PBGC-Initiated Pension Plan Terminations after the United Airlines Pilots’ Pension Plan Termination Case
Written by: Jeffrey B. Cohen [1]
Ivins, Phillips & Barker; Washington, D.C.
Section 4042(a) of the Employee Retirement Income Security Act of 1974 (ERISA) authorizes the Pension Benefit Guaranty Corporation (PBGC) to initiate termination of a defined benefit plan, in its discretion, whenever PBGC determines that:
(1) the plan has not met the minimum funding requirements;
(2) the plan will be unable to pay benefits when due;
(3) there has been a distribution to a substantial owner (as described in ERISA §4043(c)(7)); or
(4) the possible long-run loss of PBGC with respect to the plan is reasonably expected to increase unreasonably if the plan is not terminated.
The “long-run loss” provision is the most commonly utilized statutory ground where, for instance, the agency determines that the break-up of a controlled group is going to unreasonably increase PBGC’s loss in the absence of termination.[2] Once PBGC makes such a determination, the plan administrator may agree to the termination and the appointment of a trustee. [3] In the absence of such agreement, PBGC may, under ERISA §4042(c), “apply to the appropriate United States district court for a decree adjudicating that the plan must be terminated in order to protect the interests of the participants or to avoid any unreasonable deterioration of the financial condition of the plan or any unreasonable increase in the liability of the fund.” Section 4042(e) of ERISA provides that “[a]n application by [PBGC] under this section may be filed notwithstanding the pendency in the same or any other court of any bankruptcy. . . .”
PBGC typically has filed so-called “involuntary” termination actions in federal district court, often where a bankruptcy is pending, reading the provision of §4042(e) as an express exemption from the automatic stay.[4] Moreover, PBGC was accorded substantial deference in the exercise of its discretion, and courts reviewed its determination under the arbitrary and capricious standard of review in accordance with bedrock principles of administrative law. This deferential review, the scope of which was limited to the administrative record before the agency at the time of its decision, resulted in relatively summary proceedings in district court without discovery and expert battles, giving PBGC the upper hand in such litigation.
The propriety of proceeding in that fashion has now been put in doubt by a series of rulings in the United Airlines bankruptcy proceedings, arising out of PBGC’s exercise of its authority under §4042 of ERISA involving the United Airlines Pilots’ Pension Plan. When PBGC brought its action in district court, United successfully argued that the action should be referred to the bankruptcy court under the standing “order of reference.” While it was ultimately held to be a “noncore” matter, the case was referred to the bankruptcy court, which held that discovery beyond the administrative record was permissible, and that the Pan Am line of cases gave PBGC too much deference in view of the wording of §4042 of ERISA. Specifically, the bankruptcy court found that PBGC was not entitled to deference under §4042(c) because its determination under subsection (a) was not self-enforcing and was ineffective in the absence of a judicial decree. Accordingly, the bankruptcy court held that a trial de novo was necessary on the issue of whether PBGC’s increased risk of loss was unreasonable within the meaning of §4042(c). Following a trial on that issue, the bankruptcy court held that PBGC had met its burden of proof, and PBGC prevailed on the merits, obtaining an order terminating the plan as of the date it had sought. On appeal, the Seventh Circuit Court of Appeals affirmed that result, but rejected PBGC’s argument that it was entitled to deference.
Thus, in future cases, one can expect that debtors will look to the United playbook and try to have PBGC’s involuntary termination cases heard by bankruptcy judges, rather than district judges, in the first instance. In addition, those debtors will likely argue that review should not be limited to the agency’s administrative record, but that there should be a trial de novo on whether PBGC’s loss is unreasonable. And those debtors will be armed with an appellate decision authored by Chief Judge Easterbrook, which quite pointedly says that PBGC is just like any other litigant and is not entitled to deference when it goes to court under §4042 of ERISA.
On the other hand, one can expect that PBGC will not quietly acquiesce, at least not in circuits other than the Seventh Circuit. Rather, it should be expected that PBGC will continue to file its involuntary termination actions in district court, expecting the action to stay there. Similarly, don’t expect that PBGC will abandon its position that review should be deferential, and limited to the administrative record before the agency at the time of its decision just because one appellate panel misapprehended, in the agency’s view, that there is any meaningful distinction between the informal adjudication that took place in the LTV case under §4047 of ERISA and the informal adjudication that PBGC engages in before initiating an action under §4042.
Ultimately, it is possible that the effect of the Pilots’ Pension Plan Termination decision is of minimal consequence going forward, because of a provision in the Pension Protection Act of 2006 (PPA). As is often the case, the most significant issue in the Pilots’ Pension Plan Termination case wasn’t whether the pension plan would terminate—that was inevitable given the agreement between the debtor-in-possession and the Pilots’ union—but rather what the date of plan termination would be. The date of termination is of central importance in the pension insurance scheme because it fixes the amount of the liabilities, entitlements to benefits and the composition of the controlled group. It is also sometimes inextricably linked, as it was in Pilots’ Pension Plan Termination, to PBGC’s loss prevention. However, effective for all bankruptcies filed after Sept. 16, 2006, the date of the bankruptcy filing is the deemed date of plan termination for purposes of determining the amount of benefits guaranteed by PBGC, and which benefits get priority under ERISA’s asset allocation rules. This provision will probably obviate the need for PBGC to pre-emptively seek plan termination during a bankruptcy to prevent further loss.
[1] The author was formerly chief counsel of PBGC and participated in the litigation of the Pilots’ Pension Plan Termination case in the United Airlines bankruptcy. He personally argued the case on behalf of PBGC in the Seventh Circuit Court of Appeals.
[2] Pension Benefit Guar. Corp. v. FEL Corp., 798 F. Supp 239 (D. N.J. 1992).
[3] ERISA §4042(b)(3); 29 U.S.C.A. §1342(b)(3) (West 2008).
[4] Even if there were not a specific exemption in ERISA, PBGC would have a good argument that its termination action falls within the police power exception to the automatic stay under the Bankruptcy Code. 11 U.S.C.A. §362(b)(4) (West 2008).