Court denies trustee appointment for non-union Patriot Coal debtors

By Caroline Salls

Pittsburgh, May 10 - Patriot Coal Corp. noteholder fund managers Aurelius Capital Management, LP and Knighthead Capital Management, LLC's motion for appointment of a Chapter 11 trustee to control the estates of Patriot Coal debtors that are not signatories to collective-bargaining or retiree-health care agreements with the United Mine Workers of America (UMWA) was denied Friday, according to a court filing.

The motion filed with the U.S. Bankruptcy Court for the Eastern District of Missouri said only 13 of the 99 debtors in Patriot Coal's Chapter 11 case actually have obligations to the UMWA or union retirees.

Aurelius and Knighthead said recent proposals to the UMWA were built on a plan to satisfy union liabilities with the assets of the "non-obligor debtors," which have no obligations to the UMWA.

"Worse, the plans do so without providing the non-obligor debtors any value in return," the motion said.

"The proposals are a clear breach of the fiduciary duties owed to the non-obligor debtors, breaches that will severely prejudice their creditors, such as the noteholders, which bargained for and received obligations from Patriot and guarantees from the remaining non-obligor debtors that the UMWA did not."

In addition, Aurelius and Knighthead said the company is moving toward liquidation, "a fate the non-union debtors need not meet."

Court ruling

"Here, there is no evidence of fraud, dishonesty, incompetence or gross mismanagement of the affairs of the debtors by current management or counsel for debtors," judge Kathy A. Surratt-States said in her ruling.

The judge said interdebtor conflicts are present in most large multi-debtor cases and do not by themselves establish fraud or mismanagement or misconduct that constitutes cause for appointment of a trustee.

In addition, the judge said the Patriot Coal debtors "are currently inextricably intertwined between unionized and nonunionized operations, and some non-union operations are either completely dependent on other operations that involves unionized labor or operate with both union and non-union labor.

As a result, Surratt-States said the debtors share some administrative operations, operate under a single cash management system and use some blanket purchase agreements, export contracts, transloading agreements and coal supply agreements that require blending of coal mined from unionized and non-unionized mines.

"This court cannot fathom, and no party has presented this court with any potential structure for, the creation of two pools of debtors," the judge said in her ruling.

Patriot Coal, a St. Louis-based miner, producer and seller of thermal coal, filed for bankruptcy on July 9, 2012 in the U.S. Bankruptcy Court for the Southern District of New York. The case was transferred to the U.S. Bankruptcy Court for the Eastern District of Missouri under Chapter 11 case number 12-51502.

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