In calculating the claim of the Pension Benefit Guaranty Corp., or PGBC, Bankruptcy Judge John S. Dalis of Brunswick, Ga., disagreed with the methodology used by several circuit courts in opinions decided before the Supreme Court’s 2000 decision in Raleigh v. Illinois Dept. of Revenue.
Judge Dalis was asked to decide the amount of a PBGC claim for unfunded liabilities arising from termination of a pension plan 16 months after the debtor’s chapter 11 filing. Everyone conceded that the PBGC had a valid claim and that it was a non-priority, general unsecured claim, although the liquidating trustee and the PBGC disagreed about the amount.
The PBGC contended that the amount of the claim should be calculated under the Employee Retirement Security Act of 1974 and the assumptions contained in implementing regulations. The trustee argued that the Bankruptcy Code controlled, requiring the court to quantify the claim at present value as of the filing date based on discount rate assumptions used in bankruptcy cases.
In his Jan. 18 decision, Judge Dalis concluded that the PBGC regulations determine the amount of the claim, not methods used under the Bankruptcy Code for fixing the present value of a claim.
In Raleigh, the Supreme Court stated the governing principle as, “Creditors’ entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligations, subject to any qualifying or contrary provisions of the Bankruptcy Code.”
In substance, Judge Dalis said that the PBGC’s claim had already been reduced to present value, thus giving no occasion for reducing the claim to present value under Section 502(g) of the Bankruptcy Code, because the PBGC claim “is not a stream of future payments.”
There are two lines of cases, Judge Dalis said. The Second, Tenth and Sixth Circuits said that a PBGC claim must be reduced to present value using the “prudent investor” standard because PBGC regulations overstate the claim. With one exception, those cases were decided before Raleigh. The one later case, the judge said, misread Raleigh as addressing only the validity of the claim, not also the amount.
The other line of cases, Judge Dalis said, came later from lower courts and are “better reasoned.” Those cases conclude that the PBGC regulations have already reduced the claim to present value. He said that the PBGC’s “claim for unfunded benefit liabilities [is] not a stream of future payments [but] the PBGC’s present right, granted by statute, to recover an amount determined by the same statute.”
Citing a Georgia bankruptcy court decision that takes Section 502(g) out of the picture, he said that the debtor has no liability for future payments because the liability belonged to the PBGC when the pension plan was terminated.
Judge Dalis also rejected the trustee’s contention that fixing the claim as of the date of termination, 16 months after the chapter 11 filing, conflicts with the Bankruptcy Code’s mandate that a claim is determined as of the date of the petition under Section 502(b). He said that the PBGC’s claim was contingent and unliquidated on the filing date, but became “fixed as to liability and amount” when the pension plan was terminated. Thus, he said, there is no conflict between PBGC regulations and Section 502(g).
The judge also found no violation of Section 1123(a)(4), which requires the “same treatment” of claims in a class. The trustee argued that the present value assumptions in the regulations would give the PBGC better treatment than other creditors with claims reduced to present value under Bankruptcy Code methodology.
Judge Dalis said that Section 1123(a)(4) has “nothing to do with” the computation of claims. Rather, he said, it ensures that creditors in a class enjoy “equality of distribution” once their claims are determined.