Summary
describing settlement in which Coal Act obligor paid Trustees lump sum in exchange for, inter alia , release of "claims for the funding of the provision of health care benefits by the 1992 Plan"
Summary of this case from Holland v. Westmoreland Coal Co. (In re Westmoreland Coal Co.)Opinion
Case Nos. 01-15288 (BRL) through, 01-15302, 01-15308 through, 01-15315 (BRL), Jointly Administered
February 9, 2004
WEIL, GOTSHAL MANGES, LLP, Attorneys for the Debtors, New York, New York, By: Jeffrey L. Tannenbaum, Esq., Lawrence J. Baer, Esq.
JONES DAY, Attorneys for International Steel Group, Inc., New York, New York, By: Richard H. Engman, Esq.
CHADBOURNE PARKE LLP, Attorneys for St. Paul Fire and Marine Insurance Co., New York, New York, By: Howard Seife, Esq.
MEMORANDUM DECISION ALLOWING CLAIM
Bethlehem Steel Corporation ("BSC") and its affiliates, as debtors and debtors in possession (collectively with BSC, the "Debtors") and International Steel Group Inc., object to certain administrative claims filed by St. Paul Fire and Marine Insurance Company ("St. Paul") and St. Paul Medical Liability Insurance Company ("St. Paul Medical" and, together with St. Paul, the "Sureties").
Background
On October 15, 2001 (the "Commencement Date"), each of the Debtors commenced a case under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). On April 23, 2003, this Court entered an order authorizing the Debtors to sell substantially all of their assets to ISG Acquisition Inc. ("ISG"), a subsidiary of International Steel Group Inc. The sale occurred on May 7, 2003 (the "ISG Closing Date"). This Court entered an order confirming the Debtors' Plan of Liquidation Under Chapter 11 of the Bankruptcy Code (the "Plan") on October 22, 2003 (the "Confirmation Order").
The Coal Act
Generally, the Coal Industry Retiree Health Benefit Act of 1992, 26 U.S.C. § 9701-9722 (the "Coal Act") allocates legal responsibility for funding the health benefits of certain coal industry retirees and their beneficiaries (collectively, the "Coal Act Retirees") among companies that formerly employed the retirees. More specifically, the Coal Act has three components to fund health benefits provided to Coal Act Retirees: (1) the United Mine Workers of America Combined Benefit Fund (the "Combined Fund"); (2) a statutory requirement that certain employers continue their existing contractual individual employer health plan ("IEP"); and (3) the United Mine Workers of America 1992 Benefit Plan (the "1992 Plan"). The history of the Coal Act is fully set forth in several published decisions and will not be repeated here. See Lewittes v. Connors (In re Olga Coal Co.), 159 F.3d 62, 63-65 (2d Cir. 1998); LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478, 481-86 (2d Cir. 1995), cert. denied, 516 U.S. 913 (1995) (" Chateaugay I").
The Coal Act requires each of certain last signatory operators to maintain an IEP as long as any eligible Coal Act Retirees live and such last signatory operator and any of its related persons remain "in business." See id. § 9711(a). A Coal Act Retiree is eligible for coverage under an IEP if such Coal Act Retiree was receiving, or was eligible to receive, benefits under an IEP as of February 1, 1993 and actually retired from the coal industry on or before September 30, 1994. See id. § 9711(b)(1). Once a last signatory operator and its Related Persons are no longer "in business," Coal Act Retirees who formerly received health benefits under such operator's IEP receive health benefits from the 1992 Plan. See id. § 9712(b)(2)(B).
Any "related person" (a "Related Person") of a last signatory operator is jointly and severally liable for the obligation to maintain an IEP. See id. § 9711(c).
The 1992 Plan provides lifetime health benefits to certain Coal Act Retirees who retired before October 1, 1994 and are not otherwise covered by the Combined Fund or an IEP. See id. § 9712(b)(2). Under the Coal Act, a 1988 last signatory operator (a "Last Responsible 1992 Plan Operator") is obligated to finance the provision of such health benefits. See id. § 9712(d)(1). A Last Responsible 1992 Plan Operator must comply with the following to meet its financing obligation: (1) payment of an annual prefunding premium to fund health benefits provided by the 1992 Plan to "orphaned retirees" (the "1992 Plan Prefunding Premiums"); (2) payment of monthly per beneficiary premiums to fund health benefits provided by the 1992 Plan to certain Coal Act Retirees attributable to such Last Responsible 1992 Plan Operator (the "1992 Plan Monthly Premiums"); and (3) provision of security in the form of a bond, letter of credit or cash escrow in an amount equal to a portion of the projected future cost to the 1992 Plan of providing health benefits to Coal Act Retirees attributable to such Last Responsible 1992 Plan Operator (the "1992 Plan Security"). See id. § 9712(d)(1)(C).
Each Related Person of a Last Responsible 1992 Plan Operator is jointly and severally liable for the obligations of such Last Responsible 1992 Plan Operator to the 1992 Plan. See id. § 9712(d)(4).
Upon the effective date of the Coal Act on February 1, 1993, each of BSC and BethEnergy Mines Inc. ("BethEnergy"), became an obligor under the Coal Act. Specifically, (i) BSC and BethEnergy became assigned operators for purposes of the Combined Fund and (ii) BethEnergy, as a last signatory operator and a Last Responsible 1992 Plan Operator, became liable for the provision of health benefits to certain Coal Act Retirees through an IEP (the "Bethlehem IEP") and/or by the 1992 Plan. As a Last Responsible 1992 Plan Operator, BethEnergy was required to pay 1992 Plan Prefunding Premiums and 1992 Plan Monthly Premiums and to provide 1992 Plan Security.
Additionally, many of BSC's direct and indirect, debtor and non-debtor subsidiaries and affiliates are Related Persons of BSC and BethEnergy (collectively, the "Bethlehem Related Persons" and together with BSC and BethEnergy, the "Bethlehem Coal Act Parties"). Under the Coal Act, the Bethlehem Related Persons are jointly and severally liable for the Coal Act obligations of BSC and BethEnergy (and BSC is jointly and severally liable for the Coal Act obligations of BethEnergy) simply by virtue of having been members or successors in interest to a member of a corporate control group that included BethEnergy as of July 20, 1992.
On January 25, 1999, St. Paul issued surety bond KA2838 (the "Coal Act Bond") in the penal sum of $40,611,543 on behalf of BethEnergy to the Trustees of the United Mine Workers of America 1992 Benefit Plan (the "1992 Plan Trustees") for the benefit of the 1992 Plan pursuant to the Coal Act. On April 15, 2001, the penal sum of the Coal Act Bond was adjusted to $40,932,612.
Upon consummation of the sale of the Debtors' assets to ISG Acquisition Inc. on May 7, 2003 (the "ISG Sale"), the Bethlehem Coal Act Parties ceased to be "in business," and their obligations to the Combined Fund and to maintain the Bethlehem IEP ceased. At such time, the Coal Act Retirees formerly receiving health benefits under the Bethlehem IEP became entitled to receive health benefits from the 1992 Plan. As a result of the termination of the Bethlehem IEP and pursuant to the terms of the Coal Act Bond, the 1992 Plan demanded payment of the Coal Act Bond. St. Paul paid the entire penal sum of the Coal Act Bond to the 1992 Plan on July 11, 2003.
To facilitate the ISG Sale and to settle certain claims of the 1992 Plan, the 1992 Plan Trustees, the Combined Fund and its trustees (such parties, collectively, the "Coal Act Entities"), the Bethlehem Coal Act Parties and BSC entered into an Agreement and Release, dated April 22, 2003 (the "Coal Act Agreement"). Pursuant to the Coal Act Agreement, BSC paid $10,000,000 to the Coal Act Entities and the Coal Act Entities, among other things, (i) released all claims against all non-debtor Bethlehem Coal Act Parties, (ii) released all prepetition unsecured claims and administrative claims against all Debtors other than BSC and BethEnergy, (iii) released all administrative claims against BSC, (iv) expressly retained all claims against BethEnergy, id., and (v) covenanted not to bring or maintain any legal action against any Bethlehem Coal Act Parties in respect of claims for the funding of the provision of health care benefits by the 1992 Plan to Coal Act Retirees. Additionally, the Coal Act Agreement preserved any rights that St. Paul might have in respect of the Coal Act Bond, but also provided that nothing in the Coal Act Agreement would create any rights that St. Paul would not otherwise have if the Coal Act Agreement had never been executed.
St. Paul asserts that the entire penal sum of the Coal Act Bond has been paid by St. Paul to or for the benefit of the 1992 Plan. As a result of such payment, St. Paul claims an administrative expense claim in the amount of $9.835 million and a general unsecured claim in the amount of $30,232,612 against the Debtors, both arising from St. Paul's alleged ability to subrogate to alleged administrative expense claims of the 1992 Plan against the Debtors under the Coal Act.
St. Paul alleges that the 1992 Plan has, among other claims, claims against BethEnergy and the other Debtors (as Bethlehem Coal Act Related Parties) for (i) an unpaid 1992 Plan Prefunding Premium (the "Unpaid Annual Prefunding Premium") that allegedly became due under the Coal Act in January 2003 and (ii) six 1992 Plan Monthly Premiums (collectively, the "Unpaid Monthly Premiums") that allegedly became due between the time of the ISG Sale in May 2003 and the confirmation of the Plan of Liquidation in October 2003. St. Paul alleges that such claims are administrative expenses pursuant to section 503(b)(1)(B) of the Bankruptcy Code.
The Debtors and ISG assert that the (i) Coal Act premium obligations constitute prepetition claims because they relate back to when the Coal Act was enacted in 1993, (ii) Coal Act premiums are not taxes entitled to administrative priority, (iii) St. Paul has no right to subrogate to the 1992 Plan's claims against the Debtors because the 1992 Plan's claims have not been satisfied in full, and (iv) equitable considerations prohibit St. Paul from asserting its subrogation rights.
Discussion
Despite the Debtors' and ISG's arguments to the contrary, this court is bound by the holding of the Second Circuit Court of Appeals in Chateaugay I. In Chateaugay I, the Second Circuit held that Coal Act payment obligations constitute taxes which are entitled to administrative expense status. See Chateaugay I, 53 F.3d at 498 ("we agree with the district court that `the Coal Act obligations are appropriately described as `taxes' due to their overwhelmingly involuntary nature, their explicitly stated public purpose, and their obvious potential to be imposed pursuant to the taxing power'"). Both the Fourth and the Tenth Circuit Courts of Appeal have ruled similarly. See Rushton v. UMWA 1992 Benefit Plan (In re Sunnyside Coal Co.), 146 F.3d 1273, 1278 (10th Cir. 1998) ("the undeniably involuntary nature of these assessments as crafted by the Coal Act to directly remediate continuing crises in the nation's production of coal qualifies them as taxes" and "Coal Act premiums are taxes incurred by the estate and entitled to administrative expense priority under § 503(b)(1)(B)"); Adventure Resources, Inc. v. Holland, (In re Adventure Resources, Inc.), 137 F.3d 786, 795 (4th Cir.), cert. denied, 142 L.Ed.2d 328 (1998) ("there is no doubt, then, that the assessments meet this circuit's definition of a `tax.'"). See also United Mine Workers of Am. v. Leckie Smokeless Coal Co. (In re Leckie Smokeless Coal Co.), 99 F.3d 573, 583 (4th Cir. 1996) ("Coal Act premiums are taxes").
Both parties have advanced compelling arguments pro and con as to the effect of the current jurisprudence affecting the precedent of Chateaugay I as it applies to the issues presented here. However, it is not for this court to speculate as to how the Second Circuit might rule today with respect to the Debtors' attempts to factually and legally distinguish the Chateaugay I precedent. The facts and issues are sufficiently aligned to keep this Coal Act case within the confines of the predecessor cases.
The Debtors and ISG also argue that Chateaugay I is not and should not be dispositive because the test adopted by Chateaugay I for determining whether a particular obligation is a tax has been modified by the Supreme Court's decision In re Reorganized CFI Fabricators of Utah, Inc., 518 U.S. 213 (1996) (" CFI 1"). The Debtors and ISG contend that the CFI 1 decision narrowed the "public purpose" prong of the test used by the Second Circuit in Chateaugay I. The Debtors argue that Coal Act obligations would fail the more narrowly tailored public purpose prong of CF I 1 because the objective of the contributions is not to defray the expenses of the government, but rather, to finance a private obligation. In CFI 1, however, the Supreme Court affirmed the continuing vitality of the " Feiring line of cases" upon which the Second Circuit began its analysis in Chateaugay I. See id. at 222. Moreover, in In re Sunnyside Coal Co., the Tenth Circuit addressed a similar argument made by the trustee in that case. 146 F.3d 1273. The Tenth Circuit noted that the Supreme Court "employed the same functional analysis followed in Chateaugay I and asked whether the particular exaction "is an enforced contribution to provide for the support of government." 146 F.3d 1277. Accordingly, the Tenth Circuit concluded that " CFI is not inconsistent with Chateaugay nor does it require a different analysis here." Id. See also In re CFI Fabricators of Utah, Inc., 150 F.3d 1293 (1998) (" CFI 2") (discussing CFI 1 and utilizing Chateaugay I test to determine whether PBGC claim qualified as a "tax.")
In CFI 1 the Court held that the 10% exaction under ERISA on an accumulated funding deficiency was a "penalty" and not a "tax" entitled to priority status under the Bankruptcy Code.
The analysis in Chateaugay I began with reliance on New York v. Feiring, 313 U.S. 283 (1941) which held a tax priority under the 1938 Bankruptcy Act "extends to those pecuniary burdens laid upon individuals or their property, regardless of their consent, for purpose of defraying expenses of government or undertakings authorized by it." In concluding that the 1992 Coal Act premium payments were taxes, Chateaugay applied criteria summarized by the Ninth Circuit in In re Lorber Indus. of Calif., Inc., 675 F.2d 1062, 1066 (9th Cir. 1982), as to whether the payments are:
(a) an involuntary pecuniary burden, regardless of name, laid upon the individuals or property;
(b) imposed by, or under authority of the legislature;
(c) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it;
(d) under the police or taxing power of the state.
Lastly, the Tenth Circuit found that Coal Act obligations satisfy the public purpose prong because the Coal Act's purpose "is to support the government in its effort to maintain stability in the coal industry." Id. at 1277. The Tenth Circuit found that "Congress thus created a statutory obligation to serve a unique purpose, not unlike, for example, the imposition of unemployment taxes on employers or the assessment of uninsured motor vehicle `taxes' on licensed drivers." Id.
The Debtors and ISG also seek to distinguish Chateaugay I because in that case the Coal Act was enacted subsequent to the debtor's filing of its chapter 11 petition ( see footnote 5, supra). In this case, although the Coal Act was enacted prior to the Debtors' bankruptcy filing, the Debtors did not have an enforceable obligation to pay monthly premiums to the 1992 Plan during the prepetition period. See In re Sunnyside Coal Co., 146 F.3d at 1279. Cf. Buckner v. Westmoreland Coal Company (In re Westmoreland Coal Company), 213 B.R. 1 (Bankr. D. Colo. 1997) (Breach of debtor's IEP as well as the 1992 Plan's coverage of IEP beneficiaries occurred prepetition). The Coal Act only requires companies to pay monthly premiums to the 1992 Plan if there are eligible retirees receiving health benefits from the 1992 Plan. See 26 U.S.C. § 9712(d)(1)(B). As long as a company provides benefits to its retirees directly through its IEP, these retirees are not enrolled in the 1992 Plan. Consequently, as long as an IEP remains in place, the 1992 Plan has no enforceable claim against the employer for monthly premiums. Therefore, the Debtors were not obligated to pay monthly premiums until the date that their IEP was terminated, which occurred postpetition. See Adventure Resources, Inc. v. Holland, 193 B.R. 787, 795-96 (S.D. W. Va. 1996), aff'd in part, rev'd in part on other grounds, 137 F.3d 786 (4th Cir. 1998), cert. denied, 142 L.Ed.2d 328 (1998) (the lower court explained that so long as an employer provides benefits for these retirees directly through the employer's own plan, as required under 26 U.S.C. § 9711, the beneficiaries are not enrolled in the 1992 Plan. This means the employer has no 1992 Plan beneficiaries attributed to it and the Funds have no enforceable claim for per beneficiary premiums. When Adventure ceased the maintenance of its § 9711 plan in 1994, however, there arose in the Funds an "enforceable claim" for per beneficiary premiums and the premiums thus accrued on that date.).
Moreover, the Second Circuit has made clear that Coal Act obligations "are exclusively statutory in origin and cannot be considered a `pay-back' for pre-petition labor." Chateaugay I, 53 F.3d at 497; cf. CF I (2), 150 F.3d at 1299, 1300 ("The nature of the Coal Act claims is fundamentally different from the [ERISA] claim presented in this case because the Coal Act claims are entitled to priority as a tax.")
Lastly, the Debtors and ISG argue that St. Paul cannot subrogate to the rights of the 1992 Plan because (i) St. Paul has not satisfied the Debtors' obligations to the 1992 Plan in full, and (ii) St. Paul's recovery through subrogation would be inequitable.
Section 509(a) of the Bankruptcy Code provides that "an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment." 11 U.S.C. § 509(a). Subrogation is an equitable remedy which permits one who pays another's debt to stand in the shoes of the latter party and assert whatever rights that party held. See In re Chateaugay Corporation, 89 F.3d 942, 947 (2d Cir. 1996) "An essential prerequisite to the right of equitable subrogation is that the person seeking subrogation must have made a payment of another's obligation." Pandora Industries, Inc. v. Paramount Communications Inc. (In re Wingspread Corporation), 145 B.R. 784, 789 (S.D.N.Y. 1992), aff'd mem., 992 F.2d 319 (2d Cir. 1993). And that payment must fully satisfy the debt owed the creditor. See Aetna Casualty Surety Company v. LTV Steel Company, Inc. (In re Chateaugay) 94 F.3d 772 (2d Cir. 1996) ( "Chateaugay II").
In addressing the requirement of "payment in full," however, the Second Circuit has held that when an underlying creditor compromises its claim against a debtor for less than full value, without any additional recourse against the debtor, the creditor's claim will be deemed to be "paid in full" for purposes of section 509(c) of the Bankruptcy Code and the secondary obligor will not be subordinated. Chateaugay II, 94 F.3d at 778-79. In light of the Coal Act Agreement, and the release of any further claims against the Debtors, St. Paul meets the requirement of "payment in full."
Lastly, even assuming that there is an equity component under section 509(a) of the Bankruptcy Code ( see In re Northview Motors, Inc., 202 B.R. 389, 400-01 (Bankr. W.D.Pa. 1996)), the Debtors and ISG have failed to demonstrate that the exercise of St. Paul's subrogation rights would be unjust. Conclusion
For the reasons set forth above, the Debtors' and ISG's objections to St. Paul's claims are denied and St. Paul's request for an administrative priority claim in the amount of $9.835 million and a general unsecured claim in the amount of $30,232,612 is granted.
SETTLE AN ORDER CONSISTENT WITH THIS DECISION.