Involuntary Terminations of Pension plans under ERISA Are Non-core Matters
Journal Article:A recent decision from the United Air Lines bankruptcy case addressed an important issue with respect to involuntary terminations of pension plans under the Employee Retirement Income Security Act of 1974 (ERISA). In In re United Air Lines Inc., 337 B.R. 904 (N.D. Ill. 2006), the district court held that an involuntary termination proceeding initiated by the Pension Benefit Guaranty Corp. (PBGC) pursuant to Title IV of ERISA was a non-core matter within the meaning of 28 U.S.C. §157. This is significant as a practical matter because there are a number of issues that arise in an involuntary termination that could have an impact on the employer/debtor's bankruptcy, which would be subject to de novo review by a district court. The PBGC Title IV of ERISA establishes a mandatory government insurance program for defined-benefit pension plans that are administered and enforced by the PBGC, a wholly-owned federal government corporation established under 29 U.S.C. §1302(a). The PBGC currently insures the pensions of 44.1 million American workers and retirees in 30,330 private, defined-benefit pension plans and is financed entirely through premiums paid by plan sponsors, investment income, the assets of terminated plans and recoveries from the sponsors of terminated plans.1 The PBGC guarantees the payment of certain, but not all, pension benefits. The PBGC insures only defined-benefit pension plans.2 A defined-benefit plan is one that promises to pay employees, upon retirement, a fixed benefit under a formula that takes into account factors such as final salary and years of service with the employer.3 Defined-benefit plans pay benefits from a pool of assets, as opposed to defined-contribution plans (such as 401(k) plans) that establish an individual account for each plan participant.4 Generally, there are two types of defined-benefit plans: single-employer plans and multiemployer plans. A single-employer plan is maintained by one contributing employer; multi-employer plans are maintained by two or more contributing employers and a union. Voluntary Terminations under ERISA An employer/debtor can initiate a voluntary termination of its plan at any time,5 unless the plan is collectively bargained (in which case it must first bargain with the union to modify the collective-bargaining agreement). Section 1341 of ERISA sets out the means for voluntarily terminating a single-employer, defined-benefit pension plan.6 Such a plan may be terminated in a standard termination under §1341(b) or a distress termination under §1341(c).7 A standard termination is a termination initiated by the employer/debtor in which the employer/debtor's plan has sufficient assets to cover all the obligations to the plan participants.8 A standard termination does not implicate the PBGC's insurance function.9 A distress termination is a termination initiated by an employer with an underfunded defined benefit pension plan. If plan assets are not sufficient to cover all of a plan's benefit liabilities, the employer must demonstrate to the PBGC that it is in financial distress.10 To meet this test, (1) the employer must establish that it is liquidating through bankruptcy or an insolvency proceeding; (2) the employer must establish that it is reorganizing in bankruptcy or other insolvency proceedings, and the court has found that the reorganization cannot succeed unless the pension plan is terminated; (3) the PBGC must determine that there is an inability to pay debts when due and an inability to continue in business unless the pension plan is terminated; or (4) the PBGC must determine that pension costs have become unreasonably burdensome as a result of a declining workforce. A distress termination implicates the PBGC's insurance function, unless the plan is sufficient to cover all of the benefits guaranteed by the PBGC. When a plan terminates with insufficient assets to satisfy its pension obligations to the employees, the PBGC becomes trustee of the plan, taking over the plan's assets and liabilities.11 The PBGC then uses the plan's assets to cover what it can of the benefit obligations.12 The PBGC then must add its own funds to ensure payment of the remaining "guaranteed" benefits (i.e., those benefits to which participants have earned a nonforfeitable entitlement under the plan terms as of the date of termination) up to certain statutory limits.13 In such instances, the PBGC will file claims in the employer/debtor's bankruptcy proceeding and will usually be one of the largest creditors.14 Involuntary Terminations by the PBGC The PBGC has the authority to institute involuntary terminations. While the PBGC must institute termination proceedings whenever it determines that a plan does not have assets available to pay benefits currently due, it has discretion to institute termination proceedings in other circumstances.15 Pursuant to §1342, the PBGC is authorized, but is not required, to institute proceedings to terminate a plan whenever it determines that certain factors indicate a termination is appropriate. Such factors include: 1. the plan has not met the minimum funding standard required under §412 of Title 26 [Tax Code], or has been notified by the Secretary of the Treasury that a notice of deficiency under §6212 of Title 26 has been mailed with respect to the tax imposed under §4971(a) of Title 26; 2. the plan will be unable to pay benefits when due; 3. the reportable event described in §1343(c)(7) of this title has occurred; or 4. the possible long-run loss of the corporation with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated. 29 U.S.C. §1342(a) The PBGC can commence an involuntary termination notwithstanding the pendency of a bankruptcy proceeding.16 It can also do so notwithstanding the existence of a collective bargaining agreement.17 If the plan administrator of the plan (often, but not always, the employer) agrees to the termination, the parties enter into an agreement for PBGC to become the plan's trustee, and the matter is concluded.18 If the plan administrator does not agree, the PBGC "may, upon notice to the plan administrator, apply to the appropriate U.S. district court for a decree adjudicating that the plan must be terminated."19 In re United Air Lines Inc. In In re United Air Lines Inc., 337 B.R. 904 (N.D. Ill. 2006), the PBGC initiated an involuntary termination with the District Court for the Northern District of Illinois pursuant to 29 U.S.C. §§1342 and 1348(a), seeking, among other things, an order terminating the defined benefit plan of the United pilots (the "Pilot Plan") sponsored by United and appointing PBGC as the statutory trustee of the Pilot Plan.20 The Air Line Pilots Association (ALPA), the union that represents United's active pilots, and the United Retired Pilots Benefit Protection Association (URPBPA), an organization formed to represent some of United's retired pilots, sought to intervene in the proceeding. United moved to refer the termination proceeding to the bankruptcy court in which United's bankruptcy case was pending. The PBGC filed an opposition to the referral to the bankruptcy court and, in the alternative, sought to withdraw the reference. Pursuant to 28 U.S.C. §157(a), the district court referred the case and the motions to intervene to the bankruptcy court. In the bankruptcy court, Judge Wedoff ruled that PBGC's involuntary termination proceeding was a "core" proceeding under 28 U.S.C. §157(b) (2)(A), as a matter concerning estate administration.21 Thereafter, the bankruptcy court entered a final order retroactively terminating the plan and finding that the PBGC had established that termination of the plan was necessary in order to avoid any unreasonable increase in liability to the fund that it administered.22 ALPA and URPBPA filed notices of appeal. On cross-appeal, the PBGC raised three issues: (1) the district court erred in referring the termination proceeding to the bankruptcy court,23 (2) the bankruptcy court erred in finding that the termination was a core proceeding, and (3) the bankruptcy court erred by holding a de novo trial. The bankruptcy court dismissed the PBGC's cross-appeal because it was untimely. However, because the core/non-core issue was jurisdictional, the district court nevertheless addressed it. The district court held that the termination proceeding filed by PBGC pursuant to Title IV of ERISA was a non-core proceeding based on its findings that (1) the PBGC brought the proceeding against United as the plan administrator, not as the debtor in the pending bankruptcy; (2) the PBGC's right to initiate the termination of the Pilots Plan arose exclusively from Title IV of ERISA, not the Bankruptcy Code, and the right to bring the termination proceeding exists outside the Bankruptcy Code and can arise outside the context of a bankruptcy case; and (3) the termination proceeding neither invokes a substantive right provided by Title 11 nor, by its nature, could it arise only in the context of a bankruptcy case. United argued that the involuntary termination proceeding was a core proceeding because whether and when the pension plan was terminated affected PBGC's claim in United's bankruptcy for pension plan underfunding; therefore, the termination proceeding affected the administration of the estate and/or the debtor-creditor relationship. The district court rejected this contention, holding that the mere fact that a proceeding may ultimately affect the size of the estate does not mandate that the proceeding is a core proceeding.24 The district court further noted that any additional effect on the debtor-creditor relationship is tenuous, as the termination proceeding was brought by PBGC in its role as the federal agency that enforces Title IV of ERISA, not in the role of a creditor. In addition, the district court stated that while the termination proceeding may ultimately affect United's bankruptcy case, it does not concern the administration of the estate or involve estate assets within the meaning of §157(b)(2) of the Code, because pension plan assets are not part of the bankruptcy estate.25 Practical Implications If an involuntary termination proceeding filed by the PBGC pursuant to Title IV of ERISA is deemed to be a non-core proceeding when the law is settled, then a bankruptcy court cannot issue a final judgment in that proceeding. Rather, a bankruptcy court will be limited to submitting proposed findings of fact and conclusions of law to the district court, as required by §157(c)(1). Further, the district court will not apply a deferential standard of review to the bankruptcy court's findings of fact (as is the case of a "core" proceeding) but will engage in de novo review. This is significant as a practical matter because there are a number of issues that arise in an involuntary termination proceeding that impact a debtor's bankruptcy case. Most important is the establishment of the date of plan termination (DOPT).26 The DOPT for a pension plan is the point in time that is used to fix and determine the statutory rights and liabilities of the participants, their employer/debtor and the PBGC.27 It can have a significant impact on the amount of the claim filed by the PBGC in the debtor's bankruptcy proceeding, and will determine which nondebtor entities are jointly and severally liable with the debtor on the claim. First, the DOPT will determine when the employer/debtor's minimum funding obligation ceases.28 ERISA requires employers/debtors with defined benefit pension plans to make minimum annual plan contributions. These minimum funding obligations continue to accrue until the DOPT. Second, the DOPT will determine what discount rate applies when calculating the PBGC's claim for "unfunded benefit liabilities," the PBGC's most significant claim in bankruptcy. This claim arises on the termination of a covered pension plan, and it amounts to the difference between the value of the plan assets at the time of termination and the value of the plan's benefit obligations to its participants.29 Finally, the DOPT will determine who is considered a member of the debtor's controlled group. When a pension plan terminates, the PBGC is left with a claim against the debtor's estate. The PBGC may collect on its claims not only from the plan sponsor, but also from all members of its "controlled group" as of DOPT.30 Accordingly, a controlled group member's liability may ultimately be dependent upon the DOPT. A court will establish the DOPT when the PBGC and the plan administrator do not agree on a date.31 The selection of the DOPT requires a balancing of the sometimes competing interests of the participants and the PBGC. It is most often the case that an employer/debtor and the PBGC will have a difference of opinion as to what is the proper DOPT depending on the facts and circumstances of each case. Although courts have repeatedly emphasized that the financial interests of the employer/ debtor should not play a role in setting the DOPT,32 the bankruptcy court has a somewhat narrow focus—that of rehabilitating the debtor—which may ultimately influence the bankruptcy court's determination of the DOPT. For that reason alone, this decision can be viewed as a victory for the PBGC because the district court will not apply a deferential standard of review to the bankruptcy court's findings of fact (as is the case in a core proceeding), but will engage in a de novo review. Conclusion With a reported a deficit of $22.8 billion in 2005, which may mushroom with the possible transfer of pensions from some of the large airlines in bankruptcy such as Delta and Northwest, and the increasingly troubled automotive industry, the PBGC is making every effort to reduce its exposure to unpaid pension obligations. In In re United Air Lines Inc., the PBGC successfully argued that an involuntary termination proceeding filed by the PBGC pursuant to Title IV of ERISA is a non-core proceeding, and therefore, a bankruptcy court cannot issue a final judgment on this issue. This means that a bankruptcy court will be limited to submitting proposed findings of fact and conclusions of law to the district court, as required by §157(c)(1).33 Ultimately, this decision may assist the PBGC in its efforts to reduce its exposure in an involuntary proceeding because it may permit a district court make a determination without considering the economic issues arising in an involuntary termination proceeding. Footnotes 1 Ass'n. of Flight Attendants-CWA, AFL-CIO v. Pension Ben. Guar. Corp., No. Civ.A. 05-1036ESH, 2006 WL 89829, at *4 (D. D.C. 2006). 2 29 U.S.C.A. §1321(a) (West 2005). 3 See 29 U.S.C.A. §1321(a), (b)(1) and (c)(1) (West 2006). 4 See 29 U.S.C.A. §1002(35) (West 2006); see, also, Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999). 5 This section does not discuss the termination mechanisms for multiemployer plans, because the termination of a multiemployer plan is not a PBGC-insurable event. 6 See 29 U.S.C.A. §1341(a) (West 2006). 7 Id. 8 See 29 U.S.C.A. §1341(b) (West 2006). 9 See Morse, Daniel J., "Does ERISA's Provision Governing the Termination of a Pension Plan Preclude the Rejection of a Pension Plan Agreement in a Chapter 11 Case?" Norton Annual Survey of Bankruptcy Law (2005 ed.). 10 See Id. 11 See Pension Ben. Guar. Corp. v. LTV Corp., 496 U.S. 633, 637 (1990). 12 Id. (citing 29 U.S.C. §1344). 13 Id. (citing §§1301(a)(8), 1322(a) and (b)). 14 The PBGC's claim is for the total amount of the plan's unfunded benefit liabilities (i.e., the amount by which the plan is insufficient for both guaranteed and nonguaranteed benefits). It is then obligated to share its recoveries with the participants who have lost nonguaranteed benefits. See 29 U.S.C. §1322(c). 15 29 U.S.C.A. §1342(a) (West 2006). 16 29 U.S.C.A. §1342(e) (West 2006). 17 29 U.S.C.A. §1341(a)(3) (West 2006). 18 29 U.S.C.A. §1342(b)(3) (West 2006). 19 29 U.S.C.A. §1342(c) (West 2006). 20 See "PBGC Reaches Pension Settlement with United Airlines" (April 22, 2005), available at www.pbgc.gov/media/news-archive/2005/pr05-36.html. 21 In re UAL Corp., 333 B.R. 802 (Bankr. N.D. Ill. 2005). 22 In re UAL Corp., 332 B.R. 858 (Bankr. N.D. Ill. 2005). 23 Prior to this case, the PBGC had been uniformly successful with its argument that it is improper for a district court to refer an involuntary termination proceeding to a bankruptcy court pursuant to 28 U.S.C. §157(a). See, e.g., In re United Air Lines Inc., et. al, Opening Brief of Appellee/Cross-Appellant Pension Benefit Guaranty Corp. at pg. 12 (filed 12/22/2005). The PBGC contends that by referring involuntary termination actions to bankruptcy judges, the PBGC's ability to implement its statutory mission could be "significantly hampered." See Id. For instance, in United, it took nearly a year from the date the PBGC filed the termination action for the bankruptcy court to decree the pension plan terminated. See Id. The PBGC argued that this termination should have been a routine matter. See Id. 24 337 B.R. at 910. 25 Id. 26 It should be noted that the DOPT will determine the cap imposed upon the amount of "guaranteed benefits" to be received by the pensioners. Following an involuntary termination of an underfunded defined benefit pension plan, the PBGC is for paying "guaranteed benefits," which are the nonforfeitable basic pension benefits promised by the pension plan. See 29 U.S.C. §1322(a). The guaranteed benefits are subject to limitation (see 29 U.S.C. §1322(b)), such as a maximum dollar amount. See 29 U.S.C. §1322(b)(3). Ultimately, the year of the DOPT determines the cap on the "guaranteed benefits" to be received by pensioners. For instance, for underfunded pension plans terminating in 2006, the maximum insurance benefit for participants is $47,659 per year for those who retire at age 65. See "PBGC Announces Maximum Insurance Benefit for 2006" (12/12/2005), available at www.pbgc.gov/ media/news-archive/2005/pr06-09.html. 27 See PBGC v. Heppenstall Co., 663 F.2d 293, 296 (3d Cir. 1980). The DOPT is not simply the date on which the termination of a pension plan is completed. See Id. 28 See Springer, Claudia Z. and Zazove, Daniel A., "The Effects of Terminating a Pension Plan in Bankruptcy," Bankr. Strat. (Nov./Dec. 2004); see, also, In re White Motor Corp., 42 B.R. 693, 696 (D.C. Ohio 1984) ("Under ERISA, White could have terminated the plans at any time, pre- or post-petition, and fixed its minimum funding obligation as of the date of termination"). 29 See Keating, Daniel, "Chapter 11's New Ten-Ton Monster: The PBGC and Bankruptcy," 77 Minn. L. Rev. 803, 814 (1993). 30 Under ERISA's definitions, a parent-subsidiary controlled group exists when a parent directly or indirectly owns at least an 80 percent equity interest in its subsidiary. See Phelan, Robin E., "Employer/Employee Problems in Bankruptcy Cases," 649 PLI/Comm 43, 77 (1993) (hereafter "Phelan"). A brother/sister controlled group exists where the same five or fewer individuals own at least 80 percent of two or more businesses. Treas. Reg. §1.414(c)-2(c); see, also, Phelan at 77. The sponsor and each member of its controlled group are jointly and severally liable on these claims. See Teamsters Joint Council No. 83 v. Centra Inc., 947 F.2d 115, 121-22 (4th Cir. 1991). 31 In a distress termination, the debtor proposes a date of plan termination, to which the PBGC may agree; in an involuntary termination, the PBGC proposes a date of plan termination to which the plan administrator may agree. 29 U.S.C.A. §4048(a)(3) (West 2006). 32 See In re Pension Plan for Employees of Broadway Maintenance Corp., 707 F.2d 647, 653 (2d Cir. 1983) ("As the Third Circuit has repeatedly emphasized, the financial interests of the employer should play no role in setting a termination date in these proceedings"); In re Syntex Fabrics Inc. Pension Plan, 698 F.2d 199, 204 (3d Cir. 1983) (when setting a plan termination date, "further[ing] the interests of the employer [is] a concern which is conspicuously absent from the statute"); PBGC v. Valley-Vulcan Mold Co., No. 92-1929, 1993 WL 476158, at *2 (W.D. Pa. July 8, 1993) ("[A]n employer's potential liability or its interests, unlike those of participants and the PBGC, is not a relevant consideration" in setting a termination date). 33 It should also be noted that this ruling may cause a district court to refrain from referring involuntary proceedings to a bankruptcy court in the first instance, since it will be the district court that will ultimately issue a final order in the proceeding.
Thursday, June 1, 2006