Stanford Law Review Volume 71 April 2019 ARTICLE Bankruptcy as Bailout: Coal Company Insolvency and the Erosion of Federal Law Joshua Macey & Jackson Salovaara* Abstract. Almost half of all the coal produced in the United States is mined by companies that have recently gone bankrupt. This Article explains how those bankruptcy proceedings have undermined federal environmental and labor laws. In particular, coal companies have used the Bankruptcy Code to evade congressionally imposed liabilities requiring that they pay lifetime health benefits to coal miners and restore land degraded by surface mining. Using financial information reported in filings to the Securities and Exchange Commission and in the companies’ reorganization agreements, we show that between 2012 and 2017, four of the largest coal companies in the United States succeeded in shedding almost $5.2 billion of environmental and retiree liabilities. Most of these liabilities were backed by federal mandates. Coal companies disposed of these regulatory obligations by placing them in underfunded subsidiaries that they later spun off. When the underfunded successor companies liquidated, the coal companies managed to get rid of their regulatory obligations without defaulting on the pecuniary debts they owed to their creditors. * Joshua C. Macey is Postdoctoral Associate, Cornell Law School. Jackson Salovaara works in the renewable energy industry. During the editorial process for this Article, Mr. Salovaara was employed by McKinsey & Company, a global consulting firm. McKinsey offers consulting services to coal companies, including on restructuring matters. Mr. Salovaara did not advise any coal companies while employed at McKinsey, nor did he have access to nonpublic information on any coal company. We wish to thank Akhil Amar, Vince Buccola, Tony Casey, Matthew Christiansen, Don Elliott, Bill Eskridge, Shannon Grammel, Kelly Holt, Bruce Huber, Rich Hynes, Melissa Jacoby, Dan Lashof, Bruce Markell, Daniel Markovits, Jerry Mashaw, John Morley, Adam Pritchard, Mikael Salovaara, David Skeel, Adam Sorensen, Tom Steyer, David Weiskopf, Shelley Welton, and Jay Westbrook for their edits, comments, and support. Finally, we are especially grateful to the editors of the Stanford Law Review for outstanding editorial support. All errors are our own. 879 Bankruptcy as Bailout 71 STAN. L. REV. 879 (2019) Our analysis of the coal industry also has implications for bankruptcy theory. First, we provide a novel reason for questioning the view that bankruptcy proceedings should prioritize Chapter 11 reorganization over Chapter 7 liquidation. Recent coal bankruptcies show that companies are using the Bankruptcy Code to externalize costs onto third parties, despite statutes designed to force coal companies to internalize those costs. We argue that reorganization should not undermine Congress’s efforts to force firms to internalize the costs they impose on others. When a reorganization threatens to do so, liquidation is the better method for resolving bankruptcies. Second, our account poses challenges for scholars who argue that parties in bankruptcy proceedings should be able to contract around Chapter 11. While there are compelling reasons to allow parties to do this, some mandatory federal rules are necessary to prevent creditors and debtors from negotiating around federal regulatory programs. And third, the use of Chapter 11 to discharge regulatory obligations whose purpose is to further congressional policy impedes the government’s ability to adopt certain efficient regulatory designs. Liabilities that can be discharged generally have to have been incurred before the bankruptcy petition. Such policies often take the form of market-based regulations or performance standards. Moreover, bankruptcy judges treat liabilities that can be converted to money judgments as ordinary contracts while giving injunctions what amounts to an effective priority claim. As a result, bankruptcy law creates incentives for regulators to adopt command-and- control regulations—a common regulatory design that is disfavored in scholarly circles for being less efficient than the alternatives. We conclude by arguing that many of the strategies coal companies have used to discharge these federal regulatory obligations are illegal. 880 Bankruptcy as Bailout 71 STAN. L. REV. 879 (2019) Table of Contents Introduction ............................................................................................................................................................ 882 I. The Regulatory Landscape .................................................................................................................. 893 A. The Surface Mining Control and Reclamation Act (SMCRA) .............................. 893 B. The Coal Act ...................................................................................................................................... 899 C. Bankruptcy: A Primer .................................................................................................................. 901 D. Local Impacts of Coal Company Bankruptcies .............................................................. 904 II. How Coal Companies Avoid Federal Regulation Through Bankruptcy .................. 906 A. Methodology ..................................................................................................................................... 907 B. Recent History of Coal Bankruptcies .................................................................................. 910 1. Patriot Coal .............................................................................................................................. 912 2. Alpha Natural Resources .................................................................................................. 918 3. Arch Coal ................................................................................................................................... 926 4. Peabody Energy ..................................................................................................................... 927 C. Bankruptcy Code Provisions That Have Eroded Environmental and Labor Laws ................................................................................................................................ 935 1. Rejecting regulatory obligations ................................................................................. 936 2. Abandoning regulatory obligations ........................................................................... 938 3. Transferring regulatory obligations ......................................................................... 940 4. Inflating asset values ........................................................................................................... 942 III. A Critique of the Continuation Bias ............................................................................................... 942 A. Bankruptcy Law’s Continuation Bias .................................................................................. 943 B. Continuation Bias Should Not Undermine Federal Laws ....................................... 944 C. Continuation Bias Should Not Undermine Market-Based Regulations or Performance Standards .......................................................................................................... 945 IV. Solutions ......................................................................................................................................................... 951 A. Judicial Solutions............................................................................................................................. 952 1. No spinning off regulatory obligations ................................................................... 952 2. Judicial priority ..................................................................................................................... 953 B. Legislative Solutions ..................................................................................................................... 955 1. No payment deferrals ......................................................................................................... 955 2. Accurate accounting ........................................................................................................... 955 3. First priority through legislative decree ................................................................. 956 4. Extend the look-back period .......................................................................................... 956 Conclusion ............................................................................................................................................................... 957 Appendix .................................................................................................................................................................. 958 881 Bankruptcy as Bailout 71 STAN. L. REV. 879 (2019) Introduction In March 2017, Arch Coal and Alpha Natural Resources, respectively the second- and third-largest coal producers in the country,1 were honored at a summit held at President Trump’s Mar-a-Lago resort for their recent emergence from bankruptcy.2 Alpha received a “Reorganization of the Year” award3 and Arch won a “Restructuring Deal of the Year” award.4 Arch’s CEO praised the company’s restructuring agreement as “establish[ing] a solid foundation for long-term success.”5 A bankruptcy attorney who represented Arch said that