Terminating Retiree Benefit Plans — New Impediments from the Courts

November 7, 2011
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By Joel R. Glucksman | A July 13, 2010 Third Circuit ruling significantly burdens firms planning to use bankruptcy to restructure. Simply put, they can no longer freely modify retiree benefit plans (neither in bankruptcy nor within six months beforehand) even if their plan’s plain language lets them do so!

Bankruptcy Code §1114 limits a company’s ability to modify retiree plans for medical, disability, or death benefits. This applies to modifications proposed during, or up to six months before, bankruptcy. The company must first: (i) make a good faith proposal to the workers, (ii) which they reject, and (iii) which the bankruptcy court finds is fair, equitable, and “clearly favored by the balance of the equities.”

Visteon Corp’s plan, however, contained a reservation giving Visteon the unilateral right to terminate. In its bankruptcy, Visteon therefore moved to terminate the plan. Despite this plain language, and contradicting rulings from other federal courts, the Third Circuit denied Visteon, instead requiring that it first satisfy the requirements of §1114.

IUE-CWA v. Visteon Corp. (In re Visteon Corp.) has significant ramifications. Within the Third Circuit, it increases employee bargaining power when a company is distressed. It also weakens the incentive for other creditors to attempt workouts, since less free cash will now be available. And, it makes timing important: A company considering bankruptcy must now pay more careful attention to the six month “look-back” of §1114.