Don’t Blame Pension Terminations on Our Bankruptcy System
John D. Penn
Haynes and Boone LLP
Fort Worth , Texas
Many in the media tend to blame large pension terminations on our bankruptcy system. It’s not uncommon to see articles claiming that companies use the bankruptcy court to eliminate their obligation to pay benefits for the lifetime of their former employees. What you never read about is anyone recognizing that a promise of “lifetime benefits” is good for the lifetime of the employee or the company – whichever ends first.
Blaming Chapter 11 for losses of jobs, security and pensions is like blaming emergency rooms for traffic accidents. You find victims of each there but neither actually caused the victim’s problems. Layoffs and pension terminations arise from a combination of many factors, large and small – including making all types of promises that could not ultimately be kept.
When companies can no longer continue in business and satisfy all of their obligations – including those to current and former workers – they really has only two choices. The companies can either close their doors and sell off parts of themselves to start up companies that would have no “legacy costs” or reorganize themselves to try to keep existing workers employed, even if they go forward with reduced wages and benefits. Chapter 11 is not sought out as a venue of choice – it is the “least worst option” of the two.
Granted, workers and retirees lose in bankruptcy court – but many others lose much, much more. The undeniable reality of bankruptcy is that billions of dollars of obligations are discharged each year because debtors cannot pay them. Of those losses, suppliers, shareholders and bondholders suffer losses that are not partially offset by the Pension Benefit Guaranty Corporation, Medicare or Social Security even though some of the credit they provided was undoubtedly spent, in part, to pay wages and benefits to the debtor’s workers.
Those advocating that either collective bargaining agreements or retiree benefits should be exempt from bankruptcy never tell readers the impact of such a policy. If companies are unable to deal with employment obligations in Chapter 11, the only remaining option for insolvent companies would be closure and liquidation. When a company is liquidated, it stops paying any retiree benefits and collective bargaining agreements become mere artifacts because no employees remain.
Reporters and commentators also feed some common misconceptions about bankruptcy. For example, arguments that Delphi’s ability to obtain $2 billion in loans means that “Delphi was creditworthy” ignore the reality that the only way that money was available is that the lenders received priority above all of Delphi’s pre-bankruptcy unsecured debts (including PBGC obligations). They also characterize debtor-in-possession lending as extremely lucrative yet do not acknowledge the risk undertaken by DIP lenders.
Arguing that managers should be fired rather than incentivized ignores the reality that replacing senior management at a company in bankruptcy is always incredibly expensive. The choice between paying replacement management tremendous sums to step into a troubled company with an uncertain future or paying consultants an hourly rate to manage the company is not much of a choice at all. The “incentives” actually save money for all by not requiring the company to hire expensive replacements.
Perhaps the most common misconception in the media is that bankruptcy professionals are overpaid. You never hear that brain surgeons saving patients’ lives are overpaid. Yet, bankruptcy professionals who literally breathe life into the dying carcasses of insolvent companies are criticized for their efforts that allow many companies to continue in business and continue to provide jobs that support thousands of families. Companies that find themselves back in bankruptcy court for a return trip usually end up there because they did not cut deeply enough. In trying to pay as much as possible to creditors and employees, the companies did not give themselves enough of a cushion against the uncertainties that materialized when they emerged.
Companies have to deal with economic pressures on many fronts, including domestic start up companies with no “legacy costs,” foreign competition and demands from shareholders to maximize stock values. Always overlooked in discussions about shareholders, corporations, profits and is who these unnamed shareholders actually are (the implication being that they are “rich fat cats.”) The fact that employee pension plans hold hundreds of billions of dollars of stock that will fund retiree benefits and which could also provide a source of financing for companies in bankruptcy is always overlooked.
If lending to Chapter 11 debtors is so easy, so safe and yet so lucrative, why are the pension funds not making these “safe” and “lucrative” loans? Instead of only complaining about losses related to bankruptcy cases, pension managers and organized labor could “put their money where their mouth is,” and make these loans as a way of improving the security of their members’ retirements. If the loans are too risky for that, DIP lenders should not be criticized for profiting handsomely for taking large risks.
Perhaps what is really showing is that we are undergoing a societal change away from having someone else taking care of us (defined benefit plans and employer provided, “no cost” healthcare) toward assuming responsibility for ourselves by saving for our own retirements and paying for part of our own health insurance. These changes are never easy and create stress wherever they emerge.
The U.S. bankruptcy system is the “relief valve” where all of these varied pressures emerge gradually rather than explosively. Instead of criticizing the system that provides alternatives for companies to avoid a meltdown through liquidation by preserving some “going concern” value for all, we would have been better served by first correctly describing the situation and then suggesting alternatives that would allow some workers to continue to be employed rather than suggesting a course that will certainly lead to liquidations and greater unemployment. In the final analysis, even the skeptics would find that our bankruptcy system deals with problems that it did not create rather than creating problems that it cannot fix.
About the Author
John D. Penn is a partner at Haynes and Boone LLP in Ft. Worth, Texas, and the president of the American Bankruptcy Institute. He is board-certified in business bankruptcy law by both the Texas Board of Legal Specialization and the American Board of Certification. Mr. Penn received his B.B.A. from Baylor University and his J.D. from the Baylor University School of Law.