Court: United States Bankruptcy Court, E.D. Missouri; May 29, 2013; Us Bankruptcy; United States Bankruptcy Court
The Court addressed a Motion to Reject Collective Bargaining Agreements and Modify Retiree Benefits under 11 U.S.C. §§ 1113 and 1114, alongside objections from the United Mine Workers of America (UMWA) and other interested parties. Various entities, including the Official Committee of Unsecured Creditors, Ohio Valley Coal Company, Drummond Company, Energy West Mining Company, Bank of America, U.S. Bank National Association, Wilmington Trust Company, Cliffs Natural Resources Inc., and others, submitted objections to the motion. Some objections were limited to a single 15-page brief, an opening statement, and a closing argument.
In response to these objections, the Debtors filed an Omnibus Reply Memorandum supporting their motion, while the UMWA also submitted a reply memorandum. Notably, on April 2, 2013, the Court allowed intervention from the United Mine Workers of America 1974 Pension Trust and the 1993 Benefit Plan, primarily due to the 1113 Proposal's contents. However, the Court later limited their participation, emphasizing their inability to negotiate concessions independently, as required under Sections 1113 and 1114.
The Court is addressing objections from the United Mine Workers of America (UMWA) regarding the Debtors’ Motion to Reject Collective Bargaining Agreements and Modify Retiree Benefits under 11 U.S.C. §§ 1113 and 1114 of the Bankruptcy Code. Hearings took place from April 29 to May 3, 2013, after which the matter was submitted for ruling. Following the 30-day deadline mandated by Congress in § 1113(d)(2), the Court will rule on the entire Motion due to the interconnected nature of the requests under §§ 1113 and 1114.
Debtor Patriot Coal Corporation and its affiliates filed for Chapter 11 bankruptcy on July 9, 2012, in the Southern District of New York, with cases jointly administered as per Federal Rule of Bankruptcy Procedure 1015(b) and a Joint Administration Order. The cases were later transferred to the Eastern District of Missouri. The Court acknowledges the significant impact of the reorganization on the livelihoods of all employees, both current and retired, emphasizing that the successful outcome is crucial for the retirees' health care and the viability of the coal industry. The Court is committed to maximizing the value of the Debtors' estates for the benefit of all stakeholders, including the UMWA and its constituents, and has considered over 900 letters from interested parties as part of the decision-making process.
Numerous letters highlight the potential bankruptcy of retired coal miners and their families if Debtors are allowed to alter the Collective Bargaining Agreements (CBAs) and Retiree Benefits. The letters recount the harsh working conditions faced by miners, who often labored for over 30 years with the expectation of lifelong health care and pensions. Personal accounts detail physical, mental, and emotional tolls, including severe injuries, loss of limbs, and fatalities among peers. The Court has received extensive documentation regarding miners' medical conditions and sacrifices made in reliance on promised benefits.
Concerns are raised about retirees' limited financial flexibility, with many facing difficult choices between medication and basic needs. The Court is tasked with evaluating the implications of the Bankruptcy Code and prior court decisions on the Debtors' request to modify the CBAs and Retiree Benefits. Key questions include whether Patriot Coal Corporation was destined to fail, the impact on current employees, and how potential modifications would affect retirees not covered under specific federal benefits. Additionally, considerations involve the allocation of funds based on health needs, prospects of strikes, and the broader effects on local mining economies. The forthcoming Memorandum Decision and Order will analyze the history of CBAs, Retiree Benefits, the Debtors' proposals under Sections 1113 and 1114, and apply relevant legal standards within the limited timeframe dictated by the Bankruptcy Code.
The document begins with a factual note defining coal as a fossil fuel formed from ancient vegetation.
Plants from ancient times utilized photosynthesis to produce carbon compounds in their tissues. Upon their death, they formed peat in swamps, which was subsequently buried under sand and compressed over time, leading to carbonization and the formation of coal. There are four coal ranks based on carbon content: lignite, subbituminous, bituminous, and anthracite, with bituminous coal constituting approximately 90% of U.S. coal reserves, primarily used for electricity generation and in steel production. Debtors are engaged in the mining of bituminous coal.
The United Mine Workers of America (UMWA), established in 1890, represents about 42% of Debtors' workforce, advocating for miners' rights. The Bituminous Coal Operators’ Association (BCOA), formed in the mid-1900s, represents coal mine operators in negotiations with the UMWA, with Peabody Energy Corporation and Arch Coal, Inc. as members.
Historically, labor disputes led President Truman to seize coal mines and negotiate with the UMWA, resulting in the 1947 National Bituminous Coal Wage Agreement (NBCWA). This agreement established benefit funds for miners and set employment terms for BCOA members and non-members agreeing to “Me Too” provisions. Disagreements over benefits led to the 1950 NBCWA, which introduced a pay-as-you-go system and required a coal royalty payment, allowing trustees to adjust benefits within budget constraints.
The Employee Retirement Income Security Act of 1974 (ERISA) mandated that pension plans be actuarially funded, leading to significant changes in the National Bituminous Coal Wage Agreement (NBCWA) of 1974. The United Mine Workers of America (UMWA) and the Bituminous Coal Operators Association (BCOA) established the 1974 NBCWA, which enhanced benefits and eligibility for health and pension plans, introducing new provisions like lifetime health benefits for disabled miners and their families. Four trusts were created: the UMWA 1950 Pension Plan, the UMWA 1974 Pension Plan, the UMWA 1950 Benefit Plan, and the UMWA 1974 Benefit Plan, with the 1950 plans covering retirees before January 1, 1976, and the 1974 plans for active miners and those retiring after that date.
The funding structure involved a per ton fee and a flat hourly fee from coal operators. However, the plans soon faced financial strain due to increased benefits, declining coal production, and a prolonged strike. This led to the 1978 NBCWA, which permitted mine operators to provide health benefits directly, restructuring the 1974 plans to care for "orphaned retirees"—those whose last employer ceased contributions. An Evergreen Clause mandated continued contributions from signatory employers as long as they remained in the coal business.
As employers withdrew from the agreement, the 1974 Benefit Plan struggled with a rising number of orphaned retirees and escalating healthcare costs. By 1988, inadequacies in the 1974 Benefit Plan’s funding were evident, prompting a new NBCWA that increased contribution rates from five to eight cents per hour, though this adjustment also proved insufficient. The 1988 NBCWA introduced the UMWA Cash Deferred Savings Plan to supplement retirement income, while challenges for the 1974 Benefit Plan persisted.
In 1988, the Pittston Coal Group, Inc. refused to sign the renewed National Bituminous Coal Wage Agreement (NBCWA) after the 1984 agreement expired, leading to the termination of its labor contract and cessation of contributions to the 1974 NBCWA Plans. Pittston also notified retirees that it would discontinue their health benefits, proposing an alternative single employer pension and health plan with different cost features. This decision triggered a strike lasting over ten months. In response, Congress acted, with Secretary of Labor Elizabeth Dole appointing a mediator and establishing the Secretary of Labor’s Advisory Commission on United Mine Workers of America Retiree Health Benefits, known as the Coal Commission. The bipartisan commission was tasked with evaluating the financial status of the 1950 and 1974 Benefit Plans and making recommendations for their sustainability. The 1990 Coal Commission report emphasized the lifelong healthcare expectations of retired coal miners, advocating for the fulfillment of these commitments. In light of the report, Congress enacted the Coal Industry Retiree Health Benefit Act of 1992 (Coal Act) on December 16, 1993, aimed at securing ongoing benefits for miners and their families. The Coal Act integrated the 1950 and 1974 Benefit Plans into the United Mine Workers of America Combined Benefit Fund. Prior legislation included various acts addressing safety, health, and compensation for miners, culminating in the Coal Act's establishment to ensure miners' health benefit continuity.
Employers providing benefits under the Coal Act are required to maintain these benefits for all beneficiaries who retired or will retire before September 30, 1994. The Coal Act established the UMWA 1992 Benefit Plan for certain retirees not covered by earlier benefit plans but who would become beneficiaries before February 1, 1993, including potential orphaned retirees. Although the current court matters do not involve the Coal Act, Congress has since enacted several key legislative changes, including amendments to the SMCRA in 2006, the Mine Improvement and New Emergency Response Act, the Pension Protection Act, and the Tax Relief and Health Care Act, aimed at enhancing benefits and responsibilities, particularly for orphan retirees.
The National Bituminous Coal Wage Agreements (NBCWAs) were revised in 1998, 2007, and 2011, maintaining similar terms while increasing contribution rates and extending coverage to retirees based on their retirement dates. The 2007 NBCWA included provisions for additional payments to the UMWA Cash Deferred Savings Plan for inexperienced miners and expired on December 31, 2011. The 2011 NBCWA, which covers retirees up to December 31, 2010, set the contribution rate to the 1974 Pension Plan at $5.50 per UMWA-represented hour, with annual increases. Under the previous 2007 NBCWA, certain beneficiaries received annual one-time payments, but these ceased under the 2011 NBCWA, which established the 2012 Retiree Bonus Account Plan to provide these payments instead. However, no payments were made in 2012 or 2013.
The 1974 Pension Plan serves about 93,000 eligible participants, including retired or disabled miners and their spouses. Several coal companies, including Heritage Coal Co. and others, are obligated to contribute to this plan, currently providing around $21 million annually, which represents 17% of the plan's revenue. It is projected that these companies will contribute an additional $74 million through 2016. Contributions are regulated by an Evergreen Clause, requiring ongoing compliance to avoid withdrawal liability.
Withdrawal liability related to multi-employer pension plans is estimated at about $1 billion, with ongoing debates regarding whether it can be paid in installments or must be settled as a lump sum under ERISA Sections 1399(c), 4201, and 4219. Multi-employer pension plans, including the 1974 Pension Plan, must maintain an 80% funded percentage; failure to do so results in the plan being classified as “Endangered” or “Seriously Endangered.” If a plan has a funding deficiency projected to be resolved in seven years or less and is under 65% funded, it enters “Critical Status.” The 1974 Pension Plan is currently “Seriously Endangered,” having been assessed at less than 73% funded as of July 1, 2011, with projections indicating it will enter “Critical Status” by July 1, 2014, largely due to financial market collapses in 2008-2009.
In 1993, the UMWA and BCOA established the 1993 Benefit Plan to provide healthcare benefits to orphan retirees not covered under the Coal Act’s 1992 Benefit Plan. Eligibility requires that retirees’ last signatory employer contributed to the plan. Funding sources include employer contributions based on mining hours worked and transfers mandated by the SMCRA, which only benefit retirees enrolled before December 31, 2006. Currently, there are about 11,000 beneficiaries, with the Debtors contributing approximately $3.7 million annually, projected to total around $12.8 million through 2016.
Additionally, the Debtors contribute about $4.4 million annually to the 2012 Retiree Bonus Account Plan, expecting to contribute another estimated $15.3 million through 2016. Approximately 51,000 beneficiaries of the 1974 Pension Plan are eligible for payments from this account.
Debtors' 1113/1114 Motion seeks to terminate contributions to the 1993 Benefit Plan and the 2012 Retiree Bonus Account Plan, and to halt contributions to the 1974 Benefit Plan unless specific written assurances are provided. Concurrently, the Coalfield Accountability and Retired Employee Act is proposed in Congress to amend the SMCRA, creating excess funding for the 1974 Pension Plan from the Office of Surface Mining revenues, similar to existing provisions for the Combined Fund and the 1992 and 1993 Benefit Plans. The Act would also extend eligibility for the 1992 Benefit Plan to retirees losing benefits due to employer bankruptcy or insolvency.
The history of Patriot Coal Corporation, which became liable for providing benefits to current employees and retirees, is rooted in its spin-off from Peabody on October 31, 2007. As part of the spin-off, Peabody transferred certain mining operations and associated retiree health care liabilities to Patriot Coal in exchange for shares in the new corporation, which then became a publicly traded entity. Following the spin-off, Patriot Coal emerged as the independent parent of 64 subsidiaries. An agreement between Peabody Holding and Patriot Coal established that Peabody would cover health care liabilities for 3,100 retired miners, crucial for Patriot Coal’s initial capitalization. Prior to the spin-off, Peabody's retiree health care liabilities were significantly reduced, facilitating this transition. Additionally, some former Peabody management involved in the spin-off took on leadership roles in Patriot Coal. The acquisition of Magnum Coal Company in 2005, which included various mining operations, further expanded Patriot Coal's footprint in Central Appalachia.
Arch assigned 12.3% of its assets and 96.7% of its retiree health care liabilities to Magnum before Debtor Patriot Coal Corporation announced its acquisition of Magnum on April 2, 2008. In this deal, Magnum stockholders were to receive 11.9 million shares of newly issued Patriot Coal Corporation common stock. At the time of the acquisition, Magnum was a major coal producer in Appalachia, with a significant portion of its operations managed by UMWA-represented labor. The acquisition, effective July 23, 2008, led Patriot Coal Corporation to assume Magnum's health care obligations, impacting over 90% of beneficiaries who were former employees or dependents of Peabody, Arch, or their subsidiaries.
Debtor Patriot Coal Corporation employs approximately 4,200 individuals, with 41% of active employees represented by the UMWA. Prior to filing for bankruptcy, the company conducted layoffs that primarily affected non-union miners, shifting the workforce to an even split of unionized and non-unionized miners. The company engages in mining, buying, and selling coal, operating eleven mining complexes in the Illinois Basin and Appalachia as of December 2012. They utilize various mining methods, including underground longwall and continuous mining, as well as surface mining. Coal extracted is processed and transported to customers via land, rail, or barge.
On November 15, 2012, Patriot Coal entered a settlement with environmental organizations that imposed restrictions on large-scale surface mining, indicating a planned decrease in such activities. Sales dropped from 31.1 million tons in 2011 to 24.9 million tons in 2012, making it occasionally more cost-effective for the company to purchase coal from other sources rather than extracting it from its own mines.
Debtors mine less coal than their sales require, necessitating purchases to meet customer demands. In 2012, about 75% of their sales were thermal coal, with the remainder primarily being metallurgical coal sold to brokers and coke producers domestically and internationally. Operating in a highly competitive Appalachia and Illinois Basin, Debtors face significant competition from companies like Alpha Natural Resources, CONSOL Energy, Alliance Resource Partners, and Peabody.
Key factors leading to Debtors’ bankruptcy include substantial liabilities from Peabody and Arch, particularly retiree healthcare obligations exceeding $1.6 billion in present value. Debtors also inherited unfavorable coal contracts, where costs to excavate exceed sales prices, compounding financial difficulties. As of February 28, 2013, they administered healthcare benefits for around 21,000 individuals, including 8,100 retirees under the 2011 National Bituminous Coal Wage Agreement (NBCWA), which offers various benefits like free prescription drugs and low co-payments. Debtors spent roughly $83 million on these healthcare benefits in 2012.
Additionally, Debtors have obligations under the Coal Act, contributing approximately $14 million in 2012 for over 2,300 retirees, with an estimated present value of these liabilities at $134.7 million. They also contribute to the 1993 Benefit Plan and the 2012 Retiree Bonus Account Plan, spending $3.7 million and $4.4 million, respectively, in 2012. Furthermore, for the 1974 Pension Plan, Debtors increased their contributions from $2.00 per hour worked in 2007 to $5.50 currently, with expected future increases to $12.50 in 2017 and $21.50 in 2020. In total, they spent about $20.8 million on the pension plan in 2012.
Pension obligations related to the 1974 Pension Plan are expected to rise due to its “Seriously Endangered Status.” Debtors currently face over $1.6 billion in health care obligations for UMWA retirees, significantly outnumbering their current employees by a factor of five. While CONSOL Energy Inc. also incurs similar retiree benefit costs, it is a larger and more diversified company, engaged in long-wall mining and both coal and natural gas sales, which offers it greater resilience against market fluctuations. Consequently, Debtors’ retiree benefits represent a disproportionately high share of their revenues compared to competitors.
The demand and price for coal have sharply declined, attributed to the rise of hydraulic fracking for natural gas, which has become a more efficient energy alternative, alongside increased reliance on renewable energy sources. Mild winters in 2011-2012 and 2012-2013 led to reduced electricity consumption, further impacting coal prices, which fell by approximately 19% in the Central Appalachian Region, 12% in Northern Appalachia, and 16% in the Illinois Basin from January 2011 to January 2013. The metallurgical coal market has similarly suffered due to reduced demand for steel, evidenced by a drop in the Australian Hard Coking Coal Index price from $330 to $165 per metric ton from mid-2011 to early 2013. Debtors’ financial performance has deteriorated, reporting a 21% decline in coal sale revenues and a net loss of $730.6 million in 2012, a fivefold increase from the previous year’s loss of $139.1 million.
Regulatory pressures also pose challenges, as the Environmental Protection Agency has introduced stringent air quality standards that are currently in effect or will be implemented in the near future, complicating compliance for coal-fueled power plants due to financial constraints.
Federal and state agencies have introduced financial incentives aimed at reducing coal usage and promoting alternative fuels. In 2012, Debtors incurred significant expenses totaling approximately $43.6 million for selenium treatment and $46.8 million for reclamation, which involves restoring mined areas to pre-mining conditions. Debtors faced financial strain due to the closure of non-compliant mines and adverse outcomes in environmental lawsuits, leading to hundreds of millions of dollars in compliance costs. New water quality regulations require costly water treatment facilities and adherence to conductivity levels in mining permits, further impacting Debtors’ finances. They also face obligations to implement safety measures such as self-contained self-rescuers and refuge shelters for miners, as well as increased rock dust usage to prevent explosions.
In response to financial challenges, Debtors sought assistance from Blackstone Advisory Partners and AlixPartners to develop a long-term business plan in July 2012, recognizing an imminent cash shortfall. The plan included cost-saving measures, resulting in the closure and idling of several mines, which reduced thermal coal production by 3.9 million tons due to unprofitability.
Debtors reduced production at unprofitable metallurgical mines, specifically the Rocklick and Wells complexes, leading to a decrease of approximately 1.9 million tons of metallurgical coal. In 2012, they significantly cut expenditures on mining equipment and rejected or renegotiated unprofitable coal supply contracts inherited from Arch, which obligated them to sell coal below market prices, sometimes even below production costs. This included rejecting unfavorable equipment and property leases, resulting in substantial savings.
Debtors terminated contractor use at several mines, resulting in nearly 640 layoffs among non-union employees. Effective March 1, 2013, they imposed wage reductions affecting half of their non-union workforce and reduced management personnel by 78, projected to save about $11.3 million annually. In April 2013, they settled a motion regarding non-vested benefits for non-union retirees, expected to yield significant savings.
Additionally, Debtors made substantial cuts to medical benefits for non-unionized employees, including introducing employee premium contributions, raising out-of-pocket maximums, enforcing working spouse coverage, reducing the list of covered medications, and implementing step therapy programs. Changes to long-term disability benefits included limiting the duration for salaried employees to 60 months and replacing benefits for hourly employees in the Midwest with a maximum of 52 weeks.
Other cost-cutting measures included eliminating charitable contributions, lowering lease costs at their St. Louis headquarters, and reducing information system outsourcing costs. Since filing for Chapter 11, Debtors have also halted certain interest payments on pre-petition unsecured debt. To address imminent cash flow issues, they created the July 2012 Business Plan primarily to secure Debtor In Possession financing, with Mr. Paul P. Huffard from Blackstone actively involved in the process.
The July 2012 Business Plan's creation commenced in May 2012, amid the Debtors' significant underperformance. The Bankruptcy Court for the Southern District of New York authorized Debtors to secure up to $802 million in post-petition financing on August 3, 2012, after finding good cause for the financing to support Debtors’ operations. The court concluded that the financing terms were fair, reflected prudent business judgment, and were negotiated in good faith, with no objections from the United Mine Workers of America (UMWA).
By October 2012, adjustments were made to the initial plan to align with updated coal market projections and the Debtors' Chapter 11 trajectory. The revised plan forecasted coal sales revenue through 2016 while outlining anticipated production, labor, retiree, and compliance costs. To maintain viability and secure exit financing, an additional $150 million in annual savings became necessary, prompting proposals to modify collective bargaining agreements (CBAs) and relieve the Debtors from retiree benefits and pension obligations.
On July 9, 2012, Mr. Hatfield, the Debtors’ CEO, informed UMWA President Cecil Roberts about the impending bankruptcy and the need for concessions from UMWA miners. Following initial communications, Mr. Hatfield later indicated that developing proposals was challenging due to the worsening coal market, which affected the July 2012 plan. Subsequently, the Debtors sought $150 million in concessions from the UMWA labor force after finalizing the October 2012 Business Plan.
To support the UMWA's evaluation of Section 1113 and 1114 proposals, the Debtors established an online Data Room for document sharing. Access was granted to the UMWA and PwC, following confidentiality agreements, on October 17, 2012, with the Data Room initially containing around 11,000 pages. By December 6, 2012, 31 individuals from the UMWA, PwC, and associated law firms had access. The UMWA began submitting specific information requests in October 2012, with PwC issuing the first written request on October 31, 2012. The Debtors presented their Original Proposals on November 15, 2012, during an initial three-and-a-half-hour meeting that included a PowerPoint presentation outlining the proposals, financial conditions, and cost analyses.
On December 6, 2012, the Debtors provided a Revised Savings Summary detailing anticipated savings from the Section 1113 relief. Since November 2012, there have been over 14 negotiation sessions totaling more than 60 hours, along with numerous calls and email exchanges. The UMWA, through PwC, issued over 200 requests for information, including more than 100 related to health care utilization. Many requests were broad and appeared unrelated to the proposals, indicating possible concerns about future litigation. For instance, the 17th request sought extensive historical financial data and evidence connected to claims against Peabody and Arch, including capital expenditure details and benefits under the Patient Protection Affordable Care Act.
Debtors addressed most items in the 17th request for information and provided specific information related to the PPACA. The UMWA submitted its 18th request on April 18, 2013, and on April 25, 2013, Debtors met with UMWA representatives to present the Fifth 1113 Proposal. This proposal was also communicated to President Roberts via letter on April 23, 2013. Debtors engaged in a Q&A session to clarify UMWA's inquiries, supplemented by presentations from Debtors' counsel and Blackstone.
Debtors compiled over 47,500 pages of documents in a Data Room, deemed responsive to UMWA requests, which include detailed information on business plans, liquidity, capital expenditures, employee benefits, and more. The Data Room software allows monitoring of document access by UMWA and PwC. Throughout negotiations, Debtors modified Original Proposals to address UMWA concerns, culminating in the Fifth 1113 and Fifth 1114 Proposals.
The October 2012 Business Plan, developed under Blackstone's guidance, was based on revised coal market forecasts. Blackstone created a Business Model using Debtors' internal budgeting system, Hyperion, to adjust production assumptions, which informed the Proposals to UMWA. The Business Model was shared with UMWA on December 3, 2012, and Debtors offered assistance for UMWA and PwC to understand and manipulate this model.
Debtors provided the UMWA access to the Hyperion system at their St. Louis Headquarters for running assumptions and scenarios, also offering to run specific assumptions on behalf of the UMWA. During a December 12, 2012 call, Blackstone detailed how to modify the Business Model to reflect changes in the October 2012 Business Plan, including adjusting model inputs, adding new line items, or replacing existing figures. Ongoing communication occurred between Debtors and the UMWA through formal negotiations, calls, emails, and meetings to clarify information.
The UMWA criticized the Business Model for lacking dynamism, supported by testimony from Mr. Perry Mandarino, a PwC Partner and U.S. Business Recovery Practice Leader. Mandarino asserted that Debtors' conservative coal pricing assumptions indicated a temporary issue that would resolve by 2015, suggesting no concessions were necessary beyond that point, and recommended reassessing Debtors' finances in 2016. He demonstrated in court that the Business Model was not designed to adapt to changes in assumptions, such as reduced production not correlating with cost or revenue adjustments.
Debtors acknowledged the limitations of the Business Model but argued that creating a more dynamic model would be impractical due to the coal industry's complexity. Mandarino expressed a desire to manipulate the Business Model directly but declined Debtors' invitation to use the Hyperion system, citing its complexity and proprietary nature, as well as concerns about potential liability and the risk of compromising the UMWA's bargaining position by revealing their strategies or assumptions. However, he did not express concern about Debtors' ability to monitor document access in the Data Room, which could similarly affect negotiations.
Mr. Mandarino acknowledges a meeting on January 24, 2013, regarding the Hyperion system, which he could not attend, and believes he could have gained access to the St. Louis Headquarters if requested. He does not contest that the Debtors and Blackstone based their Proposals on the October 2012 Business Plan and the Business Model provided to the UMWA, nor does he believe the Debtors concealed any relevant information. Mr. Huffard, Senior Managing Director at Blackstone, supported the October 2012 Business Plan with his testimony, emphasizing his extensive experience with distressed companies rather than coal pricing. He noted that without securing DIP Financing, the Debtors would likely face liquidation. Mr. Huffard asserted that the covenants in the DIP Facility were standard and the best terms available, explaining that the $100 million liquidity covenant was the lowest achievable, given the need for DIP financiers to reassess the Debtors’ financial situation if liquidity fell to that level. He identified key factors leading to the Debtors’ Chapter 11 filings, including competition from natural gas, selenium litigation costs, excessive thermal coal production in the U.S., and decreased global steel production, particularly from China. He recommended focusing on cash flow rather than EBITDA and stated that the October 2012 Business Plan was a good faith estimate of future coal prices, not overly pessimistic. The Business Model provided to the UMWA was an editable Excel version of the October plan. Mr. Huffard warned that without the projected savings, the Debtors would exhaust cash by late 2013 or early 2014, leading to potential liquidation. He expressed doubt about the feasibility of a replacement DIP Facility if liquidity covenants were breached and indicated that positive cash flow would not occur until 2016, regardless of EBITDAP. Furthermore, he believes discussions on exit financing cannot commence until the 1113/1114 Motion is settled.
Mr. Huffard analyzed various scenarios to assess the potential equity percentages for the UMWA, concluding that unsecured claims could range from 12% to 57%. Consequently, the Debtors proposed a 35% equity stake in the reorganized entity as a middle ground. Mr. Gregory Robertson, an attorney for the Debtors, testified about the challenges in developing proposals to achieve the annual savings target of $150 million set by Blackstone. He attended nearly all negotiation sessions with the UMWA and asserted that the Debtors responded to most information requests, particularly regarding the Peabody-Assumed Group, with a comprehensive approach. Mr. Hatfield supported this, stating that significant efforts were made to streamline operations before negotiations with the UMWA began.
Conversely, Mr. Arthur Traynor, a Staff Attorney for the UMWA, contended that the Debtors did not provide sufficient information for evaluating their proposals, noting outstanding requests for data necessary to assess potential liabilities related to the Peabody-Assumed Group. He criticized the Debtors' financing of retiree benefits for 500 members of this group, arguing it was Peabody Holding's responsibility. Traynor characterized the Debtors' latest proposals as potentially made in bad faith, especially the Fifth 1113 Proposal from April 23, 2013, but defended the Fourth UMWA Counterproposal from April 27, 2013 as made in good faith.
In addition, Mr. Seth Schwartz, President of Energy Ventures Analysis, Inc., testified on the impact of low natural gas prices on coal market dynamics, supporting the preceding testimonies regarding coal supply and demand trends.
Mr. Schwartz testified on the necessity for coal companies to maintain flexibility to adapt to market demands. He highlighted factors influencing coal prices and mine productivity, including geological conditions, shipment methods, federal reclamation fees, state workers' compensation, severance taxes, and special reclamation taxes. Schwartz noted a reduction in his July 2012 coal price estimates due to excess production capacity, decreasing cost inflation, lower international prices for thermal and metallurgical coals, increased retirements of U.S. coal-fired power plants due to EPA regulations, and expectations of long-term natural gas prices. He assessed that the prices in Debtors’ October 2012 Business Plan are aligned with future coal prices but could be slightly optimistic.
Schwartz acknowledged the unpredictability of future coal prices and indicated that recent market changes have been significant. He emphasized that long-term market outlooks are more relevant than current spot prices. He also observed that productivity at Debtors’ mines, both union and non-union, is comparable when accounting for factors like equipment age and mining methods. Critical factors affecting coal pricing include rock removal in surface mining and coal height and saleable percentage in underground mining, with lower sulfur content and higher MMBTU correlating to higher market prices. Additionally, uncontrollable costs such as fuel, power, taxes, and royalties impact profitability, with UMWA-represented mines being costlier due to labor obligations.
Schwartz concluded that certain mines must sell coal at a minimum price to remain viable; otherwise, idling or closure may be preferable. The UMWA challenged his conclusions through Mr. Akunuri, a valuation expert, who argued that natural gas prices will rise, making thermal coal more economical for electricity producers, suggesting that coal prices are not permanently depressed.
Mr. Akunuri acknowledges his lack of familiarity with the factors influencing coal and natural gas prices, particularly the seasonal price fluctuations. He admits to errors in his analysis due to incorrect assumptions about the MMBTU content of coal and failing to consider differences in federal black lung taxes for coal from surface versus underground mines. Despite these inaccuracies, he asserts that correcting them would not change his conclusion that coal prices will recover alongside increases in natural gas prices.
On November 15, 2012, Debtors submitted their Original Proposals, followed by a series of counterproposals and revisions exchanged with the UMWA between January and April 2013. The Fifth 1113 Proposal, submitted by several Debtor companies, mirrors the Fourth 1113 Proposal but includes conditions related to the UMWA 1974 Pension Plan. The Fourth 1113 Proposal suggested that modifications to collective bargaining agreements (CBAs) would take effect on June 1, 2013, later than initially proposed, and aimed to establish a payment stream acceptable to the Debtors and the Pension Plan to avoid a dilutive unsecured claim. Additionally, it proposed to lower wages and benefits for union employees to align with those of nonunion workers.
Wage and benefit reductions proposed include the elimination or reduction of scheduled wage increases from 2013 onward, adjustments to various pay types (overtime, premium pay), and the removal of shift differentials. Pension contributions for union employees will be aligned with those of non-union employees, and specific bonuses and payments, including the 20-Year Service Payment and Retiree Bonus Account contributions, will be abolished. The proposal also eliminates New Inexperienced Miner Payments and reduces 401(k) contributions to 6% of gross wages. Paid holidays will decrease from 11 to 8, and regular, floating, and graduated vacation days, as well as sick days, will also be reduced.
Health care coverage changes will transition from a no-cost plan to a “90/10” plan with cost-sharing features. Extended health care for laid-off miners will be limited to 60 days post-layoff. Modifications to work rules will increase management flexibility, including the use of contractors and the assigning of helpers. The proposal stipulates that UMWA-represented employees will only receive wage increases if non-union employees receive raises above UMWA levels.
The Fifth 1113 Proposal includes two critical conditions regarding the 1974 Pension Plan: Obligor Debtors will not withdraw from the plan if the UMWA refrains from increasing contribution rates before January 1, 2017; and the plan will permit Obligor Debtors to withdraw after that date if contribution rates exceed a certain threshold, allowing for withdrawal liability payments in installments. This arrangement aims to prevent dilution of the unsecured creditor pool and maintain a funding source for the pension plan while providing Debtors with greater financial stability. Additionally, if the aforementioned assurances are not secured, the contribution rate to the 401(k) plan will differ based on the status of Article XX, either remaining at 6% or reducing to 3%.
The Fifth Section 1114 Proposal outlines a plan in which Debtors would stop providing retiree benefits directly and instead create a UMWA Retiree Healthcare Trust (Trust) structured as a Voluntary Employee Benefits Association (VEBA). This Trust, managed by the UMWA Funds, would handle all decisions regarding fund usage, eligibility, and benefit levels. Debtors propose an initial funding of $15 million for the VEBA and a 35% equity stake in the reorganized Debtors, which the UMWA could sell to help fund the VEBA. The proposal allows for a transition period extending retiree benefits until January 1, 2014, contingent upon a loan of up to $21 million from the UMWA to cover benefits costs during that time.
Additionally, the proposal includes profit-sharing contributions from the Obligor Debtors and a $2 million contribution to a Litigation Trust to pursue claims against Peabody upon the Debtors' emergence from bankruptcy. While the Fifth Proposal does not change existing retiree benefits, it necessitates that the UMWA Funds or the UMWA design benefit plans tailored to available resources. Support for the proposal includes testimony from Mr. Thomas Terry, an experienced consultant in employee benefit programs, affirming its viability.
Mr. Terry evaluated the Debtors' Fourth and Fifth 1113 Proposals, concluding that the proposed health coverage is at least as generous as the national norm and exceeds the offerings of the average large U.S. company due to its cost-sharing features. He noted that the Fifth 1113 Proposal generally aligns with the health care benefits provided to non-union employees of the Debtors and is consistent with the coal mining industry's standards. Terry highlighted that only 20% of American employers provide full coverage, a figure likely to decline, and that 51% offer premium support, which is also expected to decrease. He acknowledged the potential benefits of the Patient Protection and Affordable Care Act (PPACA), effective January 2014, for current employees, although he expressed uncertainty regarding its costs and the implications of its exchanges. Despite this, he maintained that the proposed health coverage remains comprehensive and suitable for employees’ health care needs.
Regarding the Fifth 1114 Proposal, Terry did not assess the necessary comprehensiveness related to the funds available to the Voluntary Employee Beneficiary Association (VEBA), as this was outside his scope of engagement. However, he asserted that the VEBA's flexibility would allow trustees to manage retiree health benefits effectively, balancing comprehensiveness with premium sharing. Terry was confident that if the United Mine Workers of America (UMWA) Funds managed the VEBA, it would not harm their negotiating power with insurance providers, based on the assumption that larger groups possess greater market power.
He dismissed concerns about a potential "spiral down" effect on premiums, predicting instead a "spiral up" as retirees seek better coverage, thereby increasing the VEBA's resources for remaining participants. He emphasized that the VEBA's primary advantage lies in ensuring retirees access to health care, a benefit lacking for many retirees nationally.
Additionally, Mr. Dale F. Lucha, Vice President of Human Resources for Patriot Coal Services, testified about the anticipated savings from the proposals, calculated in collaboration with Debtors’ health care consultant, Mercer.
Mr. Lucha testified that unquantifiable work-rule changes are necessary for improving efficiency in the Debtors' mining operations. He acknowledged that absenteeism, though not compensated, incurs additional costs due to overtime payments and the need for extra workers. Lucha also indicated that eliminating approximately 10 jobs for helpers and roofers is justified by the planned implementation of proximity devices across all mining operations, despite currently only using them at the non-union Blue Creek operation.
In contrast, Mr. Elliott I. Cobin, representing the UMWA, provided testimony regarding the valuation of Retiree Benefits under the Fifth 1114 Proposal, estimating it at $1.8 billion based on medical trend assumptions from the Thomas E. Getzen model. Cobin clarified that this estimate reflects differing assumptions about medical costs rather than an undervaluation by the Debtors. He criticized the VEBA for lacking a "true-up" mechanism for adjusting medical assumptions over time and argued that coal miners' health care needs exceed those of typical workers.
The UMWA submitted a Fourth Counterproposal on April 27, 2013, highlighting several key provisions: 1) UMWA as a co-proponent of any Plan of Reorganization; 2) restrictions on employee compensation increases without UMWA consent; 3) UMWA's right to reopen the Agreement in 2016; 4) requirement for Debtors to provide quarterly financial reports to the UMWA; 5) a proposed 57% equity stake for the UMWA in the reorganized Debtors; and 6) an annual cash payment to the UMWA equal to 7.5% of EBITDA, subject to minimum and maximum limits. Mr. Michael Buckner, a UMWA consultant, supported the UMWA's position, asserting that while UMWA mines may appear more costly, they are, in fact, more productive.
Mr. Buckner's testimony aligns with that of other witnesses, lacking any claim to expertise. Debtors and the Official Committee of Unsecured Creditors are investigating potential fraudulent transfer claims related to the spin-off of Patriot Coal Corporation and transactions involving Magnum. The Court has defined the scope for the Rule 2004 Examination of Peabody. Peabody has been covering retiree health care for about 2,600 out of 3,100 members of the Peabody-Assumed Group. Debtors are seeking a declaratory judgment to affirm that modifications to retiree benefits under Section 1114 do not relieve Peabody Holding of its obligations under the Heritage Individual Employer Plan and Assumption Agreement. However, the Court has denied this request, indicating that the contractual language does not support the Debtors’ position.
Jurisdiction is established under 28 U.S.C. §§ 151, 157, 1334 and Local Rule 81-9.01(B), classifying this as a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is appropriate under 28 U.S.C. § 1409(a).
Under Section 1113, a debtor in possession can assume or reject a collective bargaining agreement if they first propose necessary modifications to the employee representative, ensuring fair treatment of all parties. The debtor must also provide relevant information for proposal evaluation and meet with the representative in good faith. The court will approve a rejection of the agreement only if the debtor meets specific requirements, the employee representative refuses without good cause, and the balance of equities favors rejection. Section 1114(e) mandates that retiree benefits cannot be modified without court order or mutual agreement between the debtor and retiree representatives.
Section 1114(b) defines “authorized representative” as a person designated by a labor organization to represent individuals receiving retiree benefits under a collective bargaining agreement. Retiree benefits encompass payments made for medical, surgical, or hospital care for retired employees, their spouses, and dependents, funded by the debtor before filing for bankruptcy.
Section 1114(f)(1) mandates that a debtor, after filing for bankruptcy but before moving to modify retiree benefits, must propose necessary modifications to the authorized representative, ensuring fairness to all affected parties. The debtor must provide the representative with pertinent information for evaluating the proposal. Additionally, under Section 1114(f)(2), the debtor is required to meet with the union representative at reasonable times to negotiate modifications in good faith.
According to Section 1114(g), a court can authorize modifications to retiree benefits if the debtor has made a proposal that meets specific criteria, the authorized representative has rejected it without valid reason, and the modifications are essential for the debtor’s reorganization while ensuring fair treatment of all parties involved.
Section 1114, along with Section 1129(a)(13), establishes protocols to protect retiree benefits during Chapter 11 proceedings. For court approval to modify a collective bargaining agreement under Section 1113 or retiree benefits under Section 1114, the debtor must fulfill several requirements, including making a proposal based on reliable information, ensuring that modifications are necessary for reorganization, treating all parties equitably, providing relevant information to the Union, and engaging in discussions with the Union prior to the approval hearing.
Debtors are required to negotiate in good faith to modify the collective bargaining agreement (CBA). The Union must reject any proposals without good cause, and the balance of equities must favor rejecting the CBA. Debtors must prove compliance with Sections 1113 and 1114 by a preponderance of the evidence. If debtors establish a prima facie case, the burden shifts to the Union to demonstrate that the debtor failed to provide sufficient information or did not negotiate in good faith, as well as to prove good cause for rejecting the proposal. Failure to meet any of these criteria allows the court to deny the debtor's motion to reject the CBA or modify retiree benefits. The court cannot act as a super-arbiter between proposals but must evaluate whether the debtor's proposal meets statutory requirements.
Regarding objections from the United Mine Workers of America (UMWA), the court ruled it would consider all proposals made before the hearing, overruling UMWA's objection to only considering proposals made prior to the motion filing. The court emphasized that Sections 1113 and 1114 allow for consideration of proposals up to the hearing date, acknowledging that initial proposals may change during negotiations. Debtors submitted their Fourth and Fifth 1113 and 1114 Proposals more than 14 days before the hearing, with the Fifth proposal being a modified version of the Fourth, including conditional terms.
The Court clarified that requiring Debtors to withdraw and refile the 1113/1114 Motion on April 10, 2013, would be illogical for considering post-filing Proposals. Currently under review are Debtors’ Fifth 1113 and Fifth 1114 Proposals, along with UMWA’s Fourth Counterproposal. The Court will analyze several American Provision factors in a specific order, emphasizing the proposals made to the Union and the necessity of using complete and reliable information for those proposals.
Proposals were made by Debtors to the UMWA on various dates, with the Fifth 1113 Proposal on April 23, 2013, and the Fifth 1114 Proposal on April 10, 2013. The timeline of proposals includes original proposals from November 15, 2013, and several counterproposals from both parties throughout early 2013. The proposals meet the first American Provision factor.
The second factor requires Debtors to base proposals on the most reliable information available, while the fifth factor mandates that Debtors disclose relevant information needed by the Union to evaluate the proposals. These factors necessitate a thorough analysis of the Debtors' financial situation and business plan to justify proposed concessions. The Court emphasizes that proposals must not be arbitrary or merely results-driven; they must be grounded in objective data and historical economic realities.
Data provided by debtors must be a genuine attempt to compile accurate information without intentional omissions. The debtor's submissions to the union should not include speculative or unrealistic expectations, focusing instead on factual and credible information. The scope of information required varies based on the debtor's business size, complexity, and the nature of proposed modifications to wage and benefit structures. Debtors must supply the union with a dynamic model allowing for input adjustments to evaluate different scenarios; failure to do so indicates bad faith. A debtor is not obligated to conduct analyses for the union that it has not performed for itself, nor is it required to create non-existent financial data. Requirements for information production are limited to what is feasible for the debtor, who must gather the most complete data available and base proposals on reliable information. Once the debtor provides the information, the burden shifts to the union to demonstrate that the data was inadequate for evaluating the proposal. Furthermore, debtors are not required to postpone motions under Sections 1113 or 1114 for information sharing, emphasizing the urgency of the process mandated by Congress.
The UMWA contends that the Debtors failed to provide complete and reliable information necessary for evaluating the Fourth and Fifth 1113 Proposals, particularly regarding the governance rights tied to a proposed 35% equity stake and the equity interests of other parties in the reorganized Debtors. The UMWA highlights outstanding information requests that are crucial for its assessment of the Proposals. Additionally, the UMWA critiques the Business Model provided by the Debtors, asserting it lacked dynamism as it did not allow for input adjustments to assess the impact of changing assumptions, thus warranting denial of the 1113/1114 Motion.
As of April 22, 2013, there was a disconnect between the Debtors and the UMWA regarding the fulfillment of document requests, with Debtors believing they had provided sufficient information while the UMWA sought more. However, the Court found that some UMWA requests were overly broad or irrelevant, and that the UMWA had received ample information to evaluate the Proposals, having been provided with over 47,500 documents since November 2012. The Business Model, reflecting the Debtors' October 2012 Business Plan, was shared with the UMWA and was intended to convey the Debtors' five-year financial forecast, demonstrating the operational drivers affecting coal market prices, which are influenced by various factors including coal composition, mining location, transportation, customer needs, blending costs, and geological conditions.
Representations made to the Court indicate that the United Mine Workers of America (UMWA) demands the Debtors provide a business model that allows for manipulation by PwC, which is deemed unrealistic and excessive beyond statutory requirements. Mr. Mandarino illustrated that the Business Model uses hardcoded values for coal sales, meaning that the sales figures (X tons sold for Y dollars) are manually entered rather than derived from dynamic calculations based on other model data. Consequently, increases in sales volume do not affect revenue, as Y remains constant regardless of changes in X. Although some components of the Business Model include formulas that adjust total costs based on variable inputs, the complexities of mining and coal pricing require a more sophisticated approach to accurately reflect how production levels impact revenues.
Moreover, the Debtors offered the UMWA access to their proprietary accounting forecasting system, Hyperion, to develop necessary assumptions for the Business Model, with staff assistance provided for this purpose. However, Mr. Mandarino expressed concerns about allowing external parties to manipulate the Hyperion system due to its complexity and proprietary nature, fearing potential risks to the system's integrity and the implications of being accused of causing damage. Additionally, he noted that working remotely in St. Louis would not facilitate effective collaboration with his client during negotiations.
Mr. Mandarino declined the Debtors' offer to manipulate data in Hyperion for the UMWA, fearing it would expose UMWA's strategies and weaken their bargaining position. The UMWA's expectation for highly proprietary Hyperion capabilities to be replicated in an accessible Excel format is deemed unreasonable and exceeds the obligations under the Bankruptcy Code. Debtors provided the UMWA with the Business Model they used for proposals and offered access to their process for deriving the figures, but the UMWA chose not to engage in this method. The UMWA is entitled to an unsecured claim, with the Fifth 1114 Proposal offering a 35% equity stake in the reorganized Debtors instead of monetizing the claim as previously proposed. This equity stake is based on projections of the UMWA's claim under various scenarios, but several factors remain undetermined that could significantly impact the claim's value, including potential substantive consolidation of Debtors and the resolution of inter-debtor claims. The complexity of the case, including ongoing claims sales and transfers, limits the certainty regarding other stakeholders in the reorganized Debtors. Meetings held in April 2013 aimed to clarify the 35% equity stake for the UMWA, but the inherent uncertainties of the case prevent the level of certainty requested. The UMWA also expressed concerns about insufficient information regarding the Peabody-Assumed Group, which could significantly influence the financial structure of the VEBA and challenge the Fifth 1114 Proposal, amidst ongoing confusion about the group's composition.
Mr. Tray-nor expressed concerns that the UMWA's requests for information regarding the Peabody-Assumed Group remain unaddressed, particularly focusing on request number 6 from Joint Exhibit 9. The document clarifies that the Debtors are not required to produce every possible record related to a request but must provide enough information for the UMWA to assess the Proposals. The Court reviewed several Joint Exhibits and determined that the UMWA could estimate the annual costs for benefits related to the Peabody-Assumed Group with reasonable certainty, allowing for informed decision-making about the inclusion of these individuals in the requested relief affecting the VEBA.
It was noted that the Debtors could not supply more information due to the non-existence of certain data and because the Court's ruling on the matter was pending. The current stage of the bankruptcy proceedings necessitates reliance on estimations rather than precise figures. The Court has meticulously examined multiple documents, including the UMWA's information requests and various status reports, to evaluate the completeness and adequacy of the information provided to the UMWA, emphasizing the need for a dynamic business model and supporting details as outlined in the communications from UMWA representatives.
On December 3, 2012, Mr. Mazzotti communicated with Mr. Rosen regarding the UMWA Information Request from November 30, 2012, providing explanations on wage rate classifications. The following day, Mr. Hiltz informed Mr. Rosen that the Debtors planned to respond fully to UMWA’s data requests from October 31 and November 19, requesting confirmation of no outstanding requests. Additional correspondence on December 4 included emails between Mr. Moskowitz and Mr. Traynor, with Mr. Traynor addressing comments from Mr. Moskowitz.
On December 6, 2012, a PwC Status Report indicated that all but one item related to the requests were complete or partially complete. The Debtors also issued a Status Report on the same day. A letter from Mr. Hatfield to President Roberts dated December 7 responded to a prior letter from Roberts. Following this, further UMWA Information Requests were made on December 10, December 12, and December 14.
On December 10, Mr. Perillo discussed the relevance of insolvency opinions with Mr. Moskowitz, while subsequent emails between them on December 12 and 13 focused on claims against Peabody and potential fraudulent conveyance claims. Continuing correspondence included letters and emails between Mr. Hatfield and President Roberts, with further clarifications regarding information requests and the Debtors’ business model occurring on December 21. The documentation also highlights ongoing communication related to UMWA Information Requests, reflecting a structured exchange of information between the involved parties throughout December 2012.
A series of communications and reports between the Debtors, PwC, and the United Mine Workers of America (UMWA) occurred from December 2012 to March 2013. Key events include:
- A December 21, 2012 letter and PwC's status report from December 12, 2012, indicating ongoing reviews of information uploaded to the Data Room, with further inquiries anticipated.
- On January 4, 2013, Debtors responded to PwC's information requests, marking items as complete or providing explanations for unavailability.
- The UMWA submitted a counterproposal on January 8, 2013, followed by Debtors requesting supporting data on January 11.
- An email from UMWA’s Brian Sanson on January 15 documented prior oral requests for healthcare utilization data.
- Subsequent status reports were issued by the Debtors on January 16, January 30, and February 4, addressing UMWA’s oral information requests and outlining actions taken regarding the requests.
- The UMWA made a second counterproposal on February 5, 2013.
- Debtors provided a letter from Mr. Hatfield discussing the impracticality of UMWA's production suggestions and confirming access to the Hyperion accounting system.
- By February 14, 2013, Debtors prepared a status report on UMWA requests and noted that the UMWA had substantially complied with earlier information requests by February 26.
- On February 27, Mr. Hatfield indicated plans to address UMWA concerns in a forthcoming proposal.
- The final report on March 8 detailed the status of UMWA's document requests, clarifying which items were still pending and which were resolved through documentation or discussions.
Throughout this period, there was an ongoing exchange of information and proposals aimed at addressing the UMWA's requests and concerns relating to healthcare data and other operational matters.
A series of communications and reports between President Roberts, Mr. Hatfield, the UMWA (United Mine Workers of America), and PwC (PricewaterhouseCoopers) occurred between February and April 2013. Key points include:
1. President Roberts characterized the UMWA's Second Counterproposal as historically unprecedented in his letter dated February 28, 2013, in response to Mr. Hatfield's earlier letter from February 19, 2013.
2. A March 1, 2013, Status Report from the Debtors addressed PwC's information request, and subsequent reports highlighted the status of UMWA information requests, with many items marked as partially complete.
3. On March 13, 2013, Mr. Hatfield responded to President Roberts’ February letter, followed by further communication on March 27, where Roberts expressed beliefs regarding the temporary nature of Debtors' financial troubles and the need for renegotiation of DIP Lending facilities.
4. The UMWA submitted various requests for data and information, including a March 19, 2013, request concerning capital expenditure forecasts and a request regarding the Fifth 1114 Proposal on April 18, 2013.
5. A presentation by Debtors and Blackstone occurred on March 4, 2013, with subsequent status updates indicating a resolution of most items by April 22, 2013, while others remained open.
6. In response to the UMWA's inquiries about corporate governance rights related to a proposed equity stake, Debtors clarified that standard governance rights were to be anticipated in discussions on April 25, 2013.
Overall, the correspondence reflects ongoing negotiations and information exchanges in the context of Debtors' financial restructuring and the UMWA's proposals.
The Court concludes that the Debtors have met the second and fifth factors by a preponderance of the evidence. For the third element concerning modifications, there are two interpretations of "necessary": the Third Circuit views it as necessary to prevent liquidation, while the Second Circuit focuses on whether rejecting the CBA and/or retiree benefits increases the likelihood of successful reorganization. The Court favors the Third Circuit’s interpretation, asserting that modifications must be essential to prevent liquidation and facilitate a viable reorganization.
The necessity of modifications is determined by their significant impact on the Debtors' operations and their role in enabling the Debtors to successfully compete post-bankruptcy. The Second Circuit’s approach, which emphasizes the long-term success of reorganization rather than immediate liquidation avoidance, is seen as more aligned with statutory intent.
In assessing the necessity of proposed modifications to a CBA, the Court will consider the overall impact of the changes on the Debtors' ability to reorganize, rather than evaluating each change in isolation. A debtor need only demonstrate the overall necessity of its proposal, not the necessity of each individual element. If proof of each element were required, unions could undermine the motion by identifying any single element as unnecessary. Justification for the proposed changes must be based on the debtor’s business plan or industry standards, emphasizing the importance of long-term competitiveness for successful reorganization.
Rejection of a collective bargaining agreement (CBA) may be warranted when a debtor's labor costs exceed those of competitors, particularly under significant competitive pressure. Courts must assess not only the debtor's short-term viability but also its competitive capability, especially when the debtor cannot pass costs onto customers, making competitive ability crucial for survival. The debtor's business plan should guide necessary concessions from unions, and the court should confirm that the debtor has pursued other cost-cutting measures before seeking modifications. Demonstrating the necessity of concessions for both short-term and long-term viability is essential, as courts focus on the debtor's future financial health.
Debtors need not prove that modifications make them more attractive to potential buyers if evidence shows that labor cost reductions are essential for continuing operations. Proposed changes must align with demonstrated necessity, avoiding overreach disguised as necessary modifications. Courts may consider non-economic changes that significantly impact financial operations as vital for reorganization, and snap-back provisions, which temporarily restore concessions, are generally viewed favorably, allowing profits not needed for reorganization to be returned to employees. While a snap-back provision is not mandatory, its absence can indicate unfairness, and debtors should at least consider incorporating such provisions in their proposals.
Debtors require concessions for their financial survival, as Retiree Benefits obligations exceed their revenue compared to competitors. Maintaining current Collective Bargaining Agreements (CBAs) would hinder productivity and competitiveness in the coal market. The United Mine Workers of America (UMWA) contends that Debtors are overreaching by seeking permanent solutions for a temporary issue and claims that concessions should not extend beyond 2015. While acknowledging that a snap-back is inappropriate, the UMWA insists it should have the option to renegotiate a new CBA effective January 1, 2017, given that Debtors' financial projections only extend to 2016. The UMWA argues that Debtors have not proven the necessity of CBA modifications beyond that date, as they have not linked concessions to cash savings. They assert that Debtors have exaggerated expenses, particularly capital expenditures, and have identified potential cash savings that could reduce the required concessions.
Debtors have already implemented substantial cash-saving measures prior to negotiations with the UMWA, including contract rejections, debt restructuring, and benefits reductions for non-union employees. The Court concluded that Debtors have neither understated revenue nor overstated expenses, finding the price forecasts in their October 2012 Business Plan reasonable. The relationship between natural gas and coal prices was debated, with evidence showing that while natural gas spot prices have risen, long-term futures prices have fallen, suggesting natural gas will remain a cheaper alternative to coal. Mr. Akunuri's theory that natural gas prices will rise to favor coal usage lacks support, as his sensitivity analysis was flawed and did not account for various taxes.
Royalty payments are outlined in the Debtors’ coal sale contracts, which set certain prices independent of current market fluctuations and variations in coal's MMBTU and sulfur content over time. The Court notes that changes in these contents can significantly impact coal pricing and marketability. While acknowledging that correcting some errors in Mr. Akunuri’s projections could yield higher price forecasts than those in the Debtors' October 2012 Business Plan, the Court rejects Mr. Akunuri's speculative conclusions as insufficient to challenge the Debtors’ established forecasts.
The Court also dismisses the UMWA's argument that Debtors have not adequately explored additional savings before seeking concessions from UMWA-represented miners. The UMWA suggested reductions in the capital expenditures budget and proposed leasing options; however, Mr. Mandarino conceded that these would result in only modest savings. The UMWA's claims of a substantial budget "cushion" were found unsubstantiated, as the Court could not discern the basis for their proposed savings, noting that they seemed arbitrary.
The UMWA's proposal to remove stock options from the Debtors' compensation structure is also dismissed, as there is uncertainty regarding their future issuance, and such options would not impact available cash. The Court has previously ruled that the Debtors’ executive compensation must remain competitive to prevent loss of skilled labor essential for their recovery and competitiveness post-bankruptcy.
The Court finds, based on the preponderance of evidence, that the savings outlined in the Debtors’ October 2012 Business Plan are essential for their continued operations. The plan indicates that the Debtors will experience negative cash flow from 2013 to 2015, with a forecasted modest positive cash flow in 2016. The Debtors assert that modifications to the Collective Bargaining Agreement (CBA) are crucial post-2016 to maintain a stable cost structure, which is necessary for securing exit financing. Evidence supports that positive cash flow will not occur until late 2016, and the Court emphasizes that potential financiers need assurance of the Debtors' long-term financial stability to negotiate favorable exit financing terms.
The United Mine Workers of America (UMWA) seeks to reopen CBA negotiations effective January 1, 2017, coinciding with the anticipated positive cash flow. The Court notes that uncertainties in CBA negotiations could deter investment from both imprudent and sophisticated financiers. The proposed termination of relief in the Fifth 1113 Proposal on December 31, 2018, is deemed appropriate, as it would position the Debtors favorably for serious negotiations with the UMWA.
The Fifth 1113 Proposal includes many non-economic modifications, such as a stricter absentee policy and the ability to use non-union labor in specific situations, aimed at enhancing operational flexibility. The UMWA contests the necessity of the absentee policy changes since absent miners are not compensated, but the Court recognizes that a labor shortage impacts productivity. The ability to adapt operations is critical for the Debtors' success, as missing workers place additional burdens on those present, ultimately affecting efficiency.
The Court finds that the changes proposed by Debtors for reorganization are reasonable and necessary. The UMWA contends that Debtors have artificially created a need for concessions due to covenants in the DIP Facility, particularly the requirement to maintain $100 million in liquidity to avoid breaching the facility. However, the Court notes that the UMWA has not proven that Debtors could secure more favorable terms for this facility, which was negotiated in good faith amid deteriorating coal market conditions. The covenants in question are standard in large Chapter 11 cases and are not self-imposed by Debtors.
The Court also emphasizes that the modifications proposed assure fair and equitable treatment for all creditors and affected parties, aligning with the principle that all constituencies should share the burden of reorganization. It cites precedent asserting that concessions from unionized labor should only be sought after other cost-saving measures have been exhausted, and that no group should bear a disproportionate share of financial burdens. The Court will consider the sacrifices of all parties involved when determining fairness and equity in the proposed modifications. The overall assessment leans toward flexibility in evaluating what constitutes fair treatment given the complexities of each case.
Identical modifications for all affected parties are not required in bankruptcy proceedings, as concessions can vary based on the differing wage and benefit levels among labor groups. A debtor does not need to demonstrate that managers and non-union employees will face equivalent salary and benefit cuts as union workers; it suffices to show that these employees are taking on increased responsibilities without proportional salary increases, indicating their sacrifice. When unionized employees receive compensation above industry standards, exempting other employees from reductions is not inherently unfair. While the Bankruptcy Code allows for some disparity in treatment of creditors, the debtor must justify this treatment.
Courts assess the fairness of proposals by considering potential future benefits for unionized employees, such as profit sharing or equity issuance, resulting from their sacrifices. A debtor can satisfy the "fair and equitable" standard by demonstrating that its proposal is reasonable compared to the burdens on other parties involved in the bankruptcy process. The court emphasizes that "similar" does not mean "identical," and differences in treatment are permissible if substantiated by specific circumstances.
In the Debtors' Fifth 1113 Proposal, they seek to eliminate their obligation to contribute to the 1974 Pension Plan, accepting withdrawal liability unless assurances are provided that contributions will not increase upon the expiration of the 2011 NBCWA. A key issue is whether, under ERISA, the 1974 Pension Plan would receive an unsecured claim for the total present value of contributions or if payments could be made in installments. The court does not resolve this matter but notes that an unsecured claim could approach $1 billion, significantly impacting the available funds for unsecured creditors, including the UMWA. Ultimately, the court concludes that the Debtors cannot sustain their operations if they continue contributions to all NBCWA Plans.
The Court is addressing Debtors' potential withdrawal from various benefit plans, including the 1993 Benefit Plan, the 2012 Retiree Bonus Account Plan, and possibly the 1974 Pension Plan. If Debtors withdraw from the 1974 Pension Plan and incur withdrawal liability, it could result in an unsecured claim of nearly $1 billion, impacting all creditors proportionally based on their stakes in Debtors. The UMWA contends that its represented employees bear an unfair share of this burden compared to savings from non-labor sources and non-union labor. Both Debtors and UMWA have debated the profitability of UMWA-operated mines versus non-union mines, but the Court notes that numerous factors affect mine productivity, rendering this comparison largely irrelevant to the matter at hand.
The Court emphasizes that the focus should be on Debtors' financial situation rather than the union versus non-union labor debate, which it considers a distraction. A critical issue raised by the UMWA is the perceived excessiveness of the relief requested in the Fifth 1113 Proposal compared to concessions from non-union labor, a complex challenge for courts. The Court acknowledges that bankruptcy law can be harsh on labor unions, and the UMWA has historically negotiated for better conditions for its members, which are now at risk due to Debtors' Chapter 11 filings. Pre-bankruptcy, the workforce was split evenly between unionized and non-unionized employees, but recent layoffs have shifted this to 57% unionized. The UMWA argues that the concessions requested by unionized miners are merely a recovery from previous cutbacks faced by non-union employees. However, unionized workers have avoided certain cutbacks in exchange for benefits such as pensions and healthcare.
The evaluation focuses on the fairness and equity of proposed changes within the context of bankruptcy proceedings, specifically regarding unionized miners represented by the UMWA. It emphasizes that federal law allows employees the choice of unionization and that bankruptcy law, particularly Section 1113, mandates strict adherence to fairness for all parties involved. The court acknowledges the historical contributions of miners to their employment terms but states that all reasonable savings avenues have been explored, thus leading to concessions from UMWA-represented labor being the last option.
The court asserts that the burden of bankruptcy will not disproportionately fall on UMWA-represented employees, recognizing the disparity in pay and benefits between union and non-union workers. The UMWA's challenge to the fairness of a proposed 35% equity stake is noted, particularly regarding the lack of valuation for stock and insufficient information on other stockholders to assess governance rights. The Debtors derived the 35% figure through various probabilistic calculations, indicating a range of potential values for the UMWA claim, which could range from 12% to as much as 57% depending on varying scenarios.
However, the court maintains that granting the UMWA a 57% stake would be inequitable considering other creditors’ interests. It underscores that the determination of a fair equity stake is inherently uncertain, based on projections and assumptions. Ultimately, while the UMWA believes 35% is inadequate, some creditors view it as excessive, suggesting a contentious negotiation ahead regarding the equity distribution.
The Official Committee of Unsecured Creditors analyzed the Debtors’ Fifth 1114 Proposal, concluding it equates to a 39% value for the United Mine Workers of America (UMWA) through a 35% equity stake and 4% royalty contributions. The committee deemed this proposal fair and equitable for all creditors, leading to the withdrawal of their limited objection. Previously, the UMWA was offered an unsecured claim. Despite the clarity of the equity stake offer, uncertainties remain regarding its actual value and monetization. The UMWA may choose to monetize only a portion of the equity now and defer the rest until the Debtors achieve cash flow positivity, which could significantly impact the total value derived.
The Court acknowledged the inclusion of profit-sharing and royalties as a fair approach to fund the Voluntary Employees’ Beneficiary Association (VEBA), recognizing that profits from the reorganized Debtors would largely stem from the sacrifices made by retiree beneficiaries. The Debtors proposed that profit-sharing would commence only after meeting certain financial thresholds, demonstrating consideration for their financiers and a commitment to fairness in the reorganization process.
Efforts by both the Debtors and the UMWA to meet reasonably and confer in good faith were noted, with each party showing a willingness to accommodate one another’s concerns. Despite this, a mutually satisfactory resolution was not achieved. The union bears the burden of proof to demonstrate good cause for rejecting the Debtors' proposal, as established by relevant case law.
In the case of In re Garofalo's Finer Foods, the court addressed the debtor's motion for rejection or modification of proposals, noting that a union can demonstrate good cause for rejecting a debtor's proposal if its counterproposal satisfies the debtor's need for cost savings. The debtor is not necessarily required to reduce the requested savings to show good faith, and the court can evaluate the debtor's flexibility in concessions to assess the union's rejection of the proposal. The United Mine Workers of America (UMWA) submitted a Fourth Counterproposal that lacked necessary compromise, failing to meet the standards for fairness and equity among stakeholders. Despite the UMWA's acceptance of certain concepts like a Voluntary Employees' Beneficiary Association (VEBA), the court concluded that no UMWA counterproposals approached the required savings for the debtor's emergence from bankruptcy. The court emphasized that the context of bankruptcy alters the obligations and negotiations between the parties. Furthermore, concerns about potential liabilities for retiree benefits in the event of liquidation were deemed insufficient grounds for the UMWA to reject the proposals, as this view neglected the broader implications for all retirees and current workers. Ultimately, the court found that the UMWA did not establish good cause to reject the debtor's proposals based on the necessity and fairness required for all parties involved.
The balance of equities regarding a debtor's rejection of a Collective Bargaining Agreement (CBA) requires courts to evaluate several key factors, including the likelihood of liquidation if the CBA remains, the CBA's impact on creditors' claims, the potential for a strike if rejected, and the ability of each party to manage rejection costs. The likelihood and consequences of liquidation are paramount, as noted in Mesaba I. If the current retiree benefits and CBA obligations are not alleviated, the debtors are likely to face liquidation, which is deemed the worst outcome. A potential strike called by the United Mine Workers of America (UMWA) could also lead to liquidation, as emphasized by the awareness of UMWA President Roberts regarding the severe implications of such a decision. If liquidation occurs, many employees would be left unemployed, exacerbating the existing job crisis among miners. The UMWA's stance on potentially striking, regardless of the consequences, is criticized as indefensible. The union has indicated it would strike if the debtors reject their CBAs, but this right to strike carries significant risks, including the loss of jobs for its members. Ultimately, a strike that results in liquidation serves little purpose, as it jeopardizes the very employment the union seeks to protect.
The Union's insistence on a strike if the 1113 motion is granted prompted the court in Mesaba I to critique the Union's tactics as mere posturing rather than principled legal discourse. The court expressed concern that threatening a strike to influence a legal outcome reflects a bullying approach that obscures the actual issues at hand. It emphasized that the right to strike resides with the unions, but raising threats to sway legal decisions undermines the serious implications of such actions, particularly the potential for bankruptcy and job losses for union members. While acknowledging the Union's potential motives, the court indicated that the UMWA's actions should consider the best interests of its members and retirees, especially in light of the adverse consequences of a long strike. The court expects the UMWA to heed the voices of its members and highlighted the uncertainty surrounding the Debtors' potential claims against other entities, questioning their legal viability and the prospects for recovery.
Unity of purpose is emphasized as essential in the context of the Court's considerations regarding the 1113/1114 Motion related to the Debtors, specifically the miners and retirees. The Court grapples with the dilemma of providing partial relief versus none at all, acknowledging the absence of pre-bankruptcy options and the improbability of settlement among the parties. Through a careful evaluation of the proposals and claims presented, including the conduct of the United Mine Workers of America (UMWA) and the Debtors, the Court finds that the Debtors have sufficiently demonstrated that the equities favor granting the 1113/1114 Motion.
The Court reflects on the origins of Patriot Coal Corporation and the potential misjudgments of its executive team regarding financial viability, suggesting that the challenge of unfunded retiree medical benefits is a consequence of both Congressional inaction and unrealistic expectations from both companies and unions. The Court's role is strictly to apply the law to the evidence at hand.
The Court orders the rejection of collective bargaining agreements under Section 1113 and the termination of certain retiree benefits under Section 1114, allowing the Obligor Debtors to implement the Fifth Section 1113 Proposal on June 1, 2013, and transition retiree healthcare to the UMWA Retiree Healthcare Trust on July 1, 2013, unless specific conditions are met for a later transition date. All objections to this motion are overruled, with the Official Committee of Unsecured Creditors withdrawing its objections based on agreed reservations.
The Debtors and the Committee have reached an agreement regarding the allocation of equity to the United Mine Workers of America (UMWA) in the context of the Fifth 1114 Proposal. Key points include:
1. The Committee's advisors received a detailed recovery analysis from Blackstone within the last seventy-two hours.
2. Extensive discussions took place between the Committee’s advisors and the Debtors' advisors to reconcile their recovery models and assumptions related to UMWA's equity allocation.
3. Several factors affect the equity allocation, including the estimated amount of UMWA's claims, the value available for unsecured creditors, and potential third-party claims against the Debtors.
4. The Committee estimates that the Fifth Proposal allocates approximately thirty-nine percent of the equity value of the reorganized Debtors to the UMWA, consisting of thirty-five percent equity and an additional four percent from royalty and profit-sharing payments.
5. Despite considering this allocation high, the Committee, after consultations, concluded that the allocation is fair and equitable compared to other creditors, even under conservative assumptions regarding substantive consolidation and inter-company claims.
6. The Committee has voted to withdraw its previous objection to the Fifth Proposal's implementation, no longer requiring proof of fairness or a second hearing.
7. The shared assumptions between Houlihan and Blackstone do not constitute an admission and are not binding in future litigation regarding substantive consolidation or inter-company claims.
8. The Committee has not made any determination regarding the appropriateness of substantive consolidation or the allowance of inter-company claims.
9. Additional agreements include the admission of certain declarations and deposition designations related to the 1974 Pension Trust and other plans.
Overall, the Debtors and the Committee have affirmed their mutual understanding regarding the equity allocation to the UMWA without prejudice to future rights related to substantive consolidation or inter-company claims.
Participating employers in the coal industry are required to continue contributions to the 1974 Pension Plan as long as they remain in the industry, with contribution amounts determined by future agreements. Employers who have previously agreed to participate, regardless of their current membership status with the BCOA or whether they sign new agreements, are still bound by the contribution rates established in new NBCWAs. This principle was upheld in Holland v. Freeman United Coal Mining Co., which confirmed that coal companies must adhere to the Evergreen Clause and contribute to the Plans under updated rates. The Coal Act was amended in 2006, and all references herein are based on that amendment. Various federal acts and amendments related to coal mining health and safety, benefits, and tax credits for clean coal technology are also mentioned, highlighting the ongoing legislative efforts to support retired coal miners. Additionally, the Combined Fund pertains only to the 1950 and 1974 Benefit Plans, which remain separate. Federal contributions were 25% in 2008, with projections for annual increases. The excerpt also references several legal documents and declarations, including those from UMWA officials, which have been accepted as evidence.
Limited benefits coverage was established for retirees from employers that did not fully contribute to the 1993 Benefit Plan. The document references various joint exhibits, including declarations from Stover and Hatfield, as well as a 2012 Retiree Bonus Declaration. It mentions a press release from February 22, 2013, highlighting the defense of benefits for retired coal miners. The court will address an adversary case related to Peabody and its subsidiaries, which include specific mining operations.
Additionally, the excerpt notes financial implications for the debtors, including a loss of refunds from the Early Retiree Reinsurance Program after it exhausted its funds in 2011, which previously provided $7.6 million in refunds during 2010 and 2011. The Patient Protection Affordable Care Act will require the debtors to cover an estimated additional cost of $1.5 million for 440 dependents under the age of 26. The document also includes references to various declarations discussing the debtors' other post-employment benefits in comparison to competitors.
The document references various joint exhibits and declarations related to a bankruptcy proceeding, particularly focusing on post-petition financing and the protection of pre-petition secured lenders under specific sections of the U.S. Bankruptcy Code. It includes details about a hearing on April 30, 2013, and May 2, 2013, where testimonies and declarations from various individuals, including Mr. Mandarino and Mr. Lucha, were presented regarding employee attendance policies and the implications of health insurance exchanges mandated to be operational by January 1, 2014. The testimony highlighted the potential for employee termination after a series of unexcused absences. Additionally, the historical context of unionized employees' holiday entitlements, including John L. Lewis Day, was mentioned, alongside the impact of the Fifth 1113 Proposal on these entitlements. The document also outlines the government's plan for a health insurance marketplace where individuals and small businesses can acquire health benefit plans. References to numerous joint exhibits throughout the excerpt underscore the complexity and depth of the financial and operational issues being addressed in the ongoing legal proceedings.
Numerous joint exhibits are referenced, including Joint Exs. 2, 3, 19, 290, and several others, indicating extensive documentation involved in the case. Testimonies from the May 2, 2013 hearings highlight the importance of Bank of America's stance on covenant waivers in its DIP Facility, which remains firm. It is suggested that installment payments to satisfy Debtors' obligations may continue indefinitely. The strip ratio, relevant to coal production, is mentioned in context but lacks further elaboration. The Court finds the comparison of proposed modifications to Collective Bargaining Agreements (CBAs) with employment agreements at the Debtors' Gateway mines to be unconvincing, given the unique circumstances surrounding those agreements. Testimony from Mr. Traynor indicates that he perceives Debtors' proposals, particularly the Fourth and Fifth 1114 proposals, as tactical and made in bad faith, though he does not view the UMWA's Fourth Counterproposal as similarly bad faith. The Court notes that the Bankruptcy Code does not impose timing restrictions on motions under Sections 1113 or 1114, allowing for negotiations to continue until hearings commence. Furthermore, the Court recognizes delays from the UMWA in responding to Debtors' requests and their modest concessions, which questions their good faith efforts in negotiations. Citations to additional exhibits and testimonies support these points.
