     08-2964-bk
     Pension Benefit Guaranty Corp. v. Oneida, Ltd.



 1                        UNITED STATES COURT OF APPEALS
 2
 3                             FOR THE SECOND CIRCUIT
 4
 5                                  -------------
 6
 7                               August Term, 2008
 8
 9      (Argued: January 29, 2009                     Decided: April 8, 2009)
10
11                             Docket No. 08-2964-bk
12
13   - - - - - - - - - - - - - - - - - - - - - - X
14
15   PENSION BENEFIT GUARANTY CORPORATION,
16
17                     Defendant-Appellant,
18
19               - against -
20
21   ONEIDA LTD.,
22
23                     Plaintiff-Appellee.
24
25   - - - - - - - - - - - - - - - - - - - - - - X
26
27   Before:     POOLER and LIVINGSTON, Circuit Judges, and
28               RAKOFF, District Judge.*
29
30        Direct appeal pursuant to 28 U.S.C. § 158(d)(2) from an
31   Order of the United States Bankruptcy Court, Southern District of
32   New York (Allan L. Gropper, United States Bankruptcy Judge),
33   holding that payments due the Pension Benefit Guaranty
34   Corporation as a result of an employer’s termination of a pension
35   plan while undergoing reorganization in bankruptcy are contingent
36   pre-petition claims dischargeable in bankruptcy. Concluding that
37   the payment obligation does not arise in any respect until after
38   bankruptcy, we REVERSE and REMAND for further proceedings.
39
40                           JAMES L. EGGEMAN, Assistant Chief Counsel,
41                                Pension Benefit Guaranty Corp.,
42                                Washington, D.C. (Israel Goldowitz,
43                                Chief Counsel, Karen L. Morris, Dep.
44                                Chief Counsel, Paula J. Connelly, Asst.


           *
           The Honorable Jed S. Rakoff, United States District Judge
     for the Southern District of New York, sitting by designation.

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 1                             Chief Counsel, Lawrence F. Landgraff,
 2                             Erika E. Barnes, Pension Benefit
 3                             Guaranty Corp., Greg R. Yates, Charles
 4                             G. Cole, Steptoe & Johnson LLP, New
 5                             York, New York, on the briefs), for
 6                             Defendant-Appellant.
 7
 8                       WILLIAM J.F. ROLL, III, Shearman & Sterling
 9                            LLP, New York, New York (Jaculin Aaron,
10                            Michael H. Torkin, Daniel C. Lewis,
11                            Shearman & Sterling LLP, on the brief),
12                            for Plaintiff-Appellee.

13   RAKOFF, District Judge.

14        The Pension Benefit Guaranty Corporation (“PBGC”) appeals

15   from a judgment of the Bankruptcy Court, Southern District of New

16   York (Allan L. Gropper, B.J.), which held that “Termination

17   Premiums” created by the Deficit Reduction Act of 2005, Pub. L.

18   109-171, 120 Stat. 4 (2006), are pre-petition contingent claims

19   dischargeable in bankruptcy.1   On May 12, 2008, the parties

20   jointly petitioned for permission to appeal directly from the

21   bankruptcy court pursuant to 28 U.S.C. § 158(d)(2), which grants

22   jurisdiction to the court to hear such an appeal when the

23   question presented “involves a question of law as to which there

24   is no controlling decision of the court of appeals for the

25   circuit or of the Supreme Court of the United States, or involves

26   a matter of public importance.”    On August 29, 2008, the Court



          1
           The provision of the Deficit Reduction Act creating the
     Termination Premiums amended the relevant provision of the
     Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §
     1306. The provision was later permanently enacted as part of the
     Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat. 780.

                                       -2-
1    granted the joint petition, see Pension Benefit Guar. Corp. v.

2    Oneida, Ltd., No. 08-2964-bk (2d Cir. Aug. 29, 2008), and the

3    matter was subsequently briefed and argued.    We now reverse.

4           The PBGC is essentially an insurer of pension funds.

5    “Termination Premiums” paid to the PBGC are designed to help

6    insure employees against the non-payment of pension benefits if

7    the employer terminates a covered fund under specified

8    circumstances.    The “General Rule” is that

9           [i]f there is a termination of a single-employer plan

10          [under specified provisions], there shall be payable to

11          the [PBGC], with respect to each applicable 12-month

12          period, a premium at a rate equal to $1,250 multiplied

13          by the number of individuals who were participants in

14          the plan immediately before the termination date.

15   29 U.S.C. § 1306(a)(7)(A).    If, however, the plan is

16   terminated during a bankruptcy reorganization proceeding,

17   then

18          [the General Rule] shall not apply to such plan until

19          the date of the discharge or dismissal of [the

20          employer] in such case.

21   Id. § 1306(a)(7)(B).    This is called the “Special Rule.”

22          Under the General Rule, the “applicable 12-month period”

23   runs from the “first month following the month in which the

24   termination date occurs” and requires payment for a total of


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1    three years.    Under the Special Rule, the applicable 12-month

2    period does not commence until “the first month following the

3    month which includes the earliest date as of which each

4    [employer] is discharged or dismissed” from the bankruptcy

5    proceeding.    Id. § 1306(a)(7)(C).    It is thus apparent from the

6    face of the relevant statutory provisions that “[i]n the case of

7    termination due to reorganization, the liability for the

8    [termination] premium does not arise until the employer is

9    discharged from the reorganization proceeding.”     Staff of Joint

10   Comm. on Taxation, 109th Cong. Technical Explanation of H.R. 4,

11   the “Pension Protection Act of 2006,” as Passed by the House on

12   July 28, 2006, and as Considered by the Senate on August 3, 2006

13   (emphasis added).

14        On March 19, 2006, Oneida, a designer and manufacturer of

15   flatware, filed for Chapter 11 reorganization in bankruptcy.      See

16   Oneida Ltd. v. Pension Benefit Guar. Corp. (In re Oneida), 383

17   B.R. 29, 33 (Bankr. S.D.N.Y. 2008).      While in bankruptcy, Oneida

18   terminated one of its single-employer, defined-benefit pension

19   plans, the Oneida Plan, pursuant to a stipulation by the instant

20   parties preserving their respective rights to dispute or enforce

21   payment of Termination Premiums.      Pension Settlement Agreement ¶

22   5 (May 3, 2006).    Oneida then sought a declaratory judgment that

23   the applicable Termination Premium was an unsecured, pre-petition

24   bankruptcy claim under § 101(5) of the Bankruptcy Code.     The


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1    parties cross-moved for summary judgment and the bankruptcy court

2    issued an opinion on February 27, 2008, and an Amended Order on

3    the Motions for Summary Judgment dated March 21, 2008, from which

4    the PBGC now appeals.    With no findings of fact in question, we

5    review the bankruptcy court’s conclusions of law de novo.    See

6    Shugrue v. Air Line Pilots Ass’n. Int’l, (In re Ionosphere Clubs,

7    Inc.), 922 F.2d 984, 988 (2d Cir. 1990); Gulf States Exploration

8    Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods.

9    Corp.), 896 F.2d 1384, 1388 (2d Cir. 1990).

10        The bankruptcy court believed that the Termination Premiums

11   were dischargeable pre-petition claims because of the broad

12   definition accorded the term “claim” in the bankruptcy context.

13   Specifically, the Bankruptcy Code defines “claim” as a “right to

14   payment, whether or not such right is reduced to judgment,

15   liquidated, unliquidated, fixed, contingent, matured, unmatured,

16   disputed, undisputed, legal, equitable, secured, or unsecured.”

17   11 U.S.C. § 101(5)(A).   “Congress unquestionably expected this

18   definition to have wide scope.”    United States v. LTV Corp. (In

19   re Chateaugay Corp.), 944 F.2d 997, 1003 (2d Cir. 1991).

20        At the same time, however, the definition’s reach is “not

21   infinite.”   LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53

22   F.3d 478, 497 (2d Cir. 1995).   Rather, “the existence of a valid

23   bankruptcy claim depends on (1) whether the claimant possessed a

24   right to payment, and (2) whether that right arose before the


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1    filing of the petition.”   Id. at 497; see also In re Duplan

2    Corp., 212 F.3d 144, 151 (2d Cir. 2000).   To make these

3    determinations, we look to the substantive non-bankruptcy law

4    that gives rise to the debtor’s obligation.   See Travelers Cas. &

5    Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450 (2007)

6    (noting that “creditors’ entitlements in bankruptcy arise in the

7    first instance from the underlying substantive law creating the

8    debtor’s obligation” (internal quotations omitted) (quoting

9    Raleigh v. Ill. Dept. of Revenue, 530 U.S. 15, 20 (2000))).

10        Here, the substantive, non-bankruptcy law giving rise to

11   Oneida’s obligation to pay a Termination Premium is the Special

12   Rule, which unambiguously states that where a pension plan is

13   terminated in connection with an employer’s bankruptcy

14   reorganization, the General Rule – which creates the PBGC’s right

15   to a Termination Premium – “shall not apply to such plan until

16   the date of the discharge or dismissal of [the employer].”     29

17   U.S.C. § 1306(a)(7)(B).    The obvious purpose of this rule is to

18   prevent employers from evading the Termination Premium while

19   seeking reorganization in bankruptcy.   Although in the context of

20   a private contract, this language might not control the question

21   of whether a “claim” existed, Congress may prescribe when a claim

22   will be legally effective for the purposes of the Bankruptcy

23   Code, at least where, as here, the non-bankruptcy statute

24   explicitly discusses how the obligation should be treated in


                                      -6-
1    bankruptcy.

2         This, then, is not a situation, as the bankruptcy court

3    erroneously thought, where an obligation has already been created

4    prior to bankruptcy but is subject to a contingency.   See In re

5    Oneida, 383 B.R. at 38-39.   Rather, an employer’s obligation to

6    pay a Termination Premium on a pension plan that is terminated

7    during the course of the bankruptcy does not even arise until the

8    bankruptcy itself is terminated.   No matter how broadly the term

9    “claim” is construed, it cannot extend to a right to payment that

10   does not yet exist under federal law.

11        If there is any ambiguity in the statutory language of the

12   Special Rule – and we perceive none – it is resolved in the

13   PBGC’s favor by the legislative history of the Deficit Reduction

14   Act and the Pension Protection Act.   The Termination Premiums

15   were established in response to mounting financial pressure on

16   the PBGC as a result of an increasing number of pension plan

17   terminations.   See H.R. Rep. 109-276, at 345-48 (2005).2

18   Congress recognized, however, that its Termination Premium

19   program could be jeopardized by employers seeking bankruptcy



          2
           The 109th Congress considered the Termination Premiums in
     two budget reconciliation bills, H.R. 4241, 109th Cong. (2005)
     and S. 1932, 109th Cong. (2005), and two pension reform bills,
     H.R. 2830 (Pension Protection Act of 2005), 109th Cong. (2005),
     (which was the predecessor to the bill passed in 2006), and S.
     1783 (Pension Security and Transparency Act), 109th Cong. (2005),
     (which was later reconciled with H.R. 2830 to include termination
     premiums).

                                     -7-
1    protection.   It thus created the Special Rule.   The House

2    Committee on Education and the Workforce stated:

3         [T]he Committee believes that a termination premium for

4         former plan sponsors who initiate and complete a

5         distress termination while in bankruptcy is

6         appropriate.   The bankruptcy courts should not be used

7         as a mechanism for eliminating the burden of an

8         underfunded pension plan; therefore, an additional

9         premium paid to the PBGC to recognize the agency’s

10        assumption of unfunded plan liabilities is reasonable.

11   H.R. Rep. No. 109-276, at 348.    Treating the Special Rule’s

12   Termination Premium as a pre-petition claim would therefore

13   directly thwart Congress’s aim in establishing the Special Rule.

14        For the foregoing reasons, the decision of the bankruptcy

15   court is hereby reversed and the case is remanded for further

16   proceedings consistent with this ruling.




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