The United States Court of Appeals for the Third Circuit recently issued a decision in the bankruptcy proceedings of Visteon Corporation, IUE-CWA v. Visteon Corp. (In re Visteon Corp.),1 holding that the procedure required under Section 1114 of the United States Bankruptcy Code applies to all retiree benefit plans, including those a debtor could have terminated at will before entering bankruptcy. In so doing, the court not only parted with the majority view, but also gave retiree benefit plan recipients a more powerful voice, and perhaps increased leverage, in their former employer’s bankruptcy case.
Visteon Corporation is one of largest suppliers of automotive parts, and for decades it, or its predecessors-in-interest, provided certain health and life insurance benefits to retirees (the Retirees) from two plants (the Plants) in Indiana. Under the benefit plans, Visteon was to continue medical coverage during retirement until death. However, the governing documents also gave Visteon a broad right to modify or terminate coverage.
After filing for bankruptcy Visteon continued its operations as a debtor-in-possession, and less than a month after filing moved the bankruptcy court for permission to terminate all United States retiree benefit plans under Section 363(b)(1) of the Code. Several groups of retirees objected, including those from the Plants, arguing that Visteon could not terminate any retiree benefits without first complying with the requirements of Section 1114. Specifically, Section 1114(e) provides in relevant part that: "notwithstanding any other provision of [the Code], the [debtor-in-possession] shall timely pay and shall not modify any retiree benefits" unless the court, on the motion of the debtor-in-possession or authorized representative of the retirees, orders, or the debtor-in-possession and the authorized representative agree to, the modification of such benefits.
The bankruptcy court granted Visteon’s motion to terminate the vast majority of the retiree benefits, including those of the Retirees, concluding that because Visteon had the right under non-bankruptcy law to terminate benefits unilaterally, Section 1114 did not apply. On appeal the district court agreed, reasoning that application of Section 1114 to benefits that could be unilaterally terminated outside of bankruptcy would result in the Retirees receiving more protection under bankruptcy than they would outside of bankruptcy. The Retirees filed an expedited appeal to the Third Circuit.
On appeal, the Third Circuit succinctly framed the issue: "whether [Section 1114] limits a debtor’s ability to terminate during bankruptcy those retiree benefits that it could, consistent with plan documents, collective bargaining obligations, and the prescriptions of [ERISA], terminate unilaterally outside of bankruptcy." The Retirees argued that the plain language of Section 1114 made it applicable to all retiree benefits, regardless of an employer’s right to terminate the benefits outside bankruptcy. Visteon and the Official Committee of Unsecured Creditors, supported by a majority of the reported decisions, argued that to so apply Section 1114 leads to an absurd result at odds with legislative intent. Visteon and the committee cited the Second Circuit’s decision in LTV Steel v. United Mine Workers (In re Chateaugay Corp.),2 in which the court held that interim legislation enacted with Section 1114 did not limit a debtor’s right to cease providing retiree benefits in cases in which the benefits plan expired during the bankruptcy case.
The court began with an analysis of the plain language of Section 1114, noting that Section 1114(e) requires compliance with the procedures set forth therein for termination or modification of "any retiree benefits." The term "retiree benefits" is defined in Section 1114 to include "payments to any entity or person [to provide or reimburse medical, surgical, hospital care, sickness, accident, disability or death benefits to employees or their dependents] under any plan, fund or program." The court reasoned that Section 1114 "could hardly be clearer" in providing that a debtor’s ability to terminate or modify retiree benefits applies to any payments to any entity or person under any plan, fund, or program in existence when the debtor files for bankruptcy, notwithstanding any other provision of the Bankruptcy Code. The court therefore concluded that Section 1114 is unambiguous and is not restricted to retiree benefits the debtor is otherwise compelled under nonbankruptcy law to provide.
The court rejected the argument that Section 1129 of the Bankruptcy Code, when read in conjunction with Section 1114, rendered the latter ambiguous. Section 1129(a)(13) of the Code specifies that in order to emerge from bankruptcy, the debtor’s reorganization plan must provide for "the continuation after its effective date of payment of all retiree benefits … for the duration of the period the debtor has obligated itself to provide such benefits." Visteon, following the reasoning of prior decisions, argued that ambiguity was created because Section 1129(a)(13) limits the debtor’s obligation to provide benefits, whereas Section 1114 does not. The court, however, concluded that Congress did not intend the plain language of Section 1129(a)(13) to limit the reach or operation of Section 1114. Rather, the omission of any language in Section 1114 limiting its scope to benefits the debtor obligated itself to provide, in contrast to Section 1129, was purposeful.
The court also found evidence of congressional intent for broad application of Section 1114 in the language of Section 1114(l), added to the Bankruptcy Code in 2005, which prevents an insolvent debtor from terminating retiree benefits in the six-month period before filing for bankruptcy. The court found this section not only to be without limitation to benefits the debtor is obligated to provide under nonbankruptcy law, but also "virtually meaningless" if it did not apply to those benefits the debtor could unilaterally terminate or modify. According to the court, subsection (l) therefore provides additional evidence of the coherence of the statutory scheme Congress enacted in Section 1114. In reaching this conclusion, the court disagreed with the reasoning of the bankruptcy court for the Southern District of New York in In re Delphi Corp., which found that Section 1114(l) did not undermine a limited application of Section 1114. The court found the Delphi court’s analysis indicative of "a fundamental flaw of many of the cases which have failed to afford [Section 1114] its plain meaning."
The court then turned to Visteon’s argument that a broad application of Section 1114 is inconsistent with legislative intent. Visteon and the committee pointed to certain legislators’ statements in passing Section 1114 as evidence of its limited scope. The court found that neither Visteon nor the committee was "able to point to a single statement anywhere in the legislative history suggesting that the safeguards of Section 1114 are triggered only in those instances where the debtor is legally or contractually obligated to provide benefits." Instead, noting that Section 1114 was enacted in response to LTV Corporation’s termination of retiree health and life insurance benefits for 78,000 retirees during its Chapter 11 bankruptcy case in 1986, the court found the legislative history pointed to a much broader concern of protecting retirees’ "legitimate expectations." Both in the statements of legislators and in the reports accompanying the Senate version of the bill enacting Section 1114, the court found that the legislative history pointed to a broad scope. The subsequent legislative history, cited by Visteon and the committee for the argument that after passing Section 1114 Congress sought to clarify its broad application but failed to pass bills doing so, was unpersuasive given the clarity of Section 1114’s language.
Finally, the court rejected the argument of Visteon and the committee that interpreting Section 1114 to give retirees more rights in bankruptcy than they had outside of bankruptcy leads to absurd results. The court reasoned that this argument was "based on a fundamental misunderstanding of the context in which [Section 1114] was enacted, as well as the practical realities surrounding an employer’s provision of benefits to retirees." With respect to the context giving rise to Section 1114, the court noted that in passing the statute legislators were concerned about the gap under ERISA in protection for retirees, concerns compounded by the events in the LTV case. Furthermore, according to the court, members of Congress were concerned with the affect a bankruptcy has on a reorganizing debtor’s decision-making, specifically the choices it is forced to make in order to minimize liabilities. The court reasoned that Congress enacted Section 1114 to protect retiree benefits solely during bankruptcy, when their survival is highly vulnerable and limited protections could have significant impact. Even if Section 1114 is unique in granting retirees more rights than they would otherwise have, the court concluded that this is not an absurd result: the unique nature of retiree benefits required unique protections.
The limitations of the Third Circuit’s decision in Visteon should also be noted. The court made clear that Section 1114’s protections terminate upon confirmation of the reorganization plan and Section 1129(a)(13) does not create vested benefits. Therefore, upon emergence from bankruptcy pursuant to a Chapter 11 plan, a debtor who reserved the right to terminate retiree benefits will have no ongoing obligation, other than one that it has voluntarily undertaken during the Section 1114 process, to continue to provide retiree benefits.
The Third Circuit’s decision in Visteon marks an important development for debtors and their retirees. In finding that Section 1114 applies to retiree benefit plans terminable-at-will outside of bankruptcy, the court gave retirees a stronger voice in their former employer’s bankruptcy than they would otherwise have. While the bankruptcy court after a hearing may still find that the debtor’s termination of benefits is warranted, the required procedure under Section 1114 will allow retirees a greater opportunity to negotiate with the debtor and avoid that termination.
Endnotes
1 No. 10-cv-00091, 2010 U.S. App. LEXIS 14307 (3d Cir. July 13, 2010).
2 945 F.2d 1205 (2d Cir. 1991).
Robert S. Hertzberg, David B. Stratton and Michael J. Custer
