PBGC v. Oneida Ltd.

 
Richard Levin, of Cravath, Swaine & Moore LLP, considers the significance of the first appellate decision holding that a company is liable to the Pension Benefit Guaranty Corporation for pension termination premiums after it emerges from a chapter 11 reorganization. Because of continuing obligations to the PBGC, chapter 11 may not provide meaningful relief from pension liabilities. However, the decision does not address successor liability.
 
Excerpt:
 
The United States Court of Appeals for the Second Circuit has ruled that a company that terminates its defined benefit pension plan in a chapter 11 reorganization case is liable to the Pension Benefit Guaranty Corporation (PBGC) for pension termination premiums after it emerges from a chapter 11 reorganization. The decision, PBGC v. Oneida Ltd., 562 F.3d 154, 2009 U.S. App. LEXIS 7176 (2d Cir. Apr. 8, 2009), though expected, is the first appellate court decision applying the termination premium provisions that Congress enacted in the Deficit Reduction Act of 2005 (DRA 2005) to protect the PBGC from employer bankruptcies, in which a pension plan termination usually gave the PBGC only a dischargeable general unsecured claim on which it recovered little, if anything.
 
Background

The DRA 2005 imposes an annual termination premium of $1,250 per plan participant for three years after a distress or involuntary termination of a single-employer defined benefit plan, whether or not the termination occurs in a chapter 11 case. If a plan is terminated while the employer or a member of its controlled corporate group is undergoing reorganization under chapter 11, the DRA 2005 contains a Special Rule that defers application of the general rule, and therefore the start of the three-year period for premiums, until the date of discharge or dismissal of the chapter 11 case, apparently with the intent of ensuring that the termination premium obligation is a post-bankruptcy obligation that is not affected by the bankruptcy discharge.

In its chapter 11 reorganization case, Oneida Ltd. stipulated with the PBGC for a distress termination of one of its single-employer defined benefit plans. Oneida then argued to the bankruptcy court that the termination premium was a claim that arose before bankruptcy and therefore was discharged in Oneida's chapter 11 case. Oneida reasoned that the Bankruptcy Code's definition of claim is broad, including contingent claims, that Oneida and the PBGC had a relationship with respect to the pension plan before bankruptcy and that the parties could contemplate before bankruptcy that this additional premium could arise. The bankruptcy court agreed with Oneida and discharged the PBGC's premium claim. 383 B.R. 29 (Bankr. S.D.N.Y. 2008). [footnote omitted}