John H. Rains IV, Searching for Fairness in all the Wrong Places: Valuing the Pension Benefit Guaranty Corporation’s Unsecured Claim in Bankruptcy

58 Fla. L. Rev. 1107 (2006) | | | |

INTRODUCTION :: Imagine waking up to this headline: “Major American Corporation Seeks Bankruptcy Protection.” Amid concern over lost jobs, reduced benefits for current employees, dramatic changes in stock prices, protracted litigation, enormous losses for creditors, and the displacement of current owners of the business, two nagging questions remain: First, what will happen to the retirees who depend on the corporation for pension benefits, and second, will current employees realize the retirement benefits promised to them? The answer to both questions is that the federal government guarantees these pension plans through the Pension Benefit Guaranty Corporation (PBGC), enabling both retired and current workers to receive at least some of the support that they expect. While those protected by the PBGC are guaranteed at least partial payment of their pensions, the PBGC is left with an inadequately funded pension plan and has to acquire assets to satisfy the guaranteed portion of the pensions for which it assumes responsibility. To remain solvent, the PBGC must either obtain funds from the bankrupt business or rely on a taxpayer-financed bailout of the plan. The former option is unlikely to completely cover the shortfall for an obvious reason-the insolvent company lacked the resources to meet its obligations under the plan, which partly drove the decision to seek bankruptcy protection. As for the latter source of funding, the Employee Retirement Income Security Act (ERISA) does not require Congress to bail out the PBGC. In short, current and future retirees could be left with only a hollow guarantee that their needs will be met.


While the PBGC is currently able to withstand the impact of some large plan terminations, the increasing frequency of distressed plan terminations threatens the overall solvency of the program. First, an increasing number of corporations are underfunding their pension plans. Second, as companies phase out or terminate traditional defined benefit pension plans and replace them with employee or employer funded 401(k) programs, the pool of companies paying premiums to the PBGC to insure their defined benefit plans decreases, affecting the overall fiscal viability of the PBGC.

Congress has not neglected the concerns of current and future retirees. While the future of Social Security has dominated the political landscape, lawmakers have also pursued strategies to secure the future solvency of the PBGC. These reforms, however, have neglected the PBGC’s position in bankruptcy. When a distressed pension plan is terminated in bankruptcy, the bankruptcy court is given latitude under the Bankruptcy Code to value the claim of the PBGC. Although the 109th Congress adopted sweeping changes to the Bankruptcy Code, there has been no legislative attempt to remedy this complex valuation problem.

Absent legislative direction, the federal courts have addressed these uncertainties under ERISA and the Bankruptcy Code. Bankruptcy courts have tremendous discretion to determine the allowed amount of creditors’ claims. These valuation decisions can have significant impact. Presently, the only circuit court decisions considering the valuation of PBGC claims in bankruptcy have adopted the “prudent investor” method. This method severely restricts the PBGC’s ability to cover the obligations of terminated plans. There is no consensus, however, throughout the federal judiciary as to the appropriate valuation method. In one published decision, a bankruptcy court applied the PBGC’s own valuation regulation, a different valuation method that may ultimately allow the PBGC to recover significantly more over the course of a debtor’s reorganization.

Despite this impending crisis, there has been little scholarly attention paid to the position of the PBGC in bankruptcy. This Note attempts to fill the void. Accordingly, this Note argues that Congress should legislatively adopt the valuation method promulgated by the PBGC in order to substantially increase the PBGC’s recovery when it proceeds with claims against corporations that terminate their pension plans in bankruptcy. The focus of this Note is on the valuation of the PBGC’s unsecured claim, but in order to provide a proper foundation for the comparison of the two competing valuation methods, it is necessary to examine the background against which the PBGC’s claim arises. To provide this context, Part II of this Note describes the relevant ERISA and Bankruptcy Code provisions, as well as the fragile state of the pension system in the United States. Part III details the competing methods presently employed by bankruptcy courts to value PBGC claims. Part IV assesses the strengths and weaknesses of these valuation methods. Part V analyzes recently enacted and proposed legislative reforms and illustrates the undesirability of addressing the problems identified by this Note through these initiatives. Additionally, Part V includes a proposal to amend the Bankruptcy Code to require bankruptcy courts to apply the PBGC’s valuation regulation to the PBGC’s general unsecured claims for pension liability. Legislative adoption of this valuation regulation comports with the objectives of the bankruptcy system and also strengthens the pension guaranty system.

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