In re Avaya Inc.

• Decision Date: 18 September 2017
• Docket Number: Case No. 17–10089 (SMB)
• Citation: 573 B.R. 93
• Parties: IN RE: AVAYA INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

573 B.R. 93

IN RE: AVAYA INC., et al.,¹ Debtors.

Case No. 17–10089 (SMB)

United States Bankruptcy Court, S.D. New York.

Signed September 18, 2017

STORCH AMINI PC, Attorneys for Marlene Clark, 140 East 45th Street, 25th Floor, New York, New York 10017, Jeffrey Chubak, Esq., Of Counsel

KIRKLAND & ELLIS LLP, Counsel for the Debtors and Debtors-in-Possession, 601 Lexington Avenue, New York, New York 10022, James H.M. Sprayregen, P.C., Esq., Jonathan S. Henes, P.C., Esq., Patrick J. Nash, Jr., P.C., Esq., Ryan Preston Dahl, Esq., Bradley Thomas Giordano, Esq., Of Counsel

AKIN GUMP STRAUSS HAUER & FELD LLP, Counsel to the Ad Hoc First Lien Group, One Bryant Park, New York, New York 10036, Ira S. Dizengoff, Esq., Philip C. Dublin, Esq., Abid Qureshi, Esq., Of Counsel

STROOCK & STROOCK & LAVAN LLP, Counsel to the Ad Hoc Crossover Group, 180 Maiden Lane, New York, New York 10038, Kristopher M. Hansen, Esq., Sayan Bhattacharyya, Esq., Gabriel E. Sasson, Esq., Of Counsel

MORRISON & FOERSTER LLP, Counsel for the Official Committee Of Unsecured Creditors, 250 W 55th Street, New York, New York 10019, Lorenzo Marinuzzi, Esq., Todd M. Goren, Esq., Of Counsel

MEMORANDUM DECISION REGARDING DETERMINATION OF SURVIVORSHIP BENEFITS AS "RETIREE BENEFITS"

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Marlene Clark ("Clark") is the surviving spouse of Stephan Clark, a former employee/retiree of the Debtors. Following his retirement from Avaya, Mr. Clark was receiving deferred compensation in the form of monthly pension benefits under a supplemental pension plan, and after his death, those benefits became payable to Clark. Clark seeks a determination that these payments are "retiree benefits" within the meaning of 11 U.S.C. § 1114. (Marlene Clark's Motion for Order Determining Survivorship Benefits Under Supplemental Plan Are "Retiree Benefits" Under Bankruptcy Code Section 1114(a), Compelling Compliance with Section 1114(e), and Appointing an Official Committee Under Section 1114(d) , dated May 5, 2017 (the "Motion ") (ECF Doc. # 522).) The Debtors and various creditor groups oppose the Motion , and argue that the surviving obligation to Clark is an unsecured debt not subject to the requirements of Bankruptcy Code § 1114. For the reasons that follow, the Court concludes that the benefits payable to Clark are not "retiree benefits," and the Motion is denied.

BACKGROUND

A. The Debtors' Supplemental Pension Plan

The Debtors are parties to a certain supplemental pension plan (the "Supplemental Plan"),² effective January 1, 2009.³ The Supplemental Plan "is intended to constitute both (i) an unfunded ‘excess benefit plan’ as defined in ERISA § 3(36), and (ii) an unfunded plan primarily for the purpose of providing deferred compensation and pension benefits for a select group of management or highly compensated employees ...." (Supplemental Plan at Art. 1.) The benefits include a "Minimum Retirement Benefit" payable to eligible former officers of Avaya ("Retirees") in the form of a single life annuity paid monthly to Retirees upon retirement. The Minimum Retirement Benefit amount is calculated based upon the Retiree's salary on his or her last day of employment, minus certain offsets based on other Avaya retirement payments. (Supplemental Plan at § 4.2.)

The Supplemental Plan includes a "Survivor Benefit" payable to the Retiree's surviving spouse. (Supplemental Plan at § 4.3.) The Survivor Benefit, like the Minimum Retirement Benefit, is a single life annuity, paid monthly, calculated using the same formula as the Minimum Retirement Benefit. (Supplemental Plan at § 4.3.) Clark became eligible to receive the Survivor Benefit on July 1, 2014, at which point she began receiving annuity payments in the same amount that her husband had been receiving under the Supplemental Plan before he passed away. (See Motion , Ex. 3.)

Upon filing for chapter 11, the Debtors suspended all payments under the Supplemental Plan, including Clark's Survivor Benefit, (see Motion , at ¶ 7 & Ex. 4), and their Schedules of Assets and Liabilities listed a single $90.21 million unsecured non-priority claim on account of unpaid amounts under the Supplemental Plan.⁴ (Schedule E/F at 439 of 500 (ECF Doc. # 337).)⁵ Under the currently proposed plan, the Debtors estimate that they will distribute approximately 19.7% to unsecured creditors on account of the allowed amount of their claims. (See Disclosure Statement for the First Amended Joint Chapter 11 Plan of Reorganization of Avaya Inc. and Its Debtor Affiliates , dated Sept. 8, 2017, at iii (ECF Doc. # 1106).)

B. Clark's Motion

Clark filed the Motion on May 5, 2017, requesting that the Court determine that the Survivor Benefit constitutes a "retiree benefit" within the meaning of Bankruptcy Code § 1114 because her right to receive it was triggered by the death of her husband. (Motion at ¶¶ 12–13.) She argues that the Debtors must reinstate her Survivor Benefit payments and treat any unpaid postpetition amounts as administrative expenses in accordance with Bankruptcy Code § 1114. (Motion at ¶¶ 14–15.) In addition, Clark contends that an official committee should be appointed under § 1114(d) to represent the surviving spouses. (Motion at ¶¶ 16–18.)

The Debtors, an ad hoc group of lenders holding first lien debt (the "First Lien Group"),⁶ a separate ad hoc "crossover" group of lenders holding both first lien and second lien debt (the "Crossover Group")⁷ and the Official Committee of Unsecured Creditors (the "Committee" and, together with the Debtors, the First Lien Group and the Crossover Group, the "Objectors") opposed the Motion .⁸ In the main, they contend that Bankruptcy Code § 1114 applies only to "medical, surgical, or hospital care" and "sickness, accident, disability" benefits and "benefits in the event of death," and does not encompass retirement income or deferred compensation. (Debtors' Objection at ¶¶ 12–14; First Lien Objection at ¶ 3; Crossover Objection at ¶¶ 6–8; Committee Objection at ¶¶ 8–9.) Further, they argue that the Survivor Benefit cannot be a "benefit in the event of death" because a Retiree's death does not give rise to the benefit; it merely transfers an existing pension benefit to the surviving spouse. (Debtors' Objection at ¶¶ 14–15; First Lien Objection at ¶¶ 4–5; Crossover Objection at ¶¶ 9–10; Committee Objection at ¶ 10.) In addition, the First Lien Group claims that § 1114 does not apply to a plan like the Supplemental Plan that is terminable at will, (First Lien Objection at ¶ 7), and the Debtors and the Committee submit that the Supplemental Plan is not a "plan, fund, or program" under § 1114, which the parties agree parallels the definition of "welfare plan" under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001, et al. ("ERISA"). (Debtors' Objection at ¶¶ 17–20; Committee Objection at ¶¶ 14–15; Reply In Support of Marlene Clark's Motion for Order Determining Survivorship Benefits Under Supplemental Plan Are "Retiree Benefits" Under Bankruptcy Code Section 1114(a), Compelling Compliance with Section 1114(e), and Appointing an Official Committee Under Section 1114(d) , dated May 21, 2017 ("Clark's Reply "), at ¶ 2 (ECF Doc. # 635).) Moreover, the appointment of an official committee of retired employees is not warranted, (Debtors' Objection at ¶¶ 21–22; First Lien Objection at ¶ 6; Crossover Objection at ¶ 11; Committee Objection at ¶ 16), and Clark lacks Article III standing to make such a request. (First Lien Objection at ¶ 6.)

Clark filed an omnibus reply to the objections. In addition to reiterating her previous arguments, (Clark's Reply at ¶¶ 15–16, 25–26), and attempting to distinguish the cases cited by the Objectors, (Clark's Reply at ¶¶ 17–22), she asserted for the first time that the Debtors are judicially and collaterally estopped from arguing that the Survivor Benefit is not protected by § 1114 in light of the decision in In re Lucent Death Benefits ERISA Litig. , 541 F.3d 250 (3d Cir. 2008) (" Lucent "). (Clark's Reply at ¶¶ 3–14.) According to Clark, Lucent successfully argued in that case that a certain death benefit (the "Death Benefit") constituted an unvested benefit under a welfare plan as defined by ERISA, and given the overlap between the definitions of retiree benefits under the Bankruptcy Code and a welfare plan under ERISA, the Debtors are precluded from arguing that the Survivor Benefit is not a benefit under a welfare plan (i.e. , a retiree benefit). (Clark's Reply at ¶¶ 3–14.) In the same vein, Clark submits that the Debtors' and the Committee's argument that the Supplemental Plan is not a "plan, fund, or program" is moot, given that Lucent effectively held that the Death Benefit qualified as such a plan. (Clark's Reply at ¶¶ 23–24.) Clark also asserts that the at-will termination clause is irrelevant because a debtor cannot modify or terminate retiree benefits covered by section 1114 except in accordance with that section. (Clark's Reply ¶¶ 32–36.)

The Debtors filed a sur-reply, (Debtors' Sur–Reply to Marlene Clark's Reply In Support the Motion for Order Compelling Compliance with 11 U.S.C. § 1114(e) and Appointing an Official Committee Under 11 U.S.C. § 1114(d) , dated May 24, 2017 ("Debtors' Sur–Reply ") (ECF Doc. # 653)), arguing that Clark had improperly raised the judicial and collateral estoppel arguments for the first time in Clark's Reply , (id. at ¶¶ 1–2), but in any event, the estoppel arguments lack merit.⁹ (Id. at ¶¶ 3–9.)

DISCUSSION

A. The Meaning of Section 1114

Section 1114(a) provides:

For purposes of this section, the term "retiree benefits" means payments to any entity or person for the purpose of providing or reimbursing payments for retired employees and their spouses and dependents, for medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability or death under any plan, fund, or program (through the purchase of insurance or otherwise) maintained or established in whole or in part by the

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