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Bankruptcy Court Disallows Employee’s Claims for Severance Benefits; Debtor’s Interpretation of Employee Benefit Plan Given Deference

In re The PMI Group, Inc., et al., No. 11-13730 (BLS) (Bankr. D. Del. June 23, 2014)

Judge Shannon recently sustained a debtor’s objection to benefits sought by a former employee pursuant to the debtor’s salary continuation plan (the “Salary Continuation Plan”).  The case centered on whether the implementation of insurer solvency protection provisions under the laws of the state of Arizona constituted a “change in control” as defined by the Salary Continuation Plan.

By way of background, The PMI Group, Inc. (the “Debtor”) and its subsidiaries were involved in the residential mortgage industry and thus, were subject to various state laws governing the industry.  Pre-petition, the Arizona Department of Insurance (the “ADI”) placed two of the Debtor’s subsidiaries under supervision due to insolvency concerns.  The subsidiaries, one of which was the Debtor’s principal regulated subsidiary, PMI Mortgage Insurance Co. (“MIC”), had 60 days to become solvent but failed to do so.  Thereafter, a conservatorship proceeding was commenced and a receiver appointed for MIC.

While the receivership was pending, the Debtor commenced its chapter 11 proceeding.  During the proceeding, the claimant asserted a claim for certain benefits under the Debtor’s Salary Continuation Plan.  The plan provided severance benefits to employees who resigned from the Debtor for good cause, within a certain period following a “change of control” of the Debtor.  In the instant dispute, the parties agreed that the claimant was a covered employee entitled to benefits if the Salary Continuation Plan requirements were met, that he resigned for good cause, and that the resignation occurred during the relevant time period following the ADI conservatorship of MIC.  The issue for the Court to decide was whether a “change in control” of the Debtor occurred as a result of the ADI conservatorship.

The claimant contended that the takeover constituted a change in control of the Debtor as MIC was the Debtor’s most valuable asset and should be considered “substantially all of the assets of the Company.”  The claimant also argued that the plan was intended to protect and incentivize employees after any change in management, including the compulsory takeover of MIC.  Finally, the claimant asserted that the definition of “change in control” included both involuntary and voluntary reorganizations.

The Debtor disagreed.  First, the Debtor disputed that a change of control occurred as a result of the ADI takeover because the asset at issue—the Debtor’s stock in MIC—was retained during the takeover, albeit with less benefits.  Second, the Debtor stated that the intention of the plan was to protect employees following a management change it instituted, not to insure against events imposed by third parties.  Third, the Debtor asserted that the ADI takeover was involuntary and that only voluntary reorganizations were covered by the plan as “change in control” was defined as “consummation by the Company of a reorganization.”  Finally, the Debtor asserted that even if the claimant’s various interpretations were possible, its decision, as the designated plan administrator under the Salary Continuation Plan, should be afforded deference under the law.

The Delaware Bankruptcy Court agreed with the Debtor.  As a threshold matter, the Court concluded that the Debtor, as plan administrator, was entitled to deference in exercising its discretion pursuant to the Supreme Court’s holding in Firestone Tire & Rubber v. Bruch, 489 U.S. 101 (1989) (addressing the standard for review of a denial of benefits challenged by an ERISA plan participant).  Although the Debtor was both the employer and administrator of the plan, such conflict did not require the imposition of de novo review.  Rather, it was held by the Court as simply a factor to analyze in determining whether there was an abuse of discretion in denying the claimant’s employee benefits.

Ultimately, the Court held that the Debtor did not abuse its discretion in denying the claimant’s benefits, finding that the reasons supporting the Debtor’s decision to object to the claim were convincing and robust.  The ADI takeover did not take the Debtor’s stock in MIC (its primary asset), and the Debtor may not have intended to protect employees from events initiated by third parties.  Moreover, the plan’s language requiring that a change in control must be an action taken “by the Company”—as opposed to a takeover imposed by a regulatory body—weighed in the Debtor’s favor.  Accordingly, the Court sustained the Debtor’s objection to the employee’s proof of claim, and the claim was disallowed.