This article is an excerpt from the forthcoming Second Edition of Collier
Monograph: Employee Benefits and Executive Compensation in Corporate
Bankruptcy, written by John R. Cornell, Daniel C, Hagen, Tricia
Eschbach-Hall and Lisa Rothman Jesner. The authors are lawyers with the
international firm of Jones Day, and practice in the firm's Employee Benefits
and Executive Compensation practice in New York and Cleveland.
Debtors are now more frequently selling a significant
portion of assets in bankruptcy under section 363 of the Bankruptcy Code, with
an accompanying distribution of sale proceeds and disposition of remaining
assets in a liquidating chapter 11 plan. This excerpt from the Second Edition
of Collier Monograph: Employee Benefits and Executive Compensation in Corporate
Bankruptcy looks at such sales in the context of pension plans.
The authors write: The breakdown in the credit markets that
peaked in the second half of 2008 has had a significant impact on bankruptcy
planning and strategy. With a severe lack of access to commercially reasonable
debtor-in-possession financing, debtors are more frequently selling a
significant portion of assets in bankruptcy under section 363 of the Bankruptcy
Code (a "363 Sale"), with an accompanying distribution of sale
proceeds and disposition of remaining assets in a liquidating chapter 11 plan.
A 363 Sale may allow the debtor to sell assets free and clear of liability for
underfunded pension plans. Purchasers frequently choose (i) not to assume any
pension plans or (ii) to assume only those plans they wish to maintain, leaving
any other plans behind.
Several scenarios could occur in connection with the sale. First, if there was
a plan termination during the bankruptcy, the PBGC would have a claim against
the debtor's estate. The claim would be liquidated in the bankruptcy case.
While ERISA provides that a lien is imposed in favor of the PBGC at the time of
termination, courts have found that the PBGC lien does not attach in
bankruptcy, as a result of the automatic stay. Therefore, the acquirer who
purchases the debtor out of bankruptcy in a 363 asset sale should not be
subject to those liens.
While it is somewhat unusual for the equity of a debtor to be purchased out of
bankruptcy, it nevertheless is possible for the equity of a debtor to be sold
in a 363 Sale. In addition, a debtor may sell the equity of a non-debtor
subsidiary in connection with a 363 Sale. If the equity of an entity that is
liable for an underfunded defined benefit plan is purchased in a 363 Sale, the
PBGC typically takes the position that the sale of equity is not free and clear
of pension liabilities. There is a risk that the transaction (as to the
entities acquired in an equity sale) will be treated as a sale of equity. As a
result, the PBGC may claim that the transferred entity is subject to joint and
several liability and may threaten to impose liens against the transferred entity
following the transaction. The PBGC may seek to negotiate for additional
consideration in exchange for a release of these potential liabilities.
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