"Reorganization Test" Must Be Applied In The Aggregate When Considering Requests To Terminate Debtors' Multiple Pension Plans.
In re Kaiser Aluminum Corp., 456 F.3d 328 (3d Cir. 2006) (Circuit Judge Marjorie O. Rendell)
In this issue of first impression in the circuit courts, the Third Circuit Court of Appeals held that when an employer in Chapter 11 seeks voluntarily to terminate multiple pension plans under ERISA’s “reorganization test,” a court must consider termination of the plans in the aggregate, rather than on a plan-by-plan basis.
During the reorganization, the Debtor originally sought to replace 7 pension plans that had been established in connection with collective bargaining agreements, but thereafter determined to voluntarily terminate 6 of the plans pursuant to ERISA. ERISA § 4041(c) permits termination of a pension plan if an employer in Chapter 11 satisfies certain notice requirements and demonstrates that it will be unable to pay its debts and continue in business outside Chapter 11 unless the pension plan is terminated. This inquiry is called the Reorganization Test.
The Delaware Bankruptcy Court applied the Reorganization Test in the aggregate, rather than reviewing the request to terminate on a plan-by-plan basis. The Pension Benefit Guaranty Corporation appealed to the District Court, which affirmed. The PBGC then took a timely appeal to the Third Circuit.
PBGC argued that if the Debtors’ various pension plans were considered individually and without regard to the Debtors’ obligations under the other plans, 4 of the 6 plans could continue to be funded in a reorganization, while two might have to be terminated. Because these plans were created in connection with collective bargaining agreements, however, the Bankruptcy Court found, and the Third Circuit agreed, that an individualized approach would violate the Bankruptcy Code’s requirement in section 1113(b) that debtors bargain freely and equitably with unions.
The Circuit Court looked particularly to the language of ERISA for guidance as to whether to evaluate plans individually or in the aggregate and found none. Likewise, while the Court found cases where multiple plans had been terminated (apparently without contest from the PBGC), little guidance was provided by those decisions as to why those courts examined the plans on an aggregate basis.
The PBGC argued that ERISA’s use of the singular terms “single-employer plan” and “plan” evidenced Congress’ intent that the plan-by-plan approach to terminations be used. The Circuit Court disagreed, noting that, in construing statutory provisions, 1 U.S.C. § 1 provides that use of the singular includes the plural unless context indicates otherwise.
The Court held that context did not indicate that ERISA’s use of “plan” required a plan-by-plan analysis. Instead, the Court held that such an interpretation would make the statute “unworkable.” “[T]he reorganization test cannot be rationally applied on a plan-by-plan basis unless a court makes basic assumptions about the order in which the plans should be considered and the status of the other plans that the employer is seeking to terminate.” The Circuit court was unwilling to engage in such speculation, noting, through the use of a few hypotheticals, that the outcome of a plan-by-plan analysis could change dramatically based upon the ground rules that a court might employ. Considering that bankruptcy courts are fundamentally courts of equity, the Circuit Court found such inequitable results untenable, and affirmed the practice of applying the reorganization test in the aggregate to all plans to be terminated.
