2009 Chapter 11 Recent Developments (Part I)

h. Collective Bargaining: Benefits and Pensions

United Mine Workers of America 1974 Plan and Trust, et. al. v. Lexington Coal Co., LLLC (In re HNRC Dissolution Co.), 396 B.R. 461 (BAP 6th Cir. 2008)

Facts: The Debtors were parties to collecting bargaining agreements (the "NBCWAs") with the United Mine Workers of America ("UMWA"). One of the requirements of the NBCWAs was that the Debtors participate in a multiemployer pension plan, the United Mine Workers of America 1974 Pension Plan and Trust (the "1974 Plan"). The pension plan sought allowance as an administrative claim the Debtors' post-petition portion of their withdrawal liability when the Debtors withdrew from the 1974 Plan two years after filing for bankruptcy.

Issues: "Did the bankruptcy court abuse its discretion when it determined that the postpetition portion of the 1974 Plan's withdrawal liability claim was not entitled to administrative priority?" Sub-issues:

(1)

"Did the bankruptcy court err when it concluded that the 1974 Plan failed to establish that the withdrawal liability, or a portion thereof, represented a 'direct and substantial benefit' to the Debtors' bankruptcy estate under the 'benefit of the estate' test established by the United States Court of Appeals for the Sixth Circuit...?"

(2)

"Did the bankruptcy court err when it applied the 'benefit to the estate' test, because the exception set forth by the United States Supreme Court in Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), may apply to the withdrawal liability claim?"

Rules:

(1)

In the Sixth Circuit, a claim for withdrawal liability only vests upon withdrawal. Thus the withdrawal liability claim here did not arise until the Debtors withdrew from the 1974 Plan, around two years after they declared bankruptcy.

(2)

In the Sixth Circuit, an administrative claim under § 503(b)(1)(A) may only be established by the claimant (by a preponderance of the evidence) if it arose via a transaction with the bankruptcy estate and if it directly and substantially benefitted the estate.

(3)

"Claims for withdrawal liability lack the requisite causal relationship to the work performed by the Debtors' employees for the claim to be treated as an administrative expense."

(4)

The Reading v. Brown exception does not apply to the withdrawal liability claim because it does not "stem from tortuous or deliberate misconduct by the Debtors."

Holding: Affirmed.

Reasoning: Under ERISA, when companies participate in multiemployer pension plans, they may be subject to two forms of liability: periodic contributions and withdrawal liability. Withdrawal liability represents the company's obligations to pay its proportional share of the plan's total unfunded vested benefits when it withdraws from the plan. The amount of a company's withdrawal liability, which is based upon a plan's unfunded vested benefits, may be affected by a number of factors that are completely outside of the employer's control. Although the workers that are the beneficiaries of the 1974 Plan benefitted the estate by working post-petition, the 1974 Plan failed to establish that the "withdrawal liability claim relates directly to the work performed by the Debtors' employees postpetition... [because] the calculation of a plan's vested benefits and consequently, the assessment of withdrawal liability against a particular employer, will always be a function of numerous factors [the most significant may be the return on investment of funds] that are not, and cannot be, directly linked to the postpetition work supplied by the Debtors' employees." Lastly, in applying Reading Co. v. Brown, 391 U.S. 471 (1968), courts have limited its application to "claims for tort damages, or cases involving intentional misconduct by the trustee or debtor-in-possession." Here, ERISA specifically anticipates and allows companies to withdraw from their pension plans and thus withdrawal liability is not punishment for wrongful conduct.