Patriot Coal Creditors Seek to Probe Peabody Over Spinoff

Patriot (PCXCQ) Coal Corp.’s creditors want to investigate Peabody Energy Corp.’s 2007 spinoff of the coal producer, saying the transaction rid Peabody of $600 million in health-care and environmental liabilities.

Patriot and its creditors’ committee sought permission for the probe today in U.S. Bankruptcy Court in St. Louis, where both companies are based. Patriot filed for bankruptcy in July, seeking to reorganize and shed some of the $1.6 billion it estimates is owed for lifetime health care for 8,100 retirees.

“Patriot is a Peabody creation,” lawyers for creditors wrote in a court filing. “Peabody selected which of its mines would become Patriot’s. Peabody determined what projections would underlie Patriot’s business plan. Peabody decided which liabilities it would retain and which it would unload onto Patriot.”

Patriot has already sued to force its former parent to continue paying for the health-care costs of certain retirees whom Peabody (BTU) employed before the spinoff. The proposed probe would allow Patriot to subpoena documents related to the spinoff, including those that Peabody has refused to share with the company and Patriot’s union, according to court papers.

‘Fraudulent Transfer’

Patriot said it is considering whether the 2007 transaction that created it “constituted an actual or constructive fraudulent transfer.” Under bankruptcy law, companies can make recoveries for distribution to all creditors if money was found to have been improperly transferred out of the estate before the bankruptcy filing.

The spinoff rid Peabody of “approximately $600 million of retiree health-care liabilities, along with hundreds of millions of dollars of other liabilities, including environmental reclamation obligations and black lung benefits,” Patriot and its creditors said in court papers.

Vic Svec, a spokesman for Peabody, said in an e-mail that the company will vigorously defend any claims against it related to the Patriot spinoff.

‘Good Faith’

“Peabody Energy has been participating in good faith negotiations regarding a routine information-gathering process relating to the bankruptcy of Patriot Coal Corporation, a company that has been independent from Peabody Energy for more than five years,” Svec said. “Opposing counsel has now asked the bankruptcy court to grant information requests that are clearly unreasonable.”

Patriot has said it needs to shed at least $150 million more in labor costs to avoid liquidating in bankruptcy. The company’s motion to change its collective-bargaining agreements with unionized workers is set to be heard April 29.

“Patriot is committed to making the changes necessary to emerge as a viable entity for the benefit of all stakeholders, while saving more than 4,000 jobs,” Michael Freitag, a company spokesman, said in a statement today.

Failing to make any changes in employee costs and retiree medical coverage “would simply force the company into liquidation -- and that is the worst possible outcome for retirees, employees and other Patriot stakeholders,” he said.

Reduce Obligations

Patriot has proposed to reduce its obligations by creating a voluntary employees’ beneficiary association, or VEBA, trust administered by the United Mine Workers of America or the UMWA Health and Retirement Funds. The VEBA trust would get funding from Patriot in several different ways -- including an ownership stake in the reorganized company, which is expected to be worth hundreds of millions of dollars.

Patriot will also contribute as much as $300 million, an initial $15 million and future recoveries from litigation, the company has said.

Peabody fell 3 percent today to $19.92 in New York. Patriot closed at 10 cents in over-the-counter trading.

Patriot’s 3.25 percent senior convertible notes due in May last traded at 12 cents on the dollar, and its 8.25 percent notes last traded at 48 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The case In re Patriot Coal Corp., 12-51502, U.S. Bankruptcy Court, Eastern District of Missouri (St. Louis).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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