• Third Circuit Holds Portion of Withdrawal Liability Is Postpetition Administrative Expense
  • October 24, 2011 | Authors: Mark S. Chehi; J. Eric Ivester; Ron E. Meisler
  • Law Firms: Skadden, Arps, Slate, Meagher & Flom LLP - Wilmington Office ; Skadden, Arps, Slate, Meagher & Flom LLP - Chicago Office
  • The Court of Appeals for the Third Circuit decided an issue of first impression in In re Marcal Paper Mills, Inc, No. 09-4574 (3rd Cir. June 16, 2011), holding that a Chapter 11 company that withdraws from a multiemployer pension plan incurs administrative expense liability for that portion of withdrawal liability attributable to employee work performed during the postpetition period.

    The Third Circuit’s Marcal decision seems to follow the established test for administrative expense liability articulated in the Jartan and Mammoth Mart cases, i.e., that debts are entitled to payment priority as an administrative claim under the Bankruptcy Code if (1) they arise from a transaction with the debtor-in-possession and (2) payment of the debt is supported by consideration that benefits the estate.1 However, the debtor in Marcal had made all postpetition multiemployer pension plan contributions (including “normal cost” contributions)2 required by its collective bargaining agreements, arguably satisfying any debt arising from postpetition transactions with the debtor-in-possession.

    The Third Circuit’s reasoning in Marcal creates uncertainty about the characterization of termination liability claims in bankruptcy for a single-employer defined benefit pension plan. As a result of this uncertainty, debtors may seek to expedite withdrawal from a multiemployer defined benefit pension plan, either prior to or upon commencing a bankruptcy case, thereby reducing the debtors’ exposure to administrative expense claims.


    Marcal Paper Mills, Inc. manufactured paper products and had entered into a series of collective bargaining agreements (CBAs) with Teamsters Union Local 560 (Local 560). Local 560 was the collective bargaining representative for truck drivers who operated the fleet of trucks that distributed Marcal’s products. Marcal agreed in the CBAs to make contributions to the Trucking Employees of North Jersey Welfare/Pension Fund (TENJ Pension Fund), a multiemployer defined benefit pension plan.

    On November 30, 2006, Marcal filed a Chapter 11 bankruptcy petition. Acting as a debtor-in-possession, Marcal continued to employ members of Local 560. Pursuant to the terms of the governing CBA,3 Marcal was required to continue making contributions to TENJ Pension Fund on behalf of covered employees.4 Marcal made all required contributions to the TENJ Pension Fund during Marcal’s Chapter 11 case from November 30, 2006, until May 30, 2008, when Marcal sold its assets to Marcal Paper Mills, LLC.

    As of the date that Marcal’s bankruptcy asset sale was consummated, Marcal did not employ any Local 560 truck drivers and therefore no further pension contributions were required. Because Marcal ceased to have any further obligations to make contributions to TENJ Pension Fund, Marcal was deemed to have made a “complete withdrawal” from the pension fund. Upon its “complete withdrawal,” Marcal was assessed $5.89 million in total withdrawal liability.5 Accordingly, TENJ Pension Fund filed a claim in Marcal’s bankruptcy proceeding for that assessed withdrawal liability, seeking administrative expense priority for the entire amount. Marcal objected to TENJ Pension Fund’s claim, arguing that the entire amount of Marcal’s withdrawal liability should be classified as a general unsecured claim — a position consistent with generally established treatment of termination liability claims for single-employer defined benefit claims.6 In response, TENJ Pension Fund altered its claim and sought administrative expense priority only “for that portion of the withdrawal liability attributable to postpetition services provided by the Local 560 employees to [Marcal].”

    Marcal objected to any portion of its withdrawal liability being classified as an administrative expense entitled to a bankruptcy payment priority because an employer’s withdrawal liability is its proportionate share of unfunded vested benefits, calculated based on its contributions for the five years preceding withdrawal. Marcal argued that such an amount so calculated fails the Jartan and Mammoth Mart tests of administrative expense priority because those tests of administrative payment priority require a transaction with, and postpetition benefit to, the debtor. Marcal argued further that withdrawal liability is not direct compensation for services rendered by a Chapter 11 debtor’s employees to its bankrupt estate and therefore does not satisfy the Jartan requirement that an administrative priority claim be supported by a postpetition benefit to the estate. Rather, Marcal argued, withdrawal liability is imposed by statute primarily for the benefit of persons wholly unrelated to the bankrupt estate and therefore should not constitute an administrative expense. Marcal likewise argued that its withdrawal liability bore little or no relation to services provided by any given debtor’s employees, whether pre- or postpetition, because withdrawal liability is calculated based on prior years of all participating employers and not based upon postpetition transactions with the debtor. Marcal’s periodic contributions to the TENJ Pension Fund, by contrast, were required by its CBAs and were intended to cover postpetition accrual of pension benefits earned on account of postpetition labor.

    Largely for the reasons set forth above, the Bankruptcy Court rejected TENJ Pension Fund’s claim for administrative expense priority and reclassified Marcal’s entire withdrawal liability as a general unsecured claim.

    On appeal, the United States District Court for the District of New Jersey reversed, holding that the TENJ Pension Fund’s withdrawal liability claim comprised both pre- and postpetition components, and that the portion of the withdrawal liability related to work performed during the postpetition period qualified as an administrative expense with priority payment status in Marcal’s bankruptcy case.

    The Third Circuit Decision

    The Third Circuit affirmed the District Court’s holding that withdrawal liability could be apportioned into pre- and postpetition components. The Court focused on the “nature” of withdrawal liability, characterizing the required lump sum payment owed to the TENJ Pension Fund as an accelerated payment of ongoing monthly pension plan contributions Marcal would have made to the TENJ Pension Fund if Marcal had continued to participate in the multiemployer plan. The Court explained that a portion of this accelerated payment is premised on the Local 560 employees’ earned credit toward their future right to collect pension benefits in consideration of their postpetition work. Therefore, the Third Circuit reasoned that some amount of withdrawal liability included new vested benefits arising from postpetition work of covered employees and that the portion of those underfunded benefits allocable to the postpetition period could be calculated.

    Second, the Third Circuit affirmed the District Court’s holding that the portion of withdrawal liability related to work performed by Marcal’s employees during the postpetition period was an administrative expense that was “actual and necessary” for the continued operation of Marcal. The Third Circuit noted that those “actual and necessary” expenses must arise from a postpetition transaction with the debtor-in-possession and must be beneficial to the estate,7 and explained that Marcal’s covered employees were required to perform work postpetition in order to keep Marcal operating. This work “unquestionably” conferred a benefit on Marcal’s bankruptcy estate and arose from Marcal’s decision to take advantage of the postpetition work provided by covered employees. The Court noted that it was “not seemly” for Marcal to disclaim responsibility for vested benefits that arose due to use of Local 560 employees to perform postpetition work.

    Finally, the Third Circuit rejected Marcal’s argument that withdrawal liability should not be afforded administrative expense payment priority in bankruptcy if such liability is imposed for the benefit of both persons related to the bankruptcy estate (Marcal’s former employees) and persons unrelated to the bankruptcy estate (plan participants who never worked for Marcal). The Court explained that withdrawal liability is calculated to ensure that sufficient plan assets are available to provide promised benefits to all employees in a multiemployer defined benefit plan, including the debtor’s employees. Withdrawal liability, therefore, is provided in consideration for debtor employees’ willingness to continue working postpetition regardless of the fact that non-Marcal employees may benefit as well.


    The Marcal decision may be important to an employer’s decision to withdraw from a multiemployer pension fund. A debtor may find it beneficial to terminate or withdraw from a multiemployer plan8 earlier in or before a Chapter 11 case. Withdrawal liability is calculated based on contributions made during the five years preceding withdrawal. Thus, a debtor who withdraws from a multiemployer plan as soon as possible after commencement of the Chapter 11 case will reduce the postpetition portion of the five-year period and will cut off the accrual of postpetition withdrawal liability.9

    Marcal is also important for employers who sponsor single-employer defined benefit pension plans. When a single-employer plan terminates, the employer is liable for any missed minimum contributions, missed premiums and unfunded benefit liability. If a single-employer plan is maintained during a bankruptcy, claims entitled to administrative priority have been limited to those for the “normal cost contribution” portion of the minimum required contribution (and a per participant “termination premium”). Although aggregate unfunded benefit liabilities may fluctuate in value after the commencement of a bankruptcy, courts have found the entire unfunded benefit liability to be attributable to past service of plan participants and therefore not entitled to administrative priority.10 If unfunded benefit liability is analogous to withdrawal liability, the Marcal decision may leave companies vulnerable to the argument that a portion of the unfunded benefit liability could be deemed to be on account of postpetition service and therefore entitled to administrative priority.

    It is not clear that circuit courts other than the Third Circuit will follow the reasoning in Marcal. The Third Circuit’s Marcal ruling appears to conflate a postpetition contribution claim (that may or may not exist11 due to insufficient postpetition contributions by the withdrawing employer) with a withdrawal liability claim (which is based on the difference between the present value of vested benefits and the current value of the plan’s assets). A postpetition contribution claim for insufficient postpetition contributions may exist when parties to a collective bargaining agreement have miscalculated the amount required to cover benefits that accrue postpetition. Such a claim should not be a claim for withdrawal liability, but rather a claim for missed periodic contributions. Also, a withdrawal liability claim may be caused solely by market performance — a factor unrelated to any direct benefit to the estate.12


    1 See In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir. 1984) and Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.) 536 F.2d 950, 954 (1st Cir. 1976) (establishing that in order for a claim to be entitled to administrative priority under the Bankruptcy Code, (1) the debt must arise from a transaction with the debtor-in-possession and (2) the consideration supporting the claimant’s right to payment provided a benefit to the estate).

    2 The “normal cost” contributions are composed of the portion of unfunded contributions (1) due postpetition and (2) directly attributable to the postpetition labor of the employees in the pension plan. Ordinarily, the portion of the unfunded contributions due postpetition but attributable to prepetition labor of the employees in the pension plan is treated as a general unsecured claim. Both defined benefit single and multiemployer pension plans have a “normal cost” contribution component.  26 U.S.C. § 431(b)(2)(A) and 29 U.S.C. § 1084(b)(2)(A) describe the normal cost as part of the formula for determining the annual funding requirement for multiemployer plans.

    3 Pursuant to section 1113(f) of the Bankruptcy Code, a debtor-in-possession may not unilaterally terminate or alter any provisions of a CBA without first complying with the process for negotiation set forth in section 1113. The CBA that required Marcal to make contributions to the TENJ Pension Fund was set to expire on September 15, 2007. On August 16, 2007, Marcal and Local 560 entered into a Memorandum of Understanding continuing the terms of the CBA until a new contract could be negotiated. Although the parties were never able to negotiate a new contract, the CBA continued to require Marcal to make pension plan contributions and also governed the employees’ accrued pension benefits until Marcal sold its assets to Marcal Paper Mills, LLC.

    4 While the periodic contributions required by each employer in a multiemployer plan are established by the applicable CBA, the minimum funding requirements for multiemployer defined benefit pension plans are set forth in section 412 of the Internal Revenue Code.

    5 Withdrawal liability requires a withdrawing employer to contribute a proportional share of the plan’s unfunded benefit obligations in one lump sum, upon withdrawing from a multiemployer plan. Withdrawal liability enacted as a legislative response to the plan-wide shortfall that occurs when the required contributions an employer has made are not sufficient to fund that employer’s proportionate share of benefits upon withdrawal from a multiemployer plan. Both TENJ Pension Fund and Marcal agreed that withdrawal liability is calculated based on the employer’s contribution it was obligated to pay for five years preceding withdrawal.

    6 See, e.g., PBGC v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811 (6th Cir. 1997) (limiting the PBGC’s administrative priority claim to the portion of minimum funding payments related to benefits and expenses accruing postpetition, the “normal cost,” and designating the remainder of PBGC’s claims as unsecured claims); In re Chateaugay Corp., 115 B.R. 760 (Bankr. S.D.N.Y. 1990) (same), vacated as moot, 1993 U.S. Dist. LEXIS 21409 (S.D.N.Y. June 7, 1993).

    7 This is the same standard evaluating requests for administrative expense priority set forth in In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir. 1984) and Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.) 536 F.2d 950, 954 (1st Cir. 1976).

    8 The debtor would still be required to follow the procedures listed in § 1113 of the Bankruptcy Code in order to reject any collective bargaining agreement.

    9 In Trustees of the Amalgamated Insurance Fund v. McFarlin’s Inc., 789 F.2d 98 (2d. Cir. 1986), the Second Circuit held that withdrawal liability was not entitled to priority expense treatment since it was based on the withdrawing employer’s contributions to the plan prior to the year in which the employer withdrew. McFarlin’s Inc. had withdrawn from the plan the same year it filed for bankruptcy. Thus, the Second Circuit ruled that consideration supporting its withdrawal was not furnished for the benefit of the debtor in possession. The Third Circuit cited this case favorably in In re Marcal Paper Mills, Inc, stating that although the court in In re McFarlin’s declined to classify any portion of the withdrawal liability as an administrative expense, it did so based on facts based on a period predating the Chapter 11 case and, so, In re McFarlin’s “supports a conclusion that post-petition withdrawal liability can be considered an administrative expense.” Thus, while not stated definitively in the Marcal ruling, it might be possible even in the Third Circuit to avoid postpetition administrative expense priority for withdrawal liability altogether if a debtor withdraws from a plan within a year from the time it files a Chapter 11 petition as was done in In re McFarlin’s.

    10 LTV Corp. v. PBGC (In re Chateaugay Corp.), 115 B.R. 760, 775 (Bankr. S.D.N.Y. 1990), vacated by consent order, 1993 WL 388809 (S.D.N.Y. June 16, 1993); see also LTV, 87 B.R. 779, 797-798 (S.D.N.Y. 1988) (PBGC claims based on prepetition conduct of debtors; postpetition termination merely rendered contingent claims fixed; analogizing claims for termination liability to withdrawal liability owed to multiemployer plan, citing McFarlin’s, 789 F.2d at 101, 103), aff’d sub nom. PBGC v. LTV, 875 F.2d 1008, 1019 (2d Cir. 1989) (prepetition labor, not postpetition termination of plan, gave rise to termination liability), rev’d on other grounds 496 U.S. 633 (1990) (PBGC could restore terminated plan).

    11 The Third Circuit quoted approvingly from a joint explanation submitted by the parties, which provided that even if a withdrawing employer made all contributions to date, “the withdrawing employer may not have made sufficient contributions to the plan to fund a fair share of those benefit promises.”

    12 Interestingly, the Third Circuit did not focus on the fact that contributions to a multiemployer defined benefit pension plan required under section 412 of the Internal Revenue Code — the basis for the calculation of an employer’s withdrawal liability — are composed of both the minimum funding contribution necessary to pay for benefits that are presently accruing (“normal cost”) and an additional amount to amortize unfunded liabilities that accrued in the past. Another court focusing on this distinction may conclude that where a debtor has made all normal cost contributions, no portion of the withdrawal liability is entitled to administrative expense priority as matter of law.