Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

companies in the S&P 500 maintaining defined pension benefit plans had fully funded thoseplans.Next, consider OPEB liabilities. Historically, many employers have provided OPEB plansfeaturing a generous package of benefits, including medical, dental, vision, and prescriptiondrug coverage. Some also provide life insurance and disability benefits as well. As you mightexpect, costs associated with OPEB plans go hand-in-hand with pension liabilities, as both areobligations promised primarily to retirees. While it affects both legacy liabilities, the UnitedStates’ aging workforce has significantly contributed to OPEB liabilities by increasing the costsof providing such generous healthcare and other benefits. OPEB liabilities are particularlyburdensome for state and local governments. In fact, the national total of unfunded OPEBliabilities was approaching $2 trillion in 2011, dwarfing public sector pension liabilities.Legacy liabilities can be a driving force that plunges a distressed company into balance sheetinsolvency, as claims on account of legacy liabilities can eclipse the billion dollar mark. Ascompanies facing the strain associated with ballooning legacy liabilities look for ways to cutcosts and increase liquidity, two general options emerge: (1) modify or terminate the company’spension contribution requirements and/or (2) modify or terminate OPEB benefits. Of course, acompany can exercise these options in Chapter 11 as a debtor in possession.Treatment of Legacy Liabilities in a Bankruptcy CaseBecause legacy liabilities can substantially burden a troubled company, it is no surprise thatwhen such a troubled company files for Chapter 11 protection, it targets legacy liabilities fortermination or reduction. Indeed, legacy liabilities have been front and center in a variety ofrecent Chapter 11 cases, such as the GM, Chrysler, Hostess, and American Airlines cases.First, what happens to pension liabilities in bankruptcy? Recall that pensioners have claims forunpaid benefits. Thus, a debtor will often try to modify or terminate its pension plan inbankruptcy. The rules surrounding a debtor’s termination of its pension plan in bankruptcy arequite complicated, but can be summarized as follows. If the debtor’s collective bargainingagreement(s) (―CBA‖) requires the debtor to maintain a pension plan, then the debtor mustreject the CBA by following the procedural and substantive requirements outlined in section1113 of the Bankruptcy Code. Assuming the debtor meets the section 1113 requirements andrejects the CBA, it must then meet the standards for ―distressed termination‖ of the pensionplan, which are outlined in the Employee Retirement and Income Security Act (―ERISA‖).To terminate a pension plan under the distressed termination standard, the debtor must meetthe standard set forth in section 4041(c) of ERISA. This standard contains three requirements:(1) the plan administrator must provide sixty days’ advance notice of its intent to terminate tothe affected parties, i.e., the retirement plan participants and union representatives; (2) the planadministrator must provide certain information required under section 4041(c) of ERISA, e.g.,the name of the plan and the contributing sponsor, statements as to guaranteed benefits, andstatements as to whether plan assets are sufficient to pay benefit liabilities; (3) the PensionBenefit Guaranty Corporation (―PBGC‖), a public agency that insures the payment of pensionbenefits under defined benefit plans at statutorily-specified benefit levels, must conclude thatthe ―necessary distress criteria‖ exist. The distressed termination standard is extremelystringent, however — generally, a debtor can satisfy the distressed termination standard only if53