Filing for a distress termination with the PBGC

[katieinny]

I've printed off the PBGC website material about distress terminations. The material includes a note that the contributing sponsor(s) are liable to the PBGC under ERISA section 4062(b) for the total amount of unfunded benefit liabilities under the plan. It was my understanding that if the company has a negative net worth, the sponsor would not be liable for the unfunded liability. Is that correct?

The employer will be demonstating that the distress termination is necessary because otherwise it would not be able to stay in business due to the financial strain caused by the DB plan. Any pointers anyone can offer would be appreciated.

[david rigby]

I doubt that "negative net worth" is an exemption to "liable". But, the result appears to mean zero dollars are available to go after.

However, there might be another direction, which the PBGC calls an "involuntary termination", not much different from a Distress Termination, except that the former is initiated by the PBGC. The plan sponsor's bankruptcy attorney should be talking to the PBGC; they have a legal staff kept busy by such events.

[MGB]

The PBGC will provide a notice of the amount they owe. Negative net worth is totally irrelevant. The only thing that will reduce the amount they owe is a formal filing of bankruptcy in court and then the PBGC becomes a creditor of the bankruptcy.

Through MANY, MANY techniques of accounting, companies can be in a negative net worth position and still be a viable ongoing entity and able to pay all their bills without going into bankruptcy.

[katieinny]

The material I've read says that "when it comes to a distress termination, the most critical decisions will be made not by the PBGC but by a bankruptcy court."

If the client is not in bankruptcy, who brings the matter before a bankruptcy court? The PBGC? The client will provide whatever information is needed to whoever needs it, but there's no mention in the PBGC distress termination forms about providing information to a bankruptcy court.

[MGB]

I don't see how the PBGC will accept a distress termination without it being in a bankruptcy court. I don't think they have the authority.

[katieinny]

Several sources (including the PBGC) indicate that an employer must meet one of 4 tests in order for the termination to qualify as a distress termination.

1) Liquidation (involves bankruptcy)

2) Reorganization (involves bankruptcy)

3) Business continuation (does not necessarily involve bankruptcy, but the employer is unable to pay debts when due and will be unable to stay in business)

4) Pension costs (does not necessarily involve bankruptcy, but the employer has to prove that the costs of providing pension coverage have become unreasonably burdensom due to the decline of its workforce)

So, I'm wondering if a bankruptcy court still gets involved if the employer is applying for a distress termination under numbers 3 and/or 4. Perhaps the client has to prove to a bankruptcy court rather than to the PBGC that it's financial distress is critical, even if it's not in bankruptcy?

[Guest MikeP]

The options that do not require bankruptcy court approval include:

1. A standard termination

2. Negotiated Distress Termination

Standard: Termination is required (1) to enable controlled group to pay debts when due and remain in business, or (2) to avoid unreasonably burdensome pension costs caused by declining workforce.

3. Involuntary termination

PBGC initiated termination if: (1) a funding payment has not been made, (2) the plan will be unable to pay benefits when due, (3) the possible long-run loss of the PBGC with respect to the plan may reasonable be expected to increase unreasonably if the plan is not terminated.

[david rigby]

MGB is correct. It might be technically possible but virtually inconceivable for a Distress Termination or an involuntary termination to occur without bankruptcy. This does not mean "liquidation in bankruptcy" but will almost certainly involve a formal declaration. Legal counsel is essential.

[Guest MikeP]

I agree that experienced legal counsel is required. However, a negotiated distress termination, while not favored by the PBGC, is not just a technical possibility.

[katieinny]

MikeP -- Am I understanding you correctly? You seem to be saying that a termination under numbers 3 or 4 (see above) do not qualify as reasons for a distress termination, but would qualify as reasons for a standard termination only. Yet the PBGC material lists all four tests under their distress termination criteria.

Based on what I'm hearing in this discussion, it seems that what the PBGC says and what it actually does are two different things, and bankruptcy is the key for a distress termination.

[Guest MikeP]

3 and 4 qualify as distress terminations, although they are not frequently used. Such termination can occur outside of bankruptcy.

[Guest jerry2575]

I have a client that I am currently investigating a PBGC distress termination for as well. From preliminary conversations with the PBGC, they would accept the distress termination if it could be demonstrated that the continuation of the business would be impossible if the company was forced to keep and maintain the plan. Bankrupcy proceedings were never mentioned.

The agent further stated that there would be a compromise settlement at the time the PBGC assumes the plan -- the PBGC would not collect 100% on the outstanding liability, but the plan sponsor would not get off scot-free either. There would be a negotiated payment plan for a certain number of years that the plan sponsor could live with.

Obviously, the PBGC will want to collect as much as possible without jeopardizing the viability of the company. That leads to my question -- has anyone every had a negotiated settlement with the PBGC, and what kind of terms were offered?

[david rigby]

No such experience, but seems reasonable to assume that PBGC negotiators will not be "easy".

[Guest MikeP]

The terms really depend on the facts and circumstances of the particular case. I am not aware of any general settlement guidelines. It would be interesting to see what came back if a FOIA request was made.

[katieinny]

Sorry, MikeP. What's an FOIA request?

[Guest MikeP]

"Freedom of Information Act" -- a law that requires agencies to provide information to the public upon request.

[katieinny]

Jerry2575 -- Did you file the Form 600 and then make your call to the PBGC, or did you call them for information first? I'm wondering how to begin the negotiation process.

[Guest MikeP]

Katieinney

If I can pipe in on your question...as you may have gathered from the prior posts, a distress outside of bankruptcy is not a routinely employed method of terminating a plan. Before approaching the PBGC, there are a number of strategic issues that need to be considered in light of the particular facts and circumstances of the company. I am reminded of that saying about the importance of "putting lipstick on pig" i.e., how you spin the problem to the PBGC, is just as important as what you actually say. You may want to consider employing experienced counsel to assist....

[Kirk Maldonado]

I agree with the prior comments that retaining counsel is important. The trick is finding one that is experienced with the special issues that arise in a distress termination, because that is a pretty limited group of people.

[katieinny]

Kirk, you are exactly right. We've checked with several pension attorneys and actuaries in our area, and NONE have any experience with a distress termination.

[mbozek]

You may need to consult a bankrupcty attorney who does workouts of distressed companies.

[Guest MikeP]

I generally am not in favor of using these boards as a means of advertising our practice. However, my partner, Gary Ford, and I are regularly practice in this area. Gary is a former general counsel of the PBGC. A description of our practice can be found at www.groom.com.

Mike Prame

[katieinny]

MikeP: Thanks for that information. I think we need to at least use someone in a consulting capacity while we do the leg work. Now if I can only get the boss to agree.....

[Guest MikeP]

I am not exactly sure what you mean by a "consulting capacity", but attorneys who regularly practice in this area should be able to give you a sense of whether the PBGC would consider your situation appropriate for a distress termination outside of bankrupcty...

[david rigby]

Somewhat surprising. I have worked with 3-4 attorneys I would recommend.

[Guest jerry2575]

Katieinny -- sorry for the delay, I've been out of town for a while.

In our situation, we were actually in a meeting with the PBGC and our client when the subject of distress termination came up. A PBGC representative actually suggested it off the cuff. Since then, we've had follow-up conversations with that representative, who gave us the information I relayed in my previous post.

I definitely agree with the other posters that finding counsel is important as you consider a distress termination. I expect that we will be going down that road ourselves pretty soon...