Recommended Principles:
• The trustee should comply with the requirements of section 1114 of the Bankruptcy Code for all retiree benefits (as defined in section 1114(a)), even if the trustee contends that such benefits are terminable at will under the terms of the benefit plan or applicable nonbankruptcy law. The trustee’s compliance with section 1114 for benefits that the trustee contends may be terminable at will should not create any new claims on behalf of retirees or otherwise affect the existence, nature, or scope of any retirees’ claims upon the termination or modification of such benefits in accordance with section 1114, which claims should be determined consistent with the terms of the plan or applicable nonbankruptcy law.
Retiree Benefits and Section 1114: Background
Section 1114 requires the debtor in possession622 to timely pay any retiree benefits and to follow a notice, disclosure, and bargaining process before seeking to modify any retiree benefits during the chapter 11 case. It also provides administrative priority for payments of retiree benefits required to be made before the effective date of a confirmed plan.623 The protections afforded retiree benefits under section 1114 are supplemented by a corresponding plan confirmation requirement under section 1129(a)(13). Section 1114 defines the term “retiree benefits” as “payments to any entity or person for the purpose of providing or reimbursing payments for retired employees and their spouses and dependents, for medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, or death under any plan, fund, or program (through the purchase of insurance or otherwise) maintained or established in whole or in part by the debtor prior to filing a petition commencing a case under this title.”624
With respect to the modification of retiree benefits, the section 1114 process resembles the section 1113 process for the rejection of collective bargaining agreements, with at least one key difference.625 Under section 1114, a committee authorized by the court to serve as an “authorized representative” of such retirees will represent retirees who are receiving benefits not covered by a collective bargaining agreement in the section 1114 process.626
As suggested above, the term “retiree benefits” is broad and covers such payments under any prepetition “plan, fund, or program (through the purchase of insurance or otherwise) maintained or established” by the debtor. In fact, some courts interpret this language to include payments under a prepetition retiree benefit plan even if the debtor contends that it has expressly reserved the right
622 As previously noted, references to the trustee are intended to include the debtor in possession as applicable under section 1107 of the Bankruptcy Code, and implications for debtors in possession also apply to any chapter 11 trustee appointed in the case.
See supra note 76 and accompanying text. See generally Section IV.A.1, The Debtor in Possession Model.
623 11 U.S.C. § 1114(e). 624 11 U.S.C. § 1114(a).
625 See In re Farmland Indus., Inc., 294 B.R. 903, 918 (Bankr. W.D. Mo. 2003) (“A consideration of § 1113 of the [Bankruptcy] Code provides further support for the Court’s understanding of § 1114.”).
626 11 U.S.C. § 1114(b)(1), (2), (d). The union under the collective bargaining agreement that gave rise to the retiree benefits presumptively serves as the authorized representative for retirees receiving such benefits. 11 U.S.C. § 1114(c).
to unilaterally terminate or modify such plan at any time. 627 For example, in Visteon, the relevant plan documents provided that “the Company reserves the right to suspend, modify or amend the benefits provided under the Plan, or even terminate the Plan or any of the benefits provided under the Plan. . . . [T]his handbook is not a contract, nor is it a guarantee of your coverage.”628 The Third Circuit adopted a strict reading of the statute and determined that “[t]he fact that the debtor could have unilaterally stopped the payments had it not been in chapter 11 is . . . irrelevant.”629 Nevertheless, other courts have ruled that a debtor in possession is not required to comply with the section 1114 process when the debtor in possession establishes that it has the right under the prepetition program of benefits to unilaterally modify or terminate the benefits.630
Retiree Benefits and Section 1114: Recommendations and Findings
Bankruptcy Code sections 1114 and 1129(a)(13) evidence a strong policy preference for protecting the rights of retirees in a debtor in possession’s chapter 11 case. Section 1114 was enacted in response to the LTV Steel Company chapter 11 case in which the debtor in possession announced its intention to discontinue health benefits for approximately 70,000 retired employees immediately upon the petition date on the basis that such benefits would be considered prepetition claims.631 The Commissioners understood the history behind section 1114 and the special protections afforded retirees under the Bankruptcy Code. They also observed that retiree issues, when present in a chapter 11 case, can create complex and challenging issues for the debtor in possession.
The Commissioners discussed the current split in the case law regarding whether the section 1114 procedures apply to all prepetition retiree benefit plans, including those that were found to be terminable at will by the debtor outside of bankruptcy. The Commissioners acknowledged the plain meaning interpretation of section 1114 endorsed by the Third Circuit in Visteon. They discussed the focus of this decision on the application of section 1114 during the pendency of the chapter 11 case. As the Third Circuit explained in discussing the treatment of retiree benefits under a chapter 11 plan, “the duration of the period the debtor has obligated itself to provide such benefits plainly encompasses any durational obligations, including those arising outside of the bankruptcy context.”632 Accordingly, even if bound by the section 1114 process during the chapter 11 case, the reorganized
627 See, e.g., IUE-CWA v. Visteon Corp. (In re Visteon Corp.), 612 F.3d 210, 219–20 (3d Cir. 2010) (“Section 1114 could hardly be any clearer. It restricts a debtor’s ability to modify any payments to any entity or person under any plan, fund, or program in existence when the debtor files for Chapter 11 bankruptcy, and it does so notwithstanding any other provision of the [B] ankruptcy [C]ode.”); In re Farmland Indus., Inc., 294 B.R. 903, 914 (Bankr. W.D. Mo. 2003) (“In this court’s view, §1114 prohibits a debtor from terminating or modifying any retiree benefits (as defined in that section) during a Chapter 11 case unless the debtor complies with the procedures and requirements of §1114, regardless of whether the debtor has a right to unilaterally terminate benefits.”). See also IUE-CWA v. Visteon Corp. (In re Visteon Corp.), 612 F.3d 210, 227 (3d Cir. 2010) (explaining legislative history indicating a desire to protect “the ‘legitimate expectations’ of retirees, and the necessity in a ‘just society’ of giving effect to those expectations wherever possible”); S. Rep. No. 100-119, at 1–2 (1987), reprinted in 1988 U.S.C.C.A.N. 683, 684 (“[T]o provide additional protections for the insurance benefits of retirees, their spouses and dependents, of debtors under the Bankruptcy Code”).
628 IUE-CWA v. Visteon Corp. (In re Visteon Corp.), 612 F.3d 210, 213 (3d Cir. 2010). 629 Id. at 222.
630 See, e.g., In re Gen. Motors Corp., No. 09-50026, Hr’g Tr. at 109:24-110:2 (Bankr. S.D.N.Y. June 25, 2009) (“Section 1114 doesn’t apply to employee benefit plans that are terminable or amendable unilaterally by the plan sponsor.”); In re Delphi Corp., 2009 WL 637259, at *19 (S.D.N.Y. Mar. 11, 2009) (“[I]f, in fact, the debtors have the unilateral right to modify a health or welfare plan . . . the debtors’ pre-Bankruptcy rights [are not] abrogated by the requirements of section 1114.”); In re N. Am. Royalties, Inc., 276 B.R. 860 (Bankr. E.D. Tenn. 2002); Retired W. Union Employees Ass’n v. New Valley Corp. (In re New Valley Corp.), 1993 WL 818245 (D.N.J. Jan. 28, 1993); In re Doskocil Cos. Inc., 130 B.R. 870 (Bankr. D. Kan. 1991).
631 See In re Chateaugay Corp., 64 B.R. 990, 992 (S.D.N.Y. 1986); 133 Cong. Rec. H8558 (daily ed. Oct. 13, 1987) (“[T]he triggering event for [enacting § 1114] was [the] bankruptcy of LTV Steel. . . .”).
632 IUE-CWA v. Visteon Corp. (In re Visteon Corp.), 612 F.3d 210, 224 (3d Cir. 2010) (citations omitted) (internal quotation marks omitted).
debtor could exercise any applicable contractual or nonbankruptcy law rights after the bankruptcy. The Commissioners also noted certain procedural advantages provided by the statute, including the designation of a statutory authorized representative for retirees to engage in the process.
The Commissioners weighed the Visteon approach against several competing considerations. For example, courts finding that certain retiree benefit plans fall outside the scope of section 1114 and rely heavily on the parties’ prepetition nonbankruptcy rights. Some commentators have noted the practical appeal to this approach given that, even under Visteon, the debtor in possession presumably could pay retiree benefits during the case and then, as a reorganized debtor, terminate or modify those benefits immediately after the case, provided that the prepetition benefit plan was found to support a reservation of that right for the company as plan sponsor.
The Commissioners also factored into their deliberations the significant complexity of conducting “at will” litigation over the scope of section 1114 during bankruptcy and the time and expense consumed by such litigation. They evaluated the utility of this litigation to the chapter 11 case. The Commissioners generally found nominal value in the litigation because section 1114 is a process- based provision. Any such changes could occur only if the parties agreed to them through the section 1114 negotiation process or the court authorized the modifications proposed by the debtor in possession after the required negotiations.
Moreover, the Commissioners discussed the purpose and value of the process itself. The steps required by section 1114 provide retirees with representation and a seat at the negotiation table during the chapter 11 case. The process not only gives retirees a voice, but it also ensures that any changes proposed or made by the debtor in possession to retiree benefits are not precipitous and are understood by all affected parties. The Commissioners found value in the process for both the debtor in possession and retirees in cases in which the debtor in possession believed some change to retiree benefits was necessary — regardless of whether the debtor could implement such change unilaterally outside of bankruptcy.
In light of the various relevant factors, the Commission determined that requiring a debtor in possession to follow the section 1114 process for any proposed change to, or termination of, any retiree benefits was the better approach. In reaching this conclusion, however, the Commission also agreed that the debtor in possession’s initiation of the section 1114 process where the debtor could have asserted a unilateral right to modify or terminate outside of bankruptcy should not create new claims or otherwise change the claims currently provided under the statute. Accordingly, if the parties agreed to, or the court approved, a change to, or termination of, retiree benefits through the section 1114 process, a debtor in possession asserting an “at will” or other defense limiting its obligations under the prepetition plan could assert such defense in objecting to the amount of any claims asserted by the retirees or their authorized representative arising from the termination or modification of the benefit plan through the section 1114 process. Likewise, the respective rights and remedies of the reorganized debtor and retirees under the prepetition plan (unless such obligations were altered by agreement as part of the 1114 negotiation process) would continue following the debtor’s emergence from chapter 11.