeds, and BPI shall be responsible for paying anyassociated transfer taxes. Other than the Methane Assets, Coltis expressly reserving all other mineral rights or otherinterests 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 describedin Sections 3(a), (c), and (d) shall be acceptable in formand substance to each of the Parties, provided that the QuitClaim Deeds described in Section 3(c) must substantiallyconform to **Exhibit H**.     5.     BPI agrees that it will notdrill any additional CBM or CMM wells in Sections 10 and 15of Township 9 South, Range 5 East, Saline County,Illinois. This does not affect BPI’s right to drill any newCBM and CMM wells (as permitted by law) in any other acreage inthe
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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 orfuture applications by BPI or its designees for permits todevelop CBM or CMM on the Land provided, however, that suchapplications and their content comply with Illinois laws andregulations. This does not alter or affect BPI’s promisenot to drill new wells described in Section 5 of thisMemorandum.     7. At any time, Colt or its designees (not includingCentral States) may be permitted, by mere delivery of writtennotice to BPI, to move gas gathering or gas transportation linesor roads, water disposal systems, equipment, or power linesservicing BPI’s wells, subject to (i) compliance withany applicable surface agreements and (ii) any applicablelaw. Colt shall cause the work to be performed under itsdirection and control and shall bear the cost and expenseassociated with the work. Colt acknowledges on its behalf and onbehalf of its designees that such cost and expense may includepayments to BPI for any costs incurred and revenue lost as aresult 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 havethe right to buy any CBM or CMM well located anywhere on theLand. Colt shall be wholly and principally liable for amountsdue under this Section. The payment to be made for the purchaseof 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 inWilliamson County, Illinois: (a) Delta #4 (located inSection 1, Township 9 South, Range 4 East);(b) DDH #4 (located in Section 27, Township 8South, Range 4 East); (c) DDH #5 (located inSection 10, Township 8 South, Range 4 East); and(d) Delta H1A (located in Section 9, Township 8South, Range 4 East).     10. Other than the four wells listed in Section 9above, BPI agrees, at its cost, to plug and otherwise reclaim,when required by law, all CBM and CMM wells owned and/oroperated by BPI on the Land. BPI acknowledges that it willabandon wells Delta Mine #14 (D6) and Delta #003, bothlocated in Williamson County, and BPI agrees to plug both ofthese wells within 6 months of the Closing Date.
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     11.     Withrespect to all existing and future CBM and CMM wells on the Land thatpierce mineable No. 5 or No. 6 coal including, withoutlimitation, those wells listed on **Exhibit E, BPIshall, when required by law, plug such wells in accordance with thenexisting legal standards designed by appropriate regulatory agenciesto allow mining through the plug and well-bore. By way ofillustration and not limitation, today’s standards are set forthon **Exhibit F, attached hereto.     12.     BPIexpressly represents and warrants that it will continue to honor itsobligations in relation to the Settlement Agreement and MutualRelease between BPI and Delta Mine Holding Company and PeabodyDevelopment Land Holdings, LLC dated April 15, 2005 (hereinafterthe “Peabody Agreement”) including, but not limited to,Prohibited Area (*i.e.*, the “no fly zone”) asdescribed in Section 4 of the Agreement, a copy of which isattached **Exhibit G. The Peabody Agreement shallremain in full force and effect and shall not be deemed modified oramended in any manner as a result of the Parties entering into thisMemorandum and the final Settlement Agreement. The execution of theSettlement Agreement and performance of the terms and provisionscontained in the Settlement Agreement shall not constitute a waiverof any breach of the Peabody Agreement.     13.     ByJune 29, 2006, subject to the occurrence of all of the eventsdescribed in paragraph 3 above, the Parties, through counsel,shall cause the Lawsuit and Appeal to be dismissed with prejudice bytendering the appropriate entries of dismissal.     14.     TheParties shall bear their own costs, expenses and attorney’s feesrelating 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 ofaction that one may have against the other arising out of theMethane Lease and/or the Lawsuit, or any portion of recovery orsettlement to which they may be entitled, has been assigned ortransferred by or for in any manner, including by way ofsubrogation or operation of law.     17. This Memorandum and the Settlement Agreement shall begoverned by the laws of Illinois and that any action orproceeding to enforce or arising out of this Memorandum or theSettlement Agreement shall be maintained in the United StatesDistrict Court for the Southern District of Illinois or theCircuit Court of Saline County, Illinois.     18. Neither the existence of this Memorandum or theSettlement Agreement nor anything contained therein shall beconstrued as an admission of liability of the Parties.     19. This Memorandum may be executed in multiplecounterparts, all which together shall constitute oneinstrument. The Parties shall accept facsimile signatures tothis Memorandum.     Agreed to and acknowledged by:  /s/ James Morris******