Pension Agency Will Appeal LTV Bankruptcy Ruling

The federal agency that guarantees pension plans will seek fast-track consideration for its appeal of a ruling in the LTV Corp. bankruptcy that it calls a “major blow to the pension insurance system that would rip large holes in the safety net” for 40 million Americans.

The Pension Benefit Guaranty Corp. also said on Monday that it will push for emergency legislation to resolve what is fast becoming a major conflict between bankruptcy laws and pension-fund regulations.

In the ruling, issued Friday in New York, U.S. District Judge Kevin T. Duffy said that the LTV pension plans--under-funded by about $2 billion--do not have priority ahead of other creditors of the huge aerospace, energy and steel-making company. If his ruling stands, the company’s many pension funds would have to stand near the end of the line with other unsecured LTV creditors, who may see only 10 cents on every dollar owed them. That would leave retirees dependent on the hard-pressed guaranty fund to pay some reduced level of pension benefits.

Duffy also ruled that LTV does not have to make payments to replenish the fund, as called for in last year’s tentative agreement between LTV and the PBGC. The agreement had been challenged by the Dallas-based conglomerate’s creditors, who feared that forced payments to the pension funds would eat up LTV’s income.

However, on Monday, some LTV retirees got a 45-day reprieve. The judge hearing the company’s Chapter 11 bankruptcy case ordered LTV to make enough payments into the most seriously troubled of the pension plans to keep it funded through Nov. 30.

Bankruptcy law experts agree that Duffy’s ruling could have widespread implications for troubled companies, their creditors and employees. Although other federal courts have sided with the PBGC, the LTV case is the largest and most complex bankruptcy yet to test the question of whether pension funds should be paid ahead of other creditors.

The PBGC has warned that unless its position is upheld in the courts and solidified by stronger legislation, taxpayers could be facing another bailout similar in nature, if not scope, to that of the savings and loan industry.

The federal agency is already facing its own money crunch. It has about $6 billion in claims to pay, with $4 billion in assets. The outcome of the LTV case could influence pending claims in the Pan Am and Eastern Airlines bankruptcies, where pensions are under-funded by $1.6 billion, and ultimately the fate of other seriously under-funded pension plans in the steel, airline and automotive industries.

Further, said James B. Lockhart, executive director of the PBGC, Duffy’s ruling--if upheld--would “encourage (other) companies to enter bankruptcy, stop funding their pension plans and eventually dump them on the agency when they (the plans) run out of money.”

Lockhart said that nationwide, $30 billion in pension obligations remain unfunded--$8 billion of that in financially strapped companies.

But many bankruptcy law experts strongly disagree with PBGC’s contention that pension fund obligations should come first when a bankrupt company reorganizes and begins to pay some of its bills.

“The PBGC is trying to get in front of everybody else, saying ‘pay us first and we are entitled to 100 cents on the dollar.’ That, to many of us, is a bizarre set of priorities,” said Nathan B. Feinstein, a bankruptcy attorney with the Washington firm of Piper & Marbury and chairman of the American Bar Assn.’s business bankruptcy committee.

Feinstein said the pension funds cover “management that brought about the bankruptcy and labor groups that brought about the bankruptcy. . . . Why should they come out ahead (of other creditors)?”

Christopher J. Redmond, a Wichita, Kan., attorney who is an expert in bankruptcy claims, said there may be growing pressure on Congress to weigh in on the side of the PBGC. “But there must be a balancing test here of what is good for the economy,” he said.

“If Congress passes legislation to give the PBGC priority on all claims, it will cause the liquidation of a substantial number of companies” that could not emerge from bankruptcy if faced with the requirement to fully fund all pension obligations, Redmond added. “There would be substantial economic impact--losses to banks and other credit groups as well.”