Betting the bottom dollar: ERISA fiduciary liability before and after filing for bankruptcy.

Publication: Employee Relations Law Journal

Publication Date: 22-JUN-06

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COPYRIGHT 2006 Aspen Publishers, Inc.

For directors and officers of companies facing potential bankruptcy, difficult questions mount along with the unpaid bills. How can payroll be met without falling behind on utility costs? If advertising expenses are slashed, can the company still generate the business it needs to keep the doors open? How can expenses be cut to obtain bank funding--or to avoid foreclosure--but still cover the costs of equipment and the physical plant? The list goes on, but directors and officers clearly must wrestle with how to maintain the business's viability given its limited resources.

The difficulty is compounded if the directors and officers are also fiduciaries of the company's employee benefits plans under ERISA because these directors and officers must decide if and how to fund the employee benefit plans. As ERISA generally requires fiduciaries to act in the participants' interests with respect to the plan, what obligations do directors and officers have if the company faces bankruptcy but must fund its employee benefit plans? What about after bankruptcy is filed? If contributions are not made, are the fiduciaries liable?

United Airlines's bankruptcy presented these questions but unfortunately no clear answer. In July 2004, the International Association of Machinists (IAM) and individual IAM members sued, among others, three United officers in federal court in both Illinois and New Jersey, alleging they were fiduciaries who breached their duties under ERISA. The complaint in Illinois alleged that while United agreed with the IAM in a collective bargaining agreement to fund a defined benefit pension plan for its IAM workers, after United went into Chapter 11 bankruptcy, it negotiated financing "on the condition that United's legally required pension obligations would not be paid." The complaint alleged United would make no further payments to its defined benefit pension plans while in bankruptcy because of agreements with its lenders.

Plaintiffs contended that the defendants breached their fiduciary duties under ERISA Section 404 by, one, failing to administer the plans according to the governing documents, which required the contributions, and, two, by not acting in the sole and exclusive interest of the participants by negotiating financing on the condition that United not fund the plans. In addition to requiring the individual defendants to administer the plans according to the governing documents and to take all necessary steps to meet the funding obligations, the injunctive relief plaintiffs sought under ERISA Section 502(a)(3) would have...

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