Thank you Gloria Norton -- ed.

By Elizabeth Bennett
Delaware Law Weekly
08-21-2006

In a decision that could have far-reaching implications if more large American companies file for bankruptcy, the 3rd U.S. Circuit Court of Appeals ruled that multiple pension plans should be considered in the aggregate for purposes of reorganization under Chapter 11.

Circuit Judge Marjorie O. Rendell wrote the 41-page opinion for In re Kaiser Aluminum Corp. after arguments were heard in April by Rendell, Judge D. Brooks Smith, and Senior Judge Ruggero J. Aldisert. The opinion was entered July 26.

"The instant case raises a question of first impression among the courts of appeal: When a Chapter 11 debtor seeks to terminate multiple pension plans simultaneously under the reorganization test, should a court apply the test to each plan independently, or to all of the plans in the aggregate?" Rendell wrote.

The opinion proceeded to consider the arguments of the appellant, Pension Benefit Guaranty Corp., a federal corporation set up in the 1970s to cover failed pension plans. The court concluded that, in the absence of instructions from the U.S. Congress on the matter, to consider the plans in aggregate is the most logical, equitable method.

"I think it’s a pretty significant precedent," said Gregory M. Gordon, a partner with Jones Day in Dallas and lead attorney for Kaiser. "There are industries that are in financial distress. One is the auto parts industry, as well as automakers and the like, that have multiple pension plans. This is the only case at the level of the circuit court that rules on the issue."

A spokesman for the PBGC said its lawyer declined to comment "because plan aggregation is an issue in other current PBGC cases."

In her opinion, Rendell said the court needed to examine the text of the Employee Retirement Income Security Act "for indicia of congressional intent on the issue."

Rendell noted that in every similar case identified, bankruptcy courts have applied an aggregate analysis, "apparently without protest from the PBGC."

The PBGC spokesman took care to point out that Kaiser was not the first case "in which the PBGC has asserted that pension termination should be judged plan-by-plan," adding that it had done so in a 2005 case in Hawaii bankruptcy case captioned In re Aloha Airgroup Inc., among others.

The Kaiser matter, in which the aluminum manufacturer sought to terminate six of its pension plans, was first considered by Delaware’s Bankruptcy Court in early 2004, which allowed it to proceed as part of a reorganization, the 3rd Circuit opinion said.

The PBGC appealed that decision to the U.S. District Court for the District of Delaware. In March 2005, Judge Joseph J. Farnan affirmed the bankruptcy court.

In his decision, Farnan wrote that the pertinent statute -- Section 1341 of ERISA -- does not "expressly mandate an approach to take for an employee with multiple plans, and there is no binding precedent on point," and that absent such directives he did not find the Bankruptcy Court’s conclusion clearly erroneous. According to information on PBGC’s Web site, it was created under ERISA to insure the pensions of "more than 34 million workers and retirees in nearly 29,000 private-sector defined benefit pension plans under its single-employer insurance program."

As of September 2005, PBGC had a $22.8 billion deficit for its single-employer pension insurance program. Through its appeal, according to the 3rd Circuit opinion, the PBGC was seeking to reduce its liability for Kaiser’s pension plans. It pointed out that Kaiser could maintain the four smaller plans and still meet its obligations under reorganization.

The minimum funding required for these four plans was projected to be about $12.8 million between 2004 and 2009, less than 6 percent of the estimated $230 million required to fund all of the plans, the opinion explained.

Money for these plans was not the issue. The problem was that "[i]f we adopted the PBGC’s interpretation of Section 1341, we would be concluding that Congress required courts to apply the reorganization test on a plan-by-plan basis, but provided no guidance on the mechanics of this approach, making it essentially unworkable. We will not adopt a statutory construction that leads to such an anomalous result, especially where the aggregate approach represents an alternative that is ‘neither irrational nor arbitrary,’" the opinion said, citing a 2005 3rd Circuit case, DiGiacomo v. Teamsters Pension Trust Fund of Philadelphia and Vicinity.

Among other arguments, the PBGC also said it is neither fair nor equitable to cease paying pension benefits without economic justification.

"Faced with a choice of burdening some of the participants in Kaiser’s plans and burdening them all, the PBGC contends that equity weighs in favor of the former," the 3rd Circuit opinion said. "We are not unsympathetic to this view. There is undoubtedly a tension between treating similarly situated workers alike and doing the least that is necessary for the company to emerge from bankruptcy. However, we are persuaded that, on the whole, an aggregate approach is more in line with the objectives of the Bankruptcy Code."

The court went on to explain that as an equity court, the Bankruptcy Court is obligated to find the most fair and balanced result, but to terminate a pension plan on the basis of its size would be to necessarily favor one group of workers over another.

"Without some statutory basis or other principled rationale for this result, such disparate treatment smacks of arbitrariness," Rendell wrote. "This strikes us as an unfair result, and it is one that a bankruptcy court sitting in equity should not impose absent a clear mandate from Congress."

In addition, the 3rd Circuit opinion said that applying Section 1341 on a plan-by-plan basis would simply make employee organizations more reluctant to come to the table to make the alterations to collective bargaining agreements that are often required when a company is in distress.

"This would, in turn, lead to a higher number of liquidations and, by extension, a higher number of overall plan terminations. The result would be to leave all interested parties -- the PBGC, workers, retirees and creditors -- worse off as compared to the same number of reorganizations."