Visteon Must Follow the Rules before Terminating Retiree Benefits

July 14, 2010 ( – The 3rd U.S. Circuit Court of Appeals has reversed lower court rulings that Visteon Corp. can terminate retiree benefits during bankruptcy.

The court held that Chapter 11 Bankruptcy Code § 1114 clearly applies to any and all retiree benefits, whether or not the debtor could terminate those benefits outside of bankruptcy pursuant to language in the applicable plan documents reserving that right. The appellate panel noted that § 1114(e)(1) plainly states: “[n]otwithstanding any other provision of this title, the [trustee] shall timely pay and shall not modify any retiree benefits,” except through compliance with the procedures set forth therein.  

The 3rd Circuit’s ruling differed from those by the majority of courts in such cases, and it was this prior case law that Visteon used to win its argument in the bankruptcy court and district court. Both courts reasoned that, notwithstanding the language of that statute, it would be unreasonable to interpret § 1114 as limiting an employer’s right to modify or terminate benefits during the pendency of a Chapter 11 bankruptcy proceeding, if the employer could unilaterally terminate those benefits outside of bankruptcy pursuant to a reservation of rights clause in the benefit plan, the opinion said.  

However, the 3rd Circuit found that despite arguments to the contrary, the plain language of § 1114 produces a result which is neither at odds with legislative intent, nor absurd, and that disregarding the text of that statute is tantamount to a judicial repeal of the very protections Congress intended to afford to retirees during a company’s bankruptcy.   

“We are convinced that in reaching these contrary conclusions as to the scope of § 1114, these courts mistakenly relied on their own views about sensible policy, rather than on the congressional policy choice reflected in the unambiguous language of the statute,” the appellate panel wrote.   

The Industrial Division of the Communications Workers of America (IUE-CWA), as the representative of approximately 2,100 retirees from Visteon Corporation’s manufacturing plants in Connersville and Bedford, Indiana, appealed the district court’s order, affirming the bankruptcy court’s order permitting Visteon to terminate retiree health and life insurance benefits without complying with the procedures set forth in 11 U.S.C. § 1114.   

The district court gave the union time to appeal by issuing a one-month stay on Visteon’s plan to terminate benefits because it acknowledged that the union’s legal argument had some merit, as “neither the Supreme Court nor any circuit court has ruled on this issue,” and its contrary reading of § 1114 was supported only by “the interpretation of § 1114 by several respected Bankruptcy Judges.” It also noted that “a strict application of the ‘plain meaning’ doctrine may warrant a fresh reading of this statute,” but that “such an interpretation would still have to get over the hurdle that interpreting the statute [in that manner] results in the retirees getting more protection through a bankruptcy proceeding than they would absent bankruptcy.”  

While § 1114 does not prevent a company in bankruptcy from terminating benefit plans it does require that the trustee must attempt to reach an agreement with the retirees regarding modification of retiree benefits before it can ask the bankruptcy court to modify or terminate them. The court will grant a motion to modify retiree benefits only if it finds that the trustee has made a proposal satisfying these requirements, the authorized representative has refused to accept it without “good cause,” and the “modification is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor, and all of the affected parties are treated fairly and equitably.”  

The case is IUE-CWA v. Visteon Corp. (In re Visteon Corp.), 3d Cir., No. 10-1944.