The U.S. Court of Appeals for the Third Circuit has ruled in Visteon that retiree medical benefits cannot be terminated by a debtor during the pendency of a Chapter 11 case – even if the benefit plan reserved the debtor’s right to terminate such benefits at any time — unless the debtor complies with the requirements of Section 1114 of the Bankruptcy Code. In so determining, the Third Circuit, as it did in the recent Philadelphia Newspapers case, has utilized the so-called “plain meaning” mode of statutory interpretation to reach a result that runs contrary to long standing commercial practice and expectations. The Third Circuit’s obtuse devotion to the “plain meaning” rule is particularly ill-suited to the Bankruptcy Code, a comprehensive statutory scheme deeply rooted in centuries of commercial law.
Visteon sought, and obtained, approval to terminate its obligations to pay retiree benefits in its Chapter 11 case from the U.S. Bankruptcy Court for the District of Delaware. Section 1114 limits a debtor’s ability to modify or terminate such benefits, which are defined under Section 1114 of the Bankruptcy Code as payments for medical or related benefits “under any plan, fund or program . . . maintained . . . by the debtor.” The retirement plans specifically provided Visteon with the right to modify or terminate the plans at any time. Visteon accordingly argued that it did not need to comply with the procedural steps mandated under Section 1114 which, among other things, require a debtor, before seeking court approval to terminate benefits, to make a modification proposal to “the authorized representative of the retirees”, and “to confer in good faith” with the representative in order to try and reach a settlement. Visteon asserted that Section 1114 could not provide the retirees with greater substantive rights in the Chapter 11 case than they would have had outside of bankruptcy, a position supported by most courts that have considered the issue. After the decision was affirmed by the District Court, the retirees’ union appealed to the Third Circuit, which reversed.
In the Third Circuit’s view, “Section 1114 could hardly be clearer. It restricts a debtor’s ability to modify any payments to any entity or person under any plan, fund, or program in existence when the debtor files for Chapter 11 . . . .” (emphasis in original). Congress, it stated, “did not limit § 1114’s otherwise broad scope based on whether or not the debtor reserved a right to terminate in its plan.”
The problem with the Third Circuit’s approach is that the meaning of Section 1114, as with numerous other provisions of the Bankruptcy Code, is “plain” only if one chooses to read the words in a particular fashion. An equally natural reading (and thus “plain meaning”) of the statute is to read the words “any payment” as modified by the words “under any plan, fund or program”, thus suggesting that the right to receive such payments is limited by and subject to the express language of such plan, fund or program.
Logic would suggest that when more than one natural reading of statutory words is evident, a court should look to underlying statutory principles and long standing practice in order to best understand legislative intent. Indeed, the Supreme Court has long held that contractual and property rights in bankruptcy are defined by reference to applicable state or other non-bankruptcy law. However, as it did in Philadelphia Newspapers, the Third Circuit refused to recognize any ambiguity whatsoever, notwithstanding the contrary conclusions reached by other courts. (“[T]he reasoning in In re Delphi Corp. is unpersuasive because the court’s analysis is not faithful to the plain language rule that it purports to, and must, apply.”)
Going forward, in cases in Delaware and other Third Circuit districts, any plausible interpretation of a section of the Bankruptcy Code, regardless of how divorced from established practice and precedent such interpretation may be, can and will be claimed to be “unambiguous”. The parties asserting such positions will have every incentive not to settle until taking their arguments up on appeal and seeing if they can get a majority of a Third Circuit panel to agree. Ironically, by furthering the notion that there exists only one true interpretation of broad statutory language, the Third Circuit is achieving precisely the opposite of what it is purporting to do – it is creating uncertainty in the law where none should exist.