Opposition Brief — Pension Benefit Guaranty Corp. v. CF&I Fabricators of Utah, Inc., 119 S. Ct. 2020 (1999) (No. 98-1440)

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IN THE

Supreme Court of the United States

OcTOBER TERM, 1998

RADAR STEN RR MGI

PENSION BENEFIT GUARANTY CORP.,

Petitioner,

REORGANIZED CF&!I FABRICATORS OF UTAH, INC., et ai.

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Tenth Circuit

BRIEF IN OPPOSITION FOR RESPONDENTS

REORGANIZED CF&I FABRICATORS

OF UTAH, INC., et al.

STEVEN J. MCCARDELI FRANK CUMMINGS

LeBoeur, LAMB, GREENE Counsel of Record

& MacRae, L.L.P LeEBoeuFr, LAMB, GREENE

1000 Kearns Building & MacRae, L.L.P.

136 South Main Street 1875 Connecticut Ave., N.W.

Salt Lake City, UT 84101 Washington, D.C. 20009-5728

(801) 320-6700 (202) 986-8000

WESTON L. HARRIS

STEVEN T. WATERMAN

Ray, QUINNEY & NEBEKER

79 South Main Street, #700

P.O. Box 45385

Salt Lake City, UT 84145-0385

(801) 532-1500

Attorneys for Respondents

Reorganized CF&I Fabricators of Utah, Inc., et al.

QUESTIONS PRESENTED

I. Whether the courts below correctly ruled that the

bankruptcy claims of the Pension Benefit Guaranty

Corporation (“PBGC”) are pre-petition claims in

bankruptcy, and therefore are not entitled to administrative

priority in bankruptcy under 11 U.S.C. § 503(b) because

the consideration for such claims was the pre-petition labor

of the pension plan participants, and thus administrative

priority does not apply.

I]. Whether the courts below correctly ruled that in

determining the amount of claims for future pension benefits

“as of the date of the filing of the petition,” under 11 U.S.C.

§ 502(b), they are not required to accept PBGC’s present-

value calculation, using different present-value assumptions

developed for use solely under ERISA, without regard to

bankruptcy law.

RULE 14.1(b) STATEMENT OF PARTIES

TO THE PROCEEDING

The petition accurately lists the parties to the

proceeding, with the following correction:

On November 7, 1990, the petition date of the

underlying bankruptcy cases, CF&I Steel Corporation was

publicly held and owned all of the stock of its nine

subsidiaries: CF&I Fabricators of Utah, Inc., Colorado

& Utah Land Company, Kansas Metals Company,

Albuquerque Metals Company, Pueblo Metals Company,

Denver Metals Company, Pueblo Railroad Service

Company, CF&I Fabricators of Colorado, Inc., and

Colorado and Wyoming Railway Company. These entities

were the “Debtors” in the proceedings below.

On March 3, 1993, the effective date of the confirmed

Chapter 11 plan in these cases, all stockholder interests were

canceled, including the interests of CF&I Steel Corporation

as sole stockholder of the other debtors. On and after March

3, 1993, the Debtors have been referred to as the

“Reorganized Debtors.” The Reorganized Debtors are now

ten separate corporate shells without shareholders, elected

officers, or directors. Each Reorganized Debtor is managed

by Scott C. King, a representative of creditors under

governance provisions approved by the Bankruptcy Court.

Under the asset purchase agreement approved with the

Chapter 11 plan, some of the names of the Reorganized

Debtors were changed. The Reorganized Debtors’ current

names are: Reorganized CF&I Fabricators of Utah, Inc.,

Colorado & Utah Land Company, Kansas Metals Company,

Albuquerque Metals Company, Reorganized Pueblo Metals

Company, Denver Metals Company, Reorganized Pueblo

lil

Railroad Service Company, Reorganized CF&I Fabricators

of Colorado, Inc., Reorganized CF&I Steel Corporation,

and The Reorganized Colorado & Wyoming Railway

Company.

TABLE OF CONTENTS

Copmtns PROEOS goss 88 ee

Rule 14.1(b) Statement of Parties to the Proceeding

Fae Or CE i ES he

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A. Reorganized Debtors’ Statement Of The

CM re eh es haa eine eek ee eae

B. Identification, Under Rule 15.2, Of PBGC’s

Mis-Statements Of The Case ............

Reasons for Denying the Writ .................

I. There Is No Compelling Reason To Grant

The Writ: The Tenth Circuit’s Decision

Presents No Constitutional Conflict, No

Conflict With Any Decision Of This Court,

No Conflict Among The Circuits, No Dissent

Below, And Is Consistent With The

Decisions In Other Circuits .............

Contents

Page

Il. The PBGC Regulations At Issue Here Have

Been Superseded, And Re-Superseded And

Present Only An Obsolete Context For

Consideration Of The Valuation Issue

lark gidktad Shcsasds Gace sae gee es aha aed cea 2 12

III. The Remaining Issues In This Case Lack The

Context Necessary To Evaluate The Impact

On The “Agency’s Ability To Carry Out Its

NON sos 49 ae ee Fee eed es bn 13

IV. The Tenth Circuit Correctly Denied

Administrative Priovity 2... 6 ccc eae c ess 1S

A. Claims for Unfunded Pension Liabilities

or for Contributions to Fund Such

Pension Benefits are Prepetition Debts

Because the Pensions Were Earned by

Prepetition Service oo... ces es ces 15

B. Reading Co. v. Brown Does Not Require

UPTO OU or oe ee 18

V. The Tenth Circuit Correctly Approved The

Bankruptcy Court’s Market Valuation

Method As Required By 11 U.S.C. § 502(b),

Rather Than PBGC’s Regulatory Discount

ME Ae Saka ee web koa eh oe eee 19

CE RE. Sees a Sete eee tip ese 24

TABLE OF CITED AUTHORITIES

Cases:

Alabama Surface Mining Comm'n v. N.P. Mining

Co. (In re N.P. Mining Co.), 963 F.2d 1449 (11th

Cir. 1992} i. cies area eee tree.

Batterton v. Francis, 432 U.S. 416 (1977) .......

Belfance v. PBGC (In re CSC Industries, Inc.), No.

95-4103 (Bankr. N.D. Ohio Dec. 3, 1997), appeal

docketed, No. 4:99CV00041 (N.D. Ohio, Jan 8,

1999) oi lee eee eee es

Chevron U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984) ...........

Coldwell Banker & Co. v. Godwin Bevers Co. (In re

Godwin Bevers Co.), 575 F.2d 805 (10th Cir.

LOTR) ee ees eas ws

Cramer v. Mammoth Mart, Inc. (In re Mammoth

Mart, Inc.), 536 F.2d 950 (1st Cir. 1976) ......

Cumberland Farms Inc. v. Florida Dep't of Envtl.

Protection, 116 F.3d 16 (1st Cir. 1997) .......

Gallivan v. Springfield Post Road Corp., 110 F.3d

S48 (lat Cor, SR io oe eee ce eee ee

Hughes Aircraft Co. v. Jacobson, 119 §. Ct. 755

(1999)

e¢ 0.6 44.6 © Oe. ees Ee Ee FSS S.. oO SE & 6 eee Se ee. ©

Page

—

__—-_

Cited Authorities

Page

In re Finley, Kumble, Wagner, Heine, Underberg,

Manley, Myerson & Casey, 160 B.R. 882 (Bankr.

NN orcs ye sa Peng b a be ge oo 17

In re Great N.E. Lumber & Millwork Corp., 64 B.R.

S20 (renar. B.D. Pa. 1986). ..6 0. 6 ek kk oc ac 17

In re Johns-Manville Corp., 57 B.R. 680 (Bankr.

SA ae” TORRID Saar ei gay aaa tae 17

In re Kent Plastics Corp., 183 B.R. 841 (Bankr. S.D.

er ay a aes ne ye 9

Lancaster v. Tennessee (In re Wall Tube & Metal

Prods. Co.), 831 F.2d 118 (6th Cir. 1987) ..... 18

LTV Corp. v. PBGC (In re Chateaugay Corp.), 115

B.R. 760 (Bankr. S.D.N.Y. 1990) ......... We 4 ¥.

LTV Corp. v. PBGC (In re Chateaugay Corp.), 130

B.R. 690 (S.D.N.Y. 1991),126 B.R. 165 (Bankr.

S.D.N.Y. 1991), vacated by consent order, 17

Empl. Ben. Cas. (BNA) 1102 (S.D.N.Y. 1993)

Pea G a a thie We A koa EN Bee Sob oko Ok WG 11,17, 18

PBGC v. LTV Corp., 875 F.2d 1008 (2d Cir. 1989),

rev d on other grounds, 496 U.S. 633 (1990)

PBGC v. Skeen (In re Bayly Corp.), 163 F.3d 1205

LR es. TENS a eign eicnines © peek Manes cane was l

Cited Authorities

Page

PBGC v. Sunarhauserman, Inc. (In re

Sunarhauserman, inc.), 126 F.3d 811 (6th Cir.

Peer 3 Cialiwhiens <5 kata s Gee eS Ses 11, 16

PBGC v. Sunarhauserman, Inc. (in re

Sunarhauserman, Inc.), 1997 U.S. App. LEXIS

37157. (ote Cir. bet, By SOF et he a 5 eels 1]

Reading Co. v. Brown, 391 U.S. 471 (1968) ...... 18, 19

Spunt v. Charlesbank Laundry, Inc. (in re

Charlesbank Laundry, Inc.), 755 F.2d 200 (lst

CAE EPR svn s Vi bs Nee Wk CP eee Re 18

Trustees of Amalgamated Ins. Fund v. McFarlin’s,

[RD.; TP Pee Oe a he APO ins RAR AS 16

United States v. LTV Corp., (In re Chateauguay

Corp.), 944 F.2d 997 (2d Cir. 1991) .......... 18

Yorke v. NLRB, 709 F.2d 1138 (7th Cir. 1983) .... 18

Statutes:

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RUB. G OAS ie’ MAME Ie ome eta mee a eae Ape.

UR Us ee ee hor ee ee ees |

LE Tees SURED kip ow aes 1, &, 53, 19; 20, 21, 23

29 |

Bo Os

S.C.

U.S.C.

}w.C.

Bk os

EOS Be

fF &

3 es te

POR 06

J...

b.C.

| eas

S.C

S.C,

Cited Authorities

Page

OS PAE a es wee kee ee eek ae eee

BEDS Cac kek oes CREDO ORS OER l

DR id SS oe vie REND CER ee ee eee

So SERS ic ae Raa oS ee A a 3

ie Eee ee Pe ee ee err ee aes l

FE ei 5 Poe ois ook Cs eee 4,15

AREF is oe rary ee

Di RES Meee Sareea ey Wlat enn Poles 3

PREM oe PERCE EES ee ER LESS

AS ROR 6 sae eRe Se 3

BPRS 10s sic haere aie eee.

i EE LPUNIOND cs eds Bee COR A On 21

DEE 5 ooo bi oe VEO Rasa ei tera we.

Se C555 chk whee ae en week ene l

DOSE ks ch ae OA eek one ator ees |

Cited Authorities

Page

BP Rita hrs BAUME 6s va hk eee heen 23

29 Bil. BOR os oc ee Ve es 14

Pie bE ee Te) 2 | er rae ried eA ery ae 3

Ee UAcs FSIS ORD 2668 bh ee 8 ke een 14

EP A BONE ha RENE ta 14

29 U.S.C. § 1342(a) ERISA § 4042(a) .......... 3

Fi BLE Sok Eh} Senne peta eae mee me OGLE r RL, l

Rules:

WO SA BO ics pcan eG ee ee 10

Be Ak: Bec SOUR Sse keke ee Oe ee es 1]

USA, BiG es icc nee ea oe Far ees one 5

Other Authorities:

DO EE, OE. DOME LSID avin ko 6 ta ote LER 7, 10, 12

OS FOG. Te. PRE Cl StO Es is veka iow ties 12

Ee Nee Re WEE ge RE eo RSS cee 7

WCE Me. oe 7

Cited Authorities

eb SME Ge. Raa ST ERAT ce Ree ere

SUE COOKERS AG eas

Giddens, “Attempting to Protect Employee

Retirement Income Within Bankruptcy

Reorganization: PBGC Efforts to Obtain Priority

Status,” 1993 Ann. Rev. Banking L. 397 (1993)

"i 2s Se ee et oe Tere By my ee Re OD eT a a Oe ee se A on om Oe A OY ee

SE Fes SLZG; Poet WOMB AE POG) 5 os fie S eee ees

HLR. Conf. Rep. No. 99-453 (1985) .........28:-

Pub. L. No. 93-406, § 4041(a), 88 Stat. 829 (1974)

i ve oe me ee ae a te We os ke oe Oe ee oe oe Oe oe ee Oe oe tS ee a oe oe ee eA ee ee

Pub. L. No. 99-272, 100 Stat. 82 (1986) .........

Pub. L. No. 100-203, 101 Stat. 1330 (1987) ......

S. 1730, 99th Cong. § 996, at 578-79 (as reported,

LIRR 2... Sn as a hw bec ee eho es

Dennis R. Dow and Mark Moedritzer, ERJSA-

Related Claims in Bankruptcy, 3 J. BANKR. L. &

PRR Pc LAPP oie eee ad oncom eeneen

X11

TABLE OF APPENDICES

Page

Appendix A — Relevant Statutes .......... ee la

Appendix B Excerpts From PBGC 1998 Annual

PES KV CEN MR RRR ow aiEe os l3a

a ead C 58 Federal Register 50812

(SOPUIIOE FB, SFIS) 6s 5 ies be ee os 18a

Respondents Reorganized CF &I Fabricators of Utah, Inc.,

Colorado & Utah Land Company, Kansas Metals Company,

Albuquerque Metals Company, Reorganized Pueblo Metals

Company, Denver Metals Company, Reorganized Pueblo

Railroad Service Company, Reorganized CF&I Fabricators of

Colorado, Inc., Reorganized CF&I Steel Corporation, and The

Reorganized Colorado & Wyoming Railway Company (the

“Reorganized Debtors”) respectfully request the Court to deny

the petition (“Petition”) of the Pension Benefit Guaranty

Corporation (“PBGC”’) for certiorari to review a judgment of

the United States Court of Appeals for the Tenth Circuit in

this case. The opinion below is reported at 150 F.3d 1293.

The order denying PBGC’s petition for rehearing is unreported

but appears in Pet. App. 98a-99a.!

STATUTES INVOLVED

The statutes involved are 11 U.S.C. §§ 502, 503, 507,

1113, 1114, 1123, and 29 U.S.C. §§ 1082, 1144, 1301, 1362.

1. This brief will use the following abbreviations in its citation

of documents: “Pet.” = Petition for a Writ of Certiorari; “Pet. App.” =

Appendix to Petition for a Writ of Certiorari; “Resp. App.” = Appendix

to Respondents Reorganized CF&I Fabricators of Utah, Inc., ef al.,

Brief in Opposition.

2. Citations to the United States Code are to the 1994 Edition,

except that, if an earlier edition contained a different provision

applicable in this case, the earlier edition’s provision will be identified.

Citations to the Code of Federal Regulations are to the 1998 Edition

of Title XL, except that, if an earlier edition contained a different

provision pertinent to this case, the earlier edition’s provision will be

identified.

STATEMENT OF THE CASE

A. Reorganized Debtors’ Statement of the Case

The Reorganized Debtors are ten bankrupt corporations

liquidating their assets for the benefit of creditors under a

confirmed bankruptcy plan of reorganization (the “Plan of

Reorganization’’) pursuant to Chapter 11 of the Bankruptcy

Code, 11 U.S.C. §§ 101 et seg. PBGC is one of the largest

unsecured creditors. Under the Plan of Reorganization,

proceeds of the liquidation have been and will be distributed

to creditors under the direction of a representative of creditors

appointed by the Bankruptcy Court. Because the Reorganized

Debtors are deeply insolvent, general unsecured creditors, who

suffered hundreds of millions of dollars in actual pecuniary

losses, will receive less than ten percent of their claims.

Stockholders interests were abolished, and shareholders will

receive nothing.

The Reorganized Debtors’ predecessors, CF&I Steel

Corporation (“CF&I”) and its former subsidiaries (collectively,

the “Debtors”), operated a steel plant and related businesses.

CF&I sponsored two qualified pension plans for the Debtors’

employees and retirees (the “Pension Plans”) and was required

by ERISA to meet minimum funding standards. Because of

large losses in its steel business and a general decline in the

steel industry, CF&I did not have sufficient revenues to pay

its 1989 minimum funding payment of approximately $12.4

million which came due on September 15, 1990, resulting in

the Debtors filing petitions under Chapter 1 1 of the Bankruptcy

Code on November 7, 1990 (the “Petition Date’’). Before and

after the Petition Date, CF&I asked PBGC to terminate the

larger of the Pension Plans (the “Master Plan”). PBGC denied

CF&I’s request until March 19, 1992, when PBGC terminated

the Master Plan.

Only PBGC has power unilaterally to terminate pension

plans. 29 U.S.C. § 1342(a) (ERISA § 4042(a)). Under 29

U.S.C. § 1341(a)(3) (ERISA § 4041(a)(3)), the Debtors could

not unilaterally terminate the Master Plan because the

Bankruptcy Code (11 U.S.C. § 1113(f)) prohibited the Debtors

from any unilateral termination or alteration of its collective

bargaining agreement with the United Steelworkers of America

AFL-CIO-CLC (“USWA”), which required maintenance of

the Pension Plans.

Because funding payments for retirees’ pensions earned

before the Petition Date are prepetition debts, the Debtors by

law could not pay them after filing bankruptcy, 11 U.S.C.

§ 362, except under a confirmed plan of reorganization. PBGC

v. LTV Corp., 875 F.2d 1008, 1019 (2d Cir. 1989), rev'd on

other grounds, 496 U.S. 633 (1990). Therefore, after the

Petition Date, the Debtors could not correct the 1989 funding

deficiencies or make any further prepetition pension funding

payments except under a confirmed plan of reorganization.

Debtors continued to pay prepetition retiree health benefits

after the Petition Date required by the Bankruptcy Code.

11 U.S.C. § 1114(e). PBGC incorrectly implies that Debtors

did something wrong by obeying these requirements of

bankruptcy law. Pet. 6-7.

PBGC filed two substantially identical claims against each

of the Debtors as to the terminated Master Plan. First, PBGC

claimed $64,874,511 for alleged unpaid contributions to the

Master Plan (“Minimum Contribution Claims”) on many

theories of priority, all but one of which, administrative priority

under 11 U.S.C. § 503(b)(1)(A), PBGC has abandoned.

Second, PBGC asserted a priority claim of $263,200,000 for

an alleged insufficiency in assets of the Master Plan to pay

pensions (“Unfunded Benefits Claim’). Pet. App. 4a, 82a.

PBGC now asserts no priority for its Unfunded Benefits Claim

after it was denied below but asserts a general unsecured claim.

Pet. App. 4a-5a, 48a-49a.

PBGC was granted an administrative claim for the

postpetition “normal cost” component of its pension claims

(that portion attributable to postpetition services of employees).

Pet. App. 12a n.5. PBGC was also granted a prepetition priority

claim under 11 U.S.C. § 507(a)(4) (limited unsecured

prepetition claims for contributions to employee benefit plans)

for a portion of its claim that is not in dispute here. PBGC’s

allowed administrative and priority claims (approximately $2

million) were paid in full, pursuant to the confirmed Chapter

11 plan. Under the Plan of Reorganization PBGC received a

valuable partnership interest in the new owner of the steel plant

and will receive other distributions on par with other unsecured

creditors.

PBGC scoldingly asserts that “‘as a result of Respondents’

failure to fund their Pension Plan and the agency’s obligation

to pay guaranteed benefits, PBGC sustained a loss of nearly a

quarter billion dollars.” Pet. 3.

What really occurred, however, is this: (i) as a result of

Debtors’ inability (not “failure’’) to have enough cash to

contribute to the Master Plan, the Debtors filed for relief under

Chapter 11; (i1) as a result of the Chapter 11 filing, Debtors

could not contribute to the Master Plan; (iii) as a result of the

inability (not “failure’’) of Debtors to fund the Master Plan,

PBGC after a long delay terminated the Master Plan; and (iv)

as aresult of PBGC’s statutory mission (not Debtors’ “failure”’),

PBGC has paid guaranteed pension benefits in accordance with

law. That is PBGC’s statutory duty. Before PBGC may validly

claim “losses,” PBGC must deduct its premium, investment,

and other income, including PBGC’s recoveries in this case,

the same as any insurer would do.

PBGC operates on private, not government, funds —

premiums from plan sponsors and assets from terminated plans.

PBGC Br. 6. Guaranteed pension benefits are not paid from

collection of taxes or out of general federal revenues. Pet. 4.

Among the remaining creditors is a trust to provide

medical benefits to the retirees of the defunct companies, and

the PBGC. Priority payments, or increased payments, to the

PBGC will reduce, therefore, the amounts to be received by

the other creditors, including the same retirees who are

recipients of guaranteed and non-guaranteed pension benefits

from the PBGC, whom that agency is statutorily empowered

to protect. In that sense, PBGC is in a conflict with the members

of its own protected class.

B. Identification, Under Rule 15.2, of PBGC’s Mis-

Statements of the Case

In some respects, PBGC’s “Statement of the Case” (Pet.

2) is less than accurate and far from fair. > PBGC’s Statement

3. PBGC’s opening assertion that “PBGC sustained a loss of

nearly a quarter billion dollars” seeks to expand the magnitude of the

agency’s stake in the issues presented here far beyond the adjudicated

reality. PBGC’s failure to sustain its bloated original set of claims

was the result of losing issues for which it has not sought further review.

PBGC had asserted a claim for a “lien” arising upon termination of

the CF&I pension plan, and the courts below denied that claim because

the automatic stay nullified the purported lien. Pet. App. 48a-49a,

94a-95a. PBGC’s Statement of the Case continues to describe a “lien”

for delinquent contributions (Pet. 4), although the courts below barred

that lien claim because the date of its purported occurrence — 60

days after the amount of the delinquency exceeded $1 million — was

postpetition and therefore barred by the automatic stay, 11 U.S.C.

§ 362. Pet. App. Sa-9a, 44a-46a, 95a.

of the Case includes a lengthy outside-the-record description

of how the agency’s plan termination insurance program is

operated (Pet. 3-6), including selected references to portions

of one statute (ERISA, the Employee Retirement Income

Security Act of 1974), without reference to the Bankruptcy

Code, the primary statute governing this case.

The notion that PBGC has “sustained a loss of nearly a

quarter billion dollars” (Pet. 3) ignores the fact that PBGC,

like every insurer, is in the business of paying insured benefits,

and that the insurer’s payment of benefits does not cause a

“loss” in the long run if the benefits are offset by premium and

other income in the long run. In fact, PBGC’s latest annual

report, issued only last month, shows a very handsome net

income of $1.531 billion in its single-employer insurance

program, and total return on investments of 14.4%, with

investment income exceeding actuarial charges.* PBGC’s

Statement of the Case also seeks to balance its financial

exposure in this case against a stipulated limitation on PBGC’s

recovery from the “Appeal Funds” set aside in CF&I confirmed

plan of reorganization (Pet. 7). That limitation, however, is

not evidence that only PBGC has a stake in the outcome here.

On the contrary, the “Appeal Funds” were stipulated as part

of the negotiated plan of reorganization (Pet. App. 4a) precisely

because PBGC’s legal position — a position for which PBGC

seeks to establish a precedent here —- would have given the

PBGC the right to overwhelm the claims of all other unsecured

creditors.

In its “Statement of the Case,” PBGC insists that Congress

expressly gave the agency the right to set its own discount rate

(Pet. 5-6) for both ERISA and bankruptcy cases (Pet. 14). The

statement is incorrect on the law; but right or wrong, the

4. PBGC 1998 Ann. Rep. 23, Resp. App. 15a-17a.

ae "eee

particulars of this case are peculiarly inappropriate for current

review. The previous agency regulations relied upon by the

PBGC (and lodged with the Court by them) have been

superseded and re-superseded. Only a year after their issuance

PBGC modified them for the express reason that the interest

rate used in those old regulations and relied upon by PBGC at

that time was out-of-line with annuity market rates. 58 Ved.

Reg. 50,812 (1993) (to be codified at 29 C.F.R. pts. 2619 and

2676) (discussed under Point II, infra).

PBGC states that rulings below are an “inducement for

solvent companies to enter bankruptcy.” (Pet. 15). The

argument is simply at odds with the factual evidence in the

case, including the facts that

CF&I met its funding obligations until a decline in

economic conditions of the American steel industry

left it unable to make minimum funding

contributions of approximately $14 million. This

state of affairs led CF&I into filing a Petition for

Relief under chapter 11 of the Bankruptcy Code.

(Pet. App. 3a). The adjudicated facts of this case are controlling

here, and among those facts is the finding that CF&I was nota

solvent company when it filed Chapter 11, and was in

bankruptcy precisely because it was financially unable (not

unwilling) to make further contributions to its pension plan.

On the discount rate issue, PBGC asserts that the court of

appeals’ decision “means that the agency’s regulation no longer

serves as a uniform benchmark ofa plan’s benefit liabilities in

all circumstances.” (Pet. 16). The notion that PBGC’s wish

for a “uniform benchmark” should override the bankruptcy

court’s statutory duty to treat all unsecured creditors equally

by applying a uniform discount rate for creditors of a particular

debtor is an apples-and-oranges distortion, injecting a non-

)

germane agency bookkeeping concern into the statutory duty

of a bankruptcy court under 11 U.S.C. § 502(b) to “determine

the amount of such claim . . . as of the date of the filing of the

petition” — that is, to provide equal treatment among creditors

of a specific debtor.*

The PBGC clearly knows how to lobby for its objectives

legislatively, having legislatively enhanced its position in 1986

and 1987.° Indeed, PBGC has tried to accomplish an

advancement of its priorities in bankruptcy legislatively, but

5. Pet. App. 22a. To illustrate, assume Creditor A is entitled to a

future stream of payments of $1 million per year for ten years, and

Creditor B is entitled to $10 million on the petition date. If Creditor

A’s claim were discounted using an artificially low discount rate,

Creditor A would receive a substantial amount of unmatured interest.

Assuming a market discount rate of 12.3% and that the rate sought by

Creditor A were 6.5%, the net present value (“NPV”) of Creditor A’s

ten-year payment stream would be as follows:

NPV @ 12.3% rate = $5,581,507 NPV @ 6.5% rate =

$7,188,830

If the net present value amount using the 12.3% market rate

($5,581,507) were invested in the market and earned 12.3% interest,

the future value of that present value amount would be $10,000,000.

If the net present value amount using the 6.5% rate ($7,188,830) earned

the market rate of 12.3% interest, the future value of this present value

amount would be $12,879,730. By the end of ten years, Creditor A

would have received nearly $2.9 million in investment earnings in

addition to its ten $1 million payments. Distributions to Creditors A

and B would not be equal due to the deflated rate used to value Creditor

A’s claim. To treat both creditors equitably, Creditor A’s claim must

be discounted to present value using a discount rate which reflects the

future earning power of Creditor A’s claims distribution.

6. Single-Employer Pension Plan Amendments Act of 1986, Title

XI of the Consolidated Omnibus Budget Reconciliation Act of 1986,

(Cont'd)

failed.’ PBGC’s unsuccessful quest for legislation granting the

priorities it asks this Court to create for it is noted in Giddens,

“Attempting to Protect Employee Retirement Income Within

Bankruptcy Reorganization: PBGC Efforts to Obtain Priority

Status,” 1993 Ann. Rev. Banking L. 397, 423-24 (1993);

Dennis R. Dow and Mark Moedritzer, ER/SA-Related Claims

in Bankruptcy, 3 J. BANKR. L. & Prac. 76, 94 (1993); and Jn re

Kent Plastics Corp., 183 B.R. 841, 845-46 (Bankr. S.D. Ind.

1995).

PBGC’s purported purpose in urging its unrealistic

discount rate (“uniform benchmark’’) obscures, moreover, the

agency’s real purpose in setting that rate. This admitted purpose

is to act as a deterrent to an employer who might be tempted

to voluntarily foist pension liabilities upon the agency, even

though the employer could well afford to fund them. That

“institutional goal” was a factual finding of the district court,

based on admissions of the PBGC,* but it is not the purpose or

provision of the Bankruptcy Code.

(Cont'd)

Pub. L. No. 99-272, 100 Stat. 82 (1986); Pension Protection Act of

1987, included in the Omnibus Budget Reconciliation Act of 1987,

Pub. L. No. 100-203, 101 Stat. 1330 (1987). Despite PBGC efforts,

neither bill advanced PBGC’s claims in bankruptcy.

7. See S. 1730, 99th Cong. § 996, at 578-79 (as reported, October

2, 1985), which would have amended ERISA Title IV to give PBGC

a tax priority for a “lien” under Title IV and provided that “[t]he lien

and perfection of the lien shall be treated as fixing a statutory lien that

is not avoidable under section 545 of title 11, United States Code.”

After this and other priority language of S. 1730 was incorporated in

the Consolidated Omnibus Budget Reconciliation Act, the final

language of that bill (H.R. 3128, 99th Cong. (1986)) gave no such

priority. See H.R. Conf. Rep. No. 99-453, at 576 (1985).

8. Pet. App. 36a: “PBGC’s own institutional goal of making plan

terminations less attractive than the purchase of close-out annuities.”

REASONS FOR DENYING THE WRIT

There are no compelling reasons to grant certiorari, and

there are strong reasons not to do so. This bankruptcy case

involves no constitutional question, no conflict with this

Court’s decisions, no conflict among the circuits, no dissenting

opinion below, and not even a single judge wishing to hear

reconsideration en banc. The Tenth Circuit ruling is consistent

with those in other circuits. The particular PBGC valuation

methodology which the PBGC seeks tc inject into valuation

proceedings of the bankruptcy court is in fact a methodology

which the PBGC has already abandoned because of its

acknowledged “disparity between the PBGC’s low interest

rates and familiar private sector rates.”’ 58 Fed. Reg. 50,812

(September 28, 1993). And the Tenth Circuit’s rulings rejecting

administrative priority and insisting on use of the court’s own

present-value claims evaluation are plainly consistent with the

provisions of the Bankruptcy Code governing Chapter 11

proceedings.

THERE IS NO COMPELLING REASON TO GRANT

THE WRIT: THE TENTH CIRCUIT’S DECISION

PRESENTS NO CONSTITUTIONAL CONFLICT, NO

CONFLICT WITH ANY DECISION OF THIS COURT,

NO CONFLICT AMONG THE CIRCUITS, NO

DISSENT BELOW, AND IS CONSISTENT WITH THE

DECISIONS IN OTHER CIRCUITS

While PBGC argues that there are important issues raised

in this bankruptcy case, this is not an appropriate case in which

to address them, and there are no “compelling reasons”

warranting the grant of certiorari. Sup. Ct. R. 10.

The petition cites no conflict among the courts of appeals

(Sup. Ct. R. 10(a)). PBGC’S Petition acknowledges the

consistent rulings in three cases that have considered the

discount rate issue. Pet. 14 n.10.° Likewise, on the claim of

PBGC’s administrative priority in bankruptcy, the petition

claims no conflict in circuits, and acknowledges consistent

rulings in the circuits that have considered the question. (Pet.

27). -

There was not even a dissent in the Court of Appeals for

the Tenth Circuit, and on motion for reconsideration not a

single judge of the Court of Appeals supported reconsideration

en banc. Indeed, the only time the PBGC ever persuaded even

a dissenting judge on either of these issues was in PBGC v.

Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d

811, 822 (6th Cir. 1997) (dissenting opinion), but on a motion

for reconsideration in that case, once again not a single other

judge of that Court of Appeals supported reconsideration en

banc. PBGC v. Sunarhauserman, Inc. (In re Sunarhauserman,

Inc.), 1997 U.S. App. LEXIS 37157 (6th Cir. Dec. 8, 1997).

And PBGC did not petition for certiorari in that case.

9. Citing LTV Corp. v. PBGC (In re Chateaugay Corp.), 130

B.R. 690, 695-96 (S.D.N.Y. 1991), and 126 B.R. 165 (Bankr. S.D.N.Y.

1991), vacated by consent order, 17 Empl. Ben. Cas. (BNA) 1102

(S.D.N.Y. 1993); Belfance v. PBGC (In re CSC Industries, Inc.), No.

95-4103 (Bankr. N.D. Ohio Dec. 3, 1997), appeal docketed, No.

4:99CV00041 (N.D. Ohio, Jan 8, 1999).

Il.

THE PBGC REGULATIONS AT ISSUE HERE HAVE

BEEN SUPERSEDED, AND RE-SUPERSEDED AND

PRESENT ONLY AN OBSOLETE CONTEXT FOR

CONSIDERATION OF THE VALUATION ISSUE

The obsolete regulatory context in which this case arises

makes it particularly inappropriate for further review by

certiorari. The 1992 version of PBGC’s valuation regulation,

which PBGC lodged with the Court, was supplanted a year

later. While PBGC insists that the 1993 amended regulation

was “without change to its basic approach” (Pet. 6 n.5), in fact

the preamble to the 1993 regulations conceded that a reason

for the change was the prior regulation’s “disparity between

the PBGC’s low interest rates and familiar private sector rates.”

58 Fed. Reg. 50,812 (September 28, 1993), Resp. App. 20a.'°

The 1993 superseding regulation claims to adhere to PBGC’s

stated commitment to “accurately reflect private sector group

annuity prices” (Id. 20a) (emphasis added), but concedes that

it in fact involved a “disparity between PBGC’s low interest

rates and familiar private sector rates.” (Jd.). Doubtless PBGC

has an adequate explanation to support its notion that “for most

plans, this amendment will not significantly affect the

valuations produced” (Resp. App. 18a), and in any event the

private sector insurance rates urged by PBGC are not market

rates of interest at all, in the bankruptcy sense. Be that as it

may, the context in which the interest rate issue is presented

by PBGC’s petition in this case is simply the wrong context

for certiorari. The specific regulation which the PBGC asks

this Court to impose upon a bankruptcy court’s market

10. The 1993 regulation was re-superseded, in turn, by the current

regulation, which was promulgated in 1996. 29 C.F.R. § 4044.52, 61

Fed. Reg. 34002 (1996).

valuation under 11 U.S.C. § 502(b), is not merely obsolete, it

was admittedly wrong. It presents, therefore, the wrong context

in which to test the currently-effective PBGC valuation

regulation. This context does not invoke a “compelling reason”

for the grant of certiorari.

iil.

THE REMAINING ISSUES IN THIS CASE LACK THE

CONTEXT NECESSARY TO EVALUATE THE

IMPACT ON THE “AGENCY’S ABILITY TO

CARRY OUT ITS MISSION”

PBGC argues that its petition should now be granted

because “immediate review of these issues is important to the

agency’s ability to carry out its mission.” Pet. 19. PBGC carries

out its mission, however, by filing a much wider array of claims

in each bankruptcy. That is what PBGC did in this case. PBGC

litigated all those claims in the Bankruptcy Court and District

Court. It dropped some of them in the Court of Appeals

(although the major issue it dropped was in fact tenaciously

argued at the same time in another case),'' and it has dropped

more issues in its petition here. Pet. 10 n.7. Thus, the case

presented here does not give the Court an adequate or accurate

picture of the PBGC’s ongoing litigation posture in seeking

“to carry out its mission.”

PBGC insists that “the ‘world of bankruptcy’ — to which

the court of appeals ostensibly limited its holding — is the

main world in which the PBGC insurance fund operates.” Petit.

14. That argument is both immaterial and wrong. The statute,

of course, was designed in 1974 and originally provided that a

11. PBGC v. Skeen (In re Bayly Corp.), 163 F.3d 1205 (10th

Cir. 1998).

ee ee er ener

plan termination required no bankruptcy, nor even economic

distress. Employee Retirement Income Security Act of 1974,

Pub. L. No. 93-406, § 4041(a), 88 Stat. 829, 1020 (1974). While

later amendments injected, and current law includes, voluntary

termination requirements of economic “distress,” ERISA

§ 4041, 29 U.S.C. § 1341, not all of those requirements include

proceedings in Bankruptcy. ERISA § 4041(c)(2)(B)(ii1),

29 U.S.C. § 1341(c)(2)(B)(i1).

Even more to the point, this case does not involve a

voluntary plan termination. On the contrary, this was an

involuntary plan termination, initiated by the PBGC under

ERISA § 4042, 29 U.S.C. § 1342. Involuntary terminations

may be initiated at any time the PBGC believes that its financial

exposure would “increase unreasonably.” Indeed, PBGC’s

legal strategy is the use of its “early warning system,” in which

PBGC learns of an impending corporate transaction (spin-off,

sale of assets, etc.), and induces the economically healthy plan

sponsor to make an extra contribution to the sponsor’s pension

plan by threatening the sponsor with an involuntary plan

termination under ERISA § 4042, leading to a lien for the full

amount of unfunded liabilities — outside of any bankruptcy

and therefore immune from any stay or other restriction of the

Bankruptcy Code. The 1998 Annual Report of PBGC, under

the heading “Loss Prevention,” describes this system as being

“PBGC’s principal performance measure for its strategic goal

of protecting existing defined benefit plans and their

participants .. ."” PBGC 1998 Ann. Rep. 14, Resp. App. 14a.

Clearly, the PBGC’s non-bankruptcy enforcement rights are

not only alive and well, but also the central component of

PBGC’s overall corporate strategy.

IV.

THE TENTH CIRCUIT CORRECTLY DENIED

ADMINISTRATIVE PRIORITY

The Tenth Circuit’s refusal to grant administrative priority

was for unfunded benefit liabilities of the Master Plan correct.

A. Claims for Unfunded Pension Liabilities or for

Contributions to Fund Such Pension Benefits are

Prepetition Debts Because the Pensions Were Earned

by Prepetition Service

All of PBGC’s remaining claims arise from pension

benefits earned under the Master Plan by work performed

before CF&I filed its bankruptcy petition.

PBGC’s allowed postpetition administrative claim, for

minor amounts of pension benefits earned by postpetition labor,

has already been paid in full pursuant to the confirmed Chapter

11 plan of reorganization.

PBGC also claimed and was granted a prepetition priority

claim under 11 U.S.C. § 507(a)(4) (limited unsecured

prepetition claims for contributions to employee benefit plans)

for a portion of its claim that is not in dispute here. That claim

was paid pursuant to the confirmed plan of reorganization.

That claim, however, clearly demonstrates that the Bankruptcy

Code itself treats pensions, and pension funding obligations,

as prepetition debts if the work that earned the pensions was

done prepetition. Section 507(a)(4) of the Bankruptcy Code

grants this priority to “unsecured claims for contributions to

an employee benefit plan . . . arising from services rendered

within 180 days before the date of the filing of the petition. . . .”

The Bankruptcy Code’s specific treatment of plan benefits as

“arising from services rendered . . . before the date of the filing

of the petition” is definitive of the prepetition character of the

funding claim.

PBGC’s remaining claims are not attributable to

postpetition services of the Debtors’ employees. Their character

as prepetition claims is based on undisputed facts found by

the lower courts. Pet. App. 89a-91a.

When PBGC chose to terminate unilaterally the Master

Plan and become the successor trustee, it succeeded to the

Master Plan’s prepetition claims against the Debtors. The mere

postpetition change of the trustee of the Master Plan from CF&]

to PBGC (or the postpetition transfer of the Master Plan’s

prepetition claims to PBGC) does not convert prepetition

claims into post-petition claims any more than does a

postpetition change in management of a creditor or the

postpetition assignment of a prepetition claim.

The great weight of authority holds that liabilities are not

“incurred” postpetition simply because they become due post-

petition. PBGC v. Sunarhauserman, Inc. (in re

Sunarhauserman, Inc.), 126 F.3d 811, 816-819 (6th Cir. 1997)

(rejecting PBGC’s attempts to obtain postpetition status for

prepetition claims); 7rustees of Amalgamated Ins. Fund v.

McFarlin’s, Inc., 789 F.2d 98, 101 (2d Cir. 1986); Coldwell

Banker & Co. v. Godwin Bevers Co. (In re Godwin Bevers

Co.), 575 F.2d 805, 807 (10th Cir. 1978) (prepetition

commission agreement did not give rise to administrative claim

under Bankruptcy Act when property was sold postpetition);

Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.),

536 F.2d 950, 954 (1st Cir. 1976) (“a claimant who fully

performs under a contract prior to the filing of the petition

will not be entitled to first priority even though his services

may have resulted in a direct benefit to the bankrupt estate

after the filing”); Gallivan v. Springfield Post Road Corp.,

110 F.3d 848 (1st Cir. 1997) (same result under Bankruptcy

Code, applying Mammoth Mart analysis); In re Great N.E.

Lumber & Millwork Corp., 64 B.R. 426 (Bankr. E.D. Pa. 1986);

In re Johns-Manville Corp., 57 B.R. 680, 690 (Bankr. $.D.N.Y.

1986) (appropriate focus for determining when a claim arises

is “the time when the acts giving rise to the alleged liability

were performed”).

As Judge Lifland correctly analyzed this issue in the

landmark LTV cases:

The PBGC’s night to payment upon termination

was, on the petition date, a classic prepetition

contingent claim. The postpetition termination of

the pension plans did not transform the PBGC’s

contingent pre-petition claims into post-petition

claims.

LTV Corp. v. PBGC (In re Chateaugay Corp.), 115 B.R. 760,

775 (Bankr. S.D.N.Y. 1990),’? reiterated in Jn re Finley,

Kumble, Wagner, Heine, Underberg, Manley, Myerson &

Casey, 160 B.R. 882 (Bankr. S.D.N.Y. 1993). The district court

in LTV Corp. v. PBGC (In re Chateaugay Corp.), 130 B.R.

12. On June 7, 1993, some of the LTV decisions were vacated

by consent of the parties, including L7V Corp. v. PBGC (In re

Chateaugay Corp.), 115 B.R. 760 (Bankr. S.D.N.Y. 1990), LTV Corp.

v. PBGC (In re Chateaugay Corp.), 126 B.R. 165 (Bankr. S.D.N.Y.

1991), and LTV Corp. v. PBGC (In re Chateaugay Corp.), 130 B.R.

690 (S.D.N.Y. 1991). Vacatur does not deprive these decisions of

their persuasive value and this Court is free to adopt their highly

persuasive reasoning. See Jn re Finley, Kumble, Wagner, Heine,

Underberg, Manley, Myerson & Casey, 160 B.R. 882, 898 (Bankr.

S.D.N.Y. 1993).

690, 697 (S.D.N.Y. 1991), agreed: “PBGC’s claims are pre-

petition contingent claims because the labor giving rise to the

pension obligations was performed pre-petition.”

In treating PBGC’s claims as prepetition claims, the Tenth

Circuit was squarely in line with the foregoing well established

precedent.

B. Reading Co. v. Brown Does Not Require a Different

Result

The keystone of PBGC’s argument for first priority is the

Petition’s reliance on Reading Co. v. Brown, 391 U.S. 471

(1968). Pet. 26. Reading, however, involved a debt that was

incurred postpetition. As the Petition itself recites, “the Court

granted administrative priority to a postpetition tort claim”

because the claimant’s “property was damaged by a fire

through the negligence of the receiver.” In each of the later

cases following Reading, cited by PBGC (Pet. 26-27),'? the

debtor’s conduct which gave rise to the claim occurred

13. Cumberland Farms Inc. v. Florida Dep't of Envtl. Protection,

116 F.3d 16, 20-21 (1st Cir. 1997) (postpetition operation of

underground storage tanks without satisfying financial responsibility

requirements); Alabama Surface Mining Comm'n v. N.P. Mining Co.

(In re N.P. Mining Co.), 963 F.2d 1449, 1453-58 (11th Cir. 1992)

(postpetition environmental violations); United States v. LTV Corp.,

(In re Chateauguay Corp.), 944 F.2d 997, 1009-10 (2d Cir. 1991)

(response costs of postpetition maintenance of hazardous waste sites);

Lancaster v. Tennessee (In re Wall Tube & Metal Prods. Co.), 831

F.2d 118, 123-24 (6th Cir. 1987) (response costs as to hazardous wastes

still on Debtor’s land postpetition); Spunt v. Charlesbank Laundry,

Inc. (In re Charlesbank Laundry, Inc.), 755 F.2d 200, 203 (1st Cir.

1985) (postpetition continuation of nuisance); Yorke v. NLRB, 709

F.2d 1138, 1143 (7th Cir. 1983) (back pay order against Trustee in

bankruptcy who violated NLRA postpetition).

postpetition. In CF&I’s case, the pension debt was incurred

by the prepetition labor of CF&I’s employees. Reading and

its progeny are not in point.

PBGC is even farther off the mark when the petition (Pet.

28) argues that “[t]he employer’s statutory obligation to pay

contributions to the plan is entirely separate from the plan’s

obligation to participants,” citing Hughes Aircraft Co. v.

Jacobson, 119 S. Ct. 755, 762 (1999). The Court’s Hughes

ruling had nothing to do with bankruptcy, and had nothing to

do with the question whether the obligation to fund was a

postpetition or prepetition debt. Hughes, a fiduciary duty case

under ERISA title I, simply held that the use of excess,

overfunding, assets to benefit other participants did not violate

ERISA’s fiduciary standards.

THE TENTH CIRCUIT CORRECTLY APPROVED

THE BANKRUPTCY COURT’S MARKET

VALUATION METHOD AS REQUIRED BY 11 U.S.C.

§ 502(b), RATHER THAN PBGC’S REGULATORY

DISCOUNT RATE

The Tenth Circuit correctly upheld the bankruptcy court’s

decision on the discount rate applicable to bringing future

pension payment obligations to present value.

The issue presented by the Petition is whether PBGC’s

original Unfunded Benefits Claim used the proper valuation

method in bankruptcy. The parties do not dispute PBGC’s

calculation of the aggregate future value of its Unfunded

Benefits Claim. The dispute lies in the methodology by which

the present value of PBGC’s claim should be determined.

The courts below properly ruled that PBGC’s Unfunded

Benefits Claim should be reduced to present value using a

market-based discount rate of 12.3%, which fairly reflects the

expected rate of return a prudent investor may achieve on the

investment of a sum of money set aside as of the Petition Date

to satisfy future benefit payments, and “is the only rate in

evidence compatible with the Bankruptcy Code.” Pet. App.

23a.

PBGC, on the other hand, asserts based on ERISA that it

has the unilateral prerogative to establish the discount rate for

its own claim and to impose that rate upon the bankruptcy

court, to the detriment of other unsecured creditors. PBGC

contends that its claim should be discounted utilizing a single-

creditor-specific discount rate of 6.5% embodied in its own

regulation, Pet. App. 21a. That is a rate PBGC devised to suit

its own administrative convenience and to promote PBGC’s

own “institutional goal of making plan termination less

attractive,” Pet. App. 22a. Applying the ERISA discount factor

to value PBGC’s bankruptcy claim, however, would undermine

the fundamental bankruptcy principle of equality of distribution

among similarly situated creditors. 11 U.S.C. § 502(b)(2).

The courts below properly recognized the applicability of

the fundamental bankruptcy principle of equality of treatment

between similarly situated creditors to bankruptcy claims

allowance. Pet. App. 13a-14a. Adherence to the principle of

equal treatment is more essential where the claim to be valued

is a claim for a future stream of payments. The Bankruptcy

Code mandates that claims for future payments be discounted

to present value. 11 U.S.C. § 502(b) (“the court ... shall

determine the amount of such claim in lawful currency of the

United States as of the date of the filing of the petition . . .”).

The regulatory interest rate assumption proffered by the PBGC

i i- — —" = - — ” = 7” a Ne ee a ee a es ek ee fe

applies to the present-valuing of future benefits under a

different statute (ERISA), in a different context, and for a

different purpose (to discourage plan terminations)."*

As the L7V bankruptcy court recognized, “based on its

charter, the PBGC is clearly motivated to enhance its claims

... as much as possible.” LTV Corp. v. PBGC (In re

Chateaugay Corp.), 115 B.R. 760, 771 (Bankr. S.D.N.Y.

1990). Under the Bankruptcy Code, the court, not the creditor,

is charged with the responsibility to determine the present value

of a claim for a future stream of payments. /d. at 765-71.

Allowing PBGC to dictate an artificially low discount rate

would enable PBGC to inflate the value of its own claim.

Creditors, however, are not granted that privilege. PBGC’s

discount factor is fundamentally inconsistent with 11 U.S.C.

§§ 502(b), 502(b)(2), 1123(a)(4) and the equitable bankruptcy

principles inherent in those statutory provisions.

PBGC’s position rests entirely upon its unsupportable

contention that the Bankruptcy Code must be subordinated to

PBGC’s non-bankruptcy regulation. PBGC attempts to justify

its untenable position by arguing that its regulation is entitled

to absolute deference as “legislative rules,” and that the non-

bankruptcy law embodied in its regulation is the only law to

be applied in determining the validity and amount of its

Unfunded Benefits Claim. Pet. 21-22. PBGC relies heavily

on its analysis of Batterton v. Francis, 432 U.S. 416 (1977),

Chevron U.S.A., Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837 (1984), and related cases. PBGC tries to

show that its valuation regulation carries the force of law and

thereby prevails over inconsistent provisions of the Bankruptcy

Code.

14. 29 C.F.R. § 2619.1 at 666 (7-1-92 Edition) (from Material

Lodged in Support of Petition for Certiorari, at 1).

PBGC’s reliance on Batterton and Chevron is misplaced.

Moreover, even assuming arguendo that PBGC’s 1992

regulation has the force and effect of law, its status as a

legislative rule does not justify subordination of the Bankruptcy

Code.

In Batterton and Chevron, the Supreme Court addressed

the degree of deference to be accorded an administrative agency

in the context of reviewing the agency’s construction of the

statute it administers. Batterton, 432 U.S. at 424; Chevron,

467 U.S. at 842. In that context, the Court ruled that where

Congress has expressly authorized the agency to elucidate a

specific provision of the statute by regulation, the agency’s

construction is to be given “controlling weight” unless it is

arbitrary, capricious, or manifestly contrary to law. Chevron,

467 US. at 844 (citing Batterton, 432 U.S. at 425). In reaching

its decision, the Court recognized that an agency’s construction

of the statute it administers is an area in which it has special

expertise, and because of that expertise, the agency is entitled

to substantial deference.

The Court’s rulings in Batterton and Chevron do not apply

in the instant case, and the Court of Appeals correctly saw it

that way. Pet. App. 14a-15a. This case does not present an

issue concerning an administrative agency’s construction of

the statute which it administers.'* PBGC administers ERISA,

not the Bankruptcy Code. The Reorganized Debtors do not

challenge the discount factor set forth in the 1992 PBGC

15. Valuation of PBGC’s claims requires the Bankruptcy Court

to “reconcil[e] conflicting policies” between ERISA and the

Bankruptcy Code, a task which PBGC is not at all authorized, or

equipped, to perform. LTV Corp. v. PBGC (In re Chateaugay Corp.),

115 B.R. 760, 768-71 (Bankr. S.D.N.Y. 1990); cf Chevron, 467 U.S.

at 844.

regulation as an improper construction of ERISA. The issue

in this case is whether PBGC’s discount factor should be

applied, outside of ERISA, to value a claim in bankruptcy at

present value.

Any delegation of legislative authority arguably expressed

in 29 U.S.C. § 1301(a)(18) (ERISA § 4001(a)(18)) does not

extend to the valuation of claims in bankruptcy. Section

1301(a)(18) defines the amount of unfunded benefit liabilities

“for purposes of this title [ERISA]” only. Nothing in

§ 1301(a)(18), or any other provision of ERISA, expresses any

congressional intent to authorize PBGC to determine the

present value of unfunded future benefit liabilities for purposes

of the Bankruptcy Code. Rather, Congress expressly delegated

exclusive responsibility for valuation of all claims in

bankruptcy, whatever their source, to the Bankruptcy Court in

§ 502(b).

CONCLUSION

The Court should deny the petition.

Respectfully submitted,

FRANK CUMMINGS

Counsel of Record

LeBoeur, LAMB, GREENE

& MacRag, L.L.P.

1875 Connecticut Ave., N.W.

Washington, D.C. 20009-5728

(202) 986-8000

STEVEN J. MCCARDELL

LEBoeuF, LAMB, GREENE

& MacRae, L.L.P

1000 Kearns Building

136 South Main Street

Salt Lake City, UT 84101

(801) 320-6700

WESTON L. Harris

STEVEN T. WATERMAN

Ray, QUINNEY & NEBEKER

79 South Main Street, #700

P.O. Box 45385

Sait Lake City, UT 84145-0385

(801) 532-1500

Attorneys for Respondents

Reorganized CF &I Fabricators

of Utah, Inc., et al.

APPENDIX

See Los ta ae 8 Aa SR oo end ik eed Pe Ae it act a ee he ae Le

Cain ei ee ani eal ioe

APPENDIX A — RELEVANT STATUTES

11 U.S.C. § 1113

Sec. 1113. Rejection of collective bargaining agreements

(a) The debtor in possession, or the trustee if one has been

appointed under the provisions of this chapter, other than a

trustee in a case covered by subchapter IV of this chapter

and by title I of the Railway Labor Act, may assume or reject

a collective bargaining agreement only in accordance with

the provisions of this section.

(b)

(1) Subsequent to filing a petition and prior to

filing an application seeking rejection of a

collective bargaining agreement, the debtor in

possession or trustee (hereinafter in this section

“trustee” shall include a debtor in possession),

shall —

(A) make a proposal to the authorized

representative of the employees covered

by such agreement, based on the most

complete and reliable information

available at the time of such proposal,

which provides for those necessary

modifications in the employees benefits

and protections that are necessary to

permit the reorganization of the debtor

and assures that all creditors, the debtor

and all of the affected parties are treated

fairly and equitably; and

Appendix A

(B) provide, subject to subsection

(d)(3), the representative of the

employees with such relevant

information as is necessary to evaluate

the proposal.

(2) During the period beginning on the date of the

making of a proposal provided for in paragraph

(1) and ending on the date of the hearing provided

for in subsection (d)(1), the trustee shall meet,

at reasonable times, with the authorized

representative to confer in good faith in attempting

to reach mutually satisfactory modifications of

such agreement.

a collective bargaining agreement only if the court finds

that —

(1) the trustee has, prior to the hearing, made a

proposal that fulfills the requirements of

subsection (b)(1);

(2) the authorized representative of the employees

has refused to accept such proposal without good

cause; and

(3) the balance of the equities clearly favors

rejection of such agreement.

ae hy ne PS

A OB POP IA IE

(d)

Appendix A

(1) Upon the filing of an application for rejection

the court shall schedule a hearing to be held not

later than fourteen days after the date of the filing

of such application. All interested parties may

appear and be heard at such hearing. Adequate

notice shall be provided to such parties at least

ten days before the date of such hearing. The court

may extend the time for the commencement of

such hearing for a period not exceeding seven days

where the circumstances of the case, and the

interests of justice require such extension, or for

additional periods of time to which the trustee and

representative agree.

(2) The court shall rule on such application for

rejection within thirty days after the date of the

commencement of the hearing. In the interests of

justice, the court may extend such time for ruling

for such additional period as the trustee and the

employees’ representative may agree to. If the

court does not rule on such application within

thirty days after the date of the commencement of

the hearing, or within such additional time as the

trustee and the employees’ representative may

agree to, the trustee may terminate or alter any

provisions of the collective bargaining agreement

pending the ruling of the court on such application.

(3) The court may enter such protective orders,

consistent with the need of the authorized

Appendix A

representative of the employee-to evaluate the

trustee’s proposal and the application for rejection,

as may be necessary to prevent disclosure of

information provided to such representative where

such disclosure could compromise the position of

the debtor with respect to its competitors in the

industry in which it is engaged.

(e) If during a period when the collective bargaining

agreement continues in effect, and if essential to the

continuation of the debtor’s business, or in order to avoid

irreparable damage to the estate, the court, after notice and a

hearing, may authorize the trustee to implement interim

changes in the terms, conditions, wages, benefits, or work

rules provided by a collective bargaining agreement. Any

hearing under this paragraph shall be scheduled in accordance

with the needs of the trustee. The implementation of such

interim changes shall not render the application for rejection

moot.

(f) No provision of this title shall be construed to permit a

trustee to unilaterally terminate or alter any provisions of a

collective bargaining agreement prior to compliance with the

provisions of this section.

11 U.S.C. § 1114

Sec. 1114. Payment of insurance benefits to retired

employees

(a) For purposes of this section, the term “retiree benefits”

means payments to any entity or person for the purpose of

! 5a

| Appendix A

providing or reimbursing payments for retired employees and

their spouses and dependents, for medical, surgical, or

hospital care benefits, or benefits in the event of sickness,

accident, disability, or death under any plan, fund, or program

(through the purchase of insurance or otherwise) maintained

or established in whole or in part by the debtor prior to filing

a petition commencing a case under this title.

(b)

(1) For purposes of this section, the term

“authorized representative” means the authorized

representative designated pursuant to subsection

covered by a collective bargaining agreement or

subsection (d) in the case of persons receiving

retiree benefits not covered by such an agreement.

(2) Committees of retired employees appointed

by the court pursuant to this section shall have the

same rights, powers, and duties as committees

appointed under sections //02 and 1103 of this

title for the purpose of carrying out the purposes

of sections ///4 and 1129(a)(13) and, as permitted

by the court, shall have the power to enforce the

rights of persons under this title as they relate to

retiree benefits.

(c)

(1) A labor organization shall be, for purposes of

this section, the authorized representative of those

Appendix A

persons receiving any retiree benefits covered by

any collective bargaining agreement to which that

labor organization is signatory, unless (A) such

labor organization elects not to serve as the

authorized representative of such persons, or (B)

the court, upon a motion by any party in interest,

after notice and hearing, determines that different

representation of such persons is appropriate.

(2) In cases where the labor organization referred

to in paragraph (1) elects not to serve as the

authorized representative of those persons

receiving any retiree benefits covered by any

collective bargaining agreement to which that

labor organization is signatory, or in cases where

the court, pursuant to paragraph (1) finds different

representation of such persons appropriate, the

court, upon a motion by any party in interest, and

after notice and a hearing, shall appoint a

committee of retired employees if the debtor seeks

to modify or not pay the retiree benefits or if the

court otherwise determines that it is appropriate,

from among such persons, to serve as the

authorized representative of such persons under

this section.

(d) The court, upon a motion by any party in interest, and

after notice and a hearing, shall appoint a committee of retired

employees if the debtor seeks to modify or not pay the retiree

benefits or if the court otherwise determines that it is

appropriate, to serve as the authorized representative, under

this section, of those persons receiving any retiree benefits

not covered by a collective bargaining agreement.

(e)

Appendix A

(1) Notwithstanding any other provision of this

title, the debtor in possession, or the trustee if one

has been appointed under the provisions of this

chapter (hereinafter in this section “trustee” shall

include a debtor in possession), shall timely pay

and shall not modify any retiree benefits, except

that —

(A) the court, on motion of the trustee

or authorized representative, and after

notice and a hearing, may order

modification of such payments, pursuant

to the provisions of subsections (g) and

(h) of this section, or

(B) the trustee and the authorized

representative of the recipients of those

benefits may agree to modification of

such payments, after which such benefits

as modified shall continue to be paid by

the trustee.

(2) Any payment for retiree benefits required to

be made before a plan confirmed under section

1129 of this title is effective has the status of an

allowed administrative expense as provided in

section 503 of this title.

Appendix A

(f)

(1) Subsequent to filing a petition and prior to

filing an application seeking modification of the

retiree benefits, the trustee shall —

(A) make a proposal to the authorized

representative of the retirees, based

on the most complete and reliable

information available at the time of such

proposal, which provides for those

necessary modifications in the retiree

benefits that are necessary to permit the

reorganization of the debtor and assures

that all creditors, the debtor and all of

the affected parties are treated fairly and

equitably; and

(B) provide, subject to subsection

(k)(3), the representative of the retirees

with such relevant information as is

necessary to evaluate the proposal.

(2) During the period beginning on the date of the

making of a proposal provided for in paragraph

(1), and ending on the date of the hearing provided

for in subsection (k)(1), the trustee shall meet,

at reasonable times, with the authorized

representative to confer in good faith in attempting

to reach mutually satisfactory modifications of

such retiree benefits.

Appendix A

(g) The court shall enter an order providing for modification

in the payment of retiree benefits if the court finds that —

(1) the trustee has, prior to the hearing, made a

proposal that fulfills the requirements of

subsection (f);

(2) the authorized representative of the retirees

has refused to accept such proposal without good |

cause; and

(3) such modification is necessary to permit the

reorganization of the debtor and assures that all

creditors, the debtor, and all of the affected parties

are treated fairly and equitably, and is Clearly

favored by the balance of the equities; except that

in no case shall the court enter an order providing

for such modification which provides for a

modification to a level lower than that proposed

by the trustee in the proposal found by the court

to have complied with the requirements of this

subsection and subsection (f): Provided, however,

That at any time after an order is entered providing

for modification in the payment of retiree benefits,

or at any time after an agreement modifying such

benefits is made between the trustee and the

authorized representative of the recipients of such

benefits, the authorized representative may apply

to the court for an order increasing those benefits

which order shall be granted if the increase in

retiree benefits sought is consistent with the

standard set forth in paragraph (3): Provided

10a

Appendix A

further, That neither the trustee nor the authorized

representative is precluded from making more than

one motion for a modification order governed by

this subsection.

(h)

(1) Prior to a court issuing a final order under

subsection (g) of this section, if essential to the

continuation of the debtor’s business, or in order

to avoid irreparable damage to the estate, the court,

after notice and a hearing, may authorize the

trustee to implement interim modifications in

retiree benefits.

(2) Any hearing under this subsection shall be

scheduled in accordance with the needs of the

trustee.

(3) The implementation of such interim changes

does not render the motion for modification moot.

(i) No retiree benefits paid between the filing of the petition

and the time a plan confirmed under section //29 of this title

becomes effective shall be deducted or offset from the

amounts allowed as claims for any benefits which remain

unpaid, or from the amounts to be paid under the plan with

respect to such claims for unpaid benefits, whether such

claims for unpaid benefits are based upon or arise from a

right to future unpaid benefits or from any benefits not paid

as a result of modifications allowed pursuant to this section.

(j) No claim for retiree benefits shall be limited by section

502(b)(7) of this title.

(k)

lla

Appendix A

(1) Upon the filing of an application for modifying

retiree benefits, the court shall schedule a hearing

to be held not later than fourteen days after the

date of the filing of such application. All interested

parties may appear and be heard at such hearing.

Adequate notice shall be provided to such parties

at least ten days before the date of such hearing.

The court may extend the time for the

commencement of such hearing for a period not

exceeding seven days where the circumstances of

the case, and the interests of justice require such

extension, or for additional periods of time to

which the trustee and the authorized representative

agree.

(2) The court shall rule on such application for

modification within ninety days after the date of

the commencement of the hearing. In the interests

of justice, the court may extend such time for

ruling for such additional period as the trustee and

the authorized representative may agree to. If the

court does not rule on such application within

ninety days after the date of the commencement

of the hearing, or within such additional time as

the trustee and the authorized representative may

agree to, the trustee may implement the proposed

modifications pending the ruling of the court on

such application.

(3) The court may enter such protective orders,

consistent with the need of the authorized

12a

Appendix A

representative of the retirees to evaluate the

trustee’s proposal and the application for

modification, as may be necessary to prevent

disclosure of information provided to such

representative where such disclosure could

compromise the position of the debtor with respect

to its competitors in the industry in which it is

engaged.

(1) This section shall not apply to any retiree, or the spouse

or dependents of such retiree, if such retiree’s gross income

for the twelve months preceding the filing of the bankruptcy

petition equals or exceeds $250,000, unless such retiree can

demonstrate to the satisfaction of the court that he is unable

to obtain health, medical, life, and disability coverage for

himself, his spouse, and his dependents who would otherwise

be covered by the employer’s insurance plan, comparable to

the coverage provided by the employer on the day before the

filing of a petition under this title.

* * * *

13a

APPENDIX B — EXCERPTS FROM

PBGC 1998 ANNUAL REPORT

Bersteny Desettt tat arante 4 ee

bse be Gone eet! Reet

14a

Appendix B

* oe *

[Excerpt from page 14]

Loss PREVENTION

Under its Early Warning Program, PBGC continued to

monitor more than 500 companies with pension plans

underfunded by at least $5 million in order to identify

transactions that could jeopardize pensions and to arrange

suitable protections for those pensions and the pension

insurance program. During 1998, PBGC negotiators reached

agreements valued at nearly $1.1 billion with 35 companies,

including Pepsico, Fruit of the Loom, Sunbeam, Pillowtex,

and Inland Steel Company. These agreements provided

contributions, security, and other protections for the pensions

of about 257,000 workers and retirees. Loss prevention is

PBGC’s principal performance measure for its strategic goal

of protecting existing defined benefit plans and their

participants; with regard to these agreements. PBGC is able

to report a loss prevention rate of 100 percent for 1998.

* * *x

15a

Appendix B

[Excerpts from page 23]

Financial Statements

MANAGEMENT?’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

GENERAL

The following discussion and analysis provide information

that management believes is relevant to an assessment and

understanding of the Corporation’s financial condition and

results of operations. The discussion should be read in

conjunction with the financial statements and notes thereto.

PBGC’s operating results are subject to significant

fluctuation from year to year depending on the frequency and

severity of losses from terminating pension plans, general

economic conditions, and other factors such as changes in

law. Consequently, certain traditional financial ratios and

measurements are not meaningful and therefore, not

presented.

COMBINED RESULTS

For 1998, PBGC’s combined underwriting and financial

activities resulted in a net gain of $1.653 billion on gross

income of $3.250 billion. The single-employer and

multiemployer programs reported a net income of $1.53]

billion and $122 million respectively. By law, these two

programs are separate.

16a

Appendix B

SINGLE-EMPLOYER PROGRAM

Results of Activities and Trends: The net income in 1998

was $1.531 billion compared to net income of $2.612 billion

in 1997. The $1.081 billion decrease was primarily

attributable to the decrease in investment income.

Underwriting Activity: The gain of $462 million in 1998

was down from a gain of $897 million in 1997. This $435

million decrease was primarily due to (1) a decrease in

premium income, (2) the one-time actuarial credit taken in

1997 as a result of the change in the method of calculating

expenses incurred in determining and paying a participant’s

benefits, to more closely match the agency’s annual

claims-related expenses, and (3) an increase in losses from

probable terminations.

Underwriting income decreased from $1.086 billion in

1997 to $976 million in 1998. The $110 million decrease

relates primarily to the decrease in variable-rate premium

payments.

The Corporation’s losses from completed and probable

plan terminations increased from $489 million in 1997 to

$584 million in 1998. Although there were no major plan

terminations in 1998, losses are unpredictable.

Operating costs remained level at $143 million.

Financial Activity: Investment income exceeded

actuarial charges in 1998, resulting in a $1.069 billion gain

versus a $1.715 billion gain in 1997. The total return on

17a

Appendix B

investments was 14.4% in 1998, compared to 21.9% in 1997.

Fixed-income investments experienced higher returns in 1998

than in 1997 while equity investment returns were lower.

PBGC, in accordance with generally accepted accounting

principles, marks its assets and liabilities to market.

Actuarial charges primarily resulted from the aging of

the present value of future benefits and from changes in

interest rates. In 1998, the select interest rate assumption

decreased from 6.2% at September 30, 1997, to 5.7% at

September 30, 1998, while the ultimate rate increased from

5.5% to 5.75%. The passage of time and change in the interest

rates resulted in an actuarial charge of $1.034 billion in 1998,

compared to an actuarial charge of $960 million in 1997.

cad * a *

18a

APPENDIX C — 58 FEDERAL REGISTER 50812

(SEPTEMBER 28, 1993)

PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 2619 and 2676

RIN 1212-AA61

Valuation of Plan Benefits in Single-Employer Plans;

Valuation of Plan Benefits and Plan Assets Following

Mass Withdrawal

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Final rule.

SUMMARY: The Pension Benefit Guaranty Corporation

(“PBGC”) is amending its regulation governing valuation of

plan benefits in terminated single-employer plans that are

trusteed by the PBGC. The amendment revises the

regulation’s mortality assumptions to reflect recent acturial

practice, (2) to uncouple the regulation’s administrative

expense (“loading”) assumptions from its interest

assumptions, and (3) to clarify the valuation of annuity

benefits by prescribing a new interest rate structure that bases

valuations on the length of time between the valuation date

and the presumed date of each payment. Although the

amendment continues the regulation’s historical approach of

assigning values to annuity benefits that are in line with

private sector group annuity prices, and the PBGC anticipates

that, for most plans, this amendment will not significantly

affect the valuations produced, the new assumptions and

structure will greatly enhance public understanding of the

19a

Appendix C

PBGC’s valuations. In addition, the PBGC is adopting unisex

mortality assumptions when it is calculating de minimis lump

sums (i.e., those of $3,500 or less) to be paid to a participant;

the PBGC is otherwise reserving the lump sum issue and

therefore will otherwise continue to use its existing mortality

assumptions and interest rate structure in the valuation of

lump sum benefits.

“

At the same time, the PBGC is amending its regulation

governing valuation of annuity benefits in multiemployer

plans following mass withdrawal, so as to adopt the same

mortality, loading, and interest assumptions as does the

modified single-employer regulation. This change will result

in simplification of calculations under the multiemployer

regulation as well as greater consistency of annuity valuations

between the two programs.

EFFECTIVE DATE: November 1, 1993.

FOR FURTHER INFORMATION CONTACT: Peter H.

Gould, Senior Counsel, Office of the General Counsel, at the

above address or at (202) 778-8850 ((202) 778-8859 for TTY

and TDD). These are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

On January 19, 1993, the Pension Benefit Guaranty

Corporation (“PBGC”) issued a notice of proposed

rulemaking (58 FR 5128) that would alter the structure and

assumptions used in its valuation of annuity benefits. The

—

20a

Appendix C

proposed rule would revise the PBGC’s methods of valuing

annuity benefits by adopting (1) a new table of mortality

assumptions to reflect recent actuarial practice, (2) an

administrative expense (“loading”) assumption to replace the

previous adjustment in the interest assumption that simulated

this charge, and (3) a new structure of interest assumptions

that is based on the period of time between the valuation date

of a benefit and the presumed date of each payment of the

benefit. The PBGC proposed these changes because, although

the PBGC’s existing assumptions and structure accurately

reflect private sector group annuity prices, the disparity

between the PBGC’s low interest rates and familiar private

sector rates had resulted in public confusion. The new annuity

valuation structure and assumptions would make the annuity

valuation process clearer to the public, and would more

clearly conform to the current practices of the private

insurance industry in pricing of group annuity benefits. The

proposed rule would also adopt unisex mortality assumptions

for lump sum valuations; this change would conform the

PBGC’s practice to that of private sector pension plans.

Finally, the proposed rule would apply to valuations under

terminated multiemployer plans under 29 CFR part 2676 as

well as under terminated single-employer plans under 29 CFR

part 2619.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.