Section 1114 of the Bankruptcy Code, 11 U.S.C. §1114, requires an employer in Chapter 11 to continue to pay retiree health benefits, unless that payment obligation is modified by a court order or settlement agreement. The statute clearly states that after such an order or settlement, the retiree benefits “as modified shall continue to be paid” by the bankrupt debtor. Id. §1114(e)(1). Does that “shall continue to be paid” language allow for a settlement under which the employer would cease to pay retiree health benefits? Yes, according to a recent decision by the U.S. bankruptcy court for the Southern District of Ohio. See In re Murray Energy Holdings Co., Case No. 19-56886 (Bankr. S.D. Ohio May 13, 2020)
Murray Energy Holdings Co. and its affiliates paid retiree health benefits for about 2,200 retired coal miners and their spouses and dependents. After entering Chapter 11 bankruptcy, the company struck a deal with the official committee of retirees appointed in the case and with a United Mine Workers benefit plan. The agreement relieved the company of its retiree benefit obligations, by transferring those obligations to the plan. Because of the COVID-19 pandemic, the court held a virtual hearing to consider the settlement. It then issued a decision approving the deal.
Bankruptcy judge John Hoffman held that the settlement’s allowing Murray Energy to discontinue paying retiree benefits did not run afoul of the Section 1114 language providing that such benefits, as modified, “shall continue to be paid” by the debtor. He wrote that the Bankruptcy Code should not be interpreted in a “hyperliteral” way that is “contrary to common sense,” and that “if the authorized representative has consented to the debtor in possession’s paying nothing, then nothing is all [the statute] requires the debtor in possession to pay.” The judge noted that other courts have approved termination of retiree benefits by bankruptcy debtors. Moreover, he wrote, it “defies reason” to deny relief under Section 1114 merely because the plan, rather than the company, would bear the payment obligation.
The court also noted that the settlement facilitated a sale of the business to a buyer that had not agreed to accept Murray’s retiree benefit obligations. According to Judge Hoffman, the sale would save many jobs by avoiding a liquidation of the business.
Murray Energy illustrates how flexible and pragmatic bankruptcy courts can be in interpreting the Bankruptcy Code. Typically, courts declare themselves bound to apply unambiguous statutory language. Here, Section 1114’s “shall continue to be paid” language seems unambiguous, and the judge did not point to any ambiguity. Yet, the bankruptcy court believed that applying the statutory text as written would have produced a nonsensical and undesirable result. To avoid that, it stretched the language to fit the case, concluding that one can read the phrase “shall continue to be paid” by the debtor to mean not paid by the debtor.