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Weathering the Storm: Third Circuit Rules Regardless of Plan Reservation of Rights Language, Bankruptcy Debtor Must Comply with the Bankruptcy Code to Amend, Modify or Eliminate Retiree Benefits
Arthur T. Carter, Michael E. Foreman, Stephen M. Pezanosky, Sue P. Murphy, Kenric D. Kattner, Eric Terry
Once a company files a Chapter 11 bankruptcy petition (to sell its assets, reorganize or liquidate), Bankruptcy Code § 1114 sets forth a detailed procedure for the employer to follow to modify or terminate certain retiree benefits. Among other things, § 1114 imposes on the employer the burden of showing that the elimination or modification of benefits is necessary to permit reorganization. Since the enactment of § 1114 in 1988, a recurring issue has been whether these procedures need to be followed where, as is frequently the case, the retiree benefits plan contains a reservation of rights permitting unilateral amendment, modification or termination by the employer. A number of Bankruptcy and United States District Courts have ruled on this issue, with a majority of them concluding that such reservation of rights language renders § 1114 inapplicable.
On July 13, 2010, in a decision arising out of the Visteon Corporation bankruptcy, the United States Court of Appeals for the Third Circuit became the first appellate court to directly address this issue, and in doing so, parted ways with the majority. The Third Circuit ruled that § 1114 applies even where the debtor has retained the right in the plan itself to unilaterally modify or terminate retiree benefits. See In re Visteon Corp., Case No. 10-1944 (3d Cir. July 13, 2010).
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