Third Circuit Holds Bankruptcy Code Overrides Debtor's Contractual Right to Unilaterally Terminate Retiree Health and Benefit Plans

The United States Court of Appeals for the Third Circuit recently held that a chapter 11 debtor owing retiree health, life insurance, and other benefits must comply with the restrictions set out in section 1114 of the Bankruptcy Code before seeking to modify or terminate the retiree benefits during the bankruptcy case, even if the debtor had the unilateral right to terminate the benefits under the governing agreement.  The decision in IUE-CWA v. Visteon Corporation (In re Visteon Corp.), No. 10-1944 (3d Cir. July 13, 2010), diverges from the majority of courts and creates a circuit split by disagreeing with the Second Circuit's holding in In re Chateaugay Corp., 945 F.2d 1205 (2d Cir. 1991), that the debtor's prepetition contractual rights trumped the section 1114 requirements. This landmark case may have significant ramifications to debtors with substantial retiree benefit obligations seeking to file for bankruptcy in the Third Circuit, which is comprised of Delaware, Pennsylvania and New Jersey.

Background

Visteon Corporation, a leading automotive parts supplier that spun off from Ford Motor Corporation in 2000, filed for protection under chapter 11 of the Bankruptcy Code in the District of Delaware in May 2009.

Visteon, which had the right to unilaterally terminate retiree health and insurance benefits pursuant to its pre-bankruptcy benefit plans, filed a motion with the bankruptcy court seeking permission to terminate its U.S. retiree benefit plans. Over retiree and union objections, the bankruptcy court authorized termination of the retiree benefits, which was reversed on appeal by the Third Circuit.

On August 17, 2010, following the Third Circuit's decision, the Delaware bankruptcy judge ordered Visteon to restore the health and life insurance benefits for more than 6,500 retirees.

Section 1114

Section 1114 of the Bankruptcy Code protects retiree benefits, which include medical, surgical, sickness, accident, disability or death benefits under any plan maintained or established by the debtor, by imposing certain requirements upon debtors during a chapter 11 proceeding.

In particular, a chapter 11 debtor "shall timely pay and shall not modify any retiree benefits" except upon (1) court order, following a motion and hearing, approving the modification, or (2) agreement by the debtor and an "authorized representative" of the retirees.

In addition, under the Bankruptcy Code's paradigm, a debtor must first make a proposal to the retiree's authorized representative to terminate retiree benefits, based upon the most complete and reliable information available, establishing that the requested modifications are necessary to the debtor's reorganization, and treating affected parties fairly and equitably. Thereafter, the debtor must meet and confer with the authorized representative in a good faith attempt to agree on mutually satisfactory modifications or termination of the benefit plan. Failing an agreement, the court may grant the debtor's motion only upon finding that (1) the debtor made a satisfactory proposal under section 1114, (2) the authorized representative refused to accept the proposal without good cause, and (3) the modification is necessary to effectuate the reorganization, treats all parties fairly, and is favored by the balancing of the equities.

Third Circuit Decision

The Third Circuit held that Visteon could not terminate its retiree benefit plans without complying with section 1114, even though it had reserved the right to terminate the plans outside of bankruptcy. In so holding, the Third Circuit took a plain language approach to section 1114, finding that it unambiguously applies to all "[b]enefits that the debtor could have terminated outside of bankruptcy, but which it was nonetheless providing at the time of its chapter 11 filing."

Acknowledging that its interpretation of section 1114 enhanced a retiree's rights in the context of a chapter 11 case, the Third Circuit recognized Congress' authority to pass laws capable of modifying property rights for the purposes of bankruptcy and concluded that its interpretation of section 1114 did not produce results that were "so bizarre that Congress could not have intended it." The Third Circuit also relied upon section 1114(l), which was added to the Bankruptcy Code in 2005, restricting a debtor's ability to modify or terminate retiree benefits in the six months prior to the filing of the bankruptcy petition.

Finally, while the Third Circuit's decision gives increased leverage to retirees and their unions, debtor employers may look to some favorable language in the Visteon decision. Specifically, the Third Circuit held that while section 1114 applies to all retiree benefit plans, the provision does not dictate how long an employer must provide the retiree benefits. Therefore, so long as the debtor-employer does not expressly take on any durational obligation in the section 1114 negotiations, and absent an agreement or court order to the contrary, it is free to terminate the benefits after emerging from bankruptcy.