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TURNAROUNDS
Bankruptcy Timing Is Everything
Posted by Marie Leone | CFO.com | US
September 15, 2005 5:33 PM ET

By declaring bankruptcy, and then defaulting on its pension payment obligation, Northwest Airlines made it likely that employees will not recover $65 million worth of benefits.

According to a report in The New York Times, the government would have had a stronger claim on the pension money if Northwest had delayed the Chapter 11 filings "by even one more day." As it stands now, the government — in the form of the Pension Benefit Guaranty Corp. — becomes an unsecured creditor, relegated to the back of the line in the bankruptcy pecking order to recover funds, behind secured creditors.

As the Times explains, "Had Northwest skipped the payment outside of bankruptcy, it would have been in violation [of pension law]," and the Pension Benefit Guaranty Corp. could have swooped in and placed a lien on the assets, giving employees a better shot at recovering their pension money.

In the wake of the Northwest and Delta bankruptcies, it seems quite possible that pensioners and their activist lawyers will be challenging the rules of pension and bankrutpcy law.

Comments (1)


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I am not well conversant with the pension laws in North America. However, stories abound here regarding underfunded pension funds (airlines, steel industry, etc.). I believe, in my country of origin, pensions are either controlled by the Govt. or have to be funded, and the fund itself is required to be audited annually by the external auditors. Further, all labour cost liabilities rank just after the secured creditors in the pecking order. Maybe it is a legacy of socialistic leanings under the national economic policies of yore. Regardless, I agree some measure of protection for current and especially ex-employees should be presented legally.

Posted by Vikas Kulkarni | September 16, 2005 10:00am

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