Introduction
Once a company files a Chapter 11 bankruptcy petition (to sell its assets, reorganize or liquidate), Bankruptcy Code § 1114 sets forth a detailed procedure for the employer to follow to modify or terminate certain retiree benefits. Among other things, § 1114 imposes on the employer the burden of showing that the elimination or modification of benefits is necessary to permit reorganization.
On July 13, 2010, a three-judge panel of the United States Court of Appeals for the Third Circuit unanimously held that auto-parts supplier Visteon Corporation could not terminate health and life insurance benefits for approximately 2,100 retirees during its chapter 11 bankruptcy unless Visteon followed the specific requirements laid out in section 1114 of the Bankruptcy Code, even if Visteon would have had the unilateral right to terminate these benefits outside bankruptcy.1 The Court found that a debtor may terminate any retiree benefits in bankruptcy only if,inter alia, the debt
Recently, there have been cases in several states presenting the issue whether funds in an “inherited IRA” are exempt assets.1 An Ohio Bankruptcy Court has now ruled in favor of granting exempt status.
On June 14, 2011, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that apply to single-employer pension plans maintained by employers in bankruptcy. These regulations implement a change made by the Pension Protection Act of 2006 (PPA). The change affects the amount of benefits payable by the PBGC to participants.
On June 12, 2014, the U.S. Supreme Court unanimously held in Clark v. Ramekerthat an inherited individual retirement account (IRA) does not qualify for the “retirement funds” exemption in the Bankruptcy Code and is not excluded from a bankruptcy estate on that basis.
The U.S. Supreme Court resolved a split among the circuits, holding that assets in non-spousal inherited individual retirement accounts are not exempt or protected from claims of the heir’s creditors. Clark v. Rameker, 573 U.S. ___ (2014) (No. 13-299; June 12, 2014).
“Inherited” IRAs hold funds from persons who established Individual Retirement Accounts for their own use and died before depleting the funds in those accounts. The U.S. Supreme Court affirmed the judgment by the Seventh Circuit Court of Appeals {In re Clark, 714 F.3d 559 (7th Cir. 2013)}.
Q: When is a retirement account not a retirement account?
A: When it's an inherited IRA and the owner is bankrupt.
A group of retired employees filed a class-action law suit claiming loss of certain retirement benefits. The employees worked for SPX Corporation until 1996 when it was acquired by Dana Corporation. SPX sponsored a pension plan for these employees. In 2006, Dana filed a Chapter 11 bankruptcy and sold certain assets to Mahle gmbH. Under the asset purchase agreement, Mahle assumed certain benefit plans. The dispute arises over eligibility for supplemental retirement benefits under a plan Mahle assumed from Dana.
I have blogged several times about the difficulties of preserving non-qualified plan benefits, particularly when the plan sponsor goes bankrupt. At the time of a bankruptcy, the company's non-qualified plan becomes nothing more than an unfunded promise to pay benefits and participants usually have to get in line with the company's other creditors. The recent decision in Tate v. General Motors LLC (56 EBC 1363, 6th Cir.