Pension Plan Termination Premiums in Bankruptcy

Bankruptcy Court's Decision

Oneida, and several of its affiliates, filed for bankruptcy on March 19, 2006, and confirmed a plan of reorganization on Aug. 30, 2006. Oneida commenced a declaratory judgment action arguing that the DRA Premiums it owed to the PBGC were pre-petition claims under ' 101(5) of the Bankruptcy Code, and thus, are subject to discharge. In re Oneida LTD., 383 B.R. 29, 35 (SDNY 2008). The PBGC disagreed, arguing that DRA Premiums were not pre-petition claims since they are unenforceable until the case is discharged. Id. The bankruptcy court ruled in favor of Oneida, holding that DRA Premiums were pre-petition claims which could be discharged pursuant to a plan of reorganization. The bankruptcy court found support for its decision in the Bankruptcy Code's expansive definition of what is a “claim.” The court explained that the term “claim” is broadly defined under the Code, and includes rights to payment that are “unliquidated,” “unmatured” and “contingent.” Id. at 37. The bankruptcy court rejected the PBGC's argument that termination premiums were administrative expense obligations, by reasoning observing that in determining when a contingent claim arises, the critical factor is whether, at the time of the bankruptcy petition, the parties contemplated that the contingent obligation or claim would exist if the contingency occurred. Following this rationale, the court noted that the Deficit Reduction Act was passed prior to Oneida filing for bankruptcy. The court noted that the parties had engaged in pre-petition negotiations regarding the PBGC's claim, and thus that there was no question that Oneida intended to terminate its pension plans (and thus any claims associated with such plans) as of the Petition Date. Id. at 43-44.

The bankruptcy court concluded its reasoning by observing that “[a]ny doubt concerning the appropriate characterization [of a claim] is best resolved in accordance with the Bankruptcy Code's equal distribution aim.” Id. at 42.

The Court of Appeals' Decision

The Second Circuit declined to follow the bankruptcy court's reasoning, and reversed. While recognizing the expansive scope of the Bankruptcy Code's definition of “claim,” the Second Circuit observed that “the definition's reach is not infinite.” Pension Benefit v. Oneida at 157. Instead, the Court of Appeals ruled that “the existence of a valid bankruptcy claim depends on (1) whether the claimant possessed a right to payment, and (2) whether that right arose before the filing of the petition.” Id. Departing from the bankruptcy court's reliance on the Bankruptcy Code's definition of “claim,” the Second Circuit directs courts to turn to substantive, non-bankruptcy law in making such a determination. Id. In this case, the Second Circuit reasoned that the claim arose from the liability (i.e., the termination premium) created under the Special Rule of the DRA Amendment. Under the Special Rule, the termination premium did not arise until the date of discharge. Thus, as there was no existing right of payment until the bankruptcy case was dismissed, the termination claim could not be considered pre-petition.

The Second Circuit also found support for its reversal in the legislative history of the Deficit Reduction Act, which made clear that “[t]he bankruptcy courts should not be used as a mechanism for eliminating the burden of an underfunded pension plan.” Id. at 157-58.

Conclusion

The Second Circuit's ruling in Oneida is of timely importance to companies currently seeking to file Chapter 11 bankruptcy for the purpose of mitigating and restructuring underfunded pension plan termination claims. If a company has a significantly large pension plan, a reorganization in bankruptcy could be considerably more difficult (or costly) for both struggling debtors and non-pension plan creditors seeking to maximize their own recoveries from a debtor's estate. Practitioners representing both debtors and other parties in such cases should carefully consider the impact of the Oneida decision in pre-bankruptcy planning and negotiations. The case is also a reminder for bankruptcy practitioners to take heed when analyzing whether a claim is a “claim” for bankruptcy discharge purposes ' such an analysis should be done not only under ' 101 of the Bankruptcy Code, but also under applicable non-bankruptcy law, particularly when another (non-bankruptcy) federal law is at issue.

Adam H. Friedman is a member of this newsletter's Board of Editors and a partner in the Business Restructuring and Bankruptcy Department of Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York. Michelle K. Marck is an associate in the same department.

In a case of timely significance, the Second Circuit Court of Appeals has recently ruled that pension plan termination premiums are not “claims” subject to being discharged under a Chapter 11 plan, but rather, must be paid in full upon emergence from bankruptcy. Pension Benefit Guaranty Corp. v. Oneida LTD. , 562 F.3d 154 (2nd Cir. 2009).

Pension Plan Termination Premiums

The Pension Benefit Guaranty Corporation (“PBGC”) was created under the Employee Retirement Income Security Act of 1974 (“ERISA”) in order to protect the pensions of America's myriad workers and retirees. To fulfill its mandate, the PBGC collects “termination premiums” when the plan sponsor terminates an underfunded plan. This mandate is found in the 2005 Deficit Reduction Act (the “DRA Amendment”), which imposes a penalty on those sponsors who terminate their pension plans as part of a restructuring (the “DRA Premium”). Under subsection (A) of the DRA Amendment, if a company terminates its pension plan during a restructuring it must pay, every 12 months, a premium of $1,250 for each individual who was a participant in the plan immediately before the termination date, beginning with the month following the one in which the termination date occurred (the “General Rule”). See 29 U.S.C. ' 1306(a)(7)(A). Regarding termination by debtors in bankruptcy, Congress refined the General Rule and created a special rule for reorganizations under bankruptcy law. Under subsection (B), if a sponsor terminates a pension plan during a Chapter 11 proceeding, or an analogous State law proceeding, the General Rule will not apply until the date of discharge or dismissal (the “Special Rule”). Id. at ' 1306(a)(7)(B).

Bankruptcy Court's Decision

Oneida, and several of its affiliates, filed for bankruptcy on March 19, 2006, and confirmed a plan of reorganization on Aug. 30, 2006. Oneida commenced a declaratory judgment action arguing that the DRA Premiums it owed to the PBGC were pre-petition claims under ' 101(5) of the Bankruptcy Code, and thus, are subject to discharge. In re Oneida LTD., 383 B.R. 29, 35 (SDNY 2008). The PBGC disagreed, arguing that DRA Premiums were not pre-petition claims since they are unenforceable until the case is discharged. Id. The bankruptcy court ruled in favor of Oneida, holding that DRA Premiums were pre-petition claims which could be discharged pursuant to a plan of reorganization. The bankruptcy court found support for its decision in the Bankruptcy Code's expansive definition of what is a “claim.” The court explained that the term “claim” is broadly defined under the Code, and includes rights to payment that are “unliquidated,” “unmatured” and “contingent.” Id. at 37. The bankruptcy court rejected the PBGC's argument that termination premiums were administrative expense obligations, by reasoning observing that in determining when a contingent claim arises, the critical factor is whether, at the time of the bankruptcy petition, the parties contemplated that the contingent obligation or claim would exist if the contingency occurred. Following this rationale, the court noted that the Deficit Reduction Act was passed prior to Oneida filing for bankruptcy. The court noted that the parties had engaged in pre-petition negotiations regarding the PBGC's claim, and thus that there was no question that Oneida intended to terminate its pension plans (and thus any claims associated with such plans) as of the Petition Date. Id. at 43-44.

The bankruptcy court concluded its reasoning by observing that “[a]ny doubt concerning the appropriate characterization [of a claim] is best resolved in accordance with the Bankruptcy Code's equal distribution aim.” Id. at 42.

The Court of Appeals' Decision

The Second Circuit declined to follow the bankruptcy court's reasoning, and reversed. While recognizing the expansive scope of the Bankruptcy Code's definition of “claim,” the Second Circuit observed that “the definition's reach is not infinite.” Pension Benefit v. Oneida at 157. Instead, the Court of Appeals ruled that “the existence of a valid bankruptcy claim depends on (1) whether the claimant possessed a right to payment, and (2) whether that right arose before the filing of the petition.” Id. Departing from the bankruptcy court's reliance on the Bankruptcy Code's definition of “claim,” the Second Circuit directs courts to turn to substantive, non-bankruptcy law in making such a determination. Id. In this case, the Second Circuit reasoned that the claim arose from the liability (i.e., the termination premium) created under the Special Rule of the DRA Amendment. Under the Special Rule, the termination premium did not arise until the date of discharge. Thus, as there was no existing right of payment until the bankruptcy case was dismissed, the termination claim could not be considered pre-petition.

The Second Circuit also found support for its reversal in the legislative history of the Deficit Reduction Act, which made clear that “[t]he bankruptcy courts should not be used as a mechanism for eliminating the burden of an underfunded pension plan.” Id. at 157-58.

Conclusion

The Second Circuit's ruling in Oneida is of timely importance to companies currently seeking to file Chapter 11 bankruptcy for the purpose of mitigating and restructuring underfunded pension plan termination claims. If a company has a significantly large pension plan, a reorganization in bankruptcy could be considerably more difficult (or costly) for both struggling debtors and non-pension plan creditors seeking to maximize their own recoveries from a debtor's estate. Practitioners representing both debtors and other parties in such cases should carefully consider the impact of the Oneida decision in pre-bankruptcy planning and negotiations. The case is also a reminder for bankruptcy practitioners to take heed when analyzing whether a claim is a “claim” for bankruptcy discharge purposes ' such an analysis should be done not only under ' 101 of the Bankruptcy Code, but also under applicable non-bankruptcy law, particularly when another (non-bankruptcy) federal law is at issue.

Adam H. Friedman is a member of this newsletter's Board of Editors and a partner in the Business Restructuring and Bankruptcy Department of Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York. Michelle K. Marck is an associate in the same department.