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Third Circuit Holds Post-petition Pension Fund Withdrawals Liability Is Entitled to Administrative Expense Priority Under Sectio
Posted: 2 years 8 weeks ago
By: Brian Bergin
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In a case of first impression, In re Marcal Paper Mills, Inc., the Third Circuit prorated the debtor’s pension fund withdrawal liability and gave administrative expense priority only to that portion related to the post-petition period. After filing its chapter 11 bankruptcy petition, Marcal Paper Mills, Inc. (“Marcal”) entered into a Memorandum of Understanding (the “MOU”) with certain unionized employees. The MOU required Marcal to continue making contributions to the union’s pension fund (the “Fund”) and required those unionized employees to continue working for Marcal. When Marcal sold its assets and terminated its distributing operation, Marcal’s ceased making contributions to the Fund. The Fund filed an administrative claim against Marcal for $5,890,128 in withdrawal liability on the basis of the Fund’s determination that Marcal had made a “complete withdrawal”  from the Fund under the meaning of Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”). After Marcal objected to its claim, the Fund amended its claim and sought administrative priority for only the portion of the withdrawal liability attributable to post-petition services provided by the unionized employees.
In general, for a claim to qualify as an administrative expense under section 503(b)(1)(A) of the Bankruptcy Code, the claim must both (1) arise from a transaction between the creditor and a debtor in possession; and, (2) provide a direct and substantial benefit to the estate.
The Third Circuit found that Marcal’s claim satisfied the first prong because its claim arose from the MOU, which constituted a transaction between the creditor and debtor in possession. Further, because theThird Circuit determined that unionized employees were obligated to continue working for Marcal during the post-petition period, the court concluded that they had “unquestionably conferred a benefit on the estate.” As such, the Third Circuit ruled that the Fund’s claim was entitled administrative priority for the portion of the withdrawal liability attributable to the post petition period.
The Third Circuit also suggested that two policy rationales supported its holding: (1) by classifying post-petition work as an administrative expense, workers are incentivized to continue working, which benefits a debtor; and, (2) limiting the classification to only the post-petition period prevents the company from being consumed entirely by the withdrawal liability claim, giving it an opportunity for a “fresh start.” The Third Circuit also stressed that its holding is consistent with decisions of other courts that have addressed post-petition pension fund withdrawal liability, as well as with other Third Circuit cases holding that other types of benefits can be apportioned between the pre- and post-petition period.
In re Marcal Paper Mills, Inc. may prove significant for a couple of reasons. First, the Third Circuit’s decision promotes Congress’ objectives underlying the MPPAA amendments to ERISA. By giving priority to post-petition claims of withdrawal liability from multi-employer pension funds, the decision strengthens a key MPPAA amendment by closing a loophole present in ERISA, and helps protect the capital funding of multi-employer pension funds. Secondly, classifying the post-petition portion of the withdrawal liability as an administrative expense incentivizes employees to continue showing up to work after a debtor files for bankruptcy because they can be secure that their wages and benefits will continue to be paid in the ordinary course. This steady supply of labor obviously also benefits the debtor in their reorganization efforts.
 650 F.3d 311 (3d Cir. 2011).
 The MPPAA implemented withdrawal liability to ensure that employers could not avoid their continuing obligations to provide promised benefits by withdrawing from a pension fund penalty-free, thereby possibly endangering the entire multiemployer pension fund. Marcal, 650 F.3d at315–16; see also 29 U.S.C. § 1381(a) (requiring pension fund trustees to collect “withdrawal liability” from employers whose covered operations terminated). As such, the MPPAA provides that if an employer withdraws from a multiemployer pension fund, then that employer is liable to fund its proportionate share of the “unfunded vested benefits” through a withdrawal liability payment. 29 U.S.C. § 1381(b)(1). Unfunded vested benefits constitute the difference between the benefits promised and the amount of money currently in the plan. Pension Ben. Guar. Corp. v. R. A. Gray & Co., 467 U.S. 717, 725 (1984) (“‘[U]nfunded vested benefits” [are] calculated as the difference between the present value of vested benefits and the current value of the plan's assets.”) In Marcal, the parties stipulated that Marcal’s proportionate share should be “based on [the] contributions [it was obligated to pay] for the 5 years preceding withdrawal.” Marcal, 650 F.3d at317.
 Marcal, 650 F.3d at314. A complete withdrawal occurs when an employer: (1) permanently ceases to have an obligation to contribute to the plan or (2) permanently ceases all covered operations. 29 U.S.C. § 1383.
 29 U.S.C. § 1101 et seq.
 Pub. L. No. 96-364, 94 Stat. 1208. Prior to the MPPAA, ERISA required the PBGC to guarantee benefits only for terminated single-employer pension plans, with multi-employer plan terminations benefit guarantees left to the PBGC’s discretion. Id. § 1381(c)(2)–(4). In 1980, Congress enacted the MPPAA, amending ERISA to regulate the conduct of multi-employer plans and to protect the PBGC in its role as guarantor of plan benefits. Pub. L. No. 96-364, 94 Stat. 1208.
 Marcal, 650 F.3d at314.
 Trustees of the Amalgamated Ins. Fund v. McFarlin’s Inc. (In re McFarlin’s Inc.), 789 F.2d 98, 102 (2d Cir. 1986) (denying fund’s claim to classify withdrawal liability as administrative expense because no consideration was given for benefit of DIP or for continuation of business after it filed for bankruptcy).
 Marcal, 650 F.3d at314. Actual and necessary costs of preserving the estate include, in pertinent part, “wages salaries, and commissions for services rendered after the commencement of the case” 11 U.S.C. § 503(b)(1)(A) (2006).
 Marcal, 650 F.3d. at 321.
 Id. at 320. The only other circuit court to address this issue, the Second Circuit, has suggested that post-petition withdrawal liability can be considered an administrative expense. In In re McFarlin’s Inc., 789 F.2d at 101, 103–04, the court’s analysis indicates that post-petition claims can be classified as administrative expenses, although the claim in that case did not warrant classification as an administrative expense. Lower courts have also reached that conclusion. See InreGreat Ne. Lumber & Millwork Corp., 64 B.R. 426 (Bankr. E.D. Pa. 1986) (adjudicating post-petition withdrawal liability as an administrative claim) and InreCott Corp.,47 B.R. 487 (Bankr. D. Conn. 1984) (holding post-petition withdrawal liability was an administrative claim and liability is capable of division).
 See In re Hechinger Inv. Co. of Del., 298 F.3d 219 (3d. Cir. 2002) (stating “Stay-On” benefits for continued employment can be apportioned, with post-petition benefits entitled to administrative priority); See also In re Roth Am., Inc., 975 F.2d 949 (3d. Cir 1992) (indicating vacation and severance benefits can be apportioned, with post-petition benefits entitled to administrative priority).
 Before the MPPAA’s enactment, under ERISA an employer was able to withdraw from a multi-employer fund without further obligation unless it had contributed at least 10 percent of all employer contributions to the fund in the years preceding withdrawal, or if the fund remained viable for five years following the employers' termination of participation.Gray, 467 U.S. at 721.Congress enacted the MPPAA in large part because ERISA did not “adequately protect plans from adverse consequences” arising when employers withdrew from multi-employer pension funds. Id. at 722.