The Bankruptcy Code has a special provision that prevents the bankrupt employer from unilaterally modifying or terminating retiree medical, accident or death benefits without either a court order or agreement of the retiree's authorized representatives. Typically, this provision, known as Section 1114, comes into play when bankrupt companies seek to modify or end a medical benefit plan for unionized employees. However, the Third Circuit recently ruled that Section 1114 protected a special retiree benefit plan for a company's top executives, even though the company fired the executives before they could officially retire. In Re: General DataComm Industries, Inc.
The executives were founders and key employees of General DataComm Industries, Inc. an dall were over age 65. The executives participated in a benefit plan that provided payment of the annual premium for long term care insurance coverage for the life of each participant and his or her spouse. The benefit plan also provided that each executive and spouse would receive lifetime coverage under the company's health insurance plan. A few years later, the company filed for bankruptcy, sought to "reject" the benefit plan under Section 365 of the Bankruptcy Code and fired the executives. The executives argued that the benefit plan was protected by Section 1114 and could not be rejected. The company argued that Section 1114 applies to "retired employees" only, so because the executives were fired, they never retired and did not qualify as "retired employees."
The Third Circuit sided with the executives. It was clear from the benefit plan that the intent of the DataComm and the executives was that the executives would receive the benefits unless they were terminated for cause. Moreover all of the executives were on the verge of retirement. Under those circumstances, the termination of the executive's employment constituted a "forced retirement" that qualfied the executives as "retired employees." In short, the Court would not permit DataComm to "deliberately interfere with [the executive's] retirement benefits."
Although not mentioned in the decision, Section 510 of ERISA also prevents employers from firing employees with the purpose of interfering with the employee's ability to secure retirement benefits. The Court's use of the term "interfere" suggests that the judges might have been thinking along those lines.
It will be interesting to see how courts will apply DataComm in other situations where a bankrupt company seeks to reduce retiree medical benefit liability by firing employees, whether at the executive level or below.
