Coal company bankruptcies have been making headlines in 2016, as the nation shifts to clean energy, and that has left many people worried and wondering about what it means for the workers, communities, mountains, and streams that are in danger of being left behind. Bankruptcy proceedings are a complicated legal labyrinth, and a place where decisions on all these issues are made. The Sierra Club is fortunate to have talented attorneys on our staff who know how to navigate and represent us in these proceedings, and today I'm sharing a "coal bankruptcy 101" post by our attorney Peter Morgan, as a primer and resource at this pivotal time.
There's just so much at stake, and it's essential for community, worker, and environmental advocates to have a voice as these decisions are made. As we saw this week, in the bankruptcy proceedings for one of the nation's biggest coal companies, Alpha Natural Resources, the company is pushing to secure $11 million in bonuses for its executives, while ditching retirement and health care benefits for thousands of workers. That's just wrong. From taking care of workers to cleaning up their pollution, these companies can't just leave communities and workers, like many in my home state of West Virginia, in the lurch.
But we will have to fight for our rights. We also need Congress to step in and provide the resources that are needed, which President Obama has outlined in his POWER+ coal transition plan (PDF).
And in the meantime, it's in all of our interests to understand how these proceedings work, and make sure we have a seat at the table. Without further ado, here is coal bankruptcy 101, by Peter Morgan:
When Arch Coal filed for bankruptcy on January 11, it marked the first such filing of 2016. But it was the 49th mine operator bankruptcy since the beginning of 2012 – an average of one per month. Twelve mine operators sought bankruptcy protection in 2015, including major players Patriot Coal and Alpha Natural Resources. The reason for this rush of bankruptcies is clear: plummeting demand for coal and increasing availability of alternative energy sources. It’s worth also considering how bankruptcy works, and what mine operators hope to gain through this process.
Coal operator bankruptcies generally take one of two forms: Chapter 7 liquidation or Chapter 11 reorganization. (The “Chapters” discussed here are chapters of the laws that govern bankruptcies – the U.S. Bankruptcy Code).
Under a Chapter 7 liquidation, the bankrupt company – the “debtor” – essentially ceases to exist: it stops all operations and goes immediately out of business. The company’s executives and officers no longer control the company. Instead, a Chapter 7 Trustee is appointed. This Trustee’s job is to sell off the company’s assets and use those proceeds to pay creditors. In the case of a coal mine operator, any mines not sold to another company may be abandoned. In that event, state or federal mine regulators will be responsible for “reclaiming” the mined areas, including dealing with any ongoing pollution. The regulators may be able to pay for this clean up by accessing reclamation bonds posted by the bankrupt company when it first received its permit. But if the amount of the required bond was too small, or if the company was allowed to rely on a “self-bond,” the regulator must find the resources to pay for reclamation from some other source – most likely the state’s general budget.
In contrast, under a Chapter 11 reorganization the bankrupt company is seeking to restructure itself and continue operating. Of the 49 coal operator bankruptcies filed since the start of 2012, approximately half have been Chapter 11 reorganizations. All of the highest profile recent mine operator bankruptcies – Patriot, Alpha, and Arch – have been filed under Chapter 11. In some cases, when it becomes clear that the company will not regain its footing, a Chapter 11 reorganization will be converted to a liquidation. During a Chapter 11 reorganization, the debtor company remains in possession of its assets and will seek approval from the bankruptcy court to make the types of payments required to keep operating – things like payroll, utilities, and other regular expenses.
Several important things happen on the first day of a Chapter 11 bankruptcy. A bankruptcy “estate” is created that is composed of all of the debtor’s assets. The filing of the bankruptcy petition also triggers an “automatic stay” that puts an immediate halt on litigation involving the debtor, and prevents the filing of any new litigation that could have been brought prior to the bankruptcy. Finally, the debtor describes how it intends to finance its operations while it’s in bankruptcy.
As the Chapter 11 bankruptcy proceeds, the debtor company is required to file certain disclosures about its current assets, liabilities, and future plans. Creditors have an opportunity to submit their claims for payment. Other “interested parties” can also file an appearance in the bankruptcy in order to share their perspective on the proceedings. The debtor may seek approval from the court to sell off major assets “free and clear” of any liens, claims, or interests in order to generate cash. For a coal operator, the assets to be sold may include coal mines, and the interests the debtor may seek to strip away could include environmental obligations. The debtor company is required by the Bankruptcy Code to operate its properties and manage its business in accordance with applicable state laws. However, it is often left to the bankruptcy court – which will have little knowledge of environmental laws – to determine whether and how this compliance is occurring.
A Chapter 11 bankruptcy may last anywhere from months to years. The 2015 Patriot bankruptcy lasted a little over five months. The Alpha bankruptcy has already taken that long, and is expected to continue for many more months. Eventually, the Chapter 11 debtor will file its proposed reorganization plan. This document essentially explains what the company will look like when it emerges from bankruptcy, and what it will take to get there. In cases involving a mine operator, this reorganization plan may involve the sale or transfer of significant parts of the business – including coal mines and other major operations. The reorganization plan may also seek approval from the bankruptcy court to alter or eliminate existing environmental compliance obligations. In order to be approved by the bankruptcy court, a proposed reorganization plan must be proposed “in good faith and in accordance with non-bankruptcy law”; and must be feasible – meaning that the debtor actually has the means to carry out what it’s proposing.
Unfortunately, in many cases there will be an inherent tension between decisions that maximize the value of the debtor and those that minimize further harm to the environment. Groups like the Sierra Club can therefore play an important role in these mine operator bankruptcies by opposing any efforts to strip away important protections that shield communities and the environment from harm caused by destructive coal mining practices.