New York Bankruptcy Court Finds Survivor Benefit Payable to Retiree’s Widow Not a “Retiree Benefit” Under Section 1114

By Peter D. DeChiara

pdechiara@cwsny.com

Posted October 2017

Section 1114 of the Bankruptcy Code, 11 U.S.C. §1114, provides important protections in Chapter 11 cases for “retiree benefits.”  A bankrupt employer may not unilaterally stop paying “retiree benefits” unless it proves to the court, among other things, that doing so is necessary to its reorganization.  A critical question, then, is what types of benefits fall within Section 1114’s definition of “retiree benefits.”  The bankruptcy court for the Southern District of New York recently faced that question in In re Avaya, Inc., Case No. 17-10089 (Bankr. S.D.N.Y. September 18, 2017)

In Avaya, the debtors maintained a supplemental pension plan that had a provision for a survivor benefit, payable to a surviving spouse upon the retiree’s death.  After filing for bankruptcy, the debtors suspended payments under the supplemental payment plan, including survivor benefits.  In response, a retiree’s widow filed a motion in the bankruptcy court arguing that her survivor benefit was a “retiree benefit” under Section 1114 and thus not subject to termination, absent compliance with Section 1114’s requirements.

Section 1114 does not apply to pension benefits, but its definition of “retiree benefits” includes “benefits in the event of sickness, accident, disability, or death.”  11 U.S.C. §1114(a).  The widow argued that since her husband’s death triggered her survivor benefit, it constituted a “benefit in the event of … death.”  Bankruptcy judge Stuart Bernstein found her argument to be a reasonable interpretation of the statute’s language, but he nonetheless rejected it.

Examining the legislative history of Section 1114, the judge found that Congress sought to protect retiree’s health, life and disability benefits, not their pension benefits.  He reasoned that “a death benefit feature does not convert a pension payment into a ‘retiree benefit.’”  Judge Bernstein added that his conclusion “is bolstered by the principle of interpretation ‘that preferential treatment of a class of creditors is in order only when clearly authorized by Congress.’” (citation omitted).

Avaya demonstrates at least one court’s reluctance to read expansively Section 1114’s definition of “retiree benefits.”