Natbony Declaration Exhibit 4 

 

Case:17-03283-LTS Doc#:24541-4 Filed:06/12/23 Entered:06/12/23 22:44:57 Desc:

Exhibit Ex 4 - Granada Wines v New England Teamsters 84-1518 - Appellants Page 1 of 52
APPELLANT'S BRIEF 

Robert M. Gargill 

Charles L. Glerum 

CHOATE, HALL & STEWART 

60 State Street 

Boston, MA 02109 
APPELLANT'S BRIEF 

Robert M. Gargill 

Charles L. Glerum 

CHOATE, HALL & STEWART 

60 State Street 

Boston, MA 02109 
1. Under the Precedents Established By the 

Supreme Court Granada's Contractual Right 

to Limited Liability to the Pension Fund 

ConstitutesProperty for Purposes of the 

Fifth Amendment. 

2. Application of the MPPAA Withdrawal Liability 

Provisions to Granada Constitutes a Taking 

14 

Within the Meaning of the Fifth Amendment. 16 

3. The Fifth Amendment Mandates that Granada 

Receive Just Compensation for the Property 

Taken Through Application of the MPPAA to 

Granada's Withdrawal from the Pension Plan. 19 

B. THE WITHDRAWAL LIABILITY PROVISIONS OF THE MULTIEMPLOYER PENSION PLAN AMENDMENTS ACT OF 1980 VIOLATE 

GRANADA'S FIFTH AMENDMENT DUE PROCESS RIGHTS. 22 

1. Application of the MPPAA to Granada's Involuntary Withdrawal From the Pension Plan 

Violates Granada's Due Process Rights Under 

the Fifth Amendment to the Constitution. 23 

i 
FOR WITHDRAWAL LIABILITY AS A SEPARATE CLASS, 

DOES NOT DISCRIMINATE UNFAIRLY AGAINST IT, AND 

IS FAIR AND EQUITABLE, IT MAY PROVIDE FOR 

PAYMENT OF A DIVIDEND ON ONLY ONE HALF OF 

THAT CLAIM PURSUANT TO §ll29(b) OF THE 

BANKRUPTCY CODE. 

39 

CONCLUSION 43 

ii 
CASES 

Armstrong v. United States, 364 U.S. 40 (1960) 

Arnett v. Kennedy, 416 U.S. 134 (1974) 

Commissioner v. Brown, 380 U.S. 563 (1965) 

13,16 

14 

34 

Goldberg v. Kelly 397 U.S. 254 (1970) 14 

Goldblatt v. Hempstead, 369 U.S. 390 (1962) 13 

International Brotherhood of Teamsters v. Daniel, 439 U.S. 21,26 

551 (1979) 

Lynch v. United States, 292 U.S . 571 (1934) 14 

Monongahela Navigation Co. v. United States, 148 U.S. 312 

(1893) 

Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 

19,20 

359 (1980) 18 

PBGC v. R.A. Gray & Co., 52 U.S.L.W. 4810 (1984) 14,22,28 

Penn Central Transportation Co. v. New York City, 438 U.S. 

104 (1978) 13,14,15 

16 

iii 
Peick v. Pension Benefit Guaranty Corp., 724 F. 2d 1247 

(7th Cir. 1983), cert. pending No. 83-1246 15 

Republic Industries v. Teamsters Joint Council, 718 F. 

2d 628 (4th Cir. 1983) cert. pending No. 83-541 15 

Textile Workers Pension Plan v. Standard Dye & Finishing, 

725 F. 2d 843 (2nd Cir . 1984) 20,24 

Washington Star Co. v. International Typographical Union 20,24 

Negotiated Pension Plan, 729 F . 2d 1502 (D.C . Cir. 1984) 

In Re Los Angeles Land & Investments, Ltd., 282 F . Supp. 41 

448 (D. Haw. 1968) aff'd 447 F. 2d 1366 (9th Cir. 1971) 

Peick v. Pension Benefit Guaranty Corp., 539 F. Supp. 11 

1025 (N.D. Ill. 1982), aff'd 724 F. 2d 1247 (7th Cir. 

1983) cert . pending No. 83-1246 

In Re International Automated Machines, 13 B.R. 119 

(Bkrcy. - N.D. Ohio, 1981) 

35 

In Re Sutherland, 3 Bankr. 420 (Bkrcy. - W.D. Ark. 1980) 40 

Matter of Cott Corp., 26 B.R. 332 (Bkrcy. - D. Conn. 1982) 38 

Matter of Food Fair, Inc., 14 B.R. 40 (Bkrcy. - S.D.N.Y., 38 

1981) 

iv 
Soble, Bankruptcy Claims of Multi-employer 

Pension Plans, 33 Labor L.J. 57, 60 (1982). 

12 
1. Does the requirement of the Multiemployer Pension Plan 

Amendments Act that Granada pay a portion of the under-funded 

condition of a pension plan constitute a taking of property 

impermissible under the Fifth Amendment to the Constitution of 

the United States where Granda was did not create, control or 

manage the plan, was not responsible for the under-funded condition 

of the plan and was party to a contract which did not impose upon 

it any such liability? 

2 . Does the Bankruptcy Code and the Congressional policy 

reflected therein in favor of reorganizations require that the 
with assets resulting from the infusion of new capital by its new 

stockholder, has Granada, in effect, undergone such a liquidation 

as warrants the payment, under §4225(b) of ERISA, of a dividend 

on only one-half of the Pension Fund's claim for withdrawal 

liability? 

4. Did the District Court err as matter of law in not 

holding that, since the Granada Plan of Reorganization treats the 

withdrawal liability of the Pension Fund as a separate class, 

does not unfairly discriminate against it, and is fair and equitable, 

the Plan may provide for payment of a dividend on only one-half 

of the Pension Fund's allowed claim pursuant to §ll29(b) of the 

Bankruptcy Code? 

-2-
Amended Plan of R~organization dated October 26, 1982 (the "Plan"), 

the New England Teamsters & Trucking Industry Pension Fund (the 

"Pension Fund") was entitled to receive the same percentage 

distribution on its claim in respec~ of withdrawal liability as 

the distributions to be made in respect of the claims of general 

unsecured creditors. 

2 . Prior Proceedings and Facts 

On April 1, 1982 Granada filed a petition for reorganization 

under Chapter 11 of the Bankruptcy Code. Prior thereto Granada 

was a distributor of alcoholic beverages, primarily wines (D.S . 

2 

p . 3; App . p . 27) . During the course of the proceedings, however, 

1 App. refers to the Appellant's Appendix filed herewith. 

2 D. S. refers to the Amended Disclosure Statement (as supplemented 

by the Addendum thereto) included in the record on this Appeal . 

-3-
was obligated to make contributions under collective bargaining 

agreements. Generally, the withdrawal liability claim is a claim 

asserted under the Multi-Employer P~nsion Plan Amendments Act (PL 

96-364) ("MPPAA"), amending the Employee Retirement Income Security 

Act of 1974 ("ERISA"), for Granada's allocable share of the 

amount by which the Pension Fund, which was not controlled, 

managed or created by Granada, is under-funded. 

In the course of the proceedings it became apparent that 

Granada was not capable of reorganization on a "stand alone" or 

independent basis. Even if it could retain its product lines, 

principally from wineries such as Almaden Vineyards Inc. ("Almaden''), 

those product lines were limited and Granada was no longer the 

-4-
Al111aden. To this end, it organized a subsidiary, Bilmar Inc., to 

attempt to make that acquisition by funding a plan of reorganization and, in the interim, it sought to provide working capital. 

Until shortly prior to confirmation of Granada's Plan, conditions 

were such that the Bankruptcy Court would not authorize any 

significant borrowing that would permit Granada to purchase and 

sell wines on the basis proposed by Bilmar. That basis contemplated, among other things, Granada's move to new premises and 

the performance by one or more of Whitehall and/or its affiliates 

of Granada's sales, warehouse, distribution and various administrative functions . 

3 Tr. refers to the transcript of the proceedings of December 8, 

1982, which is part of the record on appeal. 

-5-
their ~roducts to Granada subsequent to confirmation of the Plan. 

On this basis the litigation was dismissed. 

As ultimately developed, the Plan provided for the cancellation of all of Granada's outstanding stock and the acquisition 

by Bilmar of all of a new issue of Granada stock. (Plan, p.9; 

App. p. 60). Pre-confirmation stockholders were to receive 

nothing on account of their cancelled stock. (Id.) So far as is 

material to this Appeal, the Plan provided for a dividend of 30% 

on unsecured (Class Seven) claims, except that the Pension Fund 

was to receive 15% on the allowed amount of its claim in respect 

of withdrawal liability. (Plan, pp.8-9; App. p. 59-60) Thus, 

though this claim was included in Article II of the Plan in the 

category of Class Seven claims, which covered all pre-petition 

unsecured claims other than those referred to in the prior six 

-6-
for less than a 30% dividend to unsecured creditors and the 

Pension Fund. However, such a Plan may have been incapable of 

being lawfully confirmed since such equal treatment would mean 

that unsecured creditors other than the Pension Fund would thereby 

receive less than they would have received in a Chapter 7 liquidation as a consequence of the clearly limited participation of 

the withdrawal liability claim in such a liquidation. (D.S., 14, 

15; App. pp. 38, 39). This result would violate Bankruptcy Code 

§ 1129(a)(7)(A). 

As indicated in the Disclosure Statement and in the Addendum 

thereto, the Plan contemplated that Granada was to emerge from 

Chapter 11 without substantially all of its employees and would 

rely instead on the marketing, warehousing, distribution and 

administrative staff of its new affiliates. Indeed, one of the 

-7-
tion for providing in the Plan that the Pension Fund, in satisfaction 

of its withdrawal liability claim, receive 15% of that claim in 

satisfaction thereof while the other unsecured claimants received 

30% of their allowed claims . Speci~ically, the Objection stated 

that the 50% reduction of the withdrawal liability claim was not 

proper pursuant to ERISA §4225(b) , 29 U.S.C. §l405(b), since 

Granada was not ''undergoing liquidation or dissolution" within 

the meaning of that provision. 

A hearing was held on the Confirmation of Granada's Amended 

Plan on December 8 and 10, 1982, and oral argument and testimony 

were heard on the Pension Fund's Objection. On December 23, 

1982, the Bankruptcy Court confirmed Granada's Plan of Reorganization but expressly reserved a decision on the Fund's Objection. 

On January 2, 1983, the Bankruptcy Court issued its Memorandum On 

-8-
on a number of grounds. 

First, the withdrawal liability provisions of the Multiemployer 

Pension Plan Amendment Act of 1980 (MPPAA), as applied to Granada, 

violate Granada's rights under the Fifth Amendment. Not only do 

they effect a "taking" of Granada's property without just compensation in vio lation of the Taking Clause of the Fifth Amendment, 

they operate to vary the terms of Granada's collective bargaining 

agreement by imposing on Grenada unavoidable and additional 

contribution obligations beyond those bargained for in its contracts 

and thereby violate Granada's due process rights under the Fifth 

Amendment . Furthermore, the imposition of withdrawal liability 

on an insolvent employer undergoing Chapter 11 reorganization is 

both an irrational and arbitrary means of effectuating the legislative purpose of the MPPAA, namely keeping pension funds healthy 

-9-
recovery of the claims of other unsecured creditors and the cact 

that Granada's pre-confirmation stockholders receive nothing, 

that the limitation of the withdrawal liability as set forth in 

ERISA Section 4225(b) should be app~ied as provided in the Plan. 

Third, because of the nature of Granada's Plan of Reorganization, in particular the fact that the assets of the corporation 

were disposed of through a transaction which resulted in the full 

value of Granada's assets being distributed to creditors who 

received less than their full claim while stockholders received 

nothing, the District Court and the Bankruptcy Court were clearly 

erroneous in failing to find that in substance and effect the 

Plan called for a liquidation of Granada. By so failing to 

recognize the Plan as a liquidation of Granada, the court ignored 

the policy underlying ERISA Section 4225(b) which limits the 

Pension Fund's recovery on its withdrawal liability claim. 

-10-
most significant feature of MPPAA is the liability it imposes on 

employers who withdraw from multi-employer plans: under MPPAA, 

"an employer that withdraws must immediately begin to pay a fixed 

and certain debt owed to the plan." Peick v. Pension, Benefit 

Guaranty Corporation, 539 F. Supp . 1025, 1033 (N.D. Ill. 1982), 

aff'd 724 F. 2d 1247 (7th Cir. 1983) cert . pending No. 83 - 1246. 

This debt represents the employer's share of the plan's "unfunded 

ve sted benefits" -- that is, the actuarial present v alue of 

vested benefit obligations minus the value of the plan's assets 

as calculated under one of four statutorily approved methods set 

forth at 29 U.S.C . §1391 . Id. at 1033-34 . 

The statute which determines the amount of such withdrawal 

liability, ERISA Section 4225, 29 U.S . C. §1405, provides for 

different withdrawal liabilities depending on whether the trans-

-11-
its liabilities (not including any withdrawal liability imposed 

under. this section) . Soble , Bankruptcy Claims of Multiemployer 

Pension Plans, 33 Labor L.J. 57, 60 (1982). 

4 Section 4225 was added to ERISA b.Y MPPAA. Section 4225(b), 

29 U.S. C. §1405(b), provides: 

(b) In the case of an insolvent employer undergoing liquidation or dissolution, the unfunded vested benefits allocable 

to that employer shall not e x ceed an amount equal to the sum 

of--

(1) 50 percent of the unfunded vested benefits allocable 

to the employer (determined without regard to this 

section), and 

(2) that portion of 50 percent of the unfunded vested 

benefits allocable to the employer (as determined under 

paragraph (1)) which does not exceed the liquidation or 

dissolution value of the employer determined--

(A) as of the commencement of liquidation or 

dissolution , and 

(B) after reducing the liquidation or dissolution 

value of the employer by the amount determined 

under paragraph (1). 

-12-
and justice, should be borne by the public as a whole. While 

the Supreme Court has been u n able to develop any set formula for 

determining when justice and fairness require that economic 

injuries caused by public action be compensated by tne government, 

rather than remain disproportionately concentrated on a few 

persons, it has identified several factors that have particular 

significance when a Court is engaging in the ad hoc, factual 

inquiry under the Taking Clause. Goldblatt v. Hempstead, 369 U.S. 

390, 594 (1962}; Penn Central Transportation Co. v. New York City, 

438 U.S. 104, 124 (1978). A court should focus on the economic 

impact of the regulation on the claimant, the extent to which the 

regulation has interferred with distinct investment-backed expectations, and the character of the governmental action . Although 

a "taking" may perhaps more readily be found when the interference 

with property can be characterized as a physical invasion by 

-13-
571, 579 (1934), that under the Fifth Amendment, "valid contracts 

are property, whether the obliger be a private individual, a 

municipality, a State, or the United States." In fact, if the 

Supreme Court had doubted whether an employer's existing contractual provision limiting its pension fund contribution liability 

was not a valid property interest for purposes of the Fifth 

Amendment, it would not have decided the due process claim against 

the MPPAA withdrawal liability provisions that was asserted in 

PBGC v. R.A. Gray & Co., 52 U.S . L . W. 4819 (1984). 

Granada was a party to a contract with the Union which 

limited Granada's obligations in respect of the Pension Fund to 

specific bargained for contributions for each of its employees 

who were beneficiaries of that Pension Fund. Granada's contrac-

- 14-
83-541. A close reading of the Supreme Court cases, however, 

reveals that the Supreme Court continues to recognize contractual 

rights bound up with the reasonable _expectations of the claimant 

as "property" within the meaning of the Fifth Amendment. To be 

sure, appellant's contractual right to retain funds it might have 

otherwise had to contribute to the pension plan is a different 

kind of property interest than that of an owner in fee simple of 

real property. However, neither logic nor case law supports the 

proposition that such differences relegate Granada's interest 

to something less than property. Indeed, the Supreme Court has 

explicitly recognized that governmental interference with contract 

rights may constitute an unconstitutional taking. See, e.g., 

-15-
invasion demonstrates that a compensable taking has occurred 

here . The purpose underlying the withdrawal liability provisions 

of the MPPAA was to lift the financial burden of financing the 

multiemployer insurance program fro~ PBGC, a public agency, and 

place it on contributing employers, and not on all contributing 

employers, but only those who withdrew from the Fund. 5 See, 

e . g., MPPAA Section 3(a)(2) : 

5 

it is desirable to replace the termination 

insurance program for multiemployer pension 

plans with an insolvency-based benefit protection program that will .. . contain program 

costs within reasonable limits. 

After a withdrawing employer pays his share of the under-funding , 

market conditions or changes in benefits may eliminate or mitigate 

the under-funding with the result that employers who continue to 

participate for a time may withdraw without liability. That an 

employer may have had to withdraw as a consequence of financial 

problems and pay the liability which later may not exist only 

aggravates the inequity of the MPPAA . 

-17-
tually sheltered from pension fund claims is clearly a property 

interest worthy of protection under the Taking Clause. 

B. Application of the MPPAA Withdrawal Liability 

Provisions to Granada Constitutes a Taking 

Within the Meaning of the Fifth Amendment. 

When one applies to the case at bar the factors enunciated by the Supreme Court in Penn Central Transportation Co. v. 

New York City, 438 U.S. 104, 124 (1978), as relevant in determining 

whether there has been a Taking Clause violation, the conclusion 

is inescapable that the MPPAA withdrawal liability provisions 

effect a "taking" of appellant 's property within the meaning of 

that constitutional provision. The challenged government regulation has had an adverse economic impact on Granada. Not only 

has the statute destroyed the contractual limitations of liability 

on which Granada relied in entering into its collective bargaining 

-16-
ment (and, indeed, unions) of meeting pension liabilities accrued 

by underfunded multiemployer plans. Such government~l action is 

fairly characterized as an acquisition of resources to permit or 

facilitate the public function, under Title IV of ERISA, 29 U.S.C. 

§§ 1301-1381 (1976), of guaranteeing that vested retirement 

benefits will actually be received by employees and their beneficiaries. Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 

359, 375 (1980). 

Although one of the asserted purposes of the MPPAA is to 

discourage voluntary withdrawals from pension plans, the only 

justification for imposing withdrawal liability in the case of 

involuntary withdrawal due to insolvency is to buttress the 

income of the fund and relieve the pressure on the federal insurance system. 

-18-
employers, who must only meet their contractual contribution 

obligations. Granada is forced to surrender more than employees 

and unions whom the MPPAA saves harmless from any responsiblity 

and accountability in protecting employee pensions. It is irrational and grossly inequitable that the burden of underfunded 

pension plans should be borne by employers forced to withdraw 

from plans because of financial disaster and not as well by 

unions and employees and the public as a whole. Therefore, this 

Court should hold that the MPPAA withdrawal liability provisions 

have effected a taking of appellant's property for which there 

must be just compensation. 

3. The Fifth Amendment Mandates that Granada 

Receive Just Compensation for the Property 

Taken Through Application of the MPPAA to 

Granada's Withdrawal from the Pension Plan. 

The Fifth Amendment does not allow simply an approximate 

-19-
1502, 1510 (D.C. Cir. 1984); Textile Workers Pension v. Standard 

Dye Finishing, 725 F. 2d 843, 857 (2nd Cir. 1984) cert. den. 

sub nom Sibley, Lindsay & Curr Co. v. Bakery Confect~onary, 52 

U.S.L.W. 3920. Those courts reasoned that the unfunded liability 

incurred by withdrawing employers is equal to the bargained-for 

benefits, in the form of employee services, already received by 

them in exchange for their promises to fund pension benefits. 

However, it is simply incorrect to view pension benefits as the 

quid pro quo for employee services. Employees' services are 

provided only in part in exchange for an entitlement to pension 

benefits. The employer is required to give up much more than 

pension contributions to obtain those services. The employer 

must provide, inter alia, wages, training, health and accident 

-20-
tually determined employer contributions . The Supreme Court 

itself has noted that potential pension benefits are, "a relatively 

insignificant part of an employee's total and indivisible compensation package . " International Brotherhood of Teamsters v . Daniel, 

439 U. S . 551, 560 (1979). 

The Fifth Amendment does not simply require some compensation 

when property is taken for a public purpose . Rather, the Fifth 

Amendment demands that the compensation be a full and perfect 

e quivalent for the property taken . "A strong public desire to 

improve the public condition is not enough to warrant achieving 

the desire by a shorter cut than the constitutional way of paying 

for the change." Pennsylvania Coal Co . v . Mahon, 260 U.S. 393, 

416 (1922 ). The federal pension insurance system may be in a 

p r ecarious financial state . Congress may wish to reduce the 

burden on the federal budget of buttressing underfunded pension 

- 21 -
tion . Therefore , this Court should hold that the MPPAA wi thdr

.wal 

liabi lity provisions violate the Taking Clause of the Fifth 

Amendment . 

B. THE WITHDRAWAL LIABILITY PROVISIONS OF THE 

MULTIEMPLOYER PENSION PLAN AMENDMENTS ACT OF 

1980 VIOLATE GRANADA'S FIFTH AMENDMENT DUE 

PROCESS RIGHTS . 

Application of the MPPAA to vary the terms of appellant's 

collective bargaining agreement with the Teamsters Union violates 

the Due Process Clause of the Fifth Amendment . While the principles 

embodied in the Fifth Amendment's Due Process Clause are not 

coex tensive with prohibitions existing against state impairments 

of pre- e x isting contracts, see PBGC v. R. A. Gray & Co., 52 U.S . L . W. 

4810 (1984), it is clear that arbitrary and irrational legislation 

which impairs private contract rights cannot withstand judicial 

scrutiny under the Due Process Clause . Usery v . Turner Elkhorn 

- 22 -
reorganization under Chapter 11 of the Bankruptcy co,~e as a basis 

for exemption from the operation of the MPPAA withdrawal liability 

provisions (ERISA, §4225(a)) is irrational and arbitrary and thus 

violative of the Fifth Amendment. 

1. Application of the MPPAA to Granada's Involuntary 

Withdrawal From the Pension Plan Violates Granada's 

Due Process Rights Under the Fifth Amendment to the 

Constitution. 

Application of the MPPAA to vary the pension benefit provision of Granada's existing collective bargaining agreement with 

the Teamsters Union implicates the Due Process Clause of the 

Fifth Amendment . The MPPAA withdrawal liability provisions, as 

applied to the facts of this case, are irrational and arbitrary 

and therefore cannot survive due process scrutiny. Usery v. 

Turner Elkhorn Mining Co., 428 U.S. 1 (1976). Congress' chosen 

solutions to the problems posed by multiemployer pension plans 

-23-
ments had only been partially funded by em~loyer contributions, 

albeit funded at the level accepted by the employees and their 

representatives and required by contract. Congress also reasoned 

that such costs were properly imposed on withdrawing employers 

because, at the time of withdrawal, they had already received the 

benefit of employees' services and thus should be liable for the 

unfunded vested benefits of such employees. See, e.g. Textile 

Workers Pension v. Standard Dye & Finishing, 725 F. 2d 843, 849, 

857 (2d Cir. 1984); Washington Star Co. v. International Typographical Union Negotiated Pension Plan, 729 F. 2d 1502, 1505, 

1510 (D.C. Cir. 1984). 

However, such reasoning is irrational on two grounds. 

First, the withdrawal liability imposed by the MPPAA is totally 

unrelated to both the existence and the amount of a given fund's 

-24-
ing plan participants. Imposition of non-negotiated, uncontractedfor liabilitv on such an irr ational and arbitrary basis cannot 

withstand judicial scrutiny. 

Second, the share of the Fund's unfunded vested benefits 

"allocated" to withdrawing employer~ is not limited to or even 

reasonably related to the under-funding attributable to the 

v ested benefits due to the employers' own employees. Nor is it 

rationally related to the value of employee services already 

received by such employers in exchange for pension benefits that 

have vested at the time of withdrawal. As heretofore noted, 

Pension benefits comprise only a small part of an employee's 

total compensation, particularly with respect to industries 

characterized by mobile employment and strict vesting requirements. 

The Supreme Court itself has recognized that in the context of 

multiemployer plans, potential pension benefits are a relatively 

-25-
quo for employee services already received is clearly arbitrary 

and grossly inequitable in the case of involuntary withdrawal by 

insolvent employers such as Granada. This is particularly so 

where unions and their members bear no share of the responsibility 

for such under-funding. 

Moreover, in the case of Granada, an insolvent employer 

forced to cease business operations, terminate employees and 

withdraw from the plan, it is manifestly evident that it has not 

and never will receive the full benefit for which it bargained. 

Imposition of withdrawal liability on Granada simply cannot be 

justified as the quid pro quo for benefits already received. 

Therefore, the instant case is plainly distinguished from the 

situation presented in Usery v. Turner Elkhorn Mining Co., 428 

U.S. 1 (1977), in which the Supreme Court upheld a statute requiring 

coal companies to pay black lung benefits to former employees. 

-26-
contract. The MPPAA withdrawal liability provisions, however, 

have operated to undermine even that limited control by varying 

the terms of appellant's contract. The Due Process Clause of the 

Fifth Amendment requires, at the ve~y least, that burdens imposed 

on a select group of individuals bear some reasonable relation to 

benefits actually received. Furthermore, the legislative purpose 

of supplementing pension fund incomes by allocating the additional 

costs of employee's pension benefits to those who have profited 

from such employee's services must be furthered by non-arbitrary, 

rational means. Application of the MPPAA to appellant's involuntary 

withdrawal from the pension plan clearly cannot meet this Due 

Process requirement. Accordingly, this Court should hold that 

the MPPAA withdrawal liability provisions violate the Due Process 

Clause of the Fifth Amendment. 

-27-
enacted MPPAA. By virtue of the withdrawal liability provisions 

of that Act, Congress has successfully placed the financial 

burden of underfunded plans on withdrawing employers, created a 

financial disincentive to voluntary withdrawal, and protected 

remaining employers against increased costs arising from voluntary 

withdrawals. PBGC v . R. A. Gray & Co ., 52 U.S.L.W. 4810 (1984). 

The fact that the MPPAA withdrawal liability provisions were 

primarily aimed at employers who withdrew voluntarily from pension 

plans as a cost-saving move is evidenced by the provisions limiting 

withdrawal liability in the case of sale, liquidation or dissolution 

(ERISA, §4225), obvious instances of involuntary withdrawal. 

Also, see PBGC, Recommendations to the Congress for Revising Multiemployer Plan Termination Insurance, at 16 (February, 1979). It 

-28-
limit withdrawal liability in reorganization situations, particularly t h o se characterized by the employer's insolvency, renders 

the app lication of the MPPAA to such situations irrational and 

arbitrary, and thus violative of the Due Process Clause of the 

Fifth Amendment . 

In the case at bar, appellant filed a petition for reorganiz ation under Chapter 11 of the Bankruptcy Code qn Aprill, 1982. 

Because of appellant's severely distressed financial condition, 

it was forced to cease normal business operations and terminate 

all but four of its employees. The termination of its truckers 

and salesmen , who were covered by collective bargaining agreements 

with the Teamsters Union, gave rise to the claim for withdrawal 

liability by the Pension Fund in the amount of $248,614. Granada 

-29-
the future. 

Yet the irrationality and arbitrariness of Cong~ess' failure 

to limit the withdrawal liability of employers, such as Granada, 

undergoing reorganization, goes even further. Not only does the 

MPPAA's assessment of full liability in reorganization situations 

bear no relationship to the purposes of that Act, it also frustrates, 

and, in fact, directly contravenes the unambiguous Congressional 

policy favoring the reorganization of insolvent companies evidenced 

in the Bankruptcy Code. Ironically, if that "bias'' in favor of 

reorganizations were recognized by a limitation of withdrawal 

liability in a case such as the use at bar, where the creditors 

receive less than full payment and the stockholders receive 

nothing under the Plan (and thus cannot benefit from the limitation), 

-30-
but which may be and often is availed of for liquidation through 

the medium of a plan of reorganization. The policy of Congress, 

unambiguously reflected in the Bankruptcy Code, favors reorganization. 

This policy is based on the well-re~ognized fact that "[i]t is 

more economically efficient to reorganize than to liquidate, 

because it preserves jobs and assets." In re Bildisco, 682 F.2d 

72, 77 (3d Cir. 1982) aff'd sub nom NLRB v. Bildisco & Bildisco, 

52 U.S.L . W. 4270 (1984), quoting H.R. Rep. No. 95-595, 95th Cong. 

1st Sess. 220 (1977), reprinted in 1978 U.S. Code Cong. & Ad. 

News 5787, 6179. Moreover, experience under the old Bankruptcy 

Act demonstrated that creditors recover larger portions of their 

claims in reorganization proceedings than in straight liquidation 

proceedings. 682 F.2d at 77 n.6. To assure, however, that 

reorganizations under chapter 11 are not misused, Congress provided, 

in §1129(a)(7)(A), that: 

-31-
the plan as much as it would receive under Chapter 7, if the plan 

is to be capable of confirmation. 

As previously discussed, ERISA section 4225 provides for 

different withdrawal liabilities depending upon whether the 

withdrawal is the result of a sale (4225(a)) or a liquidation or 

dissolution(§ 4225(b)). In the latter case, the withdrawal 

liability claim is limited to 50% of the unfunded vested benefits 

attributable to the employer plus so much of the remaining 50% as 

does not ~xceed a defined net liquidation value. However, if a 

pension fund is to be treated under the plan of reorganization of 

an insolvent debtor on the same basis as other unsecured creditors, 

while under Chapter 7 it would receive a dividend on only half 

its claim, plans proposing to give all unsecured creditors dividends 

-32-
less than full payment on their claims and stockholders receive 

nothing on their stock interests, the policy considerations which 

give rise to the§ 4225(b) limitations of liability qre served 

and that section should be applied to permit the participation of 

the pension fund only to the extent of one-half its claim for 

withdrawal liability . In adopting the limitation, Congress 

obviously was moved by the impact of withdrawal liability on 

other parties in interest. If the impact of withdrawal liability 

which prevails in a reorganization is characteristic of the 

impact in a liquidation, there is no reason to treat the two 

situations differently as far as the limitation of the liability 

is concerned . In such circumstances, which are present in this 

case, logic and reason dictate that Congress intended that the 

Pension Fund would only have a claim for 50% of the withdrawal 

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and Bankruptcy Courts' failure generally to apply ERISA §4225(b) 

to a Chapter 11 plan in the circumstances above set forth, it is 

clear that both lower courts committed reversible error in not 

determining that Granada has undergone a liquidation within the 

meaning and intent of ERISA Section 4225(b). 

Both lower courts should not have interpreted the word 

"liquidation" in that statute or the term "wind up" referred to 

6 in the Senate Committee Report with respect to that statute so 

narrowly as to exclude from the ambit of those words the facts 

prevailing with respect to Granada in this' matter simply because 

Granada was not undergoing a Chapter 7 "liquidation". Courts 

have noted in cases involving ERISA and the old Bankruptcy Act 

that : 

6 Joint Explanation §Sb, 126 Cong. Rec. §10111, §10117, (Daily 

Ed., July 29, 1980) . 

-34-
There is no question but that Granada was insolvent within 

the meaning of §4225(b) 7 (Tr. pp. 28-43 and 46-51; App. pp 120-135 

and 138-143; Finding and Order Confirming Plan of Reorganization, 

p. 3, App. p. 89). Thus the only i~sue with respect to §4225(b) 

is whether Granada is "undergoing liquidation or dissolution," 

through and in connection with the Plan. As a matter of statutory 

construction and Congressional intent, it plainly is. 

The aforesaid Senate Committee Report on the ERISA §4225(b) 

limitation states, "to qualify for this rule, an insolvent employer 

need not undergo a formal liquidation or dissolution. It must, 

however, be insolvent and wind up its business affairs." Joint 

7 For purposes of Section 4225(b), an employer is insolvent "if 

the liabilities of the employer, including withdrawal liability 

under the plan (deterimined without regard to subsection (b) of 

this section), exceed the assets of the employer determined as of 

the commencement of the liquidation or dissolution)[.]" §4225(d), 

29 U. S . C. §l405(d). 

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Plan. 

What was in reality an asset transaction was accomplished in 

the form of a stock transaction under the Plan because initially 

it was thought that the latter approach might preserve contractual 

relationships with certain suppliers and because Granada believed 

in good faith and until it was too late to change the form of the 

transaction that the Pension Fund had accepted the reorganization 

plan's treatment of the withdrawal liability claim. That turned 

out not to be the case in both respects. To the extent that the 

new Granada was able to maintain those relationships it did so on 

the basis of the new consideration and commitments coming from 

the new owner . That the form of the transaction would create the 

problem represented by the Pension Fund's Objection herein was 

not contemplated because of actions of the Pension Fund itself. 

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and 60) Had the Pension Fund objected to such treatment at 

that time, before solicitation of the Plan's acceptance, there 

would have been time within which to change the form of the 

transaction to avoid the Pension Fund's Objection that was subsequently filed a day or two prior to the hearing on confirmation 

and after the Plan had been accepted. 

Despite all the relevant facts establishing the presence of 

a liquidation in the creation of a new corporate entity, as are 

reflected in the disclosure statement, the courts below failed to 

find a liquidation in this situation by opting for a narrow and 

formalistic definition of that word. It is respectfully submitted 

that, in taking this approach, the lower courts ignored the 

policy underlying ERISA §4225(b) . What made legitimate and 

equitable the limitation on the Pension Fund's recovery as set 

forth in that Section were the undisputed facts that after a 

-37-
tTe same which caused Congress to enact §4225(b). Since the full 

value of the assets of Granada have been distributed to creditors 

who are still receiving less than 100% of their claims even 

though the Pension Fund participates on the limited basis provided 

in Section 4225(b), since no assets of value have been distributed 

to or held for the benefit of Granada's stockholders, and since 

the new Granada is an entity with new stock, new employees, a new 

stockholder and new management, the aforesaid policy considerations 

should have been honored by the lower courts and the basic nature 

of this liquidation recognized. 

8 Examples of such massive claims are Matter of Kessler, 23 B.R. 

724 (Bkrcy. - S.D.N.Y., 1982)($4,347,640.19}; Matter of Cott 

Corp., 26 B.R. 332 (Bkrcy. - D. Conn., 1982)($2,281,767.00}; 

Matter of Food Fair, Inc. 14 B.R. 40 (Bkrcy. - S.D.N.Y., 1981) 

($4,000,000.00). 

-38-
reason, the ·~rovision meets the test of §1129(a)(7) of the Bankruptcy 

Code even if the Pension Fund is deemed to have rejected the 

Plan. Moreover, even if the Pension Fund, as a class, is deemed 

to have rejected the Plan, the Plan _may and should be confirmed 

pursuant to §1129(b) of the Code. That section provides in 

pertinent part as follows (emphasis added): 

(b)(l) Notwithstanding section 51O(a) of this title, 

if all of the applicable requirements of subsection (a) of 

this section other than paragraph (8) are met with respect 

to a plan, the court, on request of the proponent of the 

plan, shall confirm the plan notwithstanding the requirements 

of such paragraph if the plan does not discriminate unfairly, 

and is fair and equitable, with respect to each class of 

claims or interests that is impaired under, and has not 

accepted, the plan. 

(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a 

class includes the following requirements: 

-39-
y y py 

from other unsecured claims, and, in fact, in those circumstances, 

that separate treatment is required by Section 1129(a)(7)(A)(ii) 

of the Bankruptcy Code . As previously discussed, that Section 

raises to a level of critical importance the question of what a 

creditor would receive in a Chapter 7 liquidation . If different 

unsecured creditors would be treated differently in a Chapter 7 

liquidation, that difference provides a basis for separate classification and different treatment of such creditors. See e . g., In 

Re Sutherland, 3 Bankr. 420 (Bkrcy. - W.D. Ark . 1980) . In 

short, a difference in the legal characteristics of claims in a 

Chapter 7 case, which is relevant to a reorganization plan by 

virtue of§ 1129(a) (7)(A)(ii), provides a basis for fairly discriminating between those creditors. ERISA Section 4225(b) , 

which provides that the withdrawal liability claim would receive 

- 40 -
class only if they are ''substantially similar. " This standard is 

a codification of case law current ~t the time the Bankruptcy 

Code was passed and therefore pre-C?de cases are relevant to an 

analysis of its effect. Matter of Martins Point Limited Partnership, 12 BR 721, 725 (Bnkrcy - N.D . Ga ., 1981) . Such a case is 

In Re Los Angeles Land & Investments, Ltd., 282 F. Supp. 448 (D . 

Haw . 1968), aff'd 447 F.2d 1366 (9th Cir. 1971), in which the 

court determined that unsecured creditors may be divided into 

separate classes where the legal character of their claims is 

such as to accord them a status different from other unsecured 

claims. In this case, the Pension Fund's different treatment in 

a chapter 7 rather than a chapter 11 is such a difference in 

legal character which requires separate classification. See 

-41-
claim that has different and conflicting interests, the withdrawal 

l"ability claim should be placed in a separate class as it was, 

for all intents and purposes, by Granada. See Plan Article 

IV(d); App. p. 59. 

Since the Pension Fund's withd~awal liability cla~m should 

be and in substance was in a separate class, the only remaining 

issue is whether the claim's treatment by the Plan is fair and 

equitable. A determination as to that issue must be made in 

accordance with Section 1129(b)(2) of the Bankruptcy Code. 

Clause B of that Section (set forth above) provides that a Plan 

is fair and equitable with respect to a class of unsecured creditors 

who reject the plan if the holder of any junior claim or interest 

would not receive or retain any property on account of such 

junior claim or interest. That is the situation in the case at 

bar. Since no claim junior to the Pension Fund is receiving 

anything on its claims or interests and the Pension Fund is 

-42-
y p

plans, existing stockholders will retain an intere,·t even though 

unsecured creditors may receive less than 100% on their claims. 

In such cases, treatment of the withdrawal liability claim on the 

same basis as would occur in a Chap~er 7 liquidation would not be 

fair and equitable under Section 1129(b). Further, it should be 

noted that such cases where stockholders continue to participate 

post-confirmation do not involve liquidations as this case does. 

CONCLUSION 

For all of the reasons set forth above, the Appellant Granada 

respectfully requests this Court to reverse the decisions of the 

District and Bankruptcy Courts and order either that the MPPAA as 

applied in this situation to Granada is unconstitutional or that 

the withdrawal liability claim of the Pension Fund be paid a 

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