When is there sufficient evidence to hold that a fiduciary’s debt to an ERISA benefit plan is non-dischargeable in bankruptcy?  The Bankruptcy Court for the Eastern District of New York recently held in In re Kern, Case No. 13-08096 (Dec.

One week after Aegis Mortgage Corp. filed for chapter 11 in Delaware, a group of former employees filed their complaint seeking class certification over allegations that Aegis Mortgage Corporation, Aegis Wholesale Corporation and Cerberus Capital Management, L.P.—all allegedly acting as their employer—violated the Worker Adjustment and Retraining Notification (WARN) Act when they failed to give over 400 employees 60 days' notice prior to a mass termination by Aegis Mortgage on August 7, 2007.

Editor’s note: Success in the restructuring and insolvency arena requires more than an understanding of the law—it requires the ability to address issues specific to a debtor’s industry and business. Below, two Reed Smith partners with extensive experience representing health care institutions and creditors discuss issues unique to hospitals facing financial distress.

Introduction

In Oneida Ltd. v. Pension Benefit Guaranty Corp. (In re Oneida Ltd.),1 the United States Bankruptcy Court for the Southern District of New York addressed whether a premium payment created by the Deficit Reduction Act of 2005 (“DRA”)2 for pension plans terminated as part of a chapter 11 restructuring is a pre-petition claim or a post-petition administrative expense. The Court held that the statutorily mandated premium payment was a contingent pre-petition claim and was discharged upon confirmation of the debtor’s plan.

Section 510(b) of the Bankruptcy Code provides that claims for “damages arising from the purchase or sale of . . . a security” of the debtor or an affiliate of the debtor are subordinated to any claims not based on stock. 11 U.S.C. § 510(b). Because there is rarely enough value in a bankrupt company to satisfy all claims, a determination that a particular claim is subject to mandatory subordination under section 510(b) means that, as a practical matter, the claim is unlikely to receive any distribution from the estate.

The United States District Court for the Middle District of Florida, applying Florida law, has held that exclusions for claims involving the receivership of a healthcare benefit plan and claims involving Multiple Employer Welfare Arrangements (MEWA) barred coverage for claims brought by a receiver of a healthcare benefit plan alleging that brokers sold coverage under a benefit plan that was a MEWA. White v. Cont'l Cas. Co., 2008 WL 2073905 (M.D. Fla. May 14, 2008).

Bankruptcy practitioners and plan beneficiaries should take note of a little-known ERISA amendment that impacts bankruptcy cases filed on or after September 16, 2006. On June 30, 2008, the Pension Benefit Guaranty Corporation (the "PBGC") released a proposed rule clarifying how Section 404 ("Section 404") of the Pension Protection Act of 2006 (the "PPA") will be implemented. Section 404 amends Title IV of ERISA in certain key respects.

In Henderson v. Powermate Holding Corp. (In re Powermate Holding Corp.)1, the United States Bankruptcy Court for the District of Delaware became the second bankruptcy court to address the status of WARN Act claims after the 2005 amendments to section 503 of the Bankruptcy Code.

On April 8, the Second Circuit Court of Appeals reversed the Bankruptcy Court and concluded that special ERISA “termination premiums” due PBGC are not contingent prepetition claims subject to discharge in a chapter 11 reorganization. Pension Benefit Guar. Corp. v. Oneida, Ltd., 2009 WL 929528 (2d Cir. April 8, 2009), rev’g Oneida Ltd. v. Pension Benefit Guar. Corp., 383 B.R. 29 (Bankr. S.D.N.Y., 2008).

On April 8, 2009, the United States Court of Appeals for the Second Circuit found that "termination premiums" due under Section 4006(a)(7) of the Employee Retirement Income Security Act ("ERISA") are not "claims" under the Bankruptcy Code and are therefore not dischargeable in bankruptcy.