May 1 (Reuters) - As mineworkers and retirees battle to salvage their pensions and benefits from the bankruptcy of Patriot Coal Corp, lawyers for their union are trying an unusual gambit - and one that may be a test case for workers' rights when companies spin off assets.
With a difficult road ahead in bankruptcy court in St. Louis, the United Mine Workers of America has brought a parallel lawsuit 500 miles away, in West Virginia, the heart of coal country.
That lawsuit is not against Patriot but instead challenges Peabody Energy Corp, which spun Patriot off in 2007, saying the former parent must pay retiree pensions and benefits if Patriot cannot.
While experts say the lawsuit is a long shot, if successful it could upend how companies like Peabody dispose of assets in the future. And, for mineworkers, the lawsuit seeks to preserve a right to lifetime health and pension coverage that dates back to the Truman administration.
The union argues that when Peabody spun Patriot off in 2007, it knew the new company was going to fail. Parting with only about 16 percent of its assets, Peabody loaded Patriot up with nearly 60 percent of its post-employment benefit liabilities, the union alleges.
Patriot declared bankruptcy in July, and has said it must cut $150 million a year in employment costs to regain profitability. It is seeking permission this week from a judge in U.S. Bankruptcy Court in St. Louis to impose drastic cuts, which the union has cast as "nowhere near" fair.
With the odds stacked against workers in bankruptcy court, where their claims are subordinate to the claims of lenders and creditors, the union last fall brought a separate lawsuit against Peabody in federal court in Charleston, West Virginia. The lawsuit also names as a defendant Arch Coal Inc, which in 2005 sold certain units that were eventually bought by Patriot after its spinoff.
In an unusual move, the union claims that the transactions were designed to interfere with workers' benefits, which is illegal under federal employment law. It asks the court to declare that Peabody and Arch remain liable for benefits for some 13,000 union members and their families, if Patriot cannot afford them.
Transactions like Peabody's, in which it spun off liabilities as well as assets, are not uncommon. If the union's lawsuit is successful, it could set a precedent by allowing workers to keep a company on the hook for the liabilities it tries to offload.
That might cause companies to think twice before bundling employment liabilities into spinoffs, said Ronald Richman, an employment law expert and partner at law firm Schulte Roth & Zabel.
"It would cause companies to have to look ahead, to make sure they would be able to prove there were real business reasons for any transaction they plan to make," Richman said.
TOUGH LEGAL STANDARD
But in order to win, the union must prove that Patriot and Arch executed the transactions for the primary purpose of avoiding their liabilities to workers, which Richman and other legal experts said is a very difficult proposition.
Proving intent is a highly subjective, fact-based endeavor, said attorney Jeffrey Cohen, an employment law expert at the law firm Bailey & Ehrenberg.
"In the absence of a smoking gun, it's a pretty hard case to make," Cohen said.
Another potential obstacle for the union is the lawsuit's novelty.
The union brought its case under Section 510 of the Employee Retirement Income Security Act (ERISA). The statute, which makes it illegal to "discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled," has only rarely been used by groups of workers.
Grant Crandall, the union's general counsel, acknowledged that the UMWA's approach is relatively untested.
"The prototypical 510 case deals with individuals where, for example, someone works for nine years and vesting kicks in at 10 years, and they're fired just before it vests," Crandall said in an interview.
Both Peabody and Arch have filed motions to dismiss the lawsuit. Peabody argues that Section 510 applies only when a company prevents an employee from crossing an eligibility threshold, as in Crandall's example.
Arch argues that, having sold its stake in a company that was, in turn, later acquired by Patriot, there is "no contract, plan provision or statute that obligated" it to fund the workers' retirement benefits.
Cohen, who is not involved in the case, said the lawsuit has a slightly better than 50 percent chance of surviving the dismissal motions. Once into the discovery stage, the difficult work begins, he said.
"ERISA 510 covers a multitude of sins," Cohen said, from firings to fines to threats. It is "really not explicit" about exactly which actions could or could not trigger liability, he said.
In the only comparable case, employees of Abbott Laboratories argued in a class action in 2008 that Abbott's 2003 spinoff of its hospital products division to form Hospira Inc resulted in the reduction of certain pension benefits.
While the case survived a motion to dismiss, a judge eventually ruled for Abbott.
In certain cases, pension plans or the Pension Benefit Guaranty Corp have asserted similar claims under different statutes of ERISA, but those lawsuits, which are also rare, apply only to pension benefits, not healthcare.
Still, the UMWA believes it has a case. In its lawsuit, it says the companies made statements boasting of "significantly lower legacy liabilities" brought about by the spinoff.
The union alleges that Peabody loaded Patriot with overly-burdensome legacy costs, reducing its own retiree benefit obligations substantially. But it gave Patriot only about 16 percent of its assets - enough to make Patriot solvent on its face, but nothing more, said Paul Green, the lawyer representing the union in the lawsuit.
"If you eliminate a company's ability to pay for benefits by creating Patriot, you interfere with people's right to actually get their benefits," said Green. "You aren't interfering with eligibility or vesting, but with the getting of benefits."
'KEEPING THE INDUSTRY ON THE HOOK'
The union's unconventional approach is rooted in a long-held, fundamental belief that coal companies are bound to provide lifetime benefits. Coal miners are rarely wealthy, and many are in bad health after decades in coal mines, stricken with black lung and other ailments.
In 1946, during a massive strike, U.S. President Harry Truman seized the nation's coal mines, and his administration then signed an agreement with the United Mine Workers of America establishing an industrywide pension and healthcare program.
Subsequent labor contracts have explicitly referred to lifetime benefits, and the union has historically made concessions, such as on wages and by allowing employers to mechanize, in exchange for preserving those benefits.
"The lawsuit is really about keeping the coal industry, as personified by Peabody and Arch, on the hook for these lifetime benefits," Cohen said.
Peabody calls the lawsuit a "desperate attempt to rewrite history," saying analysts at the time of the spinoff forecast a bright future for Patriot and lauded its strong balance sheet.
"It is our understanding that when Patriot's market value was high, the company could have strengthened its financial position," Peabody spokesman Vic Svec said.
Instead, Svec said, Patriot in 2008 acquired the former Arch units, which had been sold to a third party in 2005, then fell victim to industry-wide downturn due to a glut of natural gas and other factors.
Arch said in a statement the transaction at issue, its 2005 sale of Magnum Coal Co, "was executed in good faith, at a time when coal market conditions were very different than they are today."
Peabody has also said the claims belong in bankruptcy court in St. Louis, not federal court in West Virginia.
But the union has noted that, even in the unlikely event it won concessions from Patriot in bankruptcy court, Patriot could still liquidate, which could leave the workers with nothing.
In the bankruptcy proceedings, Patriot has proposed ceasing pension contributions and putting $15 million toward a voluntary employees' beneficiary association to cover healthcare. It has offered the union a 35 percent stake in the company, which could be sold to help fund healthcare.
A hearing on the proposal is going on this week in the St. Louis bankruptcy court. It has sparked huge protests by the union, which has rallied against both Patriot's proposed cuts and Peabody's refusal to cover the benefit costs.
"Patriot has made the case that they can't afford these costs, and they might be right," Green said. "But Peabody and Arch can, and they made the promise."