In light of the Supreme Court’s recent rulings in Harris v. Quinn and Burwell, Secretary of Health and Human Services v. Hobby Lobby Stores, which have dealt another body shot to organized labor and further entrenched the idea of “corporate personhood” in our nation’s legal code, I feel it might be worthwhile to discuss a bankruptcy case from last year that presaged both of these decisions. The case IN RE PATRIOT COAL CORPORATION, is yet another instance of a troubling trend in our nation’s judiciary that places the bulk of the concern on protecting the rights of corporations and helping them to stay solvent, with little to no consideration of how their ruling may effect the workforces of those corporations.
The actions relevant to the case began about six years ago when The Peabody Energy Corporation—the world’s largest privately owned coal company—decided to spin-off most of their holdings east of the Mississippi into a separate outfit, which they subsequently called The Patriot Coal Corporation. At the outset, Patriot Coal consisted of 8 former Peabody mines, 2 joint venture mines and a host of contractor operated mines throughout Appalachia and the Illinois Basin. Some of the mines had been run by Peabody for as long as 40 years and, with its entire executive staff and all but one member of its board of directors having been previously employed by the company, it was clear that Patriot Coal was not an entirely independent creature. Less than a year later, Patriot Coal bought out Magnum Coal, a company that was one the biggest players in Central Appalachian coal mining that added another 12 mines to Patriot’s increasingly substantial portfolio. Magnum coal was nearly as wet behind the ears as Patriot was, having only been formed in the summer of 2005 by a Boston-based private equity investment firmcalled ArcLight Capital, which had given control of 4 West Virginia mines to Magnum when it was created. Six months after Magnum Coal came into existence, but before they were sold to Patriot, the fledgling company acquired 4 more coal mines in Central Appalachia when they were sold 100% of the stock in three subsidiaries of Arch Coal, Inc—the 2nd largest privately owned coal company in the world.
I do realize that all this talk of buyouts and mergers and subsidiaries can get rather confusing and more than a little boring, but it’s important to mention because it shows a clear pattern in the way that big coal is conducting itself. The two largest coal companies in the known world had both, within a 2 or 3 year period, packaged up a good chunk of their mining operations in Central Appalachia and placed them in the hands of a single corporation—Patriot Coal—that is being run by former employees of Peabody Energy. On the surface, this doesn’t seem like anything worth writing home about. New corporations spin-off from parent companies fairly regularly and the story of 21st century business has been one never ending series of mergers and acquisitions, so what’s the problem?
Well, it turns out that when Peabody Energy unloaded all of those mines on Patriot Coal, which contained roughly 13% of their total coal reserves, they were also saddling Patriot with the health care costs of 8,400 retired Peabody coal miners that made up 40% of the company’s health care liabilities. Tack on the acquisition of Magnum Coal and the 2,300 Arch Coal retirees that came along with it and what you’ve got is a bunch of partially mined coal reserves attached to an ultra-high risk insurance pool. By the summer of 2012, Patriot Coal and several of is its affiliates had accrued a staggering $1.6 billion in liabilities involving the health care and pension plans of 21,000 retired coal miners and their spouses. The severity of the miners’ health care liabilities are due in large part to all of the long-term occupational hazards they face down in the mines, primarily from the inhalation of coal dust. Unlike much of the particulate matter a person might breathe in over the course of their life, coal dust is incapable of being removed or destroyed by the human body. Once the dust makes it’s way through the respiratory system it beds down in pulmonary lymph nodes and connective tissue, which can lead to inflammation and scarring of the lungs. Breathe in enough coal dust and it will begin to aggregate across broad swaths of pulmonary tissue, forming lesions and turning much of the lung black in color.
Unsurprisingly, longitudinal studies conducted over nearly 40 years have shown that coal miners face increased risk of contracting Chronic Obstructive Pulmonary Disorder (COPD), Lung Cancer, and Coal Worker’s Pneumoconiosis—or as it’s colloquially known, Black Lung. Most of the time, these afflictions do not kill quickly, instead choosing to gradually suffocate those who suffer from them over the course of years and even decades, a process that can be as painful as it is expensive. With this in mind the United Mine Workers Association has been fighting for more than a century to guarantee their constituents the right to pensions and retiree health care benefits that would be provided by the coal companies, who have gleaned the lion’s share of the wealth from the mines while incurring none of the attendant maladies. In 1992, Congress enacted the Coal Industry Retiree Health Benefit Act of 1992 (henceforth known as “The Coal Act”), which guaranteed cradle-to-grave healthcare coverage for all retired UMWA miners and their families. Now, Big Coal was legally bound to care for health and well-being of their old workforce. At least, they were in theory.
In the summer of 2012, Patriot Coal shocked absolutely no one when it filed for Chapter 11 bankruptcy. It was the inevitable outcome for a company that was designed to fail. The executive powers that be at Peabody and Patriot will vehemently deny that the company was ever set up for failure, asserting, as Peabody spokesman Vic Svec did in a opinion piece printed by the St. Louis Post- Dispatch, that Patriot was spun off in order to, “create value and allow both companies to grow and succeed with distinct focus areas.” By presenting this version of reality, Peabody Energy and Patriot Coal are expecting the general public to believe that the largest private coal company in the history of man was so shortsighted and misguided that it loaded a spin-off company with a share of its parent company’s retiree health care benefits that was more than 3 times the share of coal reserves accompanying it and actually expected this company to turn a profit. Big Coal is pleading incompetence, not malevolence.
Now, one question that has yet to be answered is why in the name of all that is holy would Peabody Energy even want to create a company that was destined for bankruptcy? Someone not familiar with the US bankruptcy code would rightly assume that creating a company for the purpose of bankrupting it is a terrible way to make money. That person would be very, very wrong. In her decision on the Patriot case, Chief Judge for the US Bankruptcy Court of Eastern Missouri Kathy Surratt-States ruled that Patriot Coal was legally allowed to back out of the $1.6 billion it owes in retiree health benefits, 90% of which were promised to miners who never worked for Patriot Coal a day in their life. Judge Surratt-States found that Patriot Coal was no longer beholden to the collective bargaining agreements signed by miners at Peabody Energy and Arch Coal. A US Court of Appeals Bankruptcy panel would reverse Surratt-States’ ruling a few months later, but it honestly didn’t make too much of a difference. By the time the UMWA and Peabody/Patriot agreed on a deal, all the retired miners ended up getting was $310 million from Peabody—along with a further $75 million from Patriot—to be placed in a “Voluntary Employee Benefit Association Fund”(1) over the course of 4 years to cover retiree health benefits, provided the miners give up almost all of their 35% equity stake in the new and improved Patriot Coal.
In the end, the creation and subsequent bankruptcy of Patriot Coal has caused about $1.2 billion of Peabody and Arch Coal’s health care liabilities to dissolve into vapor, and all of it was completely legal. They didn’t need to call in any Baldwin-Felts agents or Pinkertons to intimidate their workforce into subservience; the West Virginia State Police were left alone to hassle motorists and the national guard was nowhere in site. All Big Coal needed were some sympathetic, pro-business judges and a bankruptcy code that’s been designed to concern itself with the well being of the corporation in question, while not giving a damn about that corporation’s workforce. The fact of the matter is that, contrary to Mitt Romney’s views on the subject, corporations in 21st century America are not people. Corporations aren’t treated by our government and our courts with enough disdain and contempt to be considered people.
(1) Just an FYI: Whenever a corporation or politician tries to turn guaranteed pension or retirement plans into anything with the word “voluntary” in it…run. Unless the idea of having your employer cut giant holes in your retirement safety net and placing you on the fast track to becoming a Walmart greeter by 75 sounds appealing to you.