The Pension Benefit Guaranty Corporation’s Claim Calculation Method in Bankruptcy: Erisa’s Valuation Regulation, or the Prudent-Investor Standard?

Abstract

Bankruptcy proceedings can be challenging and daunting for debtors, especially when a new claim is introduced during the proceedings. This has happened in cases of the Pension Benefit Guaranty Corporation (“PBGC”) unfunded benefit liability claims. When the PBGC files a claim, it is met with challenges from the debtor. One of the debtor’s challenges is whether the PBGC’s unfunded pension benefits claim is subjected to ERISA’s Valuation Regulation or the bankruptcy principles. Applying bankruptcy principles might allow the court to modify the PBGC’s claim with different interest rates, discount-rate assumptions, or use some other approach to determine the claim’s present value. In 2017 the Southern District of Georgia ruled on ERISA’s Valuation Regulation in Pension Benefit Guarantee Corp. v. Durango Georgia. The court ruled that PBGC’s unfunded benefits liability should be calculated using ERISA’s Valuation Regulations.

An examination of the Durango decision with other ERISA’s Valuation Regulation decisions reveals that bankruptcy courts have not been consistent with how they approach and calculate the PBGC’s claim for unfunded pension benefits. Initially, the courts ruled that bankruptcy valuation principles were controlling, reasoning that ERISA and the Bankruptcy Code conflicted. Later, the courts ruled that ERISA and the Bankruptcy Code do not conflict because ERISA is the controlling law. The courts based their decisions on their understanding of the Bankruptcy Code and ERISA, giving rise to the varying judgments. The different holdings put the bankruptcy courts’ equity principle in jeopardy. However, one can argue that the bankruptcy court’s equity principle is infringed because of the different treatment.

This Article examines bankruptcy courts’ use of ERISA’s Valuation Regulation to calculate the PBGC’s unfunded benefit liability claim and explores other calculation methods. The Article introduces a different approach, the prudent-investor standard, proposed by debtors and the reasoning for a different approach. The author provides a timeline of cases to illustrate the different court holdings on the same issue. The Article concludes with the author suggesting that bankruptcy courts or the legislature act to create one standard of calculation for PBGC’s claim to align bankruptcy courts, create harmony, and aid the court in its equity principle.