Horizon Natural Resources

Company, et al. CASE NO. 02-14261







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The Claim further asserts that withdrawal liability, the withdrawn employer’s share of the multi-employer pension plan’s unfunded vested benefits, is determined under section 4211(c)(3) of ERISA, 29 U.S.C. § 1391(c)(3), the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.