Court Hears Arguments on PBGC Plan Termination Fees

January 30, 2009 ( - U.S. federal judges on Thursday heard arguments whether companies that emerge from bankruptcy must pay termination fees to the Pension Benefit Guaranty Corporation (PBGC).

According to Reuters, the issue in the case is whether a rule passed in 2005 requiring employers who terminate their plans in bankruptcy to pay the PBGC $1,250 per participant per year for three years (see House Budget Bill Imposes Fee for Dumped Pension Plans ) constitutes a claim that can be discharged in bankruptcy.

On Thursday, James Eggeman, an attorney with Steptoe & Johnson representing the PBGC, told the 2nd U.S. Circuit Court of Appeals that Congress had intended the law to shore up the finances of the PBGC. “Congress intended this to be a post-(bankruptcy) obligation,” he said, according to Reuters.

William Roll, an attorney at Shearman & Sterling representing Oneida Ltd., which filed the challenge in U.S. Bankruptcy Court in Manhatten (see Oneida Challenges PBGC Termination Fee ), argued that the termination fee should be treated like any other claim in bankruptcy and that Congress would have had to specifically amend the U.S. bankruptcy code to exclude the fee from being treated as a claim.

Last February, U.S. Bankruptcy Judge Allan Gropper sided with Oneida, saying the termination fees were pre-bankruptcy claims that could be discharged as part of the company’s bankruptcy reorganization plan, but the PBGC is appealing that decision. If the appeals court sides with Oneida it means the PBGC would not receive much needed funds for covering employee pensions.

Roll asked the court to support the bankruptcy judge’s opinion and not to “undermine the reorganization objective in the bankruptcy code,” according to Reuters. He argues that reversing the decision could incentivize companies to liquidate in bankruptcy rather than reorganize, because companies that liquidate in bankruptcy do not have to pay the fees.

The appeals court judges asked Roll what Congress’ intent would have been in passing the law if it could be so easily discharged in bankruptcy.