IUE-CWA v Visteon Corporation, 2010 WL 2735715 (3rd Cir July 13, 2010)
The Third Circuit Court of Appeals broke from the Second Circuit, and a majority of lower court decisions, to give union and non-union retirees more protections in bankruptcy under their benefit plans than were provided for in the benefit plans themselves. The Court of Appeals held that section 1114 of the Bankruptcy Code, which sets forth strict procedures for obtaining modification of retiree benefit plans, requires the debtor to abide by those procedures before cancelling retiree health and life insurance benefits. This decision prohibits a debtor-employer from unilaterally terminating such benefits, even if the benefit plan itself permits the debtor to do so. Although the majority of courts in other circuits have ruled that Congress could not have intended to give more benefits post-petition to retirees than they had under their contracts pre-petition, the Court of Appeals disagreed, holding that the broad language in section 1114 is unambiguous on its face and that Congress did indeed intend to give retirees additional protections from the debtor and its other creditors.
The Industrial Division of the Communication Workers of America union represented hourly workers at manufacturing plants owned by Visteon Corporation. Visteon provided health and life insurance benefits to retirees, as set forth in the collective bargaining agreements and the summary plan descriptions. In the plan descriptions, Visteon reserved “the right to suspend, amend or terminate the Plan … at any time….”
On May 28, 2009, Visteon filed a petition for chapter 11 bankruptcy. Visteon continued to operate as a debtor-in-possession, restructuring with the goal of successfully emerging from bankruptcy.
Within weeks of the filing, Visteon moved the Bankruptcy Court under section 363(b)(1) (which has far less onerous restrictions than section 1114) for permission to terminate all retiree benefits. The court granted Visteon’s motion. This affected some 8,000 people in all, 2,100 of whom were represented by this union. The union appealed to the District Court, which affirmed the termination. The union then appealed to the Third Circuit Court of Appeals.
Section 1114 provides procedural and substantive protections for retiree benefits during a chapter 11 case. The primary subsection at issue, 1114(e), provides: “[n] otwithstanding any other provision of this title, the [trustee or debtor] shall timely pay and shall not modify any retiree benefits” unless the court orders, or the trustee and the authorized representative of the retirees agree to, the modification of such benefits (emphasis added). Section 1114 requires a debtor to make a modification proposal to retirees, disclose its financial information, and to meet and confer with retirees in good faith discussions. If such efforts fail, the court will only grant a motion to modify benefits over retiree objections if the retirees refused to accept the proposal without “good cause,” and the “modification is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor, and all of the affected parties are treated fairly and equitably….”
The Bankruptcy and District Courts both concluded—consistent with the majority of courts that have ruled on the issue— that since Visteon had the right to terminate the benefits at-will outside of bankruptcy, it continued to have that right during bankruptcy. Essentially, those courts held that restricting Visteon’s contractual right to terminate benefits during bankruptcy would give the union greater rights in bankruptcy than the union had outside of the process, which would serve no bankruptcy purpose. Therefore, these courts concluded, section 1114 was inoperable here.
The union appealed, arguing that the plain, unambiguous language of section 1114 made no exceptions for benefit plans that permitted unilateral termination. The retirees argued that section 1114 was enacted, along with its counterpart section 1129(a)(13), as the primary components of the Retiree Benefits Bankruptcy Protection Act of 1988. The union noted also that this legislation was the direct result of public and Congress’ dismay regarding the actions of LTV Corporation, which during its 1986 bankruptcy, terminated the health and life insurance benefits of 78,000 retirees without notice.
The Court of Appeals held “that section 1114 is unambiguous and clearly applies to any and all retiree benefits, including the ones at issue here. Moreover, despite arguments to the contrary, the plain language of section 1114 produces a result which is neither at odds with legislative intent, nor absurd. Accordingly, disregarding the text of that statute is tantamount to a judicial repeal of the very protections Congress intended to afford in these circumstances.”
However, the Court of Appeals also ruled that these protections were somewhat fleeting, and that upon the entry of a plan confirmation order, section 1129 permitted the debtor to unilaterally terminate benefits under the express language of its agreements—assuming that the debtor did not modify retiree rights under 1114 before entry of the confirmation order.
The Court of Appeals acknowledged that its decision was at odds with the majority of bankruptcy and district courts that had addressed this issue, and was seemingly in tension with a Second Circuit opinion as well. “We are convinced that in reaching these contrary conclusions as to the scope of section 1114, these courts mistakenly relied on their own views about sensible policy, rather than on the congressional policy choice reflected in the unambiguous language of the statute.” The Court of Appeals supported its decision on three grounds: the language of the statute; legislative intent; and, lack of absurdity in this statutory interpretation.
Plain Statutory Language
The court began by analyzing the language of the statute. The section states that the bankruptcy trustee “shall timely pay and shall not modify any retiree benefits,” except through the procedures set forth in the statute. The only subsection of 1114 that limits this requirement deals with high-income retirees. Otherwise, section 1114 does not allow a debtor or trustee to terminate or modify retiree benefits outside of the procedures set forth in the statute—not even if the benefit agreement permits unilateral termination.
The Court of Appeals ruled that other courts were mistaken in their findings that section 1114 was rendered ambiguous by the language of 1129(a)(13). Unlike section 1114, section 1129(a)(13) requires that a debtor’s reorganization plan provide for “the continuation after its effective date of payment of all retiree benefits … for the duration of the period the debtor has obligated itself to provide such benefits (emphasis added).” In other words, section 1129(a)(13) recognizes that a debtor may not have obligated itself to provide such benefits. Based on the seeming inconsistencies, the majority of courts have ruled that Congress must have intended section 1114 to have a similar “carve-out.” The Court of Appeals disagreed, holding that Congress said what it meant, and meant what it said, and that the differences between the two statutory sections must have been intentional.
The court also addressed a relatively recent amendment to section 1114; namely, 1114(l). This subsection requires a court to reinstate retiree benefits to the status the benefits had just prior to any modification that a debtor made in the 180-day period before filing a bankruptcy petition. The court believed that this subsection strengthened its reading of section 1114(e), and provided “additional evidence of the coherence of the statutory scheme Congress has created here. . . . Although we think that the language of section 1114 was always unambiguous, this subsection certainly reinforces our view of the text.”
Second, the Court of Appeals rejected Visteon’s “cherry-picking favorable snippets of legislative history.” The court cited the comments of several representatives and senators involved in drafting the legislation, as well as conference reports, in support of its reading of the statute. For example, the court cited the Senate Conference Report: “Section 1114 makes it clear that when a Chapter 11 petition is filed retiree benefit payments must be continued without change until and unless a modification is agreed to by the parties or ordered by the court. Section 1114 rejects any other basis for trustees to cease or modify retiree benefit payments.” (Emphasis added in the opinion.)
The court even spent time reviewing the impetus behind the enactment of section 1114, the LTV Corporation bankruptcy and termination of benefits for 78,000 retirees. LTV’s actions affected union and non-union employees. “Congress accordingly was fully committed to ensuring that both union and non-union employees would be equally protected by the Retiree Benefits Bankruptcy Protection Act.”
Lastly, the court rejected Visteon’s argument that it would be absurd to interpret “section 1114 to give retirees more rights under Chapter 11 than they would have outside of bankruptcy.” The Court of Appeals ruled that Congress clearly intended to give additional protections to retirees during the pendency of a bankruptcy case, precisely when the debtor felt the most intense pressure from its creditors to terminate the benefits of its retirees. The court ruled that it was for this very reason that, after entry of an order confirming a plan of reorganization, and after these pressures were alleviated, section 1129(a)(13) once again permitted the debtor to unilaterally terminate these benefits if the agreements so provided (assuming no section 1114 modifications were made before confirmation).
“Far from being ‘absurd,’ a literal interpretation of section 1114 reveals a remedial and equitable statutory scheme that, consistent with Congress’ concerns when enacting the RBBPA, attempts to prevent the human dimension of terminating retiree benefits from being obscured by the business of bankruptcy.”
The Third Circuit Court of Appeals held that section 1114 is clear and unambiguous on its face. Visteon could not unilaterally terminate the retiree benefits without abiding by the procedures set forth in section 1114, even though Visteon had the contractual right to terminate the benefits outside of bankruptcy. “We need not, and should not, be concerned with whether retiree benefits should be extended greater protection during bankruptcy than otherwise; that is a job for Congress. We need only give effect to the law Congress has enacted.”
However, so long as a debtor does not modify the subject agreements during the case under section 1114, it can regain its contractual rights to unilaterally terminate such benefits after the court approves its plan of reorganization.
If a company finds itself in a financial position where it can wait to unilaterally terminate benefits after confirmation (after section 1114 is no longer a bar), the company should be careful to not modify retiree benefits during the pendency of bankruptcy proceedings in such a way that it loses the contractual right to terminate post-bankruptcy under section 1129(a)(13).