Recent Third Circuit Decision Opens Door to Administrative Expense Priority for Pension Withdrawal Liability

December 1, 2011

In In re Marcal Paper Mills, Inc., 650 F.3d 311 (3d Cir. 2011), the Third Circuit Court of Appeals determined that a portion of withdrawal liability may be attributable to the post-petition time period in bankruptcy and, therefore, constitute an administrative expense claim, which would be entitled to priority payment under the Bankruptcy Code.

The Employment Retirement Income Security Act (ERISA), when read in conjunction with the Multiemployer Pension Plan Amendments Act (MPPAA), allows for what is commonly referred to as “withdrawal liability.”  This means that upon the withdrawal from a pension plan, including instances of termination of all employees, an employer becomes liable for the proportionate share of the unfunded vested benefits, calculated as if withdrawal took place on the last day of the plan year.  In this case, Marcal Paper Mills, a participant in a pension plan pursuant to collective bargaining agreements with a local truck drivers union, filed for Chapter 11 in November 2006.  In May 2008, Marcal Paper Mills sold all assets and ceased employment of all truck drivers.  The local union then filed a claim for “complete withdrawal” from the pension fund, asserting that $5,890,128 was an administrative expense priority under sections 502(a)(2) and 503(b) of the Bankruptcy Code.  The bankruptcy court disagreed with this assertion and classified the amount as a general unsecured claim.  The district court, however, reversed and allocated the liability into pre- and post-petition amounts, and in so doing, allowed the post-petition component to be treated as an administrative expense entitled to priority.  The Third Circuit affirmed the ruling.

The Third Circuit reasoned that ERISA and MPPAA were designed to protect employees, and since the employees’ continuing labor after the bankruptcy petition benefited the estate, the debtor was therefore obligated to provide the benefits delineated in the collective bargaining agreements to the post-petition labor.  The court determined this holding was not only consistent with the purposes of the ERISA and MPPAA and the Bankruptcy Code, but harmonized them as well.  It should however be noted, as the Third Circuit did, that this holding is in opposition to the Sixth Circuit BAP’s holding in In re HNRC Dissolution Co., 396 B.R. 461 (6th Cir BAP 2008), which allowed no portion of the withdrawal liability claim to be classified as an administrative expense priority because the expenses could “always” be connected to factors that are not directly related to the employee’s post-petition work.

This case presents the opportunity for strategic planning for a debtor filing for chapter 11 in the Third Circuit.  Withdrawal liability claims are often large.  Since portions of the withdrawal liability claim may now be claimed as a post-petition administrative expense, this means the composition and the length of employment for a post-petition workforce in Chapter 11 cases will have the potential to have a large impact on the budgeting and allocation of bankruptcy estate funds.

Another recent holding of note in the Third Circuit is the recognition of deepening insolvency as an independent tort claim in Pennsylvania.  Though Pennsylvania state courts have yet to formally recognize the claim as an independent cause of action, the Third Circuit Court of Appeals in In re Lemington Home for the Aged, 2011 WL 4375676 (3d Cir. Sept. 21, 2011),  following its previous decision in Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), anticipates that Pennsylvania would recognize a separate claim for deepening insolvency, and that the facts supporting such a claim are not merely components of a claim for breach of fiduciary duty as fraud would be necessary to support such a claim.