ELK GROVE TOWNSHIP, Ill. - UAL Corp. might be destroying the retirement prospects of thousands of its employee shareholders in an effort to save their jobs.
The bankrupt airline's action, which pits federal pension law against the company's protections in Chapter 11 bankruptcy, ultimately could be decided by a federal appellate court or even the U.S. Supreme Court.
In 1994, UAL Corp. asked its employees to forgo $4.9 billion in pay and benefits for a 55% stake in the company through a new employee stock ownership plan. Since then, the company's stock - which peaked at $100.75 in October 1997 from $23 after the ESOP was approved - has steadily declined. (It traded around $1.32 a share on Dec. 20.)
Now, employees might have to swallow another $2.5 billion in further pay and benefits cuts, as well as the loss of hundreds of additional jobs, as part of the airline's reorganization efforts.
The employee-owned airline filed for bankruptcy reorganization on Dec. 9 and immediately asked the U.S. Bankruptcy Court for the Northern District of Illinois to block State Street Bank & Trust Co., the fiduciary for its employee stock ownership plan, from selling more stock held by the ESOP.
United received an injunction on the sale of company stock in the ESOP at that time, and on Dec. 17 the injunction was upheld, pending a formal hearing on Dec. 30.
State Street began dumping UAL stock in September, in anticipation of a bankruptcy filing, after it was appointed independent fiduciary by the ESOP committee to manage the plan's assets. When UAL filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, State Street already had sold $43.8 million worth of company stock at $1.80 a share. State Street officials had hoped to collect between $30 million and $40 million for approximately 21.7 million of the remaining 32.5 million shares in the ESOP by Dec. 27.
UAL executives want to halt the ESOP's stock sale to preserve its tax shelter from net operating losses, or NOLs.
United has accumulated approximately $4 billion in net operating losses since 2000, and could use those losses to shelter as much as $1.4 billion of future profits under bankruptcy rules. But the company argued before the bankruptcy court that continued sale of company stock by State Street would trigger an ownership change that could, under a complicated tax law, wipe out the NOLs, by putting more shares in the hands of the company's existing large investors.
Softening the blow
Under federal tax law, companies can use NOLs to shelter future income from taxes for up to 20 years. UAL argued that softening the tax blow on the company after it reorganizes and emerges from bankruptcy could be key to ensuring it continues flying the friendly skies.
Because the UAL 401(k) plans are not treated as affiliates under securities rules, AON Fiduciary Counselors Inc., the Washington-based independent fiduciary for the airline's retirement plans, was able to sell all 10.6 million of the company stock held by the plans just days before the company filed for bankruptcy.
At a Dec. 17 hearing, George Cheever - partner in the Pittsburgh office of Kirkpatrick & Lockhart, representing State Street - argued before Mr. Wedoff that "the court order frustrates an important federal policy embodied in ERISA; that is, that a fiduciary should act only in the interests of the participants."
But Babette Ceccotti - a lawyer with Cohen Weiss & Simon, New York, which represents the Air LinePilots Association, whose members constitute 11% of the participants in the ESOP - defended UAL's move as necessary to protect the long-term viability of the airline.
Mr. Wedoff said he needed more time to study the issue and declined to lift the injunction on the sale of company stock until the Dec. 30 hearing.
Retirement security for UAL employees through the defined benefit pension plan also is tenuous, because the plan had a 25% shortfall, with assets of $7.6 billion and $10 billion in liabilities, at the end of 2001, according to its 2001 annual report. In November, UAL executives predicted they'd need to contribute $5 billion through 2008 to close the gap.
ERISA experts, bankruptcy lawyers and tax experts predict UAL could succeed in allowing the bankruptcy to override its responsibility as the plan sponsor to protect the retirement dollars of its employee owners.
"The bankruptcy law and proceedings are going to trump ERISA law," predicted J. Michael Keeling, president of the Washington-based ESOP Association.
Robert Willens, a tax expert at Lehman Brothers in New York, concurred. "I've never heard of a bankruptcy company that didn't want to preserve its NOLs. Its pretty much (standard operating procedure) in any bankruptcy."
A pension lawyer who did not wish to be identified noted that Section 514(d) of ERISA states that "nothing in ERISA should be construed to supersede any law of the U.S. or any rule or regulation issued under such law." That, he said, clearly shows ERISA must take a back seat to other federal laws.
But Frank Cummings, a partner in the Washington office of Le Boeuf, Lamb, Leiby & McRae, who has handled numerous cases involving ERISA assets in bankruptcies, disagreed. Bankruptcy court judges have jurisdiction only over assets that are part of the bankruptcy estate; and pension fund and retirement plan assets are held in trust and cannot be placed in bankruptcy, he said.
"The property of an ERISA estate, such as an ESOP trust, is not the property of a bankruptcy estate," he noted.
The same question
The question of whether bankruptcy laws supersede ERISA also came up when Arlington, Va.-based US Airways Group Inc. filed for Chapter 11 bankruptcy on Aug. 11 and moved to protect its more than $1.5 billion in net operating losses by banning large shareholders from dumping company stock. However, AON Fiduciary Counselors, the independent fiduciary for the airline's 401(k) plans and ESOP, reportedly managed to sell about $8 million to $9 million worth of company stock held in the plans before trading was halted after the bankruptcy filing.
AON could not sell all of the company stock held by the plans because of securities law restrictions on the amount of stock that could be sold by affiliates, said Nell Hennessy, president of AON Fiduciary Counselors. The plans together held approximately 22.9 million shares of US Airways stock.
"Until I saw (the issue) in US Air, I had not seen it in any previous case as an ERISA issue," she said.
Ms. Hennessy and others anticipate State Street will seek to move jurisdiction to a U.S. District Court or appellate court should Mr. Wedoff decide on Dec. 30 to uphold UAL's ban on the sale of stock from the ESOP.
By then, participants might lose all of the remaining value of their retirement assets in the ESOP.
Mr. Cheever said State Street has not yet decided whether it will seek such an appeal.