Tuesday, October 26, 2010

[Overview] Bankruptcy Protection Act trumpets pensioners ERISA, 3rd Circuit rules

Shannon p. Duffy

In a major victory for the job, a federal appeals court has ruled that a bankrupt company cannot end the benefits of life insurance and the health of its retirees--even if his plan ERISA reserved explicitly the right to unilaterally terminate these benefits--unless you can show that it's a necessary part of its plan of reorganisation.

The decision of 95 pages from the 3rd U.S. Circuit Court of Appeals in re Visteon Corp promises to change the playing field in large corporate bankruptcies by Parliament than section 1114 of retiree benefits Fall protection without exception.

It marks the first time that any federal appeals court has squarely addressed the scope of section 1114 and by asking a simple reading of the law, could reverse a strong trend between bankruptcy courts and the District Court to avoid the requirements of section 1114 would have been free to rescind retiree benefits before company insolvency of the debtor.

"We hold that section 1114 is ambiguous and clearly applies to retiree benefits all," wrote the Chief U.S. Circuit Judge Theodore a. McKee.The lower courts who have refused to apply the section 1114 widely have reasoned that doing so would produce results "absurd" giving pensioners more rights in the context of failure before they would have enjoyed.

But McKee found that Congress was fixed to protect retirees during the period of high pressure of a reorganisation of failure and that the use of a very broad language in legal proof is designed to provide a broad umbrella of protection.

In section 1114, Congress provided procedural and substantive protections for retiree benefits in proceedings of Chapter 11.

The law says that the trustee in bankruptcy must attempt to reach an agreement with retirees as regards changing the retiree benefits before may ask the referee to modify or terminate their. Thus, the trustee must also provide retirees with information on the financial situation of the company, to enable an informed assessment of the proposal.

The law also says that a bankruptcy court must grant a motion to amend the benefits pensioner only if it finds that doing so "you must enable the reorganisation of the borrower and ensures that all creditors, debtors and all stakeholders are treated equitably and loyal and clearly is favored by the balance of the shares.

Section 1114 also provides additional protection for retiree benefits, giving them priority that they would not otherwise have. Any payment for retiree benefits required to be made in the course of a procedure for Chapter 11 has the status of a "residence administrative expenditure" rather than unsecured General status which would otherwise apply.

Visteon's lawyers argued successfully in bankruptcy and district courts that applying the section 1114 no sense because the company's ERISA plan gave the power to unilaterally terminate benefits pensioner. Giving pensioners more rights in bankruptcy court would be absurd, they argued.

But the 3rd Circuit rejected that argument forthrightly.

"Despite the arguments to the contrary, the simple language of section 1114 produces a result that is neither conflict with the legislative intent, nor absurd," McKee wrote an opinion by Judge Marjorie o. Rendell and Walter k. Stapleton.

"Neglecting the text of this Statute is equivalent to a judicial repeal of the protections that Congress intended to afford under these circumstances. we must therefore give effect to the staff regulations as written," wrote McKee.

McKee said that he recognized that "the majority of bankruptcy and district courts which have addressed this issue have concluded that 1114 section does not limit the ability of the debtor to terminate benefits during the bankruptcy when she reserved the right to do so in the applicable plan documents."

But this view is wrong, the McKee found, because Congress has made space for any of these exceptions.

"Section 1114 hardly could be clearer. it limits the ability of the debtor to change any payments to any person or entity in any fund, plan or program in existence when the debtor's files for Chapter 11 bankruptcy and so does despite any other provision of the bankruptcy code. There is therefore no ambiguity if you apply the section 1114," wrote McKee.

"Using the word ' any ' three separate times, Congress ensured that the Statute applies to all benefits," McKee written. "We are therefore unpersuaded by the suggestion that failure to specifically address the advantages that could be solved unilaterally outside of bankruptcy somehow breathes ambiguity in the word ' any '. "

The ruling is a victory for attorneys Thomas m. Kennedy and Susan m. Jennik of Jennik Kennedy & Murray in New York, which have submitted the appeal on behalf of the industrial division of the communication workers of America.

Approx. 2100 retirees objected when auto parts supplier Visteon Corp finished their life insurance benefits and health without following the procedures laid down in section 1114.

But U.S. Bankruptcy judge Christopher Sontchi ruled in March that Visteon was free to do so, and retired persons lost their first round of appeals when u.s. District Judge Michael m. Baylson, special assignment to the Court of Delaware, declined to disturb the judgment of Sontchi.

Accelerated appeal to the circuit 3rd followed and pensioners have now emerged victorious with a ruling that breathes new life into section 1114 of s-PCS that its protective provisions apply in any case in which the debtor company aims to terminate the benefits pensioner.

Opinion McKee includes a lengthy discussion of the legislative history of the law at a highly controversial bankruptcy where 78,000 retirees have lost their benefits, and shows that Congress was setting a mechanism that should be followed in any failure to ensure fairness to workers who often have decided to forgo raises for decades in exchange for a promise of lifelong benefits.

The widespread tendency to ignore the section 1114, McKee concluded, stemmed from misunderstanding of the law purposes and mandates.

"Courts which have concluded that it is absurd to apply section 1114 advantages that could be resolved outside of bankruptcy are often misinterpreted rigidity of the protections of section and then the extent to which the Statute is in tension with ERISA," wrote McKee.

"Section 1114 does not prohibit termination of benefits during a bankruptcy proceeding. Rather, creates an equitable procedure through which the debtor can sustain economic necessity to do so, and retirees may conflict with their arguments on the economy, fairness and equity," McKee wrote.

For the most part, McKee said, "all section 1114 ensures retirees is a voice and some minimum amount of leverage, in a process that might otherwise be nothing short of devastating to them and their families and communities".

Visteon spokesman Jim Fisher has refused to comment except to say that the company was "disappointed by judgment" and "currency an appropriate course of action."

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