Different court conclusions prevail
Pension liabilities are becoming a growing drain on emloyers' resources. As such, counsel to a Chapter 11 debtor that is party to a multiemployer pension plan must understand the client's potential pension withdrawal liability and its impact on the employer's ability to reorganize. That duty is compounded by the different conclusions courts have reached on when a withdrawal liability claim arises. The majority have held that a "right to payment" to a withdrawal liability claim is triggered on the date of the employer's actual withdrawal from the pension plan. Other courts, however, have held that the triggering event is an employer's prepetition participation in the pension plan, creating a contingent obligation, whether the employer actually withdraws or not. This article reviews the differing bankruptcy case law on when a withdrawal liability claim arises.
MPP and Withdrawal Liability
Multiemployer pension plans (MPP) are collectively bargained pension plans, jointly administered by management and union trustees, and are generally organized by industry or region. Many of the rules applicable to MPPs emanate from the Employment Retirement Income and Security Act of 1974 (ERISA), as amended, which includes the withdrawal liability provisions of the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). Under the MPPAA, an employer that withdraws from a MPP has an obligation to pay a pro rata share of the MPP's vested but unfunded benefits to employees participating in the MPP. This obligation is the employer's withdrawal liability.
Split of Authorities
When an employer in Chapter 11 ceases business operations prior to confirmation of its plan of reorganization, the law is well settled that a MPP has a general unsecured claim for withdrawal liability, and the only issue is what portion of such claim, if any, should be awarded administrative expense status entitled to payment in full.
See e.g., in re Bayly Corp., 163 F.3d 1205 (10th Cir. 1998); Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 104 (2d Cir. 1986). Where an employer withdraws from a MPP after plan confirmation, however, the law is unsettled as to when the MPP's claim for withdrawal liability arises.
The Bankruptcy Code provides that confirmation of a reorganization plan discharges the debtor from any debt that arose before confirmation, including "contingent" claims. See 11 U.S.C. § 1141(d)(1). While the Bankruptcy Code does not define "contingent" claims, courts have held that contingent claims refer to "obligations [of the debtor] that will become due upon the happening of a future event that was within the actual or presumed contemplation of the parties at the time the original relationship between the parties was created."
LTV Corp. (In re Chateaugay Corp.), 944 F.2d 997, 1004 (2d Cir. 1991). As such, the point in time when a post-confirmation withdrawal liability claim first accrues is important for purposes of the bankruptcy discharge.
Withdrawal Liability Claim Arises Only Upon Debtor's Actual Withdrawal From MPP
In the seminal case,
Matter of Computerized Steel Fabricators Inc. 40 B.R. 344 (Bankr. S.D.N.Y. 1984), the Bankruptcy Court held that a claim for withdrawal liability does not arise until an employer actually wtihdraws from a MPP. There, the employer withdrew from the MPP 18 months after confinnation. The employer sought an order from the Bankruptcy Court declaring that the withdrawal liability was a contingent claim, which was discharged upon confinnation.
Analyzing the language of the MPPAA, the court noted that an employer becomes "absolutely liable" for a share of the MPP's unfunded vested benefits on the date the employer ceases meeting its obligations under the MPP and informs the MPP that it wi11 no longer participate. Thus, the court held that prior to the employer's withdrawal, the MPP had no provable claim against the employer and, therefore, the withdrawal liability claim could not have been discharged upon confirmation.
A similar result was reached in
In the Matter of United Merchants & Mfrs., Inc., 166 B.R. 234 (Bankr. D. Del. 1994). In
United, the employer withdrew from the MPP post-confirmation and objected to a proof of claim that was filed by the MPP during the bankruptcy, contending that upon the filing of the bankruptcy petitions, the MPP had a contingent claim, which was not dealt with in the plan, and'was subsequently discharged upon confirmation.
Relying on the Third Circuit Court of Appeals' reasoning in
In re Remington Rand Corp., 836 F.2d 825 (3d Cir. 1988), the court noted that, for a creditor to have a claim against a debtor within the meaning of § 101 of the Bankruptcy Code, "there must exist not merely a legal relationship between the pre-petition debtor and the claimant, but a legal relationship that gives rise to the asserted right to payment." The court found that the legal relationship that gives rise to a MPP's "right to payment" is an employer's actual withdrawal from the MPP. The court concluded that no "claim" existed prior to confirmation of the debtors' joint plan because the legal relationship giving rise to the MPP's right to payment - the debtors' withdrawal - was missing, and, therefore, the MPP's claim was not discharged.
In a more recent case,
In re CPT Holdings, Inc., 162 F.3d 405 (6th Cir. 1998), the Sixth Circuit Court of Appeals, the only court of appeals to address this issue to date, also found that the triggering event for a withdrawal liability claim is an employer's actual withdrawal from a MPP. There, the employer withdrew from the MPP post-confirmation and the MPP made a demand for withdrawal liability. The district court found that on the petition date, the MPP had a contingent claim, which was discharged upon confirmation of the employer's reorganization plan. Reversing the district court, the court of appeals held that under the MPPAA a MPP has no enforceable right to payment for withdrawal liability until an employer actually withdraws from the MPP and "[s]ince this may never occur, it cannot be said that a legal right to payment exists prior to withdrawal."
A 2002 decision from the Third Circuit Court of Appeals,
Board of Trustees of Teamsters Local AL 863 Pension Fund v. Foodtown. Inc., 296 F.3d 164 (3d Cir. 2002), though not addressing the issue of post-confirmation withdrawal liability claim and not relying on the foregoing cases, further supports the conclusions reached in the cases discussed above. In
Foodtown, the court reversed a district court's dismissal of a lawsuit that sought to hold a nondebtor "control" group responsible for an employer/debtor's withdrawal liability. The court of appeals held that, no claim for withdrawal liability existed on the petition date because the employer continued contributing to the MPP during the bankruptcy and did not cease its business operations until after its bankruptcy petition was filed, and, therefore, the employer had no legal or equitable interest in the claim.
Foodtown infers that, like the Sixth Circuit, in the Third Circuit the triggering event for a withdrawal liability claim is an employer's actual withdrawal from a MPP. Thus, where a debtor withdraws from a MPP post-confirmation, the MPP's claim for withdrawal liability may not be affected by the confirmation.
Withdrawal Liability Arises Simply Because of Debtor/Employer's Prepetition Participation in a MPP
Unlike each of the foregoing cases, however, the court in
CD Realty Partners, 205 B.R. 651 (Bankr. Mass. 1997), found that a contingent claim for withdrawal liability arises upon an employer's prepetition participation in the MPP, even if the employer does not withdraw from the MPP until after confirmation. There, the MPP failed to file a proof of claim in the employer's bankruptcy proceeding. Following confirmation, the employer ceased all covered operations under the MPP, thereby withdrawing from the MPP. The bankruptcy court held that the MPP's contingent claim was discharged upon confirmation of the employer's reorganization plan and the MPP should have filed a proof of claim to protect its claim.
For the court in
CD Realty, it is not the withdrawal from a MPP that is dispositive of when a withdrawal liability claim arises, but, rather:
it is the employer's [debtor's] prior participation in the plan that, through ERISA, "triggers" or imposes on that employer. . . the obligation to shoulder its share of the plan's underfunding liability. And the existence of such liability was. . . a reasonable possibility that the parties could and should fairly have anticipated.
Thus, under
CD Realty, a claim for withdrawal liability must be dealt with in the bankruptcy or face discharge upon confirmation.
Conclusion
The law regarding when a withdrawal liability claim arises is only established in the Sixth Circuit, and, arguably, the Third Circuit. As such, debtor's counsel, practicing outside of the Sixth Circuit, should carefully consider the countervailing arguments to determine when withdrawal would be in the debtor's best financial interest. Similarly, counsel representing MPPs should always seek to preserve their client's withdrawal liability claim by actively participating in the bankruptcy process.
Natasha Songonuga is an associate and practices in the Bankruptcy and Creditor's Rights Group of Wolff & Samson of West Orange, New Jersey. She can be reached by phone at (973)530-2176 or by email at:
nsongonuga@wolffsamson.com.
This article is reprinted with permission from the JULY 7, 2008 issue of the New Jersey Law Journal @ 2008 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.
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