Benefits & ERISA Law

Termination Premiums are not Pre-Petition Claims Dischargeable in Bankruptcy

By Suzanne Wynn

In PBGC v. Oneida, No. 08-2964-bk (CA 2nd, April 8, 2009), the Court of Appeals for the 2nd Circuit reversed the decision of the U.S. Bankruptcy Court for the Southern District of New York. The 2nd Circuit found that payments due to the PBGC as a result of an employer’s termination of a pension plan while undergoing reorganization in bankruptcy are not a contingent pre-petition claim which is dischargeable in bankruptcy.

At issue in this case were the Termination Premiums which Oneida disputed it owed to the PBGC for terminating its defined benefit plan while in Chapter 11 bankruptcy. Oneida contended that the Termination Premium was an unsecured, pre-petition bankruptcy claim under Section 101(5) of the Bankruptcy Code. As such, Oneida would be able to evade paying the Termination Premium to the PBGC since Oneida was seeking reorganization in bankruptcy. At stake for Oneida was a Termination Premium equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date. When Oneida terminated the plan in 2006, there were 1,846 participants in the plan according to the final Form 5500 filed with the IRS, making the Termination Premium a tidy sum that Oneida would be obligated to pay to the PBGC.

The 2nd Circuit determined that, in the case of termination due to reorganization, the employer’s obligation to pay a Termination Premium on a pension plan that is terminated during the course of the bankruptcy does not even arise until the bankruptcy itself is terminated. As such, the PBGC’s right to a Termination Premium does not apply to such plan until the date of the discharge or dismissal of the employer. Thus, Oneida’s Termination Premium was not a pre-petition claim which could be discharged in bankruptcy.

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Full post as published by Pension Protection Act Blog on April 09, 2009 (boomark / email).