Patriot Coal and the official committee of unsecured creditors appointed in its Chapter 11 proceedings filed a joint motion Tuesday seeking discovery of Peabody Energy in order to prove Patriot’s 2007 spinoff from Peabody constitutes a fraudulent transfer, a finding that “could result in sizeable recoveries for Patriot and its creditors.”
U.S. Bankruptcy Judge Kathy Surratt-States will hold an April 23 hearing on the matter.
“No party is as central to a full understanding of the path leading from the creation of Patriot Coal Corporation in 2007 to its current bankruptcy than its former parent Peabody Energy Corporation,” Patriot wrote. “Patriot is a Peabody creation. Peabody selected which of its mines would become Patriot’s. Peabody determined what projections would underlie Patriot’s business plan. Peabody decided which liabilities it would retain and which it would unload onto Patriot. And Peabody dictated the contractual terms that govern Patriot’s ongoing obligations to Peabody after the spinoff.”
Patriot and its creditors’ committee – which includes the company’s largest union, the United Mine Workers of America – have already begun an investigation and discussed discovery issues with Peabody. Patriot filed its motion when those discussions reached an impasse over production of certain documents, primarily those related to employees who transferred from Peabody to Patriot in the spinoff. Peabody also refuses to permit the UMWA to receive any discovery materials, even though the committee has agreed to enter into a tight confidentiality agreement, citing a separate West Virginia lawsuit between the union and Peabody.
The question of potential damages related to the Peabody spinoff has loomed in the background of the case from its inception. Although the first months of Patriot’s Chapter 11 were consumed by the debate over its proper venue (see, “Patriot Coal Ch. 11 transferred from Manhattan to St. Louis,” LCD News, Nov. 27, 2012), the fact that both Peabody and Patriot are headquartered in St. Louis played a part in Judge Shelley Chapman’s decision to transfer the hearing to the Eastern District of Missouri.
With the spinoff, Peabody rid itself of about $600 million of retiree-healthcare liabilities, along with hundreds of millions of dollars of other liabilities, including environmental-reclamation obligations and black-lung benefits, Patriot said. “Patriot became responsible for providing retiree-healthcare benefits to thousands of retirees who had never worked a day in their life for Patriot; even today, years later, approximately 49% of retirees covered by Patriot last worked for, or retired from, Peabody or one of its subsidiaries.”
Patriot is now knee-deep in the process of cutting those benefits. As LCD has reported, the company filed a March 14 motion seeking to reject collective-bargaining agreements with the UMWA to achieve about $150 million in annual cost savings “that are necessary for the debtors to survive.” (See, “Patriot Coal ‘exploring’ asset sales to address ‘fragile position,’” LCD News, March 15, 2013). The UMWA has objected to the cuts and the court docket has been flooded by thousands of letters written by individual retirees, sharing details of one malady after another purportedly tied to hazardous work in the mines for Peabody and Patriot.
Hedge funds Aurelius Capital Management and Knighthead Capital Management also filed an objection to Patriot’s motion, but rather than seek to maintain current benefits, the funds argue that only 13 of the 99 Patriot subsidiaries in Chapter 11 owe any obligations to the unions, and as such, the current structure of Patriot’s plan is untenable. (See, “Patriot noteholders seek appointment of Chapter 11 trustee,” LCD News, April 1, 2013). The termination motion would create “an entirely new liability that runs against the assets of not only the obligor debtors, but also the other 86 debtors, including Patriot itself, that presently owe no liability to union employees or retirees,” the funds said in a letter to Judge Surratt-States this week seeking the right to participate in the April 29 Section 1113/1114 hearing on rejection of the CBAs.
Meanwhile, Patriot also filed a motion notifying the court of its intent to cut benefits for its non-union retirees in order to dispose of a balance sheet liability of about $51.3 million. – John Bringardner