In re Alpha Natural Res., Inc.

• Decision Date: 05 August 2016
• Docket Number: Case No. 15–33896–KRH Jointly Administered
• Citation: 554 B.R. 787
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: Alpha Natural Resources, Inc., et al., Debtors.

554 B.R. 787

In re: Alpha Natural Resources, Inc., et al., Debtors.

Case No. 15–33896–KRH Jointly Administered

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

Signed August 5, 2016

Carl E. Black, Jones Day, Cleveland, OH, David G. Heiman, Thomas A. Wilson, Jones Day, Cleveland, OH, Henry Pollard Long, III, Tyler P. Brown, Shannon Eileen Daily, Hunton & Williams LLP, Richmond, VA, Jeffrey B. Ellman, Jones Day, Atlanta, GA, Robert W. Hamilton, Jones Day, Columbus, OH, for Debtors.

MEMORANDUM OPINION

Kevin R. Huennekens

, UNITED STATES BANKRUPTCY JUDGE

This matter first came before the Court on a motion filed by the Debtors seeking authority under §§ 363

and 365 of the Bankruptcy Code¹ to reject three nonqualified deferred compensation plans (the “Deferred Compensation Plans”)² and two executive retirement plans (together with the Deferred Compensation Plans, the “Nonqualified Plans”) (the “Motion to Terminate”). In connection therewith, the Debtors requested pursuant to §§ 541 and 542 of the Bankruptcy Code the return of the monies that had been set aside in trust to fund the Nonqualified Plans.

Three of the participants in the Alpha Natural Resources Inc. and Subsidiaries Deferred Compensation Plan (the “ANR Employee Plan”) filed an objection (the “Objection” or “Objectors”) to the Motion to Terminate. The Objectors contended that the Debtors could not terminate the ANR Employee Plan because it was subject to the protections of the Employee Retirement Income Security Act (“ERISA”).³ The Objectors argued that the Debtors had failed to meet their evidentiary burden that the ANR Employee Plan was exempt from the requirements of ERISA. After conducting an evidentiary hearing on proper notice (the “Evidentiary Hearing”), the Court overruled the Objection, finding that the Nonqualified Plans including the ANR Employee Plan were not subject to the substantive requirements of ERISA. An order issued granting the Motion to Terminate (the “Termination Order”).

Now before the Court is a motion filed by the Objectors seeking reconsideration of the Court's Termination Order (the “Motion to Reconsider”) under Federal Rules of Bankruptcy Procedure 9023

and 9024. The Objectors suggest that the Court committed a manifest error of law when it granted the Motion to Terminate without requiring the Debtors to commence an adversary proceeding under Bankruptcy Rule 7001. The Objectors maintain that an action to recover money or property of the estate under § 542 of the Bankruptcy Code must be brought as an adversary proceeding. Fed. R. Bankr.P. 7001(1). The Debtors oppose the Motion to Reconsider, arguing that the Objectors waived any argument they might have had under Rule 7001 by failing to raise the issue during the Evidentiary Hearing. The Debtors maintain that an adversary proceeding was not required in any event, as the Debtors merely sought a consensual turnover of property held by the trustee of the ANR Employee Plan. Following a hearing conducted on June 28, 2016, the Court entered an order denying the Motion to Reconsider (the “Reconsideration Order”). This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law in support of the Reconsideration Order in accordance with Rule 7052.⁴

Jurisdiction and Venue

The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157

and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.

Factual Background

In support of the Motion to Terminate, the Debtors offered the declaration and supplemental declaration of Gary W. Banbury (“Banbury”), the Debtors' Executive Vice President and Chief Administrative Officer.⁵ The Objectors did not offer any evidence in support of their position.⁶ The Objectors are former employees of the Debtors who participated in the ANR Employee Plan, one of the three Deferred Compensation Plans.

The Debtors established the ANR Employee Plan to allow certain highly compensated employees of the Debtors to voluntarily defer self-designated portions of their compensation to a later date. Under such deferred compensation plans, a participant pays no income tax on the compensation the participant elects to defer. Participants are able to avoid recognition of the deferred income until the year it is actually received. Deferred compensation plans are governed by § 409A of the Internal Revenue Code

. See 26 U.S.C. § 409A.

In 2014 and 2015, the Debtors offered sixty-one employees the opportunity to enroll in the ANR Employee Plan. The number of employees offered enrollment represented less than 1% of the Debtors' total workforce.⁷ Only employees with the title of at least Vice President or General Manager were eligible to participate in the ANR Employee Plan. The average salary for an employee eligible to participate in the ANR Employee Plan was approximately $270,000. The ANR Employee Plan allowed a participant to defer up to 35% of base salary, up to 100% of the annual incentive bonus,⁸ and up to 35% of any other compensation. Under the ANR Employee Plan, the deferred income was paid into and held by certain “rabbi” trusts (the “Trusts”) administered by Bank of America N.A., as trustee (the “Trustee”).⁹ The Trusts were established and governed by three trust agreements (the “Trust Agreements”).

All of the Trusts are grantor rabbi trusts. By the terms of the Trust Agreements, the funds in the Trusts are subject to the claims of the Debtors' general creditors. This was required in order for the deferred income to avoid recognition in the year it was earned and maintain its favorable tax treatment until the year it is paid. The Trust Agreements clearly provide that the rights of the plan participants under the Trust Agreements “shall be mere unsecured contractual rights of Plan participants and their beneficiaries against each applicable Participating Company. All assets held by the Trust will be subject to the claims of the Participating Companies' general creditors....” The Trust Agreements require that the Trustee cease any payments to the beneficiaries of the Trusts in the event that a “Participating Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.” The Trustee has not distributed any funds since the Debtors filed their voluntary petition. The Trustee is holding over $9 million in funds (the “Trust Funds”). The Trustee does not object to the relief sought in the Motion to Terminate.

The fact that the Trust Funds are subject to the Debtors' creditors in the event of insolvency should not have come as a surprise to the Objectors or any other beneficiary under the ANR Employee Plan. The “Welcome Letters” that invited the sixty-one employees to participate in the ANR Employee Plan clearly stated that the deferred compensation would be held in a rabbi trust, and that “[t]o avoid current income tax recognition to you, the amounts contributed to a Rabbi Trust must remain subject to the claims of your employer's general creditors.” A brochure that explained the benefits of the ANR Employee Plan also stated that the plan was “not secured by a trust that is beyond the reach of your employer's general creditors” and that the claims of a beneficiary for benefits “would have no preference over a general unsecured creditor of the company.” The deferral agreement form that each plan participant had to endorse also contained a clear statement that the participant was “a general unsecured creditor of the Company and that the Plan constitutes a mere promise by the Company to make benefit payments in the future.” Each Objector executed one of the deferral agreement forms.

Analysis

The Objectors' initial challenge to the Motion to Terminate rested on the argument that the Debtors were prohibited from terminating the Trusts and distributing the Trust Funds in accordance with the Trustee Agreements because ERISA preempts state trust law. The Objectors contended that, in order for the ANR Employee Plan to be exempt from the substantive requirements of ERISA, it must qualify as a “top hat” plan. The Objectors argued that the Debtors had failed prove that the ANR Employee Plan was a top hat plan. Therefore, the Trust Funds could not be used to satisfy the claims of the Debtors' creditors and must instead be used solely for the beneficiaries of the Trusts.

The Debtors disagreed, arguing that the Court need not consider whether the ANR Employee Plan qualified as a top hat plan. They suggested that the Court could grant the Motion to Terminate based solely on the terms of the Trust Agreements and the ANR Employee Plan. Nevertheless, the Debtors asserted that the ANR Employee Plan did satisfy all of the requirements for a top hat plan. The Court found that (i) the Debtors were authorized under the Trust Agreements to terminate the Trusts, and (ii) that the ANR Employee Plan was a top hat plan that was exempt from the substantive requirements of ERISA.

The Termination Order

No reference to the term “top hat” plan appears anywhere in ERISA. It is a “colloquial term used to refer to certain unfunded plans specially exempted from ERISA's participation, vesting, funding, and fiduciary requirements.” Guiragoss v. Khoury, 444 F.Supp.2d 649, 658 (E.D.Va.2006)

. A top hat plan “is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” 29 U.S.C. § 1051(2). A top hat plan is not subject to the substantive requirements of ERISA relating to participation, vesting, funding, and fiduciary requirements. See 29 U.S.C. §§ 1051(2), 1081(a)(3), 1101(a)(1).¹⁰ The rationale for excluding top hat plans from the substantive requirements of ERISA is that “certain individuals, by virtue of their positions or...