In Re North American Royalties, Inc.
MEMORANDUM
The court must decide whether to grant or deny a motion by the chapter 11 debtor, North American Royalties (NAR), to terminate medical and life insurance benefits for retirees. The beneficiaries include retired hourly employees and retired salaried employees. The court will refer to them as the hourly beneficiaries and the salaried beneficiaries.
Section 1114 of the bankruptcy code allows a chapter 11 debtor or trustee to modify retiree benefits by negotiating with the retirees’ representative and reaching an agreement.
As to the hourly beneficiaries, NAR contends that it has complied with
The court begins with the question of whether to approve the agreement with the hourly beneficiaries. NAR’s motion asserts that, for the purposes of
To approve the agreement, the court need not make the findings required by
The court has dealt with these questions under § 1113 of the bankruptcy code. Section 1113 imposes essentially the same process as to collective bargaining agreements that
The same reasoning applies to this agreement to terminate the retiree benefits of the hourly beneficiaries.
The court will deal with that question later in this opinion. The court must first deal with whether NAR can terminate the benefits for the salaried beneficiaries.
NAR has not bargained with an authorized representative for the salaried beneficiaries.
A number of the salaried beneficiaries filed a motion to continue the hearing on NAR’s motion to terminate. The motion for a continuance requests additional time to discover whether each version of the benefit plan reserved to NAR the power to terminate the benefit contract at any time. The motion also asks for appointment of a committee of salaried retirees to represent their interests.
The court heard the salaried beneficiaries’ motion at the same time as NAR’s motion to terminate. Mr. Wayne Tamme testified for NAR. He is the vice president for human resources. He is in charge of the benefit plans in question. He identified three summary plan descriptions — the SPD’s. Mr. Tamme testified that the three SPD’s cover the entire period of the benefit plans, from 1981 through the present. Mr. Tamme did not find any SPD dated later than the 1995 SPD. Mr. Tamme testified that he also did not find any separate plans or other SPD’s. At 55 pages long, the 1981 SPD is the shortest of the three.
The 1981 SPD reserves the right to terminate, suspend, withdraw, amend or modify the Plan at any time “subject to the applicable provisions of the Group Policy.” Exh. A, p. 53. Mr. Tamme did not find any separate group policy. Mr. Tamme testified that the coverage for every retiree is determined by the current plan — not an earlier plan that was in effect at the time of the beneficiary’s retirement.
The 1990 SPD and the 1995 SPD appear to agree with Mr. Tamme. They define eligible employees to include those who retired after March 1, 1982. This allows an argument that the 1981 SPD is irrelevant because that benefit contract was superseded by the later contracts. The salaried beneficiaries have two opposing arguments. First, the later SPD’s do not cover all employees who were covered by the 1981 SPD since it took effect on March 1, 1981 — not March 1, 1982 — and it applied to some earlier retirees. Exhibit A, page 11. Second, if the 1981 group policy prevented NAR from terminating the benefit contract, then the beneficiaries
These arguments make no difference, however, if no group policy existed. After a diligent search, NAR has not been able to find any group policy that covered the same period as the 1981 SPD. Neither party has attempted to prove any terms of a group policy that are different from those stated in the 1981 SPD. In this situation, the court will treat the SPD as the entire benefit contract without any group policy to vary its terms.
Anderson v. Alpha Portland Industries, Inc.,
NAR’s lawyer represented that NAR’s officers or employees who were present would state that they did not remember a group policy and believed NAR was always self-insured. The 1990 SPD and the 1995 SPD reveal that NAR self-insured the medical benefits under those plans. In each of these SPD’s, the explanation is found under the heading, “How The Benefits Are Provided”. The 1990 SPD states that benefits other than life insurance and special accident coverage are provided directly by NAR. The 1995 SPD refers to medical and dental benefits as provided directly by NAR. Thus, the 1990 and 1995 SPD leave no doubt that NAR was self-insured as to the medical benefits from 1990 until the present. The term “self-insured” means the plan sponsor, NAR in this case, does not have insurance; it pays the expenses from its income.
Mr. Tamme testified that NAR pays an insurance company to administer the medical benefits — to handle the claims and let NAR know how much money to deposit in the account to pay the claims. NAR does have a stop loss insurance policy. It provides coverage for claims by one beneficiary to the extent they exceed $125,000 in one year. The plans in question cover 194 beneficiaries, 97 hourly beneficiaries and the 97 salaried beneficiaries. Mr. Tamme testified that medical coverage for the salaried and the hourly beneficiaries will cost about $100,000 per month, about $50,000 for each group.
Mr. Tamme testified that the group life insurance for the salaried beneficiaries costs about $2,100 per month. He also testified that the coverage is portable, meaning that a beneficiary can continue it at his or her own expense.
There is no dispute regarding NAR’s status as an ongoing business. It is not. As stated in the motion to terminate, NAR has ceased operations, laid off almost all its employees, and is in the process of liquidating all its assets. It does not have and will not have income to continue paying benefits. In other words, benefits can be paid only from money that might otherwise be retained to pay creditors’ claims in the bankruptcy cases.
For this reason, the attorney for the unsecured creditors’ committee appeared and voiced the committee’s support for NAR’s motion to terminate the benefits. The attorney for the lenders’ group also voiced their support for NAR’s motion to
The 1990 SPD stated that NAR reserved the right to terminate, suspend, withdraw, amend or modify the plan at any time based solely on NAR’s decision. The 1995 SPD contained the same reservation of rights. Neither of these made an exception for terms of any group policy.
At the continued hearing, the attorneys agreed that NAR had conducted a diligent search, and that it was unable to find any additional relevant documents. The attorney for the objecting salaried retirees conceded that the SPD’s, except for the 1981 SPD, allow NAR to terminate the plans at any time. He did not state how the first SPD was different, but he had brought out at the earlier hearing its reference to the group policy as a possible limit on NAR’s right to terminate. The court has already decided that since no group policy has been found, it should treat the SPD as controlling, and therefore, NAR’s power to terminate is not restricted by the provisions of a group policy.
The primary legal question is whether the right to terminate the plans at any time for any reason relieves NAR from the duty to follow the procedures required by
The bankruptcy code allows a chapter 11 debtor to reject an executory contract.
The right
in
bankruptcy to reject or assume an executory contract does not render the contract ineffective during the time allowed for the debtor to decide whether to assume or reject. The debtor can terminate according to the contract terms without rejecting the contract. In other words, the debtor need not reject the contract in order to terminate it as allowed by the contract terms. Likewise, the court has not found any decision saying the debtor must assume the contract in order to terminate it according to its terms. Termination as allowed by the contract is separate from rejection or assumption.
NBD Park Ridge Bank v. SRJ Enterprises, Inc. (In re SRJ Enterprises, Inc.),
Thus, a chapter 11-debtor generally can terminate an executory contract, as allowed by the contract’s terms, without assuming or rejecting it. An argument can be made that a retiree benefits contract does not come within the traditional definition of an executory contract, but they have generally been treated as execu-tory contracts, and
Does
In this regard, involuntary termination of the contract by the debtor, as allowed by the terms of the contract, should not be treated as a modification that can be accomplished only by following the procedures of
If
Furthermore, § 1129(a)(13) would vest the benefits after reorganization. Section 1129(a)(13) requires the plan to provide for continued payment of retiree benefits according to the pre-chapter 11 contract or the modifications made under
Likewise, if
Congress could have intended these unusual results, but the court will not attribute that intent to Congress without convincing evidence, which does not exist. Instead, the court understands that
Barring termination as allowed by the contract also does not make sense for bankruptcy purposes. It would lead to widely disparate treatment of debtors, their other creditors, and retirees according to whether the debtor terminated the benefits contract before filing chapter 11. Daniel Keating, Bankruptcy Code § 1111: Congress’ Empty Response to the Retiree Plight, 67 Am.Bankr.L.J. 17, 42-43 (1993).
It could also influence the filing of involuntary bankruptcy petitions by creditors, including retirees who have not been paid their benefits.
Other courts have pointed out that
In summary,
The court’s finding that NAR has a sound business reason for terminating the retiree benefits contract applies also to NAR’s agreement with the hourly beneficiaries to terminate their retiree benefits. The court has already pointed out that approval of an agreement only requires the court to find a sound business reason.
The final question is whether to appoint a committee of salaried beneficiaries. The objecting salaried beneficiaries complained that notice of NAR’s motion did not go to all the salaried beneficiaries so that they would be warned of the termination of their retirement benefits, and appointment of a committee would create a delay during which they could be warned. Notice is required so that interested parties can appear and object. The objecting salaried beneficiaries received sufficient notice to file a motion that raised the possible objections to NAR’s motion. The court granted a continuance to give them the opportunity for more discovery and to assure a correct view of the facts. The objecting salaried beneficiaries have ably represented the interests of the group. Delaying the termination would impose on NAR the typical cost of continuing the benefits, but it would also impose the risk of additional large claims during the delay. The major unsecured creditors who would bear the cost and the risk are not willing to bear them. A delay could be very costly to NAR and would not lead to a different final result; the benefits would still be terminated by motion or conversion to chapter 7. Furthermore, the course of events in this chapter 11 case has made it obvious for some time that employee and retiree benefits would come to an end rather soon. There is no need to appoint a committee of salaried beneficiaries to negotiate, and there are no other reasons that make it appropriate to appoint a committee.
The court will enter an order approving the agreement with the hourly beneficiaries and the termination of the contract as to the salaried beneficiaries, and denying the motion to continue and for appointment of a committee. The agreement with the union provides for termination of benefits as of April 30, 2002, and NAR needs to avoid, the cost of continuing the benefits and the threat of large new claims during any continuation. Therefore, the court will make the order immediately effective under
This Memorandum constitutes findings of fact and conclusions of law as required by
ORDER APPROVING AGREEMENT TO TERMINATE CERTAIN NON-PENSION RETIREE BENEFITS AND TERMINATING CERTAIN NON-PENSION RETIREE BENEFITS
The debtor, North American Royalties, Inc. (NAR) for itself and the other above-
In accordance with the court’s memorandum opinion entered this date—
It is ORDERED that the agreement between NAR and the United Steel Workers of America to terminate, effective April 30, 2002, the non-pension retiree benefits of the retired union or hourly employees is approved;
It is FURTHER ORDERED that NAR’s contracts or plans to provide non-pension retiree benefits to the retired union or hourly employees and to the retired salaried employees are terminated, effective April 30, 2002, as allowed by the terms of the contracts or plans.
It is FURTHER ORDERED that the objectors’ motion for continuance of the hearing on NAR’s motion to terminate is denied to the extent it seeks any continuance in addition to the one already granted;
It is FURTHER ORDERED that the objectors’ motion for appointment of a committee under
It is FURTHER ORDERED that this order is effective immediately and is not stayed under