Hedge Fund Seeks Reversal of Yellow Pension Claims
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On rare occasions, shareholders discover their company might be worth more dead than alive. One hedge fund is betting its long shot, legal gambit over Yellow Corp., the iconic American trucking firm that went bust last year, will lead to just such a windfall.
As Yellow veered toward bankruptcy in 2023, MFN Partners Management LP bought up more than 40% of the cargo hauler for less than $23 million. Now, the firm is trying to collect on the hundreds of millions of dollars left sitting in Yellow’s coffers. To win, MFN has to convince a bankruptcy judge to reverse himself and throw out $6.5 billion in claims that pension funds are seeking on behalf of the company’s retirees.
While the pensions, backed by the powerful Teamsters union, have the upper hand, MFN was given a second chance on Nov. 5 when U.S. Bankruptcy Judge Craig T. Goldblatt said his September ruling — which appeared to wipe out MFN and other shareholders — contained an error and may need to be reversed. He’s expected to rule as soon as Nov. 15.
MFN’s gamble is tied to a $40 billion taxpayer bailout in 2021 that saved 11 union pension funds serving Yellow retirees from insolvency. MFN argues that the federal subsidy extinguished billions of dollars in debt the trucking company would normally owe for pulling out of the retirement plans. With the pension claims gone, MFN and other shareholders would get the cash left from the sale of the company’s valuable trucking terminals.
Yellow Corp. trucks sit at a facility in Hayward, Calif., in 2023. (David Paul Morris/Bloomberg News)
The arcane legal dispute is the first time shareholders have tried to profit from a loosely worded 2021 federal law designed to bail out troubled retirement funds known as multi-employer pension plans. Federal regulators and the Central States Pension Fund, one of the biggest retirement systems of its kind in the U.S., claim that a victory for MFN and Yellow would set off a stampede to abandon similar union benefits, sticking taxpayers with as much as $20 billion in future pension bills.
“This is a clash of the titans sort of thing,” said Mark M. Trapp, a lawyer who represents companies in pension disputes. “The pension plans and Yellow and all the best lawyers they can find have come onto the field of battle to fight this out because there is so much money at stake.”
The heart of the case stems from a 2021 federal COVID relief law written to prop up ailing pension funds through at least 2051. The legislation required the Pension Benefit Guaranty Corp. to draft regulations to ensure the bailout did not make it easier for companies to abandon their retirement obligations.
MFN argues that the Pension Benefit Guaranty Corp exceeded its authority in drafting the rules and therefore, the regulations don’t apply in the Yellow bankruptcy. That would essentially wipe out the $6.5 billion pension claims.
Goldblatt upheld the regulations, but agreed in a Nov. 5 order to give MFN a chance to argue that he should reverse himself. The judge has already said he will change a minor part of his September ruling because it contained an error.
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The bailout cash “was to be used exclusively to restore the pension benefits and administrative expenses,” said Vincent M DeBella, an attorney with a pension fund run by the New York Teamsters Union. “It was not to be used to supplement employers.”
MFN was founded in 2017 by former Baupost Group partner Michael F. DeMichele and Farhad Nanji, who had been at Highfields Capital Management. The firm had about $5.5 billion in assets under management, including an 11% stake in XPO, Inc., a trucking rival that bought some of Yellow’s terminals last year, according to regulatory filings.
Last year, burdened by a slowdown in freight demand, Yellow opened talks with the Teamsters union. When those negotiations failed the trucking company’s board voted to shut down the 100-year-old company and file bankruptcy in August, 2023, throwing 30,000 people out of work.
In the weeks leading up to the bankruptcy, as Yellow’s stock price fell, MFN bought more than 22 million shares of the firm — a risky bet considering that Yellow’s troubles were well known.
The Boston-based hedge fund’s gamble looked like a winner through much of the insolvency case, even though nearly all bankruptcies end with shareholders being wiped out.
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MFN’s chances of a recovery shot up — along with Yellow’s stock price — when the trucking company sold its terminals for about $1.9 billion. That was enough to pay off all creditors in full, except for the pension claims.
In a recent court hearing, Goldblatt said his decision will have a big impact on payouts in the bankruptcy.
“We’re talking about hundreds of millions of dollars,” he told attorneys for the pension funds.
Because the legal issues are so complex and could be decided either way, whoever loses is likely to appeal, Trapp said.
“It’s pretty clear to me that these entities are going to appeal,” he added. “I would do it. There is a ton of money at stake.”
The case is Yellow Corp., 23-11069, US Bankruptcy Court, District of Delaware (Wilmington)
