Patriot Coal (OTC: PCXCQ), which was spun off in 2007 by Peabody Energy (NYSE: BTU), said Aug. 21 that a bankruptcy appeals panel has ruled favorably related to its claims against its former parent.
Patriot, a major coal producer in western Kentucky and in West Virginia, has been in Chapter 11 bankruptcy protection since July 2012.
“We are pleased that the Bankruptcy Appellate Panel has found Peabody Energy Corporation responsible for healthcare benefits it assumed at the time of the spin-off of Patriot,” said Patriot President and CEO Bennett Hatfield. “The appellate court adopted the position that Patriot has advocated all along – Peabody should not be permitted to use Patriot’s bankruptcy to escape its healthcare obligations to thousands of retirees.”
He added: “Patriot remains committed to a fair outcome for our stakeholders, while securing the necessary savings to successfully emerge as a long-term coal producer. The decision of the Bankruptcy Appellate Panel is a welcome development that will help Patriot achieve these goals.”
Said the appeals panel ruling: “Akin to a once amicable divorce gone awry, the parties here disagree about the nature of their dissolution agreement after one of them has experienced a change in circumstances. The players in this appeal are Peabody Energy, Peabody Holding, Patriot Coal and Heritage Coal. In the background is Eastern Associated Coal. At one time, Peabody Holding, Patriot, Heritage and Eastern were all Peabody Energy subsidiaries. After a strategic spin off, only Peabody Holding remains with parent Peabody Energy, while Heritage and Eastern now operate under the Patriot Coal umbrella.”
In August 2007, while Peabody Energy was contemplating a strategic spin off, Peabody Holding entered into an acknowledgment and assent agreement with the United Mine Workers of America (UMWA) union, the court noted. The agreement stated that Peabody Holding would be “primarily obligated” to pay for the benefits for approximately 3,100 of Heritage’s retirees, known as the assumed retirees or the “attachment A” retirees, under the terms of an individual employer plan maintained by Heritage. The agreement dictated that Peabody Holding would enter into a liabilities assumption agreement with Heritage to consummate and define their relationship post-separation.
This agreement also stated that Peabody Holding will not be a party to a collective bargaining agreement with the UMWA, that Peabody Holding does not have a labor relationship with the UMWA, and the acknowledgment and assent agreement does not create any right of action by the UMWA or its retirees against Peabody Holding with respect to the benefits provided by Heritage’s individual employer plan. However, the UMWA and its members are allowed to file suit “for any benefits [Peabody Holding] has agreed to pay under the [NBCWA Liabilities Assumption Agreement], or as otherwise provided under the [Heritage Individual Employer Plan].”
Crux of case is whether Peabody just has a contact liability, or a statutory one
Peabody Holding argued to the appeals panel that the bankruptcy court correctly held that the liabilities for providing healthcare to the assumed retirees under a “me too” agreement remain with Heritage and Peabody’s only obligation is to fund the liabilities, that Peabody Holding only agreed to be liable for paying Patriot’s contractual obligation to provide health care benefits–not a statutory obligation, and that this appeal will become moot once the debtors enter into any new labor agreement with the UMWA.
The Aug. 21 ruling noted: “Under the bankruptcy court’s theory, only Heritage or Peabody could be liable to the UMWA – and the court held that only Heritage was liable. On appeal, Heritage concedes that it is secondarily liable to pay for the assumed retirees’ benefits but argues that Peabody is primarily obligated to the assumed retirees. Peabody Holding asserts that it is only liable for paying for the assumed retirees’ benefits that Heritage is contractually obligated to provide and that because the ‘me too’ agreement has been rejected, and there is no more contractual obligation, Heritage is no longer contractually obligated to provide benefits. Therefore, Peabody Holding argues, it could not be liable until a new labor agreement is in place. Peabody Holding concedes that when a new labor agreement is reached, it will be liable to fund whatever level of benefits Heritage is obligated to provide, subject to the Eastern proviso.”
The court added: “We are not concerned with, and express no opinion on, what effect a new labor agreement would have on Peabody Holding’s obligations to the assumed retirees. For the purposes of this appeal, we are only concerned with the affect the grant of the § 1114 portion of Heritage’s motion has on those obligations.”
The appeals panel later wrote: “We disagree with the bankruptcy court that only Heritage is liable for the benefits; both parties are liable. Heritage is made liable to the UMWA through the ‘me too’ agreement, pursuant to article XX, which requires Heritage to provide non-pension benefits to its employees and retirees at the levels in the individual employer plan ‘guaranteed through the term of this Agreement.’ Peabody Holding is made liable through the acknowledgment and assent agreement. The assent agreement states that the UMWA can file suit against Peabody Holding ‘for any benefits [Peabody Holding] has agreed to pay under the [NBCWA Liabilities Assumption Agreement], or as otherwise provided under the [Heritage Individual Employer Plan].’ This provision makes it clear that Peabody is liable.”
“This is a bright ray of good news in what has been a long, dreary period for the retirees, their dependents and widows who have been desperately worried about what’s going to happen to their health care,” UMWA International President Cecil Roberts said in an Aug. 21 statement. “Peabody has spent years trying to get rid of its obligations to the thousands of retirees who made it the richest coal company in the world. This decision foils part of that plan. And it makes us even more determined to keep fighting to make sure the company lives up to its entire obligation to these miners.”
Peabody argued that since Heritage (Patriot) was relieved of all its obligation to pay for retiree health care by Judge Surratt-States, that Peabody should be relieved of its obligation as well, the UMWA noted. Judge Surratt-States agreed, and issued a ruling in Peabody’s favor on May 29. Patriot and Heritage appealed, and their appeal was supported by the UMWA.
Said Peabody Energy in an upbeat Aug. 21 statement: “Peabody is pleased with today’s ruling by the Eighth Circuit Bankruptcy Appellate Panel. The court said that Peabody was obligated to make payments (that have been consistently paid) until such time as a new labor agreement was approved between Patriot and the UMWA. The Panel did not rule on how Peabody’s level of funding would be determined with this new agreement in place: ‘We are not concerned with, and express no opinion on, what effect a new labor agreement would have on Peabody Holding’s obligation to the assumed retirees.’ Now that a new labor agreement has been approved, the provisions of the contract with Patriot will apply and any future funding levels are yet to be determined.”
Patriot Coal is a producer and marketer of coal in the eastern U.S., with 11 active mining complexes in Appalachia and the Illinois Basin. It ships to domestic and international electricity generators, industrial users and metallurgical coal customers, and controls approximately 1.8 billion tons of proven and probable coal reserves.