Eleventh Circuit Holds that Chapter 11 Debtor May Shed Retiree Health Benefits in an Asset Sale

Section 1114 of the Bankruptcy Code allows a bankruptcy court to modify a Chapter 11 debtor’s retiree health obligations when, among other things, such relief is necessary to permit the debtor’s “reorganization.”   But does a sale of the debtor’s assets to another company count as a “reorganization” for purposes of Section 1114?  A recent decision by the U.S. Court of Appeals for the Eleventh Circuit answered yes to that question, allowing a bankrupt coal company to use an asset sale as a means to shed the health benefit obligations it had to its retirees.  See In re Walter Energy, Inc., Case No. 16-13483 (11th Cir. Dec. 27, 2018).

Walter Energy, which operated coal mines in Alabama and West Virginia, provided health benefits to hundreds of retirees and dependents.  Plummeting coal prices left it without sufficient cash for its operations, causing it to seek Chapter 11 protection.  After filing for bankruptcy, the company entered into an agreement to sell substantially all of its assets to an entity owned by its first-lien creditors.  The buyer, however, insisted that there be no ongoing obligation to provide health benefits to Walter Energy’s retirees.  The United Mine Workers of America, in negotiations with Walter Energy, refused to agree to a sale on those terms.

Over the objections of the UMWA and of the pension funds that administered the benefits, Walter Energy sought and obtained an order from the bankruptcy court allowing it, pursuant to Section 1114, to terminate its retiree health benefit obligations.  After the district court affirmed, the funds took the case to the Eleventh Circuit.

Before deciding whether Section 1114 applied to the sale, the appeals court first had to decide whether Section 1114 applied to Walter Energy at all.  Section 1114 applies to retiree benefits that a company “obligated itself” to provide, but in the coal industry, a federal statute mandates the continuation of lifetime retiree health benefits.  The court got past that issue by reasoning that Walter Energy had originally, in its collective bargaining agreements with the UMWA, obligated itself to provide retiree benefits, and that the legislation simply converted that contractual obligation into a statutory one.

The funds argued that even if Section 1114 applied to Walter Energy, the statute could not permit the elimination of its retiree health obligations because the sale of its assets did not qualify as a “reorganization” of the company within the meaning of Section 1114.

Judge Jill Pryor, who authored the Eleventh Circuit panel’s unanimous opinion, acknowledged that a debtor’s liquidating its business through an asset sale differed from a “classic” reorganization, in which the debtor continues to operate the business.  She also acknowledged instances in which both the Bankruptcy Code and case law refer separately to reorganizations and liquidations.  Nonetheless, the judge reasoned that, in this context, a liquidation by sale could be shoehorned into the definition of a reorganization, because with a sale, as with a “classic” reorganization, the business continues, albeit under new ownership.

Judge Pryor noted that other courts that have considered the issue have also held that a debtor pursuing a Chapter 11 liquidation can seek relief under Section 1114 or Section 1113 of the Bankruptcy Code (which permits rejection of a collective bargaining agreement under certain defined circumstances).

In its 74-page decision in Walter Energy, the Eleventh Circuit made a commendable effort to address the complexities of retiree health benefits in the highly regulated coal mining industry.  But the court missed an opportunity to steer the case law in a direction that would have provided more protection to a vulnerable population of aged miners and their families.  The court could have, without straining, read “reorganization” to mean something other than “liquidation,” and by doing so could have blocked assets sales as an avenue by which corporate debtors can shed their retiree benefit obligations.

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