U.S. Bankruptcy Court Opinions

IN RE: US AIRWAYS, INC., (E.D.Va. 2006) In re: US AIRWAYS,
INC., et al., Chapter 11, Debtors. Case No. 04-13819-SSM
(Jointly Administered). United States Bankruptcy Court,
E.D. Virginia, Alexandria Division. August 11, 2006

Thomas Tiffany, Johnstown, PA, Administrative claimant.

Douglas M. Foley, Esquire, McGuireWoods, LLP, Norfolk, VA,
Local counsel for the reorganized debtor.

Malcolm Mitchell, Esquire, Vorys, Sater, Seymour & Pease,
L.L.P., Alexandria, VA, Local counsel for the Official
Committee of Unsecured Creditors.

Dennis Early, Esquire, Assistant United States Trustee
Alexandria, VA.

MEMORANDUM OPINION ON OBJECTION TO ADMINISTRATIVE
CLAIM OF THOMAS TIFFANY

STEPHEN MITCHELL, Bankruptcy Judge

A hearing was held in open court on July 20, 2006, on the
objection of the reorganized debtors to the administrative
claim filed by Thomas Tiffany in the amount of $600,000.
Mr. Tiffany, who participated in the hearing by telephone,
is employed by the debtor as an airline pilot. In a prior
chapter 11 case filed by the debtor, the defined benefit
retirement plan for pilots of US Airways was terminated,
and the assets of the plan were turned over to the Pension
Benefit Guaranty Corporation (“PBGC”), a government agency
created by Congress to insure the payment of pension
benefits to retirees. Mr. Tiffany’s administrative claim in
this case is for what he calculates as the difference
between the benefit that the PBGC will pay him once he
retires and what he would have received under the
terminated plan. For the reasons stated, the claim must be
disallowed.

Background

US Airways, together with its parent holding company and
several affiliates, filed a petition for reorganization
under chapter 11 of the Bankruptcy Code in this court on
September 12, 2004. This was the company’s second chapter
11 filing. It had previously Page 2 filed a chapter 11
petition in this court on August 11, 2002. During the first
case, the debtor brought a motion to approve a distress
termination of the pension plan for pilots of US Airways,
Inc. That motion was approved — subject to a
determination that termination would not violate the terms
of the collective bargaining agreement — by an order
entered March 2, 2003. In re US Airways Group, Inc., 296
B.R. 734 (Bankr. E.D. Va. 2003). An appeal was taken from
the order by a group of retired pilots but was dismissed on
equitable mootness grounds. Retired Pilots Ass’n of US
Airways, Inc. v. US Airways Group, Inc., 369 F.3d 806 (4th
Cir. 2004). A plan was confirmed in the first case on March
18, 2003, under which allowed unsecured claims (except for
a convenience class of small claims) would not be paid in
cash but would instead receive stock in the reorganized
company. The assets of the retirement plan were turned over
to the PBGC, which filed a proof of claim for the full
amount of what it calculated to be the underfunding of the
plan — that is, the difference between the value of
the plan assets turned over to it and the present value of
the future payments owed to the beneficiaries of the
plan.[fn1] Following an evidentiary hearing, this court
allowed the claim in full. In re US Airways Group, Inc.,
303 B.R. 784 (Bankr. E.D. Va. 2003). No appeal was taken
from that ruling, and the PBGC received a distribution of
stock in the reorganized company in satisfaction of its
claim.

As noted, the present chapter 11 case was filed on
September 12, 2004. Mr. Tiffany filed a secured claim
(Claim No. 1444) in the amount of $600,000 on December 7,
2004. Page 3 That claim was disallowed on August 24, 2005.
Order Sustaining Debtors’ Second Omnibus Objection to
Certain Claims, Ex. C at 13 (Doc. # 2912). In the interim,
Mr. Tiffany had filed an administrative claim (Claim No.
5264) on July 22, 2005. The administrative claim is for the
same amount, and is based on the same grounds, as the
earlier claim. On May 10, 2006, the reorganized debtors
objected to Mr. Tiffany’s administrative claim as part of
its Second Omnibus Objection to Certain Administrative
Claims (Doc. # 3955) at 8-9 & Ex. D. The reorganized
debtors contend that Mr. Tiffany’s claim should be
disallowed because it does not constitute an administrative
expense and because “there is no legal basis for the
Reorganized Debtors’ liability on account of such claims.”

Discussion

Mr. Tiffany’s claim must be disallowed for two reasons.
First, the claim does not qualify as an administrative
expense claim. Second, the fundamental premise on which the
claim is based is incorrect.

A.

As the reorganized debtors correctly observe, Mr.
Tiffany’s claim is not an administrative expense as defined
by Section 503(b) of the Bankruptcy Code. In a bankruptcy
case, a court may allow, as an expense of administration,
“the actual, necessary costs and expenses of preserving the
estate, including wages, salaries, or commissions for
services rendered after the commencement of the case.”
§ 503(b)(1)(A), Bankruptcy Code. Administrative
expenses are accorded priority in distribution, and are
paid ahead of claims having a lesser priority (including
general unsecured claims). §§ 507(a)(1) and
726(a)(1), Page 4 Bankruptcy Code.[fn2] A request for
payment of an administrative expense will qualify if (a)
the right to payment arose from a post-petition transaction
with the debtor’s estate; and (b) the consideration
supporting the right to payment was beneficial to the
estate of the debtor. See In re Hemingway Transp., Inc.,
954 F.2d 1, 5 (1st Cir. 1992). A claim arises, for
administrative expense purposes, when the acts giving rise
to the liability occur, even if the payment does not
becomes due, or damages are not experienced, until some
future time. See In re The Bentley Funding Group, LLC, No.
00-13386, 2001 WL 3405425 (Bankr. E.D. Va., Jan. 2, 2001)
(where indemnity agreement between bonding company and
debtor land developer was entered into prior to the
bankruptcy, the bonding company’s claim for post-petition
costs of completing subdivision improvements was not an
administrative expense claim); In re Dornier Aviation
(North America), Inc., Nos. 02-82003 and 02-82004, 2002 WL
31999222 (Bankr. E.D. Va., Dec. 18, 2002) (severance pay
owned under a prepetition employment agreement was not an
administrative claim even though the employee worked for 86
days after the bankruptcy petition was filed).[fn3]

Mr. Tiffany asserts the basis for his claim to be unpaid
compensation for services performed from the beginning of
his employment with the debtor on March 2, 1987, to the
present. The specific events giving rise to his claim,
however, are the distress termination of Page 5 the
pilots pension plan and the turnover of the plan assets to
the PBGC, both of which occurred during the first chapter
11 case, and long before the filing of the present case.
While Mr. Tiffany will not experience any actual loss of
income from the termination of the plan until the time he
actually retires, his claim for the reduction in retirement
benefits — even if it were allowable as a claim
against the debtors — is nevertheless a prepetition
claim and not an administrative expense claim.[fn4]

B.

But even if Mr. Tiffany’s claim could be construed as
arising from a post-petition transaction with the debtor,
it would have to be disallowed because it duplicates the
allowed claim of the PBGC in the prior chapter 11 case and
because it proceeds from the incorrect premise that the
funds in the plan belonged to him and the other pilots and
should not have been turned over to the PBGC.

Title IV of the Employee Retirement Income Security Act of
1974 (ERISA) created a mandatory government insurance
program that is administered by the PBGC. The insurance
program was created to protect “private-sector workers
participating in covered pension plans against the
termination of their plans before sufficient funds have
been accumulated to pay anticipated benefits.” Pension
Benefit Guaranty Corp. v. LTV Corp., 496 U.S. 633, 637, 110
S. Ct. 2668, 2671, 110 L.Ed.2d 579 (1990). Under Title IV
of ERISA, when a defined benefit Page 6 pension plan
terminates with insufficient assets, the PBGC becomes
trustee of the plan and takes over the plan’s assets and
liabilities. See 29 U.S.C. § 1344.

Upon assumption of the plan’s assets and liabilities, the
employer becomes liable to the PBGC for the “total amount of
the unfunded benefit liabilities under the plan (as of the
termination date) . . .” 29 U.S.C. 1362 (b)(1)(B)(a). The
PBGC filed a timely claim in the first chapter 11 case for
the unfunded liabilities under the plan, and that claim was
allowed in full by this court in December 2003. Any claim
by individual plan participants would be therefore
duplicative of the PBGC’s claim.

To this, Mr. Tiffany rejoins that the debtor had no right
to turn over the funds, and the PBGC had no proper claim to
them, because the money in the plan belonged its
beneficiaries. As noted earlier, however, Congress, through
Title IV of ERISA, put forth a comprehensive statutory
scheme that governs the transfer of a terminated defined
benefit plan’s assets from an employer to the PBGC. Because
ERISA is controlling, Mr. Tiffany’s argument that the plan
assets should have been turned over to him and the other
plan participants in unavailing.

Additionally, the fundamental premise of Mr. Tiffany’s
argument — that there are specific dollars in the
plan that have his name on them — is incorrect. The
Retirement Plan for Pilots of US Airways, Inc., is a
defined benefit plan under 29 U.S.C. § 1002(35). A
defined benefit plan is a plan that “promises to pay
employees, upon retirement a fixed benefit under a formula
that takes into account factors such as final salary and
years of service with the employer.” LTV, 496 U.S. at 637,
110 S.Ct. at 2671. Under such a plan, an employee is
entitled to a fixed annuity Page 7 upon retirement for
the remainder of the retiree’s life.[fn5] This type of plan
does not, however, give an employee ownership over a
discrete portion of the plan’s assets. An employee is only
entitled to the fixed benefit under the plan upon
retirement.

ERISA distinguishes a defined benefit plan from a defined
contribution plan. See 29 U.S.C. § 1002(34). A
defined contribution plan is one under which an employer
“typically contributes a percentage of an employee’s
compensation to an account, and the employee is entitled to
the account after retirement.” Pension Benefit Guaranty
Corp., 496 U.S. at 637, 110 S.Ct. at 2671. An example of a
defined contribution plan is a 401(k) plan, in which an
employee, and not the employer, holds title to and
exercises control over the account. ERISA does not insure
these types of plans because “employees are not promised
any particular level of benefits; instead, they are promised
only that they will receive the balances in their
individual accounts.” Id. If the U.S. Airways Pilot’s
Retirement Plan were a defined contribution plan under 29
U.S.C. § 1002(34), then Mr. Tiffany would be correct
in assuming that he is entitled to a fixed portion of the
plan’s assets. This, however, is not the case. Mr. Tiffany
is only entitled to the contractual benefits under the
plan, as modified by ERISA upon the plan termination. To
allow Mr. Tiffany to assert a claim against the employer to
recover the difference between what he would have received
under the plan had it not been terminated and what he will
receive from Page 8 the PBGC would not only be duplicative
of the PBGC’s own claim but would also be inconsistent with
the Congressional scheme embodied in Title IV of ERISA.

Conclusion

In summary, the court finds that Mr. Tiffany’s claim should
be disallowed because the claim is not an administrative
claim as defined by the Bankruptcy Code and its fundamental
premise that Mr. Tiffany owns the funds now transferred to
the PBGC is flawed. A separate order will be entered
disallowing the claim.

[fn1] It is important to note that the PBGC’s claim is not
restricted to the amount needed to pay the guaranteed
benefit but is for the full amount needed to pay the
contractual benefit owed to plan participants. Although
payment of benefits by the PBGC is guaranteed only up to a
certain amount, the PBGC will pay benefits beyond the
guaranteed amount to the extent plan assets permit.

[fn2] For cases filed on or after October 17, 2005,
administrative expenses claims are now subordinate to claims
for “domestic support obligations,” such as child support
and alimony, but remain senior to all other unsecured
claims. Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, Pub.L. 109-8.

[fn3] The Bentley Funding and Dornier Aviation opinions are
http://www.vaeb.uscourts.gov/opinions/ssm/bentley_axa%20adm
available on the court’s Internet web site at
http://www.vaeb.uscourts.gov/opinions/ssm/fairchild_neely.p
in%20claim.pdf and df.

[fn4] Indeed, since the events giving rise to the claim
occurred prior to confirmation of the plan in the first
chapter 11 case, and since confirmation of a chapter 11
plan discharges a debtor that continues to engage in
business from all pre-confirmation claims, §
1141(d), Bankruptcy Code, the claim now being asserted was
allowable, if at all, only in the first chapter 11 case.

[fn5] The retirement plan for pilots of US Airways did
include an option for a pilot, on retirement, to receive a
lump sum payment rather than an annuity. The details of how
the lump sum was computed are not part of the record before
the court, but presumably it represented the commuted value
of the annuity. In any event, the fact that a particular
defined-benefit plan has a lump sum payment option does not
affect the underlying analysis of whether plan participants
own the funds in the plan or merely have a contractual
right to payment. Page 1