United States: Pension Plans Must Be Considered In The Aggregate, Not Individually, When Employer In Chapter 11 Bankruptcy Seeks To Terminate More Than One Plan

In In Re Kaiser Aluminum Corp., __F.3d__(3d Cir. 2006), 2006 U.S.App. LEXIS 18746 (July 26, 2006), the Third Circuit held that pension plans must be considered in the aggregate, not individually, when an employer in Chapter 11 bankruptcy seeks to terminate more than one plan.

Under ERISA, an employer seeking reorganization in a Chapter 11 bankruptcy may terminate a pension plan in a voluntary "distress termination" if the employer satisfies certain notice requirements and demonstrates to the bankruptcy court that it will be unable to pay its debts and continue in business outside of Chapter 11 unless the pension plan is terminated. 29 U.S.C. § 1341(c)(2)(B)(ii)(IV). This statutory requirement for a plan termination is commonly known as the "reorganization test."

Between February 2002 and January 2003, Kaiser Aluminum Corporation and 25 of its affiliates filed for Chapter 11 bankruptcy protection. As part of the reorganization, Kaiser proposed to voluntarily terminate six of its seven defined benefit pension plans, which covered over 10,000 active employees and retirees. In a proceeding before the U.S. Bankruptcy Court for the District of Delaware, the PBGC opposed the motion to terminate, arguing that each plan required a separate determination of whether it satisfied the reorganization test. The PBGC acknowledged that the two largest pension plans satisfied the reorganization test because their continuance would clearly impose an unsustainable burden on Kaiser, but argued that the four smaller plans, if considered on a plan-by-plan basis, failed to meet the test. This appears to have been a novel approach for the PBGC to take.

The bankruptcy court applied the reorganization test to all six plans in the aggregate and concluded their termination was required for Kaiser to emerge from Chapter 11. It rejected the PBGC’s approach on the ground that it would violate the requirement in the Bankruptcy Code that debtors bargain with unions in a fair and equitable manner. See 11 U.S.C. § 1113(b). On appeal by the PBGC, the District Court for the District of Delaware affirmed. On appeal to the Third Circuit, the court affirmed, noting that this was an issue of first impression before the Courts of Appeals. The decision was based on practicality. Congress did not provide any guidance in ERISA on how the courts should apply the reorganization test to the multiple termination situation. The PBGC had argued that since Title IV of ERISA uses the singular terms "single-employer plan" and "plan," the plan-by-plan approach was required.

In the court’s view, the PBGC’s plan-by-plan approach was "unworkable" inasmuch as it would require courts to make basic assumptions about the order in which the plans should be considered and the status of other plans the plan sponsor seeks to terminate. The court concluded that ERISA, as currently drafted, leaves open "too many questions" about how to engage in a plan-by-plan analysis for a court to conclude that Congress envisioned such an analysis in the context of multiple terminations. The court also explained that the PBGC’s approach would require the bankruptcy court to depart from its traditional role as an agent of equity. The bankruptcy court would be required to terminate some of the plans, and leave others in place, without a principled basis for drawing the line as to which workers should be preferred over others.

The court also rejected the PBGC’s argument that a general legislative trend to tighten restrictions on plan terminations indicated that Congress would endorse the plan-by-plan analysis espoused by the PBGC. Lastly, the court rejected the argument that the courts should show deference to the PBGC’s interpretation. The court found that the PBGC lacked both the expertise and the authority to determine when a plan should be terminated pursuant to the reorganization test. Issues involving an employer’s bankruptcy and reorganization fall within the bankruptcy court’s expertise, instead.

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