Employment Law | Expert Legal Commentary
October 26, 2010
In Re Visteon Corp. : Plan Sponsor Cannot Unilaterally Terminate Retirement Benefits While in Bankruptcy
The U.S. Court of Appeals for the Third Circuit broke with the prevailing view in federal courts and held that a bankrupt employer cannot unilaterally terminate non-vested retiree benefits while in bankruptcy, even if it retained the contractual right to do so outside of bankruptcy. The decision in IUE-CWA v. Visteon Corp. (“In re Visteon Corp.”), 612 F.3d 210 (3rd Cir. 2010), is contrary to opinions issued on the same subject by the Second Circuit Court of Appeals and the majority of Federal district and bankruptcy courts that had addressed the topic. Visteon gives unions and the retirees they represent more leverage in bankruptcy negotiations with debtors, and increases the need for employer debtors to undertake even more strategic planning prior to filing for bankruptcy.
Visteon Corporation, one of the world’s largest suppliers of automotive parts, provided certain health and life insurance benefits for its retirees. The benefits plans were memorialized in a series of collective bargaining agreements and summary plan descriptions, the most recent of which gave Visteon the unilateral right to modify or terminate retiree benefits.
As the American automotive market went into decline, so did Visteon’s business, and on May 28, 2009, Visteon filed a petition under Chapter 11 of the Bankruptcy Code. A month later, Visteon moved the bankruptcy court for permission to allow it to terminate its U.S. retiree benefit plans under Bankruptcy Code section 363(b)(1), which provides that the bankruptcy trustee “after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” Bankruptcy courts usually grant such requests if they meet the deferential business judgment standard. The requested termination would affect about 8,000 of Visteon’s present and former employees and their spouses and dependents.
The IUE-CWA, a union representing about 21,000 retirees, objected to Visteon’s motion, claiming that in bankruptcy, Visteon could not unilaterally terminate any retirement benefits, but instead had to follow the procedures set forth in Section 1114 of the Bankruptcy Code.
Both the Bankruptcy Court and, on appeal, the District Court, rejected the Union’s argument and approved Visteon’s request to terminate benefits. The two courts followed the majority trend of nearly every other federal court to address the issue, finding that application of Section 1114 to this request “would lead to an absurd result” because it would give the retirees greater rights and protection in bankruptcy than they would have had outside of bankruptcy, which is directly contrary to the intent of the Bankruptcy Code. The District Court called the union’s argument “a unique if not revolutionary interpretation of the Bankruptcy Code by improving on the pre-petition, contractual rights of a third part constituent as the result of the filing of a bankruptcy case.” IUE-CWA v. Visteon, No. 09-11786, 2010 WL 1416796, *3 (D. Del. 2010).
Section 1114 Prevents a Debtor From Unilaterally Terminating Retirement Benefits
Section 1114 of the Bankruptcy Code provides certain protections for “retiree benefits” during a Chapter 11 proceeding. Section 1114(e)(1) states: “Notwithstanding any other provision of this title, the [trustee] shall timely pay and shall not modify any retiree benefits” except by undertaking the procedure set forth in the statute. Section 1114 goes on to outline a process by which the trustee may seek modification or termination of such benefits, requiring the trustee to first attempt good faith negotiations with the retirees’ representative to look for workable modification. If the retirees’ representative refuses without good cause to accept good faith modifications, the Court can then consider the debtor’s request to modify or terminate the benefits.
The Third Circuit categorically rejected the decisions of the Bankruptcy and District Courts, as well as the prevailing trend among other federal courts on the application of Section 1114 in this case. The Circuit Court first focused on the plain language of the statute, finding that it very clearly restricts the debtor’s ability to modify any retirement benefits to any and all groups of retirees, whether vested or not. The Circuit Court stated: “Section 1114 is unambiguous and clearly applies to any and all retiree benefits, including the ones at issue here.” In re Visteon Corp., 612 F.3d 210, 219 (3rd Cir. 2010) The Circuit Court took to task other courts that had reached different conclusions, claiming that those courts had “mistakenly relied on their own views about sensible policy, rather than on the congressional policy choice reflected in the unambiguous language of the statute.” Id.
The Third Circuit then reviewed the legislative history of section 1114 to ensure that the plain language comported with the intentions of the drafters, or whether it was “absurd and must be rejected.” Id. at n.22. The Court acknowledged that its holding would indeed improve the rights of the retirees in bankruptcy compared with their rights outside of bankruptcy, but in reviewing the legislative history, the Circuit Court determined that this was consistent with the drafters’ intent. The legislative history indicated that the drafters wanted to make retirees a unique group of creditors with special protection because of their particular vulnerability during an employer’s bankruptcy proceeding. Id. at 233.
The Court noted that Section 1114 does not absolutely prevent debtor employers from terminating or modifying retirement benefits, they just have to jump through a few procedural hoops to accomplish that end. Id. at 236.
In dicta, the Circuit Court did offer some good news for Visteon and similarly situated employer debtors: So long as they do not voluntarily undertake new or enhanced obligations during the Section 1114 process, their rights to freely and unilaterally terminate retirement benefits will remain intact once they emerge from Chapter 11 bankruptcy. Id.
Visteon clearly increases the leverage of unions and the retirees they represent in the bankruptcy negotiation process, preventing debtors and bankruptcy trustees from unilaterally shedding retirement benefit debt as part of the bankruptcy restructuring. The message for employers is clear – if potential bankruptcy looms on the horizon, employers might consider terminating these retirement benefits well in advance of any bankruptcy. Recent requirements reinstate any retiree benefits that were terminated or modified within 180 days prior to the filing of a bankruptcy petition, so these considerations must be a necessary part of the strategic planning that begins many months before filing. Given that the Third Circuit stands alone in this interpretation at the moment, debtors may want to give careful consideration to the appropriate venue for any bankruptcy filing.
Because Visteon does create a clear federal court split, the issue may become ripe for Supreme Court review in the future. In the meantime, pre-filing considerations and planning have never been more important for employers facing uncertain financial conditions and potential bankruptcy.
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