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The board did in fact pass the pension plan amendment, which was drafted by outside counsel and reviewed by the VP of human resources and another senior executive, both of whom were members of the pension administration committee. The amendment was limited to 400 employees and lifted a benefit freeze for those employees vested in the pension plan. It also granted all covered employees a cash contribution to their pension account equal to 5% of annual salary plus 8% annual interest if they were employed by the company or its successor on, or were laid off prior to a certain date. Because this second provision was available to all employees covered by the pension amendment, it included even those not vested in the pension plan. Notably, however, the only company executives who reviewed the amendment also stood to gain pension benefits of between 200% and 470% at a cost to the company $2.4 million. The source of the funding for the amendment was a surplus on the 'union side' of the pension plan, which would have otherwise reverted to the company after benefits were paid.

Within days of the amendment's effective date, the debtor filed for Chapter 11 protection. A liquidation followed and the remaining assets were placed in a liquidation trust. The pension plan was taken over by the Pension Transfer Corporation, a subsidiary of the trust. Although the debtor sought and received bankruptcy court approval of payments to key employees who had participated in the KERP, it did not seek approval of disbursements under the pension amendment and the debtor initiated an adversary proceeding against the pension plan, alleging that payouts would result in a fraudulent transfer in violation ' 548. The bankruptcy court enjoined the plan from distributing payments under the amendment and the district court held that the amendment met the definition of a fraudulent transfer under ' 548 and was therefore void.

The Third Circuit affirmed, holding that the debtor had a property interest in the amendment, which it transferred under ' 548. The court ruled that because the benefits inured substantially to corporate insiders, and was reviewed by those who stood to gain significantly if it were approved, the transaction was not conducted at arm's length. The court further held that the debtor received less than a reasonably equivalent value in exchange for the transfer, noting that the transfer 'cost twice what an employee retention plan normally costs, in an industry with very few other jobs to which employees might go.' Moreover, funding the amendment from the union side pension surplus, coupled with the fact that the amendment was presented to the debtor's board inaccurately as an administrative formality, strongly suggested that the amendment was not a good faith transaction.

Pension Plan Increase Just Prior to Bankruptcy Is Voided

The Third Circuit has ruled that a pension plan amendment made only days before the sponsor filed for bankruptcy was voidable as a preferential transfer under ' 548. The court ruled that while the amendment was designed to retain employees during a time when the company was up for sale and might have conferred some value on the debtor, it was not, on the whole, useful as an independent means of maintaining it as an ongoing business prior to sale. Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corp. Retirement Plan No. 003 (In re Fruehauf Trailer Corp.), No. 05-1374, (April 12).

Despite remedial efforts, the debtor continued to have financial difficulties. When there was insufficient cash to meet its payroll and other operating expenses, the board held an emergency meeting. Although the subject of this meeting was in dispute, the district court concluded that the three matters were discussed: The possibility of a Chapter 11 bankruptcy filing; a modified retention plan that would distribute immediate cash payments to 12 of the Key Employee Retention Program beneficiaries if they agreed to remain with the company; and an amendment to the Company's pension plan.

The board did in fact pass the pension plan amendment, which was drafted by outside counsel and reviewed by the VP of human resources and another senior executive, both of whom were members of the pension administration committee. The amendment was limited to 400 employees and lifted a benefit freeze for those employees vested in the pension plan. It also granted all covered employees a cash contribution to their pension account equal to 5% of annual salary plus 8% annual interest if they were employed by the company or its successor on, or were laid off prior to a certain date. Because this second provision was available to all employees covered by the pension amendment, it included even those not vested in the pension plan. Notably, however, the only company executives who reviewed the amendment also stood to gain pension benefits of between 200% and 470% at a cost to the company $2.4 million. The source of the funding for the amendment was a surplus on the 'union side' of the pension plan, which would have otherwise reverted to the company after benefits were paid.

Within days of the amendment's effective date, the debtor filed for Chapter 11 protection. A liquidation followed and the remaining assets were placed in a liquidation trust. The pension plan was taken over by the Pension Transfer Corporation, a subsidiary of the trust. Although the debtor sought and received bankruptcy court approval of payments to key employees who had participated in the KERP, it did not seek approval of disbursements under the pension amendment and the debtor initiated an adversary proceeding against the pension plan, alleging that payouts would result in a fraudulent transfer in violation ' 548. The bankruptcy court enjoined the plan from distributing payments under the amendment and the district court held that the amendment met the definition of a fraudulent transfer under ' 548 and was therefore void.

The Third Circuit affirmed, holding that the debtor had a property interest in the amendment, which it transferred under ' 548. The court ruled that because the benefits inured substantially to corporate insiders, and was reviewed by those who stood to gain significantly if it were approved, the transaction was not conducted at arm's length. The court further held that the debtor received less than a reasonably equivalent value in exchange for the transfer, noting that the transfer 'cost twice what an employee retention plan normally costs, in an industry with very few other jobs to which employees might go.' Moreover, funding the amendment from the union side pension surplus, coupled with the fact that the amendment was presented to the debtor's board inaccurately as an administrative formality, strongly suggested that the amendment was not a good faith transaction.