The United Mine Workers suffered a stinging defeat this week when a district judge in Birmingham, Ala., ruled that coal producer Walter Energy Inc. can sell assets to secured lenders mostly in exchange for debt while insulating the buyers from liability for retiree benefits.
The bankruptcy court in Birmingham approved the sale in early January, in the process declaring that the buyers would not be the debtor’s successor and holding that the sale would be free and clear of Walter Energy’s liabilities under the Coal Act. The benefit fund appealed and lost in a March 8 opinion by District Judge R. David Proctor.
The case revolved around the federal Coal Act of 1992, which requires coal producers to make contributions to a private trust fund that provides health and welfare benefits for retired mine workers. The fund contended that the contributions are taxes, thus invoking the Tax Anti-Injunction Act, or AIA. The fund also argued that the debtor’s obligations under the Coal Act did not amount to an “interest” under the “free and clear” provisions of Section 363(f). Judge Proctor ruled against the fund on those and other issues.
The Coal Act is part of the Internal Revenue Code, thus presumably invoking the AIA, which deprives courts of subject matter jurisdiction to enjoin collection of taxes. If the argument held water, the bankruptcy court could not have enjoined the fund from attempting to collect from the buyers as successors to Walter Energy under the Coal Act.
Judge Proctor conceded that circuit court decisions from the 1990s hold that contributions under the Coal Act are taxes in the constitutional sense. Those cases were decided, however, before the Supreme Court’s 2012 decision in the Affordable Care Act case known as NFIB. That opinion stands for the proposition that not all taxes are covered by the AIA.
NFIB says that labels applied by Congress suggest whether the AIA applies. Since Congress said that the “individual mandate” under the Affordable Care Act was a penalty, not a tax, the AIA did not apply.
The Coal Act is a “funding mechanism for a multi-employer benefit plan, not a taxing scheme,” Judge Proctor said. The AIA does not apply, in his opinion, because the Coal Act “was not designed to raise revenue to fund governmental or government-sponsored endeavors.”
Even if Coal Act contributions are taxes, the benefit fund still loses, Judge Proctor said, because of a 1996 decision from the Fourth Circuit called Leckie. That case held that the AIA does not apply when Congress has not provided another method in the Coal Act for challenging the tax.
The fund next argued that the assets could not be sold “free and clear” of Coal Act obligations because the liabilities are not an “interest” under Section 363(f).
Judge Proctor said that a minority of courts take the narrow view and hold that interests are only in rem rights such as liens. “To effectuate the purposes of the Bankruptcy Code,” he said, the correct reading is broader and covers other obligations that flow from ownership of property.
Although the Eleventh Circuit has not yet taken a position, five other circuits have adopted the broader reading, Judge Proctor said. He cited Leckie as holding that Section 363(f) cuts off liabilities of a successor.
Judge Proctor ruled against the benefit fund on a third ground by holding that the purchasers are not successors.
Although the Eleventh Circuit has yet to rule on the question, he said that the sale was an asset purchase and that the fund has “not explained how a buyer of assets can become a ‘successor’ to an entire defunct business.” To turn the lenders into successors would be “wholly at odds with the congressional policy behind chapter 11.”