A fundamental principle of bankruptcy law provides that similarly situated creditors are to be treated similarly. That concept seems straightforward, but applying it in today’s complex corporate restructuring environment is not, as was illustrated in the reorganization of Peabody Energy Corporation (“Peabody” or “the Company”).
Like many corporate employers, Peabody offers its senior management team and other highly compensated employees (“Participants”) the option of participating in a “top hat plan” formally known as the Company’s Supplemental Employee Retirement Account (SERA). The SERA is a deferred compensation plan designed to supplement typical pension payments for high-earning executives because the tax code imposes limitations on executive contributions to standard pension plans. Through the SERA, a Participant defers a certain percentage, determined by the Participant, of his compensation, which is then credited by the Company into an account. Under the terms of the SERA, a Participant becomes fully vested in the SERA funds upon his separation from the Company and becomes entitled to receive those funds later, typically within six months of his separation from the Company.
After Peabody filed its plan of reorganization in December 2016, some former executives (“Former Executives”), all of whom had separated from Peabody prior to the company's bankruptcy, sought to collect the monies owed to them under the SERA. The Former Executives were concerned that Peabody was refusing to disburse the funds from their SERA accounts and, according to its plan of reorganization, intended to “assume” its SERA obligations owed to current executives (i.e., pay those benefits in full) and “reject” its SERA obligations owed to the Former Executives (i.e., treat them as general unsecured creditors and pay them only a fraction of their SERA benefits). In light of Peabody’s planned treatment of the SERA, the Former Executives objected to Peabody’s plan of reorganization and asked the Bankruptcy Court to answer a fundamental question of bankruptcy law: how was it lawful for the Company to treat certain creditors (i.e., the current executives) more favorably than others (i.e., the Former Executives) when those creditors’ claims against the Company were exactly the same. Although the Former Executives’ question was seemingly answered by the "equal creditors, equal treatment" principle, the law in this area was undeveloped, which allowed both parties to present novel arguments in support of their positions.
Initially, the Company defended its position by relying on the general rule that bankruptcy law allows debtors to assume or reject an executory contract, a contract under which both parties have continuing obligations, but provides no such option for a non-executory contract, a contract under which one or both parties have no performance obligation. According to Peabody, the law was clear: deferred compensation agreements like the SERA are non-executory if, at the time of the bankruptcy filing, the executive was already retired and owed no further duties to the debtor. Therefore, the law prohibited Peabody from “assuming” the SERA for the Former Executives and consequently permitted the Company’s differential treatment of the SERA’s Participants based on their employment status. To counter Peabody’s position, the Former Executives contended that although the SERA was non-executory with respect to them, the SERA was also non-executory with respect to the current executives, as was demonstrated in the Chrysler bankruptcy cases, where the law firm also representing Peabody in its bankruptcy proceedings had successfully argued that a supplemental executive retirement plan is non-executory for all participants and therefore cannot be assumed only for current executives. This seemed to suggest that the law required Peabody to treat all SERA Participants the same and either pay all Participants in full or reduce all Participants to the status of general unsecured creditors.
Responding to the Former Executives’ argument, Peabody abandoned its attempt to treat the SERA as being executory for current executives. Instead, Peabody revised its plan of reorganization to provide that it was “amending” the SERA by transferring the current executives' SERA obligations to a new top hat plan, which Peabody argued was expressly permitted by the SERA’s terms and justified by the bankruptcy “doctrine of necessity,” which permits debtors to favor certain creditors over others if doing so is essential to the debtors’ continued operations and successful reorganization. The Former Executives characterized Peabody’s “amendment” argument as a disguised attempt to violate the law’s prohibition of differential treatment of equal creditors and suggested that Peabody’s preservation of the SERA for the current executives was not “necessary,” because Peabody had already proposed to give the current executives a 10 percent ownership interest in the reorganized Peabody, as an incentive for them to remain with the Company through its reorganization.
Finally, the Former Executives took the offensive by alleging that the Company’s attempt to honor the benefits owed to the current executives under the SERA while denying those same benefits to the Former Executives, violated state and federal age discrimination laws because it had a disparate impact on older Participants. In response, Peabody denied that it was discriminating against the Former Executives and contended that its treatment of the SERA was a proper exercise of its business judgment and was designed to provide benefits to those employees who would be responsible for implementing its plan of reorganization and managing its post-emergence business operations.
With both sides making compelling arguments, the parties settled prior to the Bankruptcy Court’s ruling on the Former Executives’ objection. Although a decision on the merits was not reached, the arguments raised by the parties presented important issues of which corporate debtors, corporate executives, and the bankruptcy practitioners who represent them should be aware.