Court Rules Against Pension Bonus
Fruehauf Plan to Award Special Benefits to Staff Is Considered Excessive
By MICHAEL SCHROEDER -- Staff Reporter of THE WALL STREET JOURNAL
In a slap at excessive management compensation, a federal court struck down special pension benefits awarded to hundreds of employees of Fruehauf Trailer Corp. just before the company filed for bankruptcy protection eight years ago.
The decision by the U.S. Bankruptcy Court in Wilmington, Del., reinforces efforts by the Bush administration and Congress to overhaul the federal pension-insurance program.
Congress, at the urging of the administration, plans legislation that would, among other things, outlaw special benefits for management of troubled companies when those for workers are being slashed. The decision was among few court opinions ever on the subject of recovering executive retirement benefits.
Fruehauf was an Indianapolis maker and distributor of truck trailers, which teetered on the edge of bankruptcy during the mid-1990s. As the company considered seeking buyers, its directors approved bonuses to retain about 40 key executives. Cash bonuses to retain pivotal employees are routinely approved during bankruptcy proceedings. (Airlines, seeking to cut worker compensation, face a dilemma in reining in executive pay and benefits. See a related article.)
At issue in the case was a separate pension bonus that wasn't disclosed to the board and later was challenged on behalf of creditors. About three weeks before Fruehauf filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Delaware court on Oct. 7, 1996, about $2.4 million from the company's pension-plan surplus was set aside to fund additional retirement benefits for about 400 salaried employees, presumably to keep them at the company, according to the court documents.
The pension bonus plan was designed by outside attorneys at the request of management, but only two executives reviewed it: Geraldine Tigner, then-vice president of human resources, and then-Controller Greg Fehr, who would have received increases in their pension benefits of 200% and 470%, respectively, under the plan, the court said.
The bankruptcy-court judge faulted management and attorneys for withholding information about the pension bonus from directors. The board never received a copy of the plan, but approved it after being told the matter was an "administrative formality," court documents say.
Edward McNally, a Wilmington, Del., attorney representing the salaried employees, said that he expects to appeal the decision.
When Fruehauf entered bankruptcy, it had 20,000 creditors with more than $12 billion in claims and liabilities. As part of the bankruptcy, the company's plants and distribution centers were immediately liquidated.
Officials of the liquidating company believed management had improperly taken surplus pension assets for themselves instead of using the funds to pay creditors. In 1998, the liquidating company in the bankruptcy sued the salaried employees who would have received the enhanced pension benefits.
This month, the court ruled that the bonus plan for salaried employees "constituted a fraudulent transfer."
The Jan. 7 decision faulted management for not disclosing the plan to the board and found that the pension bonus was excessive.
In October, the Pension Benefit Guaranty Corp., the federal insurer of private-employer defined pension benefits, took over the obligation of paying the pensions of 3,700 former Fruehauf workers. The plan's $61 million in obligations exceeded its assets of $54 million, the PBGC said.
Because a pension surplus no longer existed to distribute to creditors, James Perkins, an outside attorney for the liquidating company, said that the effect of the court decision was to save the PBGC from having to pay an additional $4.5 million under the salaried bonus plan -- which had grown in value from the original $2.4 million.
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