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    Wisconsin Lawyer
    July 01, 2005

    Congressional Delegation Championed Employee Benefit Protections in Bankruptcy Law

    Wisconsin's congressional delegation worked together to write provisions protecting employee benefit plans that are part of the Bankruptcy Abuse and Consumer Protection Act of 2005.

    Wisconsin Lawyer
    Vol. 78, No. 7, July 2005

    Congressional Delegation Championed Employee Benefit Protections in Bankruptcy Law

    Wisconsin's congressional delegation worked together to write provisions protecting employee benefit plans that are part of the Bankruptcy Abuse and Consumer Protection Act of 2005 (BACPA).

    by Kevin M. Maroney

    The need to reform the Bankruptcy Code's treatment of employee benefit plans was brought to light by two situations that arose in Wisconsin in the late 1980s: the Louis Allis Corp. bankruptcy and the Pabst Brewing Co.'s termination of its retiree health program. These incidents showed the extent to which workers' benefits are vulnerable when an employer becomes insolvent, and they motivated our state's congressional delegation to create better protections for our system of employee benefits.

    Rep. F. James Sensenbrenner Rep. Tammy Baldwin Sen. Herb Kohl


    Baldwin Kohl

    The Louis Allis situation. The Louis Allis Corp. began manufacturing large electric motors at its plant on E. Stewart Street in Milwaukee in 1906. Louis Allis closed its doors almost a century later on Oct. 20, 1998, and filed for bankruptcy under Chapter 7 of the Bankruptcy Code. At the time of the filing, Louis Allis had issued payroll checks to its employees that were not honored by the bank. In addition, funds that Louis Allis had deducted from workers' paychecks for contribution to a 401(k) plan and a group health plan were never deposited in the appropriate accounts. A Milwaukee lender held a security interest in all Louis Allis assets and sought relief from the Bankruptcy Code's automatic stay provisions to obtain the debtor's assets, which included employee benefit plan assets. The U.S. Department of Labor estimated that about $176,000 in employee contributions and about $30,000 in employer contributions were missing from the 401(k) plan. The extent of the lost health plan contributions was unknown. The Solicitor of Labor brought an action that restored a portion of these assets by offsetting the 401(k) benefits of the company's president.

    The Pabst Brewing situation. Beginning in 1882, workers at the Pabst Brewing Co. brewed "Blue Ribbon" beer and tied silk ribbons to the bottles. When Pabst's fortunes waned, the brewery, in an effort to reduce costs, announced on Sept. 1, 1996, that it was cutting off retiree health benefits for about 800 individuals because it could no longer afford to pay the benefits. The majority of these retirees had been covered under collective bargaining agreements. The retirees and their union leaders believed that Pabst had made a promise of lifetime retiree health benefits as part of their labor contract negotiations. The case was widely covered in the local media. A temporary restraining order issued by Judge Myron Gordon prevented Pabst from immediately terminating the retirees' health benefits. Two members of Wisconsin's congressional delegation - former Reps. Gerald Kleczka and Thomas Barrett - were present in the courtroom when Judge Gordon issued the order. Ultimately, that order did not stand, and the U.S. Court of Appeals for the Seventh Circuit ruled that the language in the collective bargaining agreement allowed Pabst to terminate the retirees' health insurance.

    Both Louis Allis and Pabst were venerable Milwaukee institutions, and their workers, retirees, and workers' families were deeply affected by the loss of employee benefits in these cases. Wisconsin's congressional delegation reacted to these cases and eventually succeeded in obtaining bipartisan support for provisions intended to better protect workers' benefits in bankruptcy. Remedial provisions were enacted as part of the BACPA, in no small part because Wisconsin was well represented on the House and Senate Judiciary Committees in the eight years leading up to the BACPA's enactment. Rep. F. James Sensenbrenner (current chair of the House Judiciary Committee) chaired a House Judiciary Subcommittee and worked closely with Rep. Tammy Baldwin when key amendments were offered during the ongoing committee consideration of the measure. Sen. Herb Kohl made certain that corresponding provisions were included as part of the Senate version of the measure. This sidebar summarizes the employee benefits provisions that Wisconsin legislators advanced as part of the BACPA, as well as related provisions.

    Protection of Employee Contributions to Employee Benefit Plans (Sec. 323). In response to the Louis Allis case, the BACPA amended the Bankruptcy Code's definition of "property of the estate" to specifically exclude amounts an employer withholds from wages for contribution to an employee benefit plan. The definition of an employee benefit plan includes plans covered under the Employee Retirement Income Security Act (ERISA), governmental plans, and contributions to state health insurance plans. Under this provision, any amount withheld from wages is protected as long as the withholding was intended for contribution to an employee benefit plan. The provision protects contributions to health plans, flexible spending accounts, 401(k) plans, profit sharing plans, and disability plans. It appears that these new protections will apply to health savings accounts only if the individual accounts were part of an ERISA-covered plan.

    Employer Contributions to Employee Benefit Plans are Given Priority (Sec. 1401). The Louis Allis case also involved the employer's failure to deposit required employer contributions to its 401(k) plan. In such situations, the employee benefit plan generally becomes an unsecured creditor of the estate. Under prior law, only $4,000 per employee (less wages and other benefit payments) was afforded preferential treatment under the Bankruptcy Code's system of priorities. The BACPA expanded the amount of benefits receiving this favorable treatment to $10,000 per employee (less wages and other benefit payments.) To be eligible for preferential treatment, the claim must be for services rendered in the 180 days before the bankruptcy filing, or the date the employer ceased doing business.

    Retiree Health Care (Sec. 1403). While Congress has made numerous attempts to protect retiree health benefits, the BACPA advances this effort by making it more difficult for retiree health benefits to be reduced or eliminated in a bankruptcy proceeding. The BACPA improves current law by allowing the court to reinstate retiree health care benefits if the benefits were reduced or eliminated within 180 days of the filing and the employer was insolvent at the time. A bankruptcy court may restore retiree health benefits under these circumstances, unless the balance of the equities in the case favor modifying the benefits.

    Obligation to Administer the Employee Benefit Plan (Sec. 446). Prior to the BACPA, it was not uncommon for a debtor-employer to abandon its employee benefit plan when filing for bankruptcy, thereby exposing 401(k) participants to a risk of loss and causing health plan participants to lose coverage. The BACPA amends a debtor's duties to require that it continue to administer an employee benefit plan if at the time of the filing the debtor was a plan administrator. The plan administrator must administer the plan unless a bankruptcy trustee has been appointed in the proceeding, in which case the trustee must administer the plan.

    Protection of Retirement Savings in Bankruptcy (Sec. 224). In bankruptcy proceedings, retirement savings in ERISA-qualified pension plans have long enjoyed protection from creditors.1 Prior to the BACPA, however, there was no uniform federal protection for retirement savings in individual retirement accounts (IRAs), Roth IRAs, and other non-ERISA retirement plans, including governmental pension plans. State law protections for these assets varied from state to state, with many exemptions being contingent on a showing of actual need for the income. The BACPA creates uniform federal protection of up to $1 million (indexed to the Consumer Price Index) for retirement savings in these types of plans. The bill also makes technical changes to the bankruptcy law to allow repayment of participant loans from 401(k) plans and to protect those loans from discharge.

    Post-petition Wages and Benefits. Wages owed to workers for post-petition services receive first priority treatment as administrative expenses under the Bankruptcy Code. However, prior to the BACPA, judicial awards of back wages to address violations of labor laws were treated as unsecured claims, which provided little assurance that workers would receive their back pay. This disparate treatment created an incentive for employers in financial difficulty to avoid settling discrimination cases with the National Labor Relations Board, since it was likely that the back pay award could be discharged in bankruptcy. The BACPA amended the Bankruptcy Code to include judicial awards of wages as administrative expenses, greatly increasing the likelihood that workers in these situations would be paid.

    Kevin M. Maroney, U.W. 1988, worked in the Congressional Affairs Office at the U.S. Department of Labor from 1993 through 2000. He is now the associate general counsel for Wausau Benefits in Wausau.


    1See Patterson v. Schumate, 504 U.S. 753 (1992).

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