Judge rejects motion to split bankrupt Patriot Coal in two

A federal bankruptcy judge on May 10 rejected a motion by two companies representing Patriot Coal creditors to put Patriot’s non-union subsidiaries under a Chapter 11 trustee, effectively splitting the company in two.

Aurelius Capital Management LP and Knighthead Capital Management LLC had told the U.S. Bankruptcy Court for the Eastern District of Missouri that Patriot’s United Mine Workers of America-represented operations, with heavy union liabilities, were dragging down the non-union subsidiaries financially. So it said the non-union and union sides of the company should be managed separately.

Patriot, in the meantime, is looking to reduce union liabilities with a March 14 motion to reject collective bargaining agreements and to modify retiree benefits.

Said the judge about where the Aurelious and Knighthead motion fits into the Patriot/UMWA settlement talks: “Several proposals have been made in attempts to reach a consensus. In response to the fourth proposal, which is no longer the most recent proposal, the Noteholders Aurelius Capital Management, LP, and Knighthead Capital Management, LLC (hereinafter collectively the ‘Noteholders’) filed the Trustee Motion and asserted that it was necessary to appoint a Chapter 11 Trustee to control the estates of those Debtors that are not signatories to certain collective-bargaining and retiree-healthcare agreements with the UMWA because the proposals made pursuant to the 1113/1114 Motion involve the use of assets of nonsignatory Debtors to satisfy the obligations of signatory Debtors.”

There is no dispute that all Patriot companies in bankruptcy, called the “Debtors,” are jointly and severally liable for certain liabilities that are implicated in the 1113/1114 Motion, the judge added. But here, there is no evidence of fraud, dishonesty, incompetence or gross mismanagement of the affairs of Debtors by current management or counsel for Debtors.

“Interdebtor conflicts are present in most large multi-debtor cases and such disputes do not by themselves evidence or establish fraud or mismanagement or misconduct of the type that constitutes cause under Section 1104(a)(1),” the judge added. “Moreover, Debtors are currently inextricably intertwined between unionized and nonunionized operations in that certain mining complexes involve certain Debtors that are signatories to agreements with the UMWA as well as other Debtors that are not signatories to agreements with the UMWA. Further, some non-union operations are either completely dependent on other operations that involves unionized labor or operate with both union and non-union labor. Moreover, Debtors share certain administrative operations such as accounting, sales, legal, operational oversight, safety, training and resource management. Debtors also operate under a single cash management system and use certain blanket purchase agreements, export contracts, transloading agreements and certain coal supply agreements that require blending of coal mined from unionized and non-unionized mines.”

Judge says no cause exists for this move

The judge added: “In sum, Debtors are more efficiently operated together and in effect, Debtors’ shepherding of these extremely complicated and complex cases has been honest, competent and efficiently managed. This Court cannot fathom, and no party has presented this Court with any potential structure for, the creation of two pools of Debtors. Cause does not exist for appointment of a Chapter 11 Trustee under Section 1104(a)(1).”

  • First, the judge wrote, there is no dispute that there is joint and several liability of all Debtors with respect to certain liabilities that are implicated in the 1113/1114 Motion.
  • Second, there is no dispute that pursuant to Section 9.01(n) of the Debtor In Possession financing facility, through which Debtors received their post-petition financing, appointment of a Chapter 11 Trustee is an event of default and would therefore trigger the immediate acceleration of the DIP loans. The DIP financiers would therefore have no obligation to continue to finance Debtors upon the appointment of a Chapter 11 Trustee.
  • Third, this court is yet to determine that there are indeed non-obligor Debtors pursuant to certain agreements entered into with the UMWA.

Debtors have demonstrated themselves to be primarily interested in crafting solutions that are in the best interest of these estates, the judge noted. Numerous accomplishments, negotiations and settlements of various matters have been reached which are due in part to Debtors’ commitment to a successful Chapter 11 process. The business community and some creditors have confidence in Debtors as is demonstrated in part by the various objections to the Trustee Motion that were filed. The record is devoid of any proof required for the extraordinary relief requested in the trustee motion to be granted, added Judge Kathy Surratt-States.

Judge also rejects establishment of equity committee

The judge, in a separate May 10 order, also rejected a motion by certain Patriot shareholders for the formation of an Official Committee of Equity Security Holders to represent the interests of shareholders. That request was filed by CompassPoint Partners LP, Frank Williams and Eric Wagoner.

“The shareholders have not shown that an official committee is necessary for their interests to be adequately represented,” the judge wrote. “The Boards of Directors of the Debtors have fiduciary duties to the shareholders, even in Chapter 11 cases, and the Interested Shareholders have failed to show that the Debtors’ Boards and management will not adequately represent the interests of equity holders. There is also no basis for concluding that the Unsecured Creditors Committee (‘Committee’) will not adequately represent the shareholders, because the Committee has a duty to maximize the value of the Debtors’ estates, which will trickle down to the benefit of the shareholders.”

The judge added: “There appears to be no substantial likelihood that equity will receive a meaningful distribution in these cases to justify appointment of a committee.”

Patriot Coal, a major coal producer in West Virginia and in western Kentucky, filed for Chapter 11 protection in July 2012. Patriot told the bankruptcy court on April 23 that it will run out of cash at the beginning of 2014 and will need to shut itself down if it can’t get the UMWA benefit cuts it is seeking.

In 2012, St. Louis-based Patriot sold a total of 24.9 million tons of coal, which was a reduction of almost 20% from the 31.1 million tons sold in 2011. Patriot is the tenth largest coal-producing enterprise in the U.S. based on 2012 coal production and the sixth largest coal-producing enterprise based on 2012 revenues.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.