In every insolvency or bankruptcy proceeding, there are winners and losers. Senior secured creditors are often paid in full while general unsecured creditors receive pennies on the dollar.
Typically, who gets paid and who doesn’t is governed strictly within the confines of the U.S. Bankruptcy Code and applicable law. However, the case of the Delphi salaried retirees demonstrates that politics may play a factor in tipping the scales of justice in one direction or the other.
Delphi and GM Bankruptcy Filings
Delphi Corp. or its predecessors operated as a subsidiary of General Motors (“GM”) for many years. In 1999, Delphi was ‘spun off’ from GM and began operating as an independent company. Numerous salaried and hourly employees who had worked decades for GM became Delphi employees. At the time, hourly workers’ unions secured an agreement that GM would provide a retirement benefit supplement (“top-ups”) for their members should their pension plans be frozen or terminated.
In October 2005, Delphi filed for Chapter 11 bankruptcy due to many factors, including significant retiree obligations and high labor costs. As a part of the insolvency process, the Pension Benefit Guaranty Corp. (“PBGC”) – the government-owned pension insurer – terminated Delphi pension plans. Delphi exited bankruptcy in 2009.
Meanwhile, GM was experiencing its own financial distress. The Bush Administration and Obama Administration provided financing and other relief to support GM. In June 2009, the Obama Administration provided $30 billion in financing to assist GM through a rapid, 40-day bankruptcy process.
GM could have discharged its “top-up” obligations for the hourly pension plans through its bankruptcy. However, GM, while supported by the U.S. treasury, agreed to honor the top-ups for hourly pension plans, but it chose not to restore lost pension benefits to Delphi salaried retirees. Accordingly, the PBGC proceeded to terminate the salaried pension.
20,000 Delphi salaried retirees – including 6,000 in Michigan –reportedly lost as much of 70% of their vested benefits in the salaried pension plan.
Delphi Salaried Retirees Sue and Lose
In 2009, a group of Delphi retirees, led by the Delphi Salaried Retirees Association, filed a lawsuit arguing that the PBGC arbitrarily terminated their pension plans in violation of their due process rights and under pressure from the Obama Administration’s auto task force and the U.S. Treasury Department. The group argued that their pension was 86% funded and vested at the time of termination.
In 2011, GM reportedly responded to a governmental audit and indicated it provided top-ups to the hourly pension, and not the salary pension, based upon its dependence to the United Auto Workers.
The Sixth Circuit Court of Appeals denied the relief requested by the salaried retirees. Thereafter, the retirees requested that the Supreme Court hear the case. Attorneys general from several states, led by Michigan Attorney General Dana Nessel, filed amicus briefs in support of the retirees’ requests. 16 Republicans and Democrats also supported the retirees’ efforts.
On January 18, 2022, the Supreme Court declined to hear the salaried retirees’ case, thereby effectively ending the 13-year legal battle. The salaried retirees’ last, remaining shot to restore their pension benefits depends on the passage of legislation by Congress.
About the author:
Jason W. Bank is the chair of the firm’s Bankruptcy and Restructuring Practice Group. He focuses his practice in the areas of commercial bankruptcy, out-of-court workouts, corporate restructuring and creditors’ rights. Jason has successfully guided numerous businesses through out-of-court restructurings and Chapter 11 reorganizations. He has negotiated resolutions of complex financial issues and debtor-creditor disputes and achieved consensual restructurings while avoiding bankruptcy or litigation.
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