Eleventh Circuit Rules that Coal Act Payment Obligations Arising in 2016 Were Discharged by 1995 Chapter 11 Plan

Whether claims have been discharged in bankruptcy is a frequently litigated issue. This is particularly so in chapter 11 cases involving mass tort claims that may have technically "arisen" when the debtor manufactured or sold products before filing for bankruptcy, but where claimants may not become aware of their injuries until long after confirmation of a chapter 11 plan discharging pre-bankruptcy claims. The scope of a bankruptcy discharge also arises in chapter 11 cases where a debtor's payment obligation under a pre-bankruptcy or a pre-plan confirmation contract is not triggered until after confirmation of a chapter 11 plan.

The U.S. Court of Appeals for the Eleventh Circuit recently examined this question in U.S. Pipe & Foundry Co. v. Holland (In re U.S. Pipe & Foundry Co.), 32 F.4th 1324 (11th Cir. 2022). A divided panel of the Eleventh Circuit ruled that certain debtors' alleged obligation to pay retiree health benefits mandated by the Coal Industry Retiree Health Benefit Act of 1992, 26 U.S.C. §§ 9701 et seq. (the "Coal Act"), were discharged in 1995 upon the confirmation of a chapter 11 plan, even though the payment obligation was not triggered until 2016. According to the majority, the payment obligation was a "claim" in 1995 and was therefore discharged upon confirmation of the debtors' plan.

Discharge of Claims in Bankruptcy

By design, the Bankruptcy Code is intended to deal with as many of a debtor's pre-bankruptcy obligations as possible in keeping with its core principles of affording the debtor with a "fresh start" and promoting equality of distribution among similarly situated creditors. This mandate is facilitated in part by the Bankruptcy Code's broad definition of "claim" to include nearly every conceivable pre-bankruptcy debt or obligation.

A non-liquidating corporate debtor generally will be discharged from every "claim" that existed as of the bankruptcy petition date (and some that arose during the bankruptcy case) upon the confirmation of its chapter 11 plan of reorganization (or the completion of payments under the plan, in the case of a small business reorganization). See 11 U.S.C. §§ 1141, 1192. In particular, section 1141(d)(1) of the Bankruptcy Code provides that, with certain exceptions, the confirmation of a chapter 11 plan "discharges the debtor from any debt that arose before the date of such confirmation," and certain debts that are deemed to have arisen prepetition (e.g., prepetition lease and financial contract rejection claims), whether or not a proof of claim has been filed or deemed filed with respect to such debt, such claim has been "allowed," or the claimant has accepted the chapter 11 plan.

Section 101(12) defines "debt" as a "liability on a claim."

Section 101(5) defines "claim" as a:

(A) Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) Right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

The term "claim" is therefore "coextensive" with the term "debt" (see Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. 552, 558 (1990)), and "[b]y fashioning a single definition of 'claim' in the Code, Congress intended to adopt the broadest available definition of that term." See Collier on Bankruptcy ¶ 101.05 (16th ed. 2022) (citing In re Udell, 18 F.3d 403 (7th Cir. 1994)).

A "claim" may also include "a cause of action or a right to payment that has not yet accrued or become cognizable." Id. (citing and discussing cases). Even so, the Bankruptcy Code's broad definition of "claim" is not limitless. For example, someone injured in the future due to a chapter 11 debtor's prepetition conduct does not have a prepetition "claim" unless the person had a prepetition relationship with the debtor or its products. Id. In addition, "even if a claim exists, due process principles may prevent the claim from being discharged, or rendered unenforceable" under certain circumstances. Id. 

The Coal Act

Congress enacted the Coal Act in 1992 in response to the underfunding of United Mine Workers of America ("UMWA") health plans and the threatened vitality of health care benefit funds provided by coal companies to their employees. The Coal Act established obligations for coal companies that were or had been parties to collectively bargained coal wage agreements as of the year of enactment.

The Coal Act requires such "signatory companies" to continue to fund individual employer retiree health plans ("IEPs"). 26 U.S.C. §§ 9704(a), 9711(a), 9712(d)(1), (3). In addition, the Coal Act created two funds—the "Combined Fund" and the "1992 Fund" (collectively, the "Coal Act funds")—to provide health benefits to employees not covered by IEPs who retired before October 1994. Id. §§ 9702 and 9712. Pre-existing UMWA health benefit funds were absorbed into the Combined Fund. The 1992 Fund was created as a "back-stop" for retirees who were not covered by other funds, as well as retirees who might later be "orphaned" when a coal company's IEP was terminated.

Each of the Coal Act funds is financed by premiums assessed against "assigned operators" or their "related persons," which is defined broadly to include companies under common control and companies that are a "member of [a] controlled group of corporations." Such operators and their related persons are jointly and severally liable for all Coal Act obligations. Id. §§ 9701(c)(2)(A), 9704(a), 9711(c)(1), and 9712(d)(4). Whether an entity is a related person under the Coal Act was fixed on July 20, 1992. Therefore, entities that were related persons in 1992 but are no longer related persons are still related persons, and entities that are now related to a coal company, but were not in 1992, are not. Id. § 9701(c)(2)(B).

When a covered coal company and all related persons are no longer in business, the premium amount is reduced to zero. An entity remains in business so long as it "conducts … any business activity" or "derives revenue from any business activity, whether or not in the coal industry." Id. § 9701(c)(7).

U.S. Pipe

In 1989, Walter Industries, Inc., a holding company that owned home building, natural resources development, and industrial manufacturing companies, and its subsidiaries (collectively, the "Jim Walter companies") filed for chapter 11 protection in the Middle District of Florida. In 1992, with bankruptcy court approval, the Jim Walter companies created a benefit plan for certain employees (the "1992 Plan") under section 9712 of the Coal Act. The 1992 Plan provides benefits to miners who are owed, but are not receiving, benefits under section 9711 of the Coal Act. Covered entities that failed to provide health care benefits to their eligible retirees in an IEP under section 9711 of the Coal Act were required by section 9712 to pay monthly premiums to the 1992 Plan.

At the time the 1992 Plan was established, the Jim Walter companies included United States Pipe and Foundry Company, LLC ("USP"), JW Aluminum Company, and JW Window Components LLC (collectively, the "Appellants"), as well as coal miner and methane gas extractor Jim Walter Resources, Inc. ("JW Resources"). Because of their common ownership, the Appellants and JW Resources were "related persons" under the Coal Act.

In 1995, the bankruptcy court confirmed a chapter 11 plan for the Jim Walter companies (among other entities), including the Appellants and JW Resources. The trustees of the 1992 Plan did not file a proof of claim for future Coal Act obligations and did not object to confirmation of the plan. However, the trustees did file a proof of claim in the JW Resources bankruptcy for past-due payments owed under certain wage agreements and postpetition Coal Act fund premiums allegedly entitled to administrative priority.

The chapter 11 plan discharged all "[c]laims" against the companies that "arose at any time before the [e]ffective [d]ate" unless those claims were dealt with by the plan. The Jim Walter companies—known post-bankruptcy as Walter Energy, Inc. ("Walter Energy")—expressly assumed the obligations to fund retiree health benefits, and the plan confirmation order "authorized and directed" Walter Energy "to fund retiree health benefits."

Several years after the bankruptcy court confirmed the plan, the Appellants ceased their affiliation with Walter Energy and exited the coal industry.

In 2015, Walter Energy again filed for chapter 11 protection, this time in the Northern District of Alabama. Walter Energy then sought court approval of a sale of substantially all of its assets, which the court granted. In connection with the sale, the court entered an order terminating Walter Energy's obligations to provide benefits to retirees under the 1992 Plan and to pay premiums to the Coal Act funds. Walter Energy stopped providing benefits and paying premiums in April 2016.

In July 2016, the 1992 Plan trustees notified the Appellants that they were liable for premiums owed to the Coal Act funds and for retiree benefits under IEPs as "related persons." The Appellants refused to pay, and the trustees sued them in federal district court seeking, among other things, a declaratory judgment that the Appellants were liable under the Coal Act.

The Appellants responded by reopening their 1989 Florida bankruptcy cases and filing an adversary proceeding asserting that the Coal Act claims were discharged in 1995 and that the trustees' claims were therefore barred. One of the Appellants—USP—moved for partial summary judgment in that litigation. The Florida bankruptcy court, however, granted summary judgment to the trustees. It reasoned that the premiums must be either a "contingent claim or a tax." According to the bankruptcy court, if the premiums were a contingent claim in 1995, that claim would have been discharged under the 1995 chapter 11 plan. However, the court noted, if the premiums were a tax, claims for those premiums would have arisen only when the premiums were assessed, so they would not have been discharged.

The bankruptcy court concluded that the Coal Act premiums were "unquestionably a tax"—and "because they are taxes assessed on a periodic basis (either annually or monthly), each period gives rise to a new liability," and the premiums therefore were not discharged. It did not address the trustees' request to compel the Appellants to provide health care benefits directly to retirees under section 9711 via IEPs.

The district court affirmed on appeal. It agreed with the bankruptcy court that, because Coal Act premiums are taxes, claims for the premiums arose only when the premiums were assessed. The district court also addressed the trustees' claim under section 9711, concluding that only debts can be discharged in bankruptcy, and not "obligations giving rise to [ ] debts" like the requirement to provide benefits.

The Appellants appealed to the Eleventh Circuit.

The Eleventh Circuit's Ruling

A divided three-judge panel of the Eleventh Circuit reversed.

Writing for the majority, Chief U.S. Circuit Court Judge William H. Pryor explained that the outcome of the appeal hinged on whether there was a "claim" against the Appellants in 1995. If so, he reasoned, the claim was discharged when the bankruptcy court confirmed the Jim Walter companies' chapter 11 plan. He divided his discussion into two parts. First, Judge Pryor explained why the trustees' claim for premiums to the Coal Act funds was discharged in 1995. Second, he explained why the trustees' claim under section 9711 of the Coal Act and for premiums to the 1992 Plan was discharged in 1995. 

Noting that the definition of "claim" in section 101(5) of the Bankruptcy Code is given the broadest meaning, Judge Pryor concluded that whether the Appellants' "liability on a claim" based on their pre-plan confirmation conduct was discharged depended on whether they had a relationship with the Coal Act funds prior to confirmation. He ruled that they did. According to Judge Pryor: 

The Trustees held "claims" for future [Coal Act fund] premiums in 1995 because their right to payment was based on the [Appellants'] pre-confirmation conduct. In 1995, the [Appellants'] liability to the retirees had already been fixed; only the amount owed was uncertain.

U.S. Pipe, 32 F.4th at 1330.

Judge Pryor acknowledged that the amount of the eventual claim in 1995 was "uncertain," but reasoned that the uncertain amount meant merely that the claim was "unliquidated" and "unmatured" or "contingent," and such claims are discharged upon the confirmation of a chapter 11 plan. Moreover, he noted, the trustees were clearly aware of the existence of their claims because: (i) the Coal Act was enacted nearly three years before the effective date of the Jim Walter companies' chapter 11 plan: (ii) the Appellants' joint and several liability to pay premiums began nearly two-and-a-half years before that date; and (iii) the trustees were aware of the Appellants' Coal Act liability because the trustees filed a proof of claim for such liabilities in the bankruptcy case of JW Resources.

The majority determined that the trustees misplaced their reliance on the Second Circuit's decision in LTV Steel Co. v. Shalala (In re Chateaugay II), 53 F.3d 478 (2d Cir. 1995). According to Judge Pryor, although the Second Circuit held that "Coal Act liability" for post-confirmation premiums "was not dischargeable in bankruptcy," the court "failed to provide any rationale for its holding." U.S. Pipe, 32 F.4th at 1332. The trustees attempted to connect the dots, arguing that the Second Circuit's holding must have been based upon its separate conclusion that that Coal Act premiums are "taxes" that "accru[e]" when they are assessed and become due (meaning that postpetition, pre-confirmation premiums were entitled to administrative priority). Id. Nevertheless, Judge Pryor held that the obligation to pay such premiums, whether or not they are taxes, and whether or not accrued or cognizable, gives rise to a dischargeable claim because the Appellants' liability turned on their pre-confirmation conduct. Id. at 1333. In support of the majority's holding, Judge Pryor distinguished those laws—like state unemployment tax laws or antidiscrimination laws—that "continue to impose obligations on a debtor after bankruptcy proceedings because the basis of an entity's liability is not pre-confirmation conduct." Id. at 1331. "By contrast," he wrote, "an entity's liability under the Coal Act to pay premiums to the Combined Fund turns solely on the companies' pre-confirmation conduct. The Coal Act imposed liability on the companies on July 20, 1992 …." Id. Thus, according to Judge Pryor, Chateaugay II "has no bearing on when claims for those premiums arise." Id.

Similarly, the majority held that the trustees' claims under section 9711 of the Coal Act arising from the Appellants' obligation as "related persons" to provide health care benefits directly to retirees under IEPs and the trustees' claims for premiums due under the 1992 Plan were also discharged in 1995. According to Judge Pryor, the trustees' alleged right under section 9711 was a "claim" because, under section 9711 and the terms of the 1992 Plan, the trustees, in the event of a breach of the 1992 Plan, had a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment." Such a breach occurred prior to 1995, Judge Pryor explained, and the trustees' asserted right to the equitable remedy of specific performance is a "claim" that was discharged in 1995. "Like with the claim for Combined Fund premiums," he wrote, "the Trustees and the [Appellants] had the requisite relationship, and the [Appellants'] liability under section 9711 is based solely on the companies' pre-confirmation conduct and was fixed in 1992." Id. at 1333.

Finally, the majority ruled that the claim asserted by the trustees for 1992 Plan premiums was a "claim" discharged in 1995 even though at that time it was unliquidated and required estimation. In so ruling, Judge Pryor explained, "we join the many courts that have treated future Combined Fund and 1992 Plan premiums as similarly dischargeable in bankruptcy." Id. at 1336 (citing Holland v. Westmoreland Coal Co. (In re Westmoreland Coal Co.), 968 F.3d 526, 531, 536, 544 (5th Cir. 2020); In re Walter Energy, Inc., 911 F.3d 1121, 1157 (11th Cir. 2018); In re Alpha Nat. Res., Inc., 552 B.R. 314, 326–28 (Bankr. E.D. Va. 2016); In re Horizon Nat. Res. Co., 316 B.R. 268, 274–79 (Bankr. E.D. Ky. 2004); In re Bethlehem Steel Corp., 2004 WL 601656, at *2 (Bankr. S.D.N.Y. Feb. 9, 2004)).

The majority accordingly reversed the district court's judgment and remanded the case for further proceedings. 

Circuit Judge R. Lanier Anderson III concurred in part and dissented in part. Judge Anderson agreed with the majority that the Appellants' liability for the Combined Fund premiums was discharged in 1995. However, he did not agree that the Appellants' obligation to fund an IEP under section 9711 or to pay premiums to the 1992 Plan under section 9712 were discharged because they did not arise until 2016.

Judge Anderson explained that, under section 101(5)(B), a claim exists only if an equitable remedy gives rise to a right to payment. He reasoned that a creditor can have no such right before there is a breach of performance by the debtor, which did not occur in this case until 2016. 

Judge Anderson viewed the majority's opinion as being "in tension with the established law that a bankruptcy confirmation plan does not discharge claims that arise on account of post-confirmation conduct of the debtor." Id. at 1342.

Outlook

The majority and dissenting opinions in U.S. Pipe provide a detailed explanation of the scope of a bankruptcy discharge and the Bankruptcy Code's definition of a "claim" subject to discharge. Consistent with the Bankruptcy Code's broad definition of that term, the Eleventh Circuit majority concluded that Coal Act obligations were discharged by the Appellants' 1995 chapter 11 plan even though the payments did not become due and payable until more than two decades later. 

With its ruling in U.S. Pipe, the Eleventh Circuit appears to have split with the Second Circuit regarding the dischargeability of pre-confirmation Coal Act obligations. Significantly, the majority in U.S. Pipe noted that the Coal Act fund trustees asserting the claims were well aware of the existence of the Appellants' payment obligations in 1995, yet did not assert those claims in their bankruptcy. Thus, the due process considerations present in some other cases (such as mass tort cases with unknown future claimants) were not a factor.