Opinion
No. 77-930
September 28, 1978
Rejection of Executory Contracts — Employ Pension Plans — Effect Of Rejection
The executory portion of an employee pension plan could be rejected by a debtor steel company but only after discontinuance of its steel producing activities, since it is under these circumstances that the obligation becomes onerous, burdensome and an impediment to a successful arrangement. However, obligations that had vested were not executory and could not be rejected.
The debtor was engaged in the manufacture of steel products and related activities. It had filed for an arrangement under Chapter XI of the Bankruptcy Act. Previously, the court had approved the receivers' motion to reject the debtor's executory collective bargaining agreement, see In re Alan Wood Steel Co., BANKRUPTCY L. REP. ¶ 66,625. The issue presented to the court was whether the continuation of the pension plans, now that the debtor's steelmaking operations had been terminated, were onerous and burdensome to the debtor. The court concluded that they were and authorized the receivers to reject and terminate them. Another issue facing the court was the effect of such rejection as it related to the vested pension rights of the debtor's employees.
Prior to the filing of the Chapter XI case, the debtor had established two pension plans for its employees. The "hourly plan" covered all employees who were members of the bargaining units, as well as salaried, non-exempt, non-bargaining unit employees. The "hourly plan" was established pursuant to the collective bargaining agreements between the debtor and the union and was part of those agreements. A second plan, the "salaried plan" was unilaterally established by the debtor for its exempt employees.
To a reorganized debtor continuing in the basic steel industry, noted the court, there does not seem to be anything onerous or burdensome about meeting the minimum annual funding obligations imposed by law for a pension plan which is the equivalent of the one provided by the major steel producers. However, to a debtor who is no longer an employer in the steel industry this was an onerous and burdensome obligation.
There is an important distinction between rejection of the pension plans and the elimination of the debtor's liability for payments in excess of those already made. Elimination of further liability does not automatically follow from rejection. If the equities permit, the bankruptcy court has the jurisdiction under Section 313(1) of the Bankruptcy Act to reject only executory contracts. To the extent that a contract is not executory, the court has no power to authorize the elimination of liabilities arising under it. Here, noted the court neither of the pension plans was wholly executory. By completion of the plan participants' age and service requirements for vesting under the plans, the debtor had received all of the consideration for which it bargained with its employees. The contracts between them were executed except for the debtor's obligation to pay the specified benefits in the case of the "hourly plan", and make certain accrued periodic contributions under the "salaried plan". By a rejection the debtor would be relinquishing no benefits, it would merely be repudiating its obligations.
Under the terms of the hourly plan agreement, the debtor had obligated itself to continue the payment of vested benefits in the event of plan termination. Once benefits have become vested under the hourly plan, the debtor can obtain no future benefit from the performance of the plan participants. Thus, the obligation to continue the payments is not executory and may not be rejected. The remaining portion of the contract, involving future service accruals or past service accruals which have not vested, was executory. Thus, rejection of such portion of the contract was within the bankruptcy court's power to reject. However, rejection of the executory portion of the "hourly plan" could come only after the discontinuance of its steel producing activities. It is under these circumstances that the obligation becomes onerous, burdensome and an impediment to a successful arrangement.
Regarding the "salaried plan", the court found that it was not wholly executory. Once a periodic payment for funding becomes due under the plan, such payment is for past services of the plan participants. Since the debtor can obtain no future benefit from the past performance, an obligation to pay is no longer executory once it becomes due, but is merely an ordinary debt. Periodic contributions have become due for plan years 1975 and 1976. To the extent that periodic contributions have not been made for these years, the salaried plan is not executory and may not be rejected. The remainder of the "salaried plan" is executory and may be rejected by the debtor, but only after discontinuance of its steel producting activities. Thus, the court concluded that the debtor's liability for pensions under the salaried plan was liimted to the periodic contributions due for 1975 and 1976 and to those assets already paid to a trustee or insurance company, except to the extent expressly provided by ERISA. In the case of the hourly plan, those employees with vested pension rights as of the date of plan termination will have the rights of unsecured creditors in the debtor's estate, see Bankruptcy Act Section 353. The amount of each individual's claim will be determined pursuant to Section 57d.
See Secs. 57d at 5512 and 353 at ¶ 9117