In re Walter Energy, Inc.

• Decision Date: 28 December 2015
• Docket Number: Case No. 15–02741–TOM11 Jointly Administered
• Citation: 542 B.R. 859
• Parties: In re: Walter Energy, Inc., et al.,Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

542 B.R. 859

In re: Walter Energy, Inc., et al.,¹ Debtors.

Case No. 15–02741–TOM11 Jointly Administered

United States Bankruptcy Court, N.D. Alabama, Southern Division.

Signed December 28, 2015

Allan J. Arffa, Robert N. Kravitz, Daniel J. Leffell, Dan Youngblut, Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, James Blake Bailey, Patrick Darby, Cathleen C. Moore, Bradley Arant Boult Cummings LLP, Jayna Partain Lamar, Robert Karl Ozols, Maynard, Cooper & Gale, P.C., Jay R. Bender, Birmingham, AL, for Debtors.

MEMORANDUM OPINION AND ORDER GRANTING DEBTORS' MOTION FOR AN ORDER (I) AUTHORIZING THE DEBTORS TO (A) REJECT COLLECTIVE BARGAINING AGREEMENTS, (B) IMPLEMENT FINAL LABOR PROPOSALS, AND (C) TERMINATE RETIREE BENEFITS; AND (II) GRANTING RELATED RELIEF

TAMARA O. MITCHELL, United States Bankruptcy Judge

This case came before the Court for hearing on December 15 and 16, 2015 on Debtors' Motion for an Order (I) Authorizing the Debtors to (A) Reject Collective Bargaining Agreements, (B) Implement Final Labor Proposals, and (C) Terminate Retiree Benefits; and (II) Granting Related Relief; and Establishing Other Deadlines (hereafter "1113/1114 Motion") [Doc. No. 1094] dated November 23, 2015, and objections to the 1113/1114 Motion filed by the United Mine Workers of America (hereafter "UMWA") [Doc. No. 1189] and the United Mine workers of America 1974 Pension Plan and Trust and its Trustees, United Mine Workers of America 1992 Benefit Plan and its Trustees, United Mine Workers of America 1993 Pension Plan and Trust and its Trustees, United Mine Workers of America 2012 Retiree Bonus Account Trust and its Trustees, United Mine Workers of America Cash Deferred Savings Trust of 1988 and its Trustees, United Mine Workers of America Combined Benefit Fund and its Trustees (hereafter "UMWA Funds")[Doc. No. 1198] (collectively "objections").²

INTRODUCTION

At the outset, the Court notes and recognizes the impact any ruling on the pending Motion and objections has on multiple stake holders in these Chapter 11 cases. As noted on the record during the hearing, the dollar or quantitative monetary impact on each employee or retiree may not be as high an amount as to other creditors. However, the impact on each employee and each retiree is huge, and may be difficult for many, if not all, to understand, much less accept as fair, equitable or just.

In In re Patriot Coal, the following was noted:

[T]here is unquestionably no dispute that the lives and livelihood of Debtors' employees, both, union and non-union, current, and retired, depend on the outcome of Debtors' reorganization. "The retirees' health and access to health care depend on the outcome of these cases. Indeed, without the dedication and sacrifice of the coal miners and their families, there would be no coal, and there would be no Patriot Coal."³

The Patriot Coal court also noted, without "men and women willing to bend their knees to excavate coal" there would be no need for the Chapter 11 cases or the mines.⁴

This Court recognizes that the miners are the backbone and crucial workforce in these mining operations. Essentially, the dilemma facing the Court is whether to shut down the mines or allow the possibility that the mining operations continue in the hopes that coal prices will rebound in time and the miners keep valuable jobs, and are able to benefit when better times and better coal prices occur.

FINDINGS OF FACT⁵

1. The Debtors produce and export metallurgical coal ("met coal") for the global steel industry with mineral reserves in the U.S., Canada and the United Kingdom. The Debtors also extract, process, and market thermal and anthracite coal and produce metallurgical coke and coal bed methane gas. [Zelin Decl. ¶ 7.] The No. 4 and 7 mines at Jim Walter Resources, Inc. ("Jim Walter"), with depths over 2,000 feet, are the heart of the Debtors' operations. [Zelin Decl. ¶ 8.] However, despite the high quality of met coal that the Debtors sell, the Debtors, like many other U.S. coal producers, were unable to survive the sharp decline in the global met coal industry and filed for Chapter 11 relief on July 15, 2015 (the "Petition Date"), commencing these cases (the "Chapter 11 Cases"). After a failed attempt to restructure pursuant to a Chapter 11 plan process and a restructuring support agreement, the Debtors are now liquidating their assets pursuant to a going concern sale to an entity owned by their first lien creditors (the "First Lien Creditors"). The proposed buyer, however, will not take the Debtors' assets subject to their legacy and current labor costs. Accordingly, pursuant to sections 1113 and 1114 of the Bankruptcy Code, the Debtors are seeking to reject their collective bargaining agreements (the "CBAs" as further defined below) to eliminate the successorship provisions and to implement their final proposals pursuant to which, upon the closing of the proposed sale, the Debtors will terminate their retiree benefit obligations and any other obligations remaining under the CBAs, so the Debtors' assets may be sold free and clear any obligations pursuant to the CBAs or otherwise required.

2. The Debtors' filed a motion on November 9, 2015 to approve bidding procedures and for the sale of all or substantially all of its assets. The bidding procedures have been approved, there is a Stalking Horse Bidder, an auction is scheduled for January 5, 2016 and a hearing on the sale set for January 6, 2016. The record in this case, as well as the testimony offered at this hearing, indicate the proposed going concern sale is the best chance for selling the Debtors' Alabama mines and to provide potential future employment for the Debtors' represented employees. If the sale is not approved or the sale fails to close, the Debtors will have no choice but to immediately pursue shut downs of the mines and/or convert to Chapter 7, thereby destroying the going concern value of the mines and eliminating future employment opportunities.

A. The Debtors' Labor Obligations.

3. The Debtors are party to two collective bargaining agreements and a memorandum of understanding. Specifically, (a) Jim Walter is party to the June 2011 Contract between the United Mine Workers of America and the Bituminous Coal Operators Association (the "BCOA") (together with any side letters of agreement and closing agreements and the memorandum of understanding between Jim Walter and the UMWA, the "UMWA CBA"); and (b) Walter Coke, Inc. ("Walter Coke") is party to an Agreement dated March 25, 2010, between the USW on behalf of Local . 14 and Walter Coke (the "USW CBA").⁶ The UMWA CBA covers approximately 700 active employees.

4. In addition, the Debtors owe retiree benefits (as such term is defined by section 1114 of the Bankruptcy Code, the "Retiree Benefits") to approximately 3,100 retirees and spouses represented by either the UMWA or the USW, together with approximately 100 non–Union retirees and spouses represented by the statutory committee of retirees appointed in these Chapter 11 Cases (the " Section 1114 Committee"). These Retiree Benefits include those owed under: (i) the UMWA CBA (the "UMWA Retiree Medical Plan") which, as of December 31, 2014, had approximately $579.2 million in unfunded liabilities; (ii) a collective bargaining agreement that does not cover any active employees with the UMWA (the "Taft Retiree Medical Plan") that, as of December 31, 2014, had approximately $3.4 million in unfunded liabilities; (iii) the USW CBA (the "Walter Coke Retiree Medical Plan" and the "Walter Coke Retiree Life Plan") that, as of December 31, 2014, had approximately $11.0 million and $0.5 million in unfunded liabilities, respectively; and (iv) the medical plan for non-Union retirees⁷ (the "Salaried Retiree Medical Plan") that, as of December 31, 2014, had approximately $4.3 million in unfunded liabilities. (See Scheller Decl. ¶ 4; Farrell Decl. ¶ 4; Zelin Decl. ¶ 27.)

5. The Debtors are also responsible for numerous forms of pension liabilities and retiree benefit obligations arising from the Debtors' relationship with the UMWA, including, as defined below, the 1974 Pension Plan, the Coal Act Funds, the 1993 Benefit Plan, the Account Plan, and the CDSP (collectively, the "UMWA Funds"). Specifically, in 2014, Jim Walter Resources contributed (a) over $17 million to the 1974 Pension Plan;⁸ (b) over $80,000 to the CDSP⁹ ; and (c) approximately $3.6 million to the 1993 Benefit Plan.¹⁰ The Debtors also have an annual premium of approximately $170,000 (payable monthly) owed to the Combined Benefit Fund,¹¹ and currently administer a Coal Act individual employer plan (an "IEP") that provides retiree health benefits to approximately 572 retirees and their dependents.¹² Finally, in 2014, Jim Walter contributed approximately $5.1 million to a retiree bonus Account Plan.¹³

6. In aggregate, the Debtors pay approximately $25–30 million per year on account of their Retiree Benefits.

B. The Chapter 11 Cases and Going–Concern Sale.

7. The decline of the global met coal industry since 2011 is well established and has devastated the industry. Fundamental downward shifts in the Chinese economy, coupled with the increase of low-cost supply of met coal from Australia and Russia, have driven met coal prices down from their historic high of $330 per metric ton in 2011 to their current low of $89 per metric ton. [Zelin Decl. ¶ 8.] The spot price for met coal is currently less than $80 per metric ton. As met coal prices began to decline, the Debtors' management responded to the changing industry environment by implementing numerous operational and cash-flow savings measures.¹⁴ [Zelin Decl. ¶ 9.]

8. Despite these efforts, the burden on the Debtors of their funded debt obligations and labor-related liabilities was unsustainable. With cash reserves of as of July 15, 2015, of approximately $250 million, inclusive of cash at their Canadian and U.K. entities, the Debtors continued to suffer substantial losses from operations despite the...