Retiree-Benefits Battles Get Fierce

(Dow Jones) Linda Roberts thought she would enjoy lifetime health benefits after a dozen years of lifting radiators and iron in a factory for Visteon Corp. (VSTNQ). But the car-parts maker won bankruptcy-court approval to terminate those retiree benefits, just months after Ms. Roberts, 62 years old, was diagnosed with multiple myeloma and leukemia.

"It's inhumane," said her husband, Jerry Roberts, who digs ditches and performs other excavation work. The 63-year-old has earned less than $16,000 annually in recent years, and even with Social Security benefits and Ms. Roberts' pension, health costs eat up more than two-thirds of their income.

Now, a federal appeals court has given the Robertses and thousands of other Visteon retirees some potential relief. In mid-July, the Third U.S. Circuit Court of Appeals of Philadelphia reversed previous decisions that allowed Visteon to terminate benefits for more than 6,000 retirees without taking certain legal steps in bankruptcy court.

The ruling means that roughly 2,100 retirees should resume receiving health-care and life-insurance coverage, so long as Visteon remains under bankruptcy-court protection, which could last at least another month or so, and possibly longer. Other retirees have filed court papers arguing they, too, should be covered by the appeals court decision.

The appeals court denied Visteon's request to rehear the case. A Visteon spokeswoman said the company believes the decision applies only to the retirees who appealed to the third circuit; Visteon plans to reinstate benefits for those former workers until it exits bankruptcy proceedings. But it is Visteon's "intention to ultimately terminate these benefits," she said.

Companies reorganizing under Chapter 11 protection argue they can simply no longer afford the costs to pay for retirees' health care and pensions. They almost always prevail in terminating these contracts.

Yet with stakes so high, former employees are engaging in wide-ranging, 11th-hour fights to hold on to the benefits, if even for a few extra months. The battles have become especially contentious in the midst of the economic downturn, when new jobs are scarce and states and the federal government are cutting their own benefit programs.

With Visteon, the federal appeals court ruled the company had failed to follow proper procedures in terminating benefits, ignoring safeguards Congress enacted decades ago to protect retirees' coverage in bankruptcy proceedings. Visteon can still cut off the benefits but must meet higher legal burdens to do so. The company also can eliminate the benefits once it exits Chapter 11 court protection.

Days later, the ruling spurred another company, Nortel Networks Inc. (NRTLQ), to drop a similar move to end $2 million in monthly health, life insurance and long-term disability plans covering more than 4,000 retirees and their dependents.

Hundreds of Nortel retirees had written letters protesting the telecommunications company's move to end the benefits. Also, a bankruptcy watchdog from the Justice Department had questioned the company's inability to pay, noting that it awarded senior executives more than $50 million in bonuses during the company's liquidation.

Pension benefits have suffered, too, amid recent corporate distress. In bankruptcy, plans often get moved to the Pension Benefit Guaranty Corp., the U.S. agency charged with providing a safety net for 44 million workers and retirees in more than 29,000 private-sector pension plans.

The benefits the agency provides are capped, so some workers don't get their full pensions. What's more, the recent bankruptcy wave added billions of dollars to the PBGC's obligations, contributing to a $21.9 billion deficit and stoking fears that the agency could have trouble covering pensions in the future.

Delphi Corp. (DPH), an auto-parts supplier, eventually terminated health-care benefits and pensions for retirees before emerging from a four-year odyssey in Chapter 11. Roughly 15,000 Delphi salaried workers sued the PBGC for terminating and taking over their pension plan, which resulted in big cuts to their benefits. They are angry that General Motors Co. agreed to offset pension shortfalls for unionized workers while leaving many salaried retirees to face big cuts.

In Philadelphia, pension funds are tangling with lenders about to buy the publisher of the Philadelphia Inquirer out of bankruptcy proceedings. The pension funds are alarmed that the publisher's new owners won't contribute to the funds, which cover swelling ranks of retirees.

Visteon dubbed its health-care obligations a "crippling financial and competitive burden" and said eliminating the benefits would save it $310 million.

"I felt betrayed," said Wilma Mock, a 77-year-old Visteon retiree who has stents in her heart and kidneys. She spent 29 years at Visteon's now-closed Connersville, Ind., factory working on production lines and measuring car parts. Though eligible for Medicare, "I was expecting them to take care of my medical needs and my life insurance in return for that work."

Lower-court judges who reviewed the Visteon matter concluded that preventing the parts maker from ending benefits wouldn't make sense, since the very purpose of bankruptcy is to allow companies to shed obligations. They also pointed out that protecting the retirees would have the odd effect of giving them better rights in bankruptcy proceedings than outside of court, where Visteon can end their benefits at will.

The appeals court said those judges ignored specific protections for the benefits in bankruptcy. Before ending the benefits "unilaterally," companies must negotiate with retirees to end the plans and show it is crucial to the restructuring.

"For the most part, all [the law] guarantees retirees is a voice, and some minimal amount of leverage, in a process that could otherwise be nothing short of devastating to them and to their families and communities," the appeals court said.

The protections for these benefits in bankruptcy stemmed from steelmaker LTV Corp.'s decision in 1986 to wipe out medical and life-insurance benefits for 78,000 retirees during its bankruptcy case without any notice to its former workers.

Amid a chorus of outrage, Congress enacted a special procedure for terminating such benefits. Lawmakers "considered the termination of retiree benefits a true human tragedy," the appeals court wrote, noting that one congressman called LTV's decision "one of the most indefensible and unconscionable acts of any American corporation in this century."

The results of Visteon's recent decision proved "catastrophic," the court said. "Visteon's unilateral decision to terminate benefits has left some retirees without medical care entirely, and forced those too critically ill to do without medical care to sacrifice basic necessities in order to pay for ... coverage," it wrote.

Ms. Roberts, the Visteon retiree who worked with radiators, broke her back while trying to feed her dogs in March 2009. A doctor later diagnosed her with cancer and gave her six months to live. Other doctors recommended monitoring her condition; the cancer hasn't worsened.

Still, Mr. Roberts has been scrambling to find more work to keep up with the couple's expenses. When papers arrived informing the Robertses they could lose their benefits, "Linda was in bed two or three days," Mr. Roberts recalled. "How can you deal with stuff like that, when you're already down and thinking the worst?" he said.

The benefits for Visteon retirees haven't yet been reinstated.