In re Farmland Industries, Inc.
| Decision Date | 28 May 2003 |
| Docket Number | No. 02-50557-JWV.,02-50557-JWV. |
| Citation | 294 B.R. 903 |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
| Parties | In re FARMLAND INDUSTRIES, INC., et al., Debtor. |
Farmland Industries, Inc., and its affiliated debtors in these Chapter 11 proceedings have asked the Court to give its blessing to the termination of numerous retiree benefit programs and employment agreements. The requests raise an issue of first impression for the Court — whether a Chapter 11 debtor's proposed termination of retiree benefits must comply with the procedures and requirements of 11 U.S.C. § 1114 when the debtor has an absolute right under the pre-bankruptcy plan documents to unilaterally terminate those benefits.
There are two motions before the Court. The first is the Debtors' Motion for Order Authorizing the Termination of Certain Retiree Benefits Under Group Term Life Insurance Policy with Minnesota Life Insurance Company (Document # 1688) (the "Retiree Benefits Motion"). The second is the Debtors' Motion for Order Authorizing (I) the Termination of Certain Executive and Director Benefits and (II) Rejection of Certain Executory Employment Agreements (Document # 1689) (the "Executive Benefits Motion"). Both Motions were filed on December 11, 2002. The Court conducted a hearing on both Motions on January 28, 2003, at the United States Courthouse in Kansas City, Missouri, and took the Retiree Benefits Motion under advisement at that time. Because of a scheduling conflict for counsel, the Court held a continued hearing on February 11, 2003, on the Objections of twelve retired executives1 to the Executive Benefits Motion and then took that Motion under advisement as well. The Court has reviewed the pleadings and relevant case law, has considered the evidence adduced at the hearings and the arguments of counsel, and is now ready to rule.2
For the reasons set out below, the Court will deny the Debtors' Retiree Benefits Motion(Document # 1688) in its entirety for the Debtors' failure to comply with 11 U.S.C. § 1114. The Court will deny that portion of the Executive Benefits Motion (Document # 1689) that requests approval for the termination of retiree benefits as defined in 11 U.S.C. § 1114(a), and will grant that portion of the Executive Benefits Motion that proposes to terminate the retirement benefits for various current and former executives and directors. The Court will also grant the Debtors' request, included in the Executive Benefits Motion, to reject the employment agreements of four former executives.
In the Retiree Benefits Motion, the Debtors4 seek Court approval to terminate certain life insurance benefits provided for their retired employees under a group term life insurance policy with Minnesota Life Insurance Company ("Minnesota Life"). The life insurance program was started in 1977. The Minnesota Life policy has been in effect only since October 1, 2001; prior to that time, the life insurance coverage had been provided under a policy issued by American United Life Insurance Company. The policy provides life insurance for approximately 2,200 former or retired employees ("Retirees"), as well as an unstated number of currently active employees. The employees are divided into six classes under the policy, but the Debtors do not seek to terminate life insurance coverage for all six classes of employees. They seek only to terminate the life insurance benefits for current Retirees and, prospectively, the obligation to provide life insurance for active employees as they retire in future years.5 The amount of life insurance coverage for the active employees and the Retirees varies in each class. Most of the Retirees have coverage in excess of $10,000, and some have up to $50,000 of coverage. The monthly cost of premiums to the Debtors is approximately $63,000.00, or $756,000.00 a year. This cost will increase as active employees with the insurance coverage retire and become eligible for additional life insurance benefits. Farmland provides the benefits at no cost to the Retirees; the Retirees have never contributed to the life insurance program. (McCoy Affidavit, ¶ 18)
Farmland retained the right to unilaterally terminate or amend the life insurance program without the consent of the Retirees. (McCoy Affidavit, ¶ 11; Debtors' Ex. 33, p. 2; Debtors' Ex. 34, p. 21) This is not the first time Farmland has altered or restricted the life insurance program. In 1988, Farmland limited the group of people eligible for life insurance to those who were already employed by Farmland. In 2001, Farmland altered the program to further restrict eligibility in the program. (McCoy Affidavit, ¶ 16) As the policyholder, Farmland has the ability to terminate the insurance policy with Minnesota Life at any time, upon 31 days' written notice to Minnesota Life. (Debtors' Ex. 32, p. 10) Although it seeks to terminate the group insurance policy, Farmland has arranged with Minnesota Life for the Retirees to obtain alternative life insurance coverage at their own expense if the Retiree Benefits Motion is granted; however, the objecting Retirees contend that this option is not viable because the cost of the replacement life insurance is prohibitive. For example, Calvin Elliott, one of the objecting Retirees, stated to the Court that it would cost him $970.00 a year for $10,000 of insurance coverage, the maximum he would be permitted to obtain under the program.6
The Official Committee of Unsecured Creditors and the Bondholders Committee both supported the termination of benefits as proposed in the Retiree Benefits Motion.
In the second Motion before the Court, the Executive Benefits Motion, the Debtors seek to terminate several programs or plans providing a variety of benefits for certain current and former executive employees (the "Executives") and members of the Farmland Board of Directors (the "Board"). The programs that this Motion seeks to terminate are the Farmland Industries, Inc. Executive Deferred Compensation Plan (the "Deferred Comp Plan"); the Farmland Industries, Inc. Supplemental Executive Retirement Plan (the "SERP"); the Union Equity Deferred Compensation Plan (the "Union Equity Plan"); life insurance provided to current and former members of the Board (the "Director Life Plan"); supplemental life insurance benefits to members of the Board (the "Supplemental Life Plan"); a deferred compensation plan for the Board (the "Director Deferred Comp Plan"); and life insurance benefits under a split-dollar life insurance arrangement offered to certain Executives (the "Executive Life Plan").7
It is uncontested that the Executive Benefits Plans expressly give Farmland the right to terminate or modify the various programs and benefits. Farmland states that termination of the Executive Benefits Plans will provide over $16 million to the bankruptcy estate, primarily as a result of the cancellation of life insurance policies that were purchased to help Farmland fund the various programs and benefits. The cash surrender values payable to Farmland on the various insurance policies can be summarized as follows:
Executive Life Plan $4,150,000.00
SERP 4,100,000.00
Union Equity Plan 5,600,000.00
Director Life Plan &
Supplemental Life Plan 2,599,000.00
1. Executive Deferred Compensation Plan
Under the Deferred Comp Plan, certain executives of the Debtors were allowed to defer portions of their salaries until a later date (specified by the Executives) so as to gain certain tax benefits. Approximately 138 current and former employees of the Debtors participate in the Deferred Comp Plan. In addition to their deferred compensation, the Executives are entitled to receive an additional distribution, called a Retirement Adjustment Payment, to replace the loss in retirement benefits that occurs because of the salary deferral.8 Section 11 of the Deferred Comp Plan (Debtors' Ex. 22) authorizes the Farmland Board, in its absolute discretion, to suspend, amend, modify, or terminate the Plan at any time, without notice to the participating Executives.
Farmland states that the Debtors' liabilities to the Executives participating in the Deferred Comp Plan are about $14.4 million for deferred compensation and $2.5 million in Retirement Adjustment Payments. All of these amounts were incurred prior to the Petition Date and are unfunded. According to the Motion, the Board of Directors of Farmland suspended the Deferred Comp Plan as of May 30, 2002, immediately prior to the filing of the Chapter 11 bankruptcy.
2. Supplemental Executive Retirement Plan
The SERP, according to the Motion, is a non-qualified benefit plan designed to supplement pension payments for Executives who are affected by the limitations contained in Sections 401(a)(17) and 415 of the Internal Revenue Code relating to pension calculations. Under this plan, the Debtors have agreed to replace all or a portion of the employer-provided pension benefits lost by the Executives as a result of those limitations. Fifty-two current and former employees of the Debtors were receiving payments under the SERP as of the Petition Date. The Debtors ceased making payments under the SERP as of the Petition Date and have made no payments with respect to the SERP since the bankruptcy filing.
The Debtors state that the current amount of liabilities payable to participants in the SERP is about $9 million, and that, pursuant to Section 9 of the SERP, all amounts due to participants are general unsecured claims. However, the Debtors maintain a number of life insurance policies that, while not directly related to the SERP, are intended to assist the Debtors in satisfying the liabilities associated with the SERP. The Debtors contend that the insurance policies, which have a cash...
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