United States: Multiemployer Pension Plan Withdrawal Liability Claims—Discharge And Bar Dates: When Is A Claim A Claim?

Last Updated: July 12 2019
Article by Peter C. Blain

Withdrawal liability for underfunded multiemployer pension plans has confounded bankruptcy courts since the 1980 enactment of the Multiemployer Pension Plan Amendments Act of 1980 (MEPPAA).1 The courts disagree over whether the Bankruptcy Code's2 definition of claim is broad enough to sweep in contingent withdrawal liability claims, which are dependent upon complex actuarial calculations, asset valuations and estimates of future benefit obligations to participants, all of which are done at the time of the withdrawal; or instead whether the contingent nature of a withdrawal and the possibility of underfunding—(both of which are necessary for liability)—are too ephemeral to create a dischargeable claim until the withdrawal of an underfunded plan actually occurs.3 A March 2019 bankruptcy case from the Southern District of New York dealing with a contingent withdrawal liability claim filed after the bar date established in a Chapter 11 case adds to the dissonance.

MEPPAA

Prior to the 1974 enactment of ERISA,4 a company with a retirement plan could go out of business without being held accountable for the promised retirement benefits. ERISA tightened funding requirements for tax qualified plans, and created the Pension Benefit Guaranty Corporation (PBGC), an insurance program that makes some of the payments due retirees upon an underfunded plan's termination. However, multiemployer pension plans were excluded from PBGC coverage because of the concern that the PBGC, which was theoretically self-supporting, would not be able to handle the additional risk posed by multiemployer pension plans. Consequently, under ERISA as originally enacted, withdrawing participating employers in multiemployer pension plans could avoid any liability for unfunded pension benefits so long as the pension plan did not terminate within five years thereafter. This encouraged employers participating in financially shaky pension plans to "stampede for the exit doors,"5 thereby potentially hastening the pension plan's demise.

Congress recognized there was a looming catastrophe presented by multiemployer pension plans in declining industries whose employee base could no longer supported a growing number of retirees with fixed benefits and, in May 1980, required the PBGC to cover such retirees. However, it quickly became apparent that this, without more, would threaten the very solvency of the PBGC. To provide the "more," Congress enacted MEPPAA, which imposed liability upon any participating employer choosing to withdraw from an underfunded multiemployer pension plan. However, under MEPPAA, until a participating employer actually withdraws from a multiemployer pension plan, and the plan underfunding is established,6 the liability (which could be enormous) remains contingent.7

The Treatment of Contingent Claims Under the Code, Generally

One of the Code's principal objectives is to allow a debtor a "fresh start" by dealing with all of its debts, both fixed and contingent. The Code defines "debt" as a liability on a claim,8 and a "claim" as a "right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured."9 This definition "reflects Congress' broad rather than restrictive view of the class of obligations that qualify as a 'claim' giving rise to a 'debt.'"10 Indeed, Congress intended the definition of "claim" to be the "broadest possible," and added that the Code "contemplates that all legal obligations of the debtor . . . will be able to be dealt with in the bankruptcy case.

It permits the broadest possible relief in the bankruptcy court."11 However, this admonition has proved difficult to put into practice when courts wrestle with contingent claims.

Bankruptcy courts have had a relatively easy time deciding the status of contingent claims which become fixed during a bankruptcy case, especially those related to employment. Courts will allocate a claim, such as vacation pay which vests upon termination but which is earned over time, to the appropriate periods when the pay was earned to determine what portions of the claim have unsecured, priority and administrative status, respectively.12 However, bankruptcy courts have had considerable difficulty determining whether something constitutes a "claim" that is discharged by a bankruptcy case.

Discharge of Contingent Claims

Regarding claims arising postplan confirmation and discharge, courts have generally split into two camps. Some have adopted the "conduct test," holding that a claim does not arise until the event giving rise to liability has occurred.13 Others follow the "pre-petition relationship test," holding that claimants which have pre-petition contact, privity or other relationship with the debtor, but whose rights depend upon a future occurrence, nonetheless may have a pre-petition claim which will be discharged.14

Illustrative of the judicial murkiness are the decisions of the U.S. Court of Appeals for the Third Circuit, which migrated from one camp to the other. In 1994, in In re M. Frenville Co., 15 the court focused on the "right to payment" language in the Code's definition of a claim, holding that no claim existed until a cause of action accrued under state law. The Frenville "accrual" theory of when a claim arises was universally criticized as far too restrictive and contrary to Congressional intent. One court observed that Frenville "may be fairly characterized as one of the most criticized and least followed precedents decided under the current Bankruptcy Code."16 Another observed that "Frenville has proved a remarkably unpopular decision and no other Circuit Court of Appeals has followed it."17

Twenty-six years later, in JeldWen, Inc. v. Van Brunt (In re Grossman's Inc.), 18 the Third Circuit addressed the issue of whether a pre-petition exposure to asbestos resulting in injury manifesting 10 years after confirmation of a plan of reorganization was a claim discharged by the proceeding, and overruled Frenville. The court noted that "Courts have declined to follow Frenville because of its apparent conflict with the Bankruptcy Code's expansive treatment of the term 'claim.'"19 Continuing, the court said:

The Frenville court focused on the "right to payment" language in § 101(5) and, according to some courts, "impos[ed] too narrow an interpretation on the term 'claim,' . . . by failing to give sufficient weight to the words modifying it: "contingent," "unmatured," and "unliquidated." The accrual test in Frenville does not account for the fact that a "claim" can exist under the Code before a right to payment exists under state law.20

After reviewing the conduct test,21 and the pre-petition relationship test,22 the court held that "a 'claim' arises when an individual is exposed pre-petition to . . . conduct giving rise to an injury, which underlies a 'right to payment.'"23

In summary, those courts following the conduct test will find that unless conduct giving rise to "a right to payment" has occurred prior to a debtor's discharge, the claim is not discharged by the bankruptcy proceeding and the claimant is free to pursue the debtor, bankruptcy notwithstanding. On the other hand, courts following the pre-petition relationship test will find claims which arise after discharge but which are based upon a pre-petition relationship between the debtor and the claimant to be pre-petition claims, and are discharged in the bankruptcy case.

Footnote

1. Pub. L. No. 96-364, 94 Stat. 1208 (codified as amended in scattered sections of 29 U.S.C. and 5 U.S.C.) (MEPPAA). MEPPAA withstood a constitutional challenge under the Due Process and Takings Clauses in Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717 (1984)

2. 11 U.S.C. §§ 101-1532, hereinafter the "Code."

3. For a broader discussion of contingent withdrawal liability claims in bankruptcy, see Peter C. Blain, Contingent Withdrawal Liability in Multiemployer Pension Plans in Bankruptcy – Claims, Discharge, Solvency, and Avoidance Actions! – Part I and II, Employee Benefit Plan Review, July/August and September 2018.

4. Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of 5 U.S.C., 18 U.S.C., 29 U.S.C., and 42 U.S.C.)

5. Milwaukee Brewery Workers' Pension Plan v. Joseph Schlitz Brewing Co., 513 U.S. 414, 417 (1995).

6. See 29 U.S.C. § 1381.

7. Liability may not be limited to the multiemployer plan participant. The contributing participant's affiliates, who have no direct pension liability as a participant, but which are trades or businesses under common control with the participant, may be considered jointly and severally liable for withdrawal liability under MEPPAA as members of a controlled group. 29 U.S.C § 1301(b)(1).

8. Code § 101(12).

9. Code § 101(5)(A).

10. See Pa. Dep't. Pub. Welfare v. Davenport, 495 U.S. 552, 558 (1990) (citation omitted).

11. H.R. Rep. No. 95-595, reprinted in 1978 U.S.C.CA.N. 5963, 6266.

12. See In r. Roth Am., Inc., 975 F.2d 949 (3d Cir. 1992).

13. See Olin Corp. v. Riverwood Int'll Corp. (In re Manville Forest Prods. Corp.), 209 F.3d 125 (2d Cir. 2000).

14. See Lemelle v. Universal Mfg. Corp., 18 F.3d 1268 (5th Cir. 1994).

15. 744 F.2d 332 (3d Cir. 1984). Frenville dealt with whether a claim existed pre-petition subjecting an action to the automatic stay of Code § 362.

16. Firearms Imp. & Exp. Corp. v. Capital Ins. (In re Firearms Imp. & Exp. Corp.), 131 B.R. 1009, 1015 (Bankr. S.D. Fla. 1991).

17. Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 281 B.R. 852, 860 (Bankr. D. Del. 2002).

18. 607 F.3d 114 (3d Cir. 2010).

19. Id. at 121.

20. Id. at 121 (citing Epstein v. Official Comm. of Unsecured Creditor of the Estate of Piper Aircraft Corp. (In re Piper Aircraft Corp.), 58 F.3d 1573, 1576 n.2 (11th Cir. 1995).

21. Id. at 122-23.

22. Id. at 123-25.

23. Id. at 125

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Originally published by Wolters Kluwer

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