IN RE: SOUTH EAST COAL COMPANY, INC. CASE NO. 90-52183

UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

SOUTH EAST COAL COMPANY, INC. CASE NO. 90-52183

MICHAEL H. HOLLAND, MARTY D.

HUDSON, ELLIOT A. SEGAL,

THOMAS O.S. RAND, WILLIAM P.

HOBGOOD, CARLTON R. SICKLES, AND

GAIL R. WILENSKY, AS TRUSTEES OF

THE UNITED MINE WORKERS OF AMERICA

COMBINED BENEFIT FUND PLAINTIFFS

V. ADV. NO. 96-5014

SOUTH EAST COAL COMPANY, INC.,

DLX, INC., AND

NEWCO, INC. DEFENDANTS

RECOMMENDED FINDINGS OF FACT

AND CONCLUSIONS OF LAW

 

 

This matter is before the court on the motion of DLX, Inc., a defendant in this adversary proceeding, to dismiss the complaint against it.

FINDINGS OF FACT:

South East Coal Company, Inc. filed a petition for relief under chapter 11 of the Bankruptcy Code on October 12, 1990. From the inception of its bankruptcy, South East Coal Company, by counsel, indicated the debtor’s ability to formulate a plan of reorganization was dependent on the outcome of its litigation pending against Kentucky Utilities Company, at one time the primary purchaser of coal mined by South East Coal Company. The Kentucky Supreme Court ruled adversely to South East Coal Company on June 4, 1992. Thus, the debtor in possession was forced to commence an orderly liquidation of its assets.

On July 9, 1992, the debtor in possession filed a motion pursuant to 11 U.S.C. 363(f) for an order authorizing a process for the sale of all of its assets outside the ordinary course of business.

On August 3, 1992, after a hearing, the court entered an order authorizing a bidding process for the sale of the assets of the debtor in possession. The order authorized the debtor in possession to tender an Offering Memorandum to and to accept bids from potential purchasers. Any sale of assets would require further court approval. The order approving the bidding process provided that any sale would be free and clear of liens and encumbrances, with such liens and encumbrances to attach to proceeds of sale in accordance with their respective priorities. The order further provided:

6. Under the Court’s general equitable powers set forth in 11 U.S.C. section 105(a), the Debtor’s assets shall be sold free and clear of any and all liabilities whatsoever, whether contingent, unliquidated, unmatured or otherwise, including, but not limited to, any successor liability for claims for benefits under the Federal Black Lung Benefits Act (30 U.S.C. section 901 et seq.) or the Kentucky Worker’s Compensation Act (KRS Chapter 342) that may be asserted after the date of the sale by former employees of the Debtor.

 

Order Authorizing Process for Sale of All of the Debtor’s Assets Under Section 363(b)(1), August 3, 1992, at p. 3.

The Offering Memorandum which was given to prospective purchasers of the assets of South East Coal Company provided in part as follows:

 

13. Bankruptcy Court Approvals

 

[A]dditionally, after the Seller has conditionally accepted a Bid or Bids on the Properties, the Seller will use its best efforts to obtain an Order from the Bankruptcy Court authorizing the sale of these assets free and clear of all claims against the Seller, including claims for workmen’s compensation and/or black lung benefits. However, all potential purchasers should consult with their own independent counsel regarding the status of title which can be conveyed pursuant to Orders of the Bankruptcy Court in the Seller’s Chapter 11 bankruptcy proceeding.

 

Offering Memorandum attached to Motion for Order Authorizing Sale of Certain Mine and Related Assets and Debtor’s Interest in AMAX Contract, October 23, 1992.

On October 23, 1992, the debtor in possession filed a motion for an order authorizing the sale of real property, mine assets, equipment, inventory, and certain intangibles to Golden Oak Mining Company, and the sale of rights under a Sales Agreement between South East Coal Company and AMAX Coal Sales Company to Westmoreland Coal Company. The letter agreement between Golden Oak Mining Company and South East Coal Company dated October 16, 1992 provided:

3. Assumption of liabilities. Golden Oak shall not assume any liabilities of [South East Coal] Company, except for the reclamation liabilities under the Company's mining permits to be transferred to Golden Oak and obligations or liabilities caused after the closing as a result of the use, operation, ownership, leasing or management of the Assets by Golden Oak.

 

Letter agreement dated October 16, 1992, attached as exhibit to Motion for Order Authorizing Sale of Certain Mine and Related Assets and Debtor's Interest in AMAX Contract, October 23, 1992.

On December 1, 1992, South East Coal Company filed an amendment to the motion and represented therein that it had received a higher bid for its assets from DLX, Inc., "a new Kentucky corporation which was organized and is owned and controlled by Donald and Stephen LaViers." Amendment to Motion for Order Authorizing Sale of Certain Mine and Related Assets and Debtor’s Interest in AMAX Contract, December 1, 1992, at p. 2. Donald LaViers and Stephen LaViers were both vice-presidents of and owned, apparently indirectly, stock in South East Coal Company. Their father, Harry LaViers, Jr., was the president and principal shareholder of South East Coal Company. The offer of DLX, Inc. to purchase the assets of South East Coal Company was memorialized in a letter dated November 30, 1992 executed on behalf of DLX, Inc. by Donald LaViers, President. The letter offer provided: "Except as otherwise expressly set forth herein, DLX shall not assume and shall have no liability for any liabilities or obligations of [South East Coal] Company." The offer of DLX, Inc. was expressly conditioned on "[a]pproval by the Bankruptcy Court of the purchase by DLX of the Company’s interest in the Purchased Assets, free and clear of all liens, claims, encumbrances and rights of third parties of whatsoever nature, including any successor liability for benefits under state or Federal occupational disease or worker’s compensation laws." Letter of November 30, 1992, at p. 4, attached as exhibit A to Amendment to Motion for Order Authorizing Sale of Certain Mine and Related Assets and Debtor’s Interest in AMAX Contract, December 1, 1992.

On December 23, 1992, South East Coal Company filed a Second Amendment to Motion for Order Authorizing Sale of Certain Mine and Related Assets and Debtor’s Interest in AMAX Contract, which reflected the terms of a revised offer made by DLX, Inc. and memorialized in a letter agreement dated December 17, 1992 and executed on behalf of DLX, Inc. by Donald LaViers, President, and on behalf of South East Coal Company by Harry LaViers, Jr., President. The revised letter agreement provided: "[South East Coal] Company shall convey and transfer the Purchased Assets to DLX, and DLX shall purchase the Purchased Assets, free and clear of all liens, claims, encumbrances and rights of third parties of whatsoever nature." Exhibit A to Second Amendment to Motion for Order Authorizing Sale of Certain Mine and Related Assets and Debtor’s Interest in AMAX Contract, December 23, 1992. The revised offer contained the same condition for bankruptcy court approval as did the offer of November 30, 1992. A hearing was held on January 7, 1993, at which time the court orally sustained the debtor’s second amended motion.

By order entered January 19, 1993, the court approved the sale of the assets of South East Coal Company to DLX, Inc. in accordance with the revised offer of DLX, Inc. dated December 17, 1992. The order authorized the debtor to sell the preparation plant at Irvine, Kentucky, the Lexington office, the mine and all other real property, inventory, equipment, and intangibles for a total purchase price of $5,750,088. The purchase price was payable by the tender of cash in the amount of $3,010,000, assumption of a liability owed to the Kentucky Revenue Cabinet for severance and other taxes in the amount of $500,000, the assumption of current payroll obligations and obligations for employee vacation pay in the amount of $750,000, and the replacement by DLX of reclamation bonds posted by the debtor and the concomitant release of certain letters of credit held by the Kentucky Natural Resources and Environmental Protection Cabinet as collateral for the reclamation bonds in the amount of $1,490,088. DLX also agreed to pay to the banks which held mortgages and security interests on most of the debtor’s assets an overriding royalty of $.25 per ton of coal sold by DLX for 10 years.

In addition to the foregoing, pursuant to the terms of a second letter agreement incorporated in the debtor’s second amended motion, the order of January 19, 1993 authorized the debtor to create a wholly-owned subsidiary, referred to in the order as "New Company," now known as Newco, Inc., a defendant in this adversary proceeding, and to transfer the debtor’s interest in the AMAX Coal Sales Agreement to New Company in exchange for New Company’s assumption of indebtedness owed to the banks in the amount of $8,000,000. The agreement as approved by the court required DLX (and an entity known as Cannelton Sales Company) to supply coal to New Company at fixed prices. In turn, New Company agreed to supply such coal to AMAX under the terms of the Coal Sales Agreement. The price differential would be used to repay the assumed indebtedness owed to the banks.

DLX, Inc. and Newco, Inc. were newly formed Kentucky corporations which had been incorporated on August 11, 1992 perhaps for purpose of acquiring the assets of the debtor.

The order of January 19, 1993 provided:

11. Under 11 U.S.C. Section 363(f), and except as otherwise provided herein, upon closing and consummation of the purchase, the sale of the Purchased Assets authorized herein shall be free and clear of all liens and encumbrances of whatsoever nature, with such liens, including the liens of the Banks, Itel Rail Corporation, Ruth Swanson, and any other secured creditors, to attach to the proceeds of the sale in accordance with their relative priorities as determined pursuant to Orders of this Court.

 

12. Under the Court’s general equitable powers set forth in 11 U.S.C. Section 105(a), the Purchased Assets shall be sold free and clear of any and all liabilities whatsoever, whether contingent, unliquidated, unmatured, or otherwise, including, but not limited to, any successor liability for claims for benefits under the Federal Black Lung Benefits Act (30 U.S.C. Section 901 et seq.) or the Kentucky Worker’s Compensation Act (KRS Chapter 342) that may be asserted after the date of the sale by former employees of the Debtor.

 

Order Authorizing Sale of Substantially All of Debtor’s Assets Outside the Ordinary Course of Business, January 19, 1993, at pp. 7-8.

The sale of the assets of South East Coal Company to DLX, Inc. was consummated on March 28, 1993. The sale of the physical assets and the Coal Sales Agreement of the debtor did not realize any unencumbered proceeds for payment of a dividend for unsecured creditors.

The bankruptcy case of South East Coal Company, Inc. was dismissed by order entered on June 13, 1994, effective as of June 7, 1994.

While in operation, South East Coal Company dealt with its workers compensation claims through "self-insurance," that is, it was directly liable for the health care costs incurred by its injured or disabled employees. At the commencement of its bankruptcy case, South East Coal Company was indebted to health care providers for payment for medical services that had been rendered to employees of South East Coal Company, and was also indebted to employees and retirees for reimbursement of costs of medical treatment and for payment of wages lost as a result of injury or disability. See Schedule A-1 of the debtor’s statement of financial affairs, November 21, 1990.

The Black Lung Benefits Act, 30 U.S.C. 901-962, makes a purchaser of the assets of an operator of a coal mine liable for payment of benefits which would have been payable by the prior operator had the prior operator remained in business. 30 U.S.C. 932(i). KRS 342.316(1)(a), which is derivative of 30 U.S.C. 932(i), likewise imposes liability for compensation for occupational disease on a purchaser of the assets of a coal operator. There is no comparable statute imposing successor liability for workers’ compensation claims for injury or death resulting from injury. However, KRS 342.175 creates a lien on the assets of an employer to secure all right of compensation under KRS chapter 342 (the Workers’ Compensation Act) with the same preference or priority as is allowed by law for any unpaid wages for labor. See KRS 376.150, 376.160, 376.180. Thus, the need for a sale of assets free and clear of all liabilities, including liabilities to employees or former employees under the Black Lung Benefits Act or the state Workers’ Compensation Act, was particularly acute.

During the period July 9, 1992 to January 19, 1993, while South East Coal Company was liquidating its assets, Congress was proceeding to resolve a financial crisis facing trust funds managed by the United Mine Workers of America which provided health care benefits to retired coal miners. By 1990, the looming insolvency of the trust funds had caused an eleven-month strike against the Pittston Coal Company and was jeopardizing the stability of the coal industry. In October 1992, after two years of hearings and deliberation, Congress passed, and on October 24, 1992 the President signed into law, the Coal Industry Health Benefits Act.

The Coal Industry Health Benefits Act of 1992 (hereinafter "Coal Act"), 26 U.S.C. 9701-9722, provides for the funding of health benefits for certain retired employees of the coal industry. Prior to enactment of the Coal Act on October 24, 1992, health benefits were provided to retirees in accordance with collective bargaining agreements, known as "National Bituminous Coal Wage Agreements" ("NBCWA"), negotiated between 1946 and 1992 by the United Mine Workers of America ("UMWA") and the Bituminous Coal Operators Association ("BCOA"). The Coal Act covers employees who retired on or before September 30, 1994. 26 U.S.C. 9711(b). The funding of health benefits for employees who retire after September 30, 1994 is left to future congressional action or collective bargaining. 26 U.S.C. 9711(e).

Between 1950 and 1978, health benefits for retirees of the coal industry were financed through multi-employer benefit trusts to which participating coal operators regularly contributed. The amounts of periodic contributions operators paid into the trusts were based initially on tonnage of coal mined and later on cumulative hours worked by employees of the operator. The health benefits trusts were known as the "1950 UMWA Benefit Plan" and the "1974 UMWA Benefit Plan."

In 1978, the UMWA and the BCOA agreed to shift the primary responsibility for providing retirees’ health benefits from centralized multi-employer benefit trusts to individual employers. Pursuant to the 1978 NBCWA, the most recent employer of employees who retired on or after January 1, 1976 became directly obligated to provide health benefits to such retirees under "individual employer plans." Coal miners who retired before January 1, 1976 were covered by the 1950 UMWA Benefit Plan, which continued to be funded by contributions from all operators. "Orphaned retirees," those retirees whose employers went out of business, received health benefits from the 1974 UMWA Benefit Plan, which like the 1950 UMWA Benefit Plan was subsidized by the coal industry. The provisions of the 1978 NBCWA relating to funding of retirees’ health benefits remained substantially unchanged until enactment of the Coal Act in 1992. The only material change came in 1988, when the NBCWA imposed penalties on operators who subsequently withdrew their commitment to be bound by the current NBCWA.

During the 1980’s the financial security of the 1950 UMWA Benefit Plan and the 1974 UMWA Benefit Plan was threatened due to a combination of factors. The drafters of the 1978 NBCWA anticipated that some coal companies would cease operations, and many did. Retirees of defunct or recalcitrant operators became the "orphans" covered by the increasingly underfunded 1974 UMWA Benefit Plan. The drafters apparently did not anticipate that former or current coal operators who continued in business would abrogate their contractual obligations to fund health benefits to retirees. Some employers ceased mining coal but continued as a going concern, pursuing other ventures. Although such employers may have been financially sound, their contributions to the 1950 UMWA Benefit Plan and to the 1974 UMWA Benefit Plan were calculated to be zero because such contributions were based on tonnage of coal mined or hours worked by employees in the coal mines. Furthermore, employers not mining coal were no longer obligated under coal wage agreements to provide health benefits to retired coal miners under individual employer plans. Retired employees of such former coal operators were able to obtain health benefits from the 1974 UMWA Benefit Plan, but contributions from operators to the plan decreased.

Other operators avoided their obligations to contribute to the multi-employer plans and to offer individual employer plans by declining to sign successor wage agreements. Thus, despite the fact that such operators continued mining coal, employing either non-union labor or union labor under a non-conforming wage agreement, they were no longer obligated by agreement to provide health benefits to their own retirees or to contribute to the 1950 UMWA Benefit Plan or the 1974 UMWA Benefit Plan. More and more retirees were "dumped" into the 1974 UMWA Benefit Plan. Withdrawal penalties imposed by the 1988 NBCWA on operators who declined to sign successor coal wage agreements were not enough to make up the shortfall.

The unforeseen increase in the number of retirees covered by the 1974 UMWA Benefit Plan and a corresponding decrease in the revenues of both the 1950 and 1974 UMWA Benefit Plans, together with escalating health care costs, precipitated the financial crisis which ultimately led to passage of the Coal Industry Health Benefits Act on October 24, 1992.

The Coal Act established three discrete mechanisms for funding health benefits to eligible retirees. First, the Coal Act created the UMWA Combined Benefit Fund ("Combined Fund") and mandated the merger of the 1950 UMWA Benefit Plan and the 1974 UMWA Benefit Plan into the Combined Fund. 26 U.S.C. 9702(a).

Second, the Coal Act imposed an obligation on operators to continue providing health benefits through any "individual employer plan" maintained by the operator pursuant to the 1978 NBCWA or a subsequent wage agreement. 26 U.S.C. 9711. The transformation of the operator’s duty to fund health benefits from a contractual liability into a statutory obligation appears to have been intended to prevent operators from repudiating such obligations upon expiration of the operator’s current collective bargaining agreement.

Third, the Coal Act created a "1992 UMWA Benefit Plan" to provide funding for health benefits to persons who retired during the transitional period of the Coal Act. 26 U.S.C. 9712.

The matter now before the court involves only the Combined Fund. The plaintiffs in this adversary proceeding are the trustees of the United Mine Workers of America Combined Benefit Fund. The Combined Fund was established as of February 1, 1993. 26 U.S.C. 9702(a)(2) & (c). Benefits to retired coal industry employees payable by the Combined Fund also commenced on February 1, 1993. 26 U.S.C. 9703(b)(4).

The Combined Fund, a multi-employer fund, subsidizes health benefits for eligible coal industry retirees who, on July 20, 1992, were already receiving benefits from the 1950 UMWA Benefit Plan or the 1974 UMWA Benefit Plan. 26 U.S.C. 9703(f). The Combined Fund is financed by premiums assessed against coal operators who at any time were signatories to any coal wage agreement which offered health benefits to retired employees. See 26 U.S.C. 9704.

The Coal Act was intended to correlate each operator’s liability under the Combined Fund with the employment history of each retiree. To that end, the Coal Act directed the Commissioner of Social Security to assign each retiree in the coal industry (and such retiree’s eligible dependents) to an operator in accordance with one of three criteria. The Commissioner was required to complete said assignments before October 1, 1993. 26 U.S.C. 9706.

The Commissioner was instructed to assign each retiree to the operator who was a signatory to the 1978 or subsequent coal wage agreement and who was the most recent employer of the subject retiree for at least two years. If the retiree could not be assigned pursuant to the first criterion, the Commissioner was to assign the retiree to the operator who was a signatory to the 1978 or subsequent coal wage agreement and was the most recent employer of the retiree. If the retiree could not be assigned in accordance with either the first or second criteria, the Commissioner was to assign the retiree to the operator who employed the retiree for a period of time longer than any other operator employed the retiree prior to 1978. 26 U.S.C. 9706.

The operator to which each retiree was assigned must be one "which remains in business." 26 U.S.C. 9706. "In business" means to conduct or derive revenue from any business activity, whether or not in the coal industry. 26 U.S.C. 9701(c)(7).

Any operator receiving a notice of assignment was granted 30 days in which to request from the Commissioner of Social Security "detailed information as to the work history of the beneficiary and the basis for the assignment." 26 U.S.C. 9706(f)(1). The operator was granted 30 days thereafter in which to request a review by the Commissioner. 26 U.S.C. 9706(f)(2). The determination of the Commissioner following a review requested by the operator is final. 26 U.S.C. 9706(f)(4). However, the operator is not precluded from commencing "a separate civil action against another person for responsibility for assigned premiums, notwithstanding any prior decision by the Commissioner." 26 U.S.C. 9706(f)(6).

 

The annual premium assessed against each operator has three components: a health benefit premium, an unassigned beneficiaries premium, and a death benefit premium. The unassigned beneficiaries premium and the death benefit premium were calculated to be zero for all persons assessed a Combined Fund premium for the first and second plan years. See Exhibit C to Plaintiffs’ Post-Hearing Brief in Opposition to Defendant DLX, Inc.’s Motion to Dismiss. The health benefit premium is calculated as follows. First, the aggregate amount of payments made from the 1950 UMWA Benefit Plan and the 1974 UMWA Benefit Plan in the year between July 1, 1991 and June 30, 1992 was ascertained. That sum was divided by the total number of individuals covered under those plans during that year to attain a "per beneficiary" premium. The "per beneficiary" premium was determined to be $1,232.78 for the eight-month period from February 1, 1993 through September 30, 1993 ("the first plan year"), and $2,245.83 for October 1, 1993 through September 30, 1994 ("the second plan year"). See Exhibit C to Plaintiffs’ Post-Hearing Brief in Opposition to Defendant DLX, Inc.’s Motion to Dismiss. That figure is then multiplied by the number of beneficiaries assigned to each operator. 26 U.S.C. 9704(b).

"South East Coal Co., Inc." was assigned 143 beneficiaries for the first plan year, the eight-month period from February 1, 1993 through September 30, 1993, and 133 beneficiaries for the second plan year from October 1, 1993 through September 30, 1994. Exhibit C to Plaintiffs’ Post-Hearing Brief in Opposition to Defendant DLX, Inc.’s Motion to Dismiss.

The annual premium is payable to the Combined Fund in 12 equal monthly installments, due on the 25th day of each month. 26 U.S.C. 9704(g). Because the assignment of beneficiaries to employers was not completed until October 1, 1993, which was at the end of the first plan year, the annual premium for the first plan year was added to the annual premium for the second plan year and amortized over the second plan year. Id. South East Coal Company’s monthly premium for the first and second plan years combined was $39,581.91.

On October 22, 1993, the Combined Fund notified South East Coal Company that its first premium for the month of October 1993 in the amount of $39,581.91 would be payable by November 25, 1993. Exhibit C to Plaintiffs’ Post-Hearing Brief in Opposition to Defendant DLX, Inc.’s Motion to Dismiss.

On September 5, 1995, plaintiffs, the trustees of the United Mine Workers of America Combined Benefit Fund, commenced a civil action in the United States District Court for the Eastern District of Kentucky seeking a declaration that defendants South East Coal Company, DLX, Inc., and Newco, Inc. are jointly and severally liable for premiums payable to the Combined Fund pursuant to The Coal Industry Health Benefits Act, 26 U.S.C. 9701-9722; a judgment that the defendants are liable to the Combined Fund for premiums from November, 1993 through August 25, 1995 in the amount of $707,315.06; a judgment for all amounts that come due from September, 1995 to the date of judgment; interest, liquidated damages provided for by statute, attorneys’ fees, and costs; a permanent injunction requiring the defendants to pay the premiums owed to the Combined Fund; and such other relief to which plaintiffs may be entitled.

The complaint states in pertinent part as follows:

 

11. Plaintiffs allege upon information and belief, that Defendants DLX and Newco are successors to Defendant South-East Coal within the meaning of the Coal Act and federal common law of ERISA and labor law. As such, pursuant to Section 9704(a) of the Act, 26 U.S.C. 9704(a), Defendants DLX and Newco are jointly and severally liable for the amounts owed to the Combined Fund, by Defendant South-East Coal. Accordingly Defendant South-East Coal, Defendant DLX, and Defendant Newco shall collectively be referred to herein as Defendants.

 

12. Pursuant to Section 9704(a) of the Act, 26 U.S.C. 9704(a), the Defendants are responsible for the payment of annual premiums for their assigned beneficiaries. These premiums are payable in twelve monthly installments, pursuant to Section 9704(g)(1) of the Act, 26 U.S.C. 9704(g)(1).

 

. . . .

 

WHEREFORE, the Plaintiffs pray for the following relief:

(a) A declaration that Defendants South-East Coal, DLX, Inc. and Newco, Inc. are jointly and severally liable for all premiums owed the Combined Fund under the Coal Act; . . . .

 

Complaint, September 5, 1995.

On October 10, 1995, DLX, Inc. filed a motion to dismiss the complaint on the grounds that the order of this court entered on January 19, 1993 authorized the sale of the assets of South East Coal Company to DLX, Inc. free and clear of the claims of the plaintiffs. The motion to dismiss was briefed by the plaintiffs and the defendant DLX, Inc. and submitted to the District Court. By order entered on January 30, 1996, the District Court referred the case to the Bankruptcy Court for recommended findings of fact and conclusions of law.

CONCLUSIONS OF LAW:

The Coal Industry Health Benefits Act (the "Coal Act") is codified as chapter 99 of Subtitle J of the Trust Fund Code, which shares title 26 of the United States Code with the Internal Revenue Code. Chapter 99 is divided into four subchapters, A, B, C, and D.

Subchapter A, entitled "Definitions of General Applicability," consists of only one section, 9701, also entitled "Definitions of General Applicability."

Subchapter B, entitled "Combined Benefit Fund," is divided into four subparts. Part I deals with the establishment of the United Mine Workers of America Combined Benefit Fund and benefits available to beneficiaries of the fund. Part II deals with the financing of the fund by assessment of premiums against assigned operators, by the transfer of funds from the 1950 UMWA Benefit Plan, the 1974 UMWA Benefit Plan, and the Abandoned Mine Reclamation Fund. Part II also sets out the methodology for assignment of eligible industry retirees to current and former operators and provides for the enforcement of collection of premiums from assigned operators. Part IV deals with the effect of the legislation on claims or obligations arising in connection with the 1950 UMWA Benefit Plan and the 1974 UMWA Benefit Plan.

Subchapter C of chapter 99, entitled "Health Benefits of Certain Miners," is divided into two subparts. Part I requires signatory operators who are providing health benefits coverage to eligible beneficiaries under an Individual Employer Plan to continue to do so. Part II establishes the 1992 UMWA Benefit Plan to provide health care coverage to those formerly covered by the 1950 and 1974 UMWA Benefit Plans.

Subchapter D of chapter 99 provides for civil enforcement of obligations of operators to pay any amount required to be paid under chapter 99.

The plaintiffs allege the defendant DLX, Inc. is a successor to the defendant South East Coal Company within the meaning of the Coal Act and Federal common law of ERISA and labor law, and as such is jointly and severally liable for the amounts owed to the Combined Fund by South East Coal Company.

However, because of serious errors in draftsmanship, particularly in section 9701 of the Coal Act, the allegation that DLX, Inc. as a successor of South East Coal Company is a "related person" who under section 9704(a) is jointly and severally liable for amounts owed to the Combined Fund by South East Coal Company is not supported by the language of the Coal Act.

Problems noted in the draftsmanship of the Coal Act are discussed in order.

Problem No. 1: Subchapter A, section 9701 of the Coal Act, purports to contain definitions of general applicability. However, only the definitions appearing in subsections (a) and (d) of section 9701 are prefaced with the language "For purposes of this chapter," and clearly are of general applicability throughout chapter 99.

The definitions in subsections (b) and (c) of section 9701 are prefaced with the phrase "For purposes of this section," which makes such definitions applicable only to section 9701, the definitions section, and not throughout chapter 99 generally. This limitation on the definitions in subsections (b) and (c) renders some definitions therein essentially inoperative for purposes of construing other provisions of the Coal Act, particularly section 9704(a) on which the complaint in this action is based.

One could surmise that Congress intended all of the definitions in section 9701 to be of general applicability, as indicated by the headings of subchapter A and section 9701, and simply erred in crafting the statute. On the other hand, Congress knew how to make some of the definitions, those in subsections (a) and (d), of general applicability. It is not appropriate for the court to correct the statute based on surmise. If all the definitions appearing in subsections (b) and (c) are intended to be of general applicability throughout the Coal Act, Congress rather than the courts can best correct this oversight in draftsmanship.

In this instance Congress has limited the applicability of the definitions in subsection (c) of section 9701 of the Coal Act for purposes that are not readily discernable, but Congress must have had some reason for doing so. Unfortunately for the plaintiffs, their action appears to be grounded principally on the definition of "related persons" appearing in subsection (c)(2)(A) of section 9701, which appears to be applicable only in that section and not in section 9704(a) of the Coal Act.

By way of illustration, section 101 of the Bankruptcy Code, title 11 U.S.C. 101, contains definitions that apply "in this title," that is, throughout title 11. There are other sections of the Bankruptcy Code, as for example sections 522, 547, which contain definitions that apply only in those sections. There are other sections, as for example sections 741, 761, and 1101, which contain definitions which are applicable only to a particular chapter or subchapter of the Bankruptcy Code. Obviously, Congress knows how to limit or make general definitions in legislation.

The conclusion that the term "related persons" as defined in subparagraph (A) of paragraph (2) of subsection (c) of section 9701 applies only in section 9701 may seem absurd in view of the fact the term "related persons" does not appear in section 9701 other than in subsection (c)(2)(A). Nevertheless, that is what the statute says. It should be noted there is complementary language in paragraph (6) of subsection (c) which appears to make the terms previously defined in paragraph (1) "signatory operator," paragraph (4) "last signatory operator," and paragraph (5) "assigned operator," possibly applicable throughout chapter 99. There is no subsequent complementary language which incorporates the term "related persons" as defined in paragraph (2) or purports to make that term generally applicable throughout chapter 99. The term "related persons" is defined only for purposes of section 9701 and is left twisting in the wind in that section.

Problem No. 2 is best illustrated by setting out subsection (c) in full.

 

(c) Terms relating to operators. - For purposes of this section -

 

(1) Signatory operator. – The term "signatory operator" means a person which is or was a signatory to a coal wage agreement.

 

(2) Related persons. -

 

(A) In general. - A person shall be considered to be a related person to a signatory operator if that person is -

 

(i) a member of the controlled group of corporations (within the meaning of section 52(a)) which includes such signatory operator;

 

(ii) a trade or business which is under common control (as determined under section 52(b)) with such signatory operator; or

 

(iii) any other person who is identified as having a partnership interest or joint venture with a signatory operator in a business within the coal industry, but only if such business employed eligible beneficiaries, except that this clause shall not apply to a person whose only interest is as a limited partner.

 

A related person shall also include a successor in interest of any person described in clause (i), (ii), or (iii).

 

26 U.S.C. 9701(c)(1) and (2)(A) (emphasis added).

The complaint does not allege South East Coal Company is a signatory operator. It does allege South East Coal Company is an "assigned operator," which is defined as a signatory to which liability under subchapter B with respect to the beneficiary has been assigned. Presumably South East Coal Company was a signatory to a coal wage agreement and is a signatory operator. 26 U.S.C. 9701(c)(1) and (5).

"Signatory operator" and "related persons" are separately defined. The definition of "related person" does not include the "signatory operator," for obvious reasons. A signatory operator can hardly be related to itself.

Subsection (c) concludes with the provision that a related person includes a successor in interest of any person (related person) described in clause (i), (ii), or (iii). The statute omits to provide that a successor in interest to a signatory operator is a related person. Yet the plaintiffs' case is constructed largely on the allegation that DLX, Inc. is a "related person" because it is a successor in interest to South East Coal Company. Plaintiffs would have the court construe the last sentence of subsection (c) as if it reads "A related person shall also include a successor in interest of [the signatory operator or] any person described in clause (i), (ii), or (iii)." Words in brackets supplied. But that is not the way the statute reads. It does not define "related persons" to include a successor in interest to the signatory operator.

Compare the following language which appears in Part I of Subchapter C of the Coal Act which provides for health benefits to certain miners through Individual Employer Plans and a new 1992 UMWA Benefit Plan.

(c) Joint and several liability of related persons. - Each related person of a last signatory operator to which subsection (a) or (b) applies shall be jointly and severally liable with the last signatory operator for the provision of health care coverage described in subsection (a) or (b).

 

. . . .

 

(g) Rules applicable to this part and part II -

 

(1) Successor. - The term "last signatory operator" shall include a successor in interest of such operator.

 

(2) Reassignment upon purchase. – If a person becomes a successor of a last signatory operator after the enactment date, the last signatory operator may transfer any liability of such operator under this chapter with respect to an eligible beneficiary to such successor, and such successor shall be treated as the last signatory operator with respect to such eligible beneficiary for purposes of this chapter. Notwithstanding the preceding sentence, the last signatory operator transferring such assignment (and any related person) shall remain the guarantor of the benefits provided to the eligible beneficiary under this chapter. A last signatory operator shall notify the trustees of the 1992 UMWA Benefit Plan of any transfer described in this paragraph.

 

26 U.S.C. 9711(c), (g)(1), (g)(2). Part I of Subchapter C of the Coal Act consists of section 9711, which governs "Individual Employer Plans." Part II of Subchapter C of the Coal Act consists of section 9712, which governs the "1992 UMWA Benefit Plan."

The "Combined Fund" with which the litigation before the court is concerned, is not governed by Subchapter C of the Coal Act, but rather is governed by Subchapter B, sections 9702 through 9708. The above-referenced section 9711(g)(1) is not applicable with respect to Subchapter B, the Combined Fund. If the definition of "related person" set forth in section 9701(c)(2)(A) included a successor in interest of the operator, and that definition were deemed to be applicable throughout Chapter 99, section 9711(g)(1) would render section 9711(c) superfluous. See also 26 U.S.C. 9712(d)(4). Thus, while a successor in interest of an operator can by agreement become jointly and severally liable with the operator for providing health care under an Individual Employer Plan pursuant to 26 U.S.C. 9711 or for paying premiums to the 1992 UMWA Benefit Fund, the Coal Act does not mandate that a successor in interest of an operator shall be liable for payment of premiums to the Combined Fund pursuant to 26 U.S.C. 9704.

In this respect sections 9701(c) and 9711(g) are consistent in that neither section mandates that a successor in interest to a signatory operator shall be jointly and severally liable with the signatory operator for payment of premiums or for providing health care coverage. Section 9711(g) is permissive, not mandatory.

Problem No. 3: Subsection (c)(2)(B) of section 9701 provides that the relationship described in clauses (i), (ii), and (iii) of subparagraph (A) shall be determined as of July 20, 1992, or earlier if the signatory operator ceased business before that date. In this instance the defendants DLX, Inc. and Newco did not exist on July 20, 1992. They were both incorporated on August 11, 1992. Consequently, even if the definition of "related persons" were generally applicable throughout Chapter 99 and even if "related persons" included a successor in interest to the signatory operator, DLX, Inc. would still not be a related person if that determination were made as of July 20, 1992 or earlier, because DLX, Inc. did not exist on July 20, 1992.

The proponents of the Coal Act may have intended to accomplish by legislation the ends which the plaintiffs seek in this litigation. But it appears they may have to go back to the legislative drawing board, if there is merit in their contention that the result they seek in this action is consistent with the intent of Congress.

The Coal Act does not provide the plaintiffs with a peg on which to hang their claim against the defendant DLX, Inc.

 

Even assuming the Coal Act somehow imposes liability on DLX, Inc., as the successor in interest of South East Coal Company, for payment of premiums owed by South East Coal Company to the Combined Fund, the sale of assets of South East Coal Company to DLX, Inc. pursuant to section 363(f) of the Bankruptcy Code cut off such successor liability. Subsection (f) of section 363 of title 11 United States Code provides as follows:

(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if -

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;

(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

 

11 U.S.C. 363(f).

The order of this court entered on January 19, 1993, authorized the sale of the assets of South East Coal Company to DLX, Inc. "free and clear of any and all liabilities whatsoever, whether contingent, unliquidated, unmatured, or otherwise, including, but not limited to, any successor liability for claims for benefits under the Federal Black Lung Benefits Act (30 U.S.C. Section 901 et seq.) or the Kentucky Workers’ Compensation Act (KRS Chapter 342) that may be asserted after the date of the sale by former employees of the Debtor."

Sales of property of a bankruptcy estate free and clear of claims and interests of any entity other than the estate are authorized in recognition of the fact that if a purchaser were to acquire assets of a debtor in bankruptcy subject to the liabilities of the debtor, the price for which such assets are sold would be adjusted downward to reflect the totality of the liabilities the purchaser must assume. Much less money would be realized from the sale. Thus, the creditors of the debtor entitled to share in the proceeds of sale would actually bear the cost of any liabilities ostensibly passed on to the purchaser of assets. Generally, sales free and clear of liens and interests maximize the benefit to the bankruptcy estate and to creditors.

The plaintiffs argue that enforcement of this court's order of January 19, 1993 as against them violates their right to procedural due process because they received no notice of the pendency of the sale and were not afforded an opportunity to be heard. It is difficult to understand how South East Coal Company could have given notice of the sale to trustees of the Combined Fund when the Combined Fund did not come into existence until February 1, 1993, after the sale had been approved by the court. The earliest notice South East Coal Company had that the Combined Fund had a "claim" against it was on October 23, 1993, when the Combined Fund notified South East Coal Company of the assignment of beneficiaries and the assessment of premiums, which was nine months after entry of the order of January 19, 1993 approving the sale.

Plaintiffs further argue that the sale of bankruptcy estate assets pursuant to title 11 U.S.C. 363(f) free and clear of the "interests" of entities other than the bankruptcy estate did not affect the claim of the Combined Fund because as the holder of only an unsecured claim against the debtor the Combined Fund did not have an "interest" in the assets of the debtor sold to DLX, Inc. Thus, according to the plaintiffs the claim of the Combined Fund was not transferred to the proceeds of sale and thereby extinguished as a claim against the sold assets, but rather survived the sale not only as a claim against the debtor but also as a claim against DLX, Inc. as successor in interest of the debtor, and apparently as a claim against the assets acquired by DLX, Inc.

This argument was rejected by the court in In re Leckie Smokeless Coal Co., 99 F.3d 573 (4th Cir. 1996). The court held that the claims of the Combined Fund for premiums owed by the several chapter 11 debtors involved in that case constituted an interest in the assets of the bankruptcy estates of the debtors. Thus, the debtors in possession, as trustees, were permitted to sell the assets of the bankruptcy estates under their administration pursuant to title 11 U.S.C. 363(f) free and clear of the claims of the Combined Fund for premium payments. The court held that such a sale extinguished any claims the Combined Fund might have against the purchasers of the assets, even if it were determined the purchasers were successors in interest of the debtor signatory operators.

The court in the In re Leckie Smokeless Coal Co. case seemed uncertain as to the meaning of the phrase "any interest in such property" appearing in section 363(f), but correctly refused to limit the scope of the phrase to in rem interests in property of the estate. As a matter of fact, however, unsecured creditors of a debtor do have indirectly an in rem interest in property of the estate. This is because upon commencement of a case the trustee/debtor in possession by virtue of title 11 U.S.C. 544(a) has the rights and powers of a creditor that holds a judicial lien on property of the debtor as of the date of the petition and a writ of execution against property of the debtor returned unsatisfied as of the date of the petition. See H.R. 8200, 95th Cong., 1st Sess. (1977), p. 370. As beneficiaries of these liens acquired by the trustee by operation of law unsecured creditors do have an in rem interest in property of the debtor. This lien does not operate for the benefit of equity security holders as defined by title 11 U.S.C. 101(16) and (17), who also may have an interest in property of the debtor. It would seem the term "interest in … property" as used in section 363(f) was intended to encompass not only claims of creditors but interests of equity security holders as well. In any event, the court agrees with the ultimate conclusion of the court in the Leckie Smokeless Coal Co. case.

However, the Leckie Smokeless Coal Co. case is not dispositive of this case. All of the debtor coal companies whose assets had been or were to be sold in that case had filed their petitions for relief under chapter 11 of the Bankruptcy Code after the enactment of the Coal Act on October 24, 1992, and after the Combined Fund had come into existence on February 1, 1993, the date from which premiums could be assessed. Thus, the claims of the Combined Fund in those cases were obviously prepetition claims, partially fixed and partially contingent.

In the present case the debtor filed its petition for relief under chapter 11 of the Bankruptcy Code on October 12, 1990, more than two years prior to enactment of the Coal Act on October 24, 1992. The sale of the debtor’s assets to DLX, Inc. and Newco, Inc. pursuant to title 11 U.S.C. 363(f) free and clear of the interests of third party entities was approved by the court on January 19, 1993. This was prior to the date on which the Combined Fund was authorized to assess premiums against the debtor.

The plaintiffs concede that the 1950 UMWA Benefit Plan and the 1974 UMWA Benefit Plan, the assets of which were merged into the Combined Fund on February 1, 1993, were not creditors of the debtor on the date of bankruptcy.

The present case is more factually similar to In re Chateaugay Corp., 53 F.3d 478 (2d Cir. 1995). In that case the chapter 11 petitions of LTV Corporation and its subsidiaries and affiliates had been pending for approximately seven years when the Coal Act was signed into law. Preliminary to confirmation of their plans of reorganization LTV and a number of its related entities filed adversary proceedings seeking a determination with respect to the constitutionality of the Coal Act and their liability for the premiums owed to the Combined Fund. In one of the adversary proceedings LTV sought a determination that the Coal Act obligations constituted prepetition debts which must be disallowed because no timely proof of claim had been filed.

The court held the claims of the Combined Fund against the debtor entities were postpetition rather than prepetition claims.

The court held that the claims of the Combined Fund against the several chapter 11 debtors should be treated as requests pursuant to title 11 U.S.C. 503(a) for payment of an administrative expense. The court further held that the obligation owed by each of the debtors to the Combined Fund was a tax allowable under title 11 U.S.C. 503(b)(1)(B) as an administrative expense entitled to payment under title 11 U.S.C. 507(a)(1) as a first priority administrative expense. Id. at pages 496-498.

While this court does not necessarily agree the Coal Act obligations of signatory operators to the Combined Fund, a private organization, are taxes, it does agree obligations owed by the debtor in this case are postpetition claims.

The "claim" of the Combined Fund against the debtor, South East Coal Company, for unpaid premiums did not arise before the commencement of this case and therefore is not a prepetition claim as defined by title 11 U.S.C. 101(5); nor did the claim arise postpetition under any of the conditions specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of title 11, pursuant to which the claim might be treated as a prepetition claim.

The claim of the Combined Fund appears to have its nexus in conditions in the coal mining industry and conduct of coal mine operators in general rather than in the conduct of the debtor in this case. Congress has made the debtor liable for the premiums assessed by the Combined Fund because the debtor at some point in time prior to bankruptcy was a signatory of a National Bituminous Coal Wage Agreement with the United Mine Workers of America. There was no way anyone could predict that the act of signing such an agreement might be at some future date relied on by Congress as grounds for holding the debtor liable for the premiums the debtor now owes the Combined Fund. Thus, the fact the debtor was a party to a National Bituminous Coal Wage Agreement prior to bankruptcy is not a sufficient basis for determining the claim of the Combined Fund is a prepetition claim.

In expressing doubt that the claim of the Combined Fund is a postpetition first priority administrative claim for taxes the court relies in part on the legislative history set out in Davon, Inc. v. Shalala, 73 F.3d 1114 (7th Cir. 1996), at pages 1118-1119. Congress rejected the Coal Commission proposal of an industry-wide tax on all coal operators. Rather, Congress adopted an arrangement similar to the Coal Commission’s second alternative recommendation. Instead of imposing a new tax on all coal operators and establishing an agency of the federal government, Congress created a plan authorized to seek additional revenues from a broadened base of current and past signatories to NBCWA contracts. It is not clear that while eschewing the tax option Congress in fact adopted that option.

In any event, the Combined Fund would not be helped in this case by a finding that its claim is a first priority administrative expense claim for taxes. Such claims do not take precedence over the claims of secured creditors who received all of the proceeds of sale in this case. Absent their consent, secured creditors cannot be held liable for administrative expenses from which they derived no benefit. 11 U.S.C. 506(c). It cannot be said that these Coal Act premiums in any way were actual or necessary costs and expenses in preserving the estate in this case. The estate had been liquidated before the premiums were assessed.

In actuality the claim of the Combined Fund is merely a postpetition unsecured claim for which only the debtor South East Coal Company is liable. The claim is not an encumbrance on the assets of the debtor which were sold to DLX, Inc. and Newco, Inc. with approval of the bankruptcy court before the claim arose. The court has not been cited any rule of law that recognizes the interest of a creditor in assets sold by a debtor before the creditor’s claim arose. Obviously, in this instance the assets of the debtor were sold free and clear of the subsequent claim of the Combined Fund.

The defendant DLX, Inc. is not liable for the Coal Act premiums as a successor in interest of the debtor nor as a purchaser of the assets of the debtor.

For the reasons set forth herein, the motion of DLX, Inc. to dismiss the complaint against it should be sustained.

Dated:

 

By the court -

 

 

 

____________________

Joe Lee, Chief Judge

Copies to:

Linda J. Wallbaum, Esq.

David W. Allen, Esq.

Larry D. Newsome, Esq.

Corina M. Trainer, Esq.

D. Duane Cook