The Visteon Decision: The Third Circuit's strict construction of the Bankruptcy Code continues

Practical Law UK Legal Update 2-503-1175 (Approx. 3 pages)

The Visteon Decision: The Third Circuit's strict construction of the Bankruptcy Code continues

by Michael H. Torkin, Edmund M. Emrich, and Richard Fischetti, Shearman & Sterling LLP

Background

In its recent decision in IUE-CWA v. Visteon Corp. (In re Visteon Corp.), No. 10-1944, (3d Cir. July 13, 2010) (Visteon), the US Court of Appeals for the Third Circuit ruled that a debtor whose retiree benefits plans provide for the unilateral right by the debtor to terminate such plans at any time will nevertheless be required to comply with section 1114 of the Bankruptcy Code to terminate them post-petition.

Section 1114 provides, among other things, that before any modification to a retiree benefits plan can be made, the debtor and the retirees' authorised representative must "confer in good faith in attempting to reach mutually satisfactory modifications of such retiree benefits" (11 U.S.C. § 1114(f)(2)).

Decision

The Third Circuit applied the so-called "plain meaning rule" to conclude that section 1114 is unambiguous and "clearly applies to any and all retiree benefits," notwithstanding any contractual language to the contrary (In re Visteon Corp., at *8). The decision is directly at odds with In re Delphi Corp., No. 05-44481, (Bankr. S.D.N.Y. Mar. 10, 2009) as well as the Second Circuit's decision in In re Chateaugay Corp., 945 F.2d 1205 (2d Cir. 1991), and could have strategic implications for distressed companies that have significant retiree benefits obligations.

In reaching its conclusion, the Third Circuit relied on three significant factors:

First, it noted that although Congress had explicitly excluded certain benefits from the scope of section 1114, "Congress did not limit section 1114's otherwise broad scope based on whether or not the debtor reserved a right to terminate in its [retiree benefit plans]" (In re Visteon Corp., at *8). The court reasoned that had Congress intended to exclude retiree benefit plans that contain a unilateral right to terminate benefits from the protections afforded by section 1114, Congress would have done so specifically.
Second, the court reasoned that if section 1114 were construed to exclude retiree benefits plans with a unilateral right to terminate, then section 1114(l), which under certain circumstances permits reinstatement of retiree benefits that were modified during the 180-day period immediately preceding the filing of a bankruptcy petition, would be rendered "virtually meaningless" (In re Visteon Corp., at *13).
Third, the court noted that unless a statute "produces a result demonstrably at odds with the intentions of its drafters . . . or an outcome so bizarre that Congress could not have intended it," the court's responsibility is to adhere to the plain meaning of the statute (In re Visteon Corp., at *14 (alteration in original) (quoting Mitchell v. Horn, 318 F.3d 523, 535 (3d Cir. 2003)).

After reviewing the legislative history of section 1114, the court concluded that its reading of the statute was not "demonstrably at odds with the intention of its drafters" nor "so bizarre that Congress could not have intended it" (In re Visteon Corp., at *18).

Comment

The court's decision in Visteon highlights the Third Circuit's tendency toward strict statutory construction of the Bankruptcy Code, even where the results may be at odds with the parties' pre-bankruptcy expectations and contractual rights.

The Visteon decision follows the Third Circuit's recent decision in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), in which it narrowly construed section 1129(b)(2)(A) of the Bankruptcy Code, resulting in a significant curtailment of secured creditors' rights. In that case, the Third Circuit determined that section 1129(b)(2)(A) of the Bankruptcy Code permits a debtor to sell a secured creditor's collateral without allowing the creditor to credit bid its claim so long as the debtor's plan provides the creditor with the "indubitable equivalent" value of its collateral (In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010) at 301). The creditor-friendly Visteon decision and the debtor-friendly Philadelphia Newspapers decision demonstrate the Third Circuit's conviction that the appropriate role of the court is to apply the Bankruptcy Code as written (in the absence of any clear ambiguity or mistake), and not make inferences that go beyond the statutory language.

When considering their bankruptcy options, distressed companies with significant employee retirement benefit obligations should be aware of the impact of the Visteon decision. The decision may affect their choice of venue for the bankruptcy filing (assuming Delaware is among their options).

Moreover, given that section 1114(l) precludes a debtor from modifying medical benefits attributable to the 180-day period immediately preceding the filing of a bankruptcy petition "unless the court finds that the balance of the equities clearly favors such modification," such companies need to consider whether it is in their best interest to terminate their retiree medical plans more than 180 days prior to filing for Chapter 11.

However, such advanced termination is not always feasible given the protracted timetable involved and the potential signal that a termination might send to the marketplace at a time when the company is not under the protections of Chapter 11.

Ultimately, the impact of Visteon goes well beyond these benefits-related considerations. Companies that are weighing Delaware as an option for their bankruptcy filing would be well served to assess the major issues confronting them based on the assumption that the Third Circuit will narrowly construe the provisions of the Bankruptcy Code.

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