Fire in the hole: Patriot Coal's contentious bankruptcy

May 9, 2013


If you’ve been hanging out downtown in the last couple months, you may have noticed the crowds of people gathered to protest the ongoing Patriot Coal bankruptcy case. The protests have garnered attention because of the resulting disruptions and arrests, with the battle moving onto the airwaves as ads decrying the company’s reorganization have run on TV and the radio. Associate Professor Marcia McCormick, an employment law scholar, provides some background information and thoughts on the case and its implications.

St. Louis is watching the protests over Patriot Coal's bankruptcy and its relationship with Peabody Energy unfolding right now in the courts and in the streets; it is a story that has played out multiple times in many industries. A company's debts outweigh its profits, and the company looks to bankruptcy to let it renegotiate its debts to give it a fresh start and remain profitable. One group of creditors the company wants to renegotiate with will be its own employees. These employees may be creditors because they own stock in the company, because they have a union contract for current pay and benefits with the company or because the company has promised to provide a level of benefits for them when they can no longer work because of old age or disability. Some of these will even be former employees, currently retired and living on those promised benefits. A company might use bankruptcy to get out of its promises, but also to dissolve the parts of the business that have unionized employees, getting rid of the unions entirely. Without unions and collective contracts, the company has significantly more flexibility to pay workers less and to reduce pay and benefits unilaterally as circumstances change.

There are two main pieces of the story that people tend to focus on. One is the way that obligations to current unionized employees play out. Sometimes a company has made promises about wages and benefits that it can no longer keep because market forces have made the company less profitable. Companies and unions will renegotiate those promises, and we often do not hear about those successful renegotiations. We do hear, though, when the union digs in and refuses to renegotiate. Hostess is a good example. The union ultimately refused to make further concessions late last year, arguing that it had already made many and that the company had made poor financial choices, using funds it had promised for pensions to run operating costs and raising executive salaries. That refusal led to Hostess's complete liquidation.

The other main piece of the story relates not to ongoing wages and benefits, but instead to promises of benefits in retirement. Several high profile bankruptcy reorganizations have allowed companies like Delta, United Airlines and US Airways  to renegotiate union contracts and get out of pension and health benefit obligations but stay in business. Others, like Hostess, have liquidated and erased some of that debt in that way. A number of municipalities seem to be heading in that direction, as well. These bankruptcies have had one major thing in common—unfunded pension obligations that have been shifted to a public fund in the private sector, taxpayers in the public sector, and the employees themselves, in both sectors. And funding for healthcare has also shifted to the public or to employees themselves.

Companies used to offer pensions to employees for two main reasons. They were a reward for loyalty and a lifetime of service to the company, a way to defer compensation during an employee's most productive years to years when the employee could no longer work. Thus it was a way to keep wages lower than what the labor market might demand but still remain competitive for good workers. They were also a way for companies to predict turnover; by creating an incentive to retire at a certain age, employers could predict their future needs years in advance. That system led to employers promising more than they could deliver, however, in both the private and the public sector, and we have seen a series of scandals where employees have lost their retirement benefits, both in health insurance and income.

However, the Patriot Coal story is a little different from these typical disputes. Patriot is a relatively new company, spun off from Peabody Energy in 2007 . When Patriot filed for reorganization in bankruptcy, it claimed it needed concessions from its unionized employees and that it was going to have to stop paying promised health benefits to retirees it had previously been responsible for. But it also claimed Peabody was responsible to pay at least some of those obligations because Peabody had created Patriot as a way to unload Peabody's obligations to its retirees. The United Mine Workers, the union at issue, is aligned with Patriot in this effort, seeking to make Peabody live up to the promises originally made by it.

There are a number of possible implications from the outcome in this case. First, large companies may have an incentive to spin off parts of themselves with greater obligations or unionized workers if the bankruptcy court finds that there was nothing wrong with the transfer. All companies will have an incentive to pay less attention to whether they can live up to their promises if Patriot is allowed to reorganize and get out of its obligations to current employees and retirees. Additionally, the public will be more likely to face a serious health and welfare crisis as the population ages and the benefits they counted on disappear. Patriot Coal is a great example of this. Coal mining is a dangerous profession, and many of the retirees have black lung and other occupational injuries and disabilities. Those retirees will have to buy their own healthcare if neither Patriot nor Peabody is responsible, or rely on Medicaid or Medicare. At some point, this increased public burden might lead to the political will for retirement security reform and further healthcare reform, but that does not seem to be the direction we are heading. Much of the public outcry has been against the employees in these cases, especially in the public sector, and against their unions.


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