UPDATE 2-Court reinstates Visteon retiree benefits

* Court reverses ruling that terminated retiree benefits

* Decision divides practice in main U.S. bankruptcy courts

* Lawyers say issue is ripe for Supreme Court review (Adds comments about conflict between appeals courts, impact on Visteon bankruptcy)

By Tom Hals

WILMINGTON, Del., July 13 (Reuters) - A U.S. appeals court on Tuesday ordered bankrupt auto parts maker Visteon Corp to reinstate benefits to thousands of retirees in a decision that attorneys said could be headed for the U.S. Supreme Court.

The Court of Appeals for the Third Circuit reversed a lower court ruling that allowed the company to unilaterally cut off health and life insurance benefits for nearly 8,000 retirees and dependents.

Visteon VSTNQ.PK followed an established pattern for bankrupt companies with organized workforces, arguing it needed to end the benefits and save the company $31 million in 2009 and $310 million long term.

The ruling applies to bankrupt companies within the Third Circuit, a geographic region that includes Delaware's active bankruptcy court. The decision departs from law established by the federal appeals court in the Second Circuit, which covers the country's other main bankruptcy court in Manhattan.

"This is clearly an important issue from a social perspective," said bankruptcy attorney Stephen Selbst with Herrick Feinstein LLP in New York. "The Supreme Court likes to take up cases where there is an important social issue and conflicts between the circuits."

Visteon took aim at "other post-employment benefits," benefits that were negotiated with workers under the agreement that the company had the right to terminate at will.

Many companies, such as auto parts maker Delphi Corp, have cut benefits to thousands of retirees by arguing that if they had the right to end those benefits outside of bankruptcy, they should have that right after seeking court protection.

The appeals court sided with a union representing 2,100 retirees. In a 95-page decision written by chief judge Theodore McKee, the court said that by the plain language of the law Visteon had not gone through the proper procedures.

Visteon spokesman Jim Fisher said, "We are assessing the ruling and will determine an appropriate course of action."

Thomas Kennedy, of law firm Kennedy, Jennik & Murray, who argued the case for the unions, called the ruling "long overdue."

Christopher Sontchi, the Delaware bankruptcy court judge who approved Visteon's request to end retiree benefits, had relied on a decision in the U.S. Second Circuit, where Delphi Corp won approval to cut benefits for 15,000 in 2009.

Kennedy said the decision will make it more difficult for companies to terminate benefits in bankruptcy by requiring proof that such a move is necessary to successfully reorganize.

"They are quite stringent tests," Kennedy said.

Martin Bienenstock, an attorney with Dewey & LeBoeuf LLP, which represents shareholders in the Visteon bankruptcy, also said he thought the case could wind up before the Supreme Court. But he said he did not think the ruling would have a big impact on Visteon.

"We think the company is solvent. We think there is no basis on which you have to hair cut any claims," he said.

Van Buren Township, Michigan-based Visteon currently employs 31,900 worldwide and 5,769 in the United States.

The Third Circuit court has appellate jurisdiction over U.S. district courts in Delaware, New Jersey and Pennsylvania. The Second Circuit comprises New York, Connecticut and Vermont.

The case is In Re Visteon Corp, U.S. Bankruptcy Court for the District of Delaware, No. 09-11786.

The Appeals Court case is IUE-CWA, The industrial Division of The Communications Workers of America, AFL-CIO, CLC v Visteon Corp and the Official Committee of Unsecured Creditors of Visteon Corp, U.S. Court of Appeals for the Third Circuit, No. 10-1944.

(Editing by Bernard Orr)