Patriot Coal asked its bankruptcy court on Sept. 28 for what amounts to some flexibility in dealing with a longstanding lawsuit filed against it in West Virginia over polluted water discharges from some of its mine sites in southern West Virginia.
Patriot, a major coal producer in West Virginia, filed July 9 for chapter 11 protection at the U.S. Bankruptcy Court for the Southern District of New York. That filing triggered an automatic stay on all pending litigation against the company in other courts.
In its Sept 28 petition, Patriot noted that since as early as 2006, Patriot and various of its subsidiaries have been engaged in litigation, administrative appeals and other disputes with environmental groups, including the Ohio Valley Environmental Coalition, the Sierra Club and the West Virginia Highlands Conservancy regarding Patriot and its subsidiaries’ compliance with selenium effluent limits present in several National Pollutant Discharge Elimination System (NPDES) permits issued to its Hobet Mining LLC unit and other subsidiaries of Patriot.
Most of this litigation concerns the large-scale surface mining activities of Apogee Coal Co. LLC, Catenary Coal Co. LLC and Hobet (collectively called the “Selenium Debtors”). When the mining and the majority of the outfalls that are the subject of the environmental proceedings occurred, selenium had not been identified as a source of concern for coal mining discharges, and there were no permit conditions or required practices addressing selenium, Patriot noted.
As a result of litigation brought by the environmental groups long before the bankruptcy petition, which is currently pending before Judge Robert Chambers Jr. in the U.S. District Court for the Southern District of West Virginia, the Patriot subsidiaries are subject to a number of deadlines by which they must comply with effluent limits for selenium. Specifically, Hobet is subject to a September 2010 order and an October 2010 order (both orders together are called the “Hobet 22 Order”) requiring Hobet to construct a system at Mine 22 to treat selenium discharged from an outlet on a Hobet NPDES permit and to bring the selenium effluence from one of its mining outfalls into compliance with applicable permit limitations by May 1, 2013. The Hobet 22 order also directs Hobet to maintain an irrevocable standby letter of credit in the amount of $45m in part to ensure compliance with the deadlines imposed by the West Virginia court.
In addition, the Patriot subsidiaries are parties to a March 2012 consent decree with the plaintiffs setting similar compliance deadlines for two additional outfalls associated with Hobet’s mining operations, as well as other outfalls at a number of the mining complexes of these subsidiaries.
Patriot says it has made good progress on compliance
“Patriot and the Selenium Debtors have worked diligently and in good faith to comply with the Prepetition Orders,” Patriot wrote. “In particular, they have invested significant time and resources identifying, developing and installing treatment technologies for selenium, and expect to identify and implement even more effective technologies as those technologies develop and improve over time. As a result of these efforts, Patriot and the Selenium Debtors have made significant progress in bringing the relevant mining outfalls into compliance with the required permit conditions.”
Patriot continued: “This progress has come at a substantial cost, however, and is complicated by the commencement of these chapter 11 cases. Significantly, compliance with the Prepetition Orders would require the Debtor Movants to expend considerable amounts of their limited resources in order to meet the near-term deadlines for compliance under the Prepetition Orders. Were Judge Chambers to extend these deadlines as requested in the Motion to Modify (as defined below), the Debtor Movants will conserve liquidity over the next 12 to 18 months, and the letter of credit will continue to guarantee that sufficient funds are available to complete the planned construction at Hobet Mine 22.”
Beginning soon after the July 9 bankruptcy petition date, the litigants engaged in discussions regarding a range of options that might be considered during the chapter 11 cases. By order dated July 25, Judge Chambers modified the requirements of the prepetition orders to extend their compliance deadlines for a short period while the litigants explored options. At the request of the litigants, Chambers did so again by orders dated Aug. 10 and Aug. 16, after the litigants advised the court that counsel had reached an agreement in principle, subject to the requisite approvals, which the parties hoped to reduce to an agreed order.
“Notwithstanding diligent good-faith efforts by all the Litigants, the parties have been unable to finalize a mutually sought ‘global’ settlement agreement that would modify the Prepetition Orders,” Patriot told its bankruptcy court. “During a telephonic status conference on September 12, 2012, the Debtor Movants advised the West Virginia District Court that despite such failed discussions, they intend to seek from it a modification of the Prepetition Orders to stay the construction of the selenium treatment system at Hobet’s Mine 22, to extend the compliance deadlines under the Prepetition Orders. The Debtor Movants requested that the West Virginia District Court extend the most recent ‘stay’ order of August 16, 2012 for a short period so that it could consider the Debtor Movants’ proposed motion to modify the Prepetition Orders (the ‘Motion to Modify’).”
The company added: “Over the Plaintiffs’ objections, the West Virginia District Court granted an extension of the existing stay for an additional 14 days (until September 26, 2012) and entered a briefing schedule for the Motion to Modif (the ‘Briefing Schedule’). The Briefing Schedule required the Debtor Movants to file the Motion to Modify by September 17, 2012. At the September 12 status conference, despite the fact that the West Virginia District Court had previously stayed or extended the compliance dates in the Prepetition Orders to accommodate settlement discussions between the Litigants, the Plaintiffs asserted for the first time to the West Virginia District Court that an extension of the compliance deadlines would be subject to the automatic stay under section 362 of the Bankruptcy Code.”
Patriot wins District Court stay for now
On Sept. 17, the West Virginia court held another telephonic status conference, during which the Patriot subsidiaries notified the court of their intent to seek limited relief at the bankruptcy court and requested that the litigants be excused from complying with the briefing schedule until this court has an opportunity to consider this motion. Judge Chambers granted this request and entered an order suspending the deadlines in the briefing schedule, staying proceedings in the West Virginia court and scheduling a conference for Oct. 12 in order to discuss the court’s ruling on this motion and, if applicable, set forth a new briefing schedule for the motion to modify.
“Accordingly, the Debtor Movants are seeking to modify the automatic stay, to the extent applicable to the relief sought herein, for the sole and limited purpose of (i) allowing the Litigants to file and prosecute pleadings with respect to the Motion to Modify in accordance with a briefing schedule set forth by the West Virginia District Court and (ii) allowing the West Virginia District Court to determine whether to modify, and to order the modification of, the deadlines in the Prepetition Orders,” Patriot wrote. “Pursuant to the Proposed Order, the automatic stay, to the extent it otherwise applies to any aspect of the Environmental Proceedings, will otherwise remain in effect for all purposes as to the Environmental Proceedings.”
Extension of the compliance deadlines would permit the Patriot subsidiaries to seek to delay the installation of costly selenium treatment facilities during this critical period of their chapter cases, Patriot told the bankruptcy court. If automatic stay relief is denied, the Patriot units may be required to expend significant amounts of their limited resources, particularly cash, in order to meet the upcoming compliance deadlines.
Specifically, such compliance would require them to expend about $17m in cash in the immediate future in order to meet the compliance deadlines in the Hobet 22 order, and another approximately $12m to meet the compliance deadlines in the consent decree. Extending these deadlines would provide them with the opportunity to conserve valuable resources during their chapter 11 cases and may provide adequate time for the necessary technology to mature before full implementation is required, potentially lowering their ultimate costs of compliance, Patriot added.
“In total, the Debtor Movants estimate that if the West Virginia District Court modifies the compliance deadlines as requested, the Debtor Movants could defer up to $29 million in costs through the end of 2013, thereby providing clear tangible benefits to the Debtor Movants’ estates and their creditors,” Patriot argued.