BCS Barclays PLC

A bankruptcy judge cleared Patriot Coal Corp. to sell its remaining assets, including its Federal mining complex in West Virginia, at a September auction.

Judge Keith Phillips of the U.S. Bankruptcy Court in Richmond, Va., on Monday said he would sign off on the Sept. 9 auction. An affiliate of the Virginia Conservation Legacy Fund will lead off the bidding with its offer to take responsibility for $400 million in liabilities—workers' compensation, black lung and environmental—tied to the assets.

The auction proposal had received objections from Patriot's unsecured creditors' committee and lender agent Barclays Bank PLC regarding the $5 million breakup fee Patriot sought to offer VCLF should it lose the bidding. However, those were resolved during the hearing with an agreement to require any winning bidder's offer to provide enough cash to cover the fee.

The VCLF bid, which doesn't include cash, does feature a pledge to issue new equity to Patriot's creditors.

This month, VCLF attorney Andrew Troop told the bankruptcy court that through the deal, the nonprofit hopes to balance its quest to reclaim land through reforestation efforts while honoring the region's tradition of coal production.

"Its desire here is to…reclaim land, operate responsibly, provide some return to creditors who otherwise it looks like would receive nothing or very little in connection with this plan, preserve jobs and enter into a new workable resolution with the United Mine Workers" of America union, he said at an Aug. 18 hearing.

At Monday's hearing, UMWA union attorney Sharon Levine said VCLF has reached out to discuss the fate of union workers should it acquire the Federal mine and other assets. While negotiations have been "very difficult," she said, the union hopes to put a proposal to a vote by its members "without any consideration of a strike."

Rival bids for the Federal mine and Patriot's other assets are due Friday. Blackhawk Mining LLC has offered to buy the bulk of Patriot's mines, in exchange for which it would issue up to $653.3 million in debt.

Following the Sept. 9 auction, Patriot is hoping to secure approval of the winning bids at a Sept. 16 hearing on a debt-payment plan that is expected to face creditor objections, a long to-do list that prompted Judge Phillips to remark "good luck with that."

Patriot is due back in court Tuesday for a trial on its bid to reject its contracts with the UMWA, which represents 2,500 active and laid-off Patriot employees. Patriot says it must exit the burdensome contracts in order for it to have a business worth selling. The union, which is negotiating with the company's potential buyers, has said the move isn't necessary.

Patriot sought chapter 11 protection in May after emerging from an earlier court restructuring that saw its workers and retirees take benefit cuts. Friday, Peabody Energy Corp. moved to reopen the prior chapter 11 case in a bid to protect a deal in which it promised to pay $310 million over the next four years to help fund retiree health benefits. The deal resolved a long-running fight over who was responsible for the significant retiree liabilities that came with the mining units that Peabody spun off to create Patriot in 2007.

The UMWA has argued that if Patriot gets clearance to reject the settlement in its current bankruptcy, Peabody would still be obligated to honor its funding pledge, which Peabody disputes. It has asked the St. Louis bankruptcy court, where Patriot filed its prior chapter 11 case, to weigh in.

Write to Jacqueline Palank at jacqueline.palank@wsj.com

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(END) Dow Jones Newswires

August 31, 2015 12:15 ET (16:15 GMT)

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