Article Title
Good Intentions, Bad Economics: Retiree Insurance Benefits in Bankruptcy
Abstract
One of the emerging corporate problems of the 1980s, retiree insurance benefits, has met face to face with an increasingly common corporate solution, Chapter 11 reorganization. The intersection of these two phenomena first gained national attention with the July 1986 bankruptcy filing of the LTV Steel Corporation. Immediately after seeking bankruptcy court protection, LTV informed its 68,000 retirees that the company temporarily would cease to pay the medical and life insurance benefits that it had promised these former workers when they retired.
Prompted by tragic stories of LTV retirees and their spouses who were forced to postpone critical medical treatment, Congress enacted a temporary bill that mandated continuation of payments to retirees during LTV's reorganization. Even before Congress passed that measure,union workers staged a labor strike at one of LTV's major steel plants to protest the retiree benefits cutoff. LTV's management responded to the strike by obtaining an order from the bankruptcy court allowing the company to resume benefits during the pendency of the Chapter 11 bankruptcy.
Although the immediate LTV crisis had passed, Congress eventually enacted permanent legislation intended to respond on a broader scale to the problem of retiree insurance benefits in Chapter 11 reorganizations. On June 16, 1988, President Reagan signed into law the new legislation, which gives a special priority status to retiree medical and life insurance benefits in Chapter 11 reorganization cases.' Most of this legislation is contained in a new provision to the United States Bankruptcy Code, section 1114.
Undoubtedly Congress believes that the nation's retirees can feel secure now that section 1114 is part of the Bankruptcy Code." Unfortunately, section 1114 does little to increase the likelihood that retirees will receive their promised health and life insurance benefits. Because section 1114 applies only to Chapter 11 cases, the new legislation will affect only a small percentage of cases in which companies become in-solvent. Although retirees now will receive a special priority for their benefits claims in Chapter 11 cases," they will have no similar preferred position in Chapter 7 liquidation cases or in nonbankruptcy dissolutions.