Updated Bankruptcy Q & A's
With the questions surrounding retirement and insurance issues as they relate to the current bankruptcy filing, we have updated our most recent Bankruptcy Question and Answer article.
Thank you,
Your MEC Officers &
AFA Legal Counsel
Updated Bankruptcy Q & A’s
Part I - General Bankruptcy Questions
Q. What is a bankruptcy?
A. A bankruptcy is a legal proceeding with a special set of rules and standards governing a company's rights and obligations after the company files a bankruptcy petition. A bankruptcy also determines the rights and obligations of creditors and other parties. A creditor is an individual or business that has a claim against the bankrupt company. The bankrupt company itself is known as “the debtor” during the bankruptcy proceedings. The claims adjudicated in the bankruptcy usually are those claims that arise prior to the bankruptcy petition being filed. These claims are called "pre-petition" claims.
The laws governing a bankruptcy are contained in the U.S. Bankruptcy Code. Bankruptcy proceedings are supervised by the U.S. Bankruptcy Courts, which are divisions of the U.S. District Courts.
Q. What are the differences between a Chapter 7 and a Chapter 11 bankruptcy?
A. A Chapter 7 filing is a liquidation proceeding under which a company terminates its operations and ceases doing business. A trustee then liquidates or sells the assets of the company. Various classes of creditors are paid out of available funds pursuant to the rules of the Bankruptcy Code.
A Chapter 11 filing is a reorganization proceeding that is intended to give a company an opportunity to restructure its operations and finances and emerge from bankruptcy pursuant to a plan of reorganization. In Chapter 11 bankruptcies, companies seek a seamless transition in operations upon the filing of the bankruptcy petition so customers do not recognize a break or difference in service. In a Chapter 11 bankruptcy proceeding, a company may attempt to reorganize its operations in a 'stand-alone' reorganization or to sell some or most of its assets as a going concern.
A Chapter 11 filing does not guarantee that a company will obtain the new funding that is often necessary for a company to continue operating. Though this kind of bankruptcy filing is intended to prevent liquidation, a liquidation can occur in a Chapter 11 proceeding if attempts to reorganize the company fail.
Q. What rights and benefits does a company get when it files for Chapter 11?
A. A company filing for Chapter 11 gets the right to seek court authority to reject otherwise binding contracts (commercial contracts as well as labor agreements). Pursuant to the automatic stay, which becomes effective immediately upon a bankruptcy filing, there is a suspension of most creditors' debt collection efforts and most litigation. The company's debts become bankruptcy 'claims', these claims against the bankrupt company usually are dealt with in the plan of reorganization.
The purpose of the automatic stay is to ensure that virtually all cases that could be filed or have already been filed are dealt with in one place - the bankruptcy court.
Q. What are exceptions to the automatic stay?
A. Exceptions to the automatic stay include certain 'First Day Orders', which, if appropriate motions are filed and approved, may authorize the company to pay various claims against the company as they come due. These claims might include certain employee wages and benefits, as well as claims by key vendors, foreign creditors, and, in the case of transportation companies, ticket holders.
While most litigation is stayed, grievance and arbitration proceedings under a labor contract may go forward, although any monetary damages likely will have to be dealt with in the bankruptcy process.
Q. What happens in the Chapter 11 bankruptcy process?
A. When a company files a petition for Chapter 11, the automatic stay takes effect and the company immediately comes under the supervision of the bankruptcy court. The debtor may ask the court for the authority to reject or assume certain debts or contracts.
The company ultimately negotiates a Plan of Reorganization (POR) with creditors and other parties involved in the bankruptcy. The POR is a legal document that provides how the company will pay creditors and how it will be governed following emergence from bankruptcy.
Q. How is the POR approved?
A. The company's management has the exclusive right to file a POR for the first 120 days after filing the petition, although the bankruptcy court may shorten or extend that 'exclusive' time period. During this ‘exclusivity period’ outside parties (like groups of creditors or other potential investors) may not seek to propose their own competing POR. If the exclusivity period, or an extension of the period, runs out without an POR from current management that wins creditor approval, then other parties could come forward with a competing POR and seek the approval of the creditors’ committee and the court. Or, other parties may come forward with offers to purchase a portion of the assets of the company.
Before a POR may take effect, it must be approved by the bankruptcy court and gain the required affirmative vote of various classes of creditors. There are usually prolonged negotiations over the POR between the company and various groups involved in the bankruptcy, as the approval of the POR comes towards the end of a bankruptcy proceeding.
Q. How is a company financed under Chapter 11?
A. A company filing for Chapter 11, now called the “debtor-in-possession” (DIP) because the debtor is still in possession of the business, usually seeks new financing. This is called debtor-in-possession financing and is used to pay for the operating needs of the company. As noted, the filing of a bankruptcy petition is not a guarantee that funding will be available, in which case the Company would need to rely on existing cash resources or on terms as may be available from existing lenders/creditors.
Q. What is the role of the bankruptcy judge?
A. The judge oversees the process and must review the debtor's decision that are not in the ordinary course of business, which includes any requests for rejecting labor contracts or selling substantial assets. The judge will defer to the debtor's business judgment on many other decisions. Many bankruptcy judges strongly encourage parties to settle legal disputes by agreement, rather than bring the matter before the court.
Q. Who else is involved in a company's bankruptcy filing?
A. The creditors have a formal role in a Chapter 11 bankruptcy. An official body called the Unsecured Creditors' Committee, usually consisting of the seven largest unsecured creditors, is appointed by the United States Trustee, a federal government official, to represent the interests of unsecured creditors. Unions who have substantial bankruptcy claims are entitled to appointment to such committees.
An 'unsecured creditor' is an individual or business whose claim against the debtor is not protected or secured by any collateral. A 'secured' creditor is an individual or business whose debt is covered, in full or in part, by collateral secured from the bankrupt company (usually before the bankruptcy was filed). The collateral provides security to protect the creditor in case the bankrupt company cannot pay the money it owes.
Each member of the Unsecured Creditors Committee (the "Committee") receives one vote. The Committee can hire professionals, often including lawyers and accountants or investment bankers, to monitor the company's actions. The debtor pays the cost of retaining these professionals.
Any party can appear on any matter before the bankruptcy court. The court tends to pay special attention to the views of the Committee.
Q. What can happen to our contract if US Airways files for Chapter 11?
A. Under Section 1113 of the Bankruptcy Code, the debtor may ask the bankruptcy court for authority to reject labor contracts, and through that process management can seek to modify any provision in a labor contract. If the company elects to pursue a Sec. 1113 motion it must follow certain procedures.
Before a labor agreement can be rejected through the Sec. 1113, the company to first go through a negotiation with the union. In most cases this negotiations results in an agreement on modifications to the contract, avoiding the need for a hearing before the court, as the parties seek to avoid the risks associated with a complete rejection of the labor agreement.
Under Sec. 1113 the Company’s proposal must provide only for modifications that are 'necessary' to permit reorganization and assure 'fair' and 'equitable' treatment of all parties. The Company must also provide the union with such information as is necessary to evaluate the proposal. Then, usually within 2 - 3 weeks of filing this motion (during which negotiations would probably continue) a full-scale bankruptcy court hearing is held where all interested parties can be heard. The company would present evidence and arguments to support its contention that the changes are necessary to a successful reorganization. The union would present its own evidence and arguments to the contrary, and would have the right to cross examine the company’s witnesses. Negotiations often continue during the hearing. If no agreed settlement is reached, the court's decision on rejection of contracts will be made within 40 - 51 days of the filing of the motion unless the debtor agrees to extend this period.
Q. What happens if the negotiations fail to produce agreement on the Company’s proposed changes and the court grants the Company’s Sec. 1113 motion?
The
bankruptcy judge rules just on whether or not to grant the company’s motion to
reject the entire contract, and does not determine individual contract terms or
rule on individual proposals. If the rejection of a labor contract is approved,
the contract is abrogated by the court and the Company is free to implement the
‘necessary’ new contractual terms for wages, benefits and working
conditions. If the Company is authorized by the court to do this, they would do
so unilaterally, with no opportunity for the flight attendants to vote on
whether to ratify the changes.
Please note: Under Section 1113 (e) of the Bankruptcy Code, emergency short-term
relief may be granted on an expedited basis without a full negotiating process
if the court finds that the relief is 'essential' to the continuation of
business or to avoid 'irreparable harm' to the bankruptcy estate. This
process, like the more general Section 1113 process, would be initiated by a
motion filed by the Company.
Q. Would we have the right to strike if the Company implements changes to our
labor contract?
A. Outside the bankruptcy context the union would have the right to strike pursuant to the Railway Labor Act if the Company made unilateral changes to the collective bargaining agreement. While some people have expressed a theory that such a right to strike might apply to changes made through the bankruptcy process, that issue has not been settled by the courts.
Q. What happens to our retirement health and life insurance benefits under Chapter 11 bankruptcy?
A. Section 1114 of the Bankruptcy
Code provides procedures through which union and non-union retiree health and
life insurance benefits may be modified or terminated. The procedures for
Section 1114 are similar to those set out in Section 1113. If the Company elects
to pursue such changes that process would be initiated by filing a Sec. 1114
motion with the court.
Part II - Retirement and Insurance Bankruptcy Questions.
Q. Can the Retirement Plan be terminated?
A. Under the collective bargaining agreement, the Company may terminate the Retirement Plan only with AFA's consent. However, if the Company is in reorganization in bankruptcy and meets certain conditions specified in the Bankruptcy Code, including Section 1113, a bankruptcy court can allow the Company to terminate the Retirement Plan without AFA's consent. When a company is in bankruptcy, the most likely means of terminating a pension plan is through a "distress termination".
A distress termination may occur only when certain statutory requirements are met. These requirements include the following:
1. The company has filed ... as of the proposed termination date a petition seeking reorganization in a case under [Chapter] 11,
2. Such case, as of the termination date, has not been dismissed,
3. [The Company] submits to PBGC any request for the approval of the bankruptcy court of the plan termination, and
4. The bankruptcy court determines that, unless the plan is terminated, [the Company] will be unable to continue in business outside a Chapter 11 reorganization process and approves the termination.
As soon as practicable after determining that the criteria for a distress termination are met, the Pension Benefit Guaranty Corporation (PBGC), the federal government agency that administers and guarantees certain pension benefits, must try to determine whether the plan has sufficient assets to pay guaranteed benefits and meet benefit liabilities. The PBGC then notifies the plan sponsor of its conclusion.
In addition, the PBGC can act on its own to terminate a retirement plan (an 'involuntary termination'), if it determines that (i) the plan has not met applicable minimum funding standards, (ii) the plan will be unable to pay benefits when due, (iii) a reportable event described in ERISA section 4043(c)(7) has occurred, or (iv) its possible long-run loss in providing guaranteed benefits under the plan will increase unreasonably if the plan is not terminated.
The Employee Retirement Income Security Act of 1974, as amended (ERISA), requires that the plan administrator provide 60-days’ advance written notice to all affected parties of its intent to terminate a plan. If the PBGC is advised that the proposed plan termination violates a collective bargaining agreement and that the termination is being challenged under procedures specified in the collective bargaining agreement, the PBGC will suspend the termination proceeding until resolution of the challenge. However, the PBGC still has the authority to proceed with an involuntary termination, if the requirements of an involuntary termination are met.
Q. What are the requirements for a 'standard termination' and how are plan assets allocated in that event?
A. If a pension plan's assets exceed its liabilities, it may be terminated in a 'standard termination'. In a standard termination, plan assets are used to purchase insurance company annuities designed to cover all liabilities of the plan (for all active, retired and terminated participants and survivors). The retirement plan may provide that any assets remaining after such a fully funded termination would revert to the Company.
Q: If the pension plan undergoes a distress termination or an involuntary termination, in either case where the plan's assets do not cover its projected liabilities in full, does the PBGC guarantee all the benefits to which a plan participant is entitled?
A. Generally, the PBGC guarantees a maximum monthly benefit payable to a participant who retires at age 65. This maximum monthly amount is determined for the year in which the pension plan terminates. This maximum monthly amount payable at age 65 is reduced for each year prior to age 65 that a plan participant that a participant receives his or her pension payment. There is a chart set out below that shows the guaranteed maximum amounts for various retirement ages.
The chart is based on the assumption that, at the ages set out, the participant is receiving a pension payment. So, if you plan to retire from the company at one age but do not plan to start receiving your pension payment until a later age, the maximum guaranteed amount for you will be that amount corresponding to the year in which you begin to receive pension payments.
Once a pension plan is terminated and the PBGC becomes the trustee of that plan, the plan will be administered according to the terms of the plan, federal statutes and regulations, including ERISA, and the rules of the PBGC.
September 15, 2004