01/13/2019 by Jed Donaldson
In recent years, a variety of external factors—including, regulatory costs, political headwinds, falling oil prices, and the increased utilization of natural gas—have placed significant stress on domestic coal companies. Those external factors, in conjunction with significant pension and healthcare liabilities and debt burdens, led to numerous bankruptcy filings within the coal industry. The Bankruptcy Code has, however, provided relief to coal companies and their stakeholders, allowing companies to reorganize and restructure as going concerns or to pursue sales that maximize the value of the debtor’s assets.
In a recent decision from the 11th Circuit Court of Appeals, which hears appeals from federal district and bankruptcy courts in Florida, Alabama, and Georgia, the court affirmed the sale of a bankrupt coal company’s assets to a purchaser free and clear of claims and liabilities, including retiree healthcare benefits. That decision arose from the bankruptcy of Walter Energy, which filed its chapter 11 bankruptcy in Alabama in May 2015.
While the Walter decision is nearly 75 pages long and provides extensive analysis of the various federal statutes enacted to provide retirement and healthcare benefits to coal miners, Walter also exemplifies basic principles of the bankruptcy process that apply to almost every industry. In particular, bankruptcy sales afford purchasers significant incentives by transferring assets without burdensome liabilities attached to those assets.
Walter found that a bankruptcy court has the authority to modify or terminate retiree benefits when a chapter 11 debtor seeks to sell substantially all of its assets in a going-concern sale. At a high level, asset sales in chapter 11 cases can proceed in two manners: (i) first, through a chapter 11 plan of reorganization under § 1129 of the Bankruptcy Code; or (ii) second, outside of a plan of reorganization under § 363 of the Bankruptcy Code.
Both alternatives offer purchasers the ability to acquire assets free and clear of liens, claims, and other encumbrances that may otherwise reduce the value of those assets. In turn, the value of those assets is maximized by fetching a price that is not reduced by the effect of liens, claims, or other encumbrances against those assets.
In Walter, the debtor’s assets were sold via a § 363 sale outside of a chapter 11 plan, and the debtor later converted its case to a chapter 7 liquidation proceeding. In conjunction with the asset sale, the debtor sought and obtained authority from the bankruptcy court to terminate its obligations to retirees, including health care. Importantly, the purchaser’s acquisition was contingent upon not assuming the retiree obligations and other liabilities.
The bankruptcy court granted that relief over the objection of two benefit funds administered by the United Mine Workers of America, which had attempted to prevent the termination of benefits. The district court and the 11th Circuit affirmed that decision. In its decision, the 11th Circuit concluded with an express statement that its decision was “as a court interpreting statues that Congress has enacted, not as policymakers.” And, it made clear that the debtor’s affected retirees would still “receive health care benefits at no cost from the Funds.”