Employee Benefits in Bankruptcy Committee

ABI Committee News

Is ERISA’s New Premium for Pension Plans Terminated in Chapter 11 a Claim under Bankruptcy Code §101(5)?

The Deficit Reduction Act of 2005 amended the Employee Retirement Income Security Act of 1974 (ERISA)[1] to create a new termination premium for defined benefit pension plans that terminate under the distress and PBGC-initiated termination provisions of ERISA. Although the due date for the termination premium is generally tied to the date of plan termination under 29 U.S.C. §4048, a special rule applies for cases in which a pension plan is terminated during chapter 11 reorganizations. Essentially, the special rule provides that the termination premium does not arise until after the sponsor’s case is discharged or dismissed. Thus, a debtor whose pension plan is terminated during reorganization proceedings must consider the full termination premiums in creating a post-emergence business plan.

The Deficit Reduction Act of 2005

On Feb. 8, 2006, President Bush signed into law the Deficit Reduction Act of 2005 (DRA 2005).[2] Drafted in the shadow of large bankruptcies where Congress saw pension plans “dumped” during bankruptcy proceedings, Congress looked for ways to shore up the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures certain defined benefit pension plans under Title IV of ERISA.[3] The law significantly enhanced premiums payable to the PBGC. In addition to increasing the annual premiums due for ongoing insured pension plans, DRA 2005 created a new termination premium.

Section 8101 of DRA 2005 amended the ERISA provisions establishing the payment of statutory annual premiums under 29 U.S.C. §1306 for pension plans covered under Title IV of ERISA. Section 8101(a) of DRA 2005 increased the per-participant flat rate premiums from $19 to $30 for single employer plans and from $2.60 to $8 for multi-employer plans. The section also provided for inflation adjustments to flat rates for future years.[4]

Section 8101(b) of DRA 2005 added a new type of premium to ERISA: a termination premium under 29 U.S.C. §1306(a) applicable to single-employer plans following certain distress and PBGC-initiated terminations. The termination premium, explicitly added as an additional premium to the annual flat-rate and variable premiums,[5] was largely intended to compensate PBGC for the assumption of unfunded plan liabilities of former plan sponsors, whose plans are terminated during bankruptcy.[6]

The general rule for the termination premium was codified at 29 U.S.C. §1306(a)(7)(A). The termination premium of $1,250 per participant applies to terminations of single-employer plans under 29 U.S.C. §§1341(c)(2)(B)(ii), (iii), and §1342. While §1342(c)(2)(B)(ii)’s distress reorganization test explicitly applies to reorganization in bankruptcy or insolvency proceedings, the remaining tests apply to bankruptcy or nonbankruptcy situations. The premium is payable to PBGC for each of three years following certain distress and PBGC-initiated terminations that occur after Dec. 31, 2005.[7]

The designated payor for the termination premium is “the contributing sponsor as of immediately before the termination date.”[8] PBGC’s proposed regulations interpret this to mean the contributing sponsor on the day prior to the termination date.[9] Under 29 U.S.C. §1307(e)(2), each member of the contributing sponsor’s controlled group is jointly and severally liable for the amounts due.[10]

The termination premium is due within 30 days after the beginning of any applicable 12-month period, defined as the 12-month period beginning with the first month following the month in which termination date occurs and each of the following two 12-month periods.[11]

The Reorganization Special Rule

Plans terminated during bankruptcy reorganizations have a special rule for the termination premium. Under 29 U.S.C. §1306(a)(7)(B), if a plan is terminated during bankruptcy reorganization proceedings, the termination premium does not apply until the debtor emerges from chapter 11. The first 12-month period as referenced above then begins with the first month following the month that includes the debtor’s date of discharge or dismissal from chapter 11.[12]

Legislative history of the termination premium emphasizes that Congress intended that where a covered pension plan was terminated during bankruptcy reorganization proceedings, the termination premium constituted a set premium for each of the three years after a company emerged from bankruptcy.[13] Congress warned that the termination premiums were part of the post-emergence cost of terminating a pension plan during bankruptcy.[14] Rather than simply being able to dump a pension plan through reorganizing in bankruptcy, an entity must now maintain at least some ongoing financial responsibility following reorganization.[15]

Indeed, the very structure of the statute, with a separate special rule for terminations during bankruptcy reorganizations, indicates that Congress intended the termination premium to be treated differently when the plan sponsor was in bankruptcy reorganization proceedings. Similarly, the timing of the termination premium, which is to be paid for each of three years, indicates that Congress intended that where a sponsor continued to exist, it would maintain an ongoing financial obligation rather than a one-time payment of a bankruptcy “claim.”

Is the Termination Premium a “Claim” under the Code?

Some debtors may assert that the termination premium is a claim within the meaning of §101(5) of the Code, subject to discharge in chapter 11 proceedings.[16] The term “claim” means the “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured, or unsecured.”[17] Congress defined “claim” expansively under the Code, contemplating that “all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.”[18] Congress chose to give “claim” a broad scope, but courts have recognized that its reach is not without limit.

In LTV Steel Co. v. Shalala (In re Chateaugay Corp.) (Chateaugay II), the Second Circuit held that “the existence of a bankruptcy claim depends on (1) whether the claimant possessed a right to payment and (2) whether that right arose before the filing of the petition.”[19] The court further held that “[a] claim exists only if before the filing of the bankruptcy petition, the relationship between the debtor and the creditor contained all of the elements necessary to give rise to a legal obligation—‘a right to payment’—under the relevant nonbankruptcy law.”[20] This test implies that the time at which a claim arises is governed by the relevant nonbankruptcy law and later decisions have expressly so held.[21]

The Sixth Circuit has also held that a claim’s existence depends on the substantive nonbankruptcy law creating the right to payment. In CPT Holdings Inc. v. Industrial & Allied Employees Union Pension Plan, Local 73,[22] the court considered whether a multi-employer pension plan’s claim for withdrawal liability under ERISA had been discharged in a chapter 11 proceeding even though the employer withdrew from the pension plan after confirmation of the employer’s plan. The court reasoned that there was no right to payment under ERISA before the employer withdrew from the plan, precluding the existence of a claim before confirmation.[23]

Since the statutory right to payment against a reorganized debtor or designated payor for the termination premium expressly arises post-petition under 29 U.S.C. §1306(a)(7)(B), it is difficult to see how a claim for the termination premium could exist either pre-petition or pre-confirmation.[24] In the authors’ view, until the reorganized debtor emerges from chapter 11 there is simply no enforceable obligation or “right to payment” under the relevant non-bankruptcy law, ERISA.

[1] 29 U.S.C. §§1301-1461 (2000 & Supp. IV 2004).

[2] Pub. L. 109-171. DRA 2005 included a sunset provision that eliminated the termination premium for plans terminated after Dec. 31, 2010. Id., §8101(b). The Pension Protection Act of 2006 repealed the sunset provision. Pub. L. 109-280 §401(b).

[3] See, e.g., debate on S 1932, at 151 Cong. Rec. S12067 (Oct. 31, 2005) (remarks by Sen. Gregg); see also debate on HR 2830, at 151 Cong. Rec. H11755 (statement of Rep. McKeon), H11758 (statement of Rep. Andrews), H11759 (statement of Rep. Boehner), H11768 (statement of Rep. Stark) (commenting on the United Airlines bankruptcy), (Dec. 15, 2005).

[4] DRA 2005 §§8101(a)(1)(B) and (a)(2)(B). Prior to DRA 2005, flat rate premiums had not been raised since 1991. See “Pension Insurance Premiums,” at http://www.pbgc.gov/media/key-resources-for-the-press/content/page13541.html. Variable premium provisions were later changed by the Pension Protection Act of 2006, enacted in August 2006. See Pub. L. 109-280 §401(a).

[5] 29 U.S.C. §1307(a)(7)(A) (“Such premium shall be in addition to any other premium under this section.”).

[6] See H.R. Rep. No. 109-276, 336.

[7] The termination premium does not apply to terminations during a proceeding pursuant to a bankruptcy filing occurring before Oct. 18, 2005. DRA 2005 §8101(d)(2)(B). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became effective on Oct. 17, 2005.

[8] 29 U.S.C. §1306(a)(7)(D)(II).

[9] PBGC Proposed Rule on Premium Rates and Payment of Premiums, 72 Fed. Reg. 33,7755, 33,7757, 337762 (proposed Feb. 20, 2007) (to be codified at 29 C.F.R. pt. 4007.13(g)).

[10] See also id.

[11] 29 U.S.C. §§1306(a)(7)(C)(I) and (D)(i)(I).

[12] 29 U.S.C. §1306(a)(7)(C)(ii).

[13] H.R. Rep. No. 109-276 at 62, 348-49, 350 (2005); see also H. Comm. on Educ. and the Workforce, “House Committee Backs Measure to Place PBGC on More Solid Financial Foundation, Help Protect Agency From Massive Taxpayer Bailout” (Oct. 26, 2005), available at http://republicans.edlabor.house.gov/archive/press/press109/first/10oct/pbgc102605.htm; H. Comm. on Educ. and the Workforce, “Budget Proposals Strengthen Higher Education & Protect Pensions on Behalf of Students, Workers, Retirees & Taxpayers” (Nov. 1, 2005), available at http://republicans.edlabor.house.gov/archive/issues/109th/education/hea/hd110105.htm

[14] H.R. Rep. No. 109-276 at 348-49; 151 Cong. Rec. S12094 (Nov. 1, 2005) (remarks by Sen. Enzi).

[15] See, e.g., 151 Cong. Rec. H11660 (Dec. 15, 2005) (statement of Rep. Souter).

[16] See, e.g., Oneida Ltd. v. Pension Benefit Guaranty Corp. (In re Oneida Ltd.), Chapter 11 Case No. 06-10489, Adv. No. 06-01920 (Bankr. S.D.N.Y., filed Nov. 15, 2006).

[17] 11 U.S.C. §101(5).

[18] H.R. Rep. No. 95-595, at 309 (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6266.

[19] 53 F.3d 478, 497 (2d Cir. 1995).

[20] 53 F.3d at 497 (citing In re National Gypsum Co., 139 B.R. 397, 405 (N.D. Tex. 1992)).

[21] See, e.g., Olin v. Reiverwood Int’l Corp. (In re Manville Forest Products Corp.), 209 F.3d 125, 128 (2d Cir. 2000).

[22] 162 F.3d 405 (6th Cir. 1998).

[23] 162 F.3d at 409.

[24] The designated payor of the termination premium is “the contributing sponsor as of immediately before the termination date.” 29 U.S.C. §1306(a)(7)(D)(II).