The Bottom Line:

On June 16, 2011, the United States Court of Appeals for the Third Circuit ruled in In re Marcal Paper Mills, Inc., to allocate a portion of a debtor’s withdrawal liability claim as an administrative expense. In re Marcal Paper Mills, Inc., No. 09-4574, 2011 WL 2410740 (3d Cir. June 16, 2011). The Third Circuit affirmed the district court (which overturned the bankruptcy court), which held that a portion of withdrawal liability may be attributable to the post-petition time period and therefore constitute an administrative expense claim entitled to priority under the Bankruptcy Code. The Court reasoned that the debtor benefited from postpetition labor provided by its unionized employees.  A portion of the consideration for this labor was the promise of additional pension benefits.  The Court also found that such a holding was consistent with its views of the purposes of the Bankruptcy Code and ERISA, as amended by the MPPAA.

What Happened:

By way of background, the Employee Retirement Income Security Act (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”), provides that upon withdrawal from a pension plan, an employer incurs liability (referred to as “withdrawal liability”) for their proportionate share of the pension plan’s unfunded vested benefits at the time of withdrawal. The purpose of imposing such liability on withdrawing employers was to “ensure that employers could not avoid their obligation to provide a promised benefit by withdrawing, thereby hurting their employees and the entire pension fund’s health.” Id. at *4. An employer triggers a “complete withdrawal” from a pension plan when it ceases to have any obligation to contribute to the plan, including the termination of all employees under the plan. Withdrawal liability is generally calculated as if the withdrawal occurred on the last day of the plan year preceding withdrawal, and though the specifics of the calculations are quite complex, withdrawal liability is generally calculated based on the employer’s past contributions to the plan. 

Marcal Paper Mills, Inc. (“Marcal” or the “Debtor”) manufactured a variety of paper products, including facial and bathroom tissues and paper towels.  It filed for chapter 11 on November 30, 2006. Pursuant to collective bargaining agreements with the members of the Teamsters Union Local 560 (comprised of Marcal’s truck drivers), Marcal participated in a multiemployer defined benefit pension fund known as the Trucking Employees of North Jersey/Welfare Pension Fund (the “TENJ Pension Fund”). On May 30, 2008, Marcal sold its assets to another entity and ceased to employ any of the truck drivers for which it was contributing to the pension plan. Because Marcal no longer had any obligation to contribute to the plan, the TENJ Fund filed a claim for Marcal’s “complete withdrawal” in the amount of $5,890,128, asserting that the entire amount of the claim was entitled to administrative expense priority under section 503(b) of the Bankruptcy Code.

Initially, the bankruptcy court classified the entire amount of the claim as a general unsecured claim, but the district court reversed on appeal and apportioned the liability into pre- and post-petition components, allowing a portion of the withdrawal liability to be accorded as an administrative expense. Trucking Employees of N. Jersey Welfare Fund, Inc. v. Marcal Paper Mills, Inc., 2009 WL 3681897, at *8 (D.N.J. Nov. 2, 2009). On appeal, the Third Circuit affirmed.

In so holding, the Third Circuit reasoned that the work performed by the Debtor’s employees conferred a benefit on the estate, and under the CBA, the Debtor was obligated to provide certain pension benefits on account of that post-petition labor. Thus, the Third Circuit reasoned that allowing that portion of the withdrawal liability relating to post-petition labor as an administrative expense was consistent with the requirements of administrative expense claims under section 503(b). The Third Circuit expressly rejected the holding of the Sixth Circuit Bankruptcy Appellate Panel’s decision in In re HNRC Dissolution Co., 396 B.R. 461 (6th Cir. B.A.P. 2008) that no portion of a withdrawal liability claim could be entitled to administrative expense priority, because “the amount of withdrawal liability . . .  is always dependent upon factors that are not directly related to the postpetition work of a debtor's employees.” Id. at 479 (emphasis in original).  Instead, the Third Circuit held that “withdrawal liability can be apportioned between pre- and post-petition time periods and that the post-petition time period can be classified as an administrative expense.” Id.  The court further found that such a holding was entirely consistent with and harmonized the purposes of both the Bankruptcy Code and ERISA, as amended by the MPPAA.

Why the Case is Interesting:

Withdrawal liability claims are often very large.  In light of this decision, in the Third Circuit, a portion of these claims may now be classified as an administrative expense claim if the debtor continues to employ union employees in Chapter 11.   Depending on the composition of, and length of, employment of the postpetition workforce, this could have a meaningful impact upon Chapter 11 debtors who attempt to reorganize but ultimately are required to liquidate or sell their assets during the bankruptcy cases.   To date, only a few bankruptcy and district courts have analyzed with whether withdrawal liability claims may be divided into pre- and post-petition components.  Even fewer have developed methodologies to allocate the liabilities between such claims.   Circuit Court precedent on this issue is limited, and indeed, the only prior Circuit Court decision on this issue, McFarlin’s, reclassified the entire claim as a general unsecured claim.  One thing is clear.  Marcal requires debtors in the Third Circuit – which includes Delaware bankruptcy cases – to consider the effects of withdrawal from multiemployer plans on their strategic planning.