Patriot Coal, which has assets that are being sold off, on Oct. 19 filed an adversary proceeding, which is similar to a lawsuit, at its bankruptcy court against Peabody Energy (NYSE: BTU) over union liability issues.
Patriot Coal was spun off from Peabody last decade, taking with it a number of United Mine Workers of America-represented coal mining operations in western Kentucky and in West Virginia. Patriot was able to reorganize in bankruptcy earlier this decade, but this year sought a Chapter 11 dissolution at the U.S. Bankruptcy Court for the Eastern District of Virginia.
Patriot was joined in the complaint against Peabody by the United Mine Workers of America (UMWA), on behalf of itself and on behalf of the employees and retirees it represents.
The plaintiffs seek declaratory and injunctive relief to prevent Peabody from “evading” $145 million worth of remaining payment obligations ($75 million of which is due on Jan. 2, 2016, and $70 million of which is due on Jan. 2, 2017, together called the Peabody VEBA Obligations) to the Patriot Retirees Voluntary Employees’ Beneficiary Association (VEBA) under a settlement agreement dating back to the Patriot bankruptcy earlier this decade.
“The issues surrounding the Settlement Agreement are core proceedings that go to the heart of the Bankruptcy Court’s adjudication of claims against the Debtors, and are also related to the Debtors’ current chapter 11 cases pending before this Court,” said the Oct. 19 complaint. “Both the UMWA and the Debtors believe that Peabody remains obligated to fulfill its obligations under the contract to the UMWA, notwithstanding the Debtors’ alleged breaches. However, if Peabody succeeds in avoiding its contractual obligations to the UMWA as a result of Patriot’s alleged breaches, the Union has asserted it will seek to impose in excess of $145 million in liability on the Debtors and is supplementing its proof of claim to reflect this legal theory (the “UMWA Supplemental Proof of Claim”). Thus, the issues presented go to the core of the Bankruptcy Court’s power to resolve claims against the estates.”
On Aug. 28, Peabody filed a motion to reopen Patriot’s prior chapter 11 bankruptcy cases commenced in 2012 with the U.S. Bankruptcy Court in St. Louis to allow Peabody to commence a declaratory judgment action against the UMWA (seemingly for purposes of avoiding the automatic stay imposed by section 362 of the Bankruptcy Code in the underlying Debtors’ Virginia chapter 11 cases) for a determination that the settlement agreement is non-severable and rejection of the agreement would be a material breach and would excuse Peabody from future performance under it, the Oct. 19 complaint said.
“Thus, a fundamental issue raised by Peabody is whether the Settlement Agreement is an executory contract under section 365(a) of the Bankruptcy Code,” the complaint added. :The decision as to whether the Settlement Agreement is an executory contract is a fundamental issue over which this Court has core jurisdiction.”
On Oct. 9, over the objections of the Patriot companies, the Official Committee of Unsecured Creditors and the UMWA, the St. Louis court granted Peabody’s motion to reopen. On the same day, Peabody filed a revised complaint against only the UMWA, alleging that: the settlement agreement is a non-severable agreement; the Patriot debtors have materially breached the settlement; (c) the rejection of the settlement would be a further material breach of the settlement; and the debtors’ material breaches of the settlement excuse Peabody from performing all of its “Future Obligations” under the settlement, which include the $145 million in future payments.
Because resolution of these claims is critical to the administration of the debtors’ estate, Patriot intends to intervene in the action pending before the St. Louis court and move to transfer it to the Virginia bankruptcy court so as to facilitate the efficient resolution of these issues and avoid inconsistent rulings.