UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
ASHLAND DIVISION
IN RE:
HNRC DISSOLUTION CO., f/k/a
Horizon Natural Resources
Company,
et al. CASE NO. 02-14261
DEBTOR
MEMORANDUM OPINION
Lexington Coal Company, LLC (“Lexington Coal”), one of
the purchasers of assets of the former Debtors, has objected to the application
for allowance of administrative expense filed by the UMWA 1974 Pension Plan and
its Trustees (“the Claimant”) in which it seeks sums it maintains are
attributable to “withdrawal liability” under section 4201(a) of the Employee
Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1381(a) and entitled
to administrative, as opposed to unsecured, claim status. The objection (Doc. # 5677) was heard on May
19, 2005, and thereafter a Scheduling Order was entered on May 26, 2005, giving
the parties response and reply time and directing them to address the legal
issues that have been raised. The
Claimant filed an Opposition Brief (Doc. # 6322) and Lexington Coal filed a
Reply Memorandum (Doc. # 6480).
On September 1, 2005 the court held a telephone
conference with the attorneys for the parties and requested further information
related to the administrative claim of the Claimant and entered its order (Doc.
# 6905) directing the filing of further information related to the claim. On September 14, 2005 the Claimant filed its
Supplemental Statement in Response to Court’s Request (Doc. # 6906). The issues here relate only to “withdrawal
liability,” which only arises if the employer’s participation in the plan
ceases, and not to the regular contributions to the pension plans, all of which
were apparently made during the Chapter 11 proceeding. The matter is now ripe for decision as to
whether this is an administrative claim.
1. The First Application for Administrative Expense
The Claimant filed Administrative Expense Request Form
No. 20438 on December 27, 2004 in which it sought $19,580,146.00 for ERISA
withdrawal liability pursuant to section 1381 (“the Claim”). The Claim states that various of the Debtors
were signatory to collective bargaining agreements with the United Mine Workers
of America which obligated them to participate in the 1974 Pension Plan (“the
1974 Plan”). The Claim asserts that the
reorganization and liquidation plans filed in the Debtors’ cases effected a
complete withdrawal from participation in the 1974 Plan in the plan year ended
June 30, 2004, thereby giving rise to withdrawal liability.
The Claim further asserts that withdrawal liability,
the withdrawn employer’s share of the multi-employer pension plan’s unfunded
vested benefits, is determined under section 4211(c)(3) of ERISA, 29 U.S.C.
§ 1391(c)(3), the “rolling-five” method.
Under this method of calculation the pension plan’s unfunded vested
benefits are multiplied by the withdrawn employer’s share of contribution base
units for the five year period preceding the year of withdrawal. Using the rolling-five method, the Claimant
determined that the Debtors’ total liability was $224,986,732.61. The Claimant then calculated the portion of
the Debtors’ employees’ hours that were worked during the administrative
(post-petition) period of the case, or 8.7% of all hours worked during the
five-year period. The pro-rated amount
came to $19,580,146.00.
2. The Amended Application for Administrative Expenses
Claimant has filed its Supplemental Statement (Doc. #
6906) and appended thereto an amended claim for administrative expenses. The claim is amended to $36,248,771.00. The Supplemental Statement and the attached
affidavit of Dale R. Stover, the Comptroller of the Claimant, explain that the
initial claim for administrative expenses was filed premised on a withdrawal
from the plan in the fiscal year ending June 30, 2003. The amended claim reflects withdrawal on
September 27, 2004. The total
withdrawal liability is claimed to be $138,354,090.00 as of that date, of which
$36,248,771.00 (the administrative claim) represents the prorated portion of
the claim related to the period after the filing of the Chapter 11 proceeding
to the withdrawal date. The balance of
that amount is asserted as an unsecured prepetition claim.
The withdrawal liability as of November 13, 2002, the
date the petitions under Chapter 11 were filed (some of the debtor companies
actually filed a day later), was $145,307,051.13. Thus the net withdrawal liability went down by approximately $7
million during the Chapter 11 proceedings. The Supplemental Statement further
explains that the Plan no longer calculates withdrawal liability in the same
manner, having made a change on November 16, 2004 that was retroactive to
withdrawals after July 1, 2004. The exact effect of this change on the
calculations involved here is not explained nor is the reason for the
change.
3. Lexington Coal’s objection
Lexington Coal contends that the Claim does not
qualify as an administrative expense claim because it is based on a collective
bargaining agreement that was rejected, making it a general unsecured
claim. Lexington Coal contends that
withdrawal liability is treated as rejection damages in the bankruptcy context,
and such damages are not afforded administrative expense priority. The Debtors were permitted to reject
collective bargaining agreements by order entered on August 6, 2004. Lexington Coal further contends that the
Claim does not meet Sixth Circuit standards for determining whether a claim is
entitled to administrative expense treatment, and that the calculation of the
Claim is not supported by sufficient evidence and is “fundamentally incorrect.”
3. Discussion
Requests for administrative expenses are authorized
under Bankruptcy Code section 503.
Section 503(b) provides in pertinent part, “[A]fter notice and a
hearing, there shall be allowed administrative expenses, . . . including . . .
the actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). In order to qualify as an “actual,
necessary” administrative expense, a debt must have arisen from a post-petition
transaction with the debtor, and have directly and substantially benefitted the
estate. In re Sunarhauserman, Inc.,
126 F.3d 811, 816 (6th Cir. 1997). The
issue before the court is whether and/or what portion of withdrawal liability
is treated as an administrative expense.
Participants in multi-employer benefit plans are
subject to ERISA provisions which govern an employer’s withdrawal from such a
plan:
[T]he
Multiemployer Pension Plan Amendments Act of 1980 (MPPAA), . . . establish[ed]
a mechanism by which an employer that decides to withdraw from a multiemployer
pension plan incurs ‘withdrawal liability’ intended to cover that employer’s
share of the unfunded vested benefits in existence at the time of
withdrawal. See 29 U.S.C.
§§ 1381, 1391.
. .
. .
By thus imposing liability for complete and
partial withdrawals from pension plans, the MPPAA ensures that a withdrawing
employer pays a proportionate share of the pension plan’s unfunded benefits.
Borden,
Inc. v. Bakery & Confectionery Union & Indus. Int’l Pension, 974 F.2d 528, 529-30 (4th Cir. 1992). “A plan’s vested liability is the actuarial
present value of the benefit obligations which have vested. The difference between this figure and the
value of the plan’s assets is called its unfunded vested liability.” Peick v. Pension Benefit Guar. Corp.,
539 F.Supp. 1025 (N.D. Ill. 1982).
When an
employer withdraws from a multi-employer plan, its withdrawal liability is
calculated according to one of several methods provided for in section
1391. The Claimant states that it was
calculated under the so-called “rolling five” method set out in section
1391(c)(3), which provides as follows:
(c)
Amendment of multiemployer plan for determination respecting amount of unfunded
vested benefits allocable to employer withdrawn from plan; factors determining
computation of amount
(3)The
amount of the unfunded vested benefits allocable to an employer under this
paragraph is the product of--
(A) the plan’s unfunded vested benefits as
of the end of the plan year preceding the plan year in which the employer
withdraws, less the value as of the end of such year of all outstanding claims
for withdrawal liability which can reasonably be expected to be collected from
employers withdrawing before such year; multiplied by
(B) a fraction--
(i) the numerator of which is the total
amount required to be contributed by the employer under the plan for the last 5
plan years ending before the withdrawal, and
(ii) the denominator of which is the total
amount contributed under the plan by all employers for the last 5 plan years
ending before the withdrawal, increased by any employer contributions owed with
respect to earlier periods which were collected in those plan years, and
decreased by any amount contributed to the plan during those plan years by
employers who withdrew from the plan under this section during those plan
years.
29
U.S.C. § 1391(c)(3). The Claimant
maintains that because the Debtors’ employees who were covered under the 1974
Plan worked for a period after the Debtors filed their cases, a portion of the
withdrawal liability arose post-petition and constitutes a post-petition
claim. Lexington Coal argues that
withdrawal from the 1974 Plan came about as the result of the Debtors’ rejection
of collective bargaining agreements, making any withdrawal liability a
pre-petition unsecured claim not entitled to administrative priority, and that
no benefit to the estate is shown and it is thus not allowable as an
administrative claim.
There appears to be no dispute that the Debtors’
withdrawal liability did not arise until they ceased operations almost two
years after the commencement of their Chapter 11 cases. That withdrawal liability is its share of
the Plans’ total unfunded vested liability.
That liability may have accumulated over many years and is clearly
dependent, among other things, upon the success of the investments as
administered by the trustees of the fund and contributions by other
employers. Courts appear to agree that
the date of accrual of liability is one factor in determining how withdrawal
liability is to be treated. “Withdrawal
liability is based upon an allocation to the withdrawing employer of a portion
of each fund’s unfunded vested benefits calculated as of the end of the plan
fiscal year preceding the year in which the employer withdraws.” Vipond and Vipond, Inc. v. U.M.W.A.,
1992WL266000, *1 (W.D. Pa. 1992).
However, simply because the liability accrued after the filing of the
bankruptcy proceeding does not mean that any of the liability is an administrative
expense.
In Amalgamated Ins. Fund v. William B. Kessler,
Inc., 55 B.R. 735, 738-40 (S.D.N.Y. 1985), the debtor operated for several
months after filing the case and, during this period, the plan year end
occurred. A determination of the withdrawal
liability was made and the trustees asserted that the entire amount was an
administrative expense. The court found
that, although the debtor operated under the plan for a period of time, none of
the withdrawal liability was an administrative expense because the liability
accrued before the filing of the Chapter 11.
It also noted that the debtor’s withdrawal liability was attributable
not only to the debtor’s employees, but also to other companies which had gone
out of business. Id. at
738. The court notes at this point that
the withdrawal liability in the present case is actually less, by approximately
$7 million, than it would have been if the withdrawal had occurred on the date
of filing of the plan.
In Trustees of Amalgamated Ins. Fund v. McFarlin’s,
789 F.2d 98 (2nd Cir. 1986), the Second Circuit observed that
. . .
whether the McFarlin’s ‘withdrawal liability’ is an administrative expense
depends upon the consideration supporting the Fund’s right to receive it. The history of the MPPAA demonstrates that
the employer’s lump sum payment in satisfaction of his withdrawal liability is
made to guarantee pension benefits already earned by those employees covered by
the Plan. Were the employer not
withdrawing from the plan, he would be obligated to continue making periodic
contributions to the Fund after his withdrawal. The consideration supporting the withdrawal liability is,
therefore, the same as that supporting the pensions themselves, the past labor
of the employees covered by the Plan.
Id. at 101. The
applicable year end date for determining the withdrawal liability in that case
was prior to the filing of the bankruptcy case so the amount determined
represented a sum due prior to the inception of the case. However, despite the fact that the Chapter
11 debtor operated under the multiemployer plan for some 8 months before it
closed its operation that employed the covered employees, and the collective
bargaining agreement was not rejected until more than two years after the filing
of the case pursuant to the terms of a plan of liquidation, no administrative
claim was allowed. Id. at
100-102. In fairness to Claimant,
however, it is not apparent from the opinion whether the court focused on this
aspect of the claim.
In Matter of Cott Corp., 47 B.R. 487 (Bankr. D.
Conn. 1984), a case in which the debtor rejected a collective bargaining
agreement, the court found a portion of withdrawal liability to be a
post-petition administrative expense, stating:
Both
parties in this matter argue that the date of triggering withdrawal liability
under ERISA § 1383(a), . . ., controls the pre- or post-petition nature of
the Fund’s claim. I conclude, however,
that the provisions of ERISA § 1383(a) only signal the point in time from
which withdrawal liability is to be calculated and then becomes payable, based
on a liability that has accrued over many previous years. . . .
In the
present matter, there are three months of post-petition service included in the
last plan year . . . on which the Fund calculates its withdrawal liability
claim. I believe that the withdrawal
liability claim, if possible, should be prorated as to the amount of unfunding
that occurred during that year based upon prepetition and postpetition portions
of that year.
Id. at 491-92.
Based on this reasoning, the Debtors’ liability here would have accrued
as of June 30, 2004 (the end of the Plan year preceding the year of
withdrawal), and the applicable post-petition period would be November 14, 2002
(the date of filing) through June 30, 2004.
Proration of the withdrawal liability for purposes of
allowance as an administrative expense has also been allowed in In re
Pulaski Highway Express, Inc, 57 B.R. 502 (Bankr. M.D. Tenn. 1986) where
the debtor operated in the Chapter 11 case, for purposes of the multiemployer
plan, for 37 days. As Lexington Coal
points out, the Pulaski court saw clearly the problem of using past
contribution experience to project across the date of filing of the
petition. Id. at 511, fn. 17. The problem this court sees with the
proration of the withdrawal liability as in these cases is that, by the mere
passage of time in a case, more and more of the withdrawal liability is
converted from a pre-petition claim to an administrative claim even if, as in
the present case, the withdrawal liability goes down during the administration
of the case.
Use of the “rolling five” method of calculation, as
done by the Claimant would, in a 60 month case, result in all of the withdrawal
liability being an administrative expense without any demonstration of benefit
to the estate. A direct and substantial benefit to the estate must be shown, Sunerhauserman,
supra, and is problematic where the amount of the liability is less than
it was at the inception of the case. If
no additional indebtedness was created during the administration of the estate,
can the Claimants demonstrate a benefit to the estate?
Lexington Coal cites cases in support of its
contention that rejection of a collective bargaining agreement renders
withdrawal liability a pre-petition unsecured claim pursuant to Bankruptcy Code
sections 365(g) and 502(g). Certainly a
viable argument can be made that the enactment of section 1113 of the Bankruptcy
Code entitled Rejection of collective bargaining agreements did not
change the result of rejection of a contract under section 365 which provides
that rejection damages are pre-petition, and therefore, unsecured, claims. However, in view of the above analysis of
the claim under section 503(b), a determination of this issue is not
necessary.
As is pointed out in the memoranda, the Claimant has
not explained how it arrived at the amount it claims is owed as withdrawal
liability, except to recite the formula found in section 1391(c)(3). There can be no determination of an amount
due until the Claimant provides a detailed calculation showing how it applied
the formula set out in section 1391(c)(3) to arrive at whatever amount it
claims. However, because the claimant
cannot demonstrate that the claim benefitted the estate, the claim is not
allowable as an administrative claim and should be reclassified as an unsecured
claim subject to any further valid objections.
An order in conjunction with this opinion will be entered separately.
Copies to:
Gregory R. Schaaf, Esq.
Marilyn L. Baker, Esq.
Barbara E. Locklin, Esq.
Rex Dunn, Esq.