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Patriot investigating claim Peabody fraudulently formed Patriot

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In a court motion filed April 2, Patriot Coal requested leave to conduct discovery on Peabody Energy Corporation in order to investigate if Patriot's spin-off from Peabody constituted "an actual or constructive fraudulent transfer."

The investigation would answer a question the United Mine Workers of America have posed repeatedly since announcement of Patriot's bankruptcy last July. Did Peabody Energy purposefully spin Patriot Coal off to rid itself of liabilities and geographical challenges contained in its Eastern operations?

"Patriot is a Peabody creation," the motion filed by Patriot states. "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. And Peabody dictated the contractual terms that govern Patriot's ongoing obligations to Peabody after the spinofff."

Peabody Energy has repeatedly asserted similar claims are false and that Patriot was highly successful at its launch in 2007.

"A series of other unforeseen events affecting all coal producers followed − all on Patriot's watch," Peabody said in a prepared statement made prior to the filing. "These included an unprecedented global financial crisis; development of low-cost shale gas that reduced coal use; burdensome regulation by the U.S. EPA that dramatically increased Patriot's environmental compliance costs; an increase in safety regulations that, in turn, increased operating costs; and a significant reduction in the price of Patriot's major product: metallurgical coal."

In a statement on behalf of Peabody regarding developments yesterday, the company said it has been participating in good faith negotiations related to the routine discovery process of the bankruptcy. 

"Opposing counsel has now asked the bankruptcy court to grant information requests that are clearly unreasonable," Peabody stated. "We anticipate that the court will order this process to proceed on more reasonable grounds.

"We believe that any claims brought against Peabody Energy in relation to the launch of Patriot Coal would be without merit and we will vigorously defend against them in court."

An official with Patriot said the matter could not be discussed due to it involving pending litigation.

If the investigation revealed a fraudulent transfer, it could mean a "sizable recovery"for Patriot and its creditors.

"By spinning-off Patriot, Peabody rid itself of approximately $600 million of retiree healthcare liabilities, along with hundreds of millions of dollars of other liabilities, including environmental reclamation obligations and black lung benefits," Patriot wrote in its filing. "Peabody openly touted the benefits of the spinoff, as it improved Peabody's 'operating and geologic risk,' focused Peabody on 'high-growth, high-margin markets,' and '[r]educe[d] legacy liabilities by nearly half.'"

According to the Patriot filing, Peabody ensured that Patriot's transition team of former Peabody employees could not bring with them certain documents and emails.

"In the midst of the critical transition week leading up to the spinoff, all Future Patriot Employees were informed that they were required to select — by hand — emails that they wished to have moved to their email account at Patriot," the filing states. "Such employees had to perform a similar process for any hardcopy documents they wanted to retain. Peabody also required these employees to certify in writing that they had not kept any documents, electronic or otherwise, that did not 'solely relate to Patriot' and that they had 'not taken or caused to be taken any [d]ocuments that relate in whole or in part to Peabody as it will be configured after the spin-off of Patriot.'"

The non-email documents, Patriot said, were then reviewed and "exclusive property of Peabody" was removed.

Those documents from pre-spinoff, Patriot claims, "unquestionably holds relevant information not available from any other source."

Patriot said it disagreed with a number of obligations and provisions of the spin-off including a provision in which Patriot was to deliver Peabody coal from its operation at below-market value.

Many of the documents, the filing state, has since been automatically deleted in Peabody's system and may only exist on daily backup tapes. Though the two companies have been meeting during the past three months, the parties could not agree on five issues.

According to Patriot, Peabody will not provide documents from the Future Patriot Employees, any documents post-spinoff, refuses to restore backup tapes for more than four restoration points over a three period, refuses to share the discovery with the UMWA representative in the bankruptcy case and Peabody insists on using a search system Patriot says would overlook critical documents.

"For its part, the UMWA has loudly, repeatedly, and correctly pointed out that many of its retirees—whose healthcare liabilities the Patriot entities must modify in order to survive and emerge from bankruptcy—retired from operations owned by Peabody, long before Patriot even existed," Patriot wrote in its filing.

Details about Patriot's attempt to resolve its bankruptcy outside of a recovery from Peabody was reported Tuesday. A large protest of issues related to the bankruptcy was reported Monday.  

The State Journal detailed the history and events leading up to the formation and subsequent bankruptcy of Patriot in an article last September.