Molycorp Inc. asked a Delaware bankruptcy judge on Thursday not to dismiss the Chapter 11 case dealing with the rare minerals producer's insolvent California mine as the mine's trustee has urged, but instead to convert the case to a Chapter 7 proceeding.

The bankruptcy trustee for the mine in Mountain Pass, California, has asked to dismiss the case entirely, citing a lack of funds. Molycorp, which is undergoing its own separate Chapter 11, says that the case should instead be converted to a Chapter 7. Molycorp also wants four insurance companies — which pushed for the Chapter 11 to keep the mine from closing and cashing in on $40 million in surety bonds backing environmental cleanup — to repay $2.5 million that the mine had when it started the Chapter 11.

A bankruptcy proceeding is the only way for the company to legally abandon the mine, according to the company, and shutting down the Chapter 11 would leave no one in charge of the 19,000-acre site as Molycorp's ownership in the mine is set to expire at the end of the month.

On Aug. 11, the mine's court appointed trustee, Paul E. Harner, moved to dismiss the facility's Chapter 11 case, saying that the mine would run out of funds some time in mid-September. Mr. Harner also recently asked the court for permission to jettison the mine's insurance policies.

Molycorp, which had proposed moving the mine into a Chapter 7 proceeding in April, opposed dismissing the Chapter 11 proceeding. However, surety bond issuers preferred to use the mine's remaining funds to search for a buyer in Chapter 11.

That strategy has backfired, according to the mine operator, leaving the mine with no buyer and no funds to carry out a Chapter 7 proceeding. A Chapter 7 could allow the mine's creditors to recover $15 million in insurance proceeds, $4.5 million in real estate tax refunds, and $90 million in payments ahead of the Chapter 11 filing that may have violated bankruptcy law, Molycorp said.

The mine operator is also worried about the $56 million it pulled from its own debtor-in-possession financing to loan the mine. Dismissing the mine's Chapter 11 now could turn the superpriority administrative expense claim into an unsecured claim, “a very significant loss of rights” Molycorp said, that “would be highly prejudicial and not appropriate.”

Molycorp expects to dissolve before the end of August, when reorganized, post-Chapter 11 entities will take control of the company’s remaining rare earth processing companies, eliminating the last business connections and ties to the mine site.