Chapter 11 Gives Retirees More Than They Bargained For

By: Daniel J. Opisso
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Visteon, the Third Circuit held that a chapter 11 debtor had to follow section 1114 of the Bankruptcy Code when terminating a retiree benefit plan, notwithstanding the terms of an existing collective bargaining agreement (“CBA”) that permitted unilateral termination.[1] At the time Visteon filed for chapter 11, the CBA provided that retired employees would receive medical benefits until death.[2] However, the CBA gave Visteon the discretionary power to unilaterally terminate or modify any retiree benefits at any time.[3] Despite Visteon’s apparent reservation of the right to terminate retiree benefits, the Third Circuit held that Visteon could not do so in its bankruptcy case without complying with section 1114, which sets forth a specific procedure for termination or modification of retiree benefits.[4]

Under section 1114, employers must continue making unreduced benefit payments to retired employees unless a representative of the benefit recipients and the employer agree to a reduction. Otherwise, the court may order relief only after proper notice and a hearing.[5] The relevant provision of section 1114 merely refers to “any” retiree benefits.[6] The Visteon court found this term unambiguous and used the plain meaning of the language to determine that “any” benefits clearly included retiree health benefits that may be unilaterally terminated or modified according to the CBA.[7]

In contrast to Visteon, the Second Circuit allowed for the discontinuation of retiree benefits during a chapter 11 proceeding without regard to section 1114.[8] In relieving the employer of its obligation to continue payment of retiree benefits, the court opined that section 1114 was sufficiently ambiguous to consider legislative intent and history in its interpretation of the statute.[9] The court determined that compelling an employer to pay retiree benefits after the commencement of a chapter 11 proceeding, when the employer otherwise would not be obligated to do so, would be an absurd result and therefore clearly contrary to congressional intent.[10] Furthermore, the retiree benefit plan addressed by the Second Circuit had expired during the bankruptcy proceeding, contributing to the irrationality of continued payments through the chapter 11 proceeding.

Despite an apparent victory for retirees in the Third Circuit, the Visteon decision might put retired benefit recipients in a more detrimental position. In light of Visteon, debtors will have to seriously consider their options with respect to retiree benefit plans before filing. Those debtors with the ability to unilaterally terminate or modify retiree health benefits may choose to exercise that power before filing chapter 11 in order to avoid costly procedures set forth in section 1114. However, while this will avoid the section 1114 procedures, if the modification occurred within 180 days before bankruptcy and while the debtor was insolvent, the benefits may be reinstated unless the equities “clearly favor” modification.[11]  Additionally, Visteon might cause debtors to file outside the Third Circuit. If possible, a debtor might choose to file in the Second Circuit where their pre-filing rights to terminate or modify retiree benefits may be preserved.