“Second Circuit Upholds PBGC’s Termination Premium Over Bankruptcy Objection”

Companies contemplating termination of an underfunded pension plan as part of a Chapter 11 bankruptcy filing should take note of the recent decision of the Second Circuit Court of Appeals in Pension Benefit Guar. Corp. v. Oneida, Ltd. In Oneida, the Second Circuit addressed Section 4006(a)(7) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which provides that if, during a bankruptcy proceeding, a plan sponsor terminates its underfunded pension plan in a distress termination, or the Pension Benefit Guaranty Corporation (the “PBGC”) involuntarily terminates the pension plan, then upon the company’s emergence from bankruptcy, a special termination premium must be paid to the PBGC annually for three years. The Second Circuit, reversing the bankruptcy court, concluded that the termination premium is not a contingent prepetition claim subject to discharge in a Chapter 11 reorganization. This Stroock Special Bulletin looks at the Oneida case and its implications, particularly for companies with defined benefit plans (and their investors), that are emerging from bankruptcy, considering bankruptcy, or considering alternative structures.