United States: In re Visteon: Third Circuit Expands the Protection of Retiree Benefits in Chapter 11 Cases

Introduction

On July 13, 2010, the Court of Appeals for the Third Circuit ruled in IUE-CWA v. Visteon Corporation (In re Visteon)¹ that despite a debtor‟s unilateral right to modify or terminate retiree benefits outside of bankruptcy, the debtor² must still comply with the restrictions set forth in section 1114 of the Bankruptcy Code when seeking to modify or terminate those benefits during a chapter 11 case. The Third Circuit also indicated that a debtor must comply with section 1114 to modify or terminate retiree benefits even when the debtor‟s obligations to pay those benefits have expired during the bankruptcy case. The Third Circuit‟s decision, which is binding on courts in Delaware, Pennsylvania, and New Jersey, represents a significant departure from the majority view of bankruptcy and district courts that section 1114 does not apply when a debtor has a prepetition contractual right to modify or terminate retiree benefits at will. The decision in Visteon may dissuade potential debtors with substantial retiree benefits terminable at will from filing for bankruptcy protection in the Third Circuit.

Section 1114 of the Bankruptcy Code

Section 1114 of the Bankruptcy Code, which was enacted in 1988 as part of the Retiree Benefits Bankruptcy Protection Act of 1988 ("RBBPA"),³ restricts a chapter 11 debtor‟s ability to modify or terminate benefits provided to former employees and their dependents during a chapter 11 case. Specifically, under section 1114(e), a chapter 11 debtor "shall timely pay and shall not modify any retiree benefits" unless (i) the court, upon motion of the debtor or the retirees‟ "authorized representative,"⁴ and after notice and a hearing, orders the modification of the retiree-benefit payments or (ii) the debtor and the authorized representative agree to modify those payments. Section 1114(a) defines "retiree benefits" as:

Section 1114 further requires that a debtor must attempt in good faith to reach an agreement with the authorized representative on any modifications to its retiree benefits before it can seek bankruptcy court approval of those modifications. Specifically, section 1114(f) requires the debtor to make a proposal to the authorized representative "based on the most complete and reliable information available at the time of such proposal, which provides for those necessary modifications in the retiree benefits that are 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."⁶ The debtor must also provide the authorized representative with all "relevant information as is necessary to evaluate the proposal."⁷

A court must grant a motion to modify benefits only if it finds that (i) the debtor has made a proposal satisfying the requirements of section 1114(f), (ii) "the authorized representative of the retirees has refused to accept such proposal without good cause," and (iii) 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, and is clearly favored by the balance of the equities."⁸

Additional protections provided by section 1114 include elevating to administrative expense status all retiree benefit payments required to be made prior to plan confirmation.⁹ Also, section 1114(l), added in 2005,¹⁰ provides that if a debtor modified retiree benefits in the 180-day period before filing for bankruptcy and was insolvent at the time of the modification, then the court "on motion of a party in interest, and after notice and a hearing, shall issue an order reinstating as of the date the modification was made, such benefits as in effect immediately before such date unless the court finds that the balance of the equities clearly favors such modification."¹¹

Since section 1114‟s enactment, the majority of courts examining section 1114 have found that it does not prevent a debtor from terminating retiree benefits if the debtor had a right to terminate those benefits unilaterally outside of bankruptcy. Before Visteon, the most recent decision on this issue was handed down by the Bankruptcy Court for the Southern District of New York in In re Delphi Corp.¹² The Delphi court held that section 1114 does not override prepetition contractual rights allowing debtors to modify or terminate retiree benefits at will.¹³ And while some courts have concluded that section 1114 does apply to retiree benefits terminable at will,¹⁴ the Third Circuit‟s ruling in Visteon is by far the most important and authoritative decision to side with the minority view on this issue.

Background

In May 2009, Visteon Corporation and 29 of its affiliates and subsidiaries (collectively, "Visteon") filed voluntary petitions for bankruptcy protection under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Visteon is one of the world‟s largest automotive parts suppliers, specializing in the production of electronic, interior, and climate systems for various original equipment manufacturers. Visteon was a division of Ford Motor Company ("Ford") until June 2008, when Ford spun off Visteon by distributing Visteon common stock to Ford shareholders.

In June 2009, Visteon filed a motion with the Bankruptcy Court seeking authorization to terminate all United States retiree benefit plans. Visteon had been maintaining five different benefit plans that provided certain health and life insurance benefits to approximately 6,650 Visteon retirees, including former salaried and hourly employees. While the Official Committee of Unsecured Creditors (the "Creditors‟ Committee") filed a statement supporting Visteon‟s motion, several groups of retirees objected to the motion, including a group of over 2,000 retirees from Visteon‟s closed manufacturing plants in Connersville and Bedford, Indiana. This group was represented by the International Union of Electronic, Electrical, Technical Salaried, Machine, and Furniture Workers-Communication Workers of America, AFL-CIO (the "IUE-CWA").

In December 2009, the Bankruptcy Court issued an order authorizing Visteon to terminate its retiree benefits on the grounds that the benefits had not vested and were terminable at will.¹⁵ The IUE-CWA appealed the Bankruptcy Court‟s termination order (the "Termination Order") to the Delaware District Court (the "District Court"), which affirmed the decision.¹⁶ The IUE-CWA then appealed the District Court decision to the Third Circuit, which granted a motion to expedite the appeal, but refused to issue a stay pending appeal. Effective May 1, 2010, Visteon stopped all payments of retiree benefits at issue in the case.

The Third Circuit (or the "Court") reversed the District Court‟s affirmation of the Termination Order and remanded the matter for further proceedings. Among other reasons, the Court based its decision on the plain language of section 1114, holding that the statute‟s text unequivocally requires debtors to continue paying any and all retiree benefits under any plan or agreement, subject only to the restrictions and procedures set forth in section 1114. The Court stated:

In determining that section 1114 is unambiguous, the Court relied on, among other things, the addition of section 1114(l) to the Bankruptcy Code in 2005. Section 1114(l) restricts a debtor‟s ability to modify or terminate retiree benefits in the six months prior to filing the bankruptcy petition. The Court stated that section 1114(l) would be virtually meaningless if it did not apply to retiree benefits terminable at will, as employers outside of bankruptcy are allowed to determine vesting rights for retiree benefits and reserve the right to unilaterally modify or terminate those benefits. Presumably, a prepetition modification or termination would occur only if the employer had the unilateral right to so modify or terminate retiree benefits outside of bankruptcy. Therefore, because section 1114(l) must necessarily apply to retiree benefits terminable at will, the Court explained section 1114(l)‟s enactment reinforces the view that section 1114 in its entirety applies to retiree benefits terminable at will.¹⁸

Court Finds Support in Legislative History

After conducting its plain-meaning analysis, the Court addressed Visteon‟s and the Creditors‟ Committee‟s (together, the "Appellees") argument that restricting a debtor‟s unilateral right to terminate or modify retiree benefits contradicts the RBBPA‟s legislative history. The Court explained that only the most extraordinary showing of contrary intentions in the legislative history justifies a departure from relying on the plain language of a statute. The Court then held that the statements relied upon by Visteon in RBBPA‟s legislative history "fall woefully short of such an extraordinary showing of contrary intentions.‟"¹⁹ The Court added that its interpretation of section 1114 was in fact consistent with RBBPA‟s legislative history, pointing to, among other things, various statements by members of Congress expressing broad concern for protecting the "legitimate expectations" of former employees during a company‟s reorganization and how "the burden of turning a company around should not rest on the backs of retirees.‟"²⁰

Court Rejects the Absurdity Argument

The Court also rejected the argument that a plain-text interpretation of section 1114 results in absurdity. Relying on In re Delphi, the Appellees argued that the Court‟s plain-text reading of section 1114 contradicts a fundamental bankruptcy principal that prepetition contractual and property rights should not be altered or enhanced under bankruptcy law. The Appellees also argued that because ERISA purposely failed to mandate vesting requirements for retiree benefits and was designed to provide an employer with flexibility in providing those benefits, section 1114 should not protect what Congress purposefully refused to protect otherwise. The Appellees therefore claimed that interpreting section 1114 to give retirees more rights under chapter 11 than they would have outside of bankruptcy is so absurd that it could not reflect Congress‟ intentions for section 1114.

The Court wrote that the absurdity argument "reflects a major source of confusion about § 1114, and . . . is the primary reason that courts have failed to give effect to the statute as written."²¹ The Court explained that while property interests are generally defined by non-bankruptcy law, the Bankruptcy Code creates a federal interest that can modify those property interests for bankruptcy purposes. The Court then explained that while ERISA was designed to give employers flexibility to provide and terminate welfare benefit plans, the focus instead should be on the policy reasons behind section 1114‟s enactment, which was to remedy "the social problems that had resulted from the exclusion of retiree welfare benefits from ERISA‟s protections."²² The Court added that those courts refusing to apply section 1114 to at-will retiree benefits fail to recognize that section 1114 does not unequivocally prohibit termination of retiree benefits; rather, "it creates an equitable procedure through which the debtor can argue the economic necessity of doing so, and the retirees can counter with their own arguments about economics, fairness, and equity."²³ The Court also concluded that while section 1114 limits a debtor‟s flexibility during a chapter 11 case, section 1114‟s protections terminate upon plan confirmation, ensuring that a debtor who has reserved the right to terminate retiree benefits unilaterally may do so after bankruptcy.

Conclusion

The Third Circuit‟s decision in Visteon must be carefully considered by companies seeking to reorganize with large retiree benefit obligations that are terminable at will by the company or soon to expire. The Visteon decision essentially creates a split among circuits because it diverges from the narrower interpretation of section 1114 adopted by courts in the Second Circuit, which gave effect to a debtor‟s prepetition contractual rights over section 1114. For large companies, the section 1114 process can be a very arduous and delicate process for both the company and the retirees. Overall, the Visteon decision may have the effect of causing companies with substantial terminable-at-will retiree benefits to select a venue outside the Third Circuit when seeking to reorganize under chapter 11.

Footnotes

1 No. 10-1944 (3d Cir. July 13, 2010).

2 As used herein, "debtor" means debtor in possession or trustee.

3 Pub. L. No. 100-334, 102 Stat. 619 (1988).

4 Section 1114(b)(1) provides that an "authorized representative" is, subject to certain exceptions, (i) a labor organization for those persons receiving any retiree benefits covered by any collective bargaining agreement to which that labor organization is signatory or (ii) a court-appointed committee for those persons receiving any retiree benefits not covered by a collective bargaining agreement. Section 1114(b)(2) further provides that committees of retired employees appointed by the court have the same rights, powers, and duties as official committees for unsecured creditors or equity security holders.

5 11 U.S.C. § 1114(a).

6 11 U.S.C. § 1114(f)(1)(A).

7 11 U.S.C. § 1114(f)(1)(B).

8 11 U.S.C. § 1114(g). The court, however, may not order a modification that is "lower than that proposed by the trustee in the proposal found by the court to have complied with the requirements of [subsections 1114(f) and (g)]." Id.

9 11 U.S.C. § 1114(e)(2).

10 Pub. L. No. 109-8, 119 Stat. 23 (2005).

11 11 U.S.C. § 1114(l).

12 No. 05-44481, 2009 WL 637315 (Bankr. S.D.N.Y. Mar. 10, 2009).

13 A similar decision, although with different facts, was handed down by the Court of Appeals for the Second Circuit in LTV Steel Co. v. United Mine Workers of America (In re Chateaugay), 945 F.2d 1205 (2d Cir. 1991). In Chateaugay, the Second Circuit held that the RBBPA does not restrict a debtor‟s right to terminate retiree benefits during a bankruptcy case upon expiration of the agreement governing those benefits.

14 See, e.g., Retailers Serv. Corp. v. Employees' Comm. of Ames Dep't Store, Inc. (In re Ames Dep't Stores, Inc.), No. 92 Civ. 6145-46, 1992 WL 373492 (S.D.N.Y. Nov. 30, 1992); In re Farmland Indus., Inc., 294 B.R. 903 (Bankr. W.D. Mo. 2003).

15 The Bankruptcy Court, however, held that Visteon could not terminate benefits granted to present and former employees of Visteon‟s manufacturing plant located in Lansdale, Pennsylvania, which were still subject to an unexpired collective bargaining agreement and covered by section 1113 of the Bankruptcy Code.

16 See IUE-CWA v. Visteon Corp. (In re Visteon Corp.), No. 10-91, 2010 BL 78055 (D. Del. Apr. 7, 2010).

17 IUE-CWA v. Visteon Corporation (In re Visteon), No. 10-1944, at 33 (3d Cir. July 13, 2010) (emphasis in original).

18 The Court also rejected Visteon‟s reliance on the Second Circuit‟s ruling in Chateaugay, which held that retiree protection ceases upon expiration of the debtor‟s obligation to pay retiree benefits. The Court found the dissenting judge‟s analysis in Chateaugay more persuasive and "far more faithful to the statutory text than the analysis of that court‟s majority." Id. at 39. The Court added that "the issue before the court in Chateaugay differed from the one before us, and whatever the merits of Visteon‟s argument in that context, it plainly fails here." Id. at 39–41.

19 Id. at 58 (citations omitted).

20 Id. at 59-63.

21 Id. at 73.

22 Id. at 77–78.

23 Id. at 87.

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