News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

Learn More »

CCH® PENSION — 09/02/11

Post-petition portion of fund's withdrawal liability claim was administrative expense entitled to priority

In an issue of first impression, the U.S. Court of Appeals in Philadelphia (CA-3) in In re Marcal Paper Mills, Inc. has held that the post-bankruptcy petition portion of a multiemployer defined benefit fund's withdrawal liability claim against a debtor employer was an administrative expense that was entitled to priority under the Bankruptcy Code.

Employer filed bankruptcy petition

An employer filed a Chapter 11 bankruptcy petition and operated as a debtor-in-possession thereafter. The employees continued working, and the current collective bargaining agreement (CBA) continued operating until about 10 months after the bankruptcy petition was filed. About a month before the CBA expired, the employer and the union agreed to continue the terms of the CBA until a new contract was negotiated. No new CBA was negotiated. However, because the CBA and the multiemployer defined benefit fund were continued and the employer continued to employ covered employees, the employees continued to accrue pension credits and, thus, benefits, and the employer continued to make contributions.

The contributions ended when the employer's assets were sold to a successor company. At that point, the successor company ceased to employ the employees. The pension fund determined that employer had made a complete withdrawal from the fund within the meaning of ERISA, as amended by the Multiemployer Pension Plan Amendments Act (MPPAA), and assessed withdrawal liability against the employer. The fund filed a claim in the employer's bankruptcy proceeding for the withdrawal liability to be treated as a post-petition administrative expense claim under Bankruptcy Code Sec. 503(b). The employer objected to the fund's claim and filed a motion to reclassify it as a general unsecured claim.

The district court, reversing the bankruptcy court's decision, held that the portion of the withdrawal liability attributable to the post-petition period was entitled to priority. The district court remanded the case to the bankruptcy court to calculate the pre- and post-petition portions. The successor company, which assumed liability for the claim, appealed.

Portion of withdrawal liability related to employees' post-petition work entitled to priority

Under the Bankruptcy Code, administrative expenses are entitled to priority over the claims of general unsecured creditors. The appellate court explained that, to qualify for administrative priority, an expense had to arise from a post-petition "transaction with the debtor- in-possession," had to "be beneficial to the debtor-in-possession in the operation of the business," and had to be actual and necessary.

The appellate court determined that the covered employees were needed to perform work post-petition in order to keep the employer in operation and, thus, conferred a benefit to the bankruptcy estate. Under the continued CBA and pension plan, the employer had promised to provide pension benefits in exchange for the post-petition work. The successor company owed the portion of the withdrawal liability that corresponded to the employees' post-petition work to fulfill the promise the successor company assumed as part of the purchase of the employer's assets. Thus, according to the court, the Bankruptcy Code requirements were satisfied.

The appellate court stated that the arguments of the successor company were unpersuasive. For example, the successor company contended that because a number of factors determine the amount of withdrawal liability, some of which have nothing to do with work performed by covered employees, withdrawal liability cannot be considered to be an administrative expense. The court agreed that a number of factors are involved. However, that does not alter the fact that the amount owed to the fund was based on the employer's "decision to take advantage of work provided by the employees." The court said it was not "seemly" for the successor company to disclaim responsibility for vested benefits created by the employer by choosing to use the covered employees for post-petition work.

In addition, the court explained that the size of the benefit owed to an employee is partly determined by the amount of time the employee worked for the employer. To the extent that the employees worked post- petition, the employees continued to accrue new vested benefits. The withdrawal liability payment funds the benefits the employees earned by their past service that the employer would normally pay through continuing plan contributions.

In addition, the court's holding that withdrawal liability can be apportioned between pre- and post-petition time periods and that the post-petition portion can be an administrative expense harmonizes the purposes of the Bankruptcy Code and ERISA, as amended by the MPPAA. The definition of administrative expense in the Bankruptcy Code is intended to balance the continued functioning of the debtor-in-possession and the preservation of the estate for creditors. By classifying only the portion of the withdrawal liability attributable to post-petition work as an administrative expense, workers are provided the benefit promised to them in the continued CBA and pension plan, giving the employees an incentive to continue working for the employer after the bankruptcy petition is filed and ensuring the continued functioning of the employer. But limiting the administrative expense to the post-petition portion of withdrawal liability preserves the bankruptcy estate and prevents the estate from being "devoured" by the entire withdrawal liability claim. Permitting the post-petition portion of the withdrawal liability to be classified as an administrative expense fulfills Congress' objectives for the MPPAA.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.