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In re Fruehauf Trailer Corp.

April 12, 2006


Appeal from the United States District Court for the District of Delaware (D.C. Civil Action No. 99-cv-00115) District Judge: Honorable Joseph J. Farnan, Jr.

The opinion of the court was delivered by: Ambro, Circuit Judge


Argued January 9, 2006

Before: BARRY and AMBRO, Circuit Judges, and DEBEVOISE, District Judge*fn1


In this appeal we consider again the meaning and scope of the Bankruptcy Code's fraudulent transfer provisions in 11 U.S.C. § 548(a)(1). In particular, we review the District Court's determinations that: (1) a debtor's right to a surplus generated by a pension plan is a property interest; (2) an amendment to that pension plan that irrevocably decreases the surplus is a transfer of the property interest; and (3) the value surrendered and the value gained as a result of the transfer need not be precisely calculated in this instance in order to conclude that they are not reasonably equivalent. We also review the District Court's assignment of the burden of proof. For the reasons that follow, we affirm.

I. Facts and Procedural Background

A. Fruehauf's Financial Problems

Fruehauf Trailer Corporation ("Fruehauf" or the "Company"), a Delaware corporation, operated facilities throughout the United States that designed, manufactured, sold, distributed, and serviced truck trailers and related parts. Fruehauf expanded its business rapidly in the 1980s, leading to overextension of capital and related cash flow problems. By the early 1990s Fruehauf's long-term liabilities (such as employee health care and pensions) exceeded revenues, and by 1996 Fruehauf had a negative net worth of approximately $120 million. The Company sought to address this problem by reducing its work force to approximately 2,000 employees (about half of them union members), closing facilities, and selling assets. It also froze the calculation of retirement benefits for all employees at 1991 salary levels.

In the early 1990s the Fruehauf Board of Directors (the "Board") began exploring a possible sale of the Company, in whole or in part. In 1995 Fruehauf entered into contracts with several of its top executives that would pay them significant benefits if the Company or its assets were sold. These contracts sought to ensure that top executives would remain with the Company until the sale, as the benefits would not accrue to the beneficiaries unless they were still employed by Fruehauf at that time. In 1996, Fruehauf also instituted a Key Employee Retention Program ("KERP") under which it agreed to pay bonuses totaling $1.3 million to forty key employees if they agreed to remain until the sale or March 31, 1997, whichever came first.

B. The Emergency Board Meeting

Fruehauf continued to have financial difficulties, and on September 19, 1996, with the Company lacking sufficient cash to meet its payroll and other operating expenses, its Board held an emergency meeting. Although the parties dispute what was considered at this meeting, the District Court concluded that the Board and Fruehauf's outside counsel discussed three things. First, they considered the possibility of a Chapter 11 bankruptcy filing. Second, they discussed a modified retention plan that would distribute immediate cash payments to twelve of the KERP beneficiaries if they agreed to remain with the Company until at least March 1, 1997 (the "KERP modification"). Finally, they discussed an amendment (known as the "Third Amendment") to the Company's pension plan.*fn2

The Third Amendment was drafted by Fruehauf's outside counsel and reviewed by Geraldine Tigner (Fruehauf's Vice President of Human Resources) and Greg Fehr (a senior Fruehauf executive), both of whom were members of the Company's Pension Administration Committee. Limited to 400 Fruehauf employees (almost all of them managers or executives, and none union members or non-salaried workers), it provided two things. First, it lifted the 1991 benefit freeze for those employees who were vested in the pension plan and calculated benefits based on 1996 salaries (hereafter the "Pension Thaw Provision"). Second, it granted all covered employees a cash contribution to their pension account equal to 5% of annual salary plus 8% annual interest (hereafter the "Cash Benefit Provision") if they were employed by the Company or its successor on, or were laid off prior to, March 31, 1997. Because the Cash Benefit Provision was available to all employees covered by the Third Amendment, it included even those not vested in the pension plan. Notably, Tigner and Fehr, who were the only Fruehauf executives to review the Third Amendment and who were also beneficiaries of the KERP, stood to reap substantial benefits from its adoption. Fehr's pension benefits increased by 470%, while Tigner's benefits increased by 200%.*fn3 Fruehauf later calculated the cost of the Third Amendment as $2.4 million.

The source of funding for the Third Amendment was a surplus on the "union side" of Fruehauf's pension plan, i.e., the funds designated to pay benefits for union members exceeded the cost of those benefits. Those surplus funds would otherwise revert to the Company after benefits were paid.

With this backdrop, the Board approved the Third Amendment at the September 19, 1996 emergency meeting. It became effective on October 4, 1996.

C. Proceedings in the Bankruptcy Court

On October 7, 1996 Fruehauf filed for Chapter 11 bankruptcy protection in the District of Delaware. Fruehauf's debts and liabilities totaled over $12 billion at this time, and it was liquidated to satisfy its creditors. Several purchasers bought Fruehauf's assets in the United States and Europe. The most significant purchaser was Wabash National, L.P. ("Wabash"), which bought two manufacturing plants and 31 distribution centers in the United States for $55 million. Although the asset purchase agreement between Fruehauf and Wabash did not contain a commitment on Wabash's part to retain any of Fruehauf's employees after the sale, it did rehire approximately 475 unionized employees. Fruehauf's remaining assets were placed in a liquidation trust (known as the "End of the Road Trust"), and the pension plan was taken over by appellee Pension Transfer Corporation ("PTC"), a subsidiary of the Trust.

During the course of the bankruptcy case, Fruehauf sought and received the Bankruptcy Court's approval of payments to key employees who had participated in the KERP. It did not seek Bankruptcy Court approval of disbursements under the Third Amendment.

On January 20, 1998, Fruehauf (as debtor-in-possession) began an adversary proceeding in the Bankruptcy Court against the pension plan, alleging that payouts under the Third Amendment would result in a fraudulent transfer in violation of 11 U.S.C. § 548. The Bankruptcy Court granted Fruehauf's request for a preliminary injunction against the pension plan and enjoined the plan from distributing payments under the Third Amendment. On October 27, 1999 the Bankruptcy Court approved Fruehauf's amended reorganization plan and substituted PTC as the administrator of the pension plan. PTC thus replaced Fruehauf in the adversary action, which was transferred to the District Court.

D. Proceedings in the District Court

On April 3, 2001, the District Court granted PTC's motion to reclassify the pension plan as a nominal defendant and add the individual beneficiaries of the Third Amendment as defendants. On May 1, 2002, the Court certified a mandatory defendant class, pursuant to Federal Rule of Civil Procedure 23, consisting of all beneficiaries of the Third Amendment (the "Class Defendants"). The Court held a three-day bench trial in March 2004.

1. Testimony

At trial, PTC called three witnesses to testify: Chriss Street, an independent director of Fruehauf and trustee of the End of the Road Trust; Lawrence Wattenberg, the actuary for the Fruehauf pension plan; and Irving Becker, the head of the Compensation Advisory Services Group of the accounting firm KPMG, who ...

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