Tuesday, July 7, 2009

Retirees and ex-employees claims against a bankrupt company.

When a company enters chapter 11, many forms of payment to ex-employees and pensioners cease. The people who were receiving these payments are then classified as unsecured creditors and can file claims against the company in bankruptcy court in order to seek repayment. It is unlikely that the claims will be paid in full unless the company emerges from chapter 11 and then prospers before it pays out on the claims. Most likely only a percentage will be returned to the creditor.

The unsecured creditors are required to file a proof of claim with the company that is handling the bankruptcy dockets for the court. In the case of Nortel that was Epiqsystems in the US. The record of proofs of claims is made public on their website and is required to properly assess the liabilities of the company in chapter 11. The information can be seen on the web at http://chapter11.epiqsystems.com/Nortel under the claims category.

For retirees and ex-employees there are a number of different claims that they may have on the company. For people who were receiving a non-qualified pension which ceased when the company entered chapter 11 that will be one of their claims. The non-qualified pension may be for a fixed period of time or it may be in the form of a lifetime annuity.

Calculating the claim is extremely important since it is possible that the company may dispute the claim. In this case it may require legal representation to argue the claim before the court. This is especially true where the claim is determined from a lifetime annuity since it involves actuarial factors and interest rate assumptions. The factors used by the company will no doubt be to their advantage and will probably result in a sum that is less than the claim put forward by the creditor. This is one reason that creditors who fall into this situation should band together and hire an actuarial/legal firm to work with them to determine the factors and to argue them on their behalf.

In the case of a fixed term non-qualified pension the sum owed to the creditor is basically the monthly payment times the number of months left in the term. There is a catch here however involving the cost of money. The company’s lawyers will no doubt argue that an inflation factor should be used to reduce the future cost of money that would be paid out in today’s dollars. This would result in a sum that is less than the simple arithmetic of multiplying the number of months left times the monthly payment.

Once again, professional actuarial support to determine and apply that interest rate is advantageous and will assist in reaching agreement with the company on the actual amount of the claim in today’s dollars.

Once agreement has been reached on the values of the unsecured creditor’s claims a ruling can be determined as to the percentage that the company can offer to settle those claims. If that percentage is agreed to by the creditor’s committee then it will be applied to all unsecured creditor’s claims equally. So if the court rules that 30% for example is what creditors would get back on their claims, that is the percentage that every unsecured creditor would receive.
To complicate matters, rulings of this nature would be paid out as lump sums and subject to income tax as if they were regular earnings. As far as I know at this point, it is not possible for the amount to be moved into a tax sheltered annuity, so the creditor will be hit with a triple whammy. (1) a reduced amount of claim due to future cost of money, (2) a percentage reduction as ruled by the court, (3) a tax payment that will probably be in the upper range of tax percentages.

Other payments that are outside the normal defined pension paid from the trust fund will be subject to the same situation. For example senior executive retirement pensions paid to the top level management retirees will fall into this category. Retirement Transition Payments made directly from the company funds will stop. Severance payments made to laid off employees will stop. Deferred compensation is generally maintained in a fund external to the pension trust fund and as such will no longer be accessible by employees whether still working, laid off, or retired. Each of these categories become claims against the company and calculating the value accurately is important in order to maximize what the creditor gets back.

Nortel also offers health care, long term care, and life insurance benefits to their employees and retirees. In the case where these plans are terminated the retirees may have a claim against the company for the amount that these lifetime plans represent. Most of these plans have a clause indicating that if the retiree does not pay the monthly premium after a grace period of 30 days they are removed from the plan and if that happens there is no claim. So it’s important to maintain the premium payments to keep active in the plan and ensure that you have a claim if the plan is stopped.

At this point Nortel’s US health plan is still continuing, but the writing is on the wall and at a recent information session by Nortel the employees were told that it is possible that the health plan will cease.

Calculating the claims associated with health care, long term care, and insurance is very complicated and best left to professionals. Each person’s history and family status will come into play to determine the value of the claim, so it is probably a good reason to have a group approach that involves people who have experience in determining these claims.

We have such a group already formed in the US called Nortel US Retirees protection Committee. (NRPC-US) The group is in contact with an actuarial firm to determine what help they can provide but at this stage the only action we would suggest to everyone is to gather all the relevant information regarding your benefits and have it readily available so that it can be used to calculate the claim. There is more information on this group at www.nnra.org.

2 comments:

  1. Tom, Your recent Blogs are outstanding pieces of work....THANK YOU for all of your efforts.
    Andrew

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  2. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


    Susan

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