UPDATE 2-Bankrupt Patriot Coal can reject collective bargaining -court

Wed May 29, 2013 7:55pm EDT

* Cuts would save $150 million a year

* Pension contributions would cease; healthcare to outside fund

* Union vows appeal

By Nick Brown and Tom Hals

May 29 (Reuters) - Bankrupt Patriot Coal Corp can reject collective bargaining agreements, cease pension contributions and convert retiree healthcare to an outside fund as part of its plan to save $150 million a year in labor costs, a court ruled on Wednesday.

Patriot Coal, which filed for bankruptcy last year, might have been a victim of unwarranted optimism about future prospects, but that unions shared some blame, said Judge Kathy Surratt-States of the U.S. Bankruptcy Court in St. Louis.

"There is likely some responsibility to be absorbed for demanding benefits that the employer cannot realistically fund in perpetuity," she wrote in a 102-page opinion.

The United Mine Workers of America, which represents 1,700 current Patriot workers and 13,000 retirees and their relatives, vowed to appeal the ruling. The union has planned a public rally for June 4 in Henderson, Kentucky.

"Despite this ruling, the UMWA's effort to win fairness for these active and retired workers is by no means over," UMWA President Cecil Roberts said in a statement.

Patriot praised the court's decision, calling the cuts "essential changes" that will allow it "to achieve savings that are critical to our reorganization."

Patriot's current proposal would cease pension contributions and convert healthcare to a voluntary employees' beneficiary association, or VEBA, funded by $15 million in up-front cash and $300 million in profit-sharing contributions. The union would receive a 35 percent equity stake in post-bankruptcy Patriot, which it could sell to help fund the VEBA. The company's proposal would also reduce wages and decrease paid time-off.

Patriot's labor dispute is a thorny one. The company has said the cuts are not a matter of stinginess but necessity, insisting that it would be forced to liquidate without them. But the union believes the proposal violates a decades-old principle in the coal industry that workers are entitled to lifetime benefits.

That fundamental belief is rooted in a 1946 strike in which U.S. President Harry Truman seized the nation's coal mines. His administration signed an agreement with the UMWA establishing an industrywide pension and healthcare program, and the union has historically bargained to preserve those benefits in exchange for making other concessions.

But as an ever-shrinking work force is left to shoulder the burden, the promise is becoming harder to keep.

The UMWA has sued Peabody Energy Co, which created Patriot through a 2007 spinoff, in hopes that the company will cover any losses it sustains at the hands of Patriot.

In a case filed in West Virginia federal court, the union has accused Peabody of creating Patriot as a dumping ground for its unprofitable assets, setting it up to fail. The union alleges that Peabody and Arch Coal, which spun off a unit later acquired by Patriot, are still profitable and should remain on the hook for healthcare.

Wednesday's bankruptcy court ruling "makes it more important than ever for the architects of this travesty, Peabody Energy and Arch Coal, to take responsibility for the obligations they made to thousands of retirees who are now at imminent risk," Roberts said in his statement.

The judge's order acknowledged that Peabody has already assumed healthcare costs for a portion of the retirees, and the judge denied a separate effort by Patriot to hold Peabody accountable for costs.

Peabody said in a statement that it will "continue to meet its obligations, as affirmed by today's rulings."

Bankruptcy rules give companies formidable leverage to abandon union labor contracts. They can abrogate the deals if they can show that concessions are crucial to their survival and that they made a good-faith effort to reach them consensually.

In Patriot's case, the matter played out over a week-long hearing earlier this month. Patriot argued that it would be forced to liquidate without major concessions, while the union provided metrics claiming to show that Patriot could survive without imposing drastic cuts.

The case is In Re Patriot Coal Corp, U.S. Bankruptcy Court, Eastern District of Missouri, No. 12-51502.

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