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In re Kaiser Aluminum Corp.

July 26, 2006


Appeal from the United States District Court for the District of Delaware (D.C. Civil No. 04-cv-00145) District Judge: Honorable Joseph J. Farnan, Jr.

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


Argued April 3, 2006

Before: RENDELL, SMITH and ALDISERT, Circuit Judges.


The Employee Retiremen t Income Security Act of 1974 ("ERISA") permits an employer seeking reorganization in Chapter 11 bankruptcy to terminate a pension plan if the employer satisfies certain notice requirements and demonstrates to a bankruptcy court that it will be unable to pay its debts and continue in business outside of Chapter 11 unless the pension plan is terminated. ERISA § 4041(c)(2)(B)(ii)(IV), 29 U.S.C. § 1341(c)(2)(B)(ii)(IV) (2000). Courts typically refer to this requirement for a plan termination as the "reorganization test." The instant case raises a question of first impression among the courts of appeals: when a Chapter 11 debtor seeks to terminate multiple pension plans simultaneously under the reorganization test, should a court apply the test to each plan independently, or to all of the plans in the aggregate?

Kaiser Aluminum Corporation and twenty-five of its affiliates ("Kaiser") are debtors in a Chapter 11 bankruptcy. As part of their reorganization, they requested that the Bankruptcy Court approve the termination of six pension plans under the reorganization test. The Bankruptcy Court applied the test to all six plans in the aggregate and concluded that their termination was required for Kaiser to emerge from Chapter 11. The Pension Benefit Guaranty Corporation ("PBGC"), which is responsible under ERISA to provide benefits to participants in terminated plans, appealed the Bankruptcy Court's decision, arguing that it should have applied the reorganization test on a plan-by-plan basis to each of Kaiser's pension plans. Under this approach, the PBGC contends that some of Kaiser's plans would not fulfill the reorganization test, and therefore could not be terminated. The District Court upheld the Bankruptcy Court's decision and the PBGC appealed to our Court.

We conclude that the Bankruptcy Court correctly applied the reorganization test in the aggregate to all of the plans Kaiser sought to terminate. Congress has not provided any guidance as to how to apply the reorganization test given the fact pattern before us, and the plan-by-plan approach appears unworkable.

By contrast, applying the reorganization test to multiple plans in the aggregate is straightforward. A basic principle of statutory construction is that we should avoid a statutory interpretation that leads to absurd results. See Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575 (1982). Because it would be anomalous for Congress to mandate an unworkable approach to the reorganization test, we read ERISA as requiring an aggregated analysis.

We are also persuaded that applying the reorganization test on a plan-by-plan basis would result in unfair and inequitable consequences in that it would require bankruptcy courts to give preference to some similarly situated constituents over others. The bankruptcy courts are courts of equity that are guided by equitable principles. Absent a clear congressional mandate to the contrary, we will not impose upon them an approach to the reorganization test that would conflict with their tradition of preventing unfairness in bankruptcy proceedings. Congress must speak more clearly than it has in ERISA if it wishes the bankruptcy courts to take a plan-by-plan approach to the reorganization test.

Finally, we consider, and reject, the PBGC's arguments based on legislative history, deference to its administrative interpretation, and public policy. We will therefore affirm the decision of the District Court upholding the Bankruptcy Court.



Kaiser is involved in all aspects of the aluminum industry, including mining raw materials, refining them, and manufacturing aluminum products. As of January 1, 2003, Kaiser employed approximately 3,000 workers domestically. In addition, it was responsible for the retiree benefits (primarily medical) of more than 15,300 retirees and dependent spouses and the pension benefits of over 11,000 retirees and beneficiaries. In late 2001 and early 2002, weak industry conditions, imminent debt maturities, burdensome asbestos litigation, and growing legacy obligations for future retiree medical and pension costs took its toll on Kaiser. Unable to restructure their obligations outside of bankruptcy, Kaiser and its related corporate entities filed for relief under Chapter 11 of the Bankruptcy Code between February 2002 and January 2003.

Congress established the PBGC in 1974 as part of ERISA. Its purpose is to encourage the continuation and maintenance of private-sector defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. 29 U.S.C. § 1302(a). To this end, the PBGC provides a minimum level of pension benefits to participants in qualified pension plans in the event that the plans cannot pay benefits. As of September 30, 2005, the PBGC insured 44.1 million American workers participating in 30,330 private-sector defined benefit pension plans. PBGC, PBGC Performance and Accountability Report for Fiscal Year 2005 1 (2005), available at ("PBGC Performance Report").

The PBGC is not funded by general tax revenues. Rather, it collects insurance premiums from employers that sponsor insured pension plans, earns money from investments, and receives funds from pension plans it takes over. Id. at 1. The PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 683,000 retirees in 3,595 pension plans that have terminated.*fn1 Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, the PBGC is directly responsible for the current and future benefits of 1.3 million active and retired workers whose plans have failed. Id. at 2. The benefits guaranteed by the PBGC are often substantially lower than the fully vested pensions due to plan participants. See Mertens v. Hewitt Assocs., 508 U.S. 248, 250 (1993). Since 1987, a plan's sponsor is liable to the PBGC for the total amount of unfunded benefit liabilities to all participants and beneficiaries under the plan. 29 U.S.C. § 1362(b).


As part of its reorganization, Kaiser originally sought to replace seven pension plans that had been established in connection with collective bargaining agreements ("CBAs") then in effect with various unions.*fn2 The plans and associated CBAs are listed in the table below:

PENSION PLANUNION(S) COVERED Kaiser Aluminum Pension Plan ("KAP Plan")United Steelworkers of America ("USWA") Kaiser Aluminum Tulsa Pension Plan ("Tulsa Plan")USWA Kaiser Aluminum Bellwood Pension Plan ("Bellwood Plan")USWA; International Association of Machinists & Aerospace Workers ("IAM") Kaiser Aluminum Sherman Pension Plan ("Sherman Plan")IAM Kaiser Aluminum Inactive Pension Plan ("Inactive Plan")*fn3USWA; IAM; United Automobile, Aerospace, and Agricultural Implement Workers of America ("UAW") Kaiser Aluminum Los Angeles Extrusion Pension Plan ("LA Extrusion Plan")International Brotherhood of Teamsters ("Teamsters") Kaiser Center Garage Pension Plan ("Garage Plan")Teamsters Automotive Employees, Local 78

These plans covered nearly 13,500 active hourly workers, participants on leave or layoff, individuals who were terminated from employment, retirees, and beneficiaries. On January 11, 2004, Kaiser filed a motion seeking the Bankruptcy Court's approval to terminate all seven plans in a voluntary "distress termination" under Title IV of ERISA, 29 U.S.C. § 1341(c)(2)(B)(ii). Kaiser asserted in its motion that it owed nearly $48 million in unfunded minimum contributions for the 2003 plan year and would be required to make $230 million in minimum contributions to the plans between 2004 and 2009. In separate motions, Kaiser also requested that the Bankruptcy Court (1) use its authority under 11 U.S.C. § 1113 to reject its CBAs with USWA and IAM, under which several of the pension plans had been established, and (2) authorize the modification of retiree benefits pursuant to 11 U.S.C. § 1114.

Prior to the February 2, 2004 hearing at which the Bankruptcy Court was to consider these motions, Kaiser reached agreements with USWA, IAM, and the official committee of salaried retirees ("1114 Committee") providing for consensual termination of the KAP Plan, Tulsa Plan, Bellwood Plan, Sherman Plan, and Inactive Plan, and for the institution of replacements for these plans. At the hearing, Kaiser asked the Bankruptcy Court to approve these agreements. The company had not yet reached agreements with UAW or the Teamsters to terminate the Inactive Plan and the LA Extrusion Plan, respectively.

At the hearing, Kaiser also withdrew its motion for approval to terminate the Garage Plan on the grounds that it was not underfunded. Thus, the Bankruptcy Court actually considered only whether to terminate six of Kaiser's seven active plans.

The PBGC opposed Kaiser's motion to terminate the six pension plans. In its briefs and at the February 2, 2004 hearing, the PBGC argued that the Bankruptcy Court should make separate determinations of whether each pension plan that Kaiser sought to terminate satisfied the reorganization test. Thus, rather than considering whether Kaiser could afford to fund all six plans in the aggregate, the PBGC urged the Bankruptcy Court to determine whether the contributions required for each individual plan, considered independently and without regard to the obligations under the other plans, jeopardized Kaiser's ability to reorganize successfully. The PBGC contended that the text and legislative history of ERISA required such a "plan-by-plan" approach.

The PBGC acknowledged at the hearing that two plans -- the KAP Plan and the Inactive Plan -- satisfied the reorganization test for distress termination even if considered under a plan-by-plan analysis. These plans were much larger than the others and would clearly impose an unsustainable burden on Kaiser. The PBGC contested only Kaiser's request to terminate the Tulsa Plan, Bellwood Plan, Sherman Plan, and LA Extrusion Plan. The combined minimum funding contributions for these four plans were projected to be roughly $12.8 million between 2004 and 2009, less than six percent of the estimated $230 million required to fund all of Kaiser's pension plans during that time frame. When these smaller plans were considered on a plan-by-plan basis, rather than in the aggregate with the KAP and Inactive Plans, the PBGC argued that Kaiser could continue funding some or all of them and still emerge successfully from Chapter 11 reorganization.

The Bankruptcy Court concluded that the PBGC's plan-by-plan approach would violate the Bankruptcy Code's requirement that debtors bargain fairly and equitably with unions. See 11 U.S.C. § 1113(b). The Bankruptcy Court believed that considering the plans piecemeal would give creditors "the kind of leverage that would force the debtor to [initiate] bargaining . . . with one union and not with another." (Hr'g Tr., Feb. 2, 2004, at App. 445.) Likewise, debtors could use a plan-by-plan approach to gain leverage against creditors that Congress did not intend. The Court acknowledged that Kaiser could maintain up to three of its smaller plans under the PBGC's plan-by-plan approach, but held that, in order to be fair to all employees covered under the pensions, it would apply the reorganization test by considering the company's pension plans in the aggregate.

Under this standard, the Bankruptcy Court found that the reorganization test was satisfied with respect to all six plans that Kaiser sought to terminate. In a February 5, 2004 order, the Bankruptcy Court approved termination of the KAP Plan, the Sherman Plan, the Tulsa Plan, and the Bellwood Plan, effective upon the Court's filing of a contemporaneous order approving Kaiser's agreements with USWA, IAM, and the 1114 Committee for consensual termination of these plans. Though the Inactive Plan and the LA Extrusion Plan also satisfied the reorganization test, the Bankruptcy Court refused to approve their termination at that time because the CBAs that Kaiser had with UAW and the Teamsters presented a contractual bar to their termination. Kaiser has since reached agreements ...

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