In a huge win for labor, a federal appeals court has ruled that a corporation in bankruptcy cannot terminate its retirees' health and life insurance benefits -- even if its ERISA plan explicitly reserved its right to unilaterally terminate such benefits -- unless it can show that doing so is a necessary part of its reorganization plan.
The 95-page decision from the 3rd U.S. Circuit Court of Appeals in In re Visteon Corp. promises to alter the playing field in big corporate bankruptcies by mandating compliance with Section 1114 of the Retiree Benefits Bankruptcy Protection Act without exception.
It marks the first time that any federal appeals court has squarely addressed the scope of Section 1114 and, by demanding a plain reading of the law, could reverse a strong trend among bankruptcy and district court judges to avoid the requirements of Section 1114 whenever the debtor corporation would have been free to terminate retiree benefits prior to the bankruptcy.
"We hold that Section 1114 is unambiguous and clearly applies to any and all retiree benefits," Chief U.S. Circuit Judge Theodore A. McKee wrote. The lower courts that have refused to apply Section 1114 broadly have reasoned that doing so would produce "absurd" results by giving retirees more rights in the bankruptcy context than they would have enjoyed before.
But McKee found that Congress was setting out to protect retirees during the high-pressure period of a bankruptcy reorganization and that the use of very broad language in the statutory test was designed to provide a wide umbrella of protection.
In Section 1114, Congress provided both procedural and substantive protections for retiree benefits during a Chapter 11 proceeding.
The law says that the bankruptcy trustee must attempt to reach an agreement with the retirees regarding modification of retiree benefits before it can ask the bankruptcy court to modify or terminate them. In doing so, the trustee must also provide the retirees with information about the company's financial situation to allow for informed evaluation of the proposal.
The law also says a bankruptcy court should grant a motion to modify retiree benefits only if it finds that doing so "is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor, and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities."
Section 1114 also provides additional protection for retiree benefits by giving them priority they would not otherwise have. Any payment for retiree benefits required to be made during a Chapter 11 proceeding has the status of an "allowed administrative expense" rather than the general unsecured status that would otherwise apply.
Visteon's lawyers successfully argued in both the bankruptcy and district courts that applying Section 1114 would make no sense since the company's ERISA plan gave it the power to terminate retiree benefits unilaterally. Giving retirees more rights in bankruptcy court would be absurd, they argued.
But the 3rd Circuit flatly rejected that argument.
"Despite arguments to the contrary, the plain language of Section 1114 produces a result which is neither at odds with legislative intent, nor absurd," McKee wrote in an opinion joined by Judges Marjorie O. Rendell and Walter K. Stapleton.
"Disregarding the text of that statute is tantamount to a judicial repeal of the very protections Congress intended to afford in these circumstances. We must, therefore, give effect to the statute as written," McKee wrote.
McKee said he recognized that "the majority of bankruptcy and district courts that have addressed this issue have concluded that Section 1114 does not limit a debtor's ability to terminate benefits during bankruptcy when it has reserved the right to do so in the applicable plan documents."
But that view is mistaken, McKee found, because Congress made room for no such exceptions.
"Section 1114 could hardly be clearer. It restricts a debtor's ability to modify any payments to any entity or person under any plan, fund, or program in existence when the debtor files for Chapter 11 bankruptcy, and it does so notwithstanding any other provision of the bankruptcy code. There is therefore no ambiguity as to whether Section 1114 applies," McKee wrote.
"By using the word 'any' three separate times, Congress ensured that the statute would apply to all benefits," McKee wrote. "We are, therefore, unpersuaded by the suggestion that failure to specifically address benefits that could be unilaterally terminated outside of bankruptcy somehow breathes ambiguity into the word 'any.'"
The ruling is a victory for attorneys Thomas M. Kennedy and Susan M. Jennik of Kennedy Jennik & Murray in New York, who filed the appeal on behalf of the Industrial Division of the Communications Workers of America.
About 2,100 retirees objected when auto parts supplier Visteon Corp. terminated their health and life insurance benefits without following the procedures set forth in Section 1114.
But U.S. Bankruptcy Judge Christopher Sontchi ruled in March that Visteon was free to do so, and the retirees lost their first round of appeals when U.S. District Judge Michael M. Baylson, on special assignment to the Delaware court, refused to disturb Sontchi's ruling.
An expedited appeal to the 3rd Circuit followed and the retirees have now emerged victorious with a ruling that breathes new life into Section 1114 by mandating that its protective provisions apply in every case where the debtor corporation seeks to terminate retiree benefits.
McKee's opinion includes a lengthy discussion of the law's legislative history, beginning with a highly controversial bankruptcy in which 78,000 retirees lost their benefits, and shows that Congress was setting out to establish a mechanism that must be followed in any bankruptcy to ensure fairness to workers who often agreed to forgo raises over decades in return for the promise of lifelong benefits.
The widespread trend to ignore Section 1114, McKee concluded, stemmed from misunderstandings of the law's purposes and mandates.
"Courts that have concluded it is absurd to apply Section 1114 to benefits that could be terminated outside of bankruptcy have often misinterpreted the rigidity of the section's protections, and therefore the extent to which the statute is in tension with ERISA," McKee wrote.
"Section 1114 does not prohibit the termination of benefits during a bankruptcy proceeding. Rather, it creates an equitable procedure through which the debtor can argue the economic necessity of doing so, and the retirees can counter with their own arguments about economics, fairness, and equity," McKee wrote.
For the most part, McKee said, "all Section 1114 guarantees retirees is a voice, and some minimal amount of leverage, in a process that could otherwise be nothing short of devastating to them and to their families and communities."
Visteon spokesman Jim Fisher declined to comment except to say that the company was "disappointed by the ruling" and is "assessing an appropriate course of action."