In In Re Kaiser Aluminum Corp., __F.3d__(3d Cir. 2006),
2006 U.S.App. LEXIS 18746 (July 26, 2006), the Third Circuit held
that pension plans must be considered in the aggregate, not
individually, when an employer in Chapter 11 bankruptcy seeks to
terminate more than one plan.
Under ERISA, an employer seeking reorganization in a Chapter 11
bankruptcy may terminate a pension plan in a voluntary "distress
termination" if the employer satisfies certain notice requirements
and demonstrates to the bankruptcy court that it will be unable to
pay its debts and continue in business outside of Chapter 11 unless
the pension plan is terminated. 29 U.S.C.
§ 1341(c)(2)(B)(ii)(IV). This statutory requirement for a
plan termination is commonly known as the "reorganization test."
Between February 2002 and January 2003, Kaiser Aluminum
Corporation and 25 of its affiliates filed for Chapter 11 bankruptcy
protection. As part of the reorganization, Kaiser proposed to
voluntarily terminate six of its seven defined benefit pension
plans, which covered over 10,000 active employees and
retirees. In a proceeding before the U.S. Bankruptcy Court for
the District of Delaware, the PBGC opposed the motion to terminate,
arguing that each plan required a separate determination of whether
it satisfied the reorganization test. The PBGC acknowledged
that the two largest pension plans satisfied the reorganization test
because their continuance would clearly impose an unsustainable
burden on Kaiser, but argued that the four smaller plans, if
considered on a plan-by-plan basis, failed to meet the test.
This appears to have been a novel approach for the PBGC to take.
The bankruptcy court applied the reorganization test to all six
plans in the aggregate and concluded their termination was required
for Kaiser to emerge from Chapter 11. It rejected the PBGC's
approach on the ground that it would violate the requirement in the
Bankruptcy Code that debtors bargain with unions in a fair and
equitable manner. See 11 U.S.C. § 1113(b).
On appeal by the PBGC, the District Court for the District of
Delaware affirmed. On appeal to the Third Circuit, the court
affirmed, noting that this was an issue of first impression before
the Courts of Appeals. The decision was based on
practicality. Congress did not provide any guidance in ERISA
on how the courts should apply the reorganization test to the
multiple termination situation. The PBGC had argued that since
Title IV of ERISA uses the singular terms "single-employer plan" and
"plan," the plan-by-plan approach was required.
In the court's view, the PBGC's plan-by-plan approach was
"unworkable" inasmuch as it would require courts to make basic
assumptions about the order in which the plans should be considered
and the status of other plans the plan sponsor seeks to
terminate. The court concluded that ERISA, as currently
drafted, leaves open "too many questions" about how to engage in a
plan-by-plan analysis for a court to conclude that Congress
envisioned such an analysis in the context of multiple
terminations. The court also explained that the PBGC's
approach would require the bankruptcy court to depart from its
traditional role as an agent of equity. The bankruptcy court
would be required to terminate some of the plans, and leave others
in place, without a principled basis for drawing the line as to
which workers should be preferred over others.
The court also rejected the PBGC's argument that a general
legislative trend to tighten restrictions on plan terminations
indicated that Congress would endorse the plan-by-plan analysis
espoused by the PBGC. Lastly, the court rejected the argument
that the courts should show deference to the PBGC's
interpretation. The court found that the PBGC lacked both the
expertise and the authority to determine when a plan should be
terminated pursuant to the reorganization test. Issues
involving an employer's bankruptcy and reorganization fall within
the bankruptcy court's expertise, instead.
For more information, please contact any of the following members
of Thelen Reid's Employee
Benefits, Executive Compensation, and ERISA practice group:
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©2006 Thelen Reid & Priest LLP. This article
has been published as an information service to clients and friends
of Thelen Reid. Please recognize that the information is general in
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