Non-qualified Plans and Employer Financial Distress (Bankruptcy)

2020.02.25 Giving Priority to Nonqualified Plan Benefits - see separate heading below.

2018.11.05  "Lessons Learned from Enron and Chrysler: How to Secure Nonqualified Deferred Compensation Plans"

  • Re Code 409A and Pre-Bankruptcy Precautions, see this article, which includes the following heads-up: "The mere contractual guarantee of a retiree’s benefits under an unfunded retirement plan by an employer’s parent company will generally not accelerate the taxation of the benefits. (Ltr. Rul. 200450032.)"

2018  "Bankruptcy and Non-Qualified Deferred Compensation Plans" begins with an overview of applicable bankruptcy rules and processes, then discusses non-qualified retirement plans (which generally result in pre-petition unsecured claims), and concludes with an appendix presenting "a summary of bankruptcy cases and their treatment of NQDCP plans therein, over the last two decades."

2017.07.20 "Former Executives Beware: Some Chapter 11 Debtors Attempt to Treat Their Obligations to Current and Former Executives Differently" discusses the settlement of nonqualified plan claims that arose from the Chapter 11 reorganization of Peabody Energy. 

2016.06.14  "The Effect of Executive Compensation on Recoveries" (Harvard Law Bankruptcy Roundtable), discussing a paper whose abstract states: "Using a sample of bankrupt firms, I find that supplemental executive retirement plans are positively associated with recoveries to unsecured debt in bankruptcy. Firms where CEOs have inside debt at the sample mean experience $0.053 greater recoveries per dollar of debt in the event of bankruptcy relative to firms where the CEO does not have inside debt."

2013.01 "Protecting Retiree Benefits in Bankruptcy" (National Retiree Legislative ), suggests changes to the bankruptcy code to protect retirees, with proposal #8 advocating that "Congress should amend the Bankruptcy Code to require that the termination of non-qualified senior executive pension and deferred compensation plans are a precondition to the termination of any qualified pension plan maintained for a broader class of employees.

2012.01.24  "Kodak Bankruptcy Shows The Risks Of Nonqualified Deferred Compensation" stating that "Until its bankruptcy, Kodak had left distributions as scheduled and had not terminated its elective plan. All distributions from the plans stopped on the date of the bankruptcy filing. We have learned that all participants were informed that their interests will become an unsecured claim in the Chapter 11 proceedings and that they will receive instructions on how to file a claim in the future."

2007.12.05  In re Exide Technologies (378 B.R. 762, Bankr. D. Del. 2007), quoting from the decision:

  • “Other courts have determined that deferred compensation agreements or retirement agreements similar to the SERP are non-executory if, at the time of the bankruptcy filing, the executive was already retired and owed no further duties to the debtor. Stewart Foods, 64 F.3d at 146; Kucin v. Devan, 251 B.R. 269, 272 (D.Md. 2000).”
  • “There is no dispute that Rankin's rights under the SERP vested prior to the bankruptcy filing. The Debtor agreed to perform under the SERP based upon Rankin's past services to the company. Id. Rankin had no obligation to "continue in the employ of the Company in any capacity." SERP at 3. There is no evidence that Rankin owed any further duty to the Debtor under the SERP. The Debtor's sole remaining obligation under the SERP, was to make the annual payments. For these reasons, the SERP was not an executory contract at the time of the bankruptcy filing.”
  • “Because the SERP was not an executory contract, the Debtor could not assume the SERP in the Plan. Stewart Foods, 64 F.3d at 145.”

2007   See In re Bethlehem Steel Corp., 479 F.3d 167 (2d Circuit, 2007) (treating vested, prepetition accruals in nonqualified plans as unsecured claims on the estate).

2006.11.26  "Delta bankruptcy: Retirees agree to pension settlement: Compensation for lost benefits adds up to $800M for former pilots, but avoids litigation costs" (stating: "Delta said its unsecured creditors committee agreed to a retired pilot claim of $719 million, bringing the total to around $800 million, including previously negotiated amounts. Such claims are typically paid at a rate on the dollar, which has not been determined as part of Delta's Chapter 11 case.")

2005.07.06  In re WINN-DIXIE STORES, INC., et al., Debtors (326 B.R. 853, MD FL), under which "vested benefits under the SRP as of the Petition Date is estimated to have been $15,883,998.28," and holding that "The Court finds that the Plan Participants’ interests are already being represented by the Creditors’ Committee. To the extent that the Non-Qualified Plans are rejected and the Plan Participants have unsecured claims, they will have the same interest as every other unsecured creditor, maximizing the value of the Debtors’ estates. The Court does not find that the Plan Participants’ position is so unusual as to warrant the appointment of an additional creditors’ committee."

2001.06.27  "Retired PG&E; Executives Seek Full Pensions in Bankruptcy Case" (LA Times), stating for context: "PG&E; spokesman Ron Low said 50 retired executives and about 35 other senior employees have a portion of their retirement benefits in unsecured plans and are considered creditors."


Regarding the special treatment for nonqualified retirement benefits in a Chapter 11 proceeding, here are some interesting sources. 
SOURCE: “Chapter 11 Trustee Handbook” (Dept of Justice, 2004)

  • “A fundamental goal of the Bankruptcy Code is to ensure equality of distribution among similarly situated creditors. To ensure that some creditors do not receive better treatment than other creditors, the trustee is empowered to seek the avoidance of transfers that benefit one creditor at the expense of others of the same class.” [PDF page 39]
  • “Contested matters and adversary proceedings often are not resolved by trial to conclusion or appeal, but instead by compromise and settlement. Bankruptcy Rule 9019 requires the chapter 11 trustee to obtain court approval of such compromises. See Fed. R. Bankr. P. 9019. To obtain that approval, the trustee must show that the settlement i s in the best interest of the estate and that notice of the compromise has been served upon creditors so they have an opportunity to review the proposed settlement and object. Generally, courts give substantial deference to the trustee’s business judgment in such matters.” [PDF page 47]

SOURCE: Protecting Retiree Benefits in Bankruptcy (AREF, 9/1/2017)

  • “ Bankruptcy Code Section 1114 should be revised to provide flexibility for including the determination of claims for loss of retiree’s non-qualified pension benefits.  Section 1114 of the Bankruptcy Code applies only to retiree medical, disability, survivorship and other health and welfare benefits. Pension benefits currently do not fall under the protections of Section 1114. But while the PBGC is authorized to represent retirees with respect to qualified pension plan benefits that are insured by the agency, often obtaining a seat on the creditors’ committee, recent bankruptcy cases have highlighted the need for the protection of certain non-qualified pension benefits that have been earned by non-executive workers and managers.
  • When a debtor proposes the distress termination of a qualified defined benefit plan, the PBGC is involved in negotiations and arguments before the court if it opposes termination. Similarly, where a pension plan is subject to a collective bargaining agreement, the union also may participate in negotiations relating to the proposed termination. Left unrepresented, however, are many nonexecutive workers and retirees who have accrued non-qualified pension benefits that are not pursuant to a collective bargaining agreement. No one is authorized to represent the interests of retirees or workers with respect to non-qualified pension benefits – not the PBGC, not any union, and not the Section 1114 retiree committee, which is limited to dealing with non-pension benefits.
  • This gap in the Bankruptcy Code’s procedural protections for retiree benefits can result in serious abuses, particularly in relation to allowing and determining individual claims for the loss of nonqualified pension benefits. The calculation of the net present value of future pension payments is complex and can vary significantly depending upon actuarial assumptions relating to longevity and discount rates. A Section 1114 retiree committee is the logical body to negotiate and recommend the most appropriate determination of those claims.
  • Congress can remedy this gap in the protections provided by Section 1114 by adding “non-qualified pension plan payments or accruals not insured by the Pension Benefit Guaranty Corporation” to the list of retiree benefits specified in Section 1114(a). Alternatively, language could be added at the end of Section 1114(d) providing that if the court determines it is appropriate, the court may authorize a committee appointed under this section, or Section 1114(c)(2) above, to represent the interests of retirees with respect to non-qualified pension plan, or any other benefits other than a qualified pension plan (where payments are guaranteed by the Pension Benefit Guaranty Corporation), including with respect to the determination of any claims of retirees arising from modifications to those benefits.
  • Adding non-qualified pension benefits to the scope of the Section 1114 committee would not lessen the court’s authority to approve the termination or reduction of non-qualified pension plan benefits, but it would give bankruptcy courts additional flexibility in providing representation for retirees on critical issues, as well as a more accountable and efficient way of resolving group claims for loss of nonqualified pension benefits.
  • Congress might appropriately be concerned about whether such a provision would be misused to protect the special benefits granted to a few top executives. That is not the case, however, because Bankruptcy Code Section 1114(m) already includes an income limitation, providing that the provisions of Section 1114 do not apply to retirees who earned over $250,000 in the twelve months before the bankruptcy filing (except in unusual cases where replacement insurance is unavailable). There are many higher-wage professionals, such as the engineers who lost non-qualified retirement savings during the Kodak bankruptcy, who are neither executives nor “insiders,” and yet in many cases they can potentially lose decades of hard-earned savings without even representation under current law.
  • See also: Senate Bill 2518 (2018) – Senator Durbin.

SOURCE: Surviving Spouse Brief in Avaya Chapter 11 (2017)

  • Poerio Comment: Interesting claim under Bankruptcy Code 1114, which relates to welfare not pension benefits, in which surviving spouse of deceased SERP participant seeks 1114 protection for her death benefits.

SOURCE: Fiduciary Duties in Bankruptcy and Insolvency
University of Michigan Law School Scholarship RepositoryLaw & Economics, Working Papers, 3-29-2018

  • “most cases considering the matter do not see secured and unsecured creditors as equal subjects of the trustee’s protections. On the contrary, they say that secured creditors can look out for themselves, and thus the trustee’s “primary” obligation is to unsecured creditors.” [main text opposite footnote 66]
  • IV. Remedies [PDF page 25]  “Among the more convoluted topics in bankruptcy are the rules for when trustees can be sued for breaches of their duties (fiduciary and others). The case law is often contradictory, but some coherence emerges, and there is a recurrent theme of trustee solicitude, likely reflecting a recognition of the impossibility of the trustee serving every divergent constituent satisfactorily.”