Prepetition Amendment To Pension Plan Is A Fraudulent Transfer
Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corp. Retirement Plan No. 003 (In re Fruehauf Trailer Corp.), 444 F.3d 203 (3d Cir. 2006) (Circuit Judge Thomas L. Ambro)
The Delaware District Court approved the avoidance of an alleged fraudulent transfer under §548(a)(1) of the Bankruptcy Code of a surplus from a union pension plan that was used to provide benefits to management through a pre-petition amendment to the debtor’s pension plan.
The pension plan had been amended on September 19, 1996 and the Debtor filed its bankruptcy petition approximately two weeks later.
The District Court found that there was not reasonably equivalent value provided to the Debtor for the loss of the surplus used to provide benefits to management. The Defendants had failed to prove that the plan amendment helped to retain key personnel so that the debtor could sell its assets as a going concern.
On appeal, the Third Circuit concluded that the amendment to the pension plan was fraudulent despite the lack of a precise calculation of the benefits conferred and received by the plaintiff.
In the midst of financial turmoil, the result of an aggressive over expansion that left the company with a negative net-worth, Fruehauf’s board held an emergency meeting on September 19, 1996. During that meeting, the board approved an amendment to the pension plans of approximately 400 employees, primarily executives or managers, which provided immediate benefits and future benefits to those employees who remained with the company through March 31, 1997. The benefits were paid out of a surplus of funds Fruehauf had earmarked for the union members’ pension plan. Under the amendment, unused funds would revert back to the company.
The company filed for protection under Chapter 11 on October 7, 1996. After a sale of substantially all of its assets to Wabash National L.P., Fruehauf’s remaining assets were placed in a liquidation trust and the pension plan was taken over by the Pension Transfer Corporation, a subsidiary of the liquidation trust.
The Debtor filed an adversary proceeding in the Bankruptcy Court against the pension plan alleging that the payments under the amendment to the plan would result in a fraudulent transfer under §548 of the Bankruptcy Code. The Court approved a preliminary injunction that prohibited the plan from making distributions under the amendment. After Fruehauf’s plan of reorganization was approved, PTC was made the administrator of the pension plan and was substituted as the plaintiff in the adversary proceeding, which was then transferred to the District Court.
The District Court ruled that the pension amendment was a fraudulent transfer under §548 of the Bankruptcy Code, finding that the amendment was never properly presented to Fruehauf’s board and payments contemplated under the amended pension plan exceeded the amount normally paid to retain key employees. There was no evidence that Wabash paid more money for Fruehauf because it was an “ongoing operation.” The District Court held that the PTC had a property interest in any surplus in the union members’ pension plan and the amended plan irrevocably transferred this property interest to the defendants. Any value the Debtor may have received was not “reasonably equivalent” to the cost of the transfer. The District Court concluded that payments under the amended pension plan would be an avoidable fraudulent transfer of property of the debtor’s estate.
The beneficiaries of the amended plan appealed to the Third Circuit raising three issues: 1) the PTC did not have a property interest in the union members’ pension surplus; 2) the District Court erred in not applying the correct test for determining whether a transfer is fraudulent because PTC did not satisfy its burden of proving the value surrendered and received by the Debtor; and 3) the District Court erred in assigning the burden of proof to the Defendants.
The Third Circuit stated that the party bringing the fraudulent conveyance action had the burden of proving that: (i) the Debtor had a property interest in the pension surplus; (ii) the interest was transferred within one year of the filing of the Debtor’s bankruptcy case; (iii) insolvency of the Debtor at the time of the transfer or that the Debtor became insolvent as a result of the transfer; and (iv) that the Debtor did not receive reasonably equivalent value for the transferred property interest. There was no dispute between the parties as to either insolvency of the Debtor or whether the alleged fraudulent conveyance was within the prescribed statutory time limit.
The Third Circuit noted that the broad definition of “property” in the Code included “all legal or equitable interests of the debtor in property,” including “future interests” and the “opportunity to receive an economic benefit.” Under ERISA, an employer who sponsors a qualifying retirement plan is entitled to recapture any surplus when the plan terminates and “the recoupment right is a transferable property interest.” The Debtor’s potential recoupment of the pension surplus was, thus, a transferable property interest under §548.
Similarly, the Code also defines “transfer” broadly. Benefits accruing under a qualified pension plan are irrevocable, so the pension surplus which was awarded to the defendants under the amended pension plan was fully transferred to them. Under this reasoning, the Third Circuit held that the irrevocable allocation of the pension surplus was a transfer as defined in §548.
Finally, the Third Circuit considered whether Fruehauf received reasonably equivalent value for the transfer. The opportunity to receive an economic benefit is defined as value under the Bankruptcy Code. Fruehauf forfeited value when it amended the pension plan. Reasonably equivalent value is determined by examining the totality of the circumstances including (1) the fair market value of the benefit received as a result of the transfer, (2) the existence of an arm’s-length relationship between the debtor and the transferee, and (3) the transferee’s good faith.
The Third Circuit, citing Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d Cir.1991), stated that “the value of consideration received must be compared to the value given by the debtor.” The Court rejected a rigid application of this test, stating that the rule must bow “to common sense,” and that if the “totality of the circumstances” demonstrates that the debtor received only minimal value for the benefit it conferred, an exact calculation is not necessary.
The Court concluded that the District Court did not commit error. First, the Third Circuit found no error in the District Court’s conclusion that the pension plan amendment conferred some benefit to Fruehauf. Second, the District Court had sufficient evidence to conclude that the cost of funding the amended pension plan was at least $2.4 million. The Debtor’s own calculation of the cost of the amended pension plan was $2.4 million. The PTC had offered evidence of a $4.4 million calculation. The defendants provided no evidence of a calculation. Finally, the District Court properly relied on testimony that the amendment was not properly presented to the board and that the cost of the amended pension plan was double normal costs expended to retain key employees. The Third Circuit therefore concluded that under the totality of the circumstances, the pension amendment did not confer reasonably equivalent value upon the debtor. The Third Circuit Court also noted that several factors demonstrate the plan amendment lacked good faith: (1) the unions were never apprised of the use of the surplus, (2) the amendment was presented to the board for approval as an administrative formality that did not require discussion and (3) the plan amendment proponents told the board the amendment did not involve a cash expenditure from Fruehauf. The Court also held that PTC’s failure to provide evidence that no benefit to Fruehauf accrued was not error in light of the other circumstances surrounding the plan amendment.
Finally, the Court addressed the beneficiaries’ contention that the District Court wrongly assigned the burden of proof to them on the issue of reasonably equivalent value. The Third Circuit did not find this argument convincing and noted that the District Court stated several times that PTC had the initial burden of establishing the elements of a prima facie case of a fraudulent transfer and that the beneficiaries had no burden. The court concluded, however, that when PTC satisfied its burdens the burden then shifted to the beneficiaries to rebut the PTC’s proof.
