Bankrupt Patriot Coal asked a court to terminate about $1.6 billion in retiree health benefits as part of a plan to survive bankruptcy protection, but also filed a lawsuit yesterday against Peabody Energy (NYSE:BTU) to ensure that Peabody "does not attempt to use Patriot's bankruptcy to escape Peabody's own health care obligations to certain retirees." 

As part of Patriot's spinoff agreement with Peabody in 2007, Patriot says Peabody agreed to pay the health-care costs for thousands of retirees who were employed by Peabody at the time, but were transferred to Patriot in the spinoff. It believes Peabody might use Patriot's financial condition as an excuse to cut benefits to more than 3,000 retirees.

Peabody issued a statement saying the agreement calls for its own funding costs to be lowered if Patriot's benefit obligations decrease, and contends that Patriot's claim is not only unreasonable, but is "counter to the fundamental basis of the language in the contract. These are Patriot's obligations and, to the extent they are reduced, we will meet our agreement with Patriot to fund the new lower levels."

As an alternative to terminating retiree health benefits, Patriot proposes establishing a Voluntary Employee Beneficiary Association that includes profit sharing of up to a maximum of $300 million, and an initial cash contribution of $15 million.