Severance Payments May Constitute Retiree Benefits

By: Bertrand J. Choe
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
In In re Arclin U.S. Holding, Inc.,[1] the Bankruptcy Court for the District of Delaware held that a company, subsequent to its chapter 11 petition, was required to continue health insurance premium payments made to a former employee pursuant to a severance agreement. In so doing, the court limited protections for debtors under section 1114 of the Bankruptcy Code,[2] which requires chapter 11 business debtors to continue “retiree benefit” payments post-petition. Six months prior to filing its chapter 11 petition, Arclin U.S. Holding, Inc. (“Arclin” or “debtors”) instituted a reduction in its work force, whereby thirty-nine of its employees, including Steve Phillips, were terminated. Phillips was given a severance package including separation pay, car allowance, and payment of his health insurance premiums. Upon filing for bankruptcy, Arclin discontinued its payments to Phillips, at which point Phillips brought the present suit. The court looked to the plain meaning of section 1114(a), which requires, inter alia, that for benefits to be considered “retiree benefits,” they must be both medical in nature and for retirees.[3] Since the benefits to Phillips included payments for health insurance, the court deemed them to be “medical” within the meaning of section 1114(a). The court further deemed the payments to be for retirees because of Arclin’s own description of the payments as “an early retirement package.”[4]
 
As a general matter, section 1114 provides that a chapter 11 debtor must continue to pay retiree benefits post-petition.[5] This section was enacted to protect retirees, as, prior to its enactment, a debtor could reject a contract to provide retirees health benefits under 11 U.S.C. § 365.[6] The court in In re Arclin U.S. Holding, Inc. sought to further protect retirees by rejecting Arclin’s request to employ ERISA’s definition of “retiree benefits” in interpreting section 1114. The debtors argued that other courts have borrowed definitions from ERISA for undefined terms in the Bankruptcy Code,[7] and if so used here, the severance package would not constitute retiree benefits. However, the court noted that the Supreme Court has set a bright-line rule that definitions from other federal statutes should not be used to interpret those same terms in the Bankruptcy Code unless the Bankruptcy Code section in question explicitly states to do so.[8] If the Code lacks such explicit authorization, the court extrapolated, the meaning of the term in question must be determined according to its “essential character.”[9]
 
The In re Arclin U.S. Holding, Inc. court’s method of determining the essential character of the payments to Phillips was to look at the plain language of the payments’ own description.[10] The court emphasized that in a letter accompanying the offer of payments to Phillips, Arclin itself described the payments as constituting “an early retirement package;”[11] this was enough to convince the court that the payments to Phillips were indeed retiree benefits under section 1114.[12] Thus, companies should be mindful of the language used in their severance packages, and refrain from describing them, even subtly, as retiree benefits if they do not wish them to be seen as such in a subsequent chapter 11 reorganization.


[1] 416 B.R. 117 (Bankr. D. Del. 2009).
[2] 11 U.S.C. § 1114 (2006).
[3] See 11 U.S.C. § 1114(a) (“‘[R]etiree benefits’ means payments . . . for retired employees . . . for medical, surgical, or hospital care benefits . . . .”).
[4] In re Arclin U.S. Holding, Inc., 416 B.R. at 119.
[5] See 11 U.S.C. § 1114(e)(1).
[6] See 5 Norton Bankruptcy Law and Practice 3d, § 105:1, at 105-4 n.6 (William L. Norton, Jr., ed., 3d ed. rev. 2009).
[7] See, e.g., In re New York Trap Rock Corp., 126 B.R. 19, 22 (Bankr. S.D.N.Y. 1991) (using ERISA’s definition of “plan, fund, or program” because Bankruptcy Code has no definition).
[8] See In re Arclin U.S. Holding, Inc., 416 B.R. at 121; see also Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 662 (2006) (“Here and there in the Bankruptcy Code Congress has included specific directions that establish the significance for bankruptcy law of a term used elsewhere in the federal statutes. No such directions are contained in [the statute at issue], and we have no warrant to write them into the text.” (citation omitted)).
[9] In re Arclin U.S. Holding, Inc., 416 B.R. at 121 (citing Howard Delivery Serv., 547 U.S. at 662); see Howard Delivery Serv., 547 U.S. at 662 (“This case turns . . . not on a definition borrowed from a statute . . . but on the essential character of [the term at issue].”).
[10] See In re Arclin U.S. Holding, Inc., 416 B.R. at 122.
[11] Id. at *3. However, explicit language may not always be the deciding factor. In In re Exide Technologies., 378 B.R. 762, 768–69 (Bankr. D. Del. 2007), the court held benefits described explicitly as “Death Benefit[s]” not to be retiree benefits under section 1114, even though that section defines “retiree benefits” as, inter alia, “benefits in the event of . . . death under any plan, fund, or program.” Judge Carey (who also decided In re Arclin) reasoned that the “Death Benefit” clause did not provide for any benefits; it only provided for the timing of payment of benefits already accrued. See id.
[12] The court also succinctly mentioned that the payments to Phillips were for health insurance for a retiree, thus further evincing their essential character as retiree benefits. See In re Arclin U.S. Holding, Inc., 416 B.R. at 122.