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Much remains up in the air with the seemingly inevitable Chapter 11 filings of Chrysler LLC and General Motors Corp. (NYSE:GM). One variable, of course, is where proceedings would take place -- the automakers' home court of Detroit or the two leading out-of-state venues for large cases, Wilmington, Del., and New York City. Michigan is already advocating for a Chrysler or GM case to stay at home. Detroit was also The Deal's choice when it looked at how a GM bankruptcy might play out back in December. Keeping proceedings in the Great Lakes State would allow the assigned judge to not be overwhelmed by the volume of the proceedings -- Wilmington and Manhattan judges aren't exactly twiddling their thumbs currently -- and Delaware isn't a particularly friendly place to break union contracts. The automakers' suppliers and the United Auto Workers' headquarters are also close by; similar factors led United Air Lines Inc. parent UAL Corp. (NASDAQ:UAUA) to file in Chicago. But a recent decision by the U.S. Court of Appeals for the 2nd Circuit regarding payments for terminated pension plans may present another reason not to choose New York. (The 2nd Circuit oversees federal courts in Connecticut, New York and Vermont.) The 2nd Circuit ruled April 8 that Oneida Ltd. could not avoid $6.9 million in premium payments to the Pension Benefit Guaranty Corp., overturning an earlier decision in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan. Judge Allan Gropper of the bankruptcy court had ruled that the premium -- which arose from the termination of an Oneida pension plan -- was "a classic contingent claim." The Deficit Reduction Act of 2006 calls for companies to make three annual premium payments to the PBGC of $1,250 per individual in a terminated pension plan. Bankrupt entities aren't subject to the payments until they leave court protection. For Oneida, that tab came to three payments of $2.3 million. Oneida
and the PBGC had appeared to be on decent terms with one another during
the debtor's Chapter 11 case in 2006. Oneida originally considered
terminating all three of its pension plans but eventually chose to hang
on to two of them, all while coming to a key settlement with the agency. The
settlement granted the PBGC a $3 million secured claim in return for
the minimum funding contributions that Oneida had missed under its
pensions. The remaining pension liability -- with an estimated value of at
least $21.08 million -- was turned into an unsecured claim and wiped out
under Oneida's reorganization plan. The DRA premium, however, was not directly addressed through the plan or settlement. In his February 2008 ruling on the DRA premium, Gropper sided with Oneida, which contended the premium was a prepetition claim owed to the PBGC and, as such, was converted to a general unsecured claim through the settlement and discharged. The 2nd Circuit, however, ruled that because Congress specifically inserted the termination premium payment into the DRA to prevent the shedding of unfunded pension plan liabilities in bankruptcy, "treating the ... termination premium as a prepetition claim would therefore directly thwart Congress' aim." The court reversed Gropper's decision and sent the matter back to bankruptcy court for further proceedings. What's the upshot for the automakers and other potential debtors? With a precedential decision now on the books, bankrupt companies terminating their pension plans in New York and elsewhere in the 2nd Circuit look certain to be subject to the DRA premiums. Other courts could see the issue differently.
Still, the prudent should plan on paying the DRA premium to the PBGC if
they terminate their pension plans. In the end, the decision -- while
significant -- seems unlikely to keep GM or Chrysler from filing in New
York, if all else is equal. The potential price tag for any terminated
pension plan is too high to leave unaccounted. But it's just another
thing that argues for the automakers to stick close to home if a
bankruptcy filing is in order. - David Elman
CategoriesComments
From: Patricia,
Ignorant question, but what are reclamation claims? Are they akin to unsecured liabilities, such as retiree health care obligations. If so, why would the secured debtholders even consider having the Bankruptcy proceedings take place in Michigan. In fact, if I were a secured debtholder, I'd force the company into bankruptcy now, and petition that it be heard in NYC.
Posted on:
April 28, 2009 4:09 PM
From: David Elman,
The reclamation claims referred to in Phar-Mor v. McKesson (available here if you like to peruse legal documents) are for recovery of goods delivered to Phar-Mor on credit. The Bankruptcy Code currently allows vendors to reclaim goods delivered to an insolvent company in the 45 days before its bankruptcy filing, if the vendor demands the goods within 45 days of delivery or 20 days after the bankruptcy filing. (This appears to have changed since Phar-Mor launched its case on Sept. 24, 2001. Vendors can also, following the 2005 Code amendments, seek administrative--the highest priority--claims for goods delivered in the ordinary course of business in the 20 days before a bankruptcy filing. These are called 503(b)(9) claims for the applicable section of the Code.) The Sixth Circuit affirmed the bankruptcy court's ruling--as well as a district court decision--that McKesson's reclamation claim had priority over secured claims even though the goods subject to the claim were sold. Phar-Mor had asserted that McKesson's claim was unsecured following the sale. I'm not sure how all this fits into the big picture, though.
Posted on:
April 28, 2009 6:25 PM
From: Frederick Coombs,
Reclamation claims - whether traditional or under 503(b)(9) - will be big in an automotive filing, given the number of parts vendors who ship "just in time." The administrative-level claims thereby generated have to be balance against the post-petition pension termination liability ( the Oneida problem in the Second Circuit) in selecting venue. Of course, if a Chrysler filing starts as a Chapter 11 and then either converts to Chapter 7 or becomes administratively insolvent, the reclamation issue that arises in the chapter 11 moves to the back burner.
Posted on:
April 29, 2009 9:55 AM
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One factor militating against a Detroit filing is the Sixth circuit's decision in McKesson v. Phar- Mor (2008) (cert. den. 2/27/09), giving reclamation claims the priority over secured creditors. this, when coupled with the recent Plastech decision out of the E.d. Mich., ( 503(b)(9) claims are not subject to preference set-off), makes a filing in the Sixth Circuit risky, given the plethora of reclamation -type claims that are bound to arise. These need to be set off against the pension jettisoning exposure in the Second Circuit.