On July 26, 2006, the Third Circuit Court of Appeals issued an opinion that provides guidance and clarity with respect to the manner in which a debtor may seek the distress termination of multiple independent pension plans while in bankruptcy.¹ In particular, the Third Circuit concluded that §1341(c)(2)(B)(ii)(IV) of ERISA (the "reorganization distress test")² requires a plan-by-plan analysis—during which a bankruptcy court (or other applicable court) must consider each pension plan separately without regard to any other pension plan—to determine whether the financial requirements contained in the reorganization distress test have been satisfied.

Background

Prior to commencing its bankruptcy case, Kaiser Aluminum was involved in all aspects of the aluminum industry, including (1) mining raw materials, (2) refining raw materials and (3) manufacturing finished aluminum products. As part of its reorganization efforts, Kaiser Aluminum concluded that it would need to terminate six of its pension plans³ covering nearly 13,500 active hourly employees in accordance with the voluntary distress-termination provisions contained in Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) in order to successfully reorganize.⁴ Accordingly, on Jan. 11, 2004, Kaiser Aluminum filed a motion seeking a finding from the U.S. Bankruptcy Court for the District of Delaware that it satisfied the reorganization distress test. In support of its motion, Kaiser Aluminum asserted that it owed approximately $48 million in unfunded minimum contributions for the 2003 plan year and would be required to make $230 million in minimum contributions to the plans between 2004 and 2009. Due to the required pension plan contributions, unless the plans were terminated, Kaiser Aluminum would be unable to pay all of its debts pursuant to a reorganization plan and will be unable to continue in business outside the chapter 11 process. Accordingly, Kaiser Aluminum maintained that it satisfied the reorganization distress test.

Although the Pension Benefit Guaranty Corporation (PBGC)⁵ recognized that two of Kaiser Aluminum's six pension plans satisfied the reorganization distress test because they were significantly larger than the four remaining pension plans and would "clearly impose an unsustainable burden on Kaiser,"⁶ it opposed Kaiser Aluminum's motion because it believed that Kaiser Aluminum could "continue funding some or all of them and still emerge successfully from chapter 11 reorganization."⁷ In particular, the PBGC contended that because the reorganization distress test refers to "plan" in the singular,⁸ the bankruptcy court was required to perform a plan-by-plan analysis of each Kaiser Aluminum pension plan—without regard to the legal obligations of the other plans—to determine whether each plan independently satisfied the reorganization distress test.⁹ Thus, rather than accepting Kaiser Aluminum's position that the six pension plans—in the aggregate—satisfied the reorganization distress test, the PBGC urged the bankruptcy court to apply the reorganization distress test in accordance with the literal text of §1341(c)(2)(B)(ii)(IV) of ERISA. Under this analysis, the PBGC argued that the four smaller pension plans failed to satisfy the reorganization distress test.

Lower Court Proceedings

On Feb. 5, 2004, the bankruptcy court entered its order (1) determining that Kaiser Aluminum satisfied the reorganization distress test with respect to the six pension plans, (2) approving the distress termination of those plans, (3) authorizing the implementation of replacement plans and (4) granting related relief.¹⁰ In its decision, the bankruptcy court rejected the PBGC's argument that §1341(c)(2)(B)(ii)(IV) of ERISA required a separate plan-by-plan of each pension plan to determine whether the reorganization distress test was satisfied.¹¹ Instead, the bankruptcy court aggregated Kaiser Aluminum's six pension plans together and applied the "fair and equitable" standard contained in §1113 of the Code to ensure fairness between the several unions covered by Kaiser Aluminum's six pension plans.¹² In particular, the court concluded that:

The PBGC's plan-by-plan approach would violate the Bankruptcy Code's requirement that debtors bargain fairly and equitably with unions. The bankruptcy court believed that considering the plans piecemeal would give creditors "the kind of leverage that would force the debtor to [initiate] bargaining... with one union and not with another."¹³

Although the court recognized that Kaiser Aluminum could maintain three of the pension plans without frustrating its reorganization, under the standard adopted by the court, it found that Kaiser Aluminum satisfied the reorganization distress test with respect to the six pension plans in the aggregate.¹⁴

The PBGC appealed the bankruptcy court's decision to the District Court for the District of Delaware. In response, Kaiser Aluminum contended that (1) while §1341 of ERISA does use the singular "plan" with respect to plan termination, there is no indication that Congress intended a plan-by-plan analysis; (2) Congress gave bankruptcy courts full discretion to apply the reorganization distress test; and (3) it was proper for the bankruptcy court to consider the policies and provisions of the Code in determining whether it satisfied the reorganization distress test. The district court agreed with the bankruptcy court's finding that §1341 of ERISA did not require a plan-by-plan analysis and that the bankruptcy court properly took into consideration §1113 of the Code in determining whether Kaiser Aluminum satisfied the reorganization distress test.¹⁵ The PBGC appealed to the Third Circuit Court of Appeals.

Third Circuit Opinion: Does ERISA Require a Plan-by-Plan Analysis?

The first question addressed by the Third Circuit was whether the bankruptcy court properly reviewed Kaiser Aluminum's six pension plans in the aggregate to determine whether Kaiser Aluminum satisfied the reorganization distress test. Recognizing that Title IV of ERISA contains the exclusive means through which a debtor may terminate a single-employer pension plan, and that Kaiser Aluminum sought a distress termination pursuant to §1341(c)(2)(B)(ii) of ERISA, the Third Circuit first performed a detailed analysis of that section to determine whether bankruptcy courts were required to perform a plan-by-plan analysis. Pursuant to §1341 (c)(2)(B)(ii) of ERISA, to obtain a distress termination (1) the debtor must have filed a petition seeking a distress termination, (2) the bankruptcy case must not have been dismissed as of the proposed termination date of the pension plan, (3) the plan sponsor must submit to the PBGC a request for bankruptcy court approval of the proposed termination, and (4) the bankruptcy court (or such other court must "determine...that, unless the plan is terminated, such person will be unable to pay all of its debts pursuant to a plan of reorganization."¹⁶

Despite providing the exclusive means through which a debtor may terminate a single-employer pension plan, the Third Circuit recognized that ERISA did not explain how bankruptcy courts should apply the reorganization distress test when a plan sponsor seeks to terminate more than one pension plan. Instead, the court noted that ERISA simply provides that the reorganization distress test is satisfied when a bankruptcy court concludes that a plan sponsor will be unable to continue in business outside of chapter 11 if the pension plan is not terminated.¹⁷ In the absence of direction from ERISA with respect to how the reorganization distress test should be applied when a plan sponsor seeks to terminate more than one pension plan, the Third Circuit attempted to determine whether Congress intended, as the PBGC asserted, for bankruptcy courts to perform a plan-by-plan analysis.¹⁸

As a result of its review, the Third Circuit rejected the PBGC's position that Congress' use of the singular "plan" in §1341(c)(2)(B)(ii)(IV) represented a mandate to the bankruptcy courts that they apply the reorganization distress test on a plan-by-plan basis. In particular, the Third Circuit noted that under general rules of statutory construction, "the singular form of a word 'include[s] and appl[ies] to several persons, parties or things...unless the context indicates otherwise.'"¹⁹ Because Congress did not expressly indicate otherwise, the Third Circuit concluded that Congress' use of the singular was not intended to limit review. In addition, the Third Circuit concluded that Congress' use of the singular "plan" did not require a plan-by-plan analysis because such an application would be unworkable.²⁰ Thus, because nothing in §1341(c)(2)(B)(ii)(IV) of ERISA suggested that the traditional form of statutory construction did not apply and because Congress failed to provide any guidelines with respect to how a court should apply the reorganization distress test on a plan-by-plan basis, the Third Circuit concluded that the PBGC's plan-by-plan analysis was not supported.

Interplay of ERISA and Bankruptcy

After the Third Circuit concluded its textual analysis, the court proceeded with a separate analysis with respect to whether the PBGC's plan-by-plan approach coincided with the equitable nature of bankruptcy. Recognizing that the Supreme Court has long recognized that bankruptcy courts are courts of equity that apply equitable principles in the administration of bankruptcy estates and that bankruptcy courts have broad discretion to act in a manner that will prevent unfairness, the Third Circuit concluded that applying a plan-by-plan approach would produce an unfair result in violation of bankruptcy's equitable principles.²¹

The bankruptcy courts are courts of equity that are guided by equitable principles. Absent a clear congressional mandate to the contrary, courts will not impose upon them an approach to the reorganization test that would conflict with their tradition of preventing unfairness in bankruptcy proceedings. Congress must speak more clearly than it has in ERISA if it wishes bankruptcy courts to take a plan-by-plan approach to the reorganization test.²²

Thus, because a plan-by-plan analysis would require the bankruptcy court to determine which pension plan should be terminated and which labor group should be discriminated against without express congressional direction to that effect, the Third Circuit concluded that a plan-by-plan analysis would produce an unfair result that violates principles of equity.²³ As a result, the Third Circuit recognized that because ERISA did not expressly supersede the Code, the bankruptcy court was correct in applying the reorganization distress test in light of bankruptcy's equitable goals.

Deference to the PBGC

Finally, the Third Circuit rejected the PBGC's appeal asserting that its plan-by-plan approach was entitled to deference from the bankruptcy court. Although the Third Circuit recognized that Congress delegated to the PBGC the power to adopt rules and regulations necessary to effectuate ERISA²⁴ and that the Supreme Court has accorded Chevron²⁵ deference to the PBGC's interpretation of ERISA on certain occasions,²⁶ the Third Circuit concluded that "deference to the PBGC here is improper because the PBGC has neither the expertise nor the authority to determine when a plan should be terminated under the reorganization test."²⁷ In reaching this conclusion, the Third Circuit noted that pursuant to §1341(c)(2)(B)(ii)(IV), the bankruptcy court had the sole power to determine whether Kaiser Aluminum satisfied the reorganization distress test.²⁸ Thus, because Congress delegated its authority to the bankruptcy court and not the PBGC, the Third Circuit concluded that Chevron deference did not apply.²⁹

Moreover, even if the PBGC were entitled to deference, the Third Circuit concluded that the PBGC's plan-by-plan analysis would not be entitled to deference from the bankruptcy court in this instance because the PBGC had apparently raised the plan-by-plan approach for the first time in its litigation with Kaiser Aluminum.³⁰ "To merit deference, an agency's interpretation of the statute must be supported by regulations, rulings or administrative practice."³¹ Thus, in light of the fact that the PBGC's appeal failed to point to regulations, rulings or administrative processes in which it adopted the plan-by-plan requirement for the reorganization distress test, the Third Circuit agreed with the bankruptcy court that the PBGC was not entitled to deference.

Conclusion

Although the PBGC is the government agency that regulates the termination of defined-benefit pension plans and administers the termination insurance program for those plans, it is important to recognize that ERISA delegates certain duties, such as determining whether a debtor satisfies the reorganization distress test, to the courts.

Footnotes

1 In re Kaiser Aluminum Corp., 456 F.3d 328 (3d Cir. 2006) (Kaiser III).

2 Section 1341(c)(2)(B)(ii)(IV) of ERISA provides that a company satisfies the requirements for the voluntary termination of its pension plan(s) under the reorganization distress test if: the bankruptcy court (or such other court) determines that, unless the plan is terminated, such person will be unable to pay all of its debts pursuant to a plan of reorganization and will be unable to continue in business outside the chapter 11 reorganization process and approves the termination. 29 U.S.C. §1341 (c)(2)(B)(ii)(IV).

3 Originally, Kaiser Aluminum sought to terminate seven pension plans. This number was reduced to six, however, because Kaiser Aluminum concluded that the seventh plan, a plan that provided pension benefits for five employees, was not underfunded.

4 Pursuant to §1342(c)(2)(B)(ii) of ERISA, the provision that applies to companies operating in bankruptcy who seek to establish that a distress termination of their plan is necessary to its reorganization efforts, a distress termination of a pension plan is proper if: (I) such person has filed, or has had filed against such person, as of the proposed termination date, a petition seeking reorganization in a case under title 11... (II) such case has not, as of the proposed termination date, been dismissed, (III) such person timely submits to the [PBGC] any request for the approval of the bankruptcy court... of the plan termination, and (IV) the bankruptcy court (or such other appropriate court) determines that, unless the plan is terminated, such person will be unable to pay all its debts pursuant to a plan of reorganization and will be unable to continue in business outside the chapter 11 reorganization process and approves the termination. 29 U.S.C. §1341 (c)(2)(B)(ii).

5 The PBGC is the government agency that regulates the termination of defined benefit pension plans and administers the termination insurance program for those plans.

6 Kaiser III, 456 F.3d at 333.

7 Id.

8 See supra, footnote 3.

9 See Kaiser III, 456 F.3d at 333.

10 In re Kaiser Aluminum Corp., Case No. 02-10429, Docket No. 3657 (Bankr. D. Del. Feb. 5, 2004) (Kaiser I).

11 Id.

12 Section 1113 of the Code provides, in pertinent part, that in seeking the rejection of collective-bargaining agreements, the debtor shall assure "that all creditors, the debtor and all affected parties are treated fairly and equitably...." 11 U.S.C. §1113 (b)(1)(A).

13 Kaiser III, 456 F.3d at 333 (quoting Feb. 2, 2004, Hearing Transcript at App. 445, filed under seal) (modifications in original).

14 Despite its conclusion that Kaiser Aluminum satisfied the reorganization distress test with respect to all six pension plans, the bankruptcy court refused to approve the termination of two of the plans because certain collective-bargaining agreements precluded termination of those plans. Since that time, Kaiser Aluminum reached consensual agreements to remove the contractual prohibitions contained in the two collective-bargaining agreements.

15 Pension Benefit Guaranty Corp. v. Kaiser Aluminum Corp. (In re Kaiser Aluminum Corp.), Civ. A. No. 04-145 (D. Del. March 30, 2005).

16 See 29 U.S.C. §1341 (c)(2)(B)(ii).

17 See 29 U.S.C. §1341 (c)(2)(B)(ii)(IV).

18 Before analyzing Congress' intent, the Third Circuit noted that the parties failed to cite, and that it could not find, any case in which a court performed a plan-by-plan analysis. See Kaiser III, 456 F.3d at 336. In fact, the Third Circuit recognized that the cases identified established that in every case the bankruptcy court reviewed the pension plans in the aggregate without any objection from the PBGC. Id.

19 Id. at 337 (quoting 1 U.S.C. §1) (modifications in original).

20 The Third Circuit found that the PBGC's plan-by-plan analysis would prove unworkable because a court would be forced to make certain basic assumptions about the manner and order in which it would have to apply the reorganization distress test. See Kaiser III, 456 F.3d at 336 (providing hypothetical and additional discussion with respect to the unworkable nature of the PBGC's plan-by-plan analysis).

21 Kaiser III, 456 F.3d at 339-340.

22 Kaiser III, 456 F.3d at 339.

23 Kaiser III, 456 F.3d at 341.

24 Kaiser III, 456 F.3d at 343 (citing 29 U.S.C. §1302(b)(3).

25 Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).

26 Kaiser III, 456 F.3d at 344 (citing Pension Benefit Guaranty Corp. v. LTV Corp., 496 U.S. 633, 652 (1990); Mead Corp v. Tilley, 490 U.S. 714, 725 (1989).

27 Id.

28 See supra, footnote 3.

29 Kaiser III, 456 F.3d at 344 (citing United States v. Mead Corp, 533 U.S. 218 (2001).

30 Quoting Conn. General Life Insurance Co. v. Commissioner, 177 F.3d 136, 143-44 (3d Cir. 1999), the Third Circuit reiterated its position that deference to an agency counsel's interpretation is not proper when the agency itself has not expressed its position. See Kaiser III, 456 F.3d at 343.

31 Kaiser III, 456 F.3d at 339-340.