Automakers' Insolvency Opens All the Benefit Cutback Targets and Problems
The insolvency (whether or not in Chapter 11 reorganization) of the three automakers brings “legacy costs” back to the center stage of ERISA cutback negotiation and litigation.
The automakers have already put themselves on the cutting edge of many of these issues outside of bankruptcy.
They have litigated retirees’ medical benefit cutbacks, arguing that retirees were not vested (Sprague v. General Motors Corp., 133 F.3d 388, 21 Employee Benefits Cases 2267 (6th Cir. 1998)).
They have negotiated VEBAs with the UAW and then sought to bind the retirees by class action settlements and court approval after a fairness hearing. International Union, United Auto., Aerospace, and Agr. Implement Workers of America [McKnight] v. General Motors Corp., 497 F.3d 615, 41 Employee Benefits Cases 1692 (6th Cir. 2007) Still, further developments are inevitable, particularly in light of the recent VEBA history.
Some of the key “legacy cost” questions are these:
1. The first question, logically, is this: Are the retirees’ medical benefits “vested”? The “vesting” of retiree medical benefits is certainly possible, and it depends on the words of the plan, the magic of language such as “for your lifetime,” the admissibility of parole evidence to clarify “ambiguities” in the plan and SPD, and so on. UAW v. Yard-Man, Inc., 716 F.2d 1476, 4 Employee Benefits Cases 2108 (6th Cir. 1983), cert. denied, 465 U.S. 1007 (1984); Sprague v. General Motors Corp., 133 F.3d 388, 21 Employee Benefits Cases 2267 (6th Cir. 1998); Yolton v. El Paso Tennessee Pipeline Co., 435 F.3d 571, 36 Employee Benefits Cases 2217 (6th Cir. 2006); Bland v. Fiatallis, 401 F.3d 779, 34 Employee Benefits Cases 1875 (7th Cir. 2005); Doubtless the rules need clarification, and the various circuits’ positions need reconciliation.
2. If the case reaches the bankruptcy court, does “vesting” really matter? The answer ought to be obvious, but if you read the actual language of the Bankruptcy Code (11 U.S.C. section 1114), the statute on its face never mentions vesting, instead requiring continuation of a “program” of “retiree benefits” that was “maintained” before the bankruptcy filing (Sec. 1114(a)).
3. If a union makes a cutback bargain, how does the union get to "represent" its retirees, when unions legally only represent actives? Allied Chem. & Alkali Workers v. Pittsburgh Plate Glass Co., 404 U.S. 157, 1 Employee Benefits Cases 1019 (1971). A retirees’ medical benefit program would not be a mandatory bargaining subject under the NLRA if the bargaining issue did not affect any currently active employee. But that may be a non-problem because the bargaining topic frequently includes benefits for current employees, payable when they retire (which is certainly a mandatory bargaining subject). And in any event, there is an overriding reality in distress situations – the union has at least a little “muscle,” and the retirees ordinarily do not.
4. In any event, how do you bind the retirees? Typically, the court certifies a group of retirees as a Rule 23 class action representative. International Union, United Auto., Aerospace, and Agr. Implement Workers of America [McKnight] v. General Motors Corp., 497 F.3d 615, 41 Employee Benefits Cases 1692 (6th Cir. 2007)
5. What standard is used by the court to decide whether to force retirees to give up their claim against the employer in exchange for reliance on the VEBA? See the GM and Ford rulings. And while the Ford/GM standards are not (yet) actually under the Chapter 11 cutback devices (sections 1113 and 1114), the VEBA settlements previously approved by the district court were based on findings that the VEBA deals were less severe than the cutbacks the retirees might have lost in bankruptcy (497 F.2d at 628). And yet only recently GM has backed out of its VEBA funding commitment.
6. How can you VEBA-ize a solution to legacy costs, when a VEBA can only accumulate one year’s worth of benefit costs? A “garden variety” VEBA is allowed only a very limited pre-funding accumulation, but a collectively bargained VEBA is not so restricted. IRC §§ 419(c), 419A(f)(5)(A), 501(c)(9).
7. What if the employer buys this deal in exchange for payments into the VEBA, and then the employer defaults or goes bankrupt before full payment?
8. Is there some hidden logic in this -- an assumption that the VEBA only has to remain solvent for a few years, and then National Health will arrive in all its glory and bail out everyone? How many years? And in the meantime, what sort of “booking” treatment is allowed, in such situations, for financial statements of public corporations?
9. Do the rules really change after a filing in Chapter 11? Chapter 11 bankruptcy reorganization has its own collective bargaining provisions, which apply to changes in labor agreements (11 USC 1113) and even to retirees medical benefits (11 USC 1114). This special “last offer” bargaining lowers but does not ordinarily wipe out retirees medical benefits, because the court’s approval of the “bargain” depends upon a finding that the cut-back is the least severe change necessary to save the debtor.
10. And then there is the whole array of issues arising under the defined benefit pension plans. Termination of these plans (“distress” or involuntary termination under ERISA 4041(c) or 4042), inevitably generates losses by surprise. Employees and retirees are often surprised that they are not eligible for funded benefit levels as high as they expected, because of the calculation of “PC3" priority benefits under ERISA 4044(a)(3)), particularly after the funding level of the terminated plan is recalculated by the PBGC. And even the guaranteed benefit level may not be as high as anticipated, given the obscure rules for ERISA Title IV guaranteed benefit calculations. And the liability of the plan debtor/employer/sponsor may be higher than expected, given PBGC’s determination to argue and re-argue questions concerning their priorities in bankruptcy, even though PBGC seemingly has lost these arguments repeatedly.
The core problems, however, concern conflicts of interest – conflicts by the union, by the employer, and by the PBGC – and these conflicts abound.
The union’s conflict: It does seem clear that the UAW – now as in the past, all the way back to the seminal Studebaker case – will inevitably be faced with a terrible Hobson’s choice: Save jobs by lowering costs (“selling out” the retirees)? Or fighting tenaciously for protection of retirees, and risk destruction of the enterprise? Section 1114(c) of the Bankruptcy Code recognizes the conflict of interest of the incumbent union, but presumes that the conflict may be avoided or ignored. And yet, inevitably, it is still there.
The employer’s conflict: ERISA by its express terms makes the employer a presumptive fiduciary – even a named fiduciary – and plan administrator. ERISA §§ 3(16)(A)(ii), 402(a)(2)(A). The existence of the conflict is assumed by the statute, but the employer, even with a conflict, is prohibited from acting on the conflict (wearing “two hats” but not at the same time). And in chapter 11, the employer has three hats – employer, fiduciary for the plan, and fiduciary for the creditors. Again, the conflict is inherent in the situation. In the ordinary course, the situation is manageable. But the puzzles described above are not ordinary.
And the PBGC’s conflict: The PBGC was invented to protect employees and retirees. In recent years (decades?), however, the PBGC has often seemed more interested in protecting its balance sheet than its natural constituents.
We shall see.
-- Frank Cummings