Third Circuit Holds a Portion of Post-Petition Withdrawal Liability is Entitled to Priority Over General Unsecured Claims

Recently, in In re Marcal Papers Mills, Inc., the Third Circuit held a portion of an employer’s withdrawal liability attributable to the employer’s post-petition period is entitled to administrative priority.  This decision is important because it permits Multiemployer benefit trust funds to step ahead of general unsecured creditors in distribution of bankruptcy estates.  However, this decision may lead to an increased number of debtors-in-possession (“DIP”) deciding to reject their collective bargaining agreements to avoid paying withdrawal liability.  Such a decision may cause other entities looking to purchase assets from a bankruptcy estate to think twice before investing if there is a collective bargaining agreement still in place, which requires the DIP to make benefit contributions to multiemployer defined benefit trusts.

Background

Marcal manufactured paper products and employed truck drivers to deliver its paper products.  Marcal’s truck driver employees were members of the International Brotherhood of Teamsters, Local 560 in New Jersey.  As part of the collective bargaining agreement, Marcal agreed to pay benefits for its employees into the Trucking Employees of North Jersey Welfare/Pension Fund, which is a multiemployer defined benefit plan.  

Marcal’s collective bargaining agreement was set to expire soon after its bankruptcy filing.  Marcal, the DIP, decided to continue the current collective bargaining agreement and continue to employ Teamster members.  Covered employees continued working for the DIP until Marcal Paper Mills, LLC purchased the DIP’s assets out of the bankruptcy estate.  Upon Marcal, LLC’s purchase, Teamster members ceased working for the DIP. 

At Issue

Both parties agreed that Marcal, LLC had no duty to continue contributions after the date it purchased the DIP’s assets out of the bankruptcy estate.  The Teamsters Pension Fund sought administrative priority for the portion of withdrawal liability attributable to post-petition services provided by Teamster members to the DIP. 

Procedural History

The Bankruptcy Court rejected the Pension Fund’s administrative priority claim and classified the entire withdrawal liability as a general unsecured claim.  The Pension Fund appealed and the District Court held the Pension Fund was correct that a portion of the withdrawal liability attributable to post-petition services provided by Teamster members was entitled to administrative priority.  Marcal appealed the case to the Third Circuit.

The Law Guiding the Case

The Third Circuit was called upon to harmonize two competing Federal statutory schemes.  The Court had to harmonize the Bankruptcy Code and the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), which has been codified into Title 29 of the U.S. Code as part of ERISA.  The Bankruptcy Code has two competing interests, which are (1) survival of the debtor and (2) fair treatment of the debtor’s creditors.  The MPPAA was enacted by Congress to ensure that employers could not withdraw from making contributions in a multiemployer benefit plan and leave other employers to pickup the difference or leave beneficiaries of the plan without their promised benefits.  The MPPAA also served the purpose of protecting the Pension Benefit Guaranty Corporation from greater liabilities in multiemployer plans.

The Third Circuit held that allowing a portion of the withdrawal liability to be classified as an administrative expense, which is entitled to priority over general unsecured creditors, served the purposes of the Bankruptcy Code and the MPPAA.  The decision served the purposes of the Bankruptcy Code because the DIP needed employees to continue operating, and the Teamster members were some of those employees.  The MPPAA’s purposes were served by the decision because the Teamster members continued to earn pension credits while they worked for the DIP.  If the Court were to disallow a portion of the withdrawal liability as an administrative priority, the Pension Plan would not have sufficient funds to pay those workers benefits and other employers would have to cover the DIP’s portion of benefits. 

The Third Circuit was only the second Circuit Court of Appeal to encounter this issue.  The Court followed a previous decision by the Second Circuit.  Though the Second Circuit did not hold that a portion of withdrawal liability for post-petition services to the DIP was entitled to administrative priority under the facts of its case, it suggested that such a claim could be made.  See In re McFarlin’s, Inc., 789 F.2d 98 (2d Cir. 1986).  Two bankruptcy court decisions came to the same conclusion as the Third Circuit.  Those decisions were In re Great NE. Lumber & Millwork Corp., 64 B.R. 426 (Bankr. E.D. PA 1986) and In re Cott, 47 B.R. 487 (Bankr. D. Conn. 1984).  The Third Circuit also relied upon previous Third Circuit decisions which held withdrawal liability should not be treated differently from any other benefit. 

What does this case mean?

This case could play an important role in the coming years.  Though the Third Circuit is only the second Circuit Court to address this issue, it certainly will not be the last.  With the nation’s current economic malaise and the expected continual contraction of the U.S. manufacturing base, it is highly likely that these cases will continue to occur.  Any time a case requires harmonizing ERISA (or the MPPAA) and the Bankruptcy Code, the litigation is always costly and the time required is great.  Particularly when the decision is one that is not guided by a large amount of precedent.  It will be interesting to see if other Circuit Courts of Appeal follow the Third Circuit when they are faced with such a decision.