Buying a distressed business is risky. Even an asset buyer can get stuck with a distressed company’s liabilities under certain federal and state laws, such as the bankruptcy laws.
The coal industry is a current poster child for distressed businesses. Five coal companies filed for bankruptcy protection in the past 3 years.
Coal companies often have very significant union liabilities, including pension and health care liabilities owed to current and retired employees. For some coal companies selling its assets to a new buyer is only viable if the deal does not come with the seller’s union liabilities.
Seller was a very distressed operator of three coal mines. Rail and port disruptions and adverse mining and geological conditions, as well as the enormous capital infusions required to update and operate its coal mines led to a liquidity crisis rendering Seller incapable of meeting its obligations.
Seller was unable to work its way out of its liquidity problems without the help of chapter 11 bankruptcy protection.
So, Seller filed for chapter 11 bankruptcy protection in an Alabama bankruptcy court with $55,000 in cash and $175 million in debt.
At the time of the bankruptcy filling Seller had a collective bargaining agreement with the union covering retirement and health benefits for current and retired employees.
Seller shopped the business, but no potential buyer would take the company with the union liabilities. Going forward Seller would pay, on average, approximately $10.3 million per year on account of its union obligations. In addition, Seller’s pension plan was massively underfunded and in critical status, to the tune of approximately $1.2 billion.
Therefore, Seller asked the court to permit it to sell the business free of the union liabilities. The court agreed to do so; specifically noting that without the sale, the mines would be closed, and the union employees would be unemployed.
This case is referred to In Re Mission Coal Company, Case No. 18-04177-TOM11 (Jointly Administered), United States Bankruptcy Court, N.D. Alabama, Southern Division, (March 1, 2019).
Buying a distressed business out of bankruptcy free and clear of union liabilities is not a slam dunk.
Bankruptcy law only permits it if the court is convinced that it is the only possible way of selling the business as a going concern, and saving jobs of Seller’s union employees.
The judge described in 141 numbered paragraphs and in as many footnotes the exhausting process Seller and the union went through to try to save the union employee and retiree pension and health benefits.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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