Global Crossing Ltd., New York, and Citizens Communications Co., Stamford, Conn., are duking it out in U.S. bankruptcy court over who should control roughly $600 million in defined benefit plan assets.
In court filings tied to Global Crossing's Chapter 11 bankruptcy proceedings, Citizens argues the frozen plan's assets - which cover employees of Frontier Corp., a regional Global Crossing subsidiary that Citizens bought from Global Crossing in 2001 for $3.5 billion - should immediately be moved to a plan sponsored by Citizens. Doing so would fulfill conditions placed on Citizens' acquisition of Frontier by a New York state regulatory agency in 2000, Citizens argued in a motion filed in U.S. Bankruptcy Court in Manhattan.
But attorneys for Global Crossing and the company's creditors filed motions saying they see no need to rush the asset transfer and that the delay is prudent. They say any transfer should wait until the bankruptcy court decides whether Global Crossing is entitled to use the plan's surplus, estimated between $50 million and $100 million, to pay its creditors.
Attorneys for Citizens and Global Crossing on March 14 presented their arguments to Judge Robert E. Gerber, who gave attorneys for Global Crossing and its creditors 60 days to further refine their counter arguments.
No shortage of opinion
Everyone seems to have an opinion, including officials at the New York State Public Service Commission, Albany. The commission oversees communications companies in the state, and approved Citizens' purchase of Frontier; both companies provide telephone service. As part of that approval, the commission required that the Frontier plan assets be transferred from Global Crossing to Citizens.
Any plan surplus belongs to ratepayers who use Frontier's phone service, not Global Crossing, said Charlie Dickson, director of the commission's office of accounting and finance.
"That money should really be going back to the Frontier ratepayers if it is not needed to guard against future asset value reduction," Mr. Dickson said.
Global Crossing should not be allowed to use the surplus to pay creditors, he added, saying the Employee Retirement Income Security Act protects pension assets in case of a bankruptcy filing.
Mr. Dickson said the commission also is concerned that Global Crossing may cash out the defined benefit plan and purchase annuities for participants. If the insurance company through which those annuities were purchased should go out of business, ratepayers would be on the hook to pay those benefits, he said.
But Marcia S. Wagner, an ERISA attorney in Boston, said a company that sells a subsidiary, as Global Crossing did with Frontier, has every right to lay claim to both the defined benefit plan and any surplus assets.
Ms. Wagner, who is not involved in the Citizens-Global Crossing case, said because the Frontier plan is overfunded, there's little danger that the employees covered by the plan won't get the benefits due them, no matter who controls the plan. And in general, she added, companies that sell subsidiaries with surplus pension plan assets want to retain control so they can use the surplus.
"You never, ever transfer a surplus defined benefit plan, ever," Ms. Wagner said.
No legal requirement
Greg Braden, a partner in the Atlanta law firm Alston & Bird LLP and an expert in employee benefits and ERISA litigation, said companies that sell subsidiaries are not legally required to transfer defined benefit plan assets as part of the transaction. In fact, keeping the defined benefit plan is not at all unusual, he said, particularly if the subsidiary participated in a defined benefit plan sponsored by the parent company.
Mr. Braden, who also is not involved in the case, said even if a bankruptcy court does order the defined benefit assets transferred from a plan sponsored by the seller to one sponsored by the buyer, the court is unlikely to order the transfer of any surplus assets.
"The bankruptcy court is not going to want to part with anything but the value of the accrued benefits," Mr. Braden said. "There is no requirement that surplus assets be allocated in this kind of transfer. Absent of (such a requirement), it's going to be tough for the purchaser to obtain the surplus assets."
But in the Citizens-Global Crossing case, both parties agreed to transfer the defined benefit plan assets, according to the motion filed by Citizens. To make the eventual transfer as easy as possible, Citizens arranged for the Frontier defined benefit plan trustee, Mellon Trust Co., Pittsburgh, also to take over as trustee for Citizens' own $249 million defined benefit and $221 million 401(k) plans. The Frontier plan has more than $600 million in defined benefit assets and $260 million in 401(k) plan assets.
After several months of haggling (including delays incurred after some documents stored at the World Trade Center were destroyed Sept. 11), the two companies settled on a valuation date. Then things started to unravel, according to court documents.
On Jan. 28, Global Crossing filed for Chapter 11 bankruptcy. Subsequent to that, Citizens and Global Crossing set Feb. 14 as the date to transfer the Frontier plan assets to Citizens. To accomplish this, Global Crossing had to send a written order to Mellon authorizing the transfer.
But on Feb. 13, according to court documents, Global Crossing informed Citizens that the Pension Benefit Guaranty Corp. had launched an inquiry into pension issues surrounding Global Crossing's bankruptcy filing. Global Crossing said as a result, the transfer date would have to be delayed.
Then on Feb. 26, the PBGC notified both Global Crossing and Citizens that it had no problem with the planned transfer of the Frontier plan assets. Global Crossing and Citizens then set Feb. 28 as the transfer date.
On the morning of Feb. 28, Mellon Trust sent a form letter authorizing the transfer to officials at Global Crossing and at Citizens, according to court documents. That afternoon, instead of sending the authorization, Global Crossing officials sent word through their attorneys that some bankruptcy-related issues remained to be resolved before Global Crossing's bankruptcy lawyers would OK the transfer.
The next day, March 1, Global Crossing's lawyers informed Citizens that they were concerned the deal might be subject to certain provisions of U.S. Bankruptcy Code, namely subsection 365, which pertains to contracts in which the debtor - in this case Global Crossing - has entered.
Citizens disagreed, saying it had fulfilled all its obligations under the terms of the original agreement (a point challenged by attorneys for Global Crossing's creditors) and that the contract had essentially already been executed, save for the transfer of the Frontier plan assets.
Now, a month later, the assets remain in Global Crossing's control, and Citizens has gone to court to force Global Crossing to turn them over to Citizens.