Compliance May 18, 2005

Employer Can't Drop Retirement Benefit Agreements in Bankruptcy

May 18, 2005 (PLANSPONSOR.com) - A federal appeals court has ruled that a Naugatuck, Connecticut company cannot drop retirement benefit agreements it had with four executives who it had fired before filing for US Bankruptcy Court protection.

Reported by

Fred Schneyer

>The US 3 ^rd Circuit Court of Appeals said the four terminated executives of General DataComm Industries should have been given the procedural protections contained in federal bankruptcy law for retired employees.

>Circuit Judge Leonard Garth, in writing for the three-judge appellate panel, turned aside General DataComm’s argument that “forced retirement” does not make a discharged employee a “retired employee” within the meaning of Section 1114 of the US Bankruptcy Code. The “deliberate and involuntary termination of an employee on the verge of retirement, where the employee has otherwise met all qualifications for retirement, cannot deprive such an employee of the procedural protections of [Section] 1114,” Garth wrote.

>According to the opinion, General DataComm and its affiliates filed for Chapter 11 Bankruptcy Court relief in November 2001. Two weeks later, General DataComm informed long-time company executives James Arcara, Frederick Cronin, Robert Smith, and Thomas Thompson that they were being fired effective November 30, 2001. A day before the effective date of the firing, General DataComm filed with the US Bankruptcy Court for the District of Delaware a request to be able to drop the four executives’ retirement agreements.

>The executives objected to the request, asserting that their benefit agreements with General DataComm put them under Bankruptcy Code protection. Under federal bankruptcy law, a debtor must continue to pay retiree benefits unless modification of such benefits has been ordered by a court or the bankruptcy trustee and an authorized representative of the retired employees has agreed to such modification.

“Recognizing that the employees affected here were all over the age of 65 . . . and were purposefully discharged only one day after DataComm filed its (request to terminate the retirement agreements), we can only conclude that DataComm’s action was taken deliberately and was designed to thwart the purposes of [Section] 1114,”. Garth wrote.

>The opinion in General DataComm Industries Inc. v. Arcara, 3d Cir., No. 04-1710, 5/16/05 can be found here .