Pension and benefit claims could complicate recoveries for Yellow Corp’s other general unsecured creditors

Legal Analysis 17 August

Pension and benefit claims could complicate recoveries for Yellow Corp’s other general unsecured creditors

by Paul Gunther

Pension and employee benefit claims can constitute some of the largest claims in Chapter 11 cases. Depending on the size and priority of those claims, distributions to other general unsecured creditors can be significantly impacted. In this third and final installment of our series on Yellow Corp’s (Yellow) Chapter 11 cases, the Debtwire legal analyst team discusses the types of pension and benefit claims that might arise and who may assert them. We will also discuss the priority that those claims are likely to have. Finally, we will discuss what the pool of general unsecured claims might look like and how distributions to those creditors may be affected by the pension and benefit claims.

Part I: Pension funds, former employees, and to-be-chosen DIP lender are primed to drive Yellow’s Chapter 11 cases

Part II: Yellow Corp general unsecured creditors be WARNed that employee termination claims have payment priority

Yellow’s pension plans

Yellow has separate pension plans for its non-union and union employees. The company states in its 2022 Form 10-K (2022 10-K) that it sponsors three single-employer defined benefit pension plans for approximately 4,600 current and former non-union employees. The plans were closed to new participants as of January 2004 and benefit accruals were frozen as of July 2008. According to the 2022 10-K, as of 31 December 2022 the plans were underfunded by USD 97.6m. The company said that it expects cash contributions to be nominal for 2023 and the following years, “if required at all.” 

Yellow states in the 2022 10-K that they also contribute to several multi-employer plans for its (now former) employees who are covered by collective bargaining agreements (CBAs). Those plans are not directly managed by the company and those assets and liabilities are not included in the company’s balance sheets. Approximately 22,000 or 23,000 of the debtors’ former employees[1] are union members. The vast majority of those former employees are covered by a National Master Freight Agreement among several debtors and local teamsters unions that expires on 31 March 2024. The debtors state in their 2022 10-K that the company contributed USD 111.5m to its multi-employer plans in 2022, of which USD 63m was paid to the Central States, Southeast and Southwest Areas Pension Fund (Central States) alone. Yellow’s union employees constituted approximately 26.41% of the active employees in the fund.

In the 2022 10-K, the company notes that if it fails to make its required contributions to the plans it would be exposed to penalties, including potential withdrawal liabilities. On 15 July, Yellow failed to make required contributions to Central States and the fund terminated Yellow’s participation, effective 23 July, but subject to reinstatement if the payments were made. On 19 July, Central States filed a complaint against Yellow and Opco Holland in the US District Court for the Northern District of Illinois seeking separate awards of approximately USD 4.3m in unpaid pension contributions, compelling the payment of future contributions and seeking to recover approximately USD 18.2m in unpaid health fund contributions.

The week of 24 July, prior to the bankruptcy filing, Yellow stopped accepting new shipments and started a wind down of its operations. On 30 July, the company sent employment termination notices to all its union employees.

Possible pension-related claims in Yellow’s bankruptcy

The types of claims that could be asserted in connection with Yellow’s pensions will be governed by the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for private industry pension plans. The priority of those claims will be determined by the Bankruptcy Code.

Claims under a terminated single-employer plan

Given that it is liquidating, Yellow may seek to terminate the single-employer pension plans that it sponsors. If the company does not have sufficient assets to satisfy its plan liabilities it might pursue a distress termination. Under ERISA, a plan sponsor may pursue a distress termination of an underfunded single-employer pension plan if one of several criteria is present, including that the company is liquidating in bankruptcy. If the plan is terminated in this manner, the Pension Benefit Guaranty Corporation (PBGC), a US government corporation created under ERISA, takes over as plan trustee, receives the plan’s assets and guarantees pension benefits for plan participants up to certain limits. The PBGC is also authorized to bring suit and recover any funding shortfall. The PBGC does not guarantee health benefits.

The PBGC can also commence an involuntary termination of the plan if it determines that one of several criteria are met, including that the plan has not met minimum funding standards or is deficient in the payment of taxes, the plan cannot pay benefits when due, or the PBGC will suffer greater long-run losses if the plan is not terminated. If a plan is terminated while a company is in bankruptcy, then the termination date is the bankruptcy filing date. Since additional benefits cannot accrue post-termination, one consequence of this is that the PBGC does not insure benefits that accrue post-petition.

When an underfunded single-employer pension plan is terminated the PBGC can assert several types of claims, including (i) minimum funding contribution claims, (ii) unfunded benefit liability claims, and (iii) termination premium claims. Each of these is discussed below.

Minimum funding contribution claims

ERISA funding rules require a plan sponsor to make annual minimum funding contributions to a pension plan that are calculated by the pension plan’s actuary. Courts have generally held that unpaid minimum funding contribution obligations that arise from work performed before the bankruptcy filing are not entitled to administrative (first) priority,[2] even if the pension claims come due after the bankruptcy, but instead have fifth priority for contributions to employee benefit plans, up to the statutory limit. In contrast, pension claims attributable to work done after the filing have generally been treated as administrative claims.

In the past the PBGC has asserted that since unpaid minimum funding contributions exceeding USD 1m are entitled to priority and are treated as a tax under the Internal Revenue Code (IRC) states, they must also be treated as taxes, which are entitled to eighth priority under the Bankruptcy Code. However, courts have generally rejected this theory.

Unfunded benefit claims

In addition to minimum funding contribution claims, the PBGC can assert an unfunded benefit claim for any asset shortfall against all members of Yellow’s “controlled group,” which includes subsidiaries in which a parent corporation owns at least an 80% share. The claim is determined by calculating the difference between the plan’s assets as of the plan’s termination date from present value of its total benefit liabilities, plus interest calculated from the termination date. Unfunded benefit liability claims are generally found to be general unsecured claims. Also, courts have sometimes held that the amount of the unfunded benefit liability claim should be reduced by the amount of any minimum funding contribution claims.

Termination premium claims

Upon a termination of an underfunded single-employer plan, the plan sponsor must pay a termination premium of USD 1,250 per plan participant for three years. However, the ERISA statute provides that the premium applies in Chapter 11 reorganization cases, but not Chapter 11 liquidation cases.


If an employer has more than USD 1m in unpaid minimum funding contributions before a single-employer pension plan is terminated, then a lien in the amount of the unpaid contributions on all assets of the controlled group entities in arises in favor of the PBGC. If the lien is perfected by the PBGC prior to the bankruptcy filing, it will have priority over unsecured priority claims and general unsecured claims.

Upon termination of an underfunded plan a separate automatic lien springs against the assets of each member of the controlled group for the lesser of any underfunded pension amount or 30% of the net worth of the controlled group. The ERISA statute provides that the lien is to be treated “in the same manner as a tax due and owing the United States under the Bankruptcy Code.”[3] However, courts have held that the automatic stay prevents this lien from springing after the bankruptcy filing date.

IRS Excise Tax Claims

If a company fails to make its “minimum required contributions” to a pension plan[4], the IRC imposes an excise tax that is equal to 10% of the aggregate unpaid minimum required contributions on all members of the controlled group. The US Supreme Court has held that for purposes of the Bankruptcy Code, excise taxes on accumulated unpaid funding pension obligations arising from prepetition labor are penalties, not taxes. Thus, they do not enjoy the eighth priority status that the Bankruptcy Code grants to certain excise tax claims but are instead general unsecured claims.[5]

Withdrawal liability claims under Yellow’s multi-employer pension plans

As noted above, in addition to its single-employer plans, Yellow participates in several multi-employer pension plans for its union employees. Multi-employer plans are plans in which two or more unrelated employers participate. Each company contributes to the plan pursuant to CBAs.

An employer is considered to have completely withdrawn from a plan on the date that its obligations to make contributions to the plan are permanently terminated or the date that it ceases all covered operations under the plan. If the plan has unfunded vested benefits at the time of withdrawal, the multi-employer plan has a claim against the company for its allocable share of the unfunded benefits.

Courts generally hold that withdrawal liability claims for pension obligations that arise in connection with work performed prior to the bankruptcy are entitled only to general unsecured claim status. The US Court of Appeals for the Third Circuit, which is the jurisdiction in which the Delaware bankruptcy courts sit, has held that withdrawal liability claims for pension obligations arising from work performed by employees after the bankruptcy filing are entitled to administrative status.[7] All members of a company’s controlled group are liable for its withdrawal obligations.

Similar to single-employer pension plans, the IRC imposes a tax on employers that fail to meet funding standards for multiemployer plans as of the end of a tax year. If a company has an accumulated funding deficiency (as defined in the IRC and ERISA), the company is subject to a tax that is equal to 5% of that deficiency.

Bankruptcy Code Section 1113 – treatment of obligations under collective bargaining agreements

Yellow’s CBA might govern the payment not only of pension obligations, but also other obligations such as vacation pay, severance pay, sick leave, 401K plans and employee benefits. In contrast to some other courts, the US Court of Appeals for the Third Circuit has held that Bankruptcy Code section 1113, which governs the rejection of CBAs in bankruptcy, does not automatically confer first priority status to prepetition claims under a CBA.[8] Therefore, to prove entitlement to administrative claim status for a benefit covered by a CBA a claimant would have to show that the obligations arose from a transaction with the debtors-in-possession and were a necessary cost of preserving the bankruptcy estates.

To relieve itself of further obligations under the CBA Yellow may seek to reject the contract, which excuses the debtor from any further performance. Generally, the standard for rejecting a contract in bankruptcy is the deferential business judgment rule. However, Bankruptcy Code section 1113 imposes a more stringent standard for CBAs.[6] To reject a CBA, the debtor must make a proposal to, and negotiate in good faith with, the union representative. The proposal must contain “complete and reliable” information and provide for modifications that are “necessary” for the debtor’s reorganization. If the representative rejects the proposal, the bankruptcy court can approve the rejection if it finds that the debtor has made the proposal and engaged in good faith negotiations, that the union representative has refused to accept the proposal “without good cause” and that the “balance of the equities” favors rejection. Courts have generally found that notwithstanding section 1113’s explicit reference to “reorganization,” the statute also applies to debtors that liquidate in Chapter 11.

Rejection of a CBA gives rise to damages claims that are treated as general unsecured claims, subject to whatever portions of those claims that might qualify for fourth and fifth priority treatment as claims for wages or contributions to an employee benefit plan, respectively.

One wrinkle applicable to Yellow is that the company’s National Master Freight Agreement provides that Yellow cannot file a rejection motion under section 1113 without the “approval” of the Teamsters National Freight Industry Negotiating Committee (TNFINC) that represents the local unions. This provision gives leverage to the unions to push for Yellow to agree to a negotiated termination of the CBA in lieu of Yellow’s filing of a section 1113 motion. If Yellow nonetheless sought to file a section 1113 motion without the unions’ approval, then the unions might seek injunctive relief to enforce the terms of the agreement, and the parties could be engaged in a fight over whether the unions are entitled to enforce the approval provision.

Yellow has an incentive to seek to reject the CBA sooner rather than later. The CBA will expire under its own terms on 31 March 2024. Courts are divided on whether section 1113 applies at all after a CBA expires under its own terms. However, courts have held that an expired CBA continues to be enforceable under the National Labor Relations Act, which requires the maintenance of the “status quo” after a CBA expires, which is usually defined by the terms of the CBA.

Bankruptcy Code section 1114 - special administrative priority for retiree benefits claims

Another potentially large employee claim pool is retiree benefits. Retiree benefits encompass “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.”[9] Retiree benefits in Chapter 11, including those covered by a CBA, are governed by section 1114 of the Bankruptcy Code, which courts have held applies to liquidating Chapter 11 cases.

Section 1114 requires the debtor to “timely pay” retiree benefits and further provides that “any payment for retiree benefits required to be made before a plan confirmed . . . is effective has the status of an allowed administrative claim.” [10] Thus, the Code makes clear that claims for retiree benefits coming due postpetition have administrative priority. However, courts have split on whether claims for unpaid prepetition retiree benefits are entitled to administrative priority under the statute.

A debtor can seek relief from its retiree benefit obligations in bankruptcy court by obtaining agreement to a modification or by making a motion to modify retiree benefits. As with the constraint on filing a motion to reject the CBA pursuant to section 1113, Yellow’s CBA requires the company to obtain approval of the TNFINC prior to filing a motion to modify retiree benefits pursuant to section 1114. Under a motion to modify retiree benefits, the debtor must satisfy requirements that are similar to those for rejecting CBAs. If the modification is granted, courts have held that the difference between the original amount of retiree benefits and the modified amount is a general unsecured claim. Furthermore, the Bankruptcy Code requires as a condition of confirming a plan of reorganization that the plan continues to provide benefits, as they may have been modified during bankruptcy, for the duration of the contractual period.

Putting it all together

During the first day hearing, counsel for the debtors, Patrick Nash of Kirkland & Ellis said that the debtors have “every expectation and intention” of honoring all employee obligations, including administrative and priority claims. It is therefore helpful to analyze where pension and benefits claims might sit in the distribution waterfall and how that may affect distributions to general unsecured creditors.

Pension Claims

Courts generally find that pension obligations have administrative priority only when they arise from a transaction with the debtor-in-possession. However, the only employees that still work for the debtors postpetition are non-union, and their benefit accruals were frozen as of July 2008. Also, all the company’s union employees were terminated prior to the bankruptcy. Thus, although the wages and benefits accruing after the petition date are likely to have administrative priority, it is unlikely that any pension obligations will be entitled to administrative priority.

Based on Yellow’s SEC and court filings, it appears that the largest potential pension claims against the debtors relate to underfunding and withdrawal liability. Yellow says in its motion to pay wages and employee benefits (Wages Motion) that it does not believe that it owes any “accrued and unpaid amounts related to its [single-employer] Pension Plans.” If “accrued and unpaid” refers only to minimum contribution claims, Yellow could still have liability stemming from the termination of its single-employer plans which, the company has said, were underfunded by USD 97.6m as of 31 December 2022. As noted, courts have generally found that single-employer pension underfunding claims are general unsecured claims.

With respect to its multi-employer plans, Yellow would also be obligated for any withdrawal liability. Given the much larger size of Yellow’s former union employee pool versus its non-union employees, depending on Central State’s funded status this could be the largest pension-related claim in the case. Since the employees were terminated prepetition, any withdrawal liability could only be attributable to prepetition services and would likely be a general unsecured claim.

As noted, the company states in its 2022 10K that it anticipates that its cash contributions to its single employer plan to be nominal, if required at all. In the Wages Motion, the company is silent on the status of its contributions to the multi-employer pension plans, and it is unclear from the debtors’ court filings whether the USD 4.3m in unpaid pension contributions has been paid.[11] If those claims relate to prepetition services provided within the 180 days before the bankruptcy filing, then they would be entitled to fifth priority up to the statutory cap for all such claims, with the remainder being general unsecured claims.

Finally, the IRS might assert excise tax claims for any unpaid minimum required contributions to the single-employer plan and accumulated funding deficiencies for the multiemployer plans that are attributable to prepetition labor.  Although the IRS may argue these claims are entitled to priority, as noted above, court have generally found these claims to be general unsecured claims.

Ramifications of the American Rescue Plan Act pension bailout?

Yellow notes in its 2022 10-K that pursuant to the American Rescue Plan Act of 2021 (ARPA) many underfunded pension plans received financial assistance to cover plan payments through 2051 and that those payments are not subject to repayment obligations. The company also states that on 12 January 2023 the Central States multi-employer plan announced that it had received USD 35.8bn in funding under ARPA. One interesting question is whether Yellow will claim that it is not liable for withdrawal obligations to the extent that the ARPA payments might have been applied to the company’s share of underfunded obligations to Central States. The pension fund could take the opposite position, gearing the parties up for a possible court fight.

Benefits Claims

As has been noted, claims arising from postpetition services provided by employees to debtors to preserve the bankruptcy estate, including benefits earned for those services, generally have administrative claim status and are paid ahead of other unsecured claims. As of the petition date Yellow had approximately 1,650 “go-forward” employees who will wind down the company during the Chapter 11 cases. In its Wages Motion, Yellow, while not conceding the status of any claims, asks for authority to continue to pay, on a par with other administrative claims, outstanding prepetition and postpetition benefits (and wages)[12] for all continuing employees.

Pursuant to Bankruptcy Code section 1114, retiree benefits claims that come due postpetition (and perhaps prepetition) would be entitled to administrative status. If the debtors succeed in having retiree benefits modified, the difference between original amount and modified amount could be treated as general unsecured claim, a portion of which might enjoy fifth priority status up to the statutory cap. Similarly, non-retiree employee benefit plan damages claims arising from the rejection of the CBA could enjoy fifth priority status up to the statutory cap if they relate to unpaid obligations incurred within the 180 day prior to the bankruptcy filing or the cessation of the debtor’s business, with any excess treated as general unsecured claims.

What could the general unsecured claims pool look like?

Any analysis about the ultimate composition of the general unsecured claim pool necessarily involves a healthy degree of speculation. That said, it is possible that the pool of pension and benefits claims that are general unsecured claims could include some or all of the following claims:

·      PBGC claims for unfunded benefit liabilities for the single employer pension plans;
·      multiemployer pension plan withdrawal liability claims;
·      claims for unpaid prepetition contributions to any of the pension and employee benefit plans to the extent that such claims exceed the fourth and fifth priority claim limits;
·      CBA rejection damages claims for benefits;
·      claims arising from the modification of retiree benefits; and
·      IRS excise tax claims.

The impact that these claims will have on the recoveries of holders of other unsecured claims such as trade creditor claims, landlord claims and WARN Act claims[13] will depend on two current unknowns - the amount of those claims and the priority accorded to them. To the extent that pension and benefits claims have administrative or other priority status they will be paid ahead of general unsecured claims. To the extent that those pension and benefits claims are general unsecured claims they will dilute recoveries to a greater or lesser extent depending on total amount of such claims. 

The Debtwire team will continue to follow Yellow’s bankruptcy cases and keep our readers apprised of further developments concerning the pension and benefits claims that are asserted against Yellow and their treatment by the bankruptcy court.

Paul Gunther is a former practicing restructuring and litigation attorney. Prior to joining Debtwire as a Legal Analyst, Paul practiced in the New York offices of Dentons US LLP, Salans LLP and Mayer Brown LLP. He has represented various constituencies in high-profile restructurings.

Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.



[1] The debtors’ filings are inconsistent with respect to the number of union members employed by the debtors prior to the bankruptcy filing. The debtors’ first day declaration uses the 22,000 figure, whereas the debtors’ wages motion uses the 23,000 figure.

[2] For a general discussion of claim priorities in bankruptcy, see Part II: Yellow Corp general unsecured creditors be WARNed that employee termination claims have payment priority.

[3] 29 U.S.C. § 1368(c)(2).

[4] 26 USC § 4971(c)(4).

[5] In re CF&I Fabricators of Utah Inc., 518 U.S. 213, 226 (1996).

[6] 11 U.S.C. § 1113 (setting standards for rejecting CBAs); 11 U.S.C. § 365(a) (providing for the rejection of contracts generally).

[7] See In re Marcal Paper Mills, Inc., 650 F.3d 311, 317-20 (3rd Cir. 2011) (portion of withdrawal liability attributable to postpetition work was an administrative expense).

[8] See In re Roth Am., Inc., 975 F.2d 949, 955, 958 (3rd Cir.1992) (where CBA had not been rejected prepetition obligations would be treated as unsecured third priority claims).

[9] 11 U.S.C. § 1114(a).

[10] 11 U.S.C. § 1114(e).

[11] For a discussion of this litigation, please see Part I: Pension funds, former employees, and to-be-chosen DIP lender are primed to drive Yellow’s Chapter 11 cases.

[12] With respect to wages, Yellow says that “on average” it expects to incur approximately USD 3.4m per week, subject to possible reduction, for its remaining employees. If that sum holds for the first six months of the case, payouts for wages would total a hefty sum of USD 84m, money that would no longer be available for other priority and general unsecured claims. Also, in connection with the Wages Motion, the debtors have sought authority to pay paid time off and other leaves of absence alone in the amount of approximately USD 92.9m.

[13] For a more detailed discussion of WARN Act claims see Part II: Yellow Corp general unsecured creditors be WARNed that employee termination claims have payment priority.

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