Another Circuit Considers The “Aggregate Approach” In Applying The “Reorganization Test” To Distress Terminations Of Multiple Pension Plans In Chapter 11

The perceived ease with which financially-strapped companies such as Delta Air Lines, Inc. and Collins & Aikman Corp. were able to jettison more than $1 billion in pension liabilities has figured prominently in recent headlines. Assumption of these obligations by the Pension Benefit Guaranty Corporation ("PBGC") contributed to a PBGC deficit that aggregated nearly $18.1 billion at the end of fiscal year 2006 (for the single-employer insurance program), although that was an improvement from the deficit of nearly $23 billion in fiscal year 2005. Airline relief provisions contained in recently-enacted pension reform helped to stanch the flow of PBGC assets, but the agency's overall financial outlook is anything but rosy given a nationwide underfunding of defined benefit pension plans that, depending on whose accounting is more accurate, ranges anywhere from $300 billion to $450 billion.

Termination of one or more defined benefit pension plans has increasingly become a significant aspect of a debtor?employer's reorganization strategy under chapter 11 of the Bankruptcy Code, providing a way to contain spiraling labor costs and facilitate the transition from defined benefit- based programs to defined contribution programs such as 401(k) plans. The circumstances under which a chapter 11 debtor can effect a "distress termination" of its pension plans were the subject of a pair of rulings handed down by the federal circuit courts of appeal in the last 18 months. In 2006, the Third Circuit held in In re Kaiser Aluminum Corp. that when an employer in chapter 11 seeks to terminate more than one pension plan, the plans must be considered in the aggregate rather than on a plan-by-plan basis. The Eighth Circuit had an opportunity to address the same issue in 2007. In Pension Benefit Guaranty Corporation v. Falcon Products, Inc. (In re Falcon Products, Inc.), the court ruled that it need not decide whether the "reorganization test" requires a plan-by-plan or aggregate analysis in light of a bankruptcy court's findings that the debtor could not survive outside of chapter 11 without a $50 million investment conditioned on termination of all three of its pension plans.

ERISA and PBGC

The respective rights and obligations of employers and retirees vis--vis pension benefits are governed not by the Bankruptcy Code, but by the Employee Retirement Income Security Act ("ERISA"), which provides the primary regulatory framework and protection for pension benefits. Enacted in 1974, ERISA is a comprehensive regulatory scheme intended to protect the interests of pension plan and welfare benefit participants and beneficiaries and to preserve the integrity of trust assets. On a basic level, it establishes minimum participation, vesting and funding standards and contains detailed reporting and disclosure requirements. ERISA also created the PBGC to act as both the regulatory watchdog and the guarantor, at least to a certain extent, for the pension and related rights of the U.S. workforce.

Companies pay insurance premiums to PBGC, and if an employer can no longer support its pension plan, PBGC takes over the assets and liabilities and pays promised benefits to retirees up to certain limits. The maximum annual benefit for plans assumed by the agency in 2007 was $49,500 for workers who wait until 65 to retire. For plans assumed in 2008, the maximum yearly benefit amount will be $51,750. PBGC self-finances payments to employees under terminated plans through five sources of income: (i) insurance premiums paid by current sponsors of active plans (in 2008, $33 per year per participant, although companies posing high risks of underfunding must pay an additional variable rate premium equal to $9 for every $1,000 of unfunded vested benefits); (ii) assets from terminated plans taken over by PBGC; (iii) recoveries from former sponsors of terminated plans; (iv) PBGC's own investments; and (v) in connection with certain distress and involuntary plan terminations occurring on or after January 1, 2006, termination premiums of $1,250 per participant payable for three years after the termination.

PBGC insures only "defined benefit"...