Cases & Deals

Kaiser Aluminum obtains landmark decision in 3rd Circuit appeal regarding distress termination of pension plans

Clients Kaiser Aluminum Corporation

Jones Day obtained a unanimous decision from the United States Court of Appeals for the Third Circuit in In re Kaiser Aluminum Corp. in which the Third Circuit held that, where a company in bankruptcy seeks a distress termination of multiple pension plans under the reorganization test set forth in the Employee Retirement Income Security Act ("ERISA"), bankruptcy courts should apply the test to all plans in the aggregate.

During its chapter 11 cases, Kaiser requested that the United States Bankruptcy Court for the District of Delaware approve the distress termination of six of Kaiser's defined-benefit pension plans and argued that the Bankruptcy Court should analyze whether Kaiser met the distress-termination standards for all six plans on an aggregated basis. In opposing Kaiser's request, the Pension Benefit Guaranty Corporation (the "PBGC") argued that Kaiser could afford to retain the four smallest pension plans and because the text of the applicable ERISA provision uses the term "plan" in the singular, the Bankruptcy Court should evaluate each plan individually, without regard to the other pension plans that Kaiser sought to terminate. The Bankruptcy Court overruled the PBGC's objection and approved the termination of Kaiser's pension plans after determining that Kaiser met the distress-termination standards for all six plans in the aggregate. The United States District Court for the District of Delaware upheld the Bankruptcy Court's order, and the PBGC appealed to the Third Circuit.

The Third Circuit affirmed the decisions of the District Court and the Bankruptcy Court. In an opinion written by Circuit Judge Marjorie O. Rendell, the court concluded that, in the absence of Congressional instruction on the matter, an aggregated analysis provides a straightforward, workable approach to evaluating a debtor's proposed distress termination of multiple pension plans under ERISA. The Third Circuit determined that the plan-by-plan approach advocated by the PBGC, on the other hand, was unworkable and "would require bankruptcy courts to grant preference to some similarly situated constituents over others," which "would conflict with the bankruptcy courts' tradition of preventing unfairness in bankruptcy proceedings."

As the first circuit-level decision on the issue, the Third Circuit's ruling in Kaiser Aluminum sets a significant precedent for distressed companies with multiple pension plans.