* Company seeks court approval of cuts to pensions, healthcare * Union stages rally; conflicting reports on attendance * Patriot seeks to hold former parent liable for benefits By Tim Bross and Nick Brown ST. LOUIS/NEW YORK, April 29 (Reuters) - Patriot Coal Corp on Monday told a judge it would liquidate if not allowed to make drastic cuts to employee pension and healthcare benefits, as coal miners protested on the first day of a week-long court hearing. Patriot, which filed for bankruptcy in July, told the U.S. Bankruptcy Court in St. Louis it planned to cut $150 million in annual labor costs by ceasing pension contributions and converting healthcare to an outside fund. The United Mine Workers of America (UMWA) has condemned the proposals as "nowhere near" fair, but a Patriot lawyer said it is a matter of survival. "If denied, we are headed for a catastrophic end," Patriot attorney Elliot Moskowitz said. "We will liquidate." In rallies staged by the UMWA outside the courthouse, 16 protesters were arrested. The union boasted that the rallies drew 6,000 attendees, though the St. Louis Metropolitan Police Department reported 2,000. 'THE BLOOD OF THE MINER' Under bankruptcy law, if companies cannot negotiate compromises with unions, they can seek court permission to impose cuts unilaterally. But the companies must show that the cuts are crucial to survival, and that a good-faith effort has been made to achieve them cooperatively. Patriot has offered to 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. Benefits for about 13,000 retired workers and their dependents are at stake. During cross-examination on Monday, a union lawyer asked Gary Robertson, part of Patriot's in-house legal team, to estimate a dollar value for the proposed 35 percent stake, but Robertson said the question would more appropriate for Patriot's financial advisers. Employees' claims in bankruptcy are subordinate to secured debt like loans and bonds, meaning worker benefits are often the first place bankrupt companies look for cost savings. This is especially pertinent in the coal industry, where benefits for generations of retirees are shouldered by an ever-shrinking workforce. Fred Perillo, a lawyer for the union, cited the risk of an underfunded VEBA that could leave employees "staring into the abyss." "The cost of coal must bear the blood of the miner," Perillo said, an allusion to former British Prime Minister David Lloyd George. Perillo said generations of union workers have made concessions on wages and other items in exchange for the promise of lifetime healthcare and pension benefits. Moskowitz, Patriot's counsel, said the union wanted to take control of the company, having proposed a counteroffer to own a 57 percent stake in Patriot. PEABODY'S ROLE Both the union and Patriot have tried to shift some of the burden to former parent Peabody Energy Co, which created Patriot in a 2007 spinoff. In a separate lawsuit that was heard but not decided on Monday, Patriot is seeking a declaration that liability for the benefits rests with Peabody, not Patriot. In a similar lawsuit in a federal court in West Virginia, the union has advanced the same argument, accusing Peabody of burdening Patriot with its heaviest legacy liabilities, effectively ridding itself of labor costs while setting Patriot up to fail. The union says Peabody should fund retiree benefits if Patriot is unable to do so. The union's argument is rooted in a decades-old practice by the UMWA of compromising on wages and other factors to protect pension and retiree healthcare. Under language in various industry contracts, union workers contend they are guaranteed cradle-to-grave coverage. Peabody has tried to stay out of the fray, insisting that it has no legal obligation to foot the bill for the union's benefits. In a statement, Peabody spokesman Vic Svec said Patriot was "highly successful" following the spinoff and had "significant assets" that helped its market value "quadruple in less than a year." "Peabody has lived up to its obligations and continues to do so," Svec said. Inside the courtroom, about half of the 60 seats were occupied by miners and their families, many wearing t-shirts saying "Peabody promised, Patriot lied." Patriot will continue to call witnesses on Tuesday and Wednesday. The union is expected to argue its case and call its own set of witnesses. In one minor victory for Patriot, Judge Kathy Surratt-States ruled on Monday that the union's pension and healthcare funds could not intervene in the case, giving credence to Patriot's argument that the funds, which are aligned with the union, would effectively give the union two chances when cross-examining witnesses. Patriot Chief Executive Bennett Hatfield is slated to take the stand on Wednesday, and the hearing is expected to run through Friday. Patriot also has several thousand non-union employees, with whom it reached new, consensual labor terms last week. The bankruptcy is In Re Patriot Coal Corp, U.S. Bankruptcy Court, Eastern District of Missouri, No. 12-51502.