FAQs: What You Need to Know About Coal Bankruptcy

Coal bankruptcies involve a complex process that affects workers and communities across Central Appalachia. We have compiled responses below to clarify and explain the impacts of this process as well as the responsibilities left behind when a company files for bankruptcy.

What is bankruptcy?

Bankruptcy is a legal process that companies pursue when they are no longer able to pay their debts and thus, essentially, declare that the company can no longer continue in its present form. There are two common forms of company bankruptcy: chapter 7 bankruptcy and chapter 11 bankruptcy. In chapter 7 all of the company’s assets are sold off in order to pay debts to creditors and the company is liquidated. In chapter 11, a company negotiates with creditors to agree to new terms, reorganize and shed debt, and emerge as a financially healthy organization. 

What is a liability?

A liability is something that you are, or in this case a coal company, is held legally responsible for. Specifically, in the context of bankruptcy, we are referring to financial obligations or responsibilities. 

What happens to reclamation, black lung, and pension liabilities when a coal company goes bankrupt?

Over the last few months, more and more workers and communities have been impacted by coal company bankruptcy. Some of these recent bankruptcies have even left workers without paychecks. In addition to failing to pay their workers, there are other responsibilities that coal companies may abandon once they have filed for bankruptcy. For example, their obligations to support miners with black lung disease and reclaim abandoned mine lands. However, it is not always clear when and how these liabilities are abandoned or covered into the future. We hope to provide some clarity below!

How do coal companies pay for black lung disability benefits? 

In order to operate, a coal company is required by the Department of Labor (DOL) to have insurance to cover the expected costs of their black lung benefit liability (i.e. cumulative cost of benefits paid to existing and expected future claims). The DOL determines how much insurance a company is required to have. Coal companies have been permitted to self-insure but according to GAO testimony in 2019 before the Committee on Education and Labor, in 2015 the DOL stopped permitting or reauthorizing self-insurance as they reviewed their procedures and requirements for self-insurance. Typically, only very large companies have been permitted to self-insure. Other companies must insure their liability through a bond issued by a surety company, by creating a deposit or trust, or by submitting a letter of credit. The DOL is responsible for determining the quantity of collateral/insurance required and for many companies that have gone bankrupt in the last few years, that collateral has been insufficient to cover the company’s black lung liability.

Another way that coal companies contribute to paying for benefits is through an excise tax on coal that funds the Federal Black Lung Disability Trust Fund. All companies that are currently operating pay into the fund but this payment is separate from their insurance coverage. Then, that fund is available to pay out benefits to miners who worked for companies that are no longer operating and that did not have any or sufficient insurance coverage. 

What/who pays for black lung disability benefits of a bankrupt company

When a company files for bankruptcy, there are a few different ways that black lung liabilities might be transferred or covered into the future. If the bankruptcy is chapter 11 and is a reorganization, then the black lung liability of the company may be retained by the original company or  passed on to the new company. The employees of the new company may actually continue to be covered by the insurance of the bankrupt parent company (i.e. the case of Arch Coal). Alternatively, the amount of liability may be reduced by the bankruptcy court if the new company argues that it will only be profitable if it is permitted to shed the liability. If liability is shed, and the insurance that the bankrupt company has posted with the DOL is insufficient, then miner benefits will be covered by the Federal Black Lung Disability Trust Fund. The trust fund revenues are dependent on an excise tax on each ton of coal mined for domestic use. 

Are UMWA health care and pensions the responsibility of coal companies? 

Over the years, the UMWA has entered into several coal wage agreements to ensure acceptable wages as well as pensions and health care benefits for retired miners. The first agreement was in 1946. This agreement, known as the Krug-Lewis Agreement, was between the U.S. Government and the UMWA and it established the health care and pension fund. Coal operators accepted it and began to pay into the fund. Since then, the UMWA has continued to negotiate coal wage agreements with coal operators that determine coal companies’ contributions to the fund. The Coal Act, passed in 1992, mandated that companies continue to pay into the fund for the cost of their retirees (that retired prior to 1994) and those miners who had an employer that was no longer in operation would be paid out of transfers of surplus pension assets in combination with interest from the Abandoned Mine Land fund, a fund that receives revenues from a fee charged to coal companies as legislated under the Surface Mining and Control Act (1977). 

Who will pay for UMWA health care and pensions now that Murray Energy is bankrupt? 

While not all coal companies paid into UMWA health care and pensions, Murray Energy was one of the last remaining companies that did. Now that they have declared bankruptcy, the number of UMWA miners without an operating employer has increased. Therefore, the healthcare and pensions fund has relied more heavily on funding from AML fund interest and additional funding from the general treasury. See this information sheet to learn more about the funding mechanisms. Most recently, at the end of 2019, the Bipartisan American Miner’s Act was passed in the end of the year appropriations bill and this act authorizes up to 750 million dollars from the general treasury each year to contribute to paying health care and pensions. 

Note: UMWA health care benefits are separate from black lung medical and pension benefits. 

How does the Surface Mining and Control Act mandate company responsibility to reclaim mine lands?

In order to receive a mining permit, the Surface Mining and Control Act (1977) requires that a coal company acquire a reclamation bond. There are different kinds of bonds and different states have different requirements: self-bonds (permitted if company provides evidence of ‘good’ financial health), pool bonds, and surety bonds (3rd party). Most, but not all, states have done away with self-bonding. Self-bonding is a coal company’s promise to reclaim the land. This form of bonding is approved by the regulator when a coal company meets particular financial criteria. Pool-bonding is, again, only available in some states (i.e. KY and VA). A 2018 report by the Alliance for Appalachia explains pool bonding clearly: “Pool bonding ​requires individual operators to pay a fraction of their total anticipated reclamation costs into a common pool. If any single operator goes bankrupt, the shared pool is tapped to pay the reclamation costs. The amount of funds necessary to cover potential reclamation costs, and therefore required to be maintained in the pool at any time, is typically determined on the basis of an independent actuarial report” (p. 5). 

A surety bond is a three-party transaction between the coal company, the regulatory authority (i.e. the state or federal Office of Surface Mining), and a surety company that acts similarly to insurance. When a surety company writes a surety bond, it guarantees the mining company’s completion of the reclamation plan approved in the permit.

Who will pay for reclamation if the operating coal company goes bankrupt?

In bankruptcy, a new company may acquire one of the old company’s permits. Then, that company must provide reclamation bonding. If the permit is not acquired by any new company, the regulatory authority can revoke the permit and begin bond forfeiture proceedings. Bond forfeiture is when the regulatory authority seizes any financial resources that the company has provided for reclamation associated with that permit, including surety bonds.  The surety can either undertake reclamation itself (usually by contracting the work out) or it can forfeit the bond amount to the regulatory authority, typically a state government agency, at which point reclamation becomes the regulatory authority’s responsibility.  

If the surety company chooses to undertake reclamation, it must comply with all reclamation requirements of the approved permit and regulatory program. However, oftentimes, the actual cost of reclamation is higher than what the bond covers. If that is that case, the surety will likely forfeit the bond to the regulatory authority, requiring the regulatory authority to undertake reclamation. The issue then becomes whether the regulatory authority has the funds necessary to complete the reclamation properly.  In Kentucky, in 2011, the federal regulatory authority called the Office of Surface Mining (OSM) determined that the surety bonds that the state was permitting were insufficient to cover the costs of reclamation. In response, in 2013, Kentucky set up a pool bond as a backstop for those insufficient surety bonds. In Kentucky, if the surety bond amount is insufficient to cover the costs of reclamation, the state can draw from a pool of money that is paid into by most permittees in the state. Unfortunately, it is likely that this bond pool will be insufficient as well. 

Conclusion

Bankruptcy and the distribution of coal company liabilities is a complex process and is further made difficult to understand by the lack of transparency in bankruptcy processes.  Coal bankruptcies affect our communities in many different ways whether through job loss, loss of funding for important health and retirement benefits, or through threats to community health and safety caused by lack of reclamation. In addition, the current legal code that governs bankruptcy processes does not prioritize a coal company’s responsibility to use what remaining money it has in bankruptcy to take care of workers and communities. Instead, it generally prioritizes payments to creditors such as financial lenders. Though not yet passed, there are some current bills in Congress that seek to address this issue of priority.  

If you have any questions or are interested in learning more about bankruptcy please reach out to rshelton@aclc.org.