By: Thomas Rooney
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
The Second Circuit Court of Appeals heard arguments this past week
on appeal of the Bankruptcy Court for the Southern District of New York’s decision in Oneida Ltd. v. Pension Benefit Guaranty Corporation.
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In Oneida, the Bankruptcy Court held that the debtor’s liability for pension termination premiums (DRA Premiums)
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is a dischargeable pre-petition “claim” even though the pension termination occurs during the debtor’s chapter 11 case. This appeal’s outcome will directly impact debtors seeking relief from pension obligations.
The Bankruptcy Court’s Oneida decision was the first reported decision addressing the status of DRA Premiums. DRA Premiums were added to the law by the Deficit Reduction Act of 2005 (DRA), an amendment of the Employee Retirement Income Security Act (ERISA) that became effective only a few weeks before Oneida filed chapter 11.
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DRA Premiums permit the Pension Benefit Guaranty Corporation (PBGC) to impose upon companies terminating defined-benefit pension plans a $1,250 premium for each person who was a plan participant at the time of termination.
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The Bankruptcy Court’s decision enhanced the reorganization prospects of companies with pension obligations, since companies terminating plans in chapter 11 can emerge from bankruptcy without any pension-related liability.
The Bankruptcy Court held that Oneida’s DRA Premiums were discharged under Oneida’s reorganization plan because the DRA Premiums constituted a contingent claim that arose pre-petition.
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The court dismissed the apparent intent of Congress to avoid this very result.
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The court relied on two main arguments to support its decision: (1) the bankruptcy court is given broad discretion to define what constitutes a claim,
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and (2) any statutory amendment to the Bankruptcy Code must be based on the “clear and manifest” intent of Congress.
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Oneida further defines the bankruptcy court’s power to adjudicate statutory pension obligations,
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and requires that Congress rethink how to allocate responsibility for terminated pensions’ collateral damage.
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to have “the broadest available definition.”
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This definition includes statutory obligations
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and rights to payment that are based on a contingency that has not yet occurred.
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On the other hand, courts recognize that what may constitute a contingent claim is “not infinite.”
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For example, in CPT Holdings v. Industrial and Allied Union Employees Pension Plan, the Sixth Circuit held that a pension liability was not a claim because the debtor did not withdraw from the pension, and thereby trigger liability, until after confirmation of its plan.
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Second, the court in Oneida distinguished statutory interpretation in the bankruptcy context from statutory interpretation generally. In the bankruptcy context, “there is a strong presumption that a later law does not repeal or amend an established law such as the Bankruptcy Code.”
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Even though the DRA Amendment states that the DRA Premium “shall not apply to [a termination] plan [that occurs during a bankruptcy reorganization] until the date of the discharge,” Congress did not explicitly state that DRA Premiums cannot be discharged.
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When a statute would rearrange the hierarchy of creditors,
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bankruptcy courts require more definitive statutory language.
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This statutory-interpretive method contrasts with the general principle that “a statute must, if reasonably possible, be construed in a way that will give force and effect to each of its provisions rather than render some of them meaningless.”
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Since the effect of holding the DRA Premium dischargeable is to render it largely irrelevant when termination occurs in bankruptcy, the general principle would suggest that the DRA Premiums are not dischargeable, despite an indirect conflict with the Bankruptcy Code.
The court’s decision Oneida, that a company can reemerge from bankruptcy without any pension-related liability, threatens the PBGC’s stability
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and its ability to finance future terminated pension plans within its existing structure.
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ERISA § 1306(a)(7)(A) ( “[T]here shall be payable to the corporation (PBGC), with respect to each applicable 12-month period, a premium at a rate equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date.”).
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In re Oneida Ltd., 351 B.R. 79, 81 (Bankr. S.D.N.Y. 2006) (noting that Oneida filed its petition for reorganization under Chapter 11 on March 19, 2006).
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See ERISA § 1306(a)(7)(B) (providing that DRA Premiums do not arise in bankruptcy reorganization contexts until date of discharge).
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See CPT Holdings v. Industrial and Allied Union Employees Pension Plan, 162 F.3d 405, 409 (6th Cir. 1998) (disallowing CPT Holding from discharging its withdrawal liability from its pension plan because CPT withdrew post-confirmation); In re Esco Manufacturing Co., 50 F.3d 315, 316 (5th Cir. 1995) (withdrawing its earlier decision permitting Esco Corporation to terminate its pension plan in a Chapter 7 context because the obligation constituted a claim on other grounds).
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See Thomas Geoghegan, See You in Court: How the Right Made America a Lawsuit Nation, at 117–119 (2007) (positing negative consequences on workers and “national character” when hard-earned, perceived legal rights are withdrawn).
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11 U.S.C. § 101(5)(A) (2006) (stating that a claim is “a right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured”).
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See United States v. LTV Corp., 944 F.2d 997, 1004–05 (2d Cir. 1991) (evaluating whether the statute-based claim was a dischargeable contingent claim under a variation of contract law analysis: whether the contingency’s occurrence was “within the actual or presumed contemplation of the parties”).
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162 F.3d 405, 408–09 (6th Cir. 1998) (distinguishing not only cases where claims arose due to pre-filing termination but also claims that arose due to termination during bankruptcy proceedings).
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In re Oneida Ltd., 383 B.R. at 40. See Nat’l Ass’n of Home Builders v. Defenders of Wildlife, 127 S. Ct. 2518, 2532 (2007).
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H.R. Rep. No. 109-276, at 347–48 (2005):
[T]he Committee believes that a termination premium for former plan sponsors who initiate and complete a distress termination while in bankruptcy is appropriate. The bankruptcy courts should not be used as a mechanism for eliminating the burden of an underfunded pension plan; therefore, an additional premium paid to the PBGC to recognize the agency's assumption of unfunded plan liabilities is reasonable . . . . [T]he Committee does believe that plan sponsors that have not [yet] filed a petition for bankruptcy reorganization must take into account the cost of the termination premium that will be imposed subsequent to an emergence from bankruptcy.
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See, e.g., Int’l Brotherhood of Teamsters v. Kitty Hawk Int’l, Inc., 255 B.R. 428, 438–39 (Bankr. N.D. Tex. 2000).
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See Letter from Peter R. Orszag, Director, Congressional Budget Office, to Honorable George Miller, Chairman, Committee on Education and Labor, U.S. House of Representatives (April 24, 2008) (“At the end of 2007 . . . PBGC reported that the present value of its current liabilities exceeded the value of its current assets by an estimated $14 billion.”) (available at http://www.cbo.gov/ftpdocs/91xx/doc9156/04-24-Miller-PBGC_Letter.pdf); see also Mary Williams Walsh, U.S. Insurer of Pensions Has Lost $2 Billion, N.Y. Times, Oct. 22, 2008, at B4 (reporting PBGC’s $2.1 billion losses on its investments in 2008, which were “magnified by its decision in February [2008] to invest more aggressively to narrow its deficit”).
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