A recent decision from the Bankruptcy Court for the District of Delaware in In re Yellow Corp. could have widespread implications for bankruptcy cases, including municipal bankruptcy cases. Of particular interest, the Judge determined:
- Settlement of a claim to which a third party has filed an objection is subject to a heightened standard of review;
- The bankruptcy code’s disallowance of post-petition interest applies to claims accelerated pre-petition;
- Where future payments include an interest component (either explicit or implicit), that component is disallowed as unmatured interest, but no further discounting is appropriate;
- The proper discount rate to use to calculate the present value of a pension withdrawal claim is the pension plan’s assumed rate of return on assets; and
- The limitation on withdrawal liability applicable to an insolvent employer (ERISA section 4225(b)/29 U.S.C. § 1405(b)) undergoing liquidation or dissolution is applied after the application of the 20-year cap.
On Monday, April 7, 2025, Judge Craig T. Goldblatt published “preliminary observations” on a dispute between the Debtors, MFN Partners (which held both debt and equity), and various multiemployer pension plans on the amount of the pension plans’ claims.[1] Judge Goldblatt was originally prepared to issue a decision on various motions for summary judgment that were before him, but after the Debtors and the Official Committee of Unsecured Creditors (the “UCC”) requested that he hold off in light of the filing of a joint plan that would settle the dispute, he instead released his thoughts as preliminary observations.
Judge Goldblatt started by reminding the parties that he had not yet determined the exact standard he would use to determine whether the plan’s settlement of the issue was fair. MFN Partners had filed its own objection to the claims and was not part of the settlement proposed by the plan. In light of that outstanding objection, the Court determined that it could not simply decide the issue using the usual deferential standard for approval of settlements under Rule 9019. Judge Goldblatt declined, however, to determine whether he needed to resolve the objection on its merits or whether he simply needed to determine that the settlement was “at least in the same zip code” as how the objection would have been resolved. This is a departure from a line of precedent that was adopted by the court in the bankruptcy case of the Puerto Rico Electric Power Authority (“PREPA”). There, Judge Swain held that any rights conferred on a party upon its filing of an objection to a proof of claim could be satisfied through a hearing on a settlement motion under Rule 9019.[2]
Judge Goldblatt next turned to whether the withdrawal liability the Debtors incurred – which ERISA provides can be paid through annual payments, capped at 20 years – when they withdrew from the pension plans was accelerated pre-petition. While he resolved the issue “for the sake of completeness,” he stated that potential pre-petition acceleration “turns out to be of no consequence,” since the bankruptcy itself operated as an acceleration, and the payment would be discounted to present value whether the acceleration occurred prior to the petition or by the petition.
In determining how to value the accelerated withdrawal liability, Judge Goldblatt found that the Bankruptcy Code required discounting the stream of annual payments back to present value due to Section 502(b)(2)’s disallowance of claims for unmatured interest.
Prior Third Circuit precedent provides that, where a contract includes an explicit rate of interest (e.g., bonds issued with a set rate of interest), disallowance of unmatured interest as of the petition date operates to discount the claim back to present value, and any further discounting would result in an unfair double discount.
Judge Goldblatt took this analysis a step further. The Debtors argued that, since there was no explicit rate of interest, the total annual payments should be discounted back to present value using the Debtors’ cost of capital. Judge Goldblatt disagreed; he found that, even though the withdrawal liability did not explicitly include a rate of interest, it still could include an implied rate of interest that should be used in calculating present value. A court must look at the economic realities of the situation, rather than how the parties characterize it, to identify the portion of an obligation that is unmatured interest and disallow it. Courts make a similar judgment when they recharacterize loans as equity contributions or leases as secured loans.
Here, the calculation of withdrawal liability included estimating anticipated returns on the plan’s assets. Determining annual payments starts with calculating an amount roughly equal to the withdrawing employer’s typical annual contribution in earlier years, then determining how many annual payments would be required to amortize the withdrawal charge (that is, the employer’s share of the pension plan’s underfunding, as determined by the plan itself) with interest at a rate equal to the rate the pension plan ordinarily uses, then capping those payments at 20 years. This means that the annual payments already implicitly included an interest rate: the rate the plan ordinarily used for its calculations. To value the claims, the court would need to identify how much interest was included in calculating the withdrawal liability and to disallow that amount as unmatured interest. Judge Goldblatt also rejected the suggestion (implied by the Supreme Court in Milwaukee Brewery Workers’ Pension Plan v. Joseph Schlitz Brewing Co., 513 U.S. 414, 418-19 (1995)) that the initial annual payments are all principal, and that the interest component is paid in annual payments after the principal has been fully paid, which could result in the 20 years of annual payments being all principal. Rather, Judge Goldblatt concluded that the stream of payments are amortized in the usual form, with all payments representing principal and interest. Once the previously included interest was disallowed, any further discounting would constitute “double discounting.”
Double discounting also appeared in PREPA’s bankruptcy case. There, Judge Swain decided that bondholders’ claims should be determined by quantifying the amount of revenues that could be generated through bondholders’ exercise of equitable remedies and then discounting that amount back to present value. Bondholders argued that the disallowance of post-petition interest already accomplished the same objective as discounting to present value, and thus any further discounting was improper double discounting. Judge Swain disagreed, saying that bondholders’ claim should be determined by an estimated revenue stream over time and not the terms of the bonds. The contract rate of interest therefore had no bearing on the amount of the claim, only the estimated revenue stream, and therefore future payments that made up that estimated revenue stream needed to be discounted to present value. Ultimately, the First Circuit reversed and found that the proper amount of a claim arising under a debt instrument was the full face amount of the instrument.
[1]In re Yellow Corp., No. 23-11069 (CTG), ECF No. 6030 (Bankr. D. Del. Apr. 7, 2025).
[2]In re Puerto Rico Elec. Power Auth., No. 17-BK-4780-LTS, ECF. No. 1855, at 4 (D.P.R. Jan. 3, 2020).
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