Yellow’s Loss in Pension Battle Tees Up New Phase of Bankruptcy

Yellow Corp.'s failure to persuade a judge to throw out billions in pension liabilities answered the biggest question hovering over its bankruptcy and means the bankrupt trucker must now finagle a creditor repayment plan that encompasses those debts.

Judge Craig T. Goldblatt of the US Bankruptcy Court for the District of Delaware on Sept. 13 rejected Yellow’s challenges to the regulatory power of the Pension Benefit Guaranty Corp. The company had disputed the agency’s authority in hopes of getting its pension liability slashed or eliminated.

The decision brought clarity to what Yellow and its creditors had said was the bankruptcy’s largest issue—so big, that Yellow said it would likely be unable to agree to a settlement with creditors until Goldblatt ruled. Pension plans, including the Central States Pension Fund, asserted $6.5 billion in claims against Yellow, and that number stands to change after Goldblatt’s ruling.

But how much of the liability will be paid remains an open question that will have major implications for lower-priority creditors. The company’s stock plummeted after the ruling.

Now Yellow and its restructuring advisers at Kirkland & Ellis LLP will seek a deal with creditors. That might not take very long, especially considering how quickly Yellow’s stock fell, Vanderbilt University bankruptcy law professor and former Kirkland associate Nicole Langston said. Yellow’s restructuring advisers likely have well-developed ideas for restructuring proposals depending on how Goldblatt ruled on the pension questions, she said.

“With the stock to fall as much as it did, I’m sure Kirkland will have a plan by the end of the week,” she said.

Yellow and its creditors will have to determine what’s left to pay out after the substantial pension liability. The ruling was a notable loss for Yellow’s equity holders, which could have recovered had Goldblatt sided with the company.

Yellow’s Central Issue

Yellow’s pension liability stems from its withdrawal from 11 multiemployer pension funds. That liability arose under the Employee Retirement Income Security Act of 1974, which requires companies that withdraw from multiemployer benefit plans to cover their unfunded liability. Yellow, which is liquidating its assets, argued that it shouldn’t be liable because the pension funds received $41.1 billion in Covid-era relief under the American Rescue Plan Act.

PBGC regulations hold that those emergency funds shouldn’t be calculated into a plan’s assets, barring them from being used to let an employer off the hook for their withdrawal liability, Goldblatt said. Yellow’s arguments challenged the PBGC’s authority to issue those regulations, but Goldblatt rejected those arguments, relying in part on the US Supreme Court’s months-old decision in Loper Bright Enterprises v. Raimondo.

While the high court’s ruling overturned courts’ long-standing deference to reasonable agency interpretations of ambiguous laws, Congress explicitly empowered the PBGC to issue its rules, Goldblatt found.

For Yellow, its challenge to the pension liability “is likely the most important issue in the case in terms of creditor recoveries, and will materially impact the size of the claims pool, unsecured creditor recoveries, and a potential distribution to holders of the Debtors’ equity,” the company said in court papers earlier this month.

Yellow has brought in cash since it filed for bankruptcy last year through sales of its trucks and shipping terminals. The company must now determine how to distribute those proceeds among creditors.

Goldblatt said in a separate ruling in March that the pension claims should be liquidated through bankruptcy’s claims allowance process.

“The outcome of this dispute is likely to determine the allocation of hundreds of millions of dollars in proceeds of the debtors’ highly successful asset sale,” he wrote.

Bankruptcy Strategy

Yellow’s arguments against the pension liability reflect the high level of protection those debts are afforded in bankruptcy, Langston said. Pension debt is given a high priority in bankruptcy and isn’t typically dischargeable, she said.

“You cannot touch pension benefits in bankruptcy—that’s not an advantage of bankruptcy,” Langston said.

So instead of trying to get the debt discharged or classified as a lower-priority claim, Yellow targeted the calculations of its liability by making the regulatory arguments, Langston said.

“That was actually a creative argument, like someone else will pay it,” Langston said.

The strategy reflects an effort to reduce the size of a claim if it can’t be pushed down the creditor priority order, Perkins Coie LLP bankruptcy partner John D. Penn said.

“You have to try to minimize the exposure if you can’t reduce the priority,” Penn said.

Pension Liability Isn’t Finalized

The exact amount of the pension liability still needs to be decided.

Last week’s ruling, which noted that the pension plans asserted $6.5 billion in liability, leaves uncertainty as to what the final value of those claims will be. Goldblatt sided with Yellow in deciding that the pensioner’s liability needed to be capped at 20 years of annual payments.

Yellow had argued that the difference in capped and uncapped claims was “staggering.” The cap would reduce the pension plan’s collective claims by more than $4 billion, it said.

The pension plans argued that when companies like Yellow default on their obligations, the statutory 20-year cap is voided. Goldblatt rejected that argument, holding that Yellow is liable to pay up to 20 times an annual payment calculated under a formula within the statute.

At the same time, Goldblatt rejected Yellow’s bid for its liability to be reduced to present value.

The PBGC and the pension funds may also negotiate a decrease in their claims if Yellow agrees not to appeal Goldblatt’s decision, Bloomberg Intelligence analyst Negisa Balluku wrote.

“The decrease will be limited,” she said.

The case is In re Yellow Corp., Bankr. D. Del., No. 23-11069, 9/13/24.