In Re Farmland Industries, Inc.
In re FARMLAND INDUSTRIES, INC., et al., Debtor.
United States Bankruptcy Court, W.D. Missouri.
*904 *905 MEMORANDUM OPINION AND ORDER
JERRY W. VENTERS, Bankruptcy Judge.
Farmland Industries, Inc., and its affiliated debtors in these Chapter 11 proceedings *906 have asked the Court to give its blessing to the termination of numerous retiree benefit programs and employment agreements. The requests raise an issue of first impression for the Court whether a Chapter 11 debtor's proposed termination of retiree benefits must comply with the procedures and requirements of
There are two motions before the Court. The first is the Debtors' Motion for Order Authorizing the Termination of Certain Retiree Benefits Under Group Term Life Insurance Policy with Minnesota Life Insurance Company (Document # 1688) (the "Retiree Benefits Motion"). The second is the Debtors' Motion for Order Authorizing (I) the Termination of Certain Executive and Director Benefits and (II) Rejection of Certain Executory Employment Agreements (Document # 1689) (the "Executive Benefits Motion"). Both Motions were filed on December 11, 2002. The Court conducted a hearing on both Motions on January 28, 2003, at the United States Courthouse in Kansas City, Missouri, and took the Retiree Benefits Motion under advisement at that time. Because of a scheduling conflict for counsel, the Court held a continued hearing on February 11, 2003, on the Objections of twelve retired executives[1] to the Executive Benefits Motion and then took that Motion under advisement as well. The Court has reviewed the pleadings and relevant case law, has considered the evidence adduced at the hearings and the arguments of counsel, and is now ready to rule.[2]
For the reasons set out below, the Court will deny the Debtors' Retiree Benefits Motion(Document # 1688) in its entirety for the Debtors' failure to comply with
FACTUAL FINDINGS AND BACKGROUND[3]
A. Retiree Benefits Motion
In the Retiree Benefits Motion, the Debtors[4] seek Court approval to terminate *907 certain life insurance benefits provided for their retired employees under a group term life insurance policy with Minnesota Life Insurance Company ("Minnesota Life"). The life insurance program was started in 1977. The Minnesota Life policy has been in effect only since October 1, 2001; prior to that time, the life insurance coverage had been provided under a policy issued by American United Life Insurance Company. The policy provides life insurance for approximately 2,200 former or retired employees ("Retirees"), as well as an unstated number of currently active employees. The employees are divided into six classes under the policy, but the Debtors do not seek to terminate life insurance coverage for all six classes of employees. They seek only to terminate the life insurance benefits for current Retirees and, prospectively, the obligation to provide life insurance for active employees as they retire in future years.[5] The amount of life insurance coverage for the active employees and the Retirees varies in each class. Most of the Retirees have coverage in excess of $10,000, and some have up to $50,000 of coverage. The monthly cost of premiums to the Debtors is approximately $63,000.00, or $756,000.00 a year. This cost will increase as active employees with the insurance coverage retire and become eligible for additional life insurance benefits. Farmlаnd provides the benefits at no cost to the Retirees; the Retirees have never contributed to the life insurance program. (McCoy Affidavit, ¶ 18)
Farmland retained the right to unilaterally terminate or amend the life insurance program without the consent of the Retirees. (McCoy Affidavit, ¶ 11; Debtors' Ex. 33, p. 2; Debtors' Ex. 34, p. 21) This is not the first time Farmland has altered or restricted the life insurance program. In 1988, Farmland limited the group of people eligible for life insurance to those who were already employed by Farmland. In 2001, Farmland altered the program to further restrict eligibility in the program. (McCoy Affidavit, ¶ 16) As the policyholder, Farmland has the ability to terminate the insurance policy with Minnesota Life at any time, upon 31 days' written notice to Minnesota Life. (Debtors' Ex. 32, p. 10) Although it seeks to terminate the group insurance policy, Farmland has arranged with Minnesota Life for the Retirees to obtain alternative life insurance coverage at their own expense if the Retiree Benefits Motion is granted; however, the objecting Retirees contend that this option is not viable because the cost of the replacement life insurance is prohibitive. For example, Calvin Elliott, one of the objecting Retirees, stated to the Court thаt it would cost him $970.00 a year for $10,000 of insurance coverage, the maximum he would be permitted to obtain under the program.[6]
The Official Committee of Unsecured Creditors and the Bondholders Committee both supported the termination of benefits *908 as proposed in the Retiree Benefits Motion.
B. Executive Benefits Motion
In the second Motion before the Court, the Executive Benefits Motion, the Debtors seek to terminate several programs or plans providing a variety of benefits for certain current and former executive employees (the "Executives") and members of the Farmland Board of Directors (the "Board"). The programs that this Motion seeks to terminate are the Farmland Industries, Inc. Executive Deferred Compensation Plan (the "Deferred Comp Plan"); the Farmland Industries, Inc. Supplemental Executive Retirement Plan (the "SERP"); the Union Equity Deferred Compensation Plan (the "Union Equity Plan"); life insurance provided to current and former members of the Board (the "Director Life Plan"); supplemental life insurance benefits to members of the Board (the "Supplemental Life Plan"); a deferred compensation plan for the Board (the "Director Deferred Comp Plan"); and life insurance benefits under a split-dollar life insurance arrangement offered to certain Executives (the "Executive Lifе Plan").[7]
It is uncontested that the Executive Benefits Plans expressly give Farmland the right to terminate or modify the various programs and benefits. Farmland states that termination of the Executive Benefits Plans will provide over $16 million to the bankruptcy estate, primarily as a result of the cancellation of life insurance policies that were purchased to help Farmland fund the various programs and benefits. The cash surrender values payable to Farmland on the various insurance policies can be summarized as follows:
Executive Life Plan $4,150,000.00 SERP 4,100,000.00 Union Equity Plan 5,600,000.00 Director Life Plan & Supplemental Life Plan 2,599,000.00
1. Executive Deferred Compensation Plan
Under the Deferred Comp Plan, certain executives of the Debtors were allowed to defer portions of their salaries until a later date (specified by the Executives) so as to gain certain tax benefits. Approximately 138 current and former employees of the Debtors participate in the Deferred Comp Plan. In addition to their deferred compensation, the Executives are entitled to receive an additional distribution, called a Retirement Adjustment Payment, to replace the loss in retirement benefits that occurs because of the salary deferral.[8] Section 11 of the Deferred Comp Plan (Debtors' Ex. 22) authorizes the Farmland Board, in its absolute discretion, to suspend, amend, modify, or terminate the Plan at any time, without notice to the participating Executives.
Farmland states that the Debtors' liabilities to the Executives participating in the Deferred Comp Plan are about $14.4 million for deferred compensation and $2.5 million in Retirement Adjustment Payments. All of these amounts were incurred prior to the Petition Date and are unfunded. According to the Motion, the Board of Directors of Farmland suspended the Deferred Comp Plan as of May 30, 2002, immediately prior to the filing of the Chapter 11 bankruptcy.
*909 2. Supplemental Executive Retirement Plan
The SERP, according to the Motion, is a non-qualified benefit plan designed to supplement pension payments for Executives who are affected by the limitations contained in Sections 401(a)(17) and 415 of the Internal Revenue Code relating to pension calculations. Under this plan, the Debtors have agreed to replace all or a portion of the employer-provided pension benefits lost by the Executives as a result of those limitations. Fifty-two current and former employees of the Debtors were receiving payments under the SERP as of the Petition Date. The Debtors ceased making payments under the SERP as of the Petition Date and have made no payments with respect to the SERP since the bankruptcy filing.
The Debtors state that the current amount of liabilities payable to participants in the SERP is about $9 million, and that, pursuant to Section 9 of the SERP, all amounts due to participants are general unsecured claims. However, the Debtors maintain a number of life insurance policies that, while not directly related to the SERP, are intended to assist the Debtors in satisfying the liabilities associated with the SERP. The Debtors contend that the insurance policies, which have a cash surrender value of about $4.1 million, are property of the bankruptcy estate, and they seek to surrender the policies so as to realize their cash values for the Debtors' estates.
3. Union Equity Plan
The Union Equity Plan is an informal name given to several agreements entered into by the Debtors and certain employees who worked for Union Equity Cooperative Exchange when it was acquired by Farmland in 1992. Under this plan, the Debtors agreed to pay the affected employees specified sums in installments over 10 years after the employees' retirements. The Debtors have agreements with 11 former employees (nine of whom were receiving payments prior to the Petition Date) and one current employee. The Debtors assert that all obligations under the Union Equity Plan are general unsecured claims. As a means of helping fund these obligations, the Debtors purchased several life insurance policies, which now have a cash surrender value of about $5.9 million. As with the other life insurance policies, the Debtors assert that the insurance policies are property of the estate and that the participants in the Union Equity Plan do not have any claim or interest in the policies.
The Debtors contend that the agreements between Farmland and the Union Equity Plan participants are not executory contracts, but are simply "promises to make payments at specified times." To the extent that the Court should determine that the agreements constitute executory contracts, the Debtors ask that they be allowed to reject the contracts pursuant to
4. Director Life Insurance Plan
Under the Director Life Plan, the Debtors provide each member of the Farmland Board of Directors with a life insurance policy in the face amount of $100,000. Upon a member's retirement, the policy is reduced to $50,000. Currently, the Debtors prоvide life insurance to 20 active Board members and 28 retired Board members, at an annual cost of $246,739.51. In connection with this Plan, the Debtors have entered into Split Dollar Agreements with the directors, which provide that the Debtors are the owners of the insurance policies and require that the Debtors pay *910 the premiums thereon, and the individual directors designate the beneficiaries of the policies. The Split Dollar Agreements entered into with individuals who became members of the Board prior to 1999 are slightly different than those executed in 1999 and thereafter. The pre-1999 Split Dollar Agreements allow the Debtors to terminate the arrangement at any time and to discontinue the life insurance without the Board member's consent, although the Debtors must provide the members with notice of termination of the program. The Split Dollar Agreements entered into in 1999 and thereafter prevent the Debtors from terminating an individual's life insurance after the individual has completed his or her term on the Board or has retired or become disabled. Additionally, the director would have the option to buy out the applicable policy for the lesser of (i) the Debtors' interest in the policy or (ii) the cash surrender value of the policy.
The Debtors assert that those current and retired Board members who are subject to the pre-1999 Split Dollar Agreements would have no claim against the Debtors because the Debtors have the right to cancel the life insurance benefits unilaterally, at any time and without the member's consent. As for those members who are covered by Split Dollar Agreements entered into in 1999 and thereafter, their life insurance benefits have vested and those individuals would possibly have a claim against Farmland with respect to those benefits, the Debtors state.
Under the agreements, the current and former Board members have the right to purchase their life insurance policies from the Debtors. Because some of the individuals affected might not be able to obtain other life insurance coverage, Farmland intends to give the members the option to purchase their insurance policies so as to continue the coverage at their own cost. The Debtors would, however, be permitted to realize the cash surrender value of the policies. In addition to saving over $246,000 a year in insurance premiums, the Debtors would realize about $2.4 million in proceeds from surrender of the policies.
5. Supplemental Director Life Insurance Plan
In addition to the regular Director Life Plan, the Debtors maintain a program to provide supplemental life insurance benefits to Board members who are elected to the Board for a second term. This Plan provides each eligible Board member with an additional $100,000 in life insurance coverage. Presently, 16 active Board members and five retired Board members participate in the Supplemental Life Plan. As with the Director Life Plan, Farmland has entered into Split Dollar Agreements with the Board members participating in the Plan. Participating members are the owners of their individual insurance policies, but they are required to collaterally assign the policies to Farmland during their terms on the Board. Farmland is obligated to pay the cost of the premiums on each individual's policy for the longer of 10 years or the length of time the individual serves on the Board after election to a second term. After an individual retires, Farmland pays the insurance premiums indirectly by making the amount of the premium payment to the individual under a Director Compensation Continuation Plan, and the individual in turn pays the required premium to the insurance company. The Director Compensation Continuation Plan would be unnecessary if the Supplemental Life Plan is terminated.
Terminating the Supplemental Life Plan would save the Debtors about $50,000 a year in insurance premiums. Farmland would also be positioned to recover from the participants approximately $75,000 in *911 premiums paid on their behalf, pursuant to the Split Dollar Agreements.
6. Director Deferred Compensation Plan
The Director Deferred Comp Plan is similar to the Executive Deferred Comp Plan for the Executives. It allows Board members to defer their compensation in much the same way the Executives are permitted to defer their compensation. Only four Board members have participated in this program. Farmland has current liabilities of approximately $109,000 to the directors, and has not set aside any funds to cover these liabilities. The documents establishing the Plan allow Farmland to discontinue the program at any time. Terminating the Plan will limit further liabilities under the Plan.
7. Executive Split Dollar Life Insurance Plan
Under the Executive Life Plan, the Debtors and the Executives share the costs of premiums for the Executives' life insurance coverage. Participating active Executives receive life insurance equal to two-and-one-half times their annual compensation; this amount is reduced by one-half upon retirement. Seventeen active employees and 60 retired emрloyees participate in the Executive Life Plan. The Executives receive the life insurance coverage pursuant to individual Split Dollar Agreements with Farmland. There are two different Split Dollar Agreements involved in the Executive Life Plan. Both forms of Agreement authorize Farmland to terminate the Agreement, subject to the right of the employee to purchase the life insurance policy providing coverage for the employee. The Split Dollar Agreements executed in 1997 and thereafter provide that the Executive's benefit fully vests upon the Executive's attainment of retirement eligibility, whereas those Agreements executed prior to 1997 contain no such provision. Therefore, the Debtors believe that the benefits provided under the 1997 and later Split Dollar Agreements are "retiree benefits" within the meaning of
Although they have offered no evidence of the savings that might be realized by terminating just the Executive Life Plan, the Debtors state that the benefits received do not justify its continuation.[9] The Debtors would receive approximately $4.1 million from the surrender of the life insurance policies under this Plan.
The termination of the Executive Life Plan was objected to by twelve retired Farmland executives (the "Retired Executives"), who asserted that they were, in large part, induced to retire by Farmland's promise that the life insurance policies would be kept in force. Jack Warren, one of the Retired Executives, believed that his right to the insurance coverage had vested prior to his retirement, based on a document he received from Farmland in 1990 stating that vesting in the Split Dollar Life Insurance program would occur after 10 years with the company and upon reaching the age of 55. (Retired Executives' Ex. 102) Warren also believed that, upon his retirement, his life insurance would be paid up for the rest of his life, based on another document he received in 1990. (Retired Executives' Ex. 103) However, *912 Warren acknowledged on cross examination that he had received and signed a new agreement in 1993 that gave Farmland the right to terminate the life insurance. Warren testified that many of the Retired Executives made retirement decisions based on having the insurance coverage in effect for the rest of their lives.
At the hearing on February 11, counsel for the Retired Executives argued that the proposed termination of the split-dollar life insurance policy should be denied because Farmland had failed to meet its burden under
C. Termination of Employment Agreements
In addition to requesting Court approval to terminate all of the Plans set out above, the Debtors also seek to reject four employment agreements that the Debtors contend are executory contracts. These are the employment agreements (the "Employment Agreements") of the former president and chief executive officer of Farmland, Robert W. Honse ("Honse"); the former chief financial officer of Farmland, John F. Berardi ("Berardi"); the former president of Farmland Foods, Inc., William Fielding ("Fielding"); and another former president and chief executive officer of Farmland, H.D. Cleberg ("Cleberg") (collectively, the "Former Officers"). Under the terms of the Employment Agreements, the Debtors remain obligated to pay severance and other benefits to the Former Officers and in return the Former Officers are obligated to provide consulting services as needed, cooperate with the Debtors, and refrain from competition or interference with the Debtors' businesses. The Debtors' costs under these Employment Agreements exceed $120,000.00 per month. Under the agreement with Cleberg, the Debtors are obligated to make two remaining payments of $450,000.00 each.
Honse objected to the Debtors' Motion on grounds that his Employment Agreement was not an executory contract, because Honse had no remaining material obligations under his Employment Agreement. Although counsel for Honse presented this argument at the hearing on January 28, he did not adduce any evidence in support of the argument.
Fielding filed a qualified objection to the Motion, arguing that his termination by Farmland was "without cause" as defined in his Employment Agreement, and stating that he is entitled to liquidated damages equal to two years' base salary and various other payments. He requested additional time to file an amended Proof of Claim to present these claims. By stipulation with the Debtors (Document # 1960), Fielding was permitted to file an amended Proof of Claim to include all of his claims with respect to the Employment Agreement. Therefore, Fielding's objection is deemed withdrawn.
Calvin Elliott, one of the Retirees covered by the SERP, filed an objection stating that Farmland employees understood that, once payments had commenced under the SERP, that was an irrevocable benefit and that provisions of the Plan allowing for unilateral termination by Farmland only applied to those employees *913 who had not yet elected to retire in partial reliance on the Plan. If a covered employee had not retired, he or she would be able to adjust retirement plans with the knowledge that the supplemental retirement benefits would not be available upon one's retirement. This understanding was widespread among Farmland employees, Elliott stated. Elliott appeared at the hearing on January 28 but did not testify, although he did address the Court with respect to the Retiree Benefits Motion.[10]
The Official Committee of Unsecured Creditors and the Bondholders Committee both supported the termination of benefits as proposed in the Executives Benefits Motion.
Additional facts will be developed as necessary in the following discussion to resolve the issues before the Court.
DISCUSSION
A. The standard for approval of the Motions
The Debtors state that the standard to be employed in ruling on the Motions is similar to the business judgment rule that would apply for the acceptance or rejection of an executory contract under
With respect to the Employment Agreements of the Former Officers, the Court agrees with the Debtors that the business judgment rule applies, becausе the Court finds that the Employment Agreements are, indeed, executory contracts. However, with respect to the remainder of the Motions, the Court believes that, if
B. Application of Section
A threshold question that must be resolved is whether
The resolution of this question is not so easy as it might initially appear. Since its enactment in 1988,
In this Court's view,
(e)(1) Notwithstanding any other provision of this title, the debtor in possession, or the trustee if one has been appointed under the provisions of this chaptеr (hereinafter in this section "trustee" shall include a debtor in possession), shall timely pay and shall not modify any retiree benefits, except that
(A) the court, on motion of the trustee or authorized representative, and after notice and a hearing, may order modification of such payments, pursuant to the provisions of subsections (g) and (h) of this section, or
(B) the trustee and the authorized representative of the recipients of those benefits may agree to modification of such payments,
after which such benefits as modified shall continue to be paid by the trustee.
* * * * * *
*915 (f)(1) Subsequent to filing a petition and prior to filing an application seeking modification of the retiree benefits, the trustee shall
(A) make a proposal to the authorized representative of the retirees, based on the most complete and reliable information available at the time of such proposal, which provides for those necessary modifications in the retiree benefits that are necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably; and
(B) provide, subject to subsection (k)(3), the representative of the retirees with such relevant information as is necessary to evaluate the proposal.
(2) During the period beginning on the date of the making of a proposal provided for in paragraph (1), and ending on the date of the hearing provided for in subsection (k)(1), the trustee shall meet, at reasonable times, with the authorized representative to confer in good faith in attempting to reach mutually satisfactory modifications of such retiree benefits.
(g) The court shall enter an order providing for modification in the payment of retiree benefits if the court finds that
(1) the trustee has, prior to the hearing, made a proposal that fulfills that requirements of subsection (f);
(2) the authorized representative of the retirees has refused to accept such proposal without good cause; and
(3) such modification is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor, and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities;
Retiree benefits are defined in
(a) [F]or purposes of this section, the term "retiree benefits" means payments to any entity or person for the purpose of providing or reimbursing payments for retired employees and their spouses and dependents, for medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, or death under any plan, fund or program (through the purchase of insurance of otherwise) maintained or established in whole or in part by the debtor prior to filing a petition commencing a case under this title.
Prior to the enactment of
In July 1986, LTV Steel Company and three mining subsidiaries filed a Chapter 11 bankruptcy petition, and shortly thereafter announced that they would cease paying health benefits to approximately 78,000 retirees and their dependents. The affected retirees were both former salaried *916 employees who rеceived benefits under programs terminable at will and former union employees whose benefits were governed by collective bargaining agreements. Congress reacted swiftly. Within days, the Senate passed a bill ordering LTV to reinstate the benefits, and soon thereafter the House passed a bill to protect union retiree benefits by explicitly including them within the protection of
Considered in the light of these historic events, the meaning and purpose of
The first place to look for the meaning and purpose of a statute is in the language of the statute itself. Where the statute is clear and unambiguous, there is no need to resort to the legislative history to discern its meaning. "[A]s long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute." United States v. Ron Pair Enterprises, Inc.,
On its face, the language of the statute is clear. "Notwithstanding any other provision of this title, the debtor in possession, or the trustee . . . shall timely pay and shall not modify any retiree benefits . . . " unless the court approves those modifications pursuant to subsections (g) and (h) of *917
There is nothing in the language of the statute to suggest that Congress intended to allow the termination of retiree benefits in those instances where the debtor has the right to unilaterally terminate those benefits under the language оf the plan or program at issue. While they assert this right in the pending Motions, the Debtors have not pointed to any language in the statute that would create such an exception. Nor can they, for it does not exist. In fact, if one were to accept the Debtors' argument, the statute would be eviscerated and rendered virtually meaningless. Any debtor most debtors, more than likely would be able to point to language in the underlying documents establishing voluntary programs such as the Debtors' giving them the right to unilaterally terminate the programs. With that exception granted, the statute would essentially only apply to collective bargaining agreements or other bargained-for programs, and the legislative history makes it clear that such limitations were not intended. The language of the statute is all-encompassing.
Overall, the legislative history of
[The bill] . . . requires a company to continue paying for these [retiree health] benefits even after the termination of a collective bargaining agreement. Only if a company can prove a modification is absolutely necessary and that it treats everyone fairly can a court, after a hearing, order any modification.
Retiree Benefits Security Act of 1987: Hearings on S. 548 Before the Subcomm. on Courts and Administrative Practice of the Senate Comm. on the Judiciary, 100th Cong., 1st Sess. 14 (1987) (statement of Sen. Metzenbaum). See In re Chateaugay Corporation,
Additional support for this interpretation of
A consideration of
Moreover, Congress doubtlessly recognized that retirees as a class are unique in a bankruptcy proceeding and that they are deserving of special protection. Stabile, at p.1946. As a general rule, retirees are particularly vulnerable when their former employer goes bankrupt, because of their ages, their reduced incomes, and their inability to replace the benefits (medical coverages or life insurance, typically) that are being terminated. Unlike business and trade creditors, retirees are unable to set aside reserves for possible losses or to pass along their losses to other customers. Stabile, at p.1947. In the instant case, there was testimony that some of the retirees made their decisions to retire on the *919 basis of Farmland's promises to continue the life insurance benefits for the rest of their lives, and there was testimony that replacing the life insurance benefits would be inordinately, and perhaps prohibitively, expensive for the retirees. All of these suggest a sound basis and rationale for Congress' according special protections to retirees who are caught up in a Chapter 11 proceeding.[17]
The swiftness with which Congress acted to protect the LTV retirees and their families is also evidence of Congress' intent to provide special protections for retirees. Stabile, at p.1949.
"The clear purpose of the Act [RBBPA] is to give the bankruptcy court power to resolve the competing interests of retirees, debtors and creditors, if agreement as to continuation and level of benefits cannot be reached. The health benefits of retirees are not to be terminated by any action until the bankruptcy court has time to act." Chateaugay,
Based on the foregoing discussion, the Court holds that the provisions of
However, Farmland contends that
C. Appointment of Committee pursuant to
Having determined that
(d) The court, upon a motion by any party in interest, and after notice and a hearing, shall appoint a committee of retired employees if the debtor seeks to modify or not pay the retiree benefits or if the court otherwise determines that it is appropriate, to serve as the authorized representative, under this section, of those рersons receiving any retiree benefits not covered by a collective bargaining agreement.
The Court believes that the statute accords the Court discretion in the appointment of a committee of retired employees, and further determines that it is not appropriate to appoint a committee at this time. Because the Court is denying the Debtors' Motions to terminate the retirees' benefits, no useful purpose would be served by the appointment of a committee. Unless and until Farmland seeks to modify or terminate these plans in accordance with the procedures outlined in
Therefore, the Retirees' request for appointment of a committee under
D. Retiree Benefits Motion
As discussed hereinabove, the Court has determined that
Before filing an application to modify any retiree benefits, a debtor must submit the proposed modifications to the authorized representative of the retirees, providing the most complete and reliable information available at the time to show that the modifications are necessary to permit the reorganization of the debtor and assuring that all creditors, the debtor, and all affected parties are treated fairly and equitably.
Here, the Debtors have not alleged that they havе complied with the dictates of
E. Executive Benefits Motion
1. Director Life Plan, Supplemental Life Plan, Executive Life Plan
Under the Director Life Plan, the Supplemental Life Plan, and the Executive Life Plan, the Debtors have provided varying amounts of life insurance benefits under various arrangements to Farmland's directors and top executives. Because these plans and programs provide benefits in the event of death, they constitute "retiree benefits" within the meaning of
This does not mean, however, that the Debtors are prohibited from changing the types of life insurance provided so that they could receive the very substantial amount of cash surrender value that has been built up in the present life insurance policies, provided that such changes do not constitute modifications of the Plans under
2. Deferred Comp Plan, SERP, Union Equity Plan, Director Deferred Comp Plan
The Deferred Comp Plan, the SERP, thе Union Equity Plan, and the Director Deferred Comp Plan are plans or programs established by the Debtors that provide for the payment of deferred compensation and enhanced retirement benefits. These plans or programs, therefore, are not encompassed within
According to the Executive Benefits Motion and the McCoy Affidavit, the Debtors' liabilities to the participants in the Deferred Comp Plan, the SERP, and the Director Deferred Comp Plan are at least $26 million (no amount of liability is stated for the Union Equity Plan). Although it is *922 quite likely that the Executives affected by the termination of these Plans will file general unsecured claims for the amounts they might be owed, it appears to the Court that the Debtors have properly exercised their business judgment in deciding to terminate these Plans. Terminating the Plans should result in the Debtors' being required to pay much less than the $26 million they are presently obligated to pay under the Plans, although the exact amount to be paid will not be determined until a plan of reorganization is approved and all claims have been allowed or disallowed. Further, terminating the Plans will stop the accrual of further liabilities. Therefore, the Court will approve the Debtors' termination of the Deferred Comp Plan, the SERP, the Union Equity Plan, and the Director Deferred Comp Plan.
F. Rejection of Employment Agreements
The final issue to be dealt with is the request by the Debtors that they be permitted to reject the Employment Agreements of four Former Officers who once held some of the top executive offices in Farmland.
Farmland contends the Employment Agreements are executory contracts and can be rejected in these Chapter 11 proceedings pursuant to
Honse, the former president and chief financial officer of Farmland, contends thаt his obligations to provide consulting services, cooperate with the Debtors, and refrain from competition and interference do not rise to the level of material future performance, and therefore his Employment Agreement is not an executory contract subject to rejection by the Debtor. Honse relies on In re Spectrum Information Technologies, Inc.,
Turning to Honse's obligations in this case, the Employment Agreement provides in pertinent part:
9. Consulting. If Executive qualifies for Severance Benefits under Paragraph 7(a), Executive agrees to make himself available to the Company as needed to consult for a period of one year following termination of employment. Executive shall be available to consult up to an average of forty (40) hours per month. Executive shall be entitled to reasonable compensation for his time in providing such consulting services and to reimbursement of his out of pocket expenses.
*923 (Debtors' Ex. 31)(emphasis added) In addition to consulting services, Section 10 of the Employment Agreement specifies other obligations that Honse agreed to, such as nondisclosure of confidential information, non-interference, non-competition, and cooperation in claims. (Debtors' Ex. 31) Unlike the employment contracts examined by the court in Spectrum, Honse's Employment Agreement contains several obligations which, taken together, rise to the level of material future performance. The Court has no evidence before it to indicate that Honse's obligations were anything other than what is stated in the Employment Agreement. The agreement of a former president and chief financial officer of a major corporation to not disclose confidential information, to not compete with the company, and to assist the company in evaluating claims would seem to be highly pertinent and material obligations, even if the former executive is never asked to do anything else. Honse has not shown that he has been relieved of his contractual obligations. Therefore, the Court finds that material obligations are present on both sides of Honse's Employment Agreement and that the contract is executory.[20]
The Court may approve rejection of an executory contract where the Debtors show that they have complied with the business judgment standard. Food Barn Stores,
Based on the foregoing discussion, it is, therefore
ORDERED that the Debtors' Motion for Order Authorizing the Termination of Certain Retiree Benefits Under Group Term Life Insurance Policy with Minnesota Life Insurance Company (Document # 1688) be and is hereby DENIED, without prejudice to a later refiling in compliance with
FURTHER ORDERED that the Debtors' Motion for Order Authorizing (I) the Termination of Certain Executive and Director Benefits and (II) Rejection of Certain Exeсutory Employment Agreements (Document # 1689) be and is hereby GRANTED in part and DENIED in part as follows:
A. The Debtors' request to terminate the benefits under the Farmland Industries, Inc. Executive Deferred Compensation Plan, the Farmland Industries, Inc. Supplemental Executive Retirement Plan, the Union Equity Deferred Compensation Plan, and the Director Deferred Compensation Plan be and is hereby GRANTED.
B. The Debtors' request to terminate the Employment Agreements of Robert W. Honse, John F. Berardi, William Fielding, and H.D. Cleberg be and is hereby GRANTED.
*924 C. The Debtors' request to terminate the Director Life Insurance Plan, the Supplemental Director Life Insurance Plan, and the Executive Split Dollar Life Insurance Plan be and is hereby DENIED, without prejudice to a later refiling in compliance with11 U.S.C. § 1114 .
NOTES
Notes
[1] James Rainey, Earl Knauss, Carl Cage, Dave Fulton, Lewis Linville, Jerry Schwab, Charles Wolff, Jack Warren, Harry Platz, Don R. Rogers, James Atwood, and Glen Skold objected to the proposed termination of the Debtors' Executive Split Dollar Life Insurance Plan, which provides life insurance for the objectors.
[2] This Court has jurisdiction of the pending matter pursuant to 28 U.S.C. § § 1334 and 157. This is a core proceeding pursuant to
[3] The Court's faсtual findings are based largely on the Affidavit and the Supplemental Affidavit of Holly D. McCoy, Vice President for Human Resources of Farmland, which were offered in evidence, without objection, by the Debtors in support of the Motions. Also, none of the factual allegations in either of the Motions has been challenged.
[4] There are five Debtors in these jointly administered Chapter 11 proceedings: Farmland Industries, Inc., Farmland Foods, Inc., SFA, Inc., Farmland Pipe Line, Inc., and Farmland Transportation, Inc. Their bankruptcy petitions were filed on May 31, 2002 (the "Petition Date"). They will be referred to herein as "Debtors" or as "Farmland."
[5] The Debtors are not proposing to terminate the life insurance benefits of approximately 120 disabled former employees. The Court previously approved the continuation of those benefits in an Order entered on June 5, 2002, shortly after the Debtors filed their bankruptcy petitions on May 31, 2002. The average amount of coverage for the disabled former employees is about $73,000 a person.
[6] Although there are some 2,200 retired employees affected by the Debtors' proposed termination of the insurance coverage, only four filed formal objections to the Retiree Benefits Motiоn. One of the objectors, Donald Marsh, is now deceased. (Docket Entry # 2889)
[7] The Court will refer to the benefit plans described above collectively as the "Executive Benefits Plans."
[8] A loss in retirement benefits occurs because retirement benefits are calculated according to the salary paid. If an Executive elected to defer a portion of his or her compensation, retirement benefits would be calculated on the salary actually paid, not on the amount of salary paid plus any deferred amount.
[9] McCoy states in her Affidavit that the Debtors would eliminate approximately $383,000 in annual costs with the termination of the Executive Life Plan, the Director Life Plan, and the Supplemental Life Plan. (McCoy Affidavit, ¶ 35)
[10] The Court received approximately 15 letters and handwritten notes from persons stating that they were retired Farmland employees and objecting to the Debtors' proposal to terminate the life insurance benefits. The letters were scanned and docketed. However, the writers did not appear for the hearings and did not testify; therefore, their letters and notes cannot be considered by the Court.
[11] The Debtors assert that the benefit plans at issue are not executоry contracts within the compass of
[12] The Supreme Court listed a number of factors that should be examined by a bankruptcy court in determining whether the "balance of the equities" favors rejection of a collective bargaining agreement, and stated that the court "must consider not only the degree of hardship faced by each party, but also any qualitative differences between the types of hardship each must face." Bildisco & Bildisco,
[13] Stabile's article contains an excellent analysis of the history and development of
[14]
(a) The court shall confirm a plan only if all of the following requirements are met:
* * * * * *
(13) The plan provides for the continuation aftеr its effective date of payment of all retiree benefits, as that term is defined in
[15]
(2) Any payment for retiree benefits required to be made before a plan confirmed under
[16]
[17] The cynic also might suggest that there were more voters among the 78,000 LTV retirees and their families than there are in bankrupt corporations.
[18] The Court's reading of
[19] Lest the Retirees become too comfortable in the Court's ruling, it should be pointed out that there is nothing to prevent the Debtors from terminating the life insurance program after the confirmation of a plan of reorganization in these Chapter 11 proceedings. See
[20] Honse was the only Former Officer to object to the rejection of his Employment Agreement on the basis that it was not an executory contract. The Court finds that the remaining agreements are also executory contracts, for the same reasons stated in the body.